How the Super-Trolls of Patent Aggregation Spell Innovation Doomsday

Imagine that you are a large consumer tech manufacturer selling TVs and phone chargers and all the usual Best Buy-type stuff that isn’t exactly innovating the doors off the first-world. You’re currently being sued for patent infringement by another, smaller company that makes a lot of the same kind of stuff. The claim is legit, or at least very likely to be found legit by a court; this could potentially derail your entire product line. However, you have recently invested a very large sum in a new variety of venture capital firm, one specializing in patents. That firm actually has tens of thousands of them at its disposal. And your disposal, too. Sorting through that catalog, several patents come up as potential suiters for a counterclaim (patents the initial accuser might be infringing on). Quite suddenly, the company suing you is also maybe, possibly stepping on one of “your” patents. The counterclaim isn’t awesome, or any kind of sure thing at all in court. But the initial suit is dropped and your patent-infringing product is safe and will likely remain safe. And you have an arsenal of patents ready for these kinds of situations; you’ve purchased a kind of insurance against being accused of stealing ideas.

Meet Intellectual Ventures. Intellectual Ventures is a company that does not make any real physical products, nor does it create ideas for them. It does however own 30,000 to 60,000 ideas in the form of patents or patent applications worldwide. In the U.S. alone, that number is about 11,000 total. Most of this is done through shell corporations, at least 1,276 of them. All of this is according to new research published in the Stanford Technology Law Review by Tom Ewing and Robin Feldma. Intellectual Ventures is what’s known as a patent aggregator, a new variety of firm existing to purchase ideas, license them, and sue the shit out of anyone that comes near one of those 30,000 to 60,000 patents (or sue via proxy). It’s a new kind of business model that threatens not only technological innovation, but quite possibly the global economy. Meet the new bubble, where tons of money goes in and never finds its way out. And one all the scarier because it’s so difficult to say what happens inside (hence the 30,000 patent margin above).

Ewing and Feldma have taken a noble stab, however, primarily by sifting through the public dealings of Intellectual Ventures and its lesser peers. IV is the fifth largest patent holder in the U.S. and 15th in the world, something that it’s attained in roughly seven years since it started buying patents in ‘04/’05. It was founded in 2000 by a pair of Microsoft execs, Nathan Myhrvold and Edward Jung. Myhrvold explained the idea behind IV in a 2007 speech:

Most of people think of research as a charity, a philanthropic thing. They don't view it as a for-profit venture. So our goal is to make research something you can invest in. I think it's a valuable investment if you know what you're doing. So we think that if we supply capital and expertise in the right way then we can make a hell of an investment and if we are successful at doing it, the net research budget will go up.

The patents come from all over. Sometimes IV buys the patents of some company and then licenses them back to said company such that whatever product is being manufactured can continue being made. Other times, IV buys patents from universities, who are always in the business of ideas over the business of actually making stuff by definition. IV seems to be particularly interested in patents from universities in the developing world. In the case of one Brazilian university, IV bought all patent rights outside of Brazil, while the university got to license the patents itself within the country. This seems to be a common arrangement.

The money for IV comes from an amazing range of big names. Investors include: “Apple, eBay, Google, Intel, Microsoft, Nokia, and Sony, as well as academic institutions such as the University of Pennsylvania and Notre Dame, and other entities such as the World Bank and the William and Flora Hewlett Foundation,” according to the paper. Apple and Google and the like one can imagine being motivated by something like the situation below: protection Others, big cash returns.

Consider the story of Verizon, which paid $350 million for patent licenses and an equity stake in one of the Intellectual Ventures Funds in 2008. TiVo sued Verizon for infringement. Verizon purchased a patent from one of Intellectual Ventures' shell companies, which was then put to work as a counterclaim in the TiVo suit in a program that Intellectual Ventures calls "IP for Defense.

In terms of bare capital returns, if investors are buying funds pegged to the 20 year lifespan of a patent, it’s possible that IV could be collecting in the neighborhood of $244 billion over those years. This is based on 25-percent returns on an initial $5 billion investment. How it actually gets that revenue is where things get really dirty. You might call it privateering. This is what privateering is, historically.

It allowed governments to issue a "letter of marque and reprisal" to private parties, which allowed their ships to 1) capture any ships carrying the enemy's flag, 2) sell the ship and cargo at auction, and 3) keep the proceeds. Privateering allowed governments to enlist private parties in their aggressive activities so that the country could wage war with no impact on the treasury.

This is exactly what patent aggregators do — “the company sells a patent to a more aggressive licensing company,” the paper explains, “retaining a license for the Intellectual Ventures investors. The new owner is free to sue or license anyone not covered by the previous owner. The approach allows Intellectual Ventures to profit indirectly from the litigation without engaging in the expenditures or the risks of litigation.”

This can also be used as an interesting sort of arm twisting. Imagine company x is approached by an aggregator requesting money to license one of its patents, which company x may or may not be infringing on. x says no way, and the aggregator sells the patent to a real dick of a third party. The third party tries to play mega-hard ball with x with that same patent. Later on, when the aggregator approaches x about another patent, x is probably going to be more willing to make a deal. Good cop, bad cop.

“The successful aggregator is likely to be the one that frightens the greatest number of companies in the most terrifying way,” the paper concludes.

What we wind up with is a system where a few people own a bunch of patents that are not actually interested in making or inventing anything. They become patent middlemen. This can be a good thing, for a few reasons: it theoretically protects little patents that might otherwise get mowed over, giving them equal weight as more mainstream patents, at least in the sense of having the same army of lawyers behind them. The aggregation system also bypasses a generally screwed patent legal system full of delays and uncertainties, serving as a sort of trading floor for innovation. Finally, as mentioned above, it acts as insurance. A manufacturer has something to fight back with (lots of other patents).

That’s all neat and everything, but how about this: nothing extra is being made or sold. All this money flying around in legal settlemens and licenses is just bonus money. It’s money that we wind up paying when we buy a TV or whatever at Best Buy. Apple sunk a bunch of money into a patent aggregator, and now charges you indirectly for it. That’s how this works. Some dudes from Microsoft basically came up with a whole new marketplace to make shit more expensive for us.

Think about one other very important thing: the actual value of patents. Most have none, or very little. They’re too vague or just plain crappy to have any real licensing use. They’re bad ideas that nobody needs, or maybe they’re just old and dusty and obsolete. But even a crappy patent has value in this world. It might not yield a new technology or support a new technology, but it becomes part of the vast board game of patent aggregators. It can be used as a defensive or offensive pawn.

“The patents that are now being acquired as inputs for mass aggregators traditionally have been created and exchanged for other reasons, if at all,” the paper states. “Whether patented offensively or defensively, inventions have typically been created and acquired either in hopes of creating a commercial product or for reasons closely related to a commercial product. These inputs, very few of which would ever generate revenue, are now being monetized and traded independent of underlying products.”

So where does this leave patents that have actual uses outside of the board game? If someone’s willing to monetize the fuck out of some garbage patent that fits well-enough into some larger move in the game, where does that leave the ideas that can change the world. Boned. Remember, even the goddamn World Bank is in on this scheme. It’s all a bit like the guerilla copyright enforcement and general thuggery of ASCAP in a way, but the stakes here are vastly higher.

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Reach this writer at michaelb@motherboard.tv, @everydayelk.