Patent trolls and IBM: Will Big Blue's meta-patent fix a broken system?

Commentary about business and finance.
Jan. 19 2011 12:11 PM

Die, Patent Trolls!

Will IBM's new meta-patent help fix a broken system or just make things worse?

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Will Big Blue's meta-patent fix a broken system?

America has gone patent-crazy. In 2010, the United States Patent and Trademark Office awarded 219,614 patents, up 31 percent over 2009 and the largest one-year increase on record. One company stands alone as the national patent champ: IBM. In 2010, the company added a whopping 5,896 new patents to its roster—20 percent more than the year before, and the 18th year in a row it has come in first.

The list of IBM's newly patented technologies makes for interesting reading. The company won a patent, for instance, for an emergency-response system to be used in the wake of earthquakes, to "accurately and precisely conduct post-event analysis of seismic events." It also patented an "optoelectronic device with germanium photodetector," a technology that promises to ramp up network speeds in the near future.

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Nevertheless, I'd argue the most interesting patent IBM filed for in 2010—the application remains pending—is number 20100332285. The company dryly describes it as a "computerized system for providing an IP framework, including a storage component, a user interface, and a reporting module." The application goes on to note that IBM's new technology "defines the decision process and plan of action to identify, create, and protect IP for defensive purposes."

To translate the tech-speak and legal jargon, IBM is proposing a patent about patents—specifically, how to use, defend, file, and manage them. It is a meta-patent, perhaps the world's first. The fact that such a thing can exist is a reminder that the patent craze, while emblematic of America's research-and-development prowess, comes with a downside.

As first noted by Wolfgang Gruener at Conceivably Tech, IBM's meta-patent specifically defends the company's technologies from patent infringers and possible trolls—or, to use the nonjudgmental vernacular, "nonpracticing entities." These are companies that buy up patents from the "thicket," legal scholars' term of art for the tens of thousands of granted but unused, unlicensed, or otherwise on-offer patents. With papers in hand, some perform a useful market-making function. But some use patents as a mere avenue for suing other companies—hence the "troll" terminology.

So, how does IBM's proposed meta-patent work to defend the company's intellectual property? It's complicated, but Manny Schecter, the company's chief patent counsel, tried to explain. He describes how the company keeps track of its innovations: They process and evaluate and file them, sometimes refile rejected patents, sometimes go to court, sometimes process payments to the government, and sometimes flag prospective infringements. The new computerized system "componentizes various aspects of that practice," he notes—basically centralizing and automating the patent management process.

IBM says that it is not trying to patent a defense system against trolls. Rather, the firm explains that it filed for the patent because its technology is unique and marketable to other companies. "It's not really about other patents," Schecter says. "It is a component business model for managing patents and leveraging patents."

Still, there wouldn't be much use for such a patent-defending system if the tech world wasn't laden with trolls and dogged by a generally unhealthy patent culture. In the past decade, patent scholars say, technology companies have engaged in an arms race, with the number of patents applied for, granted, and litigated all soaring. And it is starting to have real deleterious effects.

As James Boyle of Duke Law School explains, this all started during the tech boom of the 1990s. At first, the patent office and the courts declined to let companies patent many of the innovations that sprung up in this era, particularly those around business processes. (To make up an example, a fast-food chain couldn't patent the process of making burgers, but could patent a quick-cooking oven.)

Then, the federal court of appeals where patent-infringement cases are heard expanded the scope of patentability in a series of decisions. * (Some were later modified, but the general expansion remains.) That creep in patent scope, Boyle says, coincided with "a fear that the trademark office has relaxed standards." This led to a spate of defensive patenting—corporations running to the patent office with any invention or process that a competitor might possibly latch onto.

Of course, patents are necessary to protect the incentive to innovate and to allow companies to profit off of the technologies they develop. But bad patents, and litigation over bad patents, gums up the system and imposes unnecessary costs on businesses. That is where a number of legal scholars fear the United States is now.

For instance, businesses are now spending a lot more time defending against patent trolls. Statistics from the watchdog group Patent Freedom show that suits involving nonpracticing entities more than doubled between 2004 and 2008, this due to "financial investors who speculate on potentially massive returns on the relatively modest cost of purchasing patents on the open market."

And overall, patent inefficiency has started imposing serious deadweight costs. "The cost to the defendants has soared," explains James Bessen, a patent expert at Boston University's law school. "Outside of chemicals and pharmaceuticals, where the patent system works well, the costs of litigation have quadrupled" since the late 1980s, Bessen says. * He estimates that unnecessary patent litigation is now a 10 percent to 20 percent "tax" on innovation.

That leads us back to IBM. The company, hardly an aggressor, does not seek out patent infractions for litigation and soak up patents to turn and sue others. But it does keep a staff of 100 lawyers to make sure the company has legal control of its technologies and healthy licensing agreements with its competitors and clients. And, now, it does not patent just to protect its innovations. It patents to protect its patenting as well.

But there is a bright spot on the horizon: The courts seem to be stepping in to reduce the sums awarded for patent litigation, thereby reducing the incentive to sue. "The court for patent appeals has done a very good job in the last few years of trying to make sure that damages correspond to the actual value of the product sued over," says Arti Rai, a Duke Law professor and former administrator of the office of external affairs at the patent office. "At some point, I think, judges realized that there was a natural place for the Federal Circuit to make the law clearer, and to take away that pot of gold."

Hopefully, then, there will soon come a time when IBM can focus on its earthquake and silicon-chip patents—not its meta ones.

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Corrections, Jan. 20, 2011: This article originally described the U.S. Court of Appeals as the court where patent-infringement cases are litigated. Specifically it is the U.S. Court of Appeals for the Federal Circuit. ( Return to the corrected sentence.) In addition, the author originally mistranscribed the word litigation as legislation in a quote from James Bessen. (Return to the corrected sentence.)

Annie Lowrey is a contributing editor for New York magazine. She can be reached at annie.lowrey@gmail.com.

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