A Bull Market in Tech Patents
Google was willing on Monday to pay $12.5 billion for Motorola Mobility in no small part because of its stockpile of 17,000 patents. The patent portfolio, some analysts estimate, could represent more than half of the value of the deal, or more than $400,000 a patent.
If so, it was a relative bargain. In June, Apple and Microsoft teamed up with four other companies to pay $4.5 billion for the 6,000 patents held by the bankrupt Canadian telecommunications maker Nortel Networks. That works out to $750,000 a patent or nearly four times the average price for computer, software and telecommunications patents over the last few years, patent experts say.
In a stumbling economy, stocks languish in a skittish funk and real estate remains depressed. But technology patents look downright bubbly.
This patent gold rush has a darker side. It is diverting money for innovation from industries crucial to the economic future of the United States, analysts say. Patents were created as an incentive for innovation, giving inventors a temporary right to commercialize their ideas, without others copying them. While the recent blockbuster patent deals may make sense for the companies, analysts say, they are fed largely by legal considerations — asserting patent claims or defending against claims — rather than economic ones.
So the very innovation patents were intended to encourage, they say, suffers in the patent wars. “You’d much rather see Apple spend some of that $4 billion on new inventions, and Google invest that $12 billion to generate new knowledge,” said Josh Lerner, an economist at the Harvard Business School. “It’s a transfer of wealth from innovators to bondholders and stockholders who have no motivation to innovate. It’s disturbing.”
Patent investment firms, lawsuits, weakened patent overhaul legislation and the fierce competition among well-heeled rivals have also fanned this inflation. The patent legislation that emerged from the House and Senate, and which may well be enacted in the new session of Congress, has been scaled back. It no longer includes proposals that would have sharply curbed damage awards and the freedom of patent-holding companies to file patent infringement lawsuits. Another provision that was dropped would have limited the ability to file patent claims in known plaintiff-friendly courts, notably those in the Federal District Court for the Eastern District of Texas, which includes Tyler, Texarkana and Marshall.
Large technology companies championed those patent suit restrictions. But they were cut from the legislation after resistance from interests that rely on strong patent protection, like pharmaceutical companies, individual inventors and patent-buying firms like Intellectual Ventures, a multibillion-dollar fund run by Nathan Myhrvold that owns more than 35,000 patents.
Without tougher legislation, said Mr. Lerner of Harvard, companies are left to settle disputes on their own in the courts and at the bargaining table, which tends to lift prices.
The result is that it now pays to sue over patents as a routine business practice. The smartphone business, for one, is rife with suit and countersuit. The better-known cases involve large companies. Apple, Microsoft and Oracle, in different cases, have accused Google or the companies that use its Android smartphone operating system, like Motorola and HTC, a Taiwan handset maker, of infringing on their patents.
But there are other suits by small patent-holding companies that have aimed at developers of software applications that run on Google’s Android operating system and Apple’s iOS, which powers its iPhones. So the larger companies, like Google and Apple, are often forced to step in with legal assistance to help their business partners, even single-person applications developers.
Patent monetization ...
The result, said Brian Kahin, a senior fellow at the Computer and Communications Industry Association, a trade group, and a White House technology policy adviser in the Clinton administration, is “a huge surge in the monetization of these patents.”
Some industry executives doubt whether the recent high prices amount to a patent bubble. John A. Amster, chief executive of RPX, a start-up founded in 2008, which has bought more than 1,600 patents, said the Nortel and Motorola deals were mainly special cases. The high prices, he said, reflected not only an assessment of the value of the patents, but the much larger objective of trying to gain the upper hand in the smartphone business.
In the Nortel auction, RPX worked with a group of companies that came up with a bid of more than $1 billion, Mr. Amster said. That level, according to RPX, was the estimated value of the patents — but far below the $4.5 billion Apple, Microsoft, Research in Motion and their partners were willing to pay.
In the case of Motorola, Google was under pressure from its big handset partners, including HTC and Samsung, to protect them from patent-infringement suits based on their use of Google’s Android software. And Motorola has an impressive collection of mobile phone patents, a powerful weapon in patent negotiations.
“What you’re seeing in Nortel and Motorola are prices determined by broad strategic interests, and there aren’t many of those deals,” said Mr. Amster. His company, RPX, charges clients yearly fees for licensing its patent portfolio, which reduces the companies’ risk of being sued.
Handset makers and mobile carriers are certainly hoping that Google’s purchase of Motorola will ease tensions in the smartphone market — a patent armistice among rival powers. Verizon on Tuesday welcomed the deal as a move that might well “bring some stability to the ongoing smartphone patent disputes,” John Thorne, senior vice president and deputy general counsel, said in a statement. Verizon Wireless, owned by the Vodafone Group and Verizon Communications, sells both Android-powered phones and iPhones.
Fierce patent disputes in young, fast-growing industries are anything but new. In 1895, George B. Selden, a patent lawyer and inventor, was granted a broad patent on the automobile, covering a machine with four wheels powered by a gasoline engine. Henry Ford and other early automakers fought the patent for years, and it was eventually pruned back in 1911.
The early patent battles over the airplane were so bitter and complex that the government stepped in during World War I and negotiated an agreement that required the companies to cross-license their patents, opening the door to innovation in the aircraft industry.
Patents, experts note, work well when an invention can be clearly defined, as in the patents that cover new chemical compounds — a new drug or petrochemical, for example. But a smartphone, they add, is a bundle of information technology, including hardware, software and techniques for sending and receiving voice, data and video.
In a recent blog post, David Drummond, Google’s chief legal officer, wrote that a modern smartphone might be susceptible to as many as 250,000 potential patent claims, depending on how broadly those patents and claims were interpreted.
“The trouble is that in this industry so often a patent is not a clearly defined property right, but a lottery ticket of uncertain value,” said Scott Stern, a professor at the Sloan School of Management at the Massachusetts Institute of Technology. “That uncertainty can carry a lot of risk and cost.”