In 2011, Apple and Google spent more money on patent litigation and defensive patent acquisitions than on research and development. That’s not a good sign for the U.S. economy; in fact, it’s a stark indication that our intellectual-property system is broken. Rampant patent litigation is impeding innovation and ultimately increasing the costs of gadgets for consumers, according to legal experts and industry observers. Now President Obama says he wants to reform the system.
This week, Obama introduced a proposal to crack down on so-called patent trolls — firms whose main objective is to extract licensing fees from other companies. The Administration issued five executive actions and seven legislative recommendations “designed to protect innovators from frivolous litigation and ensure the highest-quality patents in our system,” the White House said in a statement.
Patent trolls “don’t actually produce anything themselves,” Obama said in February. “They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.” In recent years, companies like Intellectual Ventures, which is run by former Microsoft chief technology officer Nathan Myhrvold, have garnered attention not for what they build but for the patents they own. Just this week, news emerged that Intellectual Ventures, which has amassed a reported 70,000 patents since it was founded in 2000, is now targeting financial firms for infringement.
Critics of the current U.S. intellectual-property system say patent trolls are placing a major drag on the economy. “This is economic terrorism,” says Drew Curtis, founder of popular website Fark.com. Curtis is a Kentucky-based tech entrepreneur who says he was sued by a patent troll over technology supposedly related to online news releases. “Somehow they got a patent on e-mailing news releases to people, and they sued me claiming infringement. I fought back.”
Curtis says the patent troll — whose identity remains a mystery, in part because it shielded itself by using a shell company — demanded money from the online start-up. “They asked me to give them my best settlement offer,” Curtis tells TIME. “I told them: ‘How about [nothing] and go [fly a kite].’” (Curtis actually used more colorful language.) Shining a spotlight on these shell corporations is a major goal of Obama’s proposed reforms.
Curtis is one of the rare entrepreneurs who had the gumption and means to fight back, as he described in a now legendary TED conference talk. “They said they’d sue me — it would have cost $100,000 in legal fees — but if I paid them less, they’d go away,” Curtis said this week. “‘Give us $100,000 or we’ll destroy your business.’ That’s the patent-troll pitch. It’s a complete shakedown.”
It’s not just entrepreneurs who bear the direct costs of the dysfunctional U.S. patent system, but consumers as well. Experts say that rampant intellectual-property litigation impedes innovation by slowing new products to market and making them more expensive. The only winners in the system are the patent lawyers, who reap fees every time one of these lawsuits is issued, or even threatened.
Everyone is ultimately harmed by a patent system that effectively hampers innovation, according to Julie Samuels, an intellectual-property specialist and staff attorney at the Electronic Frontier Foundation, a San Francisco–based digital-advocacy group. “Creation, innovation and invention are the cornerstones of the American experience,” says Samuels. “Patent trolls attack those ideals, harming us all.”
Most of the major tech giants, including Apple, Google, Microsoft, Samsung and HTC, are engaged in litigation and counter-litigation in dozens of jurisdictions worldwide. For the past several years, there’s been an escalating intellectual-property arms race gripping the tech world — and the weapons of choice have been patents.
Perhaps not surprisingly, patent-law reform is one of the major goals of the newly emboldened Silicon Valley lobby. “We’ve reached a tipping point on patents,” says Eric Goldman, director of the High Tech Law Institute at Santa Clara University School of Law. “There is growing consensus that the current patent system is slowing down our economy. Silicon Valley wants reform.”
“We all pay the cost of wrongful patent claims, because the costs to defend and settle patent claims are ultimately passed on to consumers,” says Goldman. “Resolving patent claims drains small businesses of money they could use to hire employees and invest in new goods and services.” He adds: “I think we’re seeing a lot of policymakers who want to get out front on this issue.”