The Patent War

The tech industry is at an interesting crossroads right now. While many of the largest companies have a plethora of cash at their disposal, rather than spending it on acquisitions, research and development, or stock buy backs, these companies are buying up patents to sure up their standing.

This patent purchases have been happening for some time but Google's recent purchase of Motorola has heightened the patent debate:

The costs of our broken patent system are often abstract, but this month Google put a price tag on the problem: $12.5 billion. That's what Google paid for Motorola's U.S. smartphone business and its 17,000 patents. This is $12.5 billion that one of America's most creative companies will not use to innovate, fund research or hire anyone beside patent lawyers.

Rather than using these patents to develop new products, these companies are using them to sure up their market position against their competitors and to start lawsuits. The war is taking place not in the sleek high tech buildings of Silicon Valley, but in the courtrooms.

The Google deal is the biggest in a line of purchases that has seen the biggest companies look to secure a competitive advantage:

Lacking its own trove of patents to vie with Apple, Microsoft and other companies, Google and its hardware partners were targeted by suits aimed at slowing the adoption of Android smartphones. Adding the 17,000 patents of Motorola Mobility, which has been inventing mobile-phone technology since the industry began, may help Google stanch the onslaught.

Google's Android technology has been under attack, so these purchases sure up their position against Apple and other competitors:

Apple stepped up the patent feud by suing Android manufacturers, claiming Google-powered devices copy the iPhone and iPad. Microsoft has sued Motorola Mobility and Barnes & Noble Inc., whose Nook reader runs Android software.

Already, there's a potential lawsuit from Microsoft:

“We have a responsibility to our employees, customers, partners and shareholders to safeguard our intellectual property,” David Howard, Microsoft’s corporate vice president and deputy general counsel for litigation, said in an e-mail. “Motorola is infringing our patents and we are confident that the ITC will rule in our favor.”

Besides the lawsuits, the purchase of Motorola Mobility puts a price on patents:

"There is clearly an upward sloping trend in patent value and patent value being recognized," said James Malackowski, chief executive of Ocean Tomo, an intellectual property advisory firm which values patent portfolios as part of its services. "As with any trend, it's never perfectly smooth, you see volatility in outlier transactions."

I think this best describes the situation:

"There are three textbook ways to value intellectual property, just as you would real estate -- the income approach, the cost approach, and the market approach," he said.

"If you are looking at an apartment building, the market approach says how much do other apartment buildings sell for? For the cost approach, you would ask what it would cost to build a like unit. The income approach says look at the present value of the rents -- or for patents, the present value of the expected earnings associated with owning the technology."

The question is: should these companies be spending their cash on patents? The answer isn't so simple:

Many venture capitalists and software entrepreneurs have warned that software is fundamentally different from other areas of innovation and that patents should be granted much more rarely than they are today. Software almost always builds on previous work, so patents rarely reflect the kind of original work that patent law is supposed to protect.

Part of the problem is that the law no longer distinguishes between how ideas become products and services differently in different industries. A good contrast to software is how advances are made in the pharmaceutical industry, which is made up of largely independent areas of research.

While these companies do deserve protection for their intellectual property, it is not good for the companies nor the technology sector for these companies to just duel over these patents. The cash that these companies have on their books would be better used for new innovation through R&D and to create new jobs. The posturing of these companies suggests more about patent law than anything else. There needs to be changes:

The U.S. Court of Appeals for the Federal Circuit is the exclusive forum for patent appeals, created in 1982 to keep the law consistent. But with consistency has come decisions upholding patents so broadly it’s hard to tell exactly what they cover.

The solution would be to have stricter standards:

A more reasonable approach would be stricter approval standards. The U.S. Supreme Court seemed to agree last year when it affirmed the rejection of a proposed business-method patent. The decision comes too late for companies that have shelled out for infringement fights. But it bodes well for those that would rather use patents to promote innovation than squelch it.

You cannot change what has already happened, but you can make the future more clear. The purchases of these patents have been made because of uncertainty over these patent laws. They don't know where they are protected and where they are vulnerable.

These companies can't move forward without ensuring that their present is stable. It is time to reconsider how patent law applies to technology. The US government must make a stronger push to ease these companies' worries and get them back to focusing on innovating the future.