Rise of the Pure Patent Business Model

Back in December 2004, I wrote a column titled "Five Under-the-Radar Trends for 2005". One of the below radar trends I predicted was the acceleration of intellectual property lawsuits. That turned out to be rather prescient.

There are actually two different issues here: The first is, should the USPO
be issuing so many patents, especially those for business methods? Amazon’s One-click buying, and MercExchange’s Buy it now auction are certainly questionable "inventions." That’s an issue for Congress, who needs to adequately fund the Patent Office so they can hire many more patent examiners, rather than merely have an under staffed patent office rubber stamp applications.

The second issue is that once a patent becomes issued, who gets to use it and how? Very often, we see the first issue inappropriately raised as a PR defense in the second. I don’t get the sense that all of the financial media really has a firm grasp on this. There is an entire world of patents, innovation, USPO issues, and large corporate litigants that have not been adequately discussed. Some get it, some don’t. Compare  this story: "eBay Takes on the Patent Trolls" with this one "In Patent Case, EBay Tries To Fight Its Way Out of Paper Bag." (For some intercorporate litigation, see Apple against Apple Corps. Ltd., and TiVo’s against EchoStar’s Dish Network).

Incidentally, the term "Patent Troll" was invented by Peter Detkin when he was defending a patent case against Intel. Ironically, Detkin is now managing director with Intellectual Ventures, an intellectual property firm suing patent infringers.

If you recognize the property right inherent in patents, then the term "Patent Troll" is quite meaningless, meant to stir up political opposition to patents. How you use your property is irrelevant to the property right attached to it. What does it matter if you choose to manufacture widgets — or merely license the patent to thos ethat do? 

What is actually going on now is a massive land grab underway by large corporations, looking to keep the fruits of entrepreneurs and innovators labor for themselves. These are not meek and vulnerable entities at the mercy of lawyers; rather, these are very astute players seeking to use the patent to further their own goals — often at the expense of innovation.

Take Intel, where Detkin was vice president and assistant general counsel, for example. They are certainly no stranger to patent litigation. As the book Inside Intel makes clear, INTC used its patents as a club to thwart competition in the CPU market for decades. That’s why its taken AMD so long to become a legitimate competitor to the chip giant.

The stealing of entrepreneurial innovation by large firms is fairly common place. My own experience with patent enforcement is that it is an enormously expensive, difficult, time consuming venture, fraught with peril. Consider the case of Robert Kearns, the inventor of the intermittant windshield wiper. In 1967, he received several patents on his design, which he tried to license to the Big 3 in Detroit. They sent him
packing, but later the intermittant windshield wiper somehow found its
way into autos. Long story short, he ended up in litigation for decades before finally winning. Thats decades later.

When we were interviewing various patent counsel for our litigation
versus Microsoft, I detected a general consensus amongst the patent
lawyers. Many of these attorneys had already been in litigations with
Microsoft, so they spoke from experience, and with some bias. The sense
I got from them was that Microsoft, like many large firms,
misappropriated patents on a regular basis. These lawyers figured the
calculus was made that whatever big firms ultimately spent settling
subsequent infringement suits was fraction of what it would have cost
to legitimately license various technologies. So much for innovation.

Each year, the US Patent office releases its annual list of top 10 global private sector patent recipients.
The US list includes such notables as IBM, Intel, Hewlett-Packard. In
2005, IBM received 2,941 — thats about 11 per workday, all year long.
Hewlett-Packard garnered 1,797 patents, while Intel was awarded 1,549.

These companies may complain about patents in the press, but at the
USPO, they have been filing patent apps as fast as they can . . .

Here’s the excerpt from that 2004 article:

Rise of the Pure Patent Business Model

Patent litigration revenue in the U.S. is substantial and rising.
High-profile patent suits will only accelerate in 2005. Why? A new
business model has developed in the venture capital and technology
world: the pure patent play.

Over the past few years, there have been quite a few variations on
the patent model, with differing degrees of success. Consider Ampex
(AEXCA:OTC BB) , the company credited with inventing the VCR. Its broad
patent portfolio for the storage, compression, retrieval and
decompression of video images helped it obtain royalties for digital
camcorders. More recently, the company won big settlements with Sony
($40 million) and Canon ($25 million) for digital cameras.

Those two manufacturers represent about 35% of the digital camera
market, leaving potentially another $100 million in future settlements,
and that’s before we get to camera phones, DVD recorders, DVD burners
and DVRs. Over the course of three months, the stock has rallied from
$2 to more than $50, and trades around $40 now.

Other claims have been more dubious: SCO Group’s (SCOX:Nasdaq)
litigation against Linux users, including IBM, fits into this category.
Consensus seems to be that SCO Group has not proven it owns the rights
to Unix. Even if it does, Linux has yet to be shown to infringe on
them. In 2003, the stock ran from less than $1 to more than $20. Since
a number of adverse rulings in 2004, SCO Group’s stock has plummeted
75% to where it trades now, around $4.

While SCO has been suing large firms, Acacia Research (ACTG:Nasdaq)
has been going after small ones. After acquiring streaming media
patents, it began suing small adult-content sites. The Electronic
Frontier Foundation, a technology rights organization, declared Acacia
at the top of its most-wanted list of patent offenders. More recently,
Acacia acquired a portfolio of Wi-Fi patents.

The model now has moved into the mainstream: Intellectual Ventures,
a venture capital group backed by Nokia, Sony, Intel, Microsoft and
Apple, has been creating and buying patents. IV’s war chest is about
$400 million. More recently, the defunct Commerce One’s 39 Web services
patents were auctioned off in bankruptcy to the unknown JGR
Acquisitions for $15.5 million.

Expect to see a slew of patent litigation from these and other players in 2005.

Five Under-the-Radar Trends for 2005
12/31/2004 2:00 PM EST

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What's been said:

Discussions found on the web:
  1. Andrew Schmitt commented on Mar 30

    I’m not sure how you can write an article about the “Pure-Patent” business model without mentioning the troll-royale – Rambus.

  2. B commented on Mar 30

    As someone who worked in R&D then sales for a patent machine, I can tell you the company was intensely focused on generating patents. We’d patent the neighbor’s dog if we could.

    There is much too much liberalization of what is deemed a patent IMO. And because the “haves” have a slew of attorneys who do nothing other than constantly pushing the limits of litigation, it stifles innovation IMO. That’s a rather paradoxical statement but anything that even smells of a patent infringement involves attorneys.

    The reason? That company’s patent portfolio generates $1+ billion dollars annually in licensing AND it is used as a sales tool in business process innovation, technology partnership & outsourcing opportunities. ie, The lure of an army of researchers focused on helping transform a client’s business process model via the use of amazing research in services and solutions is a tremendous weapon.

    Personally, I think the patent process itself needs a business transformation.

  3. Ken Jarboe commented on Mar 30

    I agree with “B” that it is the patent system that needs a transformation (and have written so in my blog – http://www.intangibleeconomy.org). As I understand it, in both the e-Bay case and the Blackberry case, the lawsuits were brought based on “independent invention” and inadvertant infringement – not someone “stealing” someone elses invention. And in both cases, the patent were latter invalidates by the patent office.

    Pure patents are one thing — the land-rush to patent everything and anything and then using that patent to sue anyone and everyone is a very different matter.

    By the way, I am thinking of patenting the combination of the words “patent” and “business model” (based on the LabCorp case where combinations can be patented) — this is a warning to any potential infringers (LOL!)

  4. B commented on Mar 30

    So Ken, the $64 question is how to stop the incessant abuse of patents. IMO at it’s basic form the engine is self lubricating in the sense that attorneys benefit from the current environment and attorneys write the laws Congress passes.

    I am not saying that being an attorney is not a noble profession. I just believe our economy has become supersaturated with attorneys. ie, our economy contains more solute than it would if the dissolved solute were in equilibrium with the undissolved solute. huh?

  5. Bynocerus commented on Mar 30

    In 1999, after a long period of frustration from not having anything to listen to on the radio during my commutes, I had a brainstorm. Essentially, my idea was this:

    What if you downloaded every song ever made into satellites already in orbit.? Then, sell radios that used voice recognition software so that you could literally tell your radio what you wanted to hear and it would play that song for you by downloading the song from the satellite(s). So in other words, I would tell my radio Neil Young, Harvest, Heart of Gold, and a few moments later I would hear a harmonica. To make money, you’d pay a subscription fee on a monthly basis.

    If this sounds very similar to XM, it should, although in my opinion, it’s a much better idea. Any song I want to hear anytime is much more preferable to me than listening to the radio. So, I went to see a patent firm about patenting my invention. They told me I was wasting my time for two reasons:

    1. I know nothing about electronics, and I needed to technically demonstrate how my “invention” would work, and

    2. I needed to do a patent search to make sure that my idea had not already been invented. The patent firm said that this would cost roughly $20,000 dollars.

    Now, the patent firm I was dealing with may have been lying. And, to this day, I have the original “schematics” of my idea (crudely drawn on a legal pad with notes jotted everywhere). It has occurred to me to sue XM and Sirius, since for all I know it was my idea first, but I am fully aware of Mr. Kearns’ ordeal, and so I am left thinking what if.

  6. Bynocerus commented on Mar 30

    Added to the first reason, I should mention that the paten firm told me I had to have a plan for putting my invention to work – I couldn’t just have the idea and sit on it. Since I don’t own any satellites, rockets or electronics firms, this was pretty much impossible.

  7. B commented on Mar 30

    What you want is music or any type of content on demand. Regardless of how it is implemented, that technology would be tremendous. XM and SIRI are working on the technology. Whether they are working to deliver music on demand, I don’t know but surely suspect it. Frankly, that is the only reason I don’t have an iPod. I’m not paying $2,000 to download 2,000 songs. I may not want any of those 2,000 songs next year. So, what? I pay another $2,000? NOT! The average iPod user does not download that many songs so the reality is the product is not utilized effectively. One day they may realize how much their market would expand and how a reccuring revenue model of subscriptions is actually superior to drive additional content through their service as well as bring in superior revenue streams long term. I would pay $2,000 over a period of years on a subscription model where I have access to any/every song every recorded or other content such as movies, weekly shows I missed on TV or whatever. And, when I want it, where I want it. Apple will/must change that model over time and that is when I will be a user of their service or someone else’s.

    I would say your solution could be accomplished somewhat similarly by providing WI-FI or Wi-Max or Cellular access to a digital content repository from anywhere to anywhere. So, portable devices and/or devices embedded in automobile broadband systems with wireless access could then access your subscription service. Voice and/or optical search capability would simply be an add on technology. Plus, you have the ability to utilize the broadband infrastructure for other services, thus improving the ROI. ie, Wi-Max or some sorts of broadband wireless is coming anyway. This would simply be one of many “riders” on that service.

    This really is not terribly dissimilar to satellite radio which is really a misnomer. XM uses geostationary satellites and then a boatload of terrestrial repeaters across the country. Wi-Max or Cellular or some type of broadband wireless technology will likely encroach on XM and SIRI soon enough with amazing new content delivery capabilities.

    The future is here and it will be amazing soon enough.

  8. Paul commented on Mar 30

    At the same time the Court heard arguments in the Ebay case, it also scheduled argument in Laboratory Corporation v. Metabolite about a patent on correlations about levels of vitamins in blood.

    Forgive the lengthy excerpt (via Cornell Law), but interesting discussion of the ‘big picture’:

    “CTI and Metabolite’s (Respondents) main complaint is that LabCorp (Petitioner) was using its total homocysteine assays and reporting the results from those assays to physicians. In turn, those physicians would use the measured total homocysteine level to correlate the estimated deficiency of vitamins in the blood serum of a patient. Every time physicians used the homocysteine levels to correlate the vitamin levels without Petitioner having paid the Respondents any royalties, Petitioner was accused of either infringing or inducing the infringement of Respondents’ patent. Petitioner contends that the Respondents cannot patent the supposed “correlation” step that physicians perform in their minds by determining the vitamin levels from the total homocysteine level. Petitioner further argues that Respondents cannot patent a scientific fact because the inverse relationship between homocysteine levels and vitamin deficiency is a well-known fact in the scientific community.

    “In deciding this case, the United States Supreme Court will be faced with the difficult task of maintaining balance in the United States patent system. The Patent Clause of the United States Constitution guarantees that Congress has the power to grant exclusive rights for limited periods to the respective writings and discoveries of authors and inventors in the interest of promoting the progress of science and the arts. The challenge that courts and agencies, like the Patent and Trademark Office, face in enforcing the Patent Clause is striking a balance between creating incentives for scientific inventions and advancements through patents, while also protecting other inventors from being excluded from using those innovative ideas and inventions to add to the greater body of knowledge. When a patent is granted, it creates exclusive rights. If a given patent is overly broad, it can undermine the very purpose of the Patent Clause by stifling innovation because individuals will not have access to the net FSW knowledge. Administrators at offices like the Patent and Trademark Office are eager to learn whether the Supreme Court will resolve confusion over the required specifications of patent applications and the scope of patentable subject matter.

    “This case has broader ramifications for other industries whose vitality centers on innovation and patents. If the Supreme Court agrees that patent claims should be read broadly so as to assert property rights over scientific principles or laws of nature, there is a concern that the Patent and Trademark Office might become inundated with similar broad claims from other industries. If something as basic as a correlation can be patented, entire research fields would be at the mercy of inventors who craftily patent basic principles that are the foundation of new and innovative fields of research. What state would communications technology be in today had courts granted Alexander Graham Bell exclusive rights to use electrical current to transmit voice signals over long distances? Would the cell phone have ever been invented? Would genetic engineering and forensic science be at the forefront of research and criminal law had Watson and Crick patented the use of DNA’s helical structure?”

    Full background, with links to many original source materials at

    Background brief for Ebay case is at

  9. B commented on Mar 30

    Sorry for all the posts but I’m bored until my T-time.

    Paul, that post from Cornell outlines one of the basic concerns we should all have for the betterment of man kind. And, as a country an ability to spur innovation and not stifle it.

    That’s the ability of Bio companies to patent the basic laws and knowledge of nature. That is akin to Einstein patenting the Theory of Relativity. Or Newton receiving a patent for the Principia Mathematica. In fact, I would guess that were either to discover such knowledge today, someone would be attempting to patent it. It’s simply ludicrous and a bastardization of the process. I would even go so far as to say it’s destructive.

  10. Alaskan_Pete commented on Mar 30

    Amazing, no mention of RIMM/NTP.

  11. fixoid commented on Mar 30

    i am going to patent my amazing new patent litigation techniques

  12. ajm commented on Mar 30

    Although I have no knowledge of the actual numbers, I suspect that Burst.com has made much more money from lawsuits than software sales. It’s easy to complain about patents when they other guy has them…

    (BR: note that they have “made” far less on litigation than they have spent on R&D)

  13. cm commented on Mar 31

    B: I’m not sure whether the issue in biotech patents is more patenting knowledge, or rather (supposed) facts of nature, e.g. specific naturally occurring compounds or the genetic blueprints to organisms. In the latter case more proper analogies would be Einstein/Newton patenting the concept of gravity, or the speed of light.

    Of course this language is sloppy, in order to patent this it must be cased in a “process” or “apparatus”, which often amounts to a technicality, for example when patenting anything that relates to the Internet or computers, the apparatus comes virtually free.

  14. The Big Picture commented on Apr 1

    Myhrvold on Patents

    Following up yesterday’s Patent discussion, I noticed that Nathan Myhrvold, who spent 14 years as Microsoft’s chief technology officer, had an Op-Ed piece in the WSJ yesterday on Patents. Myhrvold explodes the myths about the danger patent trolls. The …

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