The patent troll problem, widely exposed by NPR in 2011, has long infuriated real companies and the tech sector. And now people in high places are starting to notice.

This week, a young woman told President Obama in a Google Hangout that she and other entrepreneurs live in fear of patent trolls and asked if he planned to continue patent reform. In response, the president made his boldest statement to date on the issue:

“The folks that you’re talking about are a classic example; they don’t actually produce anything themselves. They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

It looks like common sense has come even to the highest halls of power (see interview and transcript here via Patent Progress). The question now is whether President Obama will actually take charge and do something about the patent plague that is sucking money out of the most innovative sector of the economy.

In the past, the president has proved adept at throwing sops to his fans and fundraisers in the tech sector without doing much to help them. In 2011, for instance, he signed the America Invents Act, which was a milquetoast measure to fix the worst elements of the patent system. While the law made it easier to challenge bad patents, it didn’t reign in absurd jury verdicts or overly broad patents that enable the trolls in the first place.

It’s time for the president to try again. To do so, he will first need to get around the specific concerns of the pharmaceutical industry, which has blocked previous patent reform efforts; as Judge Richard Posner has noted, drug makers are among the few who may need the monopoly power of a patent in order to recoup their investments. This is not the case for software and tech where a first-mover advantage provides an adequate head start and technology rapidly becomes obsolete.

As for addressing the trolls, law professor Brian Love has proposed a very sensible solution. Love, a protege of IP godfather Mark Lemley, suggests changing the patent fee structure to create disincentives for hoarding the obsolete patents that trolls typically use to torment their targets. The advantage here is that this is something Obama can do directly. Meanwhile, in Congress, the president can push for legislation to eliminate billion dollar jury verdicts.

Finally, the president can also tap his executive power to increase antitrust scrutiny of giant patent trolls like Intellectual Ventures for imposing what is, essentially, a startup tax across the tech sector. If the Obama administration even attempted to impose such a tax, the political cost would be enormous; there’s no reason the private sector should get away with the same thing.

Enough talk. It’s time to act, Mr. President.

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For the unfamiliar, IV is the dark empire of Nathan Myhrvold, a former Microsoft executive who gamed the patent system by amassing tens of thousands of often-flimsy patents and then threatening to sue everyone in sight. IV and other trolls have reportedly drained $500 billion from the economy and created widespread disenchantment with America’s patent policies.

While IV has been at this for years, its activities are often undetected thanks to a clever use of a reported 1,300 shell companies. This means that the start-ups and tech companies who receive “pay-up-or-else” letters for using things like emoticons are confronted by patent owners with futuristic names like “iZ2″ or “Mobile Transformations” — only to discover that the patent owner is little more than a group of lawyers with a PO Box in Texas. All the while, the puppet master remains well hidden.

Now, however, a boutique analytics firm called IP Checkups is creating the “IV Thicket Case Files“, a blog and database that will serve as a taxonomy of IV’s trolling. The idea, says the company, is to keep tabs on IV and to provide a warning mechanism that will help start-ups determine if they are likely to be mugged by one of IV’s progeny.

More broadly, IP Checkups’ project could reframe public perception of IV’s activities. So far, Myhrvold has gulled the media with tales of IV’s marvelous inventions. This could change once it becomes easier to see the extent of the dirty work carried out by the shells and, just possibly, galvanize the federal government to drive an anti-trust stake into IV’s heart.

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In an interview with tech site Geekwire, Myhrvold said, “I think we do a whole lot more good for the world than GigaOm does. How big is their malaria research project? How much effort do they put into polio?”

He goes on to suggest that companies, and Silicon Valley in particular, spend too much effort on making new gadgets for people who don’t need really them. We should focus instead, he says, on developing technology for the world’s poor and points to Intellectual Venture’s “laser device that shoots mosquitos out of the sky.”

What to make of all this? Well, the sentiment is certainly a noble one. The problem, though, is that Myhrvold is utterly unfit to espouse it. As we’ve stated before, no amount of philanthropy can undo the incredible ruin his company has unleashed on innovation through unfettered patent trolling. Lest you doubt, consider the following:

New research shows that Intellectual Ventures is tied to at least 1,300 shell companies whose sole purpose is to coerce real companies into buying patent license that they don’t want or need. Those who resist the “patent trolls” are dragged into nightmarish lawsuits.

Think about what this means in practice. It means thousands of entrepreneurs must divert revenue from development and technology to pay Mr. Myhrvold’s licensing tax or else brace for millions in legal fees. Worse, patent trolls are targeting some of the most promising young start-ups in the country like hand-craft site Etsy. Now, instead of hiring workers and bolstering the economy, Etsy and others must put aside money to pay the likes of Mr. Myhrvold instead.

And for what? Intellectual Ventures styles itself as a hotbed of inventive wizardry but precious few devices have come out of its lab and into the world. (Just when is that mosquito-zapping marvel going into production by the way?) The most tangible thing Mr. Myhrvold has done to date is to offer a new way to cook a hamburger. And even though it has siphoned billions from productive companies, Intellectual Ventures has even proved a rotten deal for its own reluctant investors.

To be clear, GigaOM commends Intellectual Ventures for any efforts it undertakes to fight malaria and polio. Our complaint is instead with its decision to game the country’s dysfunctional patent system. The company’s lawsuits are smothering technology development of all sorts (not just gadgets) and until Intellectual Ventures calls a halt to this, its “VP of Global Good” is no more than the feel-good face of a parasitic empire.

(Image by Henrik Larrson via Shutterstock)

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In a new job posting, Intellectual Ventures is looking for a Seattle-based “Vice-President of Global Good” to lead a team devoted to “develop and deploy inventions to save lives” in the developing world.

Saving lives is commendable to be sure but anyone applying for this job better recognize that it would be a Faustian bargain.

For anyone unfamiliar with IV, the company has reeled in a fortune by gaming America’s broken patent system. It did so by acquiring thousands of patents and then inviting its victims to become “partners” in its investment fund. Those who refused to pay for a license are being sued by IV or by shell companies that it spawned such as Lodsys, the infamous patent troll that is suing app developers over in-app purchases.

• See also: We’re all trolls now: why the patent rat’s nest is worse than you think

Intellectual Ventures’ decision to impose its own personal tax on America’s technology system is diverting money away from the most vibrant sectors of economy and into the courtroom. Even its own investors are suffering. As Forbes reports, IV’s shareholders have so far been left holding a portfolio that looks closer to Bernie Madoff than to Apple or Google.

The future “VP of Global Good” will be hard-pressed then to carry out enough good works to offset the colossal harm or his or her employer. Unless, of course, they choose to close the company and reform the patent system.

(Image by chatursunil via Shutterstock)

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This time, though, Larry Ellison’s company gets to be the good guy. In a lawsuit filed in Wisconsin federal court, Oracle is asking the court to invalidate four patents belonging to a patent troll that has been terrorizing corporations and small software developers across the country.

The troll in question, Lodsys, is a Texas-based shell company that gained infamy last year by suing app makers who included a common “in-app” purchase feature in their Apple products. The company’s business model is based  in part on using threatening letters to force app makers to hand over part of their revenues —  money which then fuels new legal campaigns.

Oracle has decided to weigh in because Lodsys “has repeatedly threatened numerous Oracle customers” such as Walgreens over the use of a web-chat feature Lodsys claims to own. Oracle is asking the court to declare that the four patents Lodsys is using to bully its customers are not new inventions. The patents, including US Patent  5,999,908 (“customer based design module”), came to prominence last year when Lodsys used them to sue Best Buy, Adidas and others.

Oracle’s lawsuit also takes a swipe at Lodsys’s status as a patent troll — a shell firm that doesn’t make anything but instead collects patents to sue companies that do:

Oracle is not the only heavyweight to challenge Lodsys. A court recently gave Apple permission to intervene on behalf of its developers in a Texas case.

The patents themselves were obtained by Dan Abelow, a self-styled inventor who attended several business schools but appears to have no training in science or engineering. The front man for Lodsys is a Chicago man named Mark Small but the real owners of the shell company have yet to reveal themselves. Lodsys is believed to be tied to Intellectual Ventures, a Seattle firm that aspires to make patent trolling a multi-billion dollar industry.

Here’s the Oracle suit:

Oracle v Lodsys
(Image by Tereshchenko Dmitry via Shutterstock)

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A Troll’s Tale

In an interview at an All Things D conference, Myhrvold appeared untroubled by his complicity in what Mossberg called a “rat’s nest” of patent lawsuits ensnaring the technology sector. The rat’s nest is most associated with the smartphone industry, but is growing rapidly thanks in large part to the arrival of troll companies like Myhrvold’s Intellectual Ventures (IV).

For the uninitiated, trolls (more politely called non-practicing entities) are shell companies whose business is to amass patents and sue companies that offer actual goods and services. The trolls are especially insidious because the patents they assert are often of dubious quality (see this one where a troll says it owns emoticons) and because, unlike a normal company, they are not vulnerable to counter-suits. An academic study last year estimated that trolls have sucked $500 billion out of the economy in the last two decades.

IV took this to a whole new level by assembling tens of thousands of patents and, despite earlier assurances that it wouldn’t, launching a spate of lawsuits. The company is also suspected of backing the infamous Lodsys, a troll that demands small app developers purchase patent protection in exchange for a percentage of their revenues.

Myhrvold and IV are using some of the money they’re extracting to fund experiments of their own, including the use of liquid nitrogen to cook a hamburger.

Everyone is a troll

While IV has been widely criticized for a business model that taxes innovation, the company has also done something that could make it impossible to stop. Namely, before it began its suing spree, IV made sure that many of its potential critics became its investors. IV’s list of investors includes Apple, Google, and Amazon who all invested in Intellectual Ventures, most likely to avoid being sued.

Meanwhile, trolling is quietly becoming part of everyday business practice.

“The whole notion of patent troll is evolving to the point where many technology companies have gotten in bed with the trolls. It’s like the pot calling the kettle black,” says Eric Lobenfeld, a co-head of law firm Hogan Lovell’s intellectual property practice.

Lobenfeld says that big technology firms like 3M, Micron and HP are earning money from the fruits of patent troll suits. He adds that leading tech executies and patent lawyers also have a stake in the troll game.

“[Former Intel exec] Peter Detkin contributed to coining the phrase patent troll … but has morphed into one himself,” said Lobenfeld. What’s more, some of the country’s top patent lawyers are leaving firms at which they made $4 -$5 million a year to be part of private equity trolling operations where they “make a lot more money than that.”

As more people see their livelihood tied to the trolling game, it will become more difficult to shut the game down. And as licensing revenue from troll-related ventures contribute to company revenues, more executives who profess to hate trolls will “hold their nose and do it anyway.” Likewise, investors and even consumers are becoming indirect participants in this growing troll eco-system.

Trolls forever

Myhrvold this week portrayed his patent practices as simply another form of capital allocation. In his view, the company’s trolling is a good thing because it raises money for Intellectual Venture’s experiments which will, in turn, produce more patents.

The problem, of course, is that patents are not synonymous with value and innovation. They are instead an artificial monopoly awarded by the government as a form of industrial policy. While  such monopolies can spur creativity, the rat’s nest of patents suggests something has gone wrong — and that it’s time to evaluate why and how we award patents in the first place. Otherwise, money will continue to flow to lawyers, IV and other middle-men rather than to the people who invent things in the first place.

Unfortunately, Myhrvold’s clever strategy of making everyone else complicit means that it will be harder to revert to common sense.

(Image by DM7 via Shutterstock)

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The University of Chicago, through its Nobel-prize winning economists, is a champion of property rights and free market policies. Now, in the field of technology, Chicago’s ideas are also being used to justify harmful and expensive lawsuits.

Patent lawsuits made headlines yet again this month after Yahoo (NSDQ: YHOO) used ten questionable patents to claim that it, not Facebook, invented the social network. There have also been a rash of new suits by patent trolls — shell companies that don’t make anything but use patents to sue companies that do.

Trolls (known more politely as “non-practicing entities”) have been around for years but stepped into high gear in 2012. In the last two months, for instance, troll shell companies have unleashed lawsuits that claim monopolies on everything from emoticons to virtual goods in video games.

The problem is becoming worse. Top patent lawyers are leaving their firms to partner with hedge funds on new trolling ventures and super-troll Intellectual Ventures (reported to own more than 60,000 patents) is now suing with a vengeance. Meanwhile, mystery troll Lodsys is still demanding small app developers hand over two percent of revenues or else be taken to court over a common ‘in-app purchase’ feature.

So where does Chicago fit into all this? The answer is that it’s behind the “liquid market” theory of patents that gives a gloss of legitimacy to what many people would call extortion.

Chicago firms like Ocean Tomo, which runs intellectual property auctions, have helped popularize the idea of treating patents like widgets to be bought and sold. Lodsys front man, Mark Small, is also from Chicago. In their view, the patent status quo is working well.

The liquid market theory has a more formidable defender in Richard Epstein, a renowned University of Chicago law professor and Financial Times contributor. In an email exchange, he described trolls as “an overrated issue” and added, “So long as there is quick closure, a patent is a wasting asset, and marketing beats lurking every time.”

This view — that treats patents as any other form property to be bought and sold — holds up in theory. But in practice, it’s dangerous because the property in question is not a widget but an idea that the owner can control and punish others for using. And since a patent is effectively a monopoly, the royalty demands seem less like a free market exchange than an old fashioned tax.

If Congress imposed a two percent tax “invention tax”, the politicians responsible would be voted out for a generation. But if a company like Lodsys does the same thing, it can claim to be promoting a free market.

The larger problem here is that a market for shaky patents is not a good idea in the first place. Do we think a complicated IRS tax is justified just because it creates a market for accounting services?

And if anyone doubts the patents are shaky, read what a former Yahoo engineer or a leading venture capitalist has to say about Yahoo’s so-called inventions. And these are just a small sample of the thousands of suspect patents fueling lawsuits and license demands.

The patent system is obviously dysfunctional and needs to be fixed but the role of patents in American mythology makes it hard to do so. To most people, the word “patent” still conjures images of Thomas Edison or Abraham Lincoln (US Patent 6469) — even though most of today’s patents are the product of lawyers and MBA’s using obtuse language to pressure a swamped and overworked patent office. The courts, meanwhile, are still in a state of confusion about what can and can’t be patented.

As for Silicon Valley developers, most know intuitively that innovation comes from sharing and collaboration and not from a single genius shrieking Eureka! For them and many academics, patent monopolies (especially those for software and “business methods”) are not a spur to research but a barrier.

These real inventors of Silicon Valley have champions of their own such as Mark Lemley, a Stanford professor and the country’s leading authority on patent law.

In a new paper called “The Myth of the Solo Inventor,” Lemley provides evidence that many famous inventions were produced by different people at the same time, and that patent owners typically sue independent inventors and not copycats. His work raises important questions about why patents are awarded in the first place.

Meanwhile, new economic research
suggests that free licensing is more efficient than patent monopolies to achieve technology breakthroughs and create large markets for new products.

For now, though, this research is going unheeded as Intellectual Ventures and others continue to spin Chicago-style theories to justify their troll taxes.

If Silicon Valley is to escape a circular firing squad of patent litigation, it must push back with its own homegrown patent theories. The recent SOPA victory taught engineers to flex their political muscles. Now, it’s time for them to flex their policy ones and restore sanity to the patent system.

(A final note: debates over innovation are, of course, taking place in many forms across the country. In this article, “Chicago” and “Silicon Valley” are simply used as shorthand for two very different visions of America’s patent system — one based on market theories and one based on how innovation actually works — and to point out that Chicago has gained the upper hand.)

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In court papers filed in Delaware federal court, Intellectual Ventures said the telco companies are infringing on 14 separate patents that have descriptions like “Transmission of Multimedia Messages between Mobile Station Terminals.” The suit was announced on the company’s IV Insights blog.

Verizon is not named in the suit which means the country’s other major telco has probably agreed to license the technology. The lawsuit also confirms that the company is intent on going after big fish as well as small ones. The company began filing lawsuits in 2010 and is now involved in dozens of cases, including ones against Canon and Motorola.

Intellectual Ventures occupies a special place among patent holding companies. The company has for years been amassing thousands of patents and inviting companies to become “investors” in its investment funds. Critics say the practice amounts to extortion and describe I.V. as a giant patent troll.

Companies like Microsoft, Google (NSDQ: GOOG) and Apple (NSDQ: AAPL) are reported to be among Intellectual Ventures’ investors.

(Update: An IV spokesman provided the following statement: “Our investor group comprises both technology companies and institutional investors and foundations who have invested purely for financial reasons.” A full list of the company’s investors can be found here via the company’s website).

The company was founded by Nathan Myhrvold, a brilliant polyglot physicist who argues that his giant patent trove will bring about a new era of innovation. For now, it is uncertain if Intellectual Ventures is benefiting inventors or even its own investors. The company’s most high-profile work so far has involved the use of chemistry techniques to cook a hamburger.

The America Invents Act, passed last fall, has made it more difficult for patent plaintiffs to sue. But the law doesn’t affect existing patents and the last year has brought increase in patent lawsuits brought by major investment funds.

The Wall Street Journal reported last month on how the cream of the country’s patent bar are leaving their firms to join entities like Round Rock, a shell company backed by billionaire investment funds.

Note: This story corrects an earlier version to say IV began filing suits in 2010, not 2009. IV was an intervenor in a 2009 case but did not itself bring the suit.

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Schmidt’s remarks were made on day-three of his trip to Asia, when he visited Taipei. “We tell our partners, including the ones here in Taiwan, we will support them,” said Schmidt (via Reuters).

That support will not be in the form of financial backing. Rather, Google will offer tesitmony, advice and access to its own patents. That is currently is a small number that one estimate put at less than 600 back in Janaury of this year, but could be bumped up by some 17,000 patents when and if the Motorola Mobility acquisition is approved.

Yet it’s unclear what that Google’s “support” has meant up to now.

At the moment, Samsung is embroiled some 20 lawsuits against Apple (NSDQ: AAPL) over patent disputes, and HTC is also facing cases in several jurisdictions, as is Motorola (NYSE: MMI).

But if Apple is the rock here, Microsoft (NSDQ: MSFT) is the hard place for these handset makers. Eleven of Google’s biggest Android device partners have signed on to a kind of “Android tax”, licensing Microsoft’s patents to avoid getting taken to court by the Redmond, Washington software giant over their use of Android.

Some Android device makers are not agreeing to Microsoft licenses without a fight: that’s made clear enough in the Barnes & Noble (NYSE: BKS) case. The company is currently being sued by Microsoft in a patent suit and the bookseller offered up a presentation detailing what it believes are Microsoft’s anti-competitive practices in patents (via Geek Wire).

In light of all these cases, it’s hard to believe Motorola’s 17,000-odd patents would give device makers the protection they need against litigation: after all, Motorola Mobility is also involved in an Apple suit of its own. That seems to imply that it may not.

Given all of the above, it comes as no surprise to hear of one more licensing deal signed between Android partner LG and patent holder Intellectual Ventures.

Under the agreement, LG will now have access to some 35,000 patents held by IV. That is the same deal that IV has already signed with RIM, Samsung, HTC and Pantech, among others. Financial terms of the deal were not disclosed.

LG already has its own trove of patents — not clear how many — but it has already been on the receiving end of a court case over patent infringement so you can see why it might want to beef up its defense. In 2009, Kodak successfully sued the company over camera technology and LG had to pay Kodak $414 million in damages (via BBC).

IV says that the patents are not only useful for defending LG in court but also to give the company a basis for future product development.

Ironically, IV is currently suing Motorola over patent infringement as well.

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IV is well known in the technology industry as a predator, perhaps the most emblematic of the “protection racket” approach to patent litigation. It’s the world’s largest holder of patents, and it either attempts to find companies that it thinks it can argue infringe those patents and either negotiate a license or file a lawsuit.

“Intellectual Ventures has successfully signed licensing agreements with many of the top handset manufacturers in the world, and has been in discussions with Motorola Mobility for some time. Unfortunately, we have been unable to reach agreement on a license,” IV’s Chief Litigation Counsel Melissa Finocchio said in a statement.

Now that Samsung has signed a licensing deal with Microsoft (NSDQ: MSFT) for its mobile patents, Motorola is the juiciest target in the mobile world, especially with the knowledge that it will take longer than expected for Google (NSDQ: GOOG) to complete its proposed acquisition of the company following federal review. Both Apple (NSDQ: AAPL) and Microsoft have filed patent-related suits against Motorola despite the fact that Google thought highly enough of Motorola’s patent portfolio to spend $12.5 billion on the company, and now IV will get its turn.

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