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How Chicago Is Beating Silicon Valley At The Patent Game

Silicon Valley leads the world in technology but it’s losing a debate over how that technology should be used. A new surge in patent lawsuits shows that Chicago, not Silicon Valley, is setting the rules for how patents should encourage innovation.

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.)

13 Responses to “How Chicago Is Beating Silicon Valley At The Patent Game”

  1. I feel there needs to be some revision of patent law, though as a whole, it is working fairly well.  The few items I have issue with should be able to be repaired fairly easily, while still keeping the majority of the patent system as-is.

    From my point of view, the real issue is with the lack of scrutiny many patent applications seem to go under.  This seems to be an issue almost exclusively with software and business concept patents.  I have seen numerous patents that all seem to be for effectively the same thing, or things that are no different than what already exists.  One of my real pet peeves is where a single idea gets patented multiple times simply by being moved to a different medium.  To me, that is the same idea, some of these ideas have existed for hundreds of years, yet when a new medium comes out, people are able to re-patent that idea on a new medium.  The one I recall best was a patent for something like “awarding prizes based on your performance in a game on a mobile platform.”  Now, this patent would prevent companies that existed using that business plan in other mediums, from entering that new medium.

    You also need to admit, that a company which to most people is only there to horde patents and sue people for using their technology, while they produce nothing themselves, does just seem like a terrible thing.  That they are paying the actual inventor for these inventions, thus encouraging the creation of these inventions in the first place, gets lost.  I am unfamiliar with the function of these companies, but do they actually promote the use of their inventions, do they go around and market them to firms that would actually have use for them?  To me, if they do that they seem quite valid as promoting technology and advancement.  If they don’t how do they ever establish a market rate for their patents?  Simply forcing someone to pay after they’re already using it, is just skewing the market, they’re already invested in it and might not have gone in that direction had they been aware.

    If we simply make it much easier for people to be able to review pending patents, to make comment on whether it is valid, and to browse through/review existing patents, to assure they aren’t infringing, would be greatly appreciated.  Right now, to get any decent review of either you need to hire patent attorneys, and the majority of small companies and individuals don’t have the budget for it.

    Note: Software is already covered under copyright law, so is there really a need for additional patent protection? You can copy someone’s general plot/storyline without issue, you just can’t take the specifics, that might make sense for how software IP should work as well?

    • Vic Kley

      You should not think of software as different then hardware. Its just a way to connect up a series of electric circuits and other elements. Any logic circuit can be executed in software, any software algorithm implemented as a logic circuit (state machine).  It can be an art object like a circuit board meaning a copyright or a novel idea invention like velcro.

      As an example one might conceive of a new manner in which to perform the calculation of the inverse of a linear equation in which constants corresponding to the amplitude and phase of the tonal frequencies of each sound element of a sampled sound could be adjusted and the entire modified assembly played in real time.  This basic method could be done by any number of possible computer code combinations ALL FOLLOWING THE METHOD.  This then would be an invention and not something one could protect under a copyright.  A good example of such an invention is the Blackmun-Tuckey Fast Fourier Transform.

      Such an invention is extremely valuable to society and industry.  Those who can create such things are inventors and deserve to receive a reward for the fruits of their creation along with other artists, writers, scientists and musicians.

  2. If Silicon Valley was all that serious about getting rid of (or at least reforming) patents, Apple wouldn’t be using them to sue Samsung, Motorola, Kodak, etc., Yahoo wouldn’t be suing Facebook, and Facebook, Google, Microsoft and others wouldn’t be buying up patents to either sue others or defend themselves from lawsuits. 

  3. I do not think that one would find complete comfort in Chicago free market thought for the “Trolls”.  As please see the quote from Milton Friedman below.   I think there would be little disagreement that Milton is the main force behind the “Chicago Movement”.   So while the writer may find a law professor on the side of the Troll’s, one could not expand out to what matters from Chicago, Economics.  
    “The question of intellectual property rights is very complicated. Freedom of speech is the opposite of copyright, which means that you can’t get copyright rights. And, intellectual property is different from physical property: in both cases, you have a monopoly but the monopoly on intellectual property is wholly different because duplicating the property comes generally at a very low or zero marginal cost. You are enforcing a monopoly pricing, as it were, that limits output to lower than the optimum social level. You cannot be in favor of infinite copyright. Essentially it’s a problem of practical compromise, whether you have 17 years, 25 years, 10 years, 50 years.”

    • attoman

      AH Friedman! Don’t you just love it? 
      He is certainly telling the publishers of this electronic rag that they have no right to a COPYRIGHT THE ONE THING THEY ALWAYS ARE CAREFUL TO PROTECT FROM THEIR NAME CALLING CRIES OF TROLLS.
      As much as I like Friedman’s attack on copyrights as a turn of table so that those who make their livings through writing, software and artworks are not protected from having their work stolen, in the end its just a lesson.  The point being we all inventor and writer need to have help protecting our easily stolen works or we won’t provide them to society.

  4. Simone H.

    I am an individual inventor now onto my third I.T. business/company. I came up with an idea to solve a major problem and filed a patent 11 years ago. 4 years after I filed it, people started discussing the problem and another year later these so-called Silicon Valley geniuses came up with the exact solution that I had patented. I was granted a patent in 2008. I spent over $40,000 dollars on IP attorney fees and attribute at least 3 years of my life (opportunity cost) to working on that idea and building that business. Now, if we go by what ‘silicon valley’ says… my patent should not have been issued in the first place – even if I was 5 years ahead of my peers in coming up with the solution and it would be wrong..err.. horrible and morally unacceptable for me to enforce my patent rights. Just tell that to some one who spent his money and time to buy a plot and build a house and now wants to get rent on it. 

    • If others came up with the same solution independently then it was not a significant “invention”. Being the first to do something obvious to any skilled practioner should not be patentable. Only inventions that truly raise the bar with should be patentable.

      • attoman

        Ah yet another know-it-all who has never invented.  Well bud you might be surprised to know that large entities get presentations of new and truly novel ideas all the time and sign Non-disclosure Agreements which they then break. Lo and behold a few months or years later they magically appear with the same invention with identical parts!

        The great and all seeing  “dg” then declares the idea not “significant” and all the money made by the theft of the idea is blessed by “dg”.  

        So the movie docudrama “Flash of Genius” is all a lie eh “dg”?

        It’s happening again right now in many places all over the world honest inventors and usually solo inventors having their work stolen and schmucks like “dg” treating it as just  rather the terrible injustice it actually is.

      • Simone H.

        @dg: Wow! So you mean if I’m ahead of other (SV tech geeks) by 5 years in software – it should still not be patentable? 5 years is at least two business cycles!! In due course of time, people will come up with ideas, but it is the first one to invent who is given the rights to a patent. FYI: Alexander Graham Bell filed his telephone patents just a few hours before his competitor… but it helped him use the patents to build businesses that exist even today (Ma Bell companies to AT&T). I guess the telephone would not qualify ‘as truly raising the bar’ in your opinion. It would help if people like you defined what constituted ‘truly raising the bar’.

        • attoman

          Sarcasm is lost on “dg” Simone. 
          It would help though if she/he/it had to make a living by inventing and obtaining defendable patents. I suspect “dg” would starve to death.

    • attoman

      Dear Simone good for you!  
      Silicon Valley doesn’t say anything. 
      Roberts speaks for Roberts not for the Bay Area or anyone in it except Roberts.

      NOTICE ONE THING This discussion is copyrighted!  That’s right these birds think we inventors should give our work away but pay for their weak and sloppy prose and poor journalism. Its Roberts and his ilk who should be hanging their heads in shame.

      You go ahead and enforce your rights. My question to you is have you ever tried to do so? Have you ever put anyone on notice? Have you ever tried to make your inventions into a product? Just curious.Don’t let the childish epithet troll make you defensive or feel bad for even one minute.  Those who cannot invent and create are forever telling us after we invent that our work is obvious but that is a very special legal term and does not mean what most people think.  Its not obvious if the implementation you created with its combination of elements had not been done before. 

  5. attoman

    As an inventor who has sold internet inventions through Ocean Tomo, lives in the Bay Area, has inventions presently being used by all submicron semiconductor companies (inventions which have helped extend Moore’s Law) and met and discussed Lemley’s  “Myth….inventor” with Mark himself I feel uniquely able to comment on this article.

    First the silly straw man  Patents aren’t a game, they are a tool for the socialization and rapid advance of technology.  Don’t believe me?  In 1976 I invented a super low power touch screen technology to work with a tablet computer idea promoted by Alan Kay called Dyna-Book.  We called it the joypad the company was called iCorp.  We showed the working tablets to everyone including little start-ups like Processor Technology(best of the early bay area computers by far), Atari and Apple Computer but got only sporadic orders and the patents sold with the company which had morphed into the first Personal Computer Graphic Work Station for CAD in 1979.  By the time anyone wanted a touch screen my patents had moved into the public domain and were free for everyone including Apple to use.  This is exactly what the Patent system is supposed to do. For a limited monopoly deliver new technology to all people.

    So when it comes to useful patents I’m here to tell the author of this piece he just does not have the facts.  The Bay Area or what some like to call Silicon Valley is so far beyond in pertinent and important patents then what has ever been done in Chicago it is a meaningless comparison. Better perhaps to compare the Bay Area to the entire Midwest (including Texas). There is some chance the Bay Area might not win this latter comparison so it is at least a race.  
    However Ocean Tomo has had an enormous impact as has Intellectual Ventures in helping us inventors get a real value on our Intellectual Property other then through a company sale embodying the IP.

    Author Jeff Roberts offers up research that says that taking the property of one person without compensation is great for creating large markets.  Mr. Roberts needs to have his property stolen and used to enrich people who make “large markets for new products”!  

    Since neither Robert’s nor Lemley have any issued patents and as far as I know have never invented anything except the notion that they know something about inventing NO ONE should give the slightest credence to the “Myth of the Solo Inventor”.  Lemley did get one thing right he was involved in a myth all right. One he made up.  
    Most of my inventions have been solo.  
    Most of the group inventions I have been involved in consist of one or two people with individual core ideas and others with supporting structure around those ideas, bright people who quickly grok the new concepts, extend them but REQUIRE THE CORE SOLO STARTER TO INITIATE.  All disruptive patents are like this.

    There are millions of exceptions and almost everyone of those are patents best described as work-a-day. Sometimes these patents are more representative of the skill of the patent attorney then the inventor. 

    Robert’s did surprise me about one thing having seen all the preceding stuff on the net from its beginning (don’t ya know) Facebook invented the social network?  What extraordinary BS!  How much is the bounty to bust Facebook’s Patents?