PATENT TROLLS OR POWER ROLLS

Patents have been in the news a lot recently, both as incentives to eye-popping acquisitions and as clubs used to “stifle” innovation or “extort” payouts from “innocent” parties. As a result there has developed an emotionally charged growing debate about the benefit or detriment to the economy and society at large from the assertion of rights conferred by duly-issued patents.

The subject has been taking on the trappings of a crusade against the people who seek to enforce the rights that patents have conveyed since the very beginning of our republic (see U.S. Constitution, Section 8). Interestingly, those managing the crusade are invariably those being charged with infringement of these patents.

The basic idea behind patents is to spark experimentation, innovation and invention, a basic engine of economic growth, by giving, per the Constitutional language, “for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Innovation always has been, and remains, part and parcel of our market economy. The invention of the cotton gin led to a vast expansion of cotton growth and manufacturing. That invention came from outside the cotton world by Eli Whitney in Massachusetts, who patented his machine in 1794. He and partners struggled for many years with infringers and farmers who felt they were being taxed to have their cotton processed. After the patent was finally upheld in 1807, Whitney began to license it widely, at which point his technology took off and revolutionized that world. But, alas for him, he fought so long the term of the patent ran out before he made serious money. Whitney ultimately and finally got rich from another patent on making muskets. This may be one of the most interesting cases of all time that illuminates how powerfully patents helped create the modern US economy and how difficult it is to capture the rewards deserved by the inventors for the patented technology.

As is always the case, there are two sides to every coin and every debate.

Today, the CON argument against patent enforcement goes like this: patent “trolls” (people–frequently lawyers– who acquire interests in patents -sometimes a lot of them) have to be reined in because they are thwarting the spread and use of those inventions by ‘blackmailing’ companies, and threatening expensive litigation unless royalties are agreed to and paid. The main arguments and lobbying behind this argument originate from big, powerfully rich manufacturers and marketers who hate paying for something they could have invented (but did not). They frequently copy and sell with impunity on the theory that the little inventors simply cannot afford ever to take them on. So when the little guys (derogatorily called “trolls” by the big guys) show up with a solid patent and money to litigate its enforcement, the big guys cry foul.

And, they are now lobbying to change the patent laws to basically protect their power in the market place, which they believe is equally important to the monopoly granted to a good patent. They couch their complaint on so-called “patent-quality” concerns but does anyone believe they will act differently if confronted with a “high- quality” patent?

The real foul is the lobbying behind this power grab. These parties are using shareholder wealth to protect this attempted power grab and using shareholder wealth to protect their power in the market place.

The PRO argument to sustain patent enforcement goes like this: little guys — tinkerers, professors and nerdy types — see gaps in modern technology and invent clever ways to fill them. To do so they need financing to experiment, test, protect and promote their inventions. Without patent protection, people with money to invest simply dismiss inventors because they know that the minute the big guys learn about an unpatented improvement, the little guy will be eaten alive. So, without patent protection the little guys get virtually no support and innovation suffers. Therefore, so goes the argument, there is nothing wrong with the inventors selling interests in patents to people that know how to and can enforce them as a reward for their efforts and to enable their continued inventing. It is not only acceptable, but vital to the functioning of our economic system, that inventors be able to sell interests in their patents to people who know how to and can enforce them against the big guys who control access to markets. What becomes obvious is that patent rights need to be enforced whether owned by big companies or by investors to keep the system functioning.

There are, of course, exceptions to both the Pro and Con arguments. But, those exceptions are rare and do not diminish the substance of both points of view.

Since 1996 I have lived through one of these stories and hence understand both points of view very well. The essence of my story involves my backing a distinguished professor of computer science at Yale, David Gelernter, who had invented and patented a wholly new way of organizing and finding stuff in computer files. I was part of a group that by by 2004 had invested about $20,000,000 to perfect, commercialize and expand the patent portfolio and introduce products into the market compatible with the existing big companies’ platforms.

We explored all sorts of ways to work with the big guys. They all showed initial interest. Then they simply clammed up. Then they all started to use the patented technology. Ultimately, we shut down our operation and shifted gears into protecting our patented property rights against the big guys. As litigation is ongoing, it is inappropriate to get into too much detail here. Suffice it to say we do not see ourselves as “trolls” but as victims of a ‘power roll’ by entrenched interests who control markets and have figured out how to steal with impunity.

Accordingly, the lesson of today’s sermon is: when and if you think about the public debate about patents today, please remember there are two sides to this debate.

On one side are the little guys who need liquidity that is provided by investors in intellectual property [who then enforce rights just like big companies.] and are crucial to keeping America’s competitive advantage over much of the world.

On the other side are the big guys who have powerful lobbyists, access to expensive lawyers and tons of staying power called money and seek to perpetuate their market power by using their existing entrenched technologies in combination with new technologies in many cases obtained by ignoring third party patent rights.

It’s never been a fair fight between big and small- that’s why the Framers enshrined the principle of protecting individual inventors in our most basic and important governing document for the benefit of society at large.

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How can you tell a real Venture Investor from your neighbor?

They very likely look alike. They may even have been roommates at college and grown up next door to each other on Ohio farms. They both are good talkers; each is bright and personable. One of them is VP in the local bank with a solid career ahead, while the other just seems to float around, in and out of town, and does nothing to hide the evidence of his rolling in big bucks. They are married to twin sisters, daughters of the local Episcopal minister.

Which one would you trust with a 20 percent piece of your recent inheritance of $500,000? Your aim is to invest with the goal of an outsized return to help round out your retirement plans for 20 years out. You have read that venture investing is really the only way to make big money unless you are your own genius.

What questions do you need to ask? And, what credence can you attach to the answers?

FIRST, how do you sort out actual evidence of trust from normal human instinct and judgment? Start by tamping down any sense you have from superficial factors.

The floater appears to be the more successful guy and often the best thing to do is follow a winner. But, you do not really know how, or even if, he was so successful. Even he tells you, his answer will be “complicated” and probably impossible to verify

The local banker is surely a solid and reliable guy but he makes little local loans and not much else. What could he know about venture investing?

The floater appears to be a winner; the banker appears to be solid and prudent.

Call it a draw so far.

SECOND, what questions can you ask to draw out what they know, think and are prejudiced about?

Try “What do you consider critical considerations in making an investment for me?” and “Are your interests and mine aligned?”

The floater says the key is the skill of the entrepreneurs who run the companies he invests in and although your $100,000 is below his normal minimum investment, he will make an exception and take you in. Your interests are exactly aligned, he assures you, because he has his own money in the same fund. and he makes several investments to spread the risks.

The banker says a key is skill of the entrepreneurs AND the odds of getting a major return if a bet works out well. He points out that there are two ways to make ten times your money: [1] from 1-10; the other [2] from 10-100 — the difference is how early one becomes an investor. If one gets in at 1 there is a chance to get to 100, so look for early stage investments. His bank may not do this but he can help you find funds and the bank does not take fees, so they are completely objective. He also said one has to be aware of the cost of management fees and ‘carried” interests (share of profits), which give managers of venture funds a BIG advantage over their investors over time, even if they have their own money in the funds too.

Now you have some reasons to be concerned about the floater: he did not mention fees or carried interests at all and he seemed more concerned about risk spreading – which is good but probably helps the managers more than the investors because a mediocre return is better for managers who get fees too.

The banker makes solid sense about better odds that go with early stage investing and having the potential for higher returns. And, he has no stake – either success or failure– in what he might recommend which seems wise

OK, which way do I go?

Then an inspiration springs into your mind:  ask the floater to advise me about the banker’s suggestion and the banker to advise me about the floater’s fund.

Let them duke it out a bit, listen and then decide.