Last week I had a chance to speak to Keith Bergelt, CEO of Open Invention Network (OIN), about their recent acquisition of 22 “Linux-focused patents.” The objective of this purchase, as stated in their press release, was to avert “the prospect of these patents being placed in the hands of non-practicing entities …whether or not the patents truly read on Linux.”
Now first off I like OIN. They featured in my “Cool Vendors In Intellectual Property, 2009” research report (Gartner subscription required). But there is some irony in them railing against “non-practicing entities (NPE).” They are, after all, a non-practicing entity themselves. They buy and hold patents with no intention of using them in a product they manufacture and sell. There is, of course, a big difference between NPEs. OIN’s objective is not to profit directly from the patents but to protect Linux from infringement actions. They’re kind of a patent knight in shining armor.
One of the things I asked Bergelt was the basis upon which OIN decided whether these patents were worth purchasing. The answer was sobering. These patents were assessed basically on their potential to result in an infringement action. In other words, the value of the patents are not based on the incremental benefit they could add to a product but rather in their potential to mitigate legal costs.
I’m not about to argue that arbitraging legal costs is a socially-productive economic activity. But we have to be philosophical here. Gaming a system is one of the oldest business strategies around. Just look at the use of ultrafast computerized stock trading systems that are at the heart of the Sergey Aleynikov case with Goldman Sachs. And when these games get identified, it’s perfectly reasonable for people to advocate systemic change in order to remove these unproductive and market distorting behaviours.
The problem with legal cost arbitrage is that the debate is being distorted by the IT vendor community. Many outspoken IT vendors are happy to seek and hold software patents. They’re happy to profit from these patents without actually using them in their own products. And they’re happy to apply a little legal cost arbitrage of their own when they need to defend their economic interests.
But what really rubs these vendors up the wrong way is that companies like Intellectual Ventures and Acacia Technologies – the ones they’re calling NPEs – game the system differently. They’ve devised a business model that renders themselves largely immune to counter-suits and cross-licensing arrangements that are so effective in allowing IT vendors with big patent portfolios to shut down infringement actions from other “practicing entities.”
In fact, the whole term “non practicing entity” is a ruse. The underlying activities of the patent system – seeking patents, buying patents, licensing patents and litigating patent infringement – are practiced by a range of organizations including vendors, universities, governments and patent commons organizations like OIN. “NPE” or “troll” are just convenient terms used by those want to skew a broken system rather than actually fix it.
So, by all means, let’s fix the system to remove the arbitrage of legal costs. We can do this by focusing on the quality of granted patents and on creating greater transparency and accessibility in the system. Doing these things will reduce the uncertainty which underpins the legal cost arbitrage model.
But the goal here is not to eliminate NPEs. It’s to switch their focus to something far more productive. Pooling patents has value. It can be done to facilitate the sharing of innovation (like when vendors cross-license). It can be done to provide open access to innovation (like what OIN does). Similarly, patent pooling from companies like Intellectual Ventures and Acacia Technologies can provide small inventors access to a defensible portfolio normally available to the largest organizations.
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