Patent cartel formed to fight "trolls"

The Wall Street Journal this morning spins the PR of some big companies tired of paying patent royalties

Tech Giants Join Together
To Head Off Patent Suits

Several tech-industry heavyweights are banding together to defend themselves against patent-infringement lawsuits. Their plan: to buy up key intellectual property before it falls into the hands of parties that could use it against them, say people familiar with the matter.

Verizon Communications Inc., Google Inc., Cisco Systems Inc., Telefon AB L.M. Ericsson and Hewlett-Packard Co. are among the companies that have joined a group calling itself the Allied Security Trust, these people say.

The article goes on to cite horror stories of how those evil patent trolls that have been shaking down big companies. The big business alliance has as its CEO Brian Hinman, a big business licensing executive:

Previously he was Vice President, Intellectual Property and Licensing for IBM Corporation. While at IBM, Brian held various positions including Business Development Executive for IBM Research at the Thomas J Watson Research Laboratory. Prior to IBM, Brian was Corporate Director of Business Development and Licensing at Westinghouse Corporation.

The website Q&A says

What is Allied Security Trust?

AST is a Delaware statutory trust that was originally formed by several high technology companies to obtain cost-effective patent licenses. The Trust provides opportunities to enhance companies’ freedom to sell products by sharing the cost of patent licenses. At the same time, the Trust creates new opportunities for patent holders of all sizes to generate a return on their rights.

AST is not an investment vehicle. Its purpose is freedom of operation and cost reduction. It generates no profits and does not engage in patent assertions against other companies. AST maintains a “catch-and-release” commitment that returns to the market in a timely manner patents acquired on behalf of Trust members after licenses are secured. The Trust also addresses the increasing need for innovative companies to defend against costly patent law suits.

Why was the trust formed?

The Trust was formed in reaction to a marked increase in patent assertions and litigation involving high tech companies by patent holding companies, also known as NPEs (non-practicing entities) also known as “patent trolls.” These organizations produce no products or services of their own, and acquire patents, sometimes hundreds of them, with the sole intention of asserting them against operating companies and conducting patent litigation to extract settlements or licensing fees.

How many members are in the trust and who are they?

Currently, there are eleven members in AST. AST anticipates reaching a goal of between 30-40 members.

While some are hailing this cartel as (for example) bringing “some sanity to the patent-litigation racket,” there are at least four reasons why this is effort is suspect.

First, there’s the eligibility. The WSJ article says that any company can pay $250K to join and deposition $5m for the patent buying pool ($1.5-$2 billion). But the website imposes the additional requirement “Any company in the high tech field with annual revenues of a defined minimum level is eligible and encouraged to join.” If someone wants to put in $5.3 million, why does it matter how big they are? (Qualcomm makes $10b/year — are they eligible?)

So we have a group of big companies (no more than 40), working to their own common interest against the interest of nonmembers. Sounds like a cartel to me. The business model is that AST buys patents, grants nonexclusive royalty-free licenses to members, and then sells them.

Mr. Hinman said the group doesn't face any antitrust issues because it isn't a profit-making venture and its members don't actually own patents -- they just grant themselves a license to them.

This cooperation for the benefit of members against nonmembers has potentially collusive and anti-competitive implications. I’m no fan of big government, but I hope the DoJ will give this the same scrutiny as any other big business combination.

Third, we have the hypocrisy (conflict of interest) of the big firms suing others to put them out of business or merely to extract rents. Rich Tehrani lists the example of (member company) Verizon suing to crush Vonage — i.e., to use patents as an entry barrier to little companies that would increase competition. I would also list Alcatel’s efforts to squeeze Microsoft for a half-billion dollars.

So all we can say for sure is that this is a bunch of big companies that pay royalties who don’t want to pay royalties — whether to small companies, big companies or even universities. They intend to reduce the attractiveness of all IP licensing business models (a centerpiece of open innovation) in the name of fighting the dreaded “patent troll.”

That brings me to the fourth and final point. I have been studying IP licensing issues in the telecom industry for almost a decade, first with the Qualcomm teaching case and then for the past two and a half years with Rudi Bekkers studying all the W-CDMA patents. And the problem is, there is no viable definition of a patent troll — from a economic, legal or policy standpoint.

The claimed test (as implied in the WSJ article) that any company that “never produced a (product)” is a troll is just poppycock: that isn’t why patents exists. The patent system exists to reward inventors. For every horror story of a post hoc shakedown artist or silly story of claimed invention, we have a Bob Kearns, who invented the intermittent windshield wipers but the Big 3 auto makers decided to ship their own products without paying a license. Kearns sued for decades to get what was owed to him, ending up divorced, broke and dying without the recognition that he deserved.

And while yes, my perspective is biased because I’m writing a book that has a chapter about Qualcomm, what about Qualcomm? They brought CDMA to the cell phone industry when people said it couldn’t be made to work, designed systems to show it would work, built handsets, infrastructure and chips to jump start the industry. Is this a patent troll? (Let’s leave aside the knotty question of what the fair price is for their IP).

Or what about Dolby — Dolby Noise Reduction, Dolby Surround and Dolby Pro Logic? Again, they don’t make any products, just sell IP licenses.

My hunch (which I cannot yet prove) is that the best solution will be to reform the patent system to eliminate obvious patents, those that reflect prior art, and perhaps some of the incremental patents that are implied by prior art. I think Osapa — Open Source as Prior Art — is a great solution, and I hope there will be more. Less patents = less transaction costs = less uncertainty, and the role of patents would shift towards protecting major innovations like those that invent an entire new product category.