Monday, April 22, 2013

Patent trolls, finance markets, bad debts & bad patents

I've been thinking about patent trolls or as they like to think of themselves, patent assertion entities, and the energy they have expended in creating a market for buying and selling patents without actually getting involved in the messy business of physically producing anything relating to these patents.

In many ways it was one predictable emergent outcome arising from the broken patent system, the nature of capital markets and the success of a relatively small number of chemical, pharmaceutical, technology and entertainment industry executives in shaping the international intellectual property agenda. The latter story is told brilliantly by Peter Drahos and John Braitwaite in their book Information Feudalism: Who Owns the knowledge Economy, so I won't repeat it here.

What's now of concern in relation to patent trolls is that large numbers of patents are in the hands of commercial entities focused on treating them like structured investment vehicles - financial instruments beautifully dissected by Johns Bird and Fortune when the finance markets collapsed in 2008. Basically lots of bad debts like the so-called sub-prime mortgages were packaged together and labelled as high grade investments; actors in the financial markets competed and gambled casino style on these to extract large profits. The merry frenzy of buying and selling continued until the markets decided to recognise the reality that all the gambling was based on junk and collapsed.

Unfortunately since the patent system is broken - completely in the US - it is polluted with vast numbers of bad patents. Not just bad as in stupid patents on certain kinds of sandwiches or rounded corners on rectangles but bad as in laying claim to the real estate of the knowledge economy. Commercial control of of basic science - chemistry, physics, biology - biotechnology - the genome - business methods, mathematics, economics and more is been dished out through the patent system; and should be (but largely is not) considered a profoundly serious political issue for an aspiring information society. Yet in the thick of the invisible fire sale of the building blocks of science and nature, real inventors who don't have the financial clout to protect themselves from more well heeled exploiters of the system get swallowed up and/or squashed.

Large companies like IBM and Texas Instruments are well versed in monetizing their patent portfolios and using them for competitive advantage or defending their markets - you want to sue us for patent infringement, well I'm sure we can find several goodies in our own big patents box that you will infringe... But at least the IBMs and TIs of the world engage in value added enterprises. The patent battles in the mobile/tablet arena are simply farcical but probably the most prominent recent example of this kind of business practice.

Patent trolls, however, just monetize bundles of patents. They don't add anything to the system in spite of the WSJ letter writer's claim that they "bring new efficiencies to capital markets and innovation". If anything they just increase the incentives for patent offices to issue even more patents regardless of quality.  The concept of patent trolls as white knights that bring "big companies" to book doesn't pass the laugh test. They are not in the business to monitor the business ethics of big companies; they're in it to make money.

I don't have the empirical data to determine what proportion of current patents are legitimate and defensible if they were required to be subject to appropriate forensic scrutiny. Likewise I don't know the relative proportions of finance market SIVs that were (and are) fraudulent junk and were (and are) legitimate investments.  Did/do the finance markets and the patent system contain equivalent or even comparable proportions of junk?

It would be interesting to know but regardless of this the "patent assertion entities" are now and will likely continue to monetize the living daylights out of their  patent portfolio investment instruments. I doubt that politicians of any hew will have any effect on such markets even if they can summon up the stomach to try.

Is it at all possible, though, that the market may eventually call time on the patent trolls' naked emperor, in the same way that it did with sub prime mortgages? It would be fascinating to see the "patent assertion entities'" market collapsing because of the realization that it contained large numbers of effectively indefensible patents. If that were to happen there is a remote possibility that the backlash might create political incentives to renovate the patent system itself. I won't be holding my breath though. It's easier to explain why something is a bad debt than a bad patent.

Update: Michael Risch, a very smart associate professor at Villanova University School of Law, has been giving the question of treating patent portfolios as finance instruments some serious thought. A full draft of his paper, The Securitization of Patents, is available at SSRN.