Stephen Foley: Welcome to the age of sub-prime patents – or mutually assured litigation


US Outlook: Remember the chaos that ensued when mortgages stopped being a contract between you and your bank, and instead became financial chips bought and sold by gamblers on the world's markets?

Funny things started happening. People who shouldn't have gotten loans got them, the housing market became twisted out of shape, and a host of financial intermediaries, from corrupt mortgage brokers to reckless Wall Street bankers, managed to get filthy rich without adding a penny of value to the real economy.

Now consider the US patent system. An explosion in the number of patents being filed with the US Patent and Trademark Office, up from 312,000 a decade ago to 509,000 last year – an increase of almost two-thirds – is, sad to say, only partly a result of the increasing innovation of American business.

Mirroring the mortgage market before it, what has happened is that patents' value to speculators has gone up and their quality has gone down. This is the era of sub-prime patents.

Why? Patents have become admission tickets to the US court system. In the arena of software in particular, and most notoriously among smartphone manufacturers, overly broad patents covering everything from the idea of synching email to the look and feel of touchscreen menus, are being used to tie up competitors in expensive litigation. For some large corporations, wielding sub-prime patents in the courts has become as important as winning the battle for consumers in the real world.

Meanwhile, and worse, patents are being sold to – and sometimes even filed by – investment vehicles or even law firms that manufacture nothing at all, and specialise only in suing large technology companies. These are the so-called "patent trolls" who have become a scourge on the technology industry.

This is the depressing context in which Google decided this week to bid $900m (£550m) for patents on software and hardware that it didn't invent. The portfolio of around 6,000 technology patents owned by the bankrupt Canadian firm Nortel Networks covers wireless 4G, data networking, semiconductors and a host of other technologies that are adjacent to the things that Google has invented for its Android mobile phone operating system. The search engine giant wants to try to deter others from suing it for patent infringement, or at least be able to counter-sue if they do, so that nothing stands in the way of the development of Android phones and apps for the devices.

That figure again: $900m. That is not chump change, even for Google, and the betting is that bids on this Nortel portfolio will eventually go much higher, at least to $1.2bn. Watch this auction as it heads to its conclusion in June. When big tech companies feel the need to overpay for other people's inventions, the costs fall on shareholders and, ultimately, on consumers who will have to pay more for their products.

So patent reform is vital, and overdue, but Google's bid for the Nortel portfolio shows that the current proposals working their way through Congress fall far short of what is necessary to remedy the situation.

With so many entrenched interests, patent reform has been lobbied to death in each of the last three Congresses, but a lowest-common-denominator bill did get approved by the Senate last month. The so-called America Invents Act, if it were to become law, would achieve some good things. For a start, it would rectify the administrative catastrophe that is the US Patent and Trademark Office. As of today, the office has a backlog of 715,000 patent applications. It will be allowed to put up fees and hire more staff. Best of all, it will switch from a "first-to-invent" system to the "first-to-file" principle used by every other major country. In the US at the moment, vast amounts of time and money are spent trying to prove when an inventor came up with their idea; this expense and uncertainty will be lifted at a stroke, when the patent automatically goes to the first party to file with the USPTO.

By the by, opponents of reform have been stirring up small businesses, lone inventors, and tech industry start-ups by saying that even these limited plans will tilt the playing field against them. But "first to file" lowers costs for everyone, to the outsize benefit of small business, and fees remain modest. Here's hoping that opponents do not succeed in derailing reform in the House of Representatives, where it goes for discussion next.

The problem with the America Invents Bill is not what is in it, but what is not.

Remember again what the problem is: patents' value to speculators has gone up and their quality has gone down.

To help tackle the former, legislation should include reductions in the level of damages that can be won from successful claims. Improvements to the efficiency of the USPTO will help tackle the latter, but Congress should give guidance that narrows what can now be overly broad patents. Those who have been waiting for the courts to achieve this narrowing have been repeatedly disappointed, most recently by a much-anticipated Supreme Court ruling last summer that might have limited patents covering "methods of business".

That case involved Bernard Bilski and Rand Warsaw, genuine innovators who were turned down by the USPTO when they tried to patent a system that businesses could use to hedge the seasonal risks of buying energy. By issuing a technical ruling, rather than addressing the general issue of "methods of business" patents – often the most sub-prime patents of all – the Supreme Court told patent trolls and aggressive corporate legal departments, effectively, to keep up the good work.

Call it Mutually Assured Litigation.

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