The Patent Game

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    Posted: 23 June 2011 01:03 PM #16

    Bosco (Brad Hutchings) - 23 June 2011 03:46 PM

    Patents are a government granted monopoly. They are not a birthright, they are a privilege granted by the government and enforced by its courts. They need a market price, pure and simple. Another of the many ideas I’ve seen for patent reform is to impose a tax on the patent, perhaps 10% of revenues generated by the covered invention. If you fail to disclose use of your patent in a product (and this avoid the tax), the patent can be challenged and revert to the public domain. Yeah, you’d need some kind of accounting board to specify how to assign portions of covered patents to revenue stream, and it should be an accounting challenge for patent hoarders. Placing the patent in the public domain eliminates the tax burden of applying it. So the higher the tax, the more incentive companies have to market a product on its own merits rather than using the threat of courts against competitors.

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    Posted: 23 June 2011 01:06 PM #17

    jeffi - 22 June 2011 08:48 PM

    I do not believe that the market understands the importance and value of this patent. This is potentially huge. HUGE!

    I presume the correct business move will be to license the technology rather than prohibit it’s use.

    I am devious enough to think that Apple could license the technology to all and sundry then on their own devices use something that is even better.

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  • Posted: 23 June 2011 03:26 PM #18

    Bosco (Brad Hutchings) - 23 June 2011 03:46 PM

    Patents are a government granted monopoly. They are not a birthright, they are a privilege granted by the government and enforced by its courts. They need a market price, pure and simple. Another of the many ideas I’ve seen for patent reform is to impose a tax on the patent, perhaps 10% of revenues generated by the covered invention. If you fail to disclose use of your patent in a product (and this avoid the tax), the patent can be challenged and revert to the public domain. Yeah, you’d need some kind of accounting board to specify how to assign portions of covered patents to revenue stream, and it should be an accounting challenge for patent hoarders. Placing the patent in the public domain eliminates the tax burden of applying it. So the higher the tax, the more incentive companies have to market a product on its own merits rather than using the threat of courts against competitors.

    From Wikipedia:

    A patent ( /?p?t?nt/ or /?pe?t?nt/) is a set of exclusive rights granted by a state (national government) to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention.


    The procedure for granting patents, the requirements placed on the patentee, and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. Typically, however, a patent application must include one or more claims defining the invention which must be new, non-obvious, and useful or industrially applicable. In many countries, certain subject areas are excluded from patents, such as business methods, treatment of the human body[citation needed], and mental acts. The exclusive right granted to a patentee in most countries is the right to prevent others from making, using, selling, or distributing the patented invention without permission.[1] It is just a right to prevent others’ use. A patent does not give the proprietor of the patent the right to use the patented invention, should it fall within the scope of an earlier patent.

    Patents are not a privilege.  They grant a monopoly for exclusive use by the inventor in exchange for publication of information that would otherwise be trade secrets. 

    Although they may be licensed for use by others, this is totally at the discretion of the patent holder.  There is no requirement for a market price.

    One may disagree with the patent laws and lobby for changes, but until change is enacted they are what they are.

    I believe that the problems with our patent system revolve mostly around people (companies) trying to game the system, coupled with the explosion in the rate of information generation and an overworked and under manned patent office.

    Your proposal to impose taxes on patents are silly and would only add to the bureaucratic mess.

    [ Edited: 23 June 2011 04:19 PM by westech ]

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  • Posted: 23 June 2011 03:38 PM #19

    Among the reasons that the USPTO took so long to grant Apple’s patent, No. 7,966,578 is that the USPTO was working hard to just to process all of the other of Apple’s patents that comprise No. 7,966,578, and once that was done, realizing the effect that this would have on competition in the smart device industry, the USPTO was probably doing its best to narrow No. 7,966,578’s claims as much as possible.  But the result, No. 7,966,578, is here, and it is appears to be, along with all of the sub-patents that comprise it, a very broad patent that reads on every multitouch smart device (let’s not forget tablets) that is presently in the market.

    How will competitors defend against No. 7,966,578?  Competitors will, of course, try to invalidate all or parts of No. 7,966,578.  Failing that, they will try to argue that for a variety of reasons, their respective devices don’t infringe.  None of that at first glance looks very promising. 

    So what’s left?  Certain competitors with an at least adequate patent portfolio will try to oppose claims or counterclaims that Apple’s iOS devices are infringing on their respective patents.  It is impossible to offer any useful speculation about the success of such efforts, except to say that, since most Android OEMs and other smart device OEMs, excluding the likes of Samsung, Microsoft, and Nokia, don’t have much of a patent portfolio to use in defense.  Certainly, Google’s 700 mostly irrelevant patents won’t be of much help. 

    A crucial point for Nokia is whether Nokia’s recent settlement with Apple treats No. 7,966,578 in anyway.  No. 7,966,578 was just issued, so Nokia may not have known about it, though Apple would have known that No. 7,966,578 was about to issue.  If that is true and if the language of the Nokia-Apple settlement does not cover No. 7,966,578, Nokia, whether it uses Microsoft’s Windows Phone or not, may be subject to suit for infringing No. 7,966,578.  Since the parties’ settlement is confidential, only time will tell, but in its public statement, Apple said that the settlement did not cover any core technology that gives its iOS devices their competitive advantage.  Was Apple saying that its settlement with Nokia does not cover No. 7,966,578?  Did Apple offer some tech to Nokia that appeared to be a significant and valuable concession to simply conclude a settlement before No. 7,966,578 issued?

    There is one defense that may be available, for even infringing smart devices:  An obscure doctrine of antitrust law known as the Essential Facilities Doctrine.  If a competitor can prove that No. 7,966,578 is essential to making a smart device that can compete in the market, a federal district court has the authority to impose a licensing provision on Apple.  However, the Essential Facilities Doctrine (Doctrine) is a high hurdle.  The Doctrine does not entitle a competitor to make a device as good as Apple’s or as cheaply as Apple can make it or enjoy the profit margins that Apple enjoys.  To defeat the Doctrine, Apple need only show that the competitor has the ability, i.e., the technology, to make a competing smart device that it can sell in the market for a profit, even though it may be for far less profit than Apple receives and to a segment of the market that is seeking a cheaper alternative to Apple’s iOS devices.  It may even be enough that a competitor can produce the kind of menu driven smart devices—think Nokia—that preceded the iPhone. 

    And, of course, even if the Essential Facilities defense is successful, the district court judge must set a royalty for No. 7,966,578 that fully recognizes and compensates Apple for No. 7,966,578’s economic value but that is consistent with the requirement that the royalty allows for viable competition.  So a royalty pursuant to the Essential Facilities Doctrine would be quite expensive for Apple’s competitors and would make Apple even richer, as the entire industry of multitouch smart devices in the United States would have to pay that royalty to Apple. 

    And let me provide some historical perspective on the instant smart device patent litigation.  Of itself, it is not unique, nor does it indicate any significant flaw in the patent systems.  Epochs of innovative technology (railroads, transistors, steam engines, et al.)  often spawn a periods of intense patent litigation.  However, once the courts settled those disputes, things settled down.  Apple introduced revolutionary technology with the multitouch UI of its iOS devices, that forces Apple’s competitors to respond by suing, by infringing, and/or by trying to innovate around Apple’s IP.  Apple, in kind, must respond by defending its IP in court.  Once, however, this wave of disputes is settled by the courts or by the parties, I expect that we will return to more normal patters of IP litigation.

    Until then, however, these are going to be fun and prosperous times, at least for the lawyers, and for the parties that prevail with clear wins in this wave of IP litigation.

    [ Edited: 24 June 2011 04:25 AM by Nemo ]      
  • Posted: 23 June 2011 03:52 PM #20

    And Dear Bosco:  The idea of taxing the revenue accruing to patents is unfair double taxation and is probably impossible in any event.  Would you have the U.S. Government tax a person twice on the same revenue from his/its patents:  Taxed once on the revenue accruing from its patents, if you can figure out what that is since neither FASB or SEC reporting requirements require any attempt to report revenues accruing from patents—indeed, I doubt that it is possible to do such accounting for any product that has a complex set of features and several complex patents, such as a smart device—and then have those same revenues from patents taxed again as part of a company’s profits?  Or were you planning to provide a deduction for the patent revenue that has already been taxed, assuming once again that you can determine what that patent revenue is?

    [ Edited: 24 June 2011 03:23 AM by Nemo ]      
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    Posted: 23 June 2011 03:55 PM #21

    Great post Nemo!

    This is just another example of things that Apple does that add (possibly) to the revenue stream that most on WS never think of. They only focus on what’s right in front of them and rarely think that Apple will come up with new products/services/licenses/etc.

         
  • Posted: 23 June 2011 05:12 PM #22

    Very nice posts, Nemo. Very nice indeed.

         
  • Posted: 24 June 2011 07:52 AM #23

    Fascinating Nemo, thanks

         
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    Posted: 24 June 2011 01:14 PM #24

    Nemo - 23 June 2011 06:52 PM

    And Dear Bosco:  The idea of taxing the revenue accruing to patents is unfair double taxation and is probably impossible in any event.  Would you have the U.S. Government tax a person twice on the same revenue from his/its patents:  Taxed once on the revenue accruing from its patents, if you can figure out what that is since neither FASB or SEC reporting requirements require any attempt to report revenues accruing from patents—indeed, I doubt that it is possible to do such accounting for any product that has a complex set of features and several complex patents, such as a smart device—and then have those same revenues from patents taxed again as part of a company’s profits?  Or were you planning to provide a deduction for the patent revenue that has already been taxed, assuming once again that you can determine what that patent revenue is?

    Well, after the illuminating post about the difference between rights and privileges (which the author above lacks a fundamental understanding of), this is a minor issue. I have seen many general proposals for fundamental patent reform, as it’s something that has always interested me. These proposals arise mostly out of academic circles, not legal or accounting circles. Implement any fundamental reform imaginable and these practitioners will figure out how to practice under the new regime grin. They always do grin.

    At any rate, securing the rights conferred by the state in a patent requires a tremendous amount of coordination among all parties, including the government to resolve very complicated disputes. A river changing direction and passing through two neighboring ranches may result in a very simple property dispute by comparison. And the economic utility of granting monopolies over underpinnings of trillion dollar industries just does not pan out. There is too much at stake to (a) not trespass on others’ numerous patents, and (b) not litigate.

         
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    Posted: 24 June 2011 02:55 PM #25

    FalKirk - 23 June 2011 04:20 AM
    mbeauch - 23 June 2011 01:25 AM

    I say “release the hounds”. :-D

    This speaks to the lawyer in me in a very real and profoundly disturbing way.

    Oh, what the hell! Sue them all, damn it, sue them ALL!

    Fal, how does it speak to you as a recovering lawyer? smile

         
  • Posted: 24 June 2011 05:28 PM #26

    Bosco:

    Just to be clear, patent law has its basis in the US constitution.  Article 1, section 8 states that Congress shall have the power…

    To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

    I have a hard time figuring out how you promote something by taxing it.

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    Posted: 24 June 2011 05:58 PM #27

    @westech: Congress has done a wonderful job “securing”. What they haven’t done a good job of is “limiting”. Practically speaking, in 2011, and especially in the area of business process (software) patents, there are two groups that benefit: patent trolls and lawyers. There isn’t a significant piece of software written by anyone, and I mean anyone, today that doesn’t carry some risk of violating some patent claim, or could not be targeted as doing so by a patent troll with a little cash to burn. See Lodsys as the most evolved example to date, but they will get even worse with time.

    The reform idea I posted above isn’t my favorite. My favorite is to disallow business process patents completely, revoke every one that exists, and then tie an anchor around one foot of anyone who ever received one and drop them 1 mile from shore in shark infested waters. Oh, and give them a saw to cut off their leg if they like. But the purpose of the tax is to offer an incentive to inventors to just compete and not rely on a government protection racket for basically indefinitely. 20 years in this business is slightly beyond indefinitely.

    Another reform idea I like is to have patent applicants bid on the value of their patent. The higher the value, the more stringent the initial review, with some threshold where Congress itself votes on granting the patent. Once issue, interested parties can simply buy the patent out. Or again, another accounting challenge for all the young pups learning to sharpen their pencils today would be to figure out when the patent owner gets that value out of the patent. In either case, it goes to the public domain, and is no longer a protected idea.

    Ultimately, the problem of patents comes down to the fact that in idea space, we just don’t have very effective cartographers. We end up with overlapping claims, and too many claims that ought just be wilderness or public space, usable by all, exclusive to none. Rapid change in the space of ideas is to blame. More to blame is rapid change in how the change works.

         
  • Posted: 24 June 2011 06:28 PM #28

    Dear Bosco:  Congress can’t do whatever it wants with patents.  U.S. Const., Art. I, sec. 8, clause 8: “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries; . . . .”  Places real limits on what Congress may do.  First, Congress may only grant letters patent to inventors who promotes the progress of science and the useful arts.  It must grant to those inventors for a limited time the exclusive right to their respective inventions.

    And what are those rights that Congress grants?  The U.S. Supreme Court has held that they are property rights, which are entitled to the full protection under the U.S. Const. as all other property rights.  That means, when it comes to taxation, there are real limits on what Congress can do.  It can not, for example, discriminate in taxing patent rights compared to other types of property rights.  So, in addition to the problem of determining what revenues accrue to a patent, Congress can’t just tee off against patents.

    Also Bosco, you underestimate the problem of determining what revenues accrue to an intangible asset like a patent, when it is combined with other features and IP.  Why is the iPhone so successful?  Is it the multitouch UI?  Or is it the iTunes/iApp ecosystem?  Or is it Apple’s patented advanced materials science?  It it the iOS?  And on the sale of every iPhone, what part of that sales accrues to each of the features and IP in the iPhone, especially when that is different for each customer and also varies quickly over time?  So that one season its one collection and integrations of IP and features that sells iPhones for the average customer, while next season its a very different collection of features and IP.  And those features and IP not only vary for each customers and over time, but also vary for different cultures and different countries.  This is why accounting for revenue accruing to R&D is only done with the greatest of difficulty, if at all, and attempting to account for revenue accruing to a specific patent in a complex product is a fool’s errand.

         
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    Posted: 24 June 2011 07:04 PM #29

    Ughhhh. Nemo, I don’t underestimate the problems with any reform. I don’t underestimate the accounting challenge. I do think the existing system is horribly broken. In cases involving Apple and smart phones, my hope is that the market is big enough that business strategy-wise, it makes more sense for each of the competitors to go out and compete now and settle or don’t settle later. I think consumers are much better served by the choice that such competition has given them. If patents are seen as effectively limiting that choice, there will be clamors for significant patent reform. If patents are a way for your brethren to skim 1% off the top, it’s cost of doing business.

    But the patent system, especially concerning business process patents, is an absolute sham. Play it to your advantage of course, but be honest enough to know that nobody is being rewarded for hard work or bringing science and arts forward by any stretch of the imagination.

    As this is an Apple board, of course many of you have rooted for Apple to assert its patent rights over the past few years. Playing that game can bring it back on Apple in spades. Apple absolutely cannot avoid infringing on a myriad of patent claims, just as anyone who writes software these days can’t avoid doing so. Elevating patent infringement to some kind of moral issue is disingenuous.

    [ Edited: 24 June 2011 07:08 PM by Bosco (Brad Hutchings) ]      
  • Posted: 24 June 2011 07:42 PM #30

    Bosco (Brad Hutchings) - 24 June 2011 10:04 PM

    Ughhhh. Nemo, I don’t underestimate the problems with any reform. I don’t underestimate the accounting challenge. I do think the existing system is horribly broken. In cases involving Apple and smart phones, my hope is that the market is big enough that business strategy-wise, it makes more sense for each of the competitors to go out and compete now and settle or don’t settle later. I think consumers are much better served by the choice that such competition has given them. If patents are seen as effectively limiting that choice, there will be clamors for significant patent reform. If patents are a way for your brethren to skim 1% off the top, it’s cost of doing business.

    But the patent system, especially concerning business process patents, is an absolute sham. Play it to your advantage of course, but be honest enough to know that nobody is being rewarded for hard work or bringing science and arts forward by any stretch of the imagination.

    As this is an Apple board, of course many of you have rooted for Apple to assert its patent rights over the past few years. Playing that game can bring it back on Apple in spades. Apple absolutely cannot avoid infringing on a myriad of patent claims, just as anyone who writes software these days can’t avoid doing so. Elevating patent infringement to some kind of moral
    issue is disingenuous.[/quote/]

    OK, I get it.  You don’t like Apple so you want to change the patent system.

    Let’s move on.

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