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Patents as a destructive weapon

October 8, 2012

Last year, Apple and Google spent more on patent lawsuits and patent purchases than they did on research and development of new products. Over the last two years, in the smartphone industry alone, some $20 billion has been spent on patent litigation and patent purchases. For major companies today, patents are not about innovation; they are about competitive weapons.

Why is it that the patent system seems to work for most industries, but in the technology sector has resulted in endless high-profile litigation and threats that frequently put small and innovative companies out of business?

According to an article in the New York Times “Unlike patents for new drug formulas, patents on software often effectively grant ownership of concepts, rather than tangible creations. Today, the patent office routinely approves patents that describe vague algorithms or business methods, like a software system for calculating online prices, without patent examiners demanding specifics about how those calculations occur or how the software operates”. The result, of course is that the biggest players with the deepest pockets can frequently bully others into submission.

A major reason why the current system is so damaging is that companies now file patents for ideas in which they made no investment and which they may never pursue. The article outlines this in the case of Apple, but they are by no means alone. And for those who argue that current patent protection is necessary to protect investment in innovation, it is pointed out that Apple’s monthly profits of $3bn+ are by many considered excessive. Such high margins would typically attract competitors – but the patent system makes any investor wary.

Some ideas being discussed to improve the system include a reduction in the duration of proection. Another might be to create different classes of patent, or to limit the way in which they can be used.

The America Invents Act has made things worse by changing the principle of protection from first to prototype to first to file. This again favors the large and sophisticated companies who can often spot someone else’s new idea and then rush to filing. Indeed, it is a real issue for many inventors who perhaps wish to gain funding and cannot do so without sharing their ideas and prototypes with potential investors, who may then quite simply steal their idea.

For those in the world of contracts, there is sadly little we can do at thsi time, except remain aware of this potential threat and ensure we understand it in the context of provisions relating to intellectual property, confidentiality and indemnity clauses. And perhaps, when there is an opportunity, we might add our voice to those who campaign for change.

One Comment
  1. John Tracy permalink

    While I agree that something needs to change, patents aren’t strictly a destructive weapon. They are also a preventative weapon against patent trolls, and companies that that would copy and compete with the patent owner having not invested in the development of the patent. Some companies use them as a source of revenue in licensing patents to other parties.

    What bothers me more is that these same companies (Apple and Google) who want to use the U.S. Courts and Government to protect their patent rights are also companies that aggressively use tax management strategies to dramatically reduce the amount of income their earn in the U.S. so they can avoid U.S. corporate income taxes. At last count Apple had some 60 Billion dollars sitting in offshore tax havens and Google’s effective tax rate in the U.S. was less than one-third of what Mitt Romney paid as a percentage of his income.

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