April 25, 2006 6:28 pm

Invention shop or patent troll factory?

Nathan Myhrvold, master chef, palaeontologist and quantum physicist, seems to relish controversy.

“There’s a lot of stuff I do that I’m the only person who has the balls to do,” he says with a grin.

Once the chief technology officer at Microsoft, where he spent 14 years as one of the biggest brains in a company famous for its oversized intellects, Mr Myhrvold has certainly found an effective way to stir up a new army of enemies.

Intellectual Ventures, the investment fund he set up with former Microsoft associate Edward Jung soon after leaving the software firm in 2000, has set out to amass one of the biggest holdings of patents in the information technology world. It is, according to the former Microsoft executive, all part of a plan to create a new investment market around one of the key commodities in the modern world: ideas.

His critics, however – and there are many of them in Silicon Valley these days – accuse Mr Myhrvold of being the chief villain among a band of opportunists who are using the legal system to extort an unfair share of the tech industry’s profits.

Dubbed “patent trolls”, these entrepreneurs buy up patent rights, often cheaply and in bulk from failing companies, with a view to mounting lawsuits against other, successful tech companies. It is an easy accusation to hurl. “If anyone sues you and you don’t like it, you call them a patent troll,” says Steven Maebius, an intellectual property lawyer at Foley & Lardner in Washington DC.

Yet Mr Myhrvold’s prominence, the scale of his ambition and the lack of any clear sense of how he plans to make money in the long term from his treasure trove of intellectual property assets has fed the Valley’s paranoia and provided plen-ty of ammunition for his enemies. One person familiar with Intellectual Ventures’ plans says the firm has yet to decide how best to make money from its IP holdings – leaving open the possibility that legal action will play a significant part.

The intellectual foundations on which Mr Myhrvold rests his case are appealing. In an ideas economy, he says, inventions deserve to be properly funded and valued. Only if you can invest in them, buy and sell them will their potential be realised. “Liquid markets are a good thing,” he says.

Separating ideas from the products they result in is the first step to this end. Mr Myhrvold draws a parallel with the origins of the software industry: when Microsoft was born, conventional wisdom held that the value in technology lay in hardware, and that a set of computer instructions expressed in software code could not have an independent life. Separating the two stimulated a wave of investment in software.

He also points to the growth of the venture capital business. “People said, why do we need more companies? We already have plenty,” he says. With the availability of plentiful fi-nance and a model for how to invest in the area, why shouldn’t businesses built on pure invention become as common as venture-backed companies are – with a commensurate rise in the num-ber of ideas being produced?

Even Intellectual Ventures’ critics agree that a free market in ideas could prove to be a powerful economic force. That, though, is where the agreement ends.

A lack of transparency surrounding Intellectual Ventures’ activities has given the firm’s opponents plenty of scope to try to pick holes in Mr Myhrvold’s intellectual pretensions.

“It’s hard to tell if a firm like his is performing a public service or not,” says Mr Maebias. “They don’t always disclose how they use the money [they raise to buy patents].”

Mr Myhrvold will say only that his firm has amassed a pool of patents – including from some 50 universities – and that it also funds a number of inventors direct-ly. He adds that his company is filing 300 patent claims a year, putting it among the 25 biggest US firms by this measure. While the overall scale of its holdings is not disclosed, the firm is understood to have raised more than $300m to back its in-vestments and to control between 3,000-5,000 patents.

One criticism frequently levelled against Intellectual Ventures concerns the nature of its investors. The names of several prominent companies, including Microsoft, Intel and Nokia, have been linked to the firm, though none have confirmed their involvement.

Why would some of the biggest tech companies cosy up to an outfit that may eventually make much of its money from suing some of the industry’s richest concerns? One answer, say critics, could be that these companies are using the venture to neutralise potential future attacks. “You could say, this is a way for a large company to protect itself against trolls – to buy up and keep these patents,” says Mark Lemley, a law professor at Stanford University.

A second common criticism of Intellectual Ventures concerns its plans for how to make money from its IP assets. By funding individual inventors – Mr Myhrvold says he has about 25 on the payroll, “three or four of them” full-time – the firm claims to be generating new ideas that will have economic value in the sort of five-year time frame that venture capital investors normally embrace.

Critics claim, though, that this is not the main motivation behind the firm, and that digging up old patents to use against established companies remains its primary goal. “They’re trying to give themselves air cover by acting as an invention shop,” says one.

Underlying all of this is the complaint that Intellectual Ventures, and a growing band of less prominent patent investors, are exploiting fundamental weaknesses in the US patent system. Opponents point to two flaws in particular: it is too easy to obtain patents, and a draconian enforcement re-gime gives patent holders too much power to force lucrative settlements.

“The reason legal action is so successful is that the legal system allows people to extract unfair value [from patents],” says Joe Beyers, who oversees Hewlett-Packard’s efforts to raise money from licensing its own intellectual property assets.

Adding to the problem is the structure of the intellectual property that lies behind many of the complex products made by IT companies. A company such as Intel draws its IP from many different sources when designing a new silicon chip, says Mr Lemley: as a result, a company that claims rights to just one element on a chip and seeks an injunction to block production can effectively hold the company hostage over the entire
product.

“The potential cost to Intel is much bigger than that one little circuit,” says Mr Lemley. The computer industry is particularly vulnerable to this kind of legal attack, he adds: in the biotech industry, where many small companies are bought and sold on the strength of their IP rights, the use of components on this scale does not exist.

According to Mr Myhrvold, the threat of an injunction is one of the few things that lone inventors have at their disposal when fighting powerful corporate interests. “What leverage do you have over these giant companies otherwise?” he says.

He adds that lawsuits are not the best way to extract the value out of IP rights – it would be far better to be able to turn to an active, liquid market for ideas. “A lawsuit is a terrible idea,” he says. “It has huge costs.”

Even friends of the tech industry, meanwhile, concede that the rights of independent patent holders may not always get the attention they deserve. Some big tech companies, according to one IP expert, actually forbid their engineers to examine patents filed by others to check on whether they risk infringing someone else’s IP rights. The reason: if a decision is taken that the patent has not been infringed but a jury later finds otherwise, the offending company can be exposed to the triple damages allowed under US anti-racketeering legislation.

“They know they infringe patents,” claims Mr Myhrvold, adding that big companies are quite prepared to play fast and loose with other inventors’ ideas, even if it means running the risk of being sued. “They don’t check, they’d rather not – time to market is everything,” he says.

Of his vision of a new way to fund ideas, the former Microsoft executive says: “Any time you introduce a brand new thing, it threatens the existing players.” To judge by the antagonism he has aroused, some are starting to feel very threatened indeed.

The godfather of patent litigation

From Thomas Edison onwards, inventors have looked to the courts to defend their rights, but few have proved as litigious as Jerome Lemelson. An inveterate tinkerer, he came up with more than 600 patents that have helped to shape everyday technology, providing Sony with the audio cassette drive mechanism used in the Walkman and selling a series of patents covering data and word processing to IBM.

Lemelson instituted a campaign of litigation that made him a much-reviled figure in corporate boardrooms. Among the most controversial patents he filed were those in the mid-1950s describing how a robot could help manufacture products and be fitted with a camera to carry out quality control. Those patents, which critics claimed were more like science fiction than actual invention, were later the basis for a series of lawsuits around bar code readers and machine vision.

Lemelson’s exploitation of “submarine patents” – describing inventions that were only activated when someone else had created a product that appeared to infringe on the idea – eventually led to a change in law to ban the practice.

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