Dear Intellectual Ventures, Part 1: Your Patents Are Worth a Lot Because No One Knows What They Mean

Last Friday, Russ Merbeth of Intellectual Ventures responded to my post regarding the effect of patent infringement on patent trolls. I appreciate Mr. Merbeth’s response; it’s to his credit that he took the time to post it in the comments.

I have a few points to make, but in order to keep things manageable, I’m going to split this up into a couple of posts. In this first post, I’ll address Mr. Merbeth’s claim regarding how patents get their value.

Mr. Merbeth wrote that

In short, intermediaries make the market work. Perhaps it is just that, a working market for invention rights, that Mr. Levy opposes, not because patent intermediaries syphon value, but because they help foster it. And, the more well-functioning the market for invention rights, the more valuable – and, the more expensive – those invention rights become. Which is a threat to those who would just as soon not pay for them.

But, the secondary market for inventions, like a secondary market for cars or any goods, can only exist if the intermediary in the transaction has its legally acquired rights respected. The market for cars would fall apart if it was acceptable to steal from a used car lot but not from the original car owner.

Of course, I never said I opposed the secondary market in patents. I said it needed regulation, and I questioned whether it promotes the progress of the useful arts.

More importantly, I think Mr. Merbeth’s statement that “the more well-functioning the market for invention rights, the more valuable – and, the more expensive – those invention rights become,” is completely wrong.

The functioning of the patents market doesn’t drive patents’ value. The malfunctioning of the patent system drives patents’ value.

If patents were clear and easy to understand, then only those patents that were being used commercially would have monetary value. That’s a tiny fraction of issued patents.

But most patents aren’t clear. They’re extremely difficult to interpret, and it costs thousands of dollars just to get a lawyer’s opinion on what a patent covers. The only way to have a definite answer with respect to what a patent means is to spend millions of dollars on litigation.

And that means that many patents that should be worth no money actually have a lot of value in the secondary market. Why? Uncertainty.

A patent that has enough ambiguity in the claim language can be used to extract settlements from companies willing to pay for some peace and quiet. In other words, the uncertainty of the meaning of its patents drives the bulk of the value of Intellectual Ventures’ portfolio, not a “well-functioning market.”

And to be clear, people are not taking ideas from IV’s patents. Rather, IV and other “intermediaries” are looking at the marketplace and interpreting their patents to cover what’s out there. Trolls don’t determine what their patents mean until they decide which companies to go after.

To paraphrase Donald Rumsfeld, you troll with the patents you have, not the patents you wish you had.

As long as it remains prohibitively expensive to determine whether a patent is infringed, companies will pay rather than risk losing in court. They’re not paying for inventions when they settle; they’re paying bullies to go away. IV’s mission statement might as well be, “Nice business you’ve got there. Be a shame if something happened to it.”

That’s a strong argument in favor of patent troll legislation. It shouldn’t be so profitable to be a patent troll. And the playing field needs to be leveled so that Mr. Merbeth’s “well-functioning market” stops being little more than an arms bazaar for trolls. More on that to come.

In my next post, I’ll examine Mr. Merbeth’s argument that Intellectual Ventures is encouraging innovation.

  • Russ Merbeth

    Mr. Levy, thank you for taking time to discuss these issues. I recently joined Intellectual Ventures and discussions such as these help everyone better understand the different perspectives and facets of the debate over the proper role and function of invention rights. Our objective at IV is to facilitate a well-functioning patent system that encourages innovation. Input and participation from across the industry are required to achieve that goal.

    I agree with you that a lack of patent clarity can contribute to the abuse of the marketplace that we’re seeing from certain players. Particularly for smaller companies and startups, the costs associated with defending against frivolous, vague lawsuits can be prohibitive and detrimental.

    I also agree with you that a secondary patent market, like any market, requires regulation. Of course, the patent market already is regulated by the USPTO, FTC, ITC, DOJ, and the American court system. Although some of the mechanisms for regulating the patent market are not presently functioning as effectively and efficiently as they could, there is regulation of the market. I suspect you and I also could agree that fee diversion from the USPTO has been a problem and may bear partial blame for some of the poorer quality patents that have been granted over time.

    As you know, new pieces of patent legislation are being proposed with great frequency of late. We are very interested to see how these evolve and how they shape the conversation around patents and the patent market. I think it’s fair to say, though, that the AIA was the most comprehensive patent legislation in over five decades and it will require more time for the full effects of the AIA’s changes to the US patent system and patent assertion to be realized.

    While it may not be perfect, the secondary market gives patent owners a way to recognize value for their ideas. Where you and I may have to agree to disagree, though, is on why any given patent is valuable. As I said earlier, there definitely are bad actors taking advantage of the uncertainty in patent valuation, but we believe that the secondary market will, over time, help to minimize that uncertainty, not exacerbate it. Although stock market investors may not like the value of their equities on any given day, the fact that there is a stock market means that everyone, investor and non-investor alike, has a resource to rely on for an objective assessment of any stock’s value on that given day. The secondary market for patents may one day offer such a resource for more transparent pricing to patent transactions.

    As to your critique of Intellectual Ventures, it is not our business model, nor is it in the interest of our investors or our customers to assemble a portfolio of weak patents. On the contrary, our business depends on us owning, buying and selling high quality assets. The fact that we count some of the most sophisticated technology companies in the world as investors and as customers attests to that. We also don’t pursue small companies with frivolous, vague lawsuits for infringement and nuisance value settlements. What we have done is built a business that invests in invention and is committed to creating a well-functioning patent marketplace where invention and inventors are rewarded. I am proud of the role that IV plays in the invention economy.

    I appreciate the debate and look forward to your next post.

    • Musical Missionary

      The problem I see with your secondary market argument is that, under the status quo, it gives life to bad patents that should/would otherwise die because they have no societal value. A secondary market for inventions should value those inventions for their value to society, not their value to extort settlements. A firm purporting to help inventors realize value from their inventions should be focused on connecting said inventors with commercialization opportunities, not revenue from frivolous litigation. In today’s highly networked economy and society, it is hard to believe inventions with societal value cannot find their way into the hands of commercial entities willing to put such inventions into practice. So a “secondary market” whose pricing signals are divorced from societal value is a bad thing.