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.