Dear Intellectual Ventures, Part 2: You’re Holding Back Innovation, Not Encouraging It

This is the second post in a series. You can read the first post and the original posts that sparked this discussion (1, 2).

Russ Merbeth of Intellectual Ventures and I are having a discussion about, among other things, Intellectual Ventures’ business model and whether it’s good for innovation. I want to acknowledge Mr. Merbeth’s participation in the discussion; he didn’t have to engage, but he did, and I think it’s to his credit.

In Mr. Merbeth’s first response, he made the claim that Intellectual Ventures supports innovation by giving inventors a way to “make a return on their investment.”

This is a tough claim for me to swallow, for reasons I’ll explain.

And in his next response, Mr. Merbeth said something else that I have to take issue with:

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.

Let’s take a look at one of IV’s “high quality assets.” IV asserted U.S. Patent No. 6,460,050 in Intellectual Ventures v. Check Point Software, claiming that Check Point’s firewall software violated the patent.

The ’050 patent itself says that it’s a solution to the spam email/virus/copyrighted material detection problem. Essentially, when a file is received, the client runs the file through a process that transforms it into a number, called a hash. A hash function generates a unique number for a particular set of data; in other words, an identical file would generate the same number. If the hash is associated with a known piece of spam, a virus, or other undesirable, you can get rid of the file.

Now that sounds like a great idea, and it is. The problem is that the inventor didn’t invent it. One of the first people to use that technique was a well-known anti-virus researcher named Frans Veldman, and he did it years before the ’050 patent was filed. And hashing was used to match passwords before that.

But of course, a patent is presumed to be valid, and it’s extremely difficult to prove otherwise. The patent was filed in 1999 (after Veldman had sold his company), but IV sued in 2010, making it pretty tough to find documentation good enough to meet the high burden of proof for invalidity. And by burying the case in the details of the claim language, it becomes easy to obscure the fact that there’s nothing new in the patent.

While it’s appealing to talk about “high quality assets” and “return on investment,” those words hide what’s really going on. IV (along with other patent assertion entities) is leveraging the uncertainty of patent language, along with the unreasonably strong presumption of validity, to strong-arm companies into taking licenses.

The ’050 patent contributed no new innovations. The techniques were well known and in use long before it was filed. It should be worth nothing. But it’s still worth a lot of money to IV, because IV can exploit a legal system that strongly favors patent owners over defendants.

How many others of IV’s patents should be found invalid? I have no idea, and I won’t claim to know whether the ’050 patent is the exception or the rule. But I have little doubt that IV wouldn’t care one way or another if a patent is unoriginal; I think that what matters to IV is whether a patent can be proven invalid.

As I wrote in part I of this series, patent trolls figure out how to interpret the patents they have based on the potential targets. The goal is to make money, not encourage innovation; if there’s a good chance of getting a “return on investment” on a patent, IV will take it. What matters is not whether the patent covers a real innovation, but whether it can hold up in court.

According to Mr. Merbeth, making patents more valuable through licensing and litigation encourages innovation. After all, inventors who make money are naturally encouraged to file more patent applications, and more patent applications leads to more innovation.

I agree with Mr. Merbeth on one thing: the patent lottery that IV and others promote does encourage more patent applications, in the same way that a multi-million dollar PowerBall jackpot drives lottery ticket sales. But that doesn’t mean we’re getting more innovation as a result. We just get more patent applications.

That doesn’t mean that we’re getting more good patent applications, as the example from IV’s own portfolio illustrates.

I believe Mr. Merbeth when he says that IV doesn’t pursue small companies with frivolous lawsuits. But that’s not setting the bar real high. So long as IV is focused on getting a “return on investment” from its portfolio, IV will not be concerned with whether that portfolio really consists of innovative patents.

Which is why I strongly suspect IV’s portfolio doesn’t.

  • Musical Missionary

    The problem I see with Merbeth’s 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. Ultimately, a secondary market for inventions where pricing is divorced from societal value is not something to be lauded.