Stop the Secondary Market for Patents From Running Wild

In this post, I want to address the notion that the secondary market for patents is too valuable to risk regulating. Patent trolls and their defenders often argue that a “vibrant” secondary market benefits inventors, which implies that any restrictions on patent transfers harms inventors. One recent op-ed in the Seattle Times caught my eye.  This argument has also been made by prominent patent assertion entities like Intellectual Ventures, patent lawyers, and groups representing PAEs.

Describing the secondary market for patents as somehow helping companies and inventors recoup their investments sounds perfectly legitimate. But that’s not what’s going on at all — as I’ve written before, the value of patents on the secondary market is typically determined by how likely it is that the patent can be used to extract money from various victims. An unregulated secondary market for patents inevitably leads to patent trolls, and we all pay that cost.

To illustrate, let me offer up a fictional example:

The town of Wackoville has come up with an idea to raise money. It will sell the right to enforce its regulations! The town will sell certificates that authorize the holder to enforce some specific rule or ordinance. The certificates sell well, and the town is flush with cash. Everyone assumes that there won’t be much abuse – the initial sales are all to Wackoville residents, so the rights are kept in the town.

You moved to Wackoville a few years ago. One day, you get a notice in the mail. The notice is threatening to sue you for violating a regulation about the appearance of your house. Apparently, there’s a rule against walkways from the driveway to the front door that have an angle less than 90 degrees. (The Acute Walkway Ordinance was pushed by a local eccentric group, the Society for the Obtuse.) Your walkway has a sharp turn in it, which might be less than 90 degrees, although you can’t be sure.

As you look at the notice, you realize that it isn’t the town or even a local company threatening you. It’s some company you’ve never heard of, based in a state across the country. Apparently it bought the right to enforce the Acute Walkway Ordinance from a dry cleaner that needed to make some quick cash.

The notice tells you that if you just pay the company a few thousand dollars, you’ll be allowed to keep your walkway. Otherwise, you’ll be sued and run the risk of an injunction that forces you to get rid of your walkway, plus damages and attorneys’ fees.

It turns out that all of your neighbors are getting notices like this about all sorts of violations from companies they’re calling Ordinance Trolls. It seems that it wasn’t just the dry cleaner who sold its certificates off. As people realized that someone was willing to pay good money, they started selling off their ordinance certificates.

Of course, the buyers wanted a return on their investment. And the only value in the ordinance certificates is the money one can get by threatening to enforce the ordinance.

As these suits become more frequent, it gets harder and harder to sell a house (which residents are being forced to do in order to pay for these threats), and home values in Wackoville plummet. In the end, the town is left with abandoned homes, although at least the Ordinance Trolls have done quite well.

THE END

OK, I admit that this is a crazy story. Why should locals be able to sell the power to enforce local rules to some company across the country, with no interest in the town or the neighborhood? Shouldn’t the right to enforce a local rule be tied to the best interests of the town?

Well, it may seem crazy, but the patent system does exactly what Wackoville did in my story.

A patent is nothing more than the right to stop someone from doing something. The purpose of patents, as the Constitution puts it, is to “promote the progress of science and useful arts…” Patents serve this function by allowing someone who is willing to take the risk of developing an invention commercially to clear the competitive field temporarily.

A patent is not like a physical asset, like land or a machine. A patent is nothing more than the right to stop others from practicing the invention claimed in the patent. The only way to directly make money from a patent is to make others pay for doing something the patent says they can’t do without permission.

So what happens when we allow patents to be bought and sold to anyone with no restrictions? We get the story of Wackoville, more or less.

Companies with no interest in an industry or a region come in and attempt to enforce patents they’ve bought. They don’t care what you’re actually doing and they don’t care about the effect they’re having. They have a tool to make money, and they’re using it.

The unregulated secondary market for patents encourages this behavior. That some large companies and small inventors are managing to generate income by selling their patents doesn’t change the fact that if we allow the unregulated exchange of patents, we guarantee that patent carpetbaggers will snatch them up eventually. The opportunity to make big money is just too tempting.

Take a business with a patent portfolio it isn’t using. It’s true that by selling its patents, the business can raise cash. But at what cost? How many thousands of businesses are going to have to pay money when they’re threatened with patents bought from the struggling business?

The same thing with individual inventors who sell their patents to trolls. The individual inventors, who weren’t able to commercialize their inventions, make money at the expense of the trolls’ targets.

Make no mistake, we’re picking winners and losers here. If we say that any business (or inventor) can sell its patents to the highest bidder without restriction, we are almost certainly sentencing thousands of businesses to being victims of patent-based extortion. Good for the liquidity of a few companies and individuals, but not so good for the rest of us.

The FTC’s recently-announced study should give us some information about the secondary market for patents. But we need to recognize that if we continue to let that market run wild, things will only get worse.