High-tech patent cold war — Let the arms race begin

Google recently lost a bid to buy Nortel’s patent portfolio in bankruptcy, and it is disappointed with the results. Google blames the patent system for increasing costs of its Android platform and generally stifling innovation.

Google’s complaints are especially interesting considering President Obama’s recent speeches on how America’s government needs to promote innovation to compete with the rest of the world (and he’s right — the Constitution tells us that patents are supposed to “promote progress of science and the useful arts”). These speeches implied that individual inventors and startup companies can help bring us out of our current economic woes by creating jobs at new (and mainly small) businesses.

From a historical perspective, Google is still a startup company; it was formally incorporated in 1998. Assume that Google began applying for patents when its founders created their first search engine in 1996 — those patents would not have expired yet, since patents last 20 years after the date of filing. This means that Google is a relative newcomer to the patent game, but has 15 years’ experience as a startup company for whom the patent system is supposed to promote innovation.

And what is Google telling us from its position of experience? That the patent system is not geared towards promoting innovation by startup companies. What’s to blame, according to Google? First, the patent system itself, since it is geared towards large corporations who can afford to invest millions of dollars and years of time toward procuring and enforcing patents. A patent, at its very core, is merely the right to exclude someone else from practicing a patented invention — and the only way to exclude someone from doing what they’re doing is to sue them. The average utility patent costs somewhere in the five-figure range and takes 3–4 years to obtain, and the average patent infringement lawsuit costs at least a million dollars. What startup company or small business do you know of that can pay a million dollars for a patent infringement lawsuit?

Second, Google complains the patent system is open to exploitation by non-practicing entities (known as “NPEs”, or the less-politically-correct “patent trolls”), who do not actually make and sell innovative products, but instead buy and enforce patents against those who do. Just because a startup or small business has a patent doesn’t mean that it can’t be sued for patent infringement by someone else — products can be, and often are, covered by more than one patent.

What do the pitfalls of the patent system mean for real businesses? Well, there are two general approaches a business can choose to take. First, an industry can elect not to pursue patent protection and compete on the merits of their products. This approach is rare these days, as it is hard for small businesses and startups to attract investment capital without a protectable core product. Second, everyone in the industry can elect to pursue a patent enforcement model. This is the Cold War, mutually-assured destruction model. Since most products in the rapidly evolving high-tech industry are covered by some type of patent, the industry players can extract licensing fees from their competitors, and can resolve patent disputes through some mixture of cross-licensing arrangements, cash payments, and injunctions against future competition. Google’s recent press releases make abundantly clear that while it is playing the patent game, it doesn’t want to be.

Any industry in which one player shifts from the first two the second model will ultimately force all other players in the industry into the second model. Google is a prime example of this. Its press releases following the Nortel patent sale plainly indicate that Google would prefer to compete on the merits of its products, rather than the size of its patent portfolio. That is, Google would rather spent tens of millions per year on research and development of new technology, rather than litigating over old technology. While some portray this as sour grapes, Google is the current poster child for startup companies, so perhaps the architects of our patent system should listen to what it is saying if they truly want to encourage innovation by startups and small businesses.