Tuesday, November 15, 2011

Patent Transparency

The news about Linux and Android technology is rife with stories about attacks against free software by Microsoft. The latest trend is that Microsoft has been threatening all of the major Android cellphone  manufacturers with patent litigation. To prevent litigation, Microsoft coerces Android manufacturers into entering a very restrictive license agreement with the understanding that the terms of the agreement cost less and have less uncertainty than litigation.

There is one really big problem with all of these agreements: they're all confined to secrecy through non-disclosure agreements. Through these patent licensing agreements, Microsoft is imposing their tax (alleged to be as high as $15 per unit on cell phones) on a free, open source operating system they didn't even build. This is the cost of knowing what those patents are and the cost of being "covered" by a license to practice those patents, even if they're not being practiced by the victims.

The purpose of the high licensing fees is to impose a cost on an otherwise free work of software that is greater than or equal to the cost of a Windows phone license. In other words, the message is, "Android? Say, that's a very pretty operating system you've got there. I'd hate to see anything bad happen to it. I think you'd be a lot safer if you paid us for protection and built Windows phones, too." Does the image of Marlon Brando come to mind?

Microsoft's strategy is simple on it's face: Approach a competitor with threats of a patent lawsuit. Then offer a way to eliminate the threat, but discussions only begin with a non-disclosure agreement. This way, even if negotiations fail, the patents are never revealed. It's important to keep those patents secret to prevent competitors from working around the patents. As negotiations continue to success, the result is a royalty agreement in complete secrecy, ensuring that no one else knows which patents are included or their true value based on the agreement.

This practice can be used anti-competitively and Microsoft isn't the only one doing it. To put this in perspective, in a competitive market, competitors strive to offer a better product to consumers based on price, product quality and customer service. In a combative market, participants seek to hobble or even disable their competitors to assert a private monopoly on the market. Patents were never intended as legal weapons of combat in the marketplace. They were only intended to give inventors access to capital to practice their inventions, but that's not how they're being used in business today.

It's time for some patent transparency. Patents are government issued grants of intellectual property and each patent is a matter of public record so anyone can look them up at the USPTO website (Google has just introduced a new patent search engine, too). Each patent is a monopoly on an invention. Patents are also assets that tend to substitute for research and development and customer service. Unfortunately, many patent owners have set up a shell game of corporations to make it hard to trace the true owner of the patents.

So I have a solution: all patent licensing agreements may not be kept secret by any non-disclosure agreements and that there should be no exceptions. Investors, public or private, have a right to know the true value negotiated for a patent. Investors have the right to know the impact on their investment when the company they invest in is approached by a patent aggressor, like Microsoft, or IBM, the king of patent licensing.

This proposed law should cover a few basic points. All patent licensing agreements, including out of court settlements (95% of patent cases settle out of court), and court orders, are to be made public and shall be registered with the patent office. The patent office must be notified in advance that patent licensing negotiations are about to begin, with notice of time, place and scope to ensure they eventually get a copy of the agreement resulting from negotiations. All patent agreements shall be made public in reports made to the Securities and Exchange Commission by publicly traded corporations. Any person or company contacted by a patent aggressor for royalty negotiations that are subject to a non-disclosure agreement will have standing to sue for relief. Finally, provide for refunds of all patent costs to the licensee should the patent be ruled invalid prior to expiration of the patent.

The penalty for failure to comply is termination of the patent. That should create plenty of incentive for compliance on the part of patentees.

The public has a right to know how government issued monopolies are being used to stifle competition and remove choices from the market in favor of patent owners (sometimes affectionately referred to as "patent trolls"). Removing the veil of non-disclosure agreements from patent licensing agreements will create greater transparency in a very murky market.

Moreover, competitors have a right to see how patents are being enforced in a particular market segment. With access to these agreements, competitors can see how the agreements are structured, what rights are conferred and determine the costs of entry to the market affected by a patent. They can also find ways to work around the patents to secure entry to a market without having to risk litigation first. Transparency will allow competitors to be sure they aren't infringing on patents, which is the point of patent publication in the first place.

Some are sure to cry foul. "Patents are private property! You can't do that!" Are they really? Patents are issued by the government as a temporary monopoly to the patentee. Patents are the only kind of "property" that allow you, the patentee, to tell others what they can and cannot do with their own private property. Clearly marking the true owners, the limits of the patents and the agreements relating to their licensing has no bearing on the value of a patent and would actually increase the value of the patent to the owner and society.

Congressional intent is that patents should promote the progress of the arts and sciences. A non-disclosure agreement is a sure sign that a patent aggressor has little interest in advancing the arts and sciences and is overtly thwarting the intent of Congress. It's worth noting that there is is a lot empirical evidence to show that patents have never encouraged innovation, much less advanced the progress of the sciences or the arts.

A closer inspection of patents as "property" reveals broad, general language as to the scope of the patent, making it difficult to tell where the patent begins or ends. Try reading a patent, especially a software patent, to see how it is practiced, or even how to avoid infringement. You're going to need a lawyer to help you. Even for engineers, this can be a hopeless quest.

Real property on the other hand is easier to understand. There are clear boundaries to real property and those boundaries are very well established so that everyone knows the limits of a property claim. Car ownership is just as easy to prove. But the metes and bounds of patents are about as clear as pea soup.

The law as it currently stands is very one-sided in favor of patent holders. In order to help weed out bad patents, there needs to be some penalty for gaming the system. What happens if a patent covered under a licensing agreement is eventually invalidated before the patent expires? My proposal takes this into account by providing civil remedies for a refund of all royalties paid, legal fees and other expenses resulting from any negotiations, agreements or litigation arising from enforcement of the patent upon the plaintiff. Criminal remedies shall be available in situations where the former patent holder fails to refund costs.

Because ex post facto laws are prohibited by the Constitution (and I'm not advocating them here), there is nothing we can do about the patent agreements already in force. But the points above would go a long way towards cleaning up the fear, uncertainty and doubt in the marketplace. Perhaps we can create a voluntary patent licensing exchange so that anyone who wants to disclose previous agreements can do so, as an act of goodwill.

It is estimated that innovation has contributed 90% of GDP since 1870, with the vast majority of that innovation covered by patents issued by the government. We the People have a right to know how the patents are being used to control markets since they have a material impact on the well being of all of us.

Patents have no place in a free market. But as long as we have patents, transparency in patent royalty negotiations is essential to regulation of their use and maintaining choice in the market for consumers.
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