I am writing to you because you will be asked to vote on the upcoming Senate version of the already-passed Innovation Act (S. 1612, Patent Litigation Integrity Act).

Your vote has the power to adversely impact not only our country’s economy, entrepreneurial potential, and foothold in the free world, but also erode the Constitutional underpinnings of our Patent Clause.

Before making a decision to pass a rushed bill, I hold before you the Constitution, which you have sworn to uphold.

And before casting a vote that would offend our Founding Fathers, consider a more sound alternative to patent reform, one built upon open and free-market principles and rooted in the Constitutional underpinnings of our Patent Clause. (http://www.investinip.com/how-do-we-achieve-patent-reform/).

Firstly, before making a vote to attempt patent reform, ask yourself: what is the problem with our patent system?

If “TROLLS” immediately pop up in your mind (the practice of filing frivolous lawsuits to obtain nuisance-value settlements), then like most people you’re fixated on a symptom, rather than the underlying problem.

All current legislation, including the Innovation Act, address nothing other than symptoms, to an underlying, systemic problem to our patent system.  Because of this, the Innovation Act and all other pending legislation will fail to achieve patent reform.

So, what’s the underlying problem with our patent system?  How do we achieve patent reform?  I discuss this here (http://www.investinip.com/how-do-we-achieve-patent-reform/).

To uncover the problem with our patent system, we need to first identify how we utilize our current-day patent system.  And then for each, we need to identify the mechanisms we employ to enable those uses.

So what do we use our patent system to achieve?

They are (1) enforcement and (2) monetization.

(1) Enforcement

This is the classic “right to exclude.”  (read more here — http://www.investinip.com/patent-basics-what-is-a-patent/).

To illustrate, let’s say you’re attempting to launch a product or service and another market player infringes on your patented idea and competitive advantage, you have a Constitutional right (via our Patent Clause) to enjoin that competitor from further infringing activity, or obtain royalties for their continued infringement.

This enforcement function serves to protect investments into entrepreneurial endeavors and technological advances–the foundation of scientific progress and economic development.

And what mechanism do we use for enforcement?  Litigation.

(2) Monetization

Our current-day patent system also includes a monetization component–a tool by which a patent holder can obtain royalties from patented ideas that are valid and legitimately infringed (these actually exist).

This creates an opportunity to liquidate the value of the asset.

Regarding whether liquidity of an asset is important and whether we should keep it in our patent system, these are interesting questions that I’ll be discussing in another post on www.investinip.com.

Regardless, we have a system that enables patent monetization.

Given that, what mechanisms do we use to enable monetization?  The same one as enforcement–litigation.

And this is exactly where the problem lies.

Litigation is great for enforcement, but horrible for monetization.

Why?

Because litigation is a closed, monopoly-driven model–this is perfect for the court system (read more here — http://www.investinip.com/patent-exchange/).  But for a monetization system, we need an open, free-market model–just like we use for everything else.

Why an open and free market?

A free market, because this will enable price discovery in which the market determines the proper value to attribute to a given technology asset.

And an open market, because we want the entire investment to community to participate, not just a handful of patent experts.

So how would we create an open and free-market patent monetization system?

It’s actually incredibly simple–the template for an open, free-market monetization system is already in use today, and it is used to monetize and trade on numerous other asset classes–the stock exchange.

So why not patents?  Why not an open, free-market patent exchange?

It’s all laid out here (http://www.investinip.com/how-do-we-achieve-patent-reform/).

Now, while we are considering a patent-exchange approach to patent reform, let’s also consider the ramifications of the Innovation Act, and all other legislative measures that attempt to implement a loser-pays, bond-enforcement system.

On the surface, the Innovation Act and similar legislation seem like a great fix.

They will disincentivize the filing of frivolous lawsuits, because defendants will now have an opportunity to fight and recover costs on cases with merit to defend.

Moreover, identifying the real parties-in-interest will uncover all troll activity, and repeat offenders can be flooded with bond requirements.

The Innovation Act and other legislation like it will finally provide defendants with sufficient leverage to fight back against the trolls.

What’s wrong with that?

Well, have you considered the collateral implications?

If not, there is a serious price to pay.

The collateral implications threaten to stifle small-business innovation, angel-seed investments into entrepreneurial endeavors, and research-and-development efforts.  See, e.g., here (http://www.investinip.com/letter-congress-december-4-2013/).

How?

In a loser-pays, bond-enabled system, innovative and daring individuals with an idea, guts, and a patent won’t be able to attract investment capital, because the patent asset on its own would be too risky of an investment.

Why?  Because if I’m an investor and the patented idea is the startup venture’s competitive advantage, even if I believe in good faith that a competitor is infringing and impinging on our marketshare, how can I rely on the patent asset?  If I win, great.  But if I lose, I run this risk of paying excessive legal fees, which alone could tank the business.

How can I rely on the patent asset to back my investment?  Even when a competitor is legitimately infringing, it becomes too risky to even attempt to enforce the patent.

Instead of investing in the smaller ventures that are solely patent-based, the investor will instead invest in more well-funded operations, ones that are backed by more than just patent assets.

What will this mean?

The passage of the Innovation Act and similar legislation will be the dawn to a massive drop off of angel-seed investments into small-business ventures, particularly those that are patent-backed and where their competitive advantage relies on a patented idea.

This will serve to cripple small-business America and our entrepreneurial spirit–the foundation of our country and the very thing the Patent Clause is meant to protect.

Moreover, a loser-pays system will completely undermine the United States Patent and Trademark Office’s legitimacy (read more here — http://www.investinip.com/legitimacy-uspto-loser-pays-system/).  How can I trust the USPTO is issuing valid patents?  If they are wrong, I pay for it, not them.

Voting for the Innovation Act or similar legislation will plant seeds of doubt in the legitimacy and value of government-issued patents.

The result?  We’ll see a significant dropping in U.S. patent filings–a signal to the rest of the world of a weak patent system.

While the short-term gains of the Innovation Act and similar legislation may seem appealing, we must consider patent reform from a broader perspective, and a perspective rooted in the Constitutional underpinnings of the Patent Clause.

To achieve patent reform, we need to improve our monetization system, not weaken our patent system.

Vote to shoot down S. 1612 and support patent reform from a more holistic perspective, one that is aligned with open, free-market principles, and the Founding Fathers’ intent behind our Constitution’s Patent Clause (http://www.investinip.com/how-do-we-achieve-patent-reform/).

Our Patent Clause and America’s patent regime hang in the balance.

I hope you will read this and discuss amongst other policy makers.

Thank you for your consideration.

May God Bless our Patent Clause.

Gau

In my humble opinion, resolving disputes through litigation is a byproduct of American culture—patent litigation is a byproduct of that culture.

To put it in perspective, other cultures aren’t as litigation prone.  To provide an overly generalized example, the Japanese find it offensive that we use litigation to resolve disputes.  Traditionally, the Japanese resolve disputes in a more cooperative manner, where each side is willing to see the other side’s arguments, and willingly yield if there is merit.

American history and culture, on the other hand, isn’t quite the same.

The Constitutional right to bear arms provides some insight.  The Second Amendment is a fundamental right provided to all citizens—it stems from a cultural perspective that prioritizes property rights and, more particularly, the right to defend them.

To put it simply, it stems from a mentality that if you trespass on my property or try to take what’s mine, I have a right to defend myself, even with the use of force.

This similar mentality comes through with respect to defending patent enforcement efforts.

Albeit anecdotal, most companies refuse to pay for patent licenses, even when they are presented with reasonable arguments of infringement.  Further, even when given an opportunity to avoid litigation, most companies ignore it.

As an example from my brokering days, when we presented companies with infringement evidence and an opportunity to purchase a patent, to thereby avoid litigation, nine times out of ten we were handedly ignored.  But when we sued them on it, it got their attention and their interest to work out a deal.

We used litigation as a means to get their attention, when a sales pitch failed.

The point being, when naysayers criticize patent holders for their use of litigation, think about it from the other perspective—why do companies refuse to take licenses or make patent purchases, even when given an opportunity to avoid litigation?  Why do patent holders need to sue a company, to simply get their attention?

What is a license?

A license is a right to use a patented invention–specifically, a right to make, use, sell, offer to sell, and import into the U.S. a patented invention.

A patent holder, and only the patent holder, has the right to grant a license to third parties (provided the patent holder does not grant an exclusive license or the right to sublicence to other parties–I’ll be discussing this in successive posts).

This right stems from the government issuing the patent, and agreeing to enforce the patent holder’s right to prevent others from practicing the invention.  A third party can practice a claimed invention only after a patent holder grants a license to the patent.

From a monetization perspective, the more licenses you grant with respect to your patent asset, the more you are realizing the patent asset’s monetization potential.  Hence, your goal as a patent owner is to grant as many licenses as possible, at a price point that maximizes value.

The property-right concept stems from a tradition rooted in real property.  If you own a home, as an example, you can reside there and furnish it to your liking.  There is no requirement, however, that you actually reside in or furnish the home.  As such, a property right does not require or obligate the owner to proactively act on the given right.

Instead, a property right is defined as a privilege to prevent others from trespassing on that right.  If you wish to prevent someone from entering your home, you are legally entitled to prevent that person from doing so.  And if that person makes an unwelcomed entrance, he is trespassing and you are legally entitled to defend yourself.  And notably, the US government is obligated to help you enforce that property right, such as through law enforcement and the court system.

This same property-right concept flows to the intellectual-property arena.  There is no requirement that you, for example, develop or market the invention relating to the patent asset, but you are legally entitled to exclude others from practicing the invention defined by the patent asset.  Most importantly, the US government is obligated to help you enforce that property right when it is being infringed (a rough equivalent of trespass).  Specifically, if you make a claim of infringement against a third party and if a court rules in your favor, the government will prevent that party from continuing the infringing activity or force them to pay royalty fees for continuing the activity.

With respect to monetization, the important takeaway is that the value of a given patent ultimately stems from government enforcement, or at least the threat of government enforcement, of the property rights associated with the asset.  In fact, all value of patent assets and monetization activities relating thereto ultimately derive from government enforcement-activity of intellectual property rights.

To accurately valuate a patent asset, you need a reliable methodology to predict whether a court will enforce your property right against a party you believe to be infringing the patent asset.  If a court will enforce the property right, there is value; if not, there is no value.

Absolutely not, because this criticism stems from a perspective that fails to view intellectual property as an investment class, particularly an investment class in which any person or entity can earn a substantial return.

By way of background, a non-practicing entity is one that asserts patent assets typically through licensing or litigation, with an eye towards earning a financial return on the patent assets.  As opposed to a practicing entity that may sell a product or service, a non-practicing entity does not sell a product or service and typically does not further market or develop the inventions covered by the patent assets.

What is the basis for this criticism regarding the monetization strategies of such non-practicing entities?

When a non-practicing entity monetizes a given patent asset, they do so by suing or threatening to sue companies such as Apple, Google, and Intel.  And when they sue or threaten to sue such companies, these companies are sometimes forced to pay a massive amount in legal fees and other expenses; these fees and expenses adversely affect these corporations’ bottom line, thereby preventing them from hiring additional employees, as an example.

A closer look under the veil, however, reveals that the picture is not as black and white.

As an example, Intellectual Ventures (“IV”) is by-and-far the largest non-practicing entity in the world.  It is backed by a coveted list of investors that have financed IV, enabling it to have acquired over 30,000 patents, which it continually asserts against companies that have operations in the U.S.

But who are these investors that have enabled IV to purchase these patent assets?  These investors include none other than:

Corporations such as Apple, Google, Adobe, Amazon, Cisco, eBay, Microsoft, American Express, Nokia, Sony, Verizon, Yahoo, and Intel;

Universities such as Northwestern, Cornell, Brown, University of Pennsylvania, University of Southern California, University of Minnesota, University of Texas, and Grinnell College;

Financial institutions and persons JP Morgan Chase, Nancy Peretsman, Adam Holiber, and Eric Dobkin;

Foundations such as the Rockefeller Foundation, Flora Family Foundation, Bush Foundation , William and Flora Hewlett Foundation, and Skillman Foundation;

Medical institutions such as Howard Hughes Medical Institute, the Mayo Clinic, and Reading Hospital;

Consulting firms and investment funds such as McKinsey & Company, Sequoia Holdings, Dore Capital, Flag Capital, Allen SBH Investments, Charles River Ventures, Commonfund Capital Venture Partners, Legacy Ventures, Next Generation Partners, Noregin Assets, Sohn Partners, and TIFF Private Equity.

The list continues . . .

Is it fair for corporations, universities, and other entities to criticize the monetization strategies of non-practicing entities, when these very same (or at least similarly-situated) entities financed and thereby enabled IV to assemble one of the largest patent portfolios in the world?  Would be it fair to characterize the non-practicing-entity business model as being a drain on the U.S. economy, when numerous corporations, universities, and financial institutions earn returns along with non-practicing entities?

Of course not.

Remember, anyone can become an investor in IP and earn substantial returns; it is not a terrain limited to just non-practicing entities.  As described above, entities across a wide spectrum invest in the monetization strategies of non-practicing entities.  Moreover, corporations monetize their own patent assets in models similar to those employed by non-practicing entities.

Instead of criticizing, we would do much better learning from and implementing the monetization strategies of the most successful non-practicing entities, so we all can become smarter investors in IP.