How patent wars block progress

Microsoft has just spent $1.1bn buying AOL’s patent portfolio. Is this a smart move or a symptom of a broken intellectual property system? Matthew Partridge investigates.

What are the details of the deal?

Software giant Microsoft has paid internet group AOL $1.1bn to buy more than 800 of the company's patents, and license around 300 others. Patents covered by the deal "include key internet functions involved in email and messaging, as well as location-based technologies that have come to assume greater significance as the internet has gone mobile", reports the Financial Times. Microsoft will also take over AOL unit Netscape (which made an internet browser that once was the main rival to Microsoft's Internet Explorer).

Why does Microsoft want them?

As Steve Lohr puts it in The New York Times, the deal is all part of the 'patent wars' going on in the technology sector. Last year, search engine Google announced the $12.5bn acquisition of patent-rich technology firm Motorola Mobility. One of Google's stated aims was to use the patent portfolio to "help protect the Android eco-system" Google's operating system for mobile devices such as phones and tablets. Facebook, Apple and other big technology companies have also been buying patents in recent years.

With mobile devices taking off rapidly, companies are particularly keen to secure patents that can be used to defend their positions in the sector. As Maulin Shah of Envision IP tells National Public Radio: "If [Microsoft] got sued for patent infringement from someone like Google, Microsoft now has its own patents that relate to core search-engine technologies and internet-content delivery technologies, that they could counter-sue Google with. So it's almost like they were buying an insurance policy from AOL".

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Is this what patents are really for?

Many experts believe that the eruption of this patent war' suggests a bigger issue with the patent system in general, particularly as it applies to the technology world. As Lohr puts it, patents are meant to encourage innovation. It costs money to invent new products, so companies don't want to invest all that money and time only to have their creations ripped off by competitors as soon as they're in the public domain. So patents offer "a temporary period of ownership for the holder as an incentive to invent and disclose the invention".

However, as Slate's Ray Fisman points out, some patents are so broad that it is impossible to avoid infringing them. For instance, "patent number 5771354 covers any software upgrade delivered via the internet". And David C Drummond, Google's chief legal officer, reckons that modern smartphones could be susceptible to as many as 250,000 potential patent claims, notes Lohr.

Does this hurt the industry?

Ben Parr of CNET thinks that "patent law simply wasn't designed for the always changing, rapidly developing world of software. Inventing a way for generating a feed of stories' isn't the same as inventing a new type of fuel injection system or a new ultra-light alloy for space travel".

A 2008 study by patent experts James Bessen and Michael Meurer seems to back him up. They concluded that while patents worked for the pharmaceutical and chemical industries, where the parameters of the patents are more specific, they were too vague in the software and telecoms field, meaning that "the costs of litigation are more than twice the benefits in terms of gains to inventors".

This gives rise to another problem, known as patent trolling', where companies buy patents solely with the aim of suing others for infringement (rather than developing new technology themselves), leading to frivolous lawsuits and discouraging innovation.

Does trolling' really restrict innovation?

One example of harmful patent trolling comes from MIT professor Catherine Tucker, who studied the market for medical information technology. She found that litigation by the 'patent troll' Acacia slowed down research and development investment in imaging software, which has been proved to save the lives of newborn infants. Sales from companies named in the lawsuit fell, leading to an overall drop in imaging software sales.

However, text-based systems (which were unaffected by the lawsuit) continued to sell, and other companies developing imaging software, which were not sued, also continued to grow. This suggests that it was Acacia's action specifically that slowed down innovation in the area potentially costing lives that could otherwise have been saved.

Is reform on the horizon?

There have been some attempts to curb the worst abuses. Last year a major piece of patent reform legislation was passed in the US. One aim was to make it harder for patent trolls to sue multiple defendants, and it seems to be working as Thomson Reuters points out, the average number of defendants in patent cases in East Texas and Delaware (where most cases are heard) has now fallen dramatically.

Britain's patent problems

Concerns about patents are not limited to the US. Small firms in the UK, which account for 95% of inventions, complain that the high cost of legal action means that "large companies no longer fear the consequences of infringing intellectual property because entrepreneurs can't afford to [sue them]", notes The Daily Telegraph. As the SME Innovation Alliance (SMEIA) says: "Patents don't protect you unless you've got lots of money".

This is seen as a key factor behind the drop in patent applications from 20,196 in 2002 to 15,343 last year. SMEIA thinks the government should make it easier for inventors to enforce their patents. They want panels of experts to judge cases, rather than going through the normal court system.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri