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How the Patent System Really Works

Posted by hitz in Dave's Blog on Jun 6, 2007 5:16:00 PM

Many people think the patent system protects the little guy who has a great idea and is trying to get started. Perhaps it was supposed to do that, but today – at least in the computer industry – it has evolved into a taxation system that lets companies with more intellectual property impose a tax on companies with less.

Here's what it feels like if you are a small company. Lawyers from a really big computer company – let's call it BigCo – show up and say, "We think you are violating these five patents. You should license our patent portfolio." The patents don't impress you. You write a document criticizing each patent – either it doesn't apply to your design, or you found some prior art that invalidates it. Hard work, but worth it to avoid that licensing fee.


A week later, BigCo's lawyers show up again and say, "Here are five more patents we think you are violating. Did you know we have sixty-seven thousand patents? We really think you should license our patent portfolio." You can spend the rest of your life rebutting BigCo patents, or you can pay. Plus, you have a nagging fear that BigCo's patents may cover something you do, given how many they have. (I could discuss whether too many patents are being issued, but I am describing how the patent system does work, not how it should work.)


BigCo wants your money, but also access to your patents, so the cross-licensing negotiation begins. You try to identify patents that cover their products, and they try to identify patents that cover yours. In the end, you balance how much of your revenue their patents cover, and how much of their revenue your patents cover. The little guy usually loses. Ironically, patents on your super-special technology often don't cover any of BigCo's products, so "miscellaneous" patents may be more important than the ones you thought were so valuable. BigCo has so many patents that it's hard to examine them all, so they will do a statistical analysis showing how many patents they have that might apply to you. Why not save the lawyers fees and just assume that some percentage does apply? (NetApp was in a cross-licensing negotiation with a large semiconductor company, and since we don't design or manufacture chips, we got them to remove those patents from their analysis.)

Fortunately for NetApp, our CTO Steve Kleiman

explained the system to us early on, based on his experience at Sun. We invested a lot in our patent portfolio, and it paid off when the negotiations began. (I hope this note will help other companies the same way.) The big reason to file patents is not so much to defend your ideas as to save money in cross-license negotiations.

Don't patents ever protect your good ideas?! In theory, they should, but in practice it doesn't usually work that way. Suppose your small company wants to protect its ideas against a big company. Filing suit will accelerate the cross-licensing negotiation, and you'll probably end up paying. Better to let sleeping dogs lie. Patent battles between small companies work poorly because they are so expensive and take so long. Better to fight it out in the marketplace. Big companies suing small companies have a harder time than you'd imagine, because the courts recognize that an incorrect decision, especially against a startup, can cause irreversible damage. Courts are reluctant to impose injunctions, even if the patents really do apply. In the case of two big companies, both almost always violate each other's patents, so they end up cross licensing. (I'm not saying that patents never help to protect good ideas. If someone steals your patented idea, it's perfectly reasonable to go after them. I'm just saying that it seldom works out as well as you might hope.)

I know that some people are so frustrated with the patent system that they want nothing to do with it. The problem is, there's no good way to opt-out. If you don't file any patents, then the inevitable cross-licensing negotiations will be much more painful. What's worse, if you keep your ideas secret, instead of patenting them, then someone else might patent them and file suit against you for infringement. (Sounds crazy, but – in some countries at least – that's how the system works.)

In the end, my conclusion is that the patent system really is a lot like the tax system. You may not like it, but you are better off participating. Small companies should patent their "secret sauce", to protect against copycats, but more general patents will actually be most useful in cross-licensing negotiations. Larger companies have invested so much in their patent portfolio – given how the system works they really have no alternative – it only makes sense for them to collect the cross-licensing "tax" like everyone else. It helps pay for the cost of doing the patents.

My goal here is not to defend the patent system. It helps big guys more than little guys, and I don't think it encourages innovation very well. My goal is to describe as best I can how it seems to work. You may not like a system, but if you understand it you'll do better than if you don't.



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