Dealing with mad patent disease

The industry has a bad case of mad patent disease. The patent reform bill working its way through Congress could ease some symptoms, but it won't eradicate the scourge.

On the other hand, the engineers who develop patentable technologies in the first place could help find the cure for mad patent disease--but first they need to understand its epidemiology.

"Mad" in this case stands for mutually assured destruction, the Cold War-era philosophy that justified nuclear proliferation. This skewed strategy, lampooned in the movie "Doctor Strangelove," has become integral to how the electronics industry handles intellectual property.

Mad patent disease was a latent condition until recently. Companies amassed patents but did little with them. When companies failed, survivors typically bought their patents cheaply as a hedge against future use, said Ron Epstein, president of patent consulting firm IPotential LLC (San Mateo, Calif.) and a former Intel patent attorney.

But entrepreneurs, some of them familiar with financing bad debt, began to step in and buy the cheap patents, hoping to assert them against companies for a profit. Thus was born the model of the nonpracticing entity, or patent troll.

There now are more than 230 patent trolls; they have up to 800 subsidiaries, often operating in stealth mode, and own more than 10,000 patents in the United States alone, according to PatentFreedom, a service that tracks nonpracticing entities. In part to defend against the trolls, companies over the past decade have bought, sold and applied for patents at record rates to form strategic portfolios.

Big operating companies are contributing to the patent madness by expanding their portfolios to generate licensing revenue. IBM Corp. has long led the world in total U.S. patents granted per year and has been generating portfolio-related revenue of $1 billion or more a year.

Hewlett-Packard Co. started a patent licensing program in January 2003 that "has grown nearly astronomically," said Joe Beyers, vice president of intellectual-property licensing for the company. A source close to HP said the group started with licensing revenue of about $35 million and grew that to about $350 million within as little as three years.

Renesas Technology Corp. is exploring what might be the next step. It started a pilot program last year to create teams, comprising IP licensing, R&D and sales staff, who define ideas for patents tied to core technologies that Renesas could assert strategically with partners and competitors.

Thus far, the effort has generated at least 20 ideas for patents. "I think it's very important for IP people to have a voice in R&D and business decisions," said Hiro Seki, general manager of Renesas' IP group.

The game has spread to China. Telecom giant Huawei filed 6,000 patents at China's patent office last year, and its rival ZTE now ranks with General Electric and Texas Instruments among big holders of patents in that country.

"I may be able to draft a thousand applications this year, if I have the capacity," said Singer Huang, managing director of East IP, a Beijing-based IP law firm.

Patent litigation is also on the rise in China, having gone from about 1,000 cases in 1996 to 4,000 in 2007, he said.

The resulting global patent market in electronics has grown to about $1 billion a year, divided about equally between electronics companies and trolls, estimates John Amster, who last year formed RPX Corp., a novel subscription service that buys and licenses patents as a defense against nonpracticing entities.

IPotential alone claims to have sold $270 million in patents in 130 separate transactions over the past five years. Allied Security Trust, a consortium set up to buy patents for giants such as Cisco and IBM, last year updated its members on as many as 10,000 patents available on the market, said Dan McCurdy, who manages both Allied and PatentFreedom.

Intellectual Ventures (IntVen), formed by representatives from Intel and Microsoft to combat the trolls, has itself become part of the problem, having ingested as many as 20,000 patents. To maintain its business model, it must raise its rates for corporate members--a fact that some say has turned IntVen into a troll.

"They are the world's biggest nonpracticing entity, period," said McCurdy.