David Balto is a former policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and antitrust lawyer at the U.S. Department of Justice. He represents retailers and consumer groups on patent issues. He has been a senior fellow at the Center for American Progress and has worked with the International Center on Law and Economics, both of which receive funding from many organizations, including Google. Balto has also published research and authored scholarship for Google on technology policy topics.
Even casual readers of tech media have likely noticed a tremendous spike in attention paid to America's broken patent system. Instead of rewarding innovators, the patent system has been hijacked by trolls (or "patent assertion entities") who prey on small businesses and startups, extorting licensing fees with claims that they are infringing often obscure, old and vaguely-worded patents. As I have written elsewhere, companies targeted by trolls often have no choice but to pay the ransom or be forced into costly and time-consuming litigation.
Tech companies large and small and end-users such as retailers have recently found common ground in supporting judicial, legislative and other efforts that could meaningfully reform the patent system for good. But there will be no simple fix, and more significant changes will take time, even as the troll problem continues to put a drag on innovation and job growth.
That being the case, some companies are putting forward their own ideas, with the aim of fostering "patent peace" and reducing litigation between them. Twitter has promised to only use its engineers' inventions for defensive purposes. Google, too, has announced it's working with other companies on defensive patent licenses and recently pledged not to sue open-source users of some of its patented technologies.
It is in this environment that Microsoft this week released a searchable list of its patents under the banner of promoting "transparency." While additional transparency is generally welcome, commentators have recognized Microsoft's announcement is unlikely to improve the patent landscape. In fact, its true motivation is to promote the idea that simple "transparency" can fix the tech patent problem—a silver bullet that does not exist.
In fact, Microsoft is actively participating in and benefiting from one of the most opaque areas of the patent system: The growing practice of companies transferring their patents to patent assertion entities to attack their competitors. The practice of patent privateering—selling and transferring patents to entities so they can pursue litigation rather than innovation—has been getting increasing attention from competition regulators, including the Federal Trade Commission and Antitrust Division of the Justice Department in a workshop on patent trolls in late 2012. Former FTC Chairman, Jon Leibowitz highlighted the practice of privateering as an "unsavory" and "asymmetric" way of raising rivals' costs.
Some of Microsoft's patent holdings are relatively well-known, since they are either assigned to Microsoft itself or a known subsidiary of Microsoft. But Microsoft over the years has grown very close to the patent assertion entity community. It has strong ties with Intellectual Ventures, Rockstar and MOSAID, three of the world's largest patent trolls. When patents are transferred to trolls, identifying the ultimate "owner" of a patent is likely to be complicated and will frequently fail to reveal the information that might be of most interest to the market or enforcers.
For example, Microsoft was involved in the transfer of more than 2,000 wireless patents from Nokia to MOSAID in 2011. Notably, Microsoft's transparency proposal won't list these patents, since Microsoft doesn't technically "control" MOSAID, and never owned the Nokia patents that it helped transfer.
MOSAID was taken private later that year and is now owned by private equity firm Sterling Partners, who (rather than MOSAID) would be shown as the ultimate "owner" of the patents. Yet Microsoft and Nokia still maintain the ability to reclaim control over the patents they transferred to MOSAID if MOSAID fails to satisfy their revenue targets. Microsoft has not disclosed such interests as part of its transparency announcement—but if it truly intended this effort to have any meaning, it would.
Similarly, Rockstar Consortium, Inc —formed by Microsoft, Apple, Ericsson and others—is now one of the largest trolls in the world, with more than 4,000 patents acquired from Nortel. Rockstar's CEO, John Veschi argued that "it would be hard to envision that there are high-tech companies out there that don't use some of the patents in our portfolio." He has also said that Rockstar is not bound by the same patent promises made by its founding member companies. Arguably, the founders of Rockstar, who funded the purchase of its portfolio and who continue to own the company (reportedly owning equal or near-equal shares), can each plausibly claim not to "control" Rockstar.
Disclosure of patent ownership is only a small answer to a much larger problem. Such disclosures will not reveal companies' royalty interests in patents they do not technically "own." A company wanting to circumvent its transparency obligation could simply omit patents from its list, or create a special-purpose entity in which to "park" patents until they are needed.
Microsoft's gesture does not say whether the company will disclose patents in which it has revenue interests (such as those held by MOSAID). Will it announce the details of the patent trolls to which it has already transferred patents? Will it commit to refraining from such transfers in the future? Will it require its "partners" in patent acquisitions and transfers to abide by obligations to license on fair, reasonable and nondiscriminatory terms?
One of the best ways to prevent patent abuse by trolls is to refrain from arming them with patents. We need to stop patent privateering in its tracks, and that's going to need more than hollow promises.
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