Last year I wrote that Intellectual Ventures is a kind of reductio ad absurdum of our flawed patent system. It’s a firm that literally does nothing useful, its only business is the acquisition and licensing of patents. Not only does it have no intention of commercializing the technologies it “invents,” its business model is based on minimizing the amount of research performed per patent obtained. In Malcolm Gladwell’s brilliant (if inadvertent) exposé of IV, he describes how IV hires smart people to participate in brainstorming sessions and then has patent lawyers immediately file patent applications for every idea that comes up during the discussion, without bothering to actually implement any of them, or even devoting much effort to verifying that they actually work. IV then approaches firms that are doing the hard work of implementing “their” ideas and demands a cut of their profits.
Myhrvold’s firm illustrates in a way that no law review article could the extent to which the patent system punishes firms that actually produce useful products. Firms whose business models involve actual innovation have to show restraint in exploiting their patent portfolios. If they don’t, there’s a high probability that some of their adversaries will countersue and both firms will be dragged into a legal quagmire. But if litigation is your only business, then you’re not vulnerable to retaliatory infringement lawsuits, so you can exploit your patent portfolio much more aggressively. Many small “patent troll” firms have exploited this flaw in the past, but Myhrvold is the first person to recognize that it can be exploited in a systematic, large-scale fashion.
Until recently, one of the few points Myhrvold could make in his own favor is that he hadn’t started suing firms that declined to license his patent portfolio. I say “until recently” because we’re now learning that the lawsuits have started. IV has begun selling off chunks of its patent portfolio to people like Raymond Niro with well-deserved reputations for being “patent trolls.” Threatening to sell patents to a third party who will sue you is more subtle than threatening to sue you directly, but the threat is just as potent. Myhrvold’s “sales pitch” to prospective licensees just got a lot more convincing.
The fundamental question we should be asking about this business strategy is how it benefits anyone other than Myhrvold and the patent bar. Remember that the standard policy argument for patents is that they incentivize beneficial research and development. Yet IV’s business model is based on the opposite premise: produce no innovative products, spend minimal amounts on research and development, and make a profit by compelling firms that are producing products and investing in R&D to pay up. Not only does this enrich Myhrvold at everyone else’s expense, but it also reduces the incentive to innovate, because anyone who produces an innovative product is forced to share his profits with Intellectual Ventures. Patents are supposed to make innovation more profitable. Myhrvold is using the patent system in a way that does just the opposite. In thinking about how to reform the patent system, a good yardstick would be to look for policy changes that would tend to put Myhrvold and his firm out of business.