Patent wars and the ideas that are their casualties

This guest post is written by Dr. Tony Webb, Director, Analytics for FINCAD.

Patents have been in the news a lot recently. In July, bankrupt Nortel Networks sold thousands of patents to an alliance made up of Apple, Microsoft, RIM, Sony, Ericsson, and others for $4.5 billion in cash. This alliance beat out bids from Google and Intel. A big reason for these bids was interpreted to be defensive, in that holding these patents can be used as a way of discouraging others to sue the patent holder for infringements of other patents. This was followed by the purchase of Motorola by Google in August for $12.5 billion. Again, a big rationale for making this deal appears to be about buying mobile patents and defending Android from Apple’s and Microsoft’s attacks.

In September, the “America Invents Act” was enacted in the United States. This is the fourth set of changes to US patent law in recent years, following the Patent Reform Act of 2009, and other Acts in 2007 and 2005. One of the main changes in this latest Act is to switch from a First-to-Invent system to a First-to-File system, in which the right to a patent lies with the first person to file a patent application, as opposed to the first to conceive of the idea. This brings U.S. patent law in line with the rest of the world. Under the old First-to-Invent system, the date of conception was considered to be the priority date, provided that the inventor diligently “reduced to practice” the invention. This includes filing a patent, or alternatively building a working model, having a successful experiment, or proving in some other way that the claimed invention works for its intended purpose. One benefit of switching away from First-to-Invent is that it simplifies the system, and eliminates the costly proceedings of “interferences”. This is a process that allows a party which has not filed a patent application on time to challenge the patent of another party, based upon order of invention. But under First-to-File, all parties must race to the patent office with every new idea. This system favors larger companies with well-established in-house patent procedures and in-house lawyers, over small companies. It will also increase the number of patent applications filed, with the associated legal fees and internal costs, and decrease the overall quality of patents.

The changes seem to have done little to address the practice of hoarding and non-operating of patents as a defensive play against being sued for infringement of other (sometimes trivial) patents. If a company is sitting on a patent purely for its value as legal ammunition, and not using the idea in its products or operations, then that idea is languishing, and doing nothing to help society or the economy. Of course, this is a tough one to prove.

Dr. Tony Webb is FINCAD’s Director of Analytics. He holds degrees in mathematics and computational fluid dynamics from Cambridge University in the UK, and the University of British Columbia in Canada. He also holds an MBA with a specialization in finance and derivatives. He joined FINCAD in 2000, and worked for several years as a quant on various instruments, asset classes and models, as well as on risk and hedge accounting applications, while taking on a variety of senior management roles within the company.

In his current role as Director of Analytics, Dr. Webb is responsible for defining the roadmap for new analytics development, for research in quantitative finance, and for communicating the results externally.