When dot-com patents go bad

The auction of Commerce One's intellectual property demonstrates that patents are worth more today as weapons than anything else. That's wrong.

Topics: Intellectual Property,

Last week, the financial and technological world saw yet another dot-com star go dark. In 1999, Commerce One Inc. was the belle of the dot-com IPO ball. Promising a gateway to faster, more efficient business-to-business (B2B) transactions over the Web, it was the No. 1 initial public offering of 1999, boosting its stock price over 600 percent and making millionaires out of its founders. After the crash of 2000, however, Commerce One’s fortunes reversed, leading it down a path to delisting and, eventually, bankruptcy.

As in most bankruptcies, Commerce One’s creditors sought to sell off the company’s assets to the highest bidder, hoping to recoup its lost investment and satisfy the $9.7 million of outstanding debt the company had left behind. What made this fire sale different from most, though, was the power of a single set of assets — Commerce One’s Web services patent portfolio. In a relatively rare decision, the bankruptcy court decided to separate the sale of these patents from the sale of the rest of the company, thereby allowing a separate bidding process to take place exclusively for the patent portfolio.

This decision drew significant attention from the patent community, including companies such as Intellectual Ventures and ThinkFire Inc. that persist solely on the acquisition, licensing and litigation of patents. With these new bidders in the game, the auction became highly competitive, eventually ending with a bid from the mysterious “JGR Acquisitions” for $15.5 million. (The rest of the business was sold for a mere $4.1 million.)

While the sale of patents is nothing new, the Commerce One patent auction highlights a disturbing trend in our current patent system.

When faced with two choices — selling a company’s patents as part of its overall assets or selling the patents alone — the court (and the market) chose the latter. This means that in the eyes of the legal system and the marketplace, the Commerce One patents were more valuable to independent licensing firms as legal threats than they were to an actual company that makes a Web services product.

This is not what the patent system was intended to promote. The idea behind patents is that inventors and manufacturers of new products should have some protection against free riders in the marketplace that would otherwise copy their innovations. If competitors are able to simply copy the innovations of those first to market, few will have incentives to release their products to the public. In this instance, however, we see the opposite result.

Here, the patents at issue were less valuable to companies that actually produce Web services products than they were to firms that produce nothing but lawsuits and licensing threats. In other words, patents like these have become worth more as weapons than as protections for companies competing in the marketplace.

Many have compared these new patent licensing firms to terrorists, and in some ways, the analogy is apt. When the Soviet Union collapsed, one of the biggest worries was that rogue military personnel might sell off one or more of the USSR’s nuclear missiles to a terrorist group. Securing those weapons became a top priority. The reason was fear — fear that the terrorists, who had little to nothing at stake in terms of world peace and national stability, would use the missiles to extort or manipulate the world political climate. Unlike the United States or China, which could be retaliated against and which had a stake in stability, terrorists were essentially immune from attack, and thrived on instability.

With the patents of bankrupt dot-coms, the dynamics are similar. Rogue licensing firms buy up these patents and then threaten legitimate innovators and producers. They have no products on which a countersuit can be based and no interest in stable marketplaces, competition or consumer benefit. Their only interest is in the bottom line.

While profit itself is often a worthy objective, it is not always synonymous with innovation. Every dollar a tech company pays to patent lawyers or licensing firms is one less dollar available for R&D or new hires. Thus, many companies that offer new products end up paying a “tax” on innovation instead of receiving a reward. When this happens, it’s a signal that the patent system is broken. Forcing companies to pay lawyers instead of creating jobs and new products is the wrong direction for our economy to be headed and not the result our patent system should be promoting.

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