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Next killer product is the patent itself

Posted: 01 May 2006 ?? ?Print Version ?Bookmark and Share

Keywords:Patriot Scientific? microprocessor? XX? XX? XX?

Patriot Scientific Corp. had spent nearly a decade trying unsuccessfully to establish a new microprocessor architecture when it decided it needed to do some soul-searching. It hit pay dirt when that process revealed its real products: patents.

The six-person company netted more than $24 million in 2005 from Advanced Micro Devices, Casio, Fujitsu, Intel and Hewlett-Packard by licensing seven U.S. patents it considers fundamental to CPUs. And it's just getting started.

"Hundreds of companies have been put on notice as potential infringers," said David Pohl, CEO of Patriot, which hopes to collect royalties on sales of all microprocessor-based systemssales that are estimated at $200 billion a year. "Virtually every electronic product that a consumer or business comes into contact with is touched by this portfolio."

Once its strategy was clear and its portfolio in place, Patriot pared its operations to the bone, outsourced enforcement of its patents to a joint venture and commissioned a study to look at how it might dispose of its CPU business. "This company doesn't need to be manufacturing anything or marketing a product. We can essentially rely on our licensing team to create revenue for us," said Pohl.

Patriot is just one of a rising number of so-called patent-licensing and -enforcement companies (PLECs). One source said multiple venture funds are forming to bankroll the efforts of these PLECs as they carve out business models in the midst of a gold rush in intellectual property (IP).

New breed of innovator
The PLECs are part of a broader group of emerging patent companies that see themselves as innovators, creating new ways to buy and sell patentsincluding the first major patent auction, which was held in California last April. Such efforts will generate high-margin businesses and champion the rights of small companies and lone inventors, proponents say.

"The highest-margin part of our industry is the invention. We don't want to compete where there are increasingly slim margins in manufacturing and distribution," said Brent Frei, a vice president at Intellectual Ventures, a startup founded by the former CTO of Microsoft Corp.

Intellectual Ventures aims to write and buy patents to create and commercialize powerful patent portfolios. "A cool set of patents in itself is an incredible product. Our founder, Nathan Myhrvold, is fond of saying IP is the next software," said Frei.

Too much of the patent power is locked up with big corporations today, said William Reber, a former director of technology for Motorola who has been working as a lone inventor since 2002 and participated in the April auction organized by Ocean Tomo LLC.

"If they create a new market for IP, that's a whole new trajectory for commercializing patents," said Reber, who foresees a day when productless invention companies like Intellectual Ventures might play a role similar to today's fabless chip companies.

"Once inventors are unshackled from corporations that own you 24 hours a day, a whole lot more brainpower becomes available," said Reber, who has patents on camera phones, biochips and bar codes.

Others see the new players as trolls raising nuisance suits or otherwise trying to cash in on innovation without adding real value. Such entrepreneurs are fueling a rush on a U.S. Patent Office already swamped in applications, struggling with delays and confronting concerns about the quality of patents it issues, they say.

"We think work that results in real products coming to market is the right system to reward. People who go around buying patents is not the right system to reward," said David Simon, chief patent counsel for Intel Corp., which is now involved in about 30 patent infringement suits, a number growing at a rate of about one a month.

"It's become a major distraction from innovation. In the end, you have a lot of people spending time on litigation rather than building products," said Simon, who oversees a patent and litigation department of about 160 people.

According to one database search, Intel was named in 11 patent suits or countersuits in 2005. That's more than triple the number of suits the database listed for Intel in the decade of the 1980s.

"With so many new stakeholders in IP, the complexity is much greater," said Agilent Labs director Darlene Solomon. "It becomes a whole new level to manage."

Solomon is reviewing submissions now for Agilent's second annual Bill Hewlett Award, which goes to an engineer whose patent made a fundamental contribution to business results. She said the company "does not look favorably" on firms whose only business is in asserting patents.

"We may be screwing up our own competitiveness by suing each other," said Rich Belgard, a patent analyst.

All sides agree the U.S. patent system needs reform, although consensus on how to proceed is far harder to come by. "It looks like we have a system fairly close to crisis," said Intel's Solomon. "The system is in pretty serious danger of reaching an overload situation."

The number of patent lawsuits settled in or disposed by U.S. federal district courts doubled between 1988 and 2001, from 1,200 to nearly 2,400, according to a report from the National Research Council. Meanwhile, the number of patent attorneys in the United States rose 39 percent, more than six times the growth rate overall for attorneys, the report found.

Companies typically spend $500,000 to $4 million to take a patent suit to trial, depending on the stakes. "The costs of strategic patenting are not trivial and may redirect resources away from productive research or raise costs to consumers," the report concludes.

'Gold rush'
In this environment, the U.S. Patent Office saw a historic high of nearly 400,000 new applications last year and is carrying a record backlog of about 620,000 applications. Some filings sit as long as six years before an examiner reviews them.

"There is definitely a gold rush to produce patents to get ahead of the litigation problem. When everybody starts playing the game, you could get to a stalemate, where everyone spends a lot getting patents, but no one can get any revenue from them," said Lewis Zaretzki, a VP at ThinkFire Services USA Ltd, a group of patent experts who help companies negotiate deals.

U.S. President Bush pushed Congress to let the Patent Office keep all the fees it raised for the past two years so that it could hire nearly a thousand examiners in 2005 and another thousand this year, to step up the pace. But it's not enough.

"It takes about three years after you hire before you see the backlog move. But if new filings go up 9 percent a year, we will not turn that backlog around," said patent office director Jon Dudas. His greatest fear, he said, is that applications could go back to the 11 percent annual increases that the office saw in the 1990s.

"We can't continue to hire a thousand examiners a year and watch the backlog grow; we need to change the system as a whole," said Dudas.

In today's environment, both big companies and lone inventors are suffering. "I wish there were more opportunities for individual inventors to produce patents at a reasonable price," Reber said. "It takes three years and $10,000 to $20,000 if you do it right. Then it takes years to get licensees. I've been successful, but I've had to take huge financial risks."

- Rick Merritt
EE Times

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