Reforming the Patent System

It's easy to miss amid the chaos, but the WSJ has an important story this morning on Nathan Myhrvold and his company, Intellectual Ventures. It helps to counteract the fluffy excitement of Malcom Gladwell, back in May, which always seemed as though it missed the dark side of the company.

Myhrvold, it turns out, is essentially running a hedge fund specializing in intellectual property arbitrage. He even charges hedge-fund-like management fee of 2% of assets, plus an undisclosed "percentage of any gains".

Myhrvold is buying low and selling high: as Gladwell demonstrated, it's really very cheap and easy for Intellectual Ventures to amass thousands of patents. And as the WSJ shows today, those patents are extremely valuable:

Verizon, for instance, disclosed in a July filing with the Securities and Exchange Commission that it plans to pay as much as $350 million for patent licenses and an equity stake in a patent-holding investment fund. The company operating that investment fund is Intellectual Ventures, according to a person familiar with the terms of the deal.

Intellectual Ventures and its ilk are arguably the single biggest risk to America's continued leadership in technology and innovation. As dsquared elegantly put it in a comment here in May, the company might do a bit of R, but it doesn't do any D. Instead, it acts as a brake on any company wanting to do substantive R&D of its own, since there's a good chance Intellectual Ventures will have got there first, patented the idea, and then just decided to sit on it until somebody dares to violate it.

The long term repercussions of this will be a competitive advantage for companies based in places like China or Brazil which have much weaker intellectual property laws. It's sad, because patents, as originally envisaged, can help to encourage innovation. Maybe, with the right litigation, we can return to those days:

The tech industry has sought to reform the patent system to make it harder for licensing firms like these to operate. Its preferred legislation stalled in Congress this year, but the effort still has momentum. Both Sens. John McCain and Barack Obama say they want to reform the patent system to reduce lawsuits, although neither side has any specific plans to deal with the so-called trolls.

It won't be easy to get this legislation right, but it will be important.