Jack Ellis

In a speech earlier this week, David Kappos told software patent critics that the US IP system is “the envy of the world”, but that the patent marketplace needs more transparency.

Speaking at the Center for American Progress thinktank in Washington DC, the USPTO Director argued that innovations in software must be eligible for patent protection as they are so closely intertwined with innovations in hardware. “What amount of venture capital would [a] team of innovators raise if half of their innovation was free to be lifted by their competitors the moment they put it in the marketplace?” he asked.

Kappos also suggested that the money spent on acquiring and litigating patents in the smartphone space and adjacent industries – many of them covering software – should be interpreted as the sign of a healthy and competitive economy. “The fact is, the explosion of innovation—and follow-on litigation—that we see across consumer electronics hardware and software is a direct reflection of how our patent system wires us for innovation,” he said. “It's both natural and reasonable that in a fast-growing, competitive market, innovators would seek to protect their breakthroughs using our patent system.”

Nonetheless, Kappos accepted that the current state of affairs is far from perfect. In particular, he suggested that ambiguity surrounding the ownership of many assets is one of the key stumbling blocks for the patent system:

"A root cause of problems with our current environment for software patents – and indeed all patents – is simply deciphering ownership,” he said. “At the heart of a well-functioning innovation environment is accurate information about who owns what assets, so that license rights can be confirmed or sought, and unproductive effort simply avoided. By analogy, if you want to build a house on a piece of land, you check property records to determine who owns the land, so you know who to contact about purchasing or leasing the land. Of course, the same goes, in theory, for patent properties. But in our current environment, it can be a real challenge for those who find themselves facing a possible infringement suit to determine the owner of the patent they may be infringing… The completeness of the patent record, including ownership, is essential to a functioning innovation market. Transparent and accurate markets attract investment, and repel gaming. It’s time for the patent system to man up."

While many seem to have picked up on Kappos’s comments about software patents, perhaps the really significant portion of his speech was the section above. At the moment, who really owns which patents in the US (and elsewhere, of course) can be very hard to determine. This state of affairs is exploited not only by NPEs, but also by operating companies – and, as Kappos says, that can have a profound affect on the way in which markets operate.

As IAM has previously reported, the patent analytics firm IP Checkups plans to research and document the patents owned by Intellectual Ventures (IV) and the variety of shell companies that it uses to hold many of its IP assets. “In our view, the secrecy surrounding IV’s patent portfolio gives IV an unfair advantage when approaching potential licensees with a set of patents,” IP Checkups’ managing director Matt Rappaport told IAM. “IV’s shell companies leave open the possibility – the threat – that IV has strong IP funneled away in some bizarrely-named entity. Operating companies will acquiesce to inflated licensing and settlement fees to avoid this spectre of future litigation.” IP Checkups has indicated that similar projects could be commissioned to investigate the opaque patent holdings of other NPEs and operating companies.

Of course, IV would respond that were it to be completely open and transparent about what it owned it would immediately set itself up for continued re-examination attacks – something that would have a major impact on its strategy and potential shareholder returns. But, if the rules changed, then they would have no choice. And, of course, what applies to IV would apply to every other patent owner too. The consequences could be profound.

It’s also worth remembering that this is not only a market issue, there could also be national security concerns involved too. As things stand, it is quite possible for foreign governments – or companies closely associated with foreign governments – to buy up key US patents (or those in other jurisdictions) without anybody knowing about it. The Chinese, for example, have a stated policy that by 2020 “a large number of core patents will be acquired in some key fields of emerging industries and in key technological fields of traditional industries”. Does anyone know how far along the road they are with this? If IV has hundreds of shell companies, why not the Chinese or anyone else for that matter?

There is no reason to believe that foreign holders of key US patents would want them for sinister reasons, but ownership does confer a lot of potential power in a country where the rule of law is sacrosanct. If governments consider the full implications of this, they may end up deciding that they would at least like to know just who patent owners really are. Perhaps Kappos was hinting in his speech that in the US the Obama administration is beginning to think along such lines. But even if it is not, perhaps it should.