8:04pm

Fri July 22, 2011
Planet Money

When Patents Attack

Originally published on Wed April 18, 2012 1:58 pm

Update, July 26: This story from Planet Money's Alex Blumberg and NPR's Laura Sydell aired this weekend on This American Life. (Check out TAL's "Ways to Listen" page to find how you can hear the story.) A shorter version of the piece is also airing today on All Things Considered. Here's the story.

Nathan Myhrvold is a genius and a polymath. He made hundreds of millions of dollars as Microsoft's chief technology officer, he's discovered dinosaur fossils, and he recently co-authored a six-volume cookbook that "reveals science-inspired tech­niques for prepar­ing food."

Myhrvold has more than 100 patents to his name, and he's cast himself as a man determined to give his fellow inventors their due. In 2000, he founded a company called Intellectual Ventures, which he calls "a company that invests in invention."

But Myhrvold's company has a different image among many Silicon Valley insiders.

The influential blog Techdirt regularly refers to Intellectual Ventures as a patent troll. IPWatchdog, an intellectual property site, called IV "patent troll public enemy #1." These blogs write about how Intellectual Ventures has amassed one of the largest patent portfolios in existence and is going around to technology companies demanding money to license these patents.

Patents are a big deal in the software industry right now. Lawsuits are proliferating. Big technology companies are spending billions of dollars to buy up huge patent portfolios in order to defend themselves. Computer programmers say patents are hindering innovation.

But people at companies that have been approached by Intellectual Ventures don't want to talk publicly.

"There is a lot of fear about Intellectual Ventures," says Chris Sacca, a venture capitalist who was an early investor in Twitter, among other companies. "You don't want to make yourself a target."

Sacca wouldn't say if Intellectual Ventures had been in contact with any of the companies he's invested in.

"I tried to put you in touch with other people in this community to talk to you about this and they almost uniformly said they couldn't talk to you," Sacca told us. "They were afraid to." IV has the power to "literally obliterate startups," Sacca says.

Not surprisingly, Nathan Myhrvold (pictured above) has a very different story about Intellectual Ventures. When we ask him if IV is a patent troll, he laughs.

"That's a term that has been used by people to mean someone they don't like who owns patents," he says. "I think you'd find almost anyone who stands up to their patent rights has been called a patent troll."

Intellectual Ventures, says Myhrvold, is just the opposite. It's on the side of the inventors. It pays inventors for patents. It gathers patents together into a huge warehouse of inventions that companies can use if they want. It's sort of like a department store for patents: Whatever technology you're looking for, IV has it.

The company even has its own massive lab, with people walking around in white lab coats, mixing chemicals in beakers and looking at stuff under microscopes. There's a machine shop. A nanotechnology section. It's like a playground for scientists and engineers.

IV says it has invented a nuclear technology that's safer and greener than existing technologies. A cooler that can keep vaccines cold for months without electricity. And the world's most high-tech mosquito zapper.

But the lab is a tiny fraction of what IV does. The company has received about 1,000 patents on stuff it's come up with at the lab; it's purchased roughly 30,000 patents from other people. In fact, nothing that's come out of this lab — not the mosquito zapper, not the nuclear technology — has made it into commercial use.

IV, for its part, says its job is to encourage invention, not to bring products to market.

Imagine an inventor out there — someone with a brilliant idea, a breakthrough. This inventor has a patent, but companies are stealing his idea. And this inventor doesn't have the money or legal savvy to stop them. That's where IV comes in. It buys this inventor's patent, and it makes sure that companies who are using the idea pay for it.

When we asked for an example of an inventor in this situation, someone with a breakthrough, who wasn't getting paid for it, two separate people at IV pointed us to a guy named Chris Crawford.

Joe Chernesky, a vice-president at Intellectual Ventures, said:

The neat thing about Chris is he had no idea how to get money for his patents. He had this great idea. These patents were immensely valuable because every technology company was adopting the technology. Yet he didn't know how to get paid. He eventually found Intellectual Ventures. So we bought those patents

So we went to talk to Chris Crawford. But that turned out to be harder than we thought — and it led us on a five month journey, where things did not quite fit the story Intellectual Ventures was telling.

***

When we followed up with IV to get Chris Crawford's contact info, the company told us it no longer owned Chris Crawford's patent. And Crawford probably wouldn't want to talk right now anyway, the company said, because he was in the middle of litigation.

We started digging around and found Chris Crawford in Clearwater, Florida. As predicted, he never responded to our many emails and phone calls. You'll never hear from him in this story. But we were able to locate Chris's patent — number 5771354.

He got it in 1998. And the way IV explained the patent to us, Chris Crawford invented something that we do all the time now: He figured out a way to upgrade the software on your home computer over the Internet. In other words, when you turn on your computer and a little box pops up and says, "Click here to upgrade to the newest version of iTunes," that was Chris Crawford's idea.

But when we looked at the patent, it seemed to claim a lot more than that. The name of the actual invention is "an online back-up system." The patent says this invention makes it possible to connect to an online service provider to do a bunch of stuff — software purchases, online rentals, data back ups, information storage. The patent makes it seem like Chris Crawford invented a lot of the most common things we do on the Internet.

We weren't sure what to make of all this, so we went to see David Martin, who runs a company called M-Cam. It's hired by governments, banks and business to assess patent quality, which the company does with a fancy piece of software. We asked Martin to assess Chris Crawford's patent.

At the same time Crawford's patent was being prosecuted, more than 5,000 other patents were issued for "the same thing," Martin says.

Crawford's patent was for "an online backup system." Another patent from the same time was for "efficiently backing up files using multiple computer systems." Yet another was for "mirroring data in a remote data storage system."

And then there were three different patents with three different patent numbers but that all had the same title: "System and method for backing up computer files over a wide area computer network."

Martin says about 30 percent of U.S. patents are essentially on things that have already been invented. In 2000, for example, the patent office granted a patent on making toast — patent number 6080436, "Bread Refreshing Method."

We also asked Rick Mc Leod, a patent lawyer and former software engineer, to evaluate Chris Crawford's patent.

"None of this was actually new," he told us.

Mc Leod looked to see if anyone else in the field was already doing the thing Chris Crawford claimed to invent in 1993, when he first filed his patent. Here's what he found:

There were institutions, both academic and businesses, that used computers in this way, and I think it's a very interesting collection of things that were well known in the 1980s, with the exception that it adds the word "Internet."

Mc Leod said he didn't think the patent should have been issued in the first place.

***

For a long time, the patent office would have agreed with Rick Mc Leod. For a long time, the patent office was very reluctant to grant patents for software at all.

For decades, the patent office considered software to be like language. A piece of software was more like a book or an article. You could copyright the code, but you couldn't patent the whole idea.

In the 1990s, the Federal courts stepped in and started chipping away at this interpretation. There was a couple big decisions, one in 1994 and another in 1998, which overturned the patent office completely.

A flood of software patents followed. A lot of people in Silicon valley wish that had never happened, including a very surprising group: computer programmers.

"I worked on a whole bunch of patents in my career over the years and I have to say that every single patent is nothing but crap," says Stephan Brunner, a programmer.

Brunner says software patents on his own work don't even make sense to him.

I can't tell you for the hell of it what they're actually supposed to do. The company said we have to do a patent on this. ... Personally, when I look at them, I'm not proud at all. It's just like mungo mumbo jumbo that nobody understands and makes no sense from an engineering standpoint whatsoever.

(For the record, Stephan Brunner has a patent for a "configurator using structure and rules to provide a user interface.")

We met Stephan randomly one afternoon in South Park, a park in San Francisco where lots of tech people eat lunch.

That same afternoon, we talked to a half dozen different software engineers. All of them hated the patent system, and half of them had patents in their names that they felt shouldn't have been granted. In polls, as many as 80 percent of software engineers say the patent system actually hinders innovation. It doesn't encourage them to come up with new ideas and create new products. It actually gets in their way.

Many patents are so broad, engineers say, that everyone's guilty of infringement. This causes huge problems for almost anyone trying to start or grow a business on the Internet.

"We're at a point in the state of intellectual property where existing patents probably cover every behavior that's happening on the Internet or our mobile phones today," says Chris Sacca, the venture capitalist. "[T]he average Silicon Valley start-up or even medium sized company, no matter how truly innovative they are, I have no doubt that aspects of what they're doing violate patents right now. And that's what's fundamentally broken about this system right now."

***

This brings us back to Chris Crawford's patent, the patent Intellectual Ventures cited as an example of how they encourage innovation by ensuring that inventors get paid. As we've said, this patent also seems to cover a big chunk of what happens on the Internet: upgrading software, buying stuff online, and what's called cloud storage. If you have a patent on all that, you could sue a lot of people.

And, in fact, that's what's happening with Chris Crawford's patent. Intellectual Venures sold it to a company called Oasis research in June of 2010. Less than a month later, Oasis Research used the patent to sue over a dozen different tech companies, including Rackspace, GoDaddy, and AT&T.

We called Oasis several times, but no one ever answered the phone. For a while, the company's voice mail message directed all questions to John Desmarais , a lawyer in New York.

He didn't return our phone calls, but we did track him down at an intellectual property conference in San Francisco.

He cited attorney-client privilege, and wouldn't tell us anything — not even who owns Oasis Research. (He did say he's a big fan of NPR.)

There was hardly any public information about Oasis Research. No way to know who owned it, or how many employees it had.

One of the few details that was available was an address: 104 E. Houston street, suite 190, Marshall, Texas.

So we went to Marshall. The door to Oasis's office was locked, and through the crack under the door we could see there were no lights were on inside.

It's kind of a cliche to knock on the door of the empty office. But we'd flown a long way. So we knocked. No one answered.

The office was in a corridor where all the other doors looked exactly the same --locked, nameplates over the door, no light coming out. It was a corridor of silent, empty offices with names like "Software Rights Archive," and "Bulletproof Technology of Texas."

It turns out a lot of those companies in that corridor, maybe every single one of them, is doing exactly what Oasis Research is doing. They appear to have no employees. They are not coming up with new inventions. The companies are in Marshall, Texas because they are filing lawsuits for patent infringement.

Patent lawsuits are big business in Marshall, which is part of the eastern district of Texas.

Many people say that juries in Marshall are friendly to patent owners trying to get a large verdict. A local lawyer who has argued on both sides of numerous patent cases says it's actually because cases go to trial more quickly in Marshall than in other places.

In any case, thousands of lawsuits are filed there, claiming that there's an inventor whose invention is being used without permission. But there are no inventors in Marshall, just corridors of empty offices.

***

We did find one key detail about Oasis Research. It was in a legal document called a Certification of Interested Parties, which lists all the entities with a financial interest in Oasis. Tom Ewing, an intellectual property lawyer who makes a business of tracking IV, brought it to our attention.

The Oasis document lists the usual parties — the plaintiff, the defendants, the attorneys involved. But it also includes one other name: Intellectual Ventures.

Peter Detkin, an attorney who co-founded Intellectual Ventures with Nathan Myhrvold, told us that IV likely has a "back-end arrangement" with Oasis.

In other words, Detkin said, "We sell for some amount of money up front, and we get some percentage of the royalty stream down the road that is generated from these assets."

That means it's likely that Intellectual Ventures is taking a cut of whatever money Oasis gets from its lawsuits. Oasis is a company with no operations, no products, and, as far as we can tell, no employees, that is using a very broad patent from 1998 to sue over a dozen companies.

As it happens, Detkin is the man who coined the term "patent troll." He came up with it back in in 1999, when he was working for Intel.

We asked him how it feels to make money from an entity that's behaving much like the patent trolls he once condemned. He said:

These are patents we used to hold, we no longer hold. And we ensure that we have no control over the actions of these third parties. They are independent actors. They are not Intellectual Ventures. They may be monetizing in ways we disagree with, but it's not our call.

...we believe in our heart that litigation is a highly inefficient way to do licensing. But let's not lose sight that litigation is just licensing by other means.

In other words, we try to license these patents in a friendly way. But sometimes, you have to sue. Detkin then repeated the company line we heard from a lot of people at IV: The mission of Intellectual Ventures is to help inventors bring great ideas into the world.

We asked if he could point us to a patent that was languishing, but then got licensed and built.

"There were two deals that were done," he said. "One was with a toy company. The other was... I can't remember the technology, it was out there last Christmas, but I don't know how it's done."

He continued:

The fact is the bulk of our patents, the bulk of our revenue is from people ... [who] were using it before we bought it, they were using it after we bought it, but we provided an efficient way for them to get access to the invention rights.

This is a good thing, Detkin says, because it means inventors — the people who hold the patents — get paid. This, in turn, creates an incentive for people to come up with new inventions.

But IV is not buying inventions. It's buying patents. And most software engineers will tell you, at least when it comes to software, a patent and an invention are not the same. Lots of patents cover things that people who write software for a living wouldn't consider inventions at all.

***

All the big tech companies have started amassing troves of software patents — not to build anything, but to defend themselves. If a company's patent horde is big enough, it can essentially say to the world, "If you try to sue me with your patents, I'll sue you with mine."

It's mutually assured destruction. But instead of arsenals of nuclear weapons, it's arsenals of patents. And this was a problem Intellectual Ventures founder Nathan Myhrvold said he was trying to solve when he first started the company. A problem that he and others from his company talked about at investor meetings around Silicon Valley. Chris Sacca attended one of those meetings a few years back.

The pitch he heard was, basically, Intellectual Ventures helps defend against lawsuits. Intellectual Ventures has this horde of 35,000 patents — patents that, for a price, companies can use to defend themselves.

Technology companies pay Intellectual Ventures fees ranging "from tens of thousands to the millions and millions of dollars ... to buy themselves insurance that protects them from being sued by any harmful, malevolent outsiders," Sacca says.

There's an implication in IV's pitch, Sacca says: If you don't join us, who knows what'll happen?

He says it reminds him of "a mafia-style shakedown, where someone comes in the front door of your building and says, 'It would be a shame if this place burnt down. I know the neighborhood really well and I can make sure that doesn't happen.' "

Sacca continues:

Here's what's funny: When I've seen Nathan speak publicly about this and when I've seen spokespeople from IV they constantly remind us that they themselves don't bring lawsuits, that they themselves aren't litigators, that they are a defensive player. But the truth is the threat of their patent arsenal can't actually be realized, it can't be taken seriously, unless they have that offensive posture, unless they're willing to assert those patents. And so it's this very delicate balancing act that is quite reminiscent of scenes you see in movies when the mafia comes and visits your butcher shop and they say, "Hey, It would be a real shame if they came and sued you. Tell you what: pay us an exorbitant membership fee into our collective and we'll keep you protected that way." A protection scheme isn't credible if some butcher shops don't burn down now and then.

In an email to us, Peter Detkin called the comparison to the mafia "ridiculous and offensive." Detkin wrote:

We're a disruptive company that's providing a way for patent-holders to recognize value that wasn't available before we came on the scene, and we are making a big impact on the market. That obviously makes people uncomfortable. But no amount of name-calling changes the fact that ideas have value. (See Detkin's full response here.)

True enough. But you can see why many people feel like lots of butcher shops have been burning. As we were reporting this story, more and more Intellectual Ventures patents started showing up in the hands of companies like Oasis, companies without employees or operations, that were formed for the purpose of filing lawsuits. They're known as non-practicing entities, or NPEs.

One former IV patent was used by an NPE to sue 19 different companies, a broad assortment that included Dell, Abercrombie & Fitch, Visa, and UPS.

These companies all have websites where, when you scroll your mouse over certain sections, pop-up boxes appear. The NPE said, "We have the patent on that." Which would make pretty much the entire Internet guilty of infringing the patent.

Another group of former IV patents is being used in one of the most controversial and talked about cases in Silicon Valley right now. An NPE called Lodsys is suing roughly three dozen companies developing apps for the iPhone and for Android phones. Lodsys says it owns the patent on buying things from within a smartphone app.

One interesting wrinkle about that case: The address for Lodsys is 104 E. Houston street, Marshall Texas, suite 190. The same exact address, down to the suite number, as Oasis Research.

***

For this story, we called people who had licensing arrangements with IV, we called people who were defendants in lawsuits involving IV patents, we called every single company being sued by Oasis Research. No one would talk to us.

Part of this is probably fear. Part of it is the fact that agreements with Intellectual Ventures include a non-disclosure agreement that's rumored to be the strictest in Silicon Valley.

The Oasis Research case is still ongoing, but many of the original defendants seem to have settled.

Michael Smith, the attorney in Marshall, Texas, represented one of those defendants. He was pretty sure they would have won the case if they'd gone to trial. But his client settled anyway. He says sometimes it makes more sense to settle and pay a license fee than to spend $2 million to $5 million on a court case.

Tom Ewing, the lawyer who tracks Intellectual Ventures, says it's likely we'll see plenty more of these cases in the future. In order to purchase its 35,000 patents, Intellectual Ventures raised more than $5 billion from investors.

Since its founding in 2000, Intellectual Ventures has generated $2 billion in revenue. But to keep its investors happy over the next 10 years, Ewing says, it's going to have to do a lot better than that:

"Intellectual Ventures seems to have signed a number of deals," Ewing says. "If the stream of deals they're signing doesn't increase significantly, I imagine they would be forced to file more litigation, in order to achieve their revenue targets."

Ewing's prediction already seems to be coming true. Earlier this month, Intellectual Ventures itself filed a lawsuit in federal court against several companies it claimed were infringing some semiconductor patents it owns.

***

In early July, the bankrupt tech company Nortel put its 6,000 patents up for auction as part of a liquidation. A bidding war broke out among Silicon Valley powerhouses. Google said it wanted the patents purely to defend against lawsuits and it was willing to spend over $3 billion to get them. That wasn't enough, though.

The portfolio eventually sold to Apple and a consortium of other tech companies including Microsoft and Ericsson. The price tag: $4.5 billion dollars. Five times the opening bid. More than double what most people involved were expecting. The largest patent auction in history.

That's $4.5 billion on patents that these companies almost certainly don't want for their technical secrets. That $4.5 billion won't build anything new, won't bring new products to the shelves, won't open up new factories that can hire people who need jobs. That's $4.5 billion dollars that adds to the price of every product these companies sell you. That's $4.5 billion dollars buying arms for an ongoing patent war.

The big companies — Google, Apple, Microsoft — will probably survive. The likely casualties are the companies out there now that no one's ever heard of that could one day take their place.

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

MICHELE NORRIS, Host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

ROBERT SIEGEL, Host:

And I'm Robert Siegel. In this part of the program, we're going to hear about patents. The patent system is so fundamental to the American way of life that our founders put it in the Constitution - to, quote, promote the useful arts and sciences. The idea is, you say to Eli Whitney, for example: Patent your cotton gin for a limited time, and no one else can use it without paying you. In exchange, you have to share your designs so others can build on them.

NORRIS: But in the world of software, patents have become legal weapons. They're being purchased by companies that don't make anything, and being used to sue companies that do. Some in the tech world call them patent trolls.

Alex Blumberg, of our Planet Money Team, and NPR's Laura Sydell have this report on a patent system that's been turned on its head.

ALEX BLUMBERG: When you talk about the patent system among techies in Silicon Valley, there's usually an audible groan.

LAURA SYDELL: I live in San Francisco. And to prove this, the other day I went down to a park called South Park around noon, where a lot of tech workers eat their lunch. I spoke with software programmers Stephan Brunner, Adam Cohn, Michael Hines(ph) and Eric Michael Ober, and the sentiment was universal.

If I say patent system, would do you say-

STEPHAN BRUNNER: I think it's just a way for lawyers to make money. And basically, it's a killer for creativity.

ADAM COHN: Complicated, broken.

MICHAEL HINES: It's basically a flim-flam game that anybody who knows how to take advantage of it, is doing.

SYDELL: If I say the word patent troll, does any company, or any entity, come to mind in particular-

COHN: Like Nathan Myhrvold, I guess, and like, whatever his company is. It has some stupid name like...

(SOUNDBITE OF LAUGHTER)

SYDELL: ...Associates, or something like that. I don't know.

The name he's searching for is Intellectual Ventures, a company founded by Nathan Myhrvold, the former chief technology officer at Microsoft.

BLUMBERG: The Wall Street Journal's law blog ran an article about IV titled "Innovative Invention Company or Giant Patent Troll-" Many other tech and law blogs have gone past the wondering stage, straight to accusations.

SYDELL: These articles talk about how IV has amassed one of the largest patent portfolios in existence, and how it's going around to technology companies demanding money to license these patents. But no one at these companies wants to talk about it.

CHRIS SACCA: There is a lot of fear about Intellectual Ventures. You don't want to make yourself a target.

BLUMBERG: This is Chris Sacca, a venture capitalist in Silicon Valley who was an early investor in companies like Twitter, FanBridge and other start-ups. He says he completely understands why his friends and colleagues wouldn't want to talk about Intellectual Ventures.

SACCA: They just said they're afraid to talk about this issue on the record. I mean, they have the potential to literally obliterate start-ups. It's such a mismatched fight that your best defensive option is security by obscurity.

NATHAN MYHRVOLD: Intellectual Ventures is a company that invests in invention.

SYDELL: This, of course, is Nathan Myhrvold. I went to talk to him and spend a day at his company. He had a very different story about what he's up to.

Are you a patent troll-

(SOUNDBITE OF LAUGHTER)

MYHRVOLD: Well, that's a term that has been used by people to mean someone they don't like who has patents. I think you would find almost anyone who stands up for their patent rights has been called a patent troll.

BLUMBERG: Intellectual Ventures, says Myhrvold, is on the side of the inventor. For example, imagine an inventor with a breakthrough idea. This inventor has a patent. But still, companies are stealing his idea. The inventor doesn't have the money or legal savvy to stop them - and that is where IV comes in. Intellectual Ventures buys this inventor's patent, and then makes sure that companies who are using the idea pay for it.

SYDELL: I asked Intellectual Ventures for an example of an inventor with a breakthrough who wasn't getting paid for it. Two separate people pointed me to the same guy.

JOE CHERNESKY: There's one story I can think of - a gentleman named Chris Crawford.

SYDELL: This is one of them, Joe Chernesky. He's a vice president at Intellectual Ventures.

CHERNESKY: The neat thing about Chris is, he had no idea how to get money for his patents. He had this great idea; these patents were immensely valuable because every technology company was adopting the technology. Yet he didn't know how to get paid. He eventually found Intellectual Ventures. So we bought those patents.

SYDELL: I wanted to talk to Chris Crawford. But when I e-mailed IV for his contact info, I got back a strange response. I was told they no longer owned his patent, and that he probably wouldn't want to talk to me because he was in the middle of litigation.

BLUMBERG: That just made us curious. So we started digging around and ended up on a five-month journey - a journey that raised a lot of questions about Intellectual Ventures, and a lot of questions about the patent system in general.

We found Chris Crawford in Clearwater, Florida. And as predicted, he never responded to us. You'll never hear from him in this story. But we were able to locate his patent.

SYDELL: Patent Number 5771354. He got it in 1998, in the relatively early days of the Internet. And the way IV explained the patent to us, Chris Crawford invented a way to upgrade the software on your home computer over the Internet - when that little box pops up and says, click here to upgrade to the new version of iTunes. That, says IV, is what Chris Crawford invented.

BLUMBERG: But when we looked at the patent, it seemed to claim a lot more than that. The name of the actual invention is, quote, an online back-up system, which the patent says makes it possible to do a bunch of stuff: software purchases, online rentals, data back-ups, information storage. The patent makes it seem like this one guy, Chris Crawford, invented a lot of the most common things we do on the Internet. Except he didn't - at least, according to the experts we talked to.

SYDELL: You're going to start by looking at the left- and right-hand screens.

SYDELL: This is David Martin, who runs a company called M-Cam. They're hired by governments, banks and businesses to assess patent quality - which they do with this fancy software program. We asked him to assess Chris Crawford's patent.

MARTIN: Now, if you would please, just click on the patent number itself.

BLUMBERG: The software program actually scans through millions of patents, and analyzes them to see if there are any overlaps.

SYDELL: An idea being patented is supposed to be non-obvious to a person of ordinary skill in the art. What that means is, you shouldn't be able to get a patent just for a common-sense, good idea. It has to be a breakthrough. In other words, we should not be seeing what we are seeing on David Martin's computer screen.

MARTIN: Five thousand, three hundred and three patents that were issued while his was being prosecuted, which covered the same material.

(SOUNDBITE OF LAUGHTER)

MARTIN: Five thousand, three hundred and three.

BLUMBERG: So that means that at the same time that Chris Crawford's patent was getting issued...

MARTIN: Only 5,303 other people were pursuing the same thing.

BLUMBERG: And when you say the same thing...

MARTIN: I mean the. same. thing.

SYDELL: David Martin may be exaggerating a little for effect. But as we looked through some of the patents that are on hisscreen, the resemblances are pretty clear. David Martin says when he first started looking into this stuff and saw all these patents that were granted for essentially the same thing...

MARTIN: We thought that would be an anomaly. And then we were told, oh no, it's not an anomaly - that happens. So that's what got us into the rabbit hole you're about to see - which is to say, well, let's see how many times that happens. And as I've testified in Congress, that happens about 30 percent of the time in U.S. patents.

BLUMBERG: That is, 30 percent of U.S. patents are essentially on things that have already been invented.

MARTIN: So for example, toast becomes the thermal refreshening of a bread product.

SYDELL: These are real patents-

MARTIN: Yes.

BLUMBERG: There's a patent on toast-

MARTIN: Yes. Thermally refreshened bread, not on toast.

SYDELL: Ladies and gentlemen, Patent Number 6080436, Bread Refreshing Method. Issued in 2000.

BLUMBERG: Both David Martin and the other patent expert we talked to said Chris Crawford's patent should never have been issued in the first place. And what's strange: For a long time, the patent office itself would have agreed with them. The patent office used to be very reluctant to issue patents for software. They thought software was more like books or articles. You could copyright it, but it wasn't an invention.

SYDELL: Then the federal court stepped in and started chipping away at this interpretation. There were a couple of big decisions - one in 1994, and another one in 1998 - that overturned the patent office completely. A flood of software patents followed. A lot of people in Silicon Valley wish that had never happened, including a very surprising group: software engineers.

BRUNNER: Well, I have to say, I actually worked on a whole bunch of patents in my career over the years. And I have to say that every single patent is nothing but crap.

SYDELL: This is Stephan Brunner, a programmer. He said something we heard from a lot of software engineers: His patents don't even make sense to him.

BRUNNER: I can't tell you for the hell of it what they're actually supposed to do and what - because I did not - the company said, we have to do a patent on this, and then they send in a lawyer. And they basically - you basically say, ah, that's probably right; that's probably wrong. And then they just like, write something that makes no sense. And I, personally, when I look at them, I'm not proud at all because most of them, again, it's just like mumbo jumbo, which nobody understands - and which makes no sense from an engineering standpoint whatsoever.

SYDELL: And I want to point out, Stephan Brunner is one of six engineers I met randomly, when I went to the park to talk to tech workers. Half of them had patents in their names that they felt shouldn't have been granted.

In polls, as many as 80 percent of software engineers say the patent system actually hinders innovation.

BLUMBERG: One problem we heard over and over: Software patents are so broad, everyone's guilty of infringement, which causes huge problems for almost anyone trying to start or grow a business on the Internet. Again, Chris Sacca, the investor you heard from earlier, who helped start lots of companies, including Twitter.

SACCA: We're at a point in the state of intellectual property where existing patents probably cover every single behavior that's happening on the Internet and our mobile phones today. So I have no doubt that the average Silicon Valley start-up, no matter how truly innovative they are, I have no doubt that aspects of whatever they're doing violate patents that are out there right now. And that's what's fundamentally broken about this system right now.

BLUMBERG: And this brings us back to patent 5771354, Chris Crawford's patent, the patent Intellectual Ventures pointed us to as an example of how they encourage innovation. This patent also seems to cover a big chunk of what happens on the Internet. And if you have a patent on the Internet, you can sue a lot of people - make a lot of money.

SYDELL: And in fact, that's what's happening with Chris Crawford's patent. Intellectual Ventures sold it to another company, a company called Oasis Research. Less than a month later, Oasis Research used the patent to sue 16 different tech companies - companies like Rackspace, Go Daddy and AT companies that do cloud storage.

(SOUNDBITE OF ANSWERING MACHINE)

SYDELL: I called the number on Oasis's website numerous times, but an actual human never picked up.

BLUMBERG: There was hardly any public information about Oasis Research, minimal corporate filings; no way to know who owned it, how many employees it had, if it even had employees at all. One of the few details that was available: an address in Marshall, Texas - 104 East Houston Street, Suite 190.

MICHAEL SMITH: Right now, we're going into the first floor of the Baxter Building, which is 104 East Houston.

SYDELL: This is Michael Smith. He's an attorney in Marshall, Texas, who does mostly patent cases. He agreed to show us the offices of Oasis Research. They were in a nondescript, two-story building on the town's main square. He led us into a narrow corridor lined with doors.

SMITH: And here we go. Suite 190, Oasis Research, LLC.

BLUMBERG: The door was locked and through the crack underneath, you could see there were no lights on inside.

SMITH: I know they're a plaintiff...

BLUMBERG: Marshall is a very small town. Michael was born and raised here, so we started quizzing him about Oasis.

SYDELL: Does it have any employees that you know about-

SMITH: Not that I know of.

SYDELL: Have you ever seen any people coming in and out of that office-

SMITH: No, I haven't.

BLUMBERG: Is this office ever occupied-

SMITH: I doubt that it is.

SYDELL: Let's - let's - if you don't mind, I'm going to knock on the door and just see if there's anyone here today.

(SOUNDBITE OF KNOCKING ON DOOR)

SYDELL: Nothing.

Michael Smith told us a lot of companies in this corridor were the same as Oasis. They were here to sue other companies for patent infringement.

BLUMBERG: And he said that right now, there are 2,000 patent cases going on in just the Eastern District of Texas alone. Something big is going on here, and we had a lot of questions for Intellectual Ventures.

(SOUNDBITE OF MUSIC)

SIEGEL: In just a moment, we'll hear some of those questions put to Intellectual Ventures, when ALL THINGS CONSIDERED continues.

(SOUNDBITE OF MUSIC)

NORRIS: From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

SIEGEL: And I'm Robert Siegel. We return now to east Texas, to the door of a company that's at the center of a mystery. We're there hoping to understand how the American patent system got turned upside down. As we heard earlier, opinion of the system is so low in Silicon Valley that software programmers describe it using words like broken, a killer for creativity, a flim-flam game. To explain why, here's NPR's Laura Sydell and Planet Money's Alex Blumberg.

BLUMBERG: To review the facts, Intellectual Ventures promotes itself as a company that helps inventors by making sure they get paid for their patented inventions. Remember, the idea of patents is so important to the American system that it's mentioned in the Constitution.

SYDELL: IV pointed us to an inventor it claimed to have helped, a guy named Chris Crawford. Crawford's patent was for a way to upgrade software over the Internet and store things online, or in the cloud.

BLUMBERG: But when we tried to reach Crawford, we couldn't. It turned out, Intellectual Ventures had sold his patent to a company, Oasis Research, which was in the midst of suing 16 different tech companies with Crawford's patent.

SYDELL: Pretty much the only publicly available information about Oasis was an address in the tiny town of Marshall, Texas. But when we went there, it was completely vacant, just a sign on the door, no employees.

(SOUNDBITE OF KNOCKING ON DOOR)

SYDELL: Nothing.

In desperation, I tracked down Oasis's lawyer, John Demeris, at a conference in San Francisco.

JOHN DEMERIS: I can't talk about folks I represent.

SYDELL: Do you know who owns Oasis Research...

DEMERIS: Yes, I do.

SYDELL: ...to reach them-

DEMERIS: Yes. But I'm not going to tell you.

SYDELL: You literally, like, hear that they're bringing a suit, and you literally can't tell us who owns the company-

DEMERIS: I'm not going to answer questions about pending lawsuits for you.

SYDELL: Is there any chance, at a later date, of actually talking to you more generally-

DEMERIS: I don't think so, but thanks for asking - although I love NPR, and I love the work that you guys do.

BLUMBERG: When someone says I know, but I'm not going to tell you, it just makes you want to find out more.

SYDELL: So in search of answers, we went to an intellectual property lawyer named Tom Ewing, who has made a business of tracking Intellectual Ventures.

TOM EWING: I heard - for the longest time, when they first started - that they hid everything in shell companies, and no one could ever find it. And I kept hearing that so much. And it irritated me because I figured that I could, if I just sat down and started looking. So I did.

SYDELL: How many shell companies do you personally believe that Intellectual Ventures has, based on your research-

EWING: Very close to 1,300.

SYDELL: Ewing said Oasis probably wasn't a shell company of Intellectual Ventures.

BLUMBERG: But, he said, there's evidence that Intellectual Ventures might be getting a cut of whatever money Oasis receives from its lawsuits. He shows us a document that's called a certification of interested parties. The court in Texas required that Oasis list all the entities with a financial stake in the outcome of the case. Among the typical parties that most people list - the plaintiff, the defendants, the attorneys - Oasis also lists Intellectual Ventures.

SYDELL: So we went back to Intellectual Ventures to talk to Peter Detkin, one of the company's founders. We showed Detkin that court document from the Oasis case, listing Intellectual Ventures as an interested party.

PETER DETKIN: OK, and it does list Intellectual Ventures as an interested party. I see that.

BLUMBERG: And you don't know why, in this instance, you're listed-

DETKIN: I believe it's because we likely have a back-end arrangement here.

BLUMBERG: What does a back-end deal mean-

DETKIN: We settle for some amount of money up front, and we get some percentage of the royalty stream down the road, that is generated from the monetization of these assets.

BLUMBERG: Just to spell this out, Peter Detkin is saying it's likely that Intellectual Ventures sold this patent to what many people would call a patent troll - a company without employees, that doesn't make anything, that just sues people. And Intellectual Ventures is taking a cut of whatever money Oasis generates with its patent from its lawsuits.

SYDELL: But here's the thing: When Nathan Myhrvold talks to people in Silicon Valley, he says he's the solution to companies like Oasis.

SACCA: I think I saw Nathan, for the first time, present the idea of Intellectual Ventures in either the fall of 2007 or the spring of 2008.

BLUMBERG: Investor Chris Sacca says that at this meeting, Nathan Myhrvold pitched the idea of Intellectual Ventures as a way to defend against the Oasis Researches of the world. Companies could buy access to Intellectual Venture's huge patent hoard, and they'd be covered no matter what technology they were using. It was a way for companies to buy protection.

SACCA: They pay administrative fees ranging from the tens of thousands to the millions and millions of dollars, all into this entity to kind of buy themselves insurance that protects them from being sued by any harmful, you know, malevolent outsiders.

SYDELL: But to Chris Sacca, there's an implication in there. If you don't join us, who knows what'll happen- It reminds him of the business practices of another organization.

SACCA: A Mafia-style shakedown, where somebody comes in the front door of your building and says, it'd be a shame if this place burned down. I know the neighborhood really well, and I can make sure that doesn't happen; and saying, pay us up. When I've seen Nathan speak publicly about this, and when I've seen spokespeople from Intellectual Ventures, they constantly remind us that they, themselves, don't bring lawsuits, that they're a defensive player. But the truth is that the threat of their patent arsenal can't actually be realized. It can't be taken seriously unless they have that offensive posture, unless they're willing to assert those patents. And so it's this very delicate balancing act that is quite reminiscent of scenes you see in movies, when the Mafia comes to visit your butcher shop. A production scheme isn't that credible unless some butcher shops burn down now and then.

BLUMBERG: We told Intellectual Ventures that Chris Sacca compared their business to a Mafia shakedown. And in an email, Peter Detkin called that ridiculous and offensive. He went on to say, quote: We're a disruptive company that's providing a way for patent holders to recognize value - recognize value means make money. He goes on: That, obviously, makes people uncomfortable, but no amount of name-calling changes the fact that ideas have value.

SYDELL: So do patents. All the big tech companies have started amassing troves of them - not to build anything, but to defend themselves. If a company's patent hoard is big enough, it can say, essentially: If you try to sue me with your patents, I'll sue you with mine.

BLUMBERG: It is the old mutually assured destruction - except instead of arsenals of nuclear weapons, it's arsenals of patents. And to show how serious it's become, consider this.

SYDELL: In early July, the bankrupt tech company Nortel put its 6,000 patents up for auction as part of a liquidation. A bidding war broke out between the Silicon Valley powerhouses. Google said in press accounts that it wanted the patents purely to defend against lawsuits, and it was willing to spend over $3 billion to get them. But that wasn't enough. The portfolio eventually sold to an unusual combination of companies including Apple and Microsoft. The price tag, $4.5 billion, more than double what most people involved were expecting - the largest patent auction in history.

BLUMBERG: Think of that - $4.5 billion in patents that these companies almost certainly don't want for their technical secrets. That $4.5 billion won't bring new products to the shelves, won't open up new factories that can hire people who need jobs. It's $4.5 billion that adds to the price of every product these companies sell you; $4.5 billion that's essentially wasted, buying arms for an ongoing patent war. The big companies - Google, Apple, Microsoft - will probably survive this war. The likely casualties: the companies out there now that no one's ever heard of, that could one day take their place. I'm Alex Blumberg.

SYDELL: And I'm Laura Sydell, NPR News.

(SOUNDBITE OF MUSIC)

NORRIS: You're listening to ALL THINGS CONSIDERED from NPR News.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright National Public Radio.

Related program: