Tuesday, December 15, 2015

Why Inventors Never Win (The Problem With Patents)

Suppose you invented something totally groundbreaking.  Would you become the wealthiest man in the world?  Not likely.

One thing that discourages me about the Patent profession is that I spend less time helping inventors make money from their inventions (which as we shall see, rarely happens) and more time just acting as a small cog in a enormous machine that arbitrates disputes between international conglomerates. The latter part is, of course, important, but it rarely is as satisfying as seeing a small company or inventor succeed.

The problem is, the Patent system, by its very nature, does not really reward inventors with all the profits from a major invention, but the bankers, investors, and other money people are the ones who make the majority of the big bucks.

Thomas Jefferson wrote in to the Constitution, that Congress may, "promote the Progress of Science [writings] and useful Arts [inventions], by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

It seems like a simple thing.  You invent something and you get a monopoly on it, for a short time.  If you invent something ground-breaking, you become fabulously wealthy. "If you build a better mousetrap," the saying goes, "the world will beat a path to your door." 

Well, I prosecuted a Patent for a client for a better mousetrap, and while he did sell a few of them, no one beat a path to his door.   The idea that companies are dying for new ideas is more than a little overstated.   A lot overstated.

But suppose you invented something really amazing.  Would you become fabulously rich?  Not exactly and let me explain why - and why the people who you think are fabulously rich inventors are either not fabulously rich or not inventors at all.   There is a lot of folklore out there about our Patent system, and most people choose to believe the folklore, not the reality.

Let's do a simple "thought experiment" as Einstein used to call them. Let's pretend you've invented something so amazing that it will change the way the world works.   You've invented the hoverboard, as shown above - some sort of anti-gravity device that will be worth billions of dollars - if not trillions.

All you have to do is go down to the Patent office and get your Patent and then watch the royalties roll in, right?

Well, not exactly. To begin with, you'd better get a good Patent Attorney and that is going to cost you in the tens of thousands of dollars.  For an invention of this importance, maybe over a hundred thousand, as you will want to file more than one Patent on this - maybe dozens.

Not only that, in order to protect the invention outside of the United States, you'll have to file a number of Patents overseas. And no, there is no such thing as an "International Patent" - the Patent Cooperation Treaty only allows you to file a super-priority-document that allows you to later file in individual treaty countries.

To cover just the industrialized countries in the world, you would have to spend hundreds of thousands of dollars to prosecute Patents in each country.  To cover all the world (or countries that have Patent systems) you would have to spend millions.  And many smaller countries, such as Mexico, have a "working requirement" so you would have to set up a hoverboard factory in Mexico to have any Patent rights.  Otherwise, gringo, you can take your stinkin' Patent and go home.

All of this costs money, and of course, you ain't got it.  So right off the bat, you have to get investors on your side to invest in the project just to protect it with Patents. And those investors will want a big chunk of the pie for their capital.

The other side of the coin is actually making the devices to sell. Patents are fine and all, but whether you make the device yourself, or license someone else to do it, you make no money at all until product goes out the door and people pay for it.

So more investors are needed to build factories, work the bugs out of the prototypes, and start building products. Oh, and to pay for insurance to cover when Marty McFly runs his hoverboard into a lamp post (which surely will happen).  You need a lot of money.  You need a lot of investors.  They will want a larger slice of the pie as well.

Meanwhile, others are not sitting on their hands.  Unless you can keep the invention secret until your Patent issues, they may try to steal the idea and start making hoverboards or hovercars or whatever, right under your nose.  Since your Patent hasn't issued, well, there ain't much you can do about it.   And unless you file for and obtain Patent protection in all the countries of the world, you can't stop them from making, using or selling the product overseas.

So, you finally get your Patent.  It could take three to five years or more.   Production of hoverboards is humming.  But your licensee is pissed off that the infringers are making knock-off hoverboards for half-price!  Or, if you are making the product yourself the infringers will soon drive you out of business.

No choice but to sue them for Patent infringement.   They won't just stop infringing because you send them a nasty letter.   They may make the rational choice to infringe and hope not to get caught, or to make a quick buck and then disappear.   Or they hope you can't afford to sue them, or suing them in a foreign venue (e.g., China) is hard to do.   The Segway company had this problem - cheap knock-offs were made in China, and the company was losing so much money as it was, they could not afford protracted litigation there - litigation that likely would have come to naught anyway.  They ended up selling out to their competitors!

So you decide to sue.  That is going to cost $100,000 a month for a big-city firm to litigate, and you'd better get a big-city firm for this kind of invention.   Once again, you ain't got the money and you have to sell off more of your company to investors in order to litigate.

And at this point, you'd better hope you have a good Patent with no hidden defects in it.  Your opponents will raise all sorts of trivial arguments as to why your Patent isn't enforceable.  You have to hope a jury - who likes cheap hoverboards - doesn't buy them.   In the end, you likely settle for a cash amount and a license agreement.

It is a nightmare, a headache, and the people making the real money are the folks you sold huge chunks of your company to, over the years to finance the Patents, production, and litigation.   If you were smart, you sold the whole thing, from the get-go, for more money you can spend in a lifetime, plus some royalty.   Maybe not the way to make the most money, but a lot less hassle, and guaranteed money in the bank.  This is probably the optimal outcome for you.

Sadly, most inventors don't do this - convinced they can make more money by "going it alone" they end up screwed out of every penny they could have made.

Now, I know what you are going to say.  "What about Alexander Graham Bell? [no relation] Or Thomas Edison?  Or Bill Gates? Steve Jobs?  Or the windshield wiper guy?  Or that Facebook kid?  Didn't they all make millions or billions from their inventions?"

Yes.  No.  Maybe.   Some of the people we think of as "innovators" or "inventors" are actually neither.   Bill Gates didn't invent DOS - Microsoft's first product.  It was a bad copy of the CP/M operating system that was cobbled together in a hurry to meet a lucrative contract for IBM.   They actually farmed out the coding to a person outside the company. As for Windows, neither Bill Gates or Steve Jobs invented that, as it was a product of Xerox Palo Alto Research Center - who gave away the idea to anyone who wanted it.

UPDATE:  And Elon Musk didn't invent the EV, PayPal, or the Starship.  Ford did not invent the automobile or the assembly line. Much of Edison's "inventions" are now attributed to his employees.  And so on and so forth.

The people we worship (and some literally do) as modern-day inventive heroes actually are more businessmen than inventors - managers of companies that produce products, whose inventors are among the legions of Engineers who work directly for them - or for their suppliers.   I know this, as I write Patents for these Engineers (actually the companies they work for) all day long.

The Zuckerberg kid is a case in point.   He didn't "invent" social networking - that had existed years before in the form of Friendster, MySpace, and Second Life.   Those other companies just weren't able to capitalize on their initial success.   Friendster had a narrow following.  MySpace almost made it big, but really messed things up by going too commercial, too soon, and moving toward a music promotion model (and giving you a mandatory friend named "Tom" who kept peppering you with videos from some grunge band you never heard of).   Second Life was an interesting concept, but given the primitive graphics of the era, too slow and hard to load for the vast majority of people.  The concept lives on in multi-player role-playing video games, which are more successful simply because we have faster computers and faster internet connections, and these games are actually interesting to play.

Facebook?  It became popular not because of some special innovation or invention - most all of its features were known in previous iterations of social networking.   It became popular because it caught on with college kids, quickly built a critical mass, and started a buzz going, to the point where people felt they had to get on it.  It also was in the "right place at the right time" when people were getting bored with the Internet (in terms of websites) and wanted a single place to go where they could post pictures and interact with others.  Facebook got lucky.  Well, luck and heavy promotion.

And in order to get lucky, Mr. Zuckerberg had to sell off a majority of the company.  He is still the largest single shareholder with about 28% of the stock.  But he could be voted out by the other shareholders if they felt he lost his magic touch.

And this is a very typical pattern.  I recounted before about how Alexander Graham Bell sold off 95% of his company shares to investors, in order to raise the capital to build all the infrastructure (phone lines, switching stations, leased handsets) for the phone company.  When the stock reached $100 a share, his wife got nervous and persuaded him to sell half of this remaining interest.   He ended up with a pitiful share of the company - still worth millions, of course.  But there is no dynastic "Bell" family still spending those millions today.  Well, there are descendants, but they are not the super-rich heirs to a family fortune.

And there is some question as to whether Alexander Graham Bell really invented the telephone.  The phone he invented is something called a "magentophone" which if you were in the Navy during WWII you may remember.  It was a passive device that used a magnet and coil and diaphragm as both speaker and microphone.  It was not very powerful and could not transmit over long distances.

The modern "phone" as we know it, uses a more powerful system of amplifiers and carbon microphones - the latter an invention of Thomas Edison.

Speaking of Edison, have you read about any wealthy Edisons making the scene with the Jet-set lately?   That is because again, Edison had to sell off a lot of his interest in inventions in order to build a company that could make use of the technology.   And a lot of his ideas - such as DC current - turned out to be impractical or wrong.  The phonograph cylinder was another - the flat phonograph record replaced it in short order.

Again, the people who made the big bucks were not Edison and his family, but the investors - the Wall Street Bankers - who invested early or later on bought stock.  Edison left an estate of $12M upon his death.  A lot of money in 1931!  But a drop in the bucket compared to the market value of GE or Consolidated Edison at the time.

And there is some question as to whether Edison invented all he claimed he did.  Some folks claim he took credit for ideas of his subordinates.  This does not sound too far-fetched to me, as invention is indeed often a group effort, and not the work of any one man.  The myth of the solo inventor, working in his garage laboratory all alone is just that - a myth. Even Hewlett had his Packard and Jobs his Wozniack (and the latter pair hardly "invented" the personal computer, so much as - like Henry Ford - came up with a way to make one far more cheaply that the competition).

So, some people who got fabulously wealthy on "inventions" were actually just business people who really didn't invent anything so much as they were either lucky, shrewd, or both (and of course, hard-working).   Others who are famous "inventors" - who actually invented something - actually never made a huge amount of money - not as much as you would think one would make for creating a ground-breaking invention like the light bulb or the telephone.  They also worked very hard, but often made less money than the former types.

But what about the Windshield-Wiper guy?  Didn't he cash-in on that invention after "sticking it to the man" with a big lawsuit?  Again, the folklore in our business is very strong - and the truth is rarely discussed.   He actually was offered a ton of money up-front from Ford, to buy his idea and/or settle the initial lawsuit.  Numbers vary from $4M to $11M depending on which source you read.   After years of bitter, protracted litigation which cost him his wife, family, and three law firms, he ended up settling for less money, and was a bitter angry old man until his death.

Now you know why I say that "selling out" is often the best move - less stress, more money.  The money people and the business people are going to make the lion's share of the money in the business, no matter what.   Inventors might get rich - with a really, really good idea - but not fabulously wealthy.

So, getting back to your hoverboard invention, at the end of the day you might end up a Billionaire, but certainly not a Trillionaire.   The investors in your company are going to take home the lion's share of the dough no matter what.   And that is a pretty inescapable fact.

So, why do we bother having a Patent system at all?   If it does not protect the rights of inventors, isn't the system sort of broken?   Well, in a way it is.   Because while the system does not reward inventors with as much as they likely should get, it does reward a lot of other people who arguably invented nothing, but had good lawyers and filed nuisance suits against big companies.

"Patent Trolls" is the popular term used today.  These are people who get Patents on vague ideas - often with narrow, unenforceable claims - and then file numerous nuisance suits against mid-sized or small companies.  They settle for token amounts and move on.   You do this enough and you can make millions and millions of dollars.

The problem is, litigation is expensive, so each lawsuit - even without without merits - costs hundreds of thousands of dollars to litigate.   And offer to settle for less than a hundred grand is often accepted by the defendant in such suits.   Do this a lot, and you can make a lot of money, even if your Patents are weak or even unenforceable.

Jerome Lemelson was accused (by some) of doing this, and according to some sources he made over $450 million at it.  His "foundation" sponsors NPR (one more reason not to listen to National People's Radio!), the Smithsonian (the people who sell you Gov't Gold!) and MIT (the management school, not the Engineering one).  He made a lot of money litigating and licensing Patents.  Some argue this was unfair.

So what is the point of our Patent system?   Good question.   The bulk of my work, as I have noted above, is in acting as a small cog in a giant machine that determines the relative rights of huge corporations in massive legal battles than often span decades.    Various companies claim they invented this or that, and the hundreds and thousands of Patents they obtain are used to determine who owes what, in terms of licensing and royalties.  Very rarely is someone actually excluded from making, using, or selling a Patented invention.

For example, Acme corporation designs a sells a smart phone, obtaining over 100 Patents on its design.  Beta corporation sells a smart phone, too, and they also have a portfolio of Patents as well.   They argue as to who invented what, and each has some Patents on some feature that the other wants to use.  At the end of the day, neither is excluded from selling products, they just settle things, cross-license and money changes hands.  Maybe once in a while, one sues the other, but this is just part of the gamesmanship involved - showing that you are serious enough to pay lawyers a lot of money to enforce your Patent.  It doesn't mean that Acme or Beta are put out of business or prevented from selling smart phones.

And of course, Zeta corporation, which is now nearly bankrupt, was the first-to-market with a smart phone.  They have a portfolio of Patents as well, and an investment banker buys the company and uses those Patents to extract royalties from Acme and Beta - which they are entitled to.  This yields some value from the tattered remnants of Zeta, for the shareholders.  Again, this is what the system is designed to do.  If Zeta was first-to-invent, they should get a slice of the pie, but like all inventors, it is a small slice.

Unfortunately, Joe Blow has obtained a Patent on a method of sending text messages over his Walkie-Talkie, a toy he came up with for his daughter.  The claims are limited to a Walkie-Talkie, but Joe finds a slimy lawyer big-city law firm to take his case, and they file nuisance suits, not against Acme or Beta, but against the wireless companies who re-sell the devices.   Joe Blow's lawyer claims - with a straight face - that his client invented text-messaging, even though the defunct Zeta corp was offering it years earlier.   They offer to settle the case for a few million dollars and a royalty on each phone sold, and go home with a wheelbarrow full of money that they never were entitled to.

This is the system we have and how it works, not the mythology as to how it should work.

And that's basically my job - a small cog in this giant machine.  I write Patents and prosecute them, and we hope - after filing dozens or hundreds of them, that we get some valuable protection for the advances our Engineers have come up with.  And we hope these Patents will help defend us if other companies accuse us of infringement.   And I am just one of a small army of lawyers who write and prosecute these Patents.  There are also the in-house counsels who manage these dockets and make decisions with regard to litigation and licensing.  And then there are the litigation firms - the powerhouses who make the big bucks - filing and prosecuting lawsuits and negotiating settlements, and of course defending against the Joe Blows of the world, who just want to abuse the system.

At the end of the day, well, the various companies have largely sorted out their individual rights, in accordance with their individual contributions, in a more or less fair and equitable manner.  We basically are like hostage negotiators - we prevent major corporations from going into all-out war with one another.

Not exactly sexy work, but there you have it.

Individual inventors?  I've represented a few, but most I try to dissuade.   Unless you have a really important invention, it is not likely to be worth Patenting.  If the potential damages are not in the millions, people can infringe with impunity, as it is not worth it for you to sue over trivial damages.   And when dozens of companies start infringing, you'd better have a deep pocket investor to pay for enforcement of your Patent.

Once in a while, I have an inventor with a great invention that is also profitable enough that someone is interested in buying the Patent or licensing it.   But it doesn't happen often.   Even with the best Patent, if the invention isn't "big" enough to warrant the cost of litigation, it arguably isn't worth protecting.

And that is the reality of Patents, like it or not.   I look forward to retirement.