Obama’s Patent Actions Will Harm U.S. Tech Industry

Yesterday, the Obama administration rolled out a sweeping set of executive actions and legislative recommendations that are supposed to “protect innovators from frivolous litigation” and improve America’s patent system in support of the Leahy-Smith America Invents Act the President signed into law in 2011.

The White House Fact Sheet also takes aim at so-called patent trolls that drain the economy, “leverage and hijack” people’s ideas, and try to “extort some money out of them,” in the President’s words.

If you didn’t know any better, you’d probably think that sounds great. And maybe you’d be right. But there’s a very good chance you wouldn’t be. There’s a very good chance that the law of unintended consequences will ultimately prove what I’ve said for years, that legislation and regulation are bad for business. And this is no exception.

You see, the war over patent reform goes back a good many years. Most of America’s technology giants like Apple (NASDAQ:AAPL), Cisco (NASDAQ:CSCO), Google (NASDAQ:GOOG), Hewlett-Packard (NYSE:HP), Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), and Oracle (NASDAQ:ORCL) lobbied heavily in support of the legislation. Just about all the big banks did, too.

But historically, the biotech and pharmaceutical industries as well as 3M (NYSE:MMM), Caterpillar (NYSE:CAT), General Electric (NYSE:GE), Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), PepsiCo (NYSE:PEP), Qualcomm (NASDAQ:QCOM), Texas Instruments (NYSE:TXN), and The National Venture Capital Association have all fought against it.

The reason for the war between these corporate giants is simple. The legislation was good for one side’s business model and not the other’s. It was all about business. And it still is.

Granted, the final legislation did have quite a bit of compromise compared with earlier versions of the bill or it never would have passed after failing so many times in the past. And I’ll admit that some of it, and some of the President’s actions and recommendations, may make sense. Some, but not most.

You see, if you don’t know a whole lot about how American companies innovate and the wars they fight with each other and foreign competitors over intellectual property rights, it’s easy to think this is all pretty straightforward. But the truth is it’s anything but that.

Intellectual property, at least in the high-tech industry, is very, very complicated. I should know; I was deeply involved with it for a good many years. And here are a few things that the average person doesn’t realize about the possible unintended consequences of tightening up our patent laws and targeting so-called patent trolls.

For one thing, there’s no clear definition of a patent troll.

I bet you didn’t know that Qualcomm, one of America’s most valuable technology companies and one of its most important innovators, was once considered a patent troll. That’s right, the very same company that invented CDMA and has a dominant patent position in advanced 3G and 4G wireless technology had to spend years and millions embroiled in one court battle after another to protect its intellectual property and gain fair license fees for the technology it spent a fortune to develop.

The same is true of Texas Instruments and IBM (NYSE:IBM), both of which have made billions licensing their technology to other companies, worldwide. Not to mention dozens of small technology companies that develop breakthrough technology but lack the scale to actually manufacture products. That’s why a licensing model works best for them.

You see, the problem is that big technology companies don’t just write eight, nine, or ten figure checks when you show up at their doorstep and ask for license fees. Even protracted negotiation often leads to impasse. In that case, the only choice is litigation.

In other words, there are indeed times when technology companies have to litigate to be fairly compensated for their technology. And the problem is that the courts have no way to distinguish between legitimate companies and trolls. Well intentioned as it may be, neither can legislation or executive actions.

If you make it harder for companies to assert their patents in court, you do that for everyone, not just the trolls. Likewise, if you make it easier for companies to challenge patent holders in the Patent and Trademark Office – as the legislation and recommendations do – that affects all patent holders, not just the trolls.

Some of President Obama’s actions and recommendations include making it harder for companies to use the International Trade Commission to stop infringing products at the border, a relatively quick and common way for innovative companies to pressure infringers to come to the negotiating table and sign license agreements.

In many cases, the ITC is the only leverage small, innovative companies have over multinational giants with war chests that can fund decades of protracted litigation.

I wish it was otherwise, but the patent reform legislation and Obama’s executive actions and recommendations will probably make it harder for American innovators to compete on a global scale against giants from China, Taiwan, Japan, Korea, and Europe.

And that means the next Qualcomm will have a much harder time bringing its innovations to market and surviving, let alone thriving and growing to become a $150 billion giant in its own right. After all, that was hard enough before the reforms.

Lastly, the White House Fact Sheet says that companies engaged in the smartphone patent wars are spending more on acquiring patents and litigation than on research and development. It implies that the President’s actions will help to stop that drain on the American economy.

No, it won’t.

Before he died, Steve Jobs very much regretted inviting then Google CEO Eric Schmidt to sit on Apple’s board. According to Walter Isaacson’s biography, Jobs said, “I will spend every penny of Apple's $40 billion in the bank, to right this wrong. I'm going to destroy Android, because it's a stolen product. I'm willing to go thermonuclear war on this.&quot

Had Jobs known that Schmidt would betray his trust and Google would more or less clone the iPhone, Apple wouldn’t be embroiled in those costly and distracting smartphone patent wars with Google, Motorola, Samsung, and others. And that’s the only thing that could have changed the outcome.

The White House task force on high-tech patent issues will not change a thing. One thing has absolutely nothing to do with the other. That sort of overstatement, that overreaching rhetoric that the Obama administration uses so consistently, should give you a clue as to the legitimacy of its actions.

While I wish it were otherwise, I’m afraid that the Leahy Smith America Invents Act and the President’s actions yesterday are likely to weaken the rights and the leverage of U.S. patent holders, both domestically and overseas. They will probably weaken the ability of small, innovative companies to grow and succeed over the long haul. And I believe they will ultimately harm the competitiveness of our technology industry on a global scale.