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Sunday, October 4, 2009

Patents and Marketing

The initial example somewhat distorts what patents are about. Patents were historically developed to protect inventors and to encourage them to publicly publish an invention for copycats to license to produce more of, so that society as a whole benefit.

The people wanting patent protection were the small guys, because, for thousands of years, large, well-funded companies would copy the small guy's invention, and trash the small guy's new company. After then a couple hundred years of legislations and judicial reviews, patent rights were created--to protect the small inventors.

At start of the invention protection laws, most inventions were mechanical, and nowadays, there are complaints about software patents. But, the business situation remains same in software as in mechanical. Without the software patents, the big companies would simply take the small startups invention and completely wipe them out, very quickly. This still happens all the time.

So, the initial example of the patent as a bully club against startups, should be reversed-- it is also the same, and sometimes the only possible, club the startup uses against the bullies.

Doesn’t sound like a very impressive startup if the only thing it could come up with is a copycat idea. There are unlimited numbers of ideas—let the startup work on something more productive or license the invention.

So the “bully” here wants to use the legal system. There’s a couple of other options the startup can do. It could ask to pay a license, which sounds very fair. Or it could simply breach the patent and see what the legal “bully” would do. The “bully” now has a problem. It costs starting a million dollars to launch a patent suit, and, if its patent is weak, it can easily lose the suit and pay the opposing sides attorney as well.

If it wins the suit against the startup, it still will likely lose millions due to that it can’t collect. So, most likely, the “bully” is threatening rather than fully intending to go through with this.

Suppose the patent is justified or the bully’s legal actions win, and subsequently, the startup is successful….

Microsoft lost a few patent lawsuits recently. One, it clearly infringed on a University of California patent and paid $700 million plus. The second, it infringed on some kind of calendar function in Outlook, which Microsoft acknowledges. The judgment was initially as a percentage of Outlook, but this was overturned, as Microsoft pointed out that the calendar function was only a small part of Outlook. Even Microsoft as the infringer appreciates that the patent doesn’t destroy the product, and that Microsoft is willing to pay a “license-penalty” fee for the patent’s direct contribution.

Microsoft is a good example of a bully who ran over small companies, subsequently got sued by those with patents, lost a few big ones and got tied up in the courts too long, and subsequently, Microsoft is a lot easier to deal with by the small companies with patents.

So, as I see it, another option is to counter-threat with trying to invalidate the patent, and if the “bully” proceeds with legal action, then minimize legal costs (e.g. plead no contest), and ask the Judge to quickly decide and set a license fee.

In summary, patents are legal clubs either way, and actually protect the smaller companies and startups better than harm them.

Additional information,

My recollection is that court-ordered patent royalties are typically 2 to 5% of their contribution to sales. This means, if a software feature contributed $100,000 in sales, the royalty is $2,000 to $5,000, not significant enough to destroy a product.

I'm not a lawyer and am writing based on what I recall.

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