Patent Wars And Their Effect On Your Wallet

By Tim Parker | August 10, 2011 AAA
Patent Wars And Their Effect On Your Wallet

In 1999, a group of computer programmers were looking to be the next big company rising out of the dot com days in Silicon Valley. While they were looking for their idea, one of the programmers had just welcomed a new child to the family. That sparked an idea. What if photos could be placed on a website where anybody could view the pictures?

This idea was the birth of a new company called FotoTime. After long nights and weekends programming and building, this group of programmers was able to quit their full time jobs and make FotoTime their full time job. In 2008, they received a letter accusing them of violating three existing patents and to contact an attorney to arrange a settlement.

The group hadn't worried about violating any patents because the site was developed 100% internally. They researched the lawsuit and found that 130 companies were named along with FotoTime. Yahoo! (who owns Flickr) Shutterfly and Photobucket were among the names.

The company listed as a plaintiff in the lawsuit was FotoMedia, a company with no website and no developed product that competed with FotoTime or any of the other 130 companies. When FotoTime asked the company the nature of the infringement, they wouldn't give them an answer. In the end, FotoTime settled with FotoMedia (For more on patents, check out Patents Are Assets, So Learn How To Value Them.)

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The story goes deeper. FotoMedia purchased the patents from David Rose who invented photo sharing technology in the mid 90s. Rose expected FotoMedia to develop the technology into something that would serve society. Instead, they used the patents as a way to make money by suing hundreds of companies. This practice is so widespread in Silicon Valley that companies like FotoMedia are referred to as "patent trolls".

High Profile
In 2004, a Harvard sophomore computer science major created a website that allowed people to join online communities to study for tests and later create social connections. The site, called TheFacebook, debuted at Harvard. As the site began to receive a following, students Cameron Winklevoss, Tyler Winklevoss and Divya Narendra accused its founder, Mark Zuckerburg, of promising to develop a similar website for them. Instead, he created a competing product for himself.

In 2008, the company now just called Facebook settled the lawsuit for $65 million to be split between the three former Harvard students in exchange for no further action being taken against Facebook. Later, the Winklevoss brothers (the third plaintiff accepted the settlement) said that Zuckerberg misrepresented the value of Facebook and that the amount was too low. In 2011, after numerous court challenges, the brothers agreed to drop the suit after a final court rejected the claim.

Although Facebook is the target of numerous patent infringement suits, they are known to protect their property just as vigorously. In 2010, they filed suit against parody site Lamebook that uses the same colors as Facebook. In another 2010 lawsuit, they sued teachbook.com for using "book" in their company branding. (For other examples of fallen business relationships, read Corporate Partnerships That Went Sour.)

A Lesser Known Case
NPR reports that Patent #6080436 is a patent by Chris Crawford. The patent is simply for "an online backup system". This technology has 5,000 other patents registered for the exact same thing. Chris Crawford sold this patent to a company that owns more than 30,000 patents and claims to represent the rights of inventors. This company, Intellectual Ventures, known in Silicon Valley as a patent troll, sold this patent to Oasis Research who is suing companies like GoDaddy and AT&T for patent infringement claiming that the products developed by these companies violated Crawford's patent.

Implications to the Consumer
Surprisingly, 80% of all computer programmers and Silicon Valley executives don't like the patent system. They claim that the system allows companies like Oasis Research and Intellectual Ventures to sue companies based on overly general patents.

According to executives, nearly every action possible on the internet is patented which means that every new technological invention is subject to a lawsuit, and it's nearly impossible to find a tech company that isn't being sued. This causes small innovative startups to close their doors and technological advancements to be delayed or permanently shelved. The amount of extra money that is priced into each new product to cover these lawsuits is substantial. The consumer doesn't realize that a significant portion of the cost of gadgets, medical therapies and some services are to cover the costs of patent litigation and compliance.

A cold war of patents has developed. Companies are now amassing as many patents as they can to protect themselves from lawsuits. Although 30% of all patents are for ideas already invented, even these patents allow companies to say, "If you sue me for patent infringement, I'll use my patents to sue you."

Noted entrepreneur and Dallas Mavericks owner Mark Cuban believes that jobs are being lost due to patent wars. "Every technology company I have is getting hit by patent lawsuits," said Cuban. "Between having to pay our lawyers a lot of money to review each, to increasing insurance rates and settlement costs because we can't afford to pay to fight the nonsense, it's an enormous expense. So much so that money that would have gone to new hires to improve and sell the product has to be saved to pay to deal with this."

The Bottom Line
According to many executives, the patent laws are broken. Not only does this happen with Silicon Valley companies, it happens in all sectors of the economy. How many lifesaving medical advancements are being kept from the market because of these patent trolls? How much money does the average consumer pay as their share of patent litigation on products that they purchase? Industry executives and even some inventors are asking questions like these to prove to argue that the patent system does the opposite of what it was meant to do and that is to make sure that real people and real companies are compensated for their work that makes the world a better place. (To identify the importance of patents to innovation, see The Most Innovative Companies.)

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