Silicon Insider: Patent Weary

It's the first dream of every new startup company and the last hope of old, dying corporations.

It's the technology patent.

A couple weeks ago I got an e-mail from an old friend from my Forbes days Josh Kruter. He's currently in the final weeks of his MBA at Columbia University and working on a group project in a course on innovation being taught by Jeff Harris of the investment firm Warburg Pincus.

One of the source documents being used by Josh and his team is an article I wrote back in 2002 about the growing crisis in the U.S. Patent and Trademark Office.

It was a fun article to write, as I got to fly back to western Pennsylvania and tour the vast underground mine that is the repository of copies of all 7-plus million patent filings of the last two centuries (and, it is rumored, where Vice President Dick Cheney was required to hide in the days after Sept. 11, 2001.)

But it was a tough article. The heart of the piece -- entitled "The Smother of Invention" -- was that the patent office was in a growing state of crisis and was beginning to lose its legendary support of U.S. competitiveness.

In writing to me, Josh asked two questions:

Did my story still hold up five years later?

What did I think of the recent (and ongoing) patent war between Alcatel-Lucent and Microsoft over patents for MP3 technology?

I must confess that I haven't been following the patent crisis much in recent years -- which in itself is telling, as apparently no one else in the media has either. As for Microsoft vs. Alcatel, I've followed the news but have yet to write about it. So, if only to help Josh raise his grade point average, I decided to look into both. We'll take them in turn:

First, the Patent Office

For 200 years, since its founding in 1802 by President Jefferson, the U.S. Patent and Trademark Office has served the United States brilliantly and with enormous competence. Decade after decade, it was generally considered the single best run operation in the federal government. Its success came from four distinct factors, each of which the patent office managed brilliantly:

Efficiency: At a couple thousand dollars, patent filing in the United States was a bargain compared to other countries, and that in turn enabled generations of poor entrepreneurs to obtain intellectual property protection for their new ideas, and sometimes create multibillion-dollar companies.

Pendency: For most of its history, the patent office has been able to keep the time between filing and award of a patent to less than three years. This proved crucial to America's ability to rapidly evolve commercially and become history's most adaptive economy.

Quality: The patent office's examiners have long been considered the best in the world, which meant that U.S. patents were more likely to be truly new and of real value.

Protection: U.S. patent law and enforcement have consistently found the right balance between giving a short-term monopoly to inventors and not crushing all potential competition.

Combined, these four factors not only made the U.S. Patent and Trademark Office the envy of the world, but also proved to be the linchpin in making the U.S. economy the most powerful and successful in the world.

Expenses Grow

But what I discovered in the course of writing my story was that in the span of just a single decade, the 1990s, the patent office began experiencing breakdowns in each of those four key strengths. While individual patent filings had remained inexpensive, the actual cost of hiring attorneys, preparing an ironclad application and filing enough variant applications (and filing them around the world) to cover all likely competition, had now on average climbed to more than $100,000.

Meanwhile, while it still took an average of three years to earn a patent, the world had radically changed. What was fast in agrarian America of 1850 was now glacial in the digital age, when entire product generations only lasted 24 months.

Meanwhile, a comparative shortage of examiners -- thanks to budget cuts resulting from Congress skimming off 10 percent of the patent office's annual revenues in the name of "homeland security" -- had kept the operation from adding the computers and people it needed to either shorten pendency or devote more than a few days to each application.

As for protection, it was becoming increasingly apparent that the classic lone inventor didn't have a chance against giant corporations with huge legal staffs willing to spend millions filing "picket fence" patents around the original patent as to render it all but worthless. This certainly wasn't in the spirit of America's historic patent protection of the little guy.

Some Improvements Made

Five years later, what has changed?

The good news is that the disaster, or at least the paralysis, that observers feared was about to take place at the patent office never occurred. One reason it didn't was that the patent office recognized the growing crisis and implemented what it called a "21st Century Strategic Plan." At the heart of this was the hiring of 1,200 new examiners every year between now and 2012 and putting each of these new recruits through an eight-month Patent Examiner Academy.

Good news, but unfortunately little else has changed. All of those new examiners will be barely enough to keep up with the exponential increase in cluster-shot patent applications. Pendency has now slipped in many cases out to four years from filing to award; Congress is still skimming its 10 percent; and filings are as expensive as ever -- and thus even more weighted against the little guy.

Worst of all, there are growing indications that the vaunted quality of the patent office has begun to show cracks as well. You may have read over the last couple years about some bizarre and unlikely patents that managed to get through the process, ranging from an anti-gravity device that appears to violate the law of physics, to Amazon's patent for one-click online ordering. This suggests either a general diminutiveness in competence of examiners -- or, more likely, that they have too little time to investigate arcane topics.

Ultimately, and this may be the really bad news, the reason the patent office hasn't yet exploded is that its ongoing crisis may have diminished the perceived value of patents themselves. They're too slow, too expensive and too ineffective. They are increasingly seen in places like Silicon Valley as a sidelight rather than a core business strategy -- an insurance policy, basically, as in, "If nothing else, if we go out of business, our patents might serve as tripwires to anyone in the future who heads down this path -- and maybe we'll get some money out of this after all."

That's a long way from Eli Whitney and the cotton gin. In fact, I can't think of a recent Valley startup that has made intellectual property protection a central part of its business plan -- or of any VCs that still demand it.

Ultimately, is this a good thing or bad? I'd need to think about that a lot more.

A Corporate Death Foretold?

Meanwhile, to answer Josh's second question: In my experience, digging up your old core patents and suing everyone in sight is the best indicator of a dying company. Fairchild did the same thing with integrated circuit patent, as did Motorola with the microprocessor, and Texas Instruments with everything in between. In the case of TI, the company reached the point where the patent attorney's office was the company's biggest profit center.

Ultimately, TI managed (no doubt with some of that licensing money) to turn itself around and become a major player in digital signal processing. But in most cases, I suspect, Alcatel-Lucent included -- is there any company out there right now with an uglier reputation than Lucent -- this kind of behavior is symptomatic of fatal structural rot. The $1.5 billion the jury awarded to Alcatel-Lucent in February will likely, after various Microsoft countersuits, end up a fraction of that amount, be swallowed up before it ever reaches shareholders and will do nothing for Alcatel-Lucent's future.

Optimistic, forward-looking and successful companies don't have time for this nonsense, and the distractions that come with it. And, sadly, that increasingly seems to be true for patents themselves.

Columnists's Note:

On a sad note, as I was finishing this column, the wires carried the news that Kurt Vonnegut had died.

Coincidentally, when I was the editor of Forbes ASAP, just about a year before I wrote the patent story above, I worked with Vonnegut. I had asked him to write an essay for one of our "Big Issues," and he had responded with "The Trouble With Reunions," which would prove to be one of his last bylines.

Vonnegut started his career as a public relations person at General Electric, and I've always been convinced that it was this experience in the halls of high-tech corporate life that gave even his most fanciful science fiction a sense of everyday, ordinary life that is missing in many of his counterparts.

In celebration of the issue, we held a public colloquium onstage at the New School in Manhattan. The panelists were Vonnegut, Peggy Noonan, the biologist E.O. Wilson and essayist Stanley Crouch. I was the master of ceremonies. Before the event, we were to converge at the Forbes brownstone for tea and conversation.

Wilson and I shared a cab getting there. And as we climbed out in front of the Forbes building, we were met by an unforgettable sight. There, standing in profile halfway up the steps, wearing a double-breasted suit, a Borsalino hat, and smoking a cigarette -- ignoring the stunned stares of recognition, and looking in every way like the ultimate boulevardier -- was Kurt Vonnegut.

And that is how I choose to remember him.

Michael S. Malone's new book, "Bill & Dave: How Hewlett and Packard Built the World's Greatest Company," has just been published by Portfolio/Penguin.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone, once called the Boswell of Silicon Valley, is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is best-known as the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the "Silicon Insider" columnist since 2000.