The "Tax" on Innovation

Sun has always been about innovation. Last year, we spent more than 15% of revenue on R&D. Previous R&D investment has lead to the development of the Solaris operating system, the Java programming language and most recently our CoolThreads chip-multi threading technology. With this focus on innovation, the current wave of patent cases brought by patent "pirates" or "trolls" is especially baneful as it requires us to redirect focus and resources from invention... to litigation.

For those of you who are new to this area, here's the reality. An individual, law firm or small group of investors will form a partnership or LLC to acquire a broadly written patent that can be used against the maximum number of target companies. The "plaintiff" then files suit - in many cases without any contact or notice - and usually in a location advantageous to plaintiffs. One of the current venue's of choice (and there are several) is a court located in the small town of Marshall, Texas where over 88% of jury verdicts favor the plaintiff. For Marshall, patent litigation has become an important part of the local economy. In fact, rumor has it that in the town's barbershop the "doctrine of equivalents" is a common topic of conversation. Call me "old fashioned", but I still prefer baseball.

In most of these cases, the plaintiff will be represented by an attorney who is working on a contingency basis. In other words, rather than an hourly rate, the attorney is compensated based on what is received through settlement or trial - usually this is between 30% and 50% of any recovery. Thus, there is no real cost to the plaintiff in litigating the case and plenty of upside for the attorney.

When the case is filed, the plaintiff requests an injunction as well as claims substantial damages. The company is then faced with a big decision. Does it settle to avoid the risk of a sizable judgment and the possibility that it will be prevented from shipping it's product? Or, does it fight the case in court? We always choose the latter and have invested significantly in legal resources to help us defend against these cases. But, as a shareholder, and with all respect to my colleagues, I'd rather invest in creative engineers than creative attorneys.

What I've described is a destructive perversion of the intent behind the U.S. patent system. The plaintiffs in these cases are not investing in R&D "to promote the progress of science and useful arts", nor are they adding value to society. Instead, they are using the current system to maximize lucrative settlements.

With this as backdrop, we were happy to recently host a visit to Sun by Congressman Lamar Smith. Along with Senators Hatch and Leahy, he has been a leader in the push for patent reform. In the course of our meeting, we shared our views on the need for significant changes to the current patent system, including the repeal of Sec. 271(f), limits on injunctive relief and the need to restrict damage awards to the value of the invention described in the contested patent. (Under the current system a plaintiff claiming a patent on a small, inexpensive component like a heat sink can claim damages based on the total profit for the entire product - even if it is something that contains thousands of other components.)

In the recent decision in eBay v. MercExchange, the judiciary has shown a willingness to level the patent litigation playing field. It's nice to see that the legislature now appears to be taking similar steps.

Comments:

This is really well written, and even though IANAL it made sense to me. You write like you write books for a living. Keep it up! Maybe you could offer thoughts about open source software licenses (CDDL, GPL, BSD, etc.) in future blog posts?

Posted by guest on September 14, 2006 at 10:42 AM PDT #

No offence but is that not your job. Being the lawyer, why do you have to worry about hiring engineers. In fact without them trolls you would be very bored.......

Posted by just a thought on September 14, 2006 at 12:48 PM PDT #

I'm not about to say this isn't a problem, because it clearly is, but I'd really like to see someone discuss the historical context. For instance:

1. The best-know similar precedent is the Selden patent, which claimed to preempt all automotive technology, and was clearly intended as exactly what your title calls this practice: A tax on innovation. That's clearly not the intention of the of the American Constitution's provision providing for patents.

2. An honest disagreement about priority, a botched patent approval process, and a refusal of all parties to negotiate resulted in the delay of the implementation of the Kelly/Bessemer steel-making processes for about a decade as it was impossible to implement a (licensed) plant based on either patent without violating the other party's patent. The necessary (and appropriate, I'd say) fix was for an association to purchase all the IP and form a cartel. My point, here, is that there was nothing petty about this disagreement; we can't rebuild the process without acknowledging that this will occur again, on something which turns out to be truly important.

3. James Watt was known to his contemporaries as both a truly creative inventor and a very aggressive patent litigator. I'd think it constructive to look at his practices if one was trying to determine where the boundaries of this issue lie.

Posted by Joel Dinda on September 15, 2006 at 01:23 AM PDT #

[Trackback] Patent troll is a topic that I am very passionate about. By the way, IMHO, I think Wikipedia defines the term Patent troll incorrectly. I am using a much stricter and narrower definitioin here. Anyway, I was very happy that Sun’s General Counse...

Posted by Kempton's blog on September 15, 2006 at 08:19 AM PDT #

Sun would have more credibility on this issue if they had not participated in funding The Mother of All Patent Trolls, SCO v IBM.

Posted by Bob Hahn on September 18, 2006 at 11:30 AM PDT #

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