Intellectual Ventures wants to define itself before someone else does. It’s been called a troll, a renegade, just another stop on shakedown street. Now, however, Nathan Myhrvold has launched a round of publicity that includes batteries from the New York Times (blog & article) and a single shot from the Harvard Business Review. Myrhvold would have his readers believe that we are standing on the edge of a capital market for invention that will unleash and remunerate the full creative power of our economy, and Intelligent Ventures is just the firm to launch it.
Sometimes, however, a troll is just a troll. But Myhrvold is right. He’s not just a troll. Myhrvold’s ambition is greater than that. He’s planning an intellectual property cartel, and policy makers would be well-advised to monitor his project.
Myhrvold had the good fortune to work closely with Steve Lohr of the New York Times to publicize his manifesto in the HBR and share his vision. Lohr provides a patient and adulating witness to the quirky polymath. With an enterprise so shrouded in secrecy, Lohr understands that Myhrvold won’t just speak with anyone and chooses to reserve judgment and ingratiate himself with him: “white hat or black hat, Intellectual Ventures is growing rapidly and becoming a major force in the marketplace.” Lohr goes further, however, and instills the underdog spirit in Myhrvold, who exclaims, “We have to be successful,” following which Lohr warns us that the “issues surrounding Intellectual Ventures, viewed broadly, are the ground rules and incentives for innovation.” Josh Lerner, an HBS economist and patent expert, speaks up in the next sentence and says, “how this plays out will be crucial to the American economy.” Could Myrhvold’s success possibly be tied to answering crucial questions about the ground rules and incentives for innovation in the American economy? Lohr’s thoughtful organization might have you think so, and Lerner’s quote would seemingly substantiate it.
Maybe Lohr was uncomfortable with the persona he had attributed to Myhrvold, for he would couple his article with an early-morning blog post on Bits. While his print subscribers drank deeply of his David & Goliath – styled allegory on patent-law, he quietly published a clarification of the patent litigation dilemma. Lohr frames the next phase of IV in terms of solving the free-rider problem. The label is interesting for two reasons. First, it implicitly says what it is not. For example, it is not greenmail, as Jim Huston, a former licensing and patent executive at Intel, suggested in a 2006 Business Week interview: “If you don’t invest, you’re our No. 1 target.” Second, it suggests that there must be a simple solution to an unacceptable practice. Afterall, we’ve all heard about free-riders.
Intellectual Venture’s limited partners invested to protect themselves from trolls. If Intellectual Ventures can buy up loose patents, then the LPs have a quasi-insurance policy against trolls, who could just as easily, though more threateningly, buy those patents. Myrhvold initially called it a defense fund, almost a patent pool. More money means more insurance, but there’s a quirk. It may require litigation to work.
Though litigation may make Intellectual Ventures look like a troll, be assured, it’s not. Myhrvold claims to have only a reluctant interest in litigation. “It’s a stupid and inefficient way to resolve disputes, but in a polarized world, there will be litigation,” claims Myhrvold. It’s necessary, however, to solve the free rider problem. Some people have paid into the defense fund, others haven’t. IV’s hands are tied. They have to sue, so they can protect the interests of their initial investors. It’s their fiduciary duty.
The solution: bring new members into the Intellectual Ventures project. Litigation, or the threat of litigation, Myhrvold believes, will encourage others to join. As they join, he can manage the free rider problem and assure appropriate and legal access to the trove of intellectual property already collected, thus demonstrating the value of their initial investors’ decision to work with them, while creating a market for invention capital – a market for eureka. “Our licensing task is to go from dozens of companies to thousands,” says Myhrvold.
Myhrvold’s vision would solve the free-rider problem, but it does not mean Intellectual Ventures is not a troll. Lohr mistakenly considers the free-rider problem in isolation. Intellectual Ventures does not have a free-rider problem in the vein of a public good. It’s not the case of a shipping association that has financed and constructed a lighthouse for their benefit, but may inadvertently serve that of the brigands, castaways and competitors who happen along. Lohr’s free-rider problem exists only because Intellectual Ventures has organized a Non-Practicing Entity to collect intellectual property with the intention of monetizing it for their limited partners. The free-rider problem in this case is that which is exploited by a troll.
It wouldn’t be wrong to just say troll, but Intellectual Ventures seems to be more than that. Myhrvold’s proposal would create a troll quite unlike anything that we have seen before – a troll with a cartel-twist: an intellectual property cartel. With “thousands of members” Myrhvold would have an agreement among competing firms to coordinate prices on a vast holding of intellectual property to the disadvantage of non-members. Patents are monopolies, so non-members will have no substitutes. Its alarming size would give it substantial reach in the intellectual property market and engender a network-effect, which would cultivate market power and make membership more valuable on a per-patent-basis as it grows. The problem with this isn’t the idea of patents. The problem is the power that an intellectual property cartel would have.
Intellectual Ventures would increasingly intersect with the interests and inventions of others. When it would, it would find itself better capitalized and equipped to pursue a claim. With growing resources, Intellectual Ventures would be able to take more risks with litigation, actual or threatened. A claim, for example, may be weak, but their credible ability to marshal legal action may force concessions and settlements where none may be merited. Because of the network-effect and the lack of substitutes, settlements and membership will become more costly on a per-patent basis. Moreover, with imperfect information on the scope and character of Intellectual Ventures’ holdings, it may only take a well-phrased bluff to induce a target into membership.
What happens in this model? What is the consequence of an intellectual property cartel? It raises the price of innovation. It puts smaller firms at a disadvantage. And it places us in a world where Non-Practicing Entities can lay in wait, as a hunter in a blind, lash out without warning and stifle the work of companies that may actually be organized to accomplish something, such as provide goods or services, with their efforts. Patents aren’t bad, but these outcomes are.
—part of the quotestream around IV—
If I appear to be a total milquetoast and I say I’ll never [sue], then people will rip me off totally…I say, ‘I can’t afford to sue you on all of these, and you can’t afford to defend on all these.’
—Nathan Myhrvold: WSJ 2008
You have a set of people who are used to getting something for free, and they are some of the wealthiest companies on earth. I was there. I was in the meetings. This is they way this business thinks about it.
Today invention is an area that people view as too illiquid, too uncertain, and too risky, so that nobody wants to invest in it. The world has shown that if you provide capital and expertise to an area that is starved for capital and expertise.
—Nathan Myhrvold, on corporate respect for patents, BW 2006. Izhar Armony, a partner at Charles River Ventures, would say, “I think that Nathan is on to something really good and important. We share a common vision of thinking of [intellectual property] as an emerging asset class.”
The appeal is twofold: the opportunity to interact with a diverse group of thinkers purely for the sake of invention, and the efficiency with which IV translates imagination into intellectual capital.
—Dennis Rivet, on working at Nathan Myhrvold’s Intellectual Ventures, which started as aPatent Defense Fund against trolls: BW 2006.
Stilltitled 
14 comments
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2 March 2010 at 1:41 am
Natanael L
I don’t even want to know what could happen if ACTA is passed internationally and IV goes international as well.
I’d move to the moon (probably using pirated rockets :).
5 March 2010 at 9:55 pm
stilltitled
Thanks for visiting. The issue is near and dear to my heart. I can’t say that I have the solution, but fortunately, a lot of people appear to be paying attention and raising the issue to a level of thoughtful discussion. And it’s discussion like this that will help us fix the problem.
Separately, did you see this quote on the social value of patents from Eric Von Hippel
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18 March 2010 at 3:19 pm
Dale B. Halling
There are a couple of errors in this post that need to be corrected. You state that “Patents are monopolies, so non-members will have no substitutes.” First patents are not monopolies, as I explain below. Second is the statement that there are no substitutes. Ask any practicing patent attorney and they will tell you that there is always a design around for any patent.
Monopoly: According to Wikipedia “in economics, a government-granted monopoly (also called a “de jure monopoly”) is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement.” Alternatively, Wikipedia defines “a legal monopoly, statutory monopoly, or de jure monopoly is a monopoly that is protected by law from competition. A statutory monopoly may take the form of a government monopoly where the state owns the particular means of production or government-granted monopoly where a private interest is protected from competition such as being granted exclusive rights to offer a particular service in a specific region while agreeing to have their policies and prices regulated.” Patents are government granted (legal, statutory) so this is appropriate definition. However a patent does not provide a “private individual or firm” the exclusive right to offer a good or service. Patent are not monopolies, they are property rights.
There are some economists that argue that all property rights provides some monopoly power. This definition of a monopoly is inconsistent with the historical definition of a monopoly and becomes a circular argument that and provides no useful insights. Economists who adhere to the point of view that property rights confer monopoly power are pushing a socialist political agenda instead of acting like a scientist trying to understand the economy.
NPEs
The post seems to imply that these companies that aggregate patents are a bad thing for our economy.
From an economic point of view NPEs are the beginning of a secondary market in patents. Most of these companies got their start in the failed companies of the dot.com bust. These patent investing companies bought the patents of failed dot.com companies. This reduces the cost and the risk associated with R&D. The VC’s I knew were going to let these patents expire, resulting in zero return to the investors. Patent investing companies should not be vilified, but appreciated for the valuable secondary market they are creating. Like all new markets, the pioneers took enormous risks but also paid very little for the assets they acquired. Their success will encourage other entrepreneurs driving up the prices for patents (excess R&D). This will reduce the cost and risk associated with R&D, which will result in more investment in high technology start-up companies.
Vilifying patent investment companies is like vilifying investors in the physical assets of failed enterprises. These investors recycle assets and make them part of the productive economy again. While it is sad to see a business fail, failure is part of the innovation process. Putting the assets of a failed enterprise back to work as soon as possible would be considered a humanitarian effort if performed by a non-profit. However it is just as valuable or more valuable to the economy when done by a for-profit enterprise.
Dale B. Halling, Author of the “Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation.” http://www.amazon.com/Decline-Fall-American-Entrepreneur-Regulations/dp/1439261369/ref=sr_1_1?ie=UTF8&s=books&qid=1262124667&sr=8-1
18 March 2010 at 5:27 pm
stilltitled
Dale,
Thanks for your thoughtful response. I’m grateful for your view on patents and the role that NPEs may play in the economy. We may differ in some respects, but I share your enthusiasm for intellectual property and believe that patents are an important part of our economic system.
First, I agree. Patents provide property rights. They can be bought and sold just as one might buy or sell real estate or investment securities. And the examples of real estate and investment securities, probably don’t provide, as you define monopoly, “the exclusive right to offer a good or service.” But if that is the definition of monopoly, I don’t understand how a patent is not a monopoly.
Your argument rests on a single claim and a suggestion. First, you appear to claim that a patent does not convey an exclusive set of rights to a patent-holder. If there are no exclusive rights, then there is no monopoly. This would appear to fly in the face of the definition of a patent. After all, do patents not convey the exclusive right to provide a good? No. And that implies that patents satisfy your definition of a monopoly: “the exclusive right to offer a good or service.” Therefore, patents provide a monopoly, albeit temporary, to the patent-holder.
You suggest that a position other than yours amounts to “pushing a socialist political agenda.” I appreciate the rhetorical sleight of hand. Start with a definition of monopolies. Call patents property rights, not monopolies. And then suggest that “there are economists” and others of ill-repute who would say, “all property rights provides [sic] some monopoly power.” It’s an appeal to common practice, followed by a false dilemma, cinched by an ad hominem and coupled with a straw man. I see its emotional appeal, but it doesn’t help me understand economists, socialism, or the law.
You are right to see that I am wary of NPEs. To that end, I am very interested in learning more about their role in the economy. I too have seen many of the origin stories that you cite, and it’s easy to stitch together a narrative of struggle against the odds, resulting in a Galtian mastery of the circumstances. Indeed, your efforts in this regard did not go unnoticed when I read that the work of NPEs “would be considered a humanitarian effort if performed by a non-profit.” It dovetails nicely with your message and further embellishes the creation myth, but it does not support your major claim in this section: that NPEs reduce the cost and risk associated with R&D. Indeed, but for the naked appeal of the origin stories that precede it, this claim is supported by a single, wistful remark: “success will encourage other entrepreneurs driving up the prices for patents.” While this statement may be desirable, it does not follow that it will “reduce the cost and risk associated with R&D.”
What is clear, however, is the controversy around NPEs, the patent system, and the economic and cultural returns from innovation. I don’t pretend to have the answers, but I am very interested in the discussion. It’s rooted in a rich history that I am certain you appreciate, with ancestors in the Licensing Act of 17th century England, our own constitution, the Patent Act of 1790, among other conventions and agreements. As you note, it’s critical to consider the history and the consequences of our present condition and any positions we may choose to adopt. I couldn’t agree more.
18 March 2010 at 6:31 pm
Natanael L
“Second is the statement that there are no substitutes. Ask any practicing patent attorney and they will tell you that there is always a design around for any patent.”
> Have you seen the the video streaming patent? http://w2.eff.org/patent/wanted/patent.php?p=acacia
Just having media that can be used as if it was played on a VCR (play, pause, rewind, etc) and playing it over any kind of network is a violation of the patent…
“However a patent does not provide a “private individual or firm” the exclusive right to offer a good or service.”
> How doesn’t it? While that video streaming patent was still valid, nobody else could stream video without paying or risking being sued. I don’t care if they just might not be able to do it themselves because of some other patent or because they just ain’t using it themselves, they still have the legal power to determine who can do what.
“Patent are not monopolies, they are property rights.”
> If those rights give you monopolistic rights, they are monopolies. If a goverment decided that it would sell exclusive rights to operate in certain ways (or in any way) in certain businesses as patents are sold, would you still argue that they are property rights rather then monopoly rights?
Surprise surprise, this is exactly what patents do. I don’t care if patents are property or not. Also, the word “rights” should be banned in the context, exclusivity is the right word.
“There are some economists that argue that all property rights provides some monopoly power. This definition of a monopoly is inconsistent with the historical definition of a monopoly”
> How? Besides, even if it were inconsistent words are redefined all the time. You should know that.
“and becomes a circular argument that and provides no useful insights.”
> I don’t see you providing any evidence for anything else.
“Economists who adhere to the point of view that property rights confer monopoly power are pushing a socialist political agenda instead of acting like a scientist trying to understand the economy.”
> Socialist agenda? Your view: People who call patents monopolies imply that monopolies are bad. People who imply that monopolies are bad thinks that information, etc, should be free. People who thinks that information, etc, should be free thinks that everything should be evenly distributed in a fair way in the society. You think that they are evil. Whoa. (No, I’m not socialist. Just to make it clear.)
Who is denying science here, really? WERE IS THE EVIDENCE that patents do any good!?
“NPEs – The post seems to imply that these companies that aggregate patents are a bad thing for our economy.”
> Of course.
“From an economic point of view NPEs are the beginning of a secondary market in patents.”
> Why is this needed?
“Most of these companies got their start in the failed companies of the dot.com bust. These patent investing companies bought the patents of failed dot.com companies.”
> They failed for a reason. Their business didn’t work. So if their business didn’t work even if they had patents, those patents didn’t do any good. Why should anything happen but revocation? Why should it be possible to buy the exclusive right to do something that the first person failed with? Why shouldn’t everybody be allowed to try?
“This reduces the cost and the risk associated with R&D.”
> For whom? The one that gets the first patent and know they can sell them afterwards if the company fail? How much money can be recovered this way? It’s way too little and it does too much harm to be allowed.
“The VC’s I knew were going to let these patents expire, resulting in zero return to the investors.”
> The companies they invested in fail. Why should they be able to make money on selling the exclusive rights that the company had? Why not just sell the physical stuff?
“Patent investing companies should not be vilified, but appreciated for the valuable secondary market they are creating.”
> I will “make vicious and defamatory statements about” anybody I think is bad (if I believe that the statements are true, of course). They are not creating a valuable secondary market. They are creating a secondary market that does as much harm as any black market.
“Like all new markets, the pioneers took enormous risks but also paid very little for the assets they acquired.”
> You mean the patentees that the VC’s funded?
“Their success will encourage other entrepreneurs driving up the prices for patents (excess R&D).”
> Their success has nothing to do with NPE’s. High patents prices means nothing, it only encourages people to write more patent applications. Do you really think money makes people invent new useful things? Haven’t you ever seen any bad patent that were written just for the sake of trying to make money on suing?
“This will reduce the cost and risk associated with R&D, which will result in more investment in high technology start-up companies.”
> No, it will increase the risk for everybody that can get sued by NPE’s for doing stuff that old failed companies patentet once upon a time. It won’t increase the investment in anything by anybody that don’t have the financial muscles to fight a patent claim.
“Vilifying patent investment companies is like vilifying investors in the physical assets of failed enterprises.”
> Why? They just buy physical property. They don’t try to enforce the exclusive right to send video over any network or things like it.
“These investors recycle assets and make them part of the productive economy again.”
> Recycle? Maybe. Productive? ********!? Name anybody who has bought a patent from a company that failed company that really did new innovative things, where that patent allowed the person to make what he wanted while being able to defend himself against pure trolls who was trying to mimic every move he did, using the patent.
Then I can give you 10x the number of names of people who were sued by pure trolls that awsn’t trying to do anything but suing for money.
“While it is sad to see a business fail, failure is part of the innovation process.”
> Huh? No, that’s “creative destruction”/”progress”/”life”/””
“Putting the assets of a failed enterprise back to work as soon as possible would be considered a humanitarian effort if performed by a non-profit. However it is just as valuable or more valuable to the economy when done by a for-profit enterprise.”
> Yeah, such as providing poor people with chairs, etc. Others who just want to make money on exclusive rights that belonged to a company that failed despite them is considered the opposite.
You still can’t just compare patents with things like chairs. I don’t care they are both property. One is well defined and is property for a reason that makes sense (keeping people from fighting over who can do what), the other is made up recently as an financial incentive to make new things. It should not be considered property, ever.
19 March 2010 at 4:54 pm
stilltitled
Natanael,
Thanks for stepping in here and providing such a vigorous response. On the subject, I thought you might appreciate this quote from Lord Macaulay on the role of monopolies with copyright. The same principles would apply to patents…
19 March 2010 at 5:37 pm
Natanael L
@stilltitled: Thanks for reading my comments, and thanks for the quote.
I do agree that authors and creators should have *some* rights over what they make, but the kind of monopolies there are today.
I want to be able to put my name on something I make and know it stays, but anything that lets you to halt innovation is just evil.
A system that is designed to promote innovation should do just that. But today, that’s not what the systems are doing.
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