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MICHELE NORRIS, Host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

ROBERT SIEGEL, Host:

And I'm Robert Siegel. In this part of the program, we're going to hear about patents. The patent system is so fundamental to the American way of life that our founders put it in the Constitution - to, quote, promote the useful arts and sciences. The idea is, you say to Eli Whitney, for example: Patent your cotton gin for a limited time, and no one else can use it without paying you. In exchange, you have to share your designs so others can build on them.

NORRIS: But in the world of software, patents have become legal weapons. They're being purchased by companies that don't make anything, and being used to sue companies that do. Some in the tech world call them patent trolls.

Alex Blumberg, of our Planet Money Team, and NPR's Laura Sydell have this report on a patent system that's been turned on its head.

ALEX BLUMBERG: When you talk about the patent system among techies in Silicon Valley, there's usually an audible groan.

LAURA SYDELL: I live in San Francisco. And to prove this, the other day I went down to a park called South Park around noon, where a lot of tech workers eat their lunch. I spoke with software programmers Stephan Brunner, Adam Cohn, Michael Hines(ph) and Eric Michael Ober, and the sentiment was universal.

If I say patent system, would do you say-

STEPHAN BRUNNER: I think it's just a way for lawyers to make money. And basically, it's a killer for creativity.

ADAM COHN: Complicated, broken.

MICHAEL HINES: It's basically a flim-flam game that anybody who knows how to take advantage of it, is doing.

SYDELL: If I say the word patent troll, does any company, or any entity, come to mind in particular-

COHN: Like Nathan Myhrvold, I guess, and like, whatever his company is. It has some stupid name like...

(SOUNDBITE OF LAUGHTER)

SYDELL: ...Associates, or something like that. I don't know.

The name he's searching for is Intellectual Ventures, a company founded by Nathan Myhrvold, the former chief technology officer at Microsoft.

BLUMBERG: The Wall Street Journal's law blog ran an article about IV titled "Innovative Invention Company or Giant Patent Troll-" Many other tech and law blogs have gone past the wondering stage, straight to accusations.

SYDELL: These articles talk about how IV has amassed one of the largest patent portfolios in existence, and how it's going around to technology companies demanding money to license these patents. But no one at these companies wants to talk about it.

CHRIS SACCA: There is a lot of fear about Intellectual Ventures. You don't want to make yourself a target.

BLUMBERG: This is Chris Sacca, a venture capitalist in Silicon Valley who was an early investor in companies like Twitter, FanBridge and other start-ups. He says he completely understands why his friends and colleagues wouldn't want to talk about Intellectual Ventures.

SACCA: They just said they're afraid to talk about this issue on the record. I mean, they have the potential to literally obliterate start-ups. It's such a mismatched fight that your best defensive option is security by obscurity.

NATHAN MYHRVOLD: Intellectual Ventures is a company that invests in invention.

SYDELL: This, of course, is Nathan Myhrvold. I went to talk to him and spend a day at his company. He had a very different story about what he's up to.

Are you a patent troll-

(SOUNDBITE OF LAUGHTER)

MYHRVOLD: Well, that's a term that has been used by people to mean someone they don't like who has patents. I think you would find almost anyone who stands up for their patent rights has been called a patent troll.

BLUMBERG: Intellectual Ventures, says Myhrvold, is on the side of the inventor. For example, imagine an inventor with a breakthrough idea. This inventor has a patent. But still, companies are stealing his idea. The inventor doesn't have the money or legal savvy to stop them - and that is where IV comes in. Intellectual Ventures buys this inventor's patent, and then makes sure that companies who are using the idea pay for it.

SYDELL: I asked Intellectual Ventures for an example of an inventor with a breakthrough who wasn't getting paid for it. Two separate people pointed me to the same guy.

JOE CHERNESKY: There's one story I can think of - a gentleman named Chris Crawford.

SYDELL: This is one of them, Joe Chernesky. He's a vice president at Intellectual Ventures.

CHERNESKY: The neat thing about Chris is, he had no idea how to get money for his patents. He had this great idea; these patents were immensely valuable because every technology company was adopting the technology. Yet he didn't know how to get paid. He eventually found Intellectual Ventures. So we bought those patents.

SYDELL: I wanted to talk to Chris Crawford. But when I e-mailed IV for his contact info, I got back a strange response. I was told they no longer owned his patent, and that he probably wouldn't want to talk to me because he was in the middle of litigation.

BLUMBERG: That just made us curious. So we started digging around and ended up on a five-month journey - a journey that raised a lot of questions about Intellectual Ventures, and a lot of questions about the patent system in general.

We found Chris Crawford in Clearwater, Florida. And as predicted, he never responded to us. You'll never hear from him in this story. But we were able to locate his patent.

SYDELL: Patent Number 5771354. He got it in 1998, in the relatively early days of the Internet. And the way IV explained the patent to us, Chris Crawford invented a way to upgrade the software on your home computer over the Internet - when that little box pops up and says, click here to upgrade to the new version of iTunes. That, says IV, is what Chris Crawford invented.

BLUMBERG: But when we looked at the patent, it seemed to claim a lot more than that. The name of the actual invention is, quote, an online back-up system, which the patent says makes it possible to do a bunch of stuff: software purchases, online rentals, data back-ups, information storage. The patent makes it seem like this one guy, Chris Crawford, invented a lot of the most common things we do on the Internet. Except he didn't - at least, according to the experts we talked to.

SYDELL: You're going to start by looking at the left- and right-hand screens.

SYDELL: This is David Martin, who runs a company called M-Cam. They're hired by governments, banks and businesses to assess patent quality - which they do with this fancy software program. We asked him to assess Chris Crawford's patent.

MARTIN: Now, if you would please, just click on the patent number itself.

BLUMBERG: The software program actually scans through millions of patents, and analyzes them to see if there are any overlaps.

SYDELL: An idea being patented is supposed to be non-obvious to a person of ordinary skill in the art. What that means is, you shouldn't be able to get a patent just for a common-sense, good idea. It has to be a breakthrough. In other words, we should not be seeing what we are seeing on David Martin's computer screen.

MARTIN: Five thousand, three hundred and three patents that were issued while his was being prosecuted, which covered the same material.

(SOUNDBITE OF LAUGHTER)

MARTIN: Five thousand, three hundred and three.

BLUMBERG: So that means that at the same time that Chris Crawford's patent was getting issued...

MARTIN: Only 5,303 other people were pursuing the same thing.

BLUMBERG: And when you say the same thing...

MARTIN: I mean the. same. thing.

SYDELL: David Martin may be exaggerating a little for effect. But as we looked through some of the patents that are on hisscreen, the resemblances are pretty clear. David Martin says when he first started looking into this stuff and saw all these patents that were granted for essentially the same thing...

MARTIN: We thought that would be an anomaly. And then we were told, oh no, it's not an anomaly - that happens. So that's what got us into the rabbit hole you're about to see - which is to say, well, let's see how many times that happens. And as I've testified in Congress, that happens about 30 percent of the time in U.S. patents.

BLUMBERG: That is, 30 percent of U.S. patents are essentially on things that have already been invented.

MARTIN: So for example, toast becomes the thermal refreshening of a bread product.

SYDELL: These are real patents-

MARTIN: Yes.

BLUMBERG: There's a patent on toast-

MARTIN: Yes. Thermally refreshened bread, not on toast.

SYDELL: Ladies and gentlemen, Patent Number 6080436, Bread Refreshing Method. Issued in 2000.

BLUMBERG: Both David Martin and the other patent expert we talked to said Chris Crawford's patent should never have been issued in the first place. And what's strange: For a long time, the patent office itself would have agreed with them. The patent office used to be very reluctant to issue patents for software. They thought software was more like books or articles. You could copyright it, but it wasn't an invention.

SYDELL: Then the federal court stepped in and started chipping away at this interpretation. There were a couple of big decisions - one in 1994, and another one in 1998 - that overturned the patent office completely. A flood of software patents followed. A lot of people in Silicon Valley wish that had never happened, including a very surprising group: software engineers.

BRUNNER: Well, I have to say, I actually worked on a whole bunch of patents in my career over the years. And I have to say that every single patent is nothing but crap.

SYDELL: This is Stephan Brunner, a programmer. He said something we heard from a lot of software engineers: His patents don't even make sense to him.

BRUNNER: I can't tell you for the hell of it what they're actually supposed to do and what - because I did not - the company said, we have to do a patent on this, and then they send in a lawyer. And they basically - you basically say, ah, that's probably right; that's probably wrong. And then they just like, write something that makes no sense. And I, personally, when I look at them, I'm not proud at all because most of them, again, it's just like mumbo jumbo, which nobody understands - and which makes no sense from an engineering standpoint whatsoever.

SYDELL: And I want to point out, Stephan Brunner is one of six engineers I met randomly, when I went to the park to talk to tech workers. Half of them had patents in their names that they felt shouldn't have been granted.

In polls, as many as 80 percent of software engineers say the patent system actually hinders innovation.

BLUMBERG: One problem we heard over and over: Software patents are so broad, everyone's guilty of infringement, which causes huge problems for almost anyone trying to start or grow a business on the Internet. Again, Chris Sacca, the investor you heard from earlier, who helped start lots of companies, including Twitter.

SACCA: We're at a point in the state of intellectual property where existing patents probably cover every single behavior that's happening on the Internet and our mobile phones today. So I have no doubt that the average Silicon Valley start-up, no matter how truly innovative they are, I have no doubt that aspects of whatever they're doing violate patents that are out there right now. And that's what's fundamentally broken about this system right now.

BLUMBERG: And this brings us back to patent 5771354, Chris Crawford's patent, the patent Intellectual Ventures pointed us to as an example of how they encourage innovation. This patent also seems to cover a big chunk of what happens on the Internet. And if you have a patent on the Internet, you can sue a lot of people - make a lot of money.

SYDELL: And in fact, that's what's happening with Chris Crawford's patent. Intellectual Ventures sold it to another company, a company called Oasis Research. Less than a month later, Oasis Research used the patent to sue 16 different tech companies - companies like Rackspace, Go Daddy and AT companies that do cloud storage.

(SOUNDBITE OF ANSWERING MACHINE)

SYDELL: I called the number on Oasis's website numerous times, but an actual human never picked up.

BLUMBERG: There was hardly any public information about Oasis Research, minimal corporate filings; no way to know who owned it, how many employees it had, if it even had employees at all. One of the few details that was available: an address in Marshall, Texas - 104 East Houston Street, Suite 190.

MICHAEL SMITH: Right now, we're going into the first floor of the Baxter Building, which is 104 East Houston.

SYDELL: This is Michael Smith. He's an attorney in Marshall, Texas, who does mostly patent cases. He agreed to show us the offices of Oasis Research. They were in a nondescript, two-story building on the town's main square. He led us into a narrow corridor lined with doors.

SMITH: And here we go. Suite 190, Oasis Research, LLC.

BLUMBERG: The door was locked and through the crack underneath, you could see there were no lights on inside.

SMITH: I know they're a plaintiff...

BLUMBERG: Marshall is a very small town. Michael was born and raised here, so we started quizzing him about Oasis.

SYDELL: Does it have any employees that you know about-

SMITH: Not that I know of.

SYDELL: Have you ever seen any people coming in and out of that office-

SMITH: No, I haven't.

BLUMBERG: Is this office ever occupied-

SMITH: I doubt that it is.

SYDELL: Let's - let's - if you don't mind, I'm going to knock on the door and just see if there's anyone here today.

(SOUNDBITE OF KNOCKING ON DOOR)

SYDELL: Nothing.

Michael Smith told us a lot of companies in this corridor were the same as Oasis. They were here to sue other companies for patent infringement.

BLUMBERG: And he said that right now, there are 2,000 patent cases going on in just the Eastern District of Texas alone. Something big is going on here, and we had a lot of questions for Intellectual Ventures.

(SOUNDBITE OF MUSIC)

SIEGEL: In just a moment, we'll hear some of those questions put to Intellectual Ventures, when ALL THINGS CONSIDERED continues.

(SOUNDBITE OF MUSIC)

NORRIS: From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

SIEGEL: And I'm Robert Siegel. We return now to east Texas, to the door of a company that's at the center of a mystery. We're there hoping to understand how the American patent system got turned upside down. As we heard earlier, opinion of the system is so low in Silicon Valley that software programmers describe it using words like broken, a killer for creativity, a flim-flam game. To explain why, here's NPR's Laura Sydell and Planet Money's Alex Blumberg.

BLUMBERG: To review the facts, Intellectual Ventures promotes itself as a company that helps inventors by making sure they get paid for their patented inventions. Remember, the idea of patents is so important to the American system that it's mentioned in the Constitution.

SYDELL: IV pointed us to an inventor it claimed to have helped, a guy named Chris Crawford. Crawford's patent was for a way to upgrade software over the Internet and store things online, or in the cloud.

BLUMBERG: But when we tried to reach Crawford, we couldn't. It turned out, Intellectual Ventures had sold his patent to a company, Oasis Research, which was in the midst of suing 16 different tech companies with Crawford's patent.

SYDELL: Pretty much the only publicly available information about Oasis was an address in the tiny town of Marshall, Texas. But when we went there, it was completely vacant, just a sign on the door, no employees.

(SOUNDBITE OF KNOCKING ON DOOR)

SYDELL: Nothing.

In desperation, I tracked down Oasis's lawyer, John Demeris, at a conference in San Francisco.

JOHN DEMERIS: I can't talk about folks I represent.

SYDELL: Do you know who owns Oasis Research...

DEMERIS: Yes, I do.

SYDELL: ...to reach them-

DEMERIS: Yes. But I'm not going to tell you.

SYDELL: You literally, like, hear that they're bringing a suit, and you literally can't tell us who owns the company-

DEMERIS: I'm not going to answer questions about pending lawsuits for you.

SYDELL: Is there any chance, at a later date, of actually talking to you more generally-

DEMERIS: I don't think so, but thanks for asking - although I love NPR, and I love the work that you guys do.

BLUMBERG: When someone says I know, but I'm not going to tell you, it just makes you want to find out more.

SYDELL: So in search of answers, we went to an intellectual property lawyer named Tom Ewing, who has made a business of tracking Intellectual Ventures.

TOM EWING: I heard - for the longest time, when they first started - that they hid everything in shell companies, and no one could ever find it. And I kept hearing that so much. And it irritated me because I figured that I could, if I just sat down and started looking. So I did.

SYDELL: How many shell companies do you personally believe that Intellectual Ventures has, based on your research-

EWING: Very close to 1,300.

SYDELL: Ewing said Oasis probably wasn't a shell company of Intellectual Ventures.

BLUMBERG: But, he said, there's evidence that Intellectual Ventures might be getting a cut of whatever money Oasis receives from its lawsuits. He shows us a document that's called a certification of interested parties. The court in Texas required that Oasis list all the entities with a financial stake in the outcome of the case. Among the typical parties that most people list - the plaintiff, the defendants, the attorneys - Oasis also lists Intellectual Ventures.

SYDELL: So we went back to Intellectual Ventures to talk to Peter Detkin, one of the company's founders. We showed Detkin that court document from the Oasis case, listing Intellectual Ventures as an interested party.

PETER DETKIN: OK, and it does list Intellectual Ventures as an interested party. I see that.

BLUMBERG: And you don't know why, in this instance, you're listed-

DETKIN: I believe it's because we likely have a back-end arrangement here.

BLUMBERG: What does a back-end deal mean-

DETKIN: We settle for some amount of money up front, and we get some percentage of the royalty stream down the road, that is generated from the monetization of these assets.

BLUMBERG: Just to spell this out, Peter Detkin is saying it's likely that Intellectual Ventures sold this patent to what many people would call a patent troll - a company without employees, that doesn't make anything, that just sues people. And Intellectual Ventures is taking a cut of whatever money Oasis generates with its patent from its lawsuits.

SYDELL: But here's the thing: When Nathan Myhrvold talks to people in Silicon Valley, he says he's the solution to companies like Oasis.

SACCA: I think I saw Nathan, for the first time, present the idea of Intellectual Ventures in either the fall of 2007 or the spring of 2008.

BLUMBERG: Investor Chris Sacca says that at this meeting, Nathan Myhrvold pitched the idea of Intellectual Ventures as a way to defend against the Oasis Researches of the world. Companies could buy access to Intellectual Venture's huge patent hoard, and they'd be covered no matter what technology they were using. It was a way for companies to buy protection.

SACCA: They pay administrative fees ranging from the tens of thousands to the millions and millions of dollars, all into this entity to kind of buy themselves insurance that protects them from being sued by any harmful, you know, malevolent outsiders.

SYDELL: But to Chris Sacca, there's an implication in there. If you don't join us, who knows what'll happen- It reminds him of the business practices of another organization.

SACCA: A Mafia-style shakedown, where somebody comes in the front door of your building and says, it'd be a shame if this place burned down. I know the neighborhood really well, and I can make sure that doesn't happen; and saying, pay us up. When I've seen Nathan speak publicly about this, and when I've seen spokespeople from Intellectual Ventures, they constantly remind us that they, themselves, don't bring lawsuits, that they're a defensive player. But the truth is that the threat of their patent arsenal can't actually be realized. It can't be taken seriously unless they have that offensive posture, unless they're willing to assert those patents. And so it's this very delicate balancing act that is quite reminiscent of scenes you see in movies, when the Mafia comes to visit your butcher shop. A production scheme isn't that credible unless some butcher shops burn down now and then.

BLUMBERG: We told Intellectual Ventures that Chris Sacca compared their business to a Mafia shakedown. And in an email, Peter Detkin called that ridiculous and offensive. He went on to say, quote: We're a disruptive company that's providing a way for patent holders to recognize value - recognize value means make money. He goes on: That, obviously, makes people uncomfortable, but no amount of name-calling changes the fact that ideas have value.

SYDELL: So do patents. All the big tech companies have started amassing troves of them - not to build anything, but to defend themselves. If a company's patent hoard is big enough, it can say, essentially: If you try to sue me with your patents, I'll sue you with mine.

BLUMBERG: It is the old mutually assured destruction - except instead of arsenals of nuclear weapons, it's arsenals of patents. And to show how serious it's become, consider this.

SYDELL: In early July, the bankrupt tech company Nortel put its 6,000 patents up for auction as part of a liquidation. A bidding war broke out between the Silicon Valley powerhouses. Google said in press accounts that it wanted the patents purely to defend against lawsuits, and it was willing to spend over $3 billion to get them. But that wasn't enough. The portfolio eventually sold to an unusual combination of companies including Apple and Microsoft. The price tag, $4.5 billion, more than double what most people involved were expecting - the largest patent auction in history.

BLUMBERG: Think of that - $4.5 billion in patents that these companies almost certainly don't want for their technical secrets. That $4.5 billion won't bring new products to the shelves, won't open up new factories that can hire people who need jobs. It's $4.5 billion that adds to the price of every product these companies sell you; $4.5 billion that's essentially wasted, buying arms for an ongoing patent war. The big companies - Google, Apple, Microsoft - will probably survive this war. The likely casualties: the companies out there now that no one's ever heard of, that could one day take their place. I'm Alex Blumberg.

SYDELL: And I'm Laura Sydell, NPR News.

(SOUNDBITE OF MUSIC)

NORRIS: You're listening to ALL THINGS CONSIDERED from NPR News.

(SOUNDBITE OF MUSIC)

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