JOHN SILVIA: I think the fundamental issue is the economy doesn't have the upside momentum that many firms had expected. And so they're cutting back on orders (ph).
(SOUNDBITE OF CENTRO-MATIC SONG, "ONLY IN MY DOUBLE MIND")
JACOB GOLDSTEIN, HOST:
Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
ALEX BLUMBERG, HOST:
And I'm Alex Blumberg joining you virtually over the line from San Francisco. I'm in the booth out here. Today is Tuesday, August 2. And that was chief economist of Wells Fargo Securities you heard at the top, John Silvia, talking about weak growth in manufacturing. Today on the show, mystery office buildings in a tiny town in Texas and how the patent system, at least when it comes to software and the Internet, is possibly doing the opposite of what it was intended to do.
GOLDSTEIN: Last week, Alex, you and Laura Sydell, an NPR reporter based in the Bay Area - you guys did these big stories on This American Life and All Things Considered about how the patent system has really broken down in the software business. Our podcast today is a follow-up to those stories. We will play a few clips from the This American Life story, but we're also going to hear from a few people who we haven't heard from before. And they'll explain why this broken system is such a problem and how much it's costing America.
BLUMBERG: But first, the Indicator from - well, you, Jacob Goldstein.
GOLDSTEIN: Today's PLANET MONEY Indicator, Alex, is 0.4 percent. The U.S. economy grew at an annual rate of just 0.4 percent in the first three months of this year. That's according to numbers the government released just a few days ago. This is terrifyingly slow economic growth. And it's much slower than what earlier estimates had suggested.
BLUMBERG: And this number is for GDP, gross domestic product, which is the country's total economic output. And GDP seems like this big, abstract thing. But one way to think about it is how much our country earns. And this is really essential when you hear about things like - what we've been hearing about constantly - the national debt. GDP growth is by far the most pleasant way to get out of debt trouble. Just think if you have a massive credit card bill, you can either cut back on your spending. Or if you get a huge raise at work, it's much easier to pay off the bill. So when our GDP is growing, it's like the country's getting a big raise at work. And the more your economy grows, the less you have to cut spending or raise taxes to deal with your debt.
GOLDSTEIN: And, Alex, I should say we're recording this at about 2 o'clock in the afternoon East Coast time on Tuesday. The Senate has just passed this big debt ceiling increase. And yeah, it's a big deal that the U.S. is not going to default on its debt. But I have to say, I think these GDP numbers - they came out on Friday - they would've gotten a lot more attention if all of this whole debt ceiling show hadn't have been going on in Washington. You know, they showed that GDP growth in the first quarter was much lower than expected. The preliminary number for the next three months was higher but still quite low. And overall, when you look at the big picture, it looks like economic growth this year is even slower than it was last year. So...
BLUMBERG: And last year wasn't all that hot.
GOLDSTEIN: Exactly. Like, the recovery was already weak, and now it's even weaker.
BLUMBERG: All right. Well, thanks, Jacob, for telling it like it is.
GOLDSTEIN: All right, Alex. Let's get to the show.
BLUMBERG: All right. Patents - they are so foundational to the American system that the idea is in the Constitution right there in Article 1. They are necessary to, quote, "promote the progress of science and the useful arts."
GOLDSTEIN: And, Alex, here's the basic idea of how it's supposed to work. Say you - Alex, you come up with some brilliant breakthrough.
BLUMBERG: Happens every day.
GOLDSTEIN: It happens every day. And every day, you go to the patent office. You get your patent. And anybody who wants to use your idea for the next 20 years - they have to pay you a fee. In exchange for that - in order to get that patent, you have to share your idea. You have to explain your breakthrough to the world by publicly registering your idea with the patent office. That way, the world gets the benefit of your idea. And you, Alex, get the benefit of everybody paying to use your idea.
BLUMBERG: Win-win is what the Founding...
BLUMBERG: ...It's what the Founding Fathers were all about.
GOLDSTEIN: They gave business seminars in their spare time.
BLUMBERG: Exactly. The problem is - what we're going to be talking about today - a lot of people say that this system, the patent system, when it comes to software and the Internet, is broken. And the people who make this claim the most - the people who complain the loudest about the patent system in software are the very people you would think would be profiting from software patents, software engineers. In polls, as many as 80 percent of computer programmers say the patent system hinders innovation in software. And so we're going to play you this clip from the This American Life story that I did with NPR reporter Laura Sydell. This is one of the computer programmers we talked to in the story. The clip is under a minute long.
(SOUNDBITE OF RADIO SHOW, "THIS AMERICAN LIFE")
STEPHAN BRUNNER: 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.
LAURA SYDELL, BYLINE: This is Stephan Brunner, a programmer. He said something we heard from a lot of software engineers. His software 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, yeah, that's probably right. That's probably wrong. And they just, like, write something. And it 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 a mongo - mumbojungo (ph) which nobody understands and which makes no sense from an engineering standpoint whatsoever.
BLUMBERG: Let's call it the Mongo Mumbojungo Problem.
BLUMBERG: It's connected to this larger problem, which is that software patents can be very broad. Some of the patents we looked at when we were doing our reporting - they seem to cover almost everything that people do on the Internet.
GOLDSTEIN: And, Alex, if you have a patent that broad - if you have a patent that covers almost everything people do on the Internet, you can go out and start suing Internet companies left and right. And, in fact, just in the past few months, there have been some really high-profile cases where this is exactly what's happening. And you and Laura focused on one of these really broad patents.
BLUMBERG: Right. This patent was issued in 1998. And it changed hands a bunch of times since then. Patents, we should remind people, are property. You can buy them and sell them just like you can buy and sell a piece of land. And this particular patent that we looked at in the story ended up in the hands of a company called Oasis Research, which used the patent to sue over a dozen tech companies. And the thing about Oasis Research - we couldn't talk to anyone from the company. They didn't answer the phone. We couldn't find out who owned the company, what they made or sold, whether or not they even had any employees. The one detail that was available was an address. And I'm going to play you another short clip where Laura and I actually went to that address. It was in Marshall, Texas. Our guide was a local lawyer there named Michael Smith. And he took us to the address, 104 East Houston Street, Suite 190.
(SOUNDBITE OF RADIO SHOW, "THIS AMERICAN LIFE")
MICHAEL SMITH: And here we go. Suite 190, Oasis Research, LLC.
BLUMBERG: It was late morning on a weekday, not a holiday, but the door was locked. Through the crack underneath, you can see there were no lights on inside. Marshall is a very small town, 24,000 people. 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.
GOLDSTEIN: Is this office ever occupied?
SMITH: I doubt that it is.
SYDELL: 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)
GOLDSTEIN: I know this is kind of a cliche at this point, knocking on the door of the suspected fake office...
GOLDSTEIN: ...But we'd flown a long way.
SYDELL: But I will SAY standing in that corridor was eerie. All the other doors looked exactly the same - locked, nameplates over the door, no light coming out. It was a corridor of silent, empty offices.
SMITH: Right next door to Software Rights Archive, Bulletproof Technology of Texas, Jellyfish Technology of Texas and a couple others that I recognize as plaintiffs in cases that were involved down here.
SYDELL: Are there a lot of companies like this here in East Texas?
GOLDSTEIN: And we're standing in a whole corridor of them, it seems like.
SMITH: (Laughter) Yes, this would be ground zero. Yes.
(SOUNDBITE OF MUSIC)
BLUMBERG: OK. It's me, Alex, back on the podcast again.
GOLDSTEIN: As evidenced by the fact that we no longer have the super high-tension This American Life soundtrack underneath our voices.
BLUMBERG: No, this is PLANET MONEY, baby.
GOLDSTEIN: It's just us.
BLUMBERG: It's all raw. (Laughter). So, Jacob, what we found in that corridor, with the music playing, was that a lot of those companies in that corridor were exactly like Oasis Research. And the technical term for them is a nonpracticing entity, or NPE. They are companies that don't make any products. They don't have employees, as far as we could tell. Their only business is suing companies for patent infringement.
GOLDSTEIN: And, Alex, on the This American Life episode, you and Laura dug deeply into the secrets of this patent. If you're listening to the podcast now, and you haven't heard that show, you should go listen to it. But for the rest of this podcast today, we're going to hear from two people who you and Laura talked to, Alex, but who were not on This American Life, who were not on All Things Considered. And these are people who've spent a long time figuring out the cost of these NPEs in Marshall, Texas, and around the country. And these guys say these NPEs are really affecting the high-tech industry and are ultimately hurting innovation in America.
BLUMBERG: And just to give you some numbers here, there are 2,000 patent infringement cases happening in the Eastern District of Texas alone. That's where Marshall is. For complicated historical reasons, Marshall's one of the leading court districts when it comes to patent infringement. But there are thousands more cases in other districts around the country. Like, California's a big one. Delaware's a big one. And patent infringement lawsuits are on the rise. Between 2004 and 2009, they were up 70 percent in the technology and Internet sector.
GOLDSTEIN: And the first guy we're going to hear from now is named Jim Bessen. He's an entrepreneur and a lecturer at Boston University's School of Law. And he's worked with a lot of economists to study this stuff.
BLUMBERG: And Bessen told me and Laura there are industries where the patent idea works well. In the words of the Constitution, it does promote the progress of science and the useful arts.
JAMES BESSEN: For the chemical and pharmaceutical industries, the patent system is promoting the progress. It's providing benefits that far exceed the risks of litigation. For most other industries, and in particular for software-related industries, we're finding the reverse - that beginning in the mid-'90s, the rates of litigation started soaring. About 1 percent of chemical patents get involved in a lawsuit - chemicals or pharmaceuticals. If you look at a software patent, they're four or five times as likely to be involved in a lawsuit. Well, so what's going on there? Well, you have these patents that have very vague boundaries. People want them to be vague because they can be interpreted more broadly. But, of course, that leads to uncertainty, unpredictability. And that leads to lawsuits. So it is serving as a disincentive. It's not blocking innovation. It's not preventing innovation. But it's discouraging innovation.
BLUMBERG: Bessen wanted to measure this. What is the impact of software patents on innovation? If it's discouraging them, how much? So he teamed up with a Nobel Prize-winning economist, Eric Maskin. Now, the problem with trying to measure something like this - how have software patents affected innovation? - you need a control group. You know, you need a universe without patents that you can compare to the universe we live in with software patents. And then you see which universe has cooler iPhones or whatever. Now, unfortunately, creating a parallel universe is still beyond the reach of the economics profession. But Eric Maskin discovered that, staying in our own current universe, there is a way around this problem just by looking back in history.
ERIC MASKIN: There's an interesting natural experiment. We went from a negligible number of software patents per year to about 20,000 a year by the mid-1990s and an exponential increase since then.
BLUMBERG: So the way it was - until the mid-'90s, there weren't a lot of software patents issued because the patent office tended not to issue them. For decades, the patent office considered software to be like language. Software programs were like books or articles. You could copyright them. You could still protect them. You just couldn't patent them. They weren't inventions. But then a series of court decisions changed all that and made software patents much more common.
GOLDSTEIN: So Maskin figured if patents are supposed to protect ideas and encourage companies to spend more on innovation, you'd think that in this era when we have more patents on software, we would also see companies in the industry pouring more money into innovation. You'd expect to see them spending more on research and development.
MASKIIN: But the interesting thing is that that increase in intellectual property was not accompanied by a corresponding increase in innovation. If software patents were really doing their job, you would expect that they would encourage more innovation. And they didn't. In fact, there's evidence suggesting just the opposite.
SYDELL: A lot of people would look at Silicon Valley and look at the technology world and say, how could you possibly say there's any shortage of innovation? Look at how much is happening. You know, look at Android and the iPhone and all of that. You know, you're crazy. What's wrong?
MASKIIN: Well, it's always a matter of doing the thought experiment. What would've happened had something been different? Sure, we have a lot of innovation today. And let's be thankful for that. But the natural experiments that have been conducted in the last 30 years suggests that we might have even more if intellectual property protection were relaxed a bit.
BLUMBERG: And you can see this phenomenon in action - how money that might have been used for R&D is being diverted away from it into patents. Recently, the bankrupt tech company Nortel put its 6,000 patents up for auction as part of a liquidation. A bidding war broke out for those patents between the Silicon Valley powerhouses. And Google, one of the bidders, said in press accounts that it wanted the patents purely to defend itself against lawsuits.
GOLDSTEIN: Alex, just to be clear here - so Google, they bid billions of dollars for this patent portfolio. And they wanted these patents not to make their search engine better or to make Gmail better or anything like that. They wanted the patents so they don't get sued. And what this is a sign of is this patent arms race that is going on in Silicon Valley right now, where the weapons are patents. Alex, on the show, you called this mutually assured destruction. You know, a company with a lot of patents can say, you sue me with your patents? I'll sue you back with mine.
BLUMBERG: And just to show you the size of this arms race, Google bid more than $3 billion on this patent portfolio. And it still wasn't enough. The portfolio eventually sold to Apple and a strange consortium of other tech companies, including Apple's archrival Microsoft, for $4.5 billion, which was five times the opening bid and more than double what most people were expecting. It was actually the largest patent auction in history.
GOLDSTEIN: This patent war - it's escalating now. But it's actually been going on for years and years. And Jim Bessen wanted to know, what was the long-term price tag of this war?
BESSEN: There's a technique called a stock market event study. You first look at how a stock behaves relative to the market over a long period of time. And then you look at what happens in the few days after a lawsuit is filed. And so the stock goes down - tends to go down after the lawsuit is filed. And that is a loss of wealth. And so we can actually measure how much the stock went down for reasons having to do with the filing of the lawsuit rather than for reasons of the normal market variation. We're able to separate that out. And we tally it up over these several thousand defendants. And we estimated that NPEs have resulted in the loss of half a trillion dollars of wealth of companies that they've sued.
BLUMBERG: So this is the bottom line. This is what this costs - $500 billion. And remember, these lawsuit costs don't serve any productive purpose in terms of creating or improving products. Eric Maskin, the economist, says they're essentially a tax on innovation. And it's a tax paid not to the government but to companies, like Oasis Research - these non-practicing entities who've set up shop in empty offices in Marshall, Texas. And Eric Maskin says innovation - it's the last thing we want to be taxing right now.
MASKIIN: I think the stakes are potentially huge for the United States in particular because this is a country whose competitive advantage is in innovation. We've ceased being primarily a manufacturing country. We're a country of ideas. That's what we do best. We produce new ideas, new inventions. And so if we're going to stay competitive, we want a system which encourages as many new ideas, as many good new ideas as possible. And if our patent system is working against that, that works against our very ability to compete.
(SOUNDBITE OF SONG, "ONLY IN MY DOUBLE MIND")
CENTRO-MATIC: (Singing) Calculate the trouble lines only in my double mind. Foresee the history and then follow through.
GOLDSTEIN: We'll link to the studies we talked about on the podcast today on the blog. We'll also have links to the stories you guys did on This American Life and All Things Considered. The blog, of course - npr.org/money.
BLUMBERG: As always, we're interested to hear your thoughts on this topic. Tweet us, Facebook us or - if you're still a relic from 2005 - email us at email@example.com. I'm Alex Blumberg.
GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.
(SOUNDBITE OF SONG, "ONLY IN MY DOUBLE MIND")
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