Caveat Lector (Let the Reader Beware).

As we noted in our last post, patents have become the topic du jour for business commentators and leading media outlets.  The opinions continue to flow, and one of the notable entries came from Vivek Wadhwa, a fellow at Stanford’s Rock Center for Corporate Governance, who published a recent piece on theWashington Post Op/Ed page (Where are the Jobs? Ask the Patent Trolls).

The good news is that the patent market and its current shortcomings are stimulating a lot of ideas.  The bad news is that so many of those ideas are fundamentally misguided.

Wadhwa makes some good observations about how the growing cost of patent litigation is diverting capital from corporate R&D, and he argues that patents should be more rigorously analyzed and narrowly defined.  He’s right.  The number of vaguely worded patents that overlap other issued IP has indeed allowed some NPEs and other patent owners to assert arguably low-quality assets with a high degree of legal success.

But the rest of his article illustrates just how poorly understood the patent market still is, even by sophisticated observers.  For example, Wadhwa claims that patents no longer foster innovation (or stimulate job creation) because NPEs have incited “an arms race of sorts … that is sapping billions out of the economy and crushing tech startups.”  As examples, he points to the $12.5 billion Google spent on Motorola Mobility (ignoring the fact that MMI is a successful, established operating company, not just a patent portfolio), the Apple/Microsoft consortium that paid $4.5 billion for Nortel’s patents, and the recent billions invested by Microsoft and Facebook for AOL patents.

But these patents weren’t acquired to fend off NPE attacks. (Wadhwa seems to have forgotten that NPEs don’t make or sell products; they can’t be countersued.)  They were acquired to create a credible threat of legal response to another operating company threatening an infringement lawsuit.  As we’ve written in previous blogs, the patent “arms race” is driven by corporate operating strategies; it has nothing to do with the NPE threat.

Wadhwa also makes much of a 2010 study by Mark Lemley, John Allison and Joshua Walker that seems to show that NPEs have a lower win rate in litigation than do plaintiffs in company-vs.-company patent trials.  While this is indeed an encouraging data point for operating companies, RPX’s data shows that fully 98% of NPE cases resolve before ever going to trial.  So the focus for operating companies facing NPE risk should not be on whether they can win an expensive litigation; it should be on avoiding that litigation altogether by preventing patents from getting into the hands of NPEs in the first place.

Wadhwa’s ultimate prescription for “this system [that] is enriching patents trolls” is simple and draconian: eliminate or curtail patents.  While this certainly would eliminate patent litigation, it would also be … well, un-American.  Patents are explicitly delineated in the United States Constitution, Article 1, Section 8.  They have always existed in US law as a way to protect – and promote – innovative ideas.

This protection has been at the heart of ground-breaking commercial inventions over the centuries.  Would the Wright Brothers have been as creative if they didn’t trust that their ground-breaking ideas had value in and of themselves?  Remember, the original Wright Flyer itself wasn’t commercialized.  Others built upon the innovations at the heart of the brothers’ machine and perfected them into commercially viable, profitable airplanes.  But the original ideas were protected by patent law, and the inventors (eventually, after a great deal of litigation) benefitted financially from their inventions.  Patents matter and they absolutely should exist.

But the problem isn’t really patents anyway.  Patents are simply assets – some more valuable, some less so.  The problem, which Wadhwa and other commentators fail to understand, is how these assets are being monetized.  Today, NPEs and operating companies are transacting this value transfer primarily through the legal system – an inefficient, imprecise, time-consuming and highly risky way to price any asset.

The real problem, then, is not the assets themselves.  It is the need for a broad-based, transparent and orderly market for the exchange of value between the owners and users of intellectual property.  And that is precisely the problem that RPX is focused on solving.