Patents Give You Power, So Stop Whining!
EchoStar and Micron Technology have rolled out the "they're using their patents to be monopolists!" defenses in court fights with Big Bad patent holders Gemstar-TV Guide and Rambus. Whine, whine, whine. A patent grants the right to exclude others from using your invention without a license. It's a legal monopoly. If you don't like the system, change the laws, but don't expect owners of intellectual property -- who invested millions inventing it -- to forego the rewards of their work. Most importantly, EchoStar and Micron investors should ask why management hasn't licensed crucial technology long ago at rates less than litigation costs.
By Tom Jacobs (TMF Tom9)
December 6, 2000
Satellite TV deliverer EchoStar (Nasdaq: DISH) yesterday sued Gemstar-TV Guide (Nasdaq: GMST), alleging that Gemstar acted anticompetitively by refusing to license its patented interactive programming guide technology or demanded exorbitant license fees. This follows Micron Technology's (NYSE: MU), which sued Rambus (Nasdaq: RMBS) -- of which I own shares -- on the same grounds: that Rambus acts as a monopolist, using its computer memory technology patents as an anticompetitive weapon.
I have two answers for EchoStar and Micron, one short and one long. Short: Your nemeses are not Microsoft (Nasdaq: MSFT) or Standard Oil. Neither of you is the original trust buster, Teddy Roosevelt. Shut up!
Long: While you may have a thin reed of a legal argument, that's all you have. Your decisions should have shareholders clutching at management's throats.
Patents are legal monopolies
Americans love money and power, but within limits. Succeed, beat your competitors into the ground fair and square -- that's good, right? But not if you use your monopoly power to hurt the consumer. Most people ignore the economists and cast it as a moral battle -- small versus big, David and Goliath, Netscape against Microsoft (Nasdaq: MSFT). Yet we cast this aside in the patent arena. Patents grant the holder a legal right to exclude anyone else from using her invention without permission -- a legal right to act like a monopolist and restrict competition. Catch that: It's legal to be a patent monopolist.
And this right stems from -- wave the flag -- the U.S. Constitution itself. For a welcome break from presidential election arguments, check out Section 8, Clause 8, which gives Congress the power to "promote the Progress of Science and the useful Arts, by securing for limited times for authors and inventors the exclusive Right to their respective Writings and Discoveries." (Don't you love that "useful Arts"?)
Never fearful to legislate, Congress came up with Title 35 of the United States Code, and patents protect the science-side rights of Section 8, Clause 8, for 20 years (or 14 or 17 years, for two other less common kinds of patents). But be warned: "A common misconception is that the patent gives its owner the right to make, use, or sell the invention," notes law firm Oppedahl & Larson. "It only gives the owner the ability to exclude others from making, using or selling the invention."
You can exclude anyone you want. If you own the patent for four legs to a chair, and -- I kid you not -- if you have a non-fraudulently obtained patent, you can prevent anyone else from making a chair with four legs in the U.S. unless they pay you whatever price you want. That's why there are pitched battles over who invented this or that first and should get the patent on it. And why companies spend lots of money building the legal armies to fight the patent battles. For examples, check out the horrible story of how RCA used its might to squash TV's inventor Phil Taylor Farnsworth, or note the words of a law firm partner I once worked for: "How can you not like litigation? It's the last legal form of combat left to a man!" (Or woman.)
Any law on EchoStar and Micron's sides?
But EchoStar and Micron's lawyers are not morons, and they are not making frivolous claims. They are suing in federal courts, and under federal law, lawyers who sign court papers state under penalty that their arguments have a good faith basis in law or fact. And there are a very few cases out there that appear to set standards for plaintiffs to obtain cash for patent holder's monopolizing behavior: Specifically, fraud in obtaining the patent that leads to the patent holder's own monopoly power in the marketplace.
But Gemstar isn't interested in satellite TV, and it licenses its technology to other companies. Rambus is no semiconductor fab, and it licenses to seven out of the top ten DRAM manufacturers, including number one Samsung. Under current law, as long as Gemstar and Rambus aren't in the markets themselves -- as long as they are intellectual property companies that make their money licensing their patent property (technically, their patent "estate") -- and especially if they license their inventions to someone, they win.
Popular ambivalence about monopolies
Facing the weakness of their position, management's lawyers struggle with what little they've got. It's a last ditch attempt to make some kind of -- emotional? -- appeal. Yet Americans are very ambivalent about monopolies, anticompetitive behavior, and unfair competition today. On the one hand, Ralph Nader received a not insignificant share of the vote based on his decades-old appeals to the power of the big corporations. One should not ignore those appeals, even if standing by Winston Churchill's slightly edited observation that a person who is not a liberal at 20 has no heart, and not a conservative at 50 has no mind.
On the other hand, we love innovation and we take (perhaps too much) pride in our country's ability to produce it. Today is not the era of Teddy Roosevelt, or the railroad trusts or Standard Oil against whom the muckrakers raised the non-unionized, non-OSHA protected, ill-treated working public. Today, millions -- and millions -- of the modern equivalent of those workers own, say, Microsoft shares either directly or through state or private employer pension funds. So it isn't entirely clear who is worse off -- the consumer who pays a few bucks more for Windows or the stockholders who saw their investments decline in value. In this view, the vilified wealthy of the trust-busting era are now the shareholding middle class.
Foolish investors in a company might well spend less time agonizing over a competitor's vigorous, aggressive patent defense. They should perhaps wonder why management has not licensed patents crucial to business plans instead of litigating, and whether those business plans made sense if the possibilities of failure to obtain those licenses on favorable terms were substantial. Valid, non-fraudulently obtained patents are the result of Constitutionally-granted powers, and they aren't going away anytime soon.
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