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Apple-Samsung Case Hurts You, Me, The Economy

Both companies deserve our wrath as their patent trial gets under way. Why? They're propagating an intellectual property war with immense collateral damage.
Even though their federal courtroom battle is likely to continue for the next four weeks, the patent dispute between Samsung and Apple already has a loser. Three of them, in fact--you, your company, and our economy.

While they're both world-class companies, in this situation I'm booing both. Reason for my wrath: By asserting broad and specious claims over things like the look and feel of smartphones and tablets or the ability to take and send a photo--two of the central claims in the case--these two tech titans are taking advantage of the same egregious weaknesses in patent law that have resulted in an escalating intellectual property (IP) war.

It's one that's causing an immense amount of collateral damage: Its direct costs are sapping promising young companies and R&D budgets. It's frustrating the forces of innovation that are vital to economic renewal. And if that's not enough, it's also consolidating more power in the hands of a few companies already uncomfortably close to market domination in mobile--namely Apple and Google, with Microsoft and Amazon not far behind.

For a decade now, smart people have been clambering about the dangers of a patent system run amok, especially as a growing phalanx of "patent trolls" snaps up patents just to assert them for the sake of settlements and damages. One of the most clear-headed is James Bessen, an economist and Boston University law school lecturer who teamed up with colleague Michael Meurer to identify, analyze, and quantify the impacts of the IP wars.

[ Learn more. Read Apple Vs. Samsung Trial: What's At Stake. ]

In a paper they published in June, they reported these astonishing findings:

-- A total of 2,150 companies had to defend themselves 5,842 times against patent suits in 2011 alone--an amount of litigation that represents "a wholly unprecedented scale and scope."

-- Those claims accounted for $29 billion in direct costs--outside legal fees, damages, and settlement amount. And, oh yeah, it doesn't include indirect costs, like the time and resources it takes a company to defend itself and the price of product delays and market share losses.

-- The amount represents a nearly 10% hunk of the $250 billion devoted by all U.S. business to R&D. Much of the burden has fallen disproportionally on small businesses: The defendants in that universe had median revenue of just $10.8 million.

Are you getting as legitimately angry as I am yet?

Bessen discussed the causes of this outrage with me. When I asked him what created this mess, he put it succinctly enough: "In two words," he said, "the answer is fuzzy boundaries."

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It's easy to claim ownership for real property. Not so much when it involves an abstract idea or invention. It's especially tricky when it comes to software. For one thing, the U.S. Patent Office has shown a penchant for approving patents with vague and sweeping claims--doozies like "information manufacturing machinery" and "commodities on a network."

And things get even fuzzier when a patent is for a product used by millions, not just by one person reinforcing an ownership claim by living in a house built on a suburban plot.

And it doesn't help that more than 200,000 software patents alone have been filed since the 1990s. If you want to do the right thing by creating an e-commerce product that doesn't infringe on someone else's claim, you may have to slog through as many as 5,000 possibly related patents. Want to advertise, charge, or ship your product? Prepare to sift through more than double that many.

No wonder so many companies have become innocent violators.

While the number of business victims is bad enough, it gets worse. The patent wars are starting to have a chilling effect on investment markets.

Consider this dispatch from Paul Deninger, a foot soldier in the IP war. His company, Evercore Partners, is an investment banking firm that advised AOL on its way to selling a $1.5 billion hunk of its patent portfolio to Microsoft and Facebook. At the recent AlwaysOn Silicon Valley Innovation Summit, he offered this anecdote: One of his clients is being required by a buyer to prove its patents are squeaky clean. They want ironclad assurances the seller not only owns its patents but that they don't infringe on anyone else's either--a herculean, and perhaps even impossible, test to meet.

The point: The growing risk of litigation is making it that much harder for companies to cash in on their blood, sweat, and tears by attracting investments from suitors, as in this case, but also from other sources of growth capital such as venture capitalists and public shareholders, too.

What's more, the IP war has spawned an ever more active market for patents themselves. Spurred by the riches yielded by the AOL deal and others, there are, according to Deninger, 150 such packages in play right now. Because they're worth so much, only a few big players are rich enough to buy them. And those few are snapping them up for a single purpose: They want to defend and extend their competitive advantage in mobile.

Thanks in part to the IP wars, we all face an even more likely prospect that the mobile market will become more and more "closed," forcing us to pay more for fewer options, as market analyst Mike Feibus suggested in his InformationWeek column.

Can you say anti-competitive?

So enough is enough. The patent wars are imposing what is, in effect, a whopping tax on investment and innovation--a tax, by the way, shared by all of us. Here's to hoping that Samsung and Apple deliver knockout blows to each other. That would be a small victory for the rest of us who are innocent bystanders in a self-defeating system badly in need of reform.

Patrick Houston is a former SVP for a new media startup, a GM at Yahoo, and editor-in-chief at CNET.com. He is co-founder of MediaArchitechs, which offers strategic product, content and business development consulting to technology-driven media companies. He can be reached at [email protected]