08/24/2011 06:44 pm ET | Updated Oct 24, 2011

Valuing Patents Through Battle

We need patent litigation in the mobile device and telecommunications space. Ever since Google purchased Motorola Mobility, there have been numerous articles in the press about the dangers of patent litigation. Economists, from respected universities, have been quoted bemoaning the dollars spent on the purchase and the negative impact on innovation. Stop the moaning.

The appropriate Godfather quote is:

Michael: How bad do you think it's gonna be?

Clemenza: Pretty goddam bad. Probably all the other families will line up against us. That's all right. These things gotta happen every five years or so, ten years. Helps to get rid of the bad blood...

In this case, the "bad blood" is that everyone overvalues their intellectual property (IP) (i.e., they start believing their spreadsheets). Worse, they believe the patents they hold are actually valid. These patents are too complex and patent offices too overworked for competitive scrutiny not to reveal big surprises. The peer-reviewed literature is replete with articles discussing the scientific and human resource problems associated with patent examination. We need litigation because it is, unfortunately, the most efficient way to value these intangible assets.

Go to "Google Scholar" and search patents and "intangible assets," you might also add the word "value" and you will get about 500 peer-reviewed articles for just this year. Patents are intangible assets that are valued through the litigation process (i.e., negotiation, arbitration, mediation, the courts) by determining an appropriate royalty payment. This is neither new nor an innovation stopper.

Patent attorneys might talk about patent stacking or patent packing. You will often see these terms when discussing vaccines. We often think that the pharmaceutical industry is one where a company holds a single patent on a particular wonder drug. This might be true, but for vaccines the opposite is the case. It is improbable (as in close to impossible) that in today's world anyone could produce a vaccine without relying on many other intertwined patents. The vaccine world has figured out how to allocate royalties and so will Google, Apple, HP, Microsoft, Nathan Myhrvold at Intellectual Ventures and some companies who have yet to formally enter the fray.

The anxiety being generated over these patents is a predominantly U.S.-centric syndrome. The German courts have now allowed sale of the Samsung tablet. The European Patent Office (EPO) has a much better system for reducing (not eliminating) late stage patent litigation. Asia is a less litigious environment, making the valuation of these patents more uncertain.

After the smoke settles:

  • Apple will still be the leader in look, feel and vision of computers and mobile devices, as well as, the high-end provider of content;
  • Google will remain the web behemoth getting their share of every web transaction while plotting their vertical integration of Android (see DEALBOOK);
  • Amazon will be the virtual shopping mall offering for less what others sell for more; and
  • Facebook will be the innovation hub of social networking, albeit the only one of the four without a direct hardware connection to consumers.