Google’s Motorola Deal Shows Need for Better Patent System: View

If members of Congress needed a reminder that it’s high time to pass new patent legislation, the multibillion-dollar flurry over mobile-phone patents should concentrate their minds.

About a dozen of the world’s biggest companies are battling for supremacy in the smartphone business. No single, brilliant innovation defines these gadgets. Instead, countless individual phone features might be subject to various narrow patents. Google Inc. (GOOG)estimates that a single smartphone could be the subject of 250,000 patent claims.

No one owns all the relevant patents. It’s unclear which ones might hold up in court and which are duds. What’s indisputable is that losing a big patent-infringement case would be catastrophic. So every competitor wants to stockpile thousands of patents, serving as both shield and club against any rival tempted to start a court battle. The result is a system that rewards lawyers and investment bankers far more than inventors or consumers.

In June, six companies led by Apple Inc. beat Google in a competitive auction, paying $4.5 billion for 6,000 patents that had been owned by now-defunct Nortel Networks Inc. Not to be outdone, Google this week agreed to buy Motorola Mobility Holdings Inc. for $12.5 billion. Google justified the acquisition chiefly as a way of gaining access to 17,000 Motorola patents.

Now Eastman Kodak Co. (EK)’s stock has been rallying on news that the company is exploring options for its more than 1,100 digital-image patents. As Bloomberg News reported this week, some analysts and investment bankers say Kodak’s patents could fetch $3 billion, nearly quadruple the ailing company’s current market value.

Unproductive Arms Race

When a host of major players in an industry all feel compelled to build comparable patent arsenals, we’re seeing something akin to an unproductive Cold War arms race. Billions of dollars are spent, merely to preserve a suspicious state of detente.

And the arms are piling up. Last year U.S. officials approved a record 244,341 patents, up 27 percent from 2009. Big companies bombard the patent office with incremental claims. Too many of these patents are duplicative or defensive; their existence becomes a tax on innovation, rather than a reward.

A smarter system would reduce this clutter. Earlier this year, both the House and Senate passed bills that encourage a more orderly, judicious approach. There’s bipartisan support for change: Democratic Senator Patrick Leahy of Vermont and Republican Representative Lamar Smith of Texas are sponsoring the two bills. The House version is due to be taken up by the Senate next month, and it provides a good template for reform.

The House bill provides for a post-grant review of patents and more extensive investigation of what technology is already in place, so that fewer dubious patents come into being. Both bills also bring the U.S. closer to other countries in terms of resolving competing patent claims in favor of the first filer. Small inventors have argued that they are better served by the current U.S. standard of awarding patents on a first-to-invent basis. But that standard is too murky and ambiguous to work fairly.

Leahy and Smith say their new law could create 200,000 jobs. The calculations are debatable, but the case for fresh approaches is compelling. Consider the rise of the open-source software industry, which operates largely without patents -- and has created many thousands of jobs in the past decade.

Government officials in China and the European Union are vowing to modernize their patent-granting systems, too. That makes it all the more crucial that the U.S. establish a code that promotes innovation, rather than an arms race.

To contact the Bloomberg View editorial board: view@bloomberg.net.