Diane Francis at Harvard

Saturday, February 04, 2006

Patented Nonsense

National Post Dec. 6:

CAMBRIDGE – Research in Motion is simply the latest “victim” of America’s patent chaos, said expert Josh Lerner of the Harvard Business School.

“It is a victim of a patent system gone awry,” he said. “I’m not a lawyer but it seems pretty clear that NTP [the company that sued RIM for patent infringement] got an extremely narrow patent but during the litigation process, it got a judge that broadened out the claim.”

The problem in the U.S. is that while a company may wait appeal, there is the threat of injunctive relief. “This forces settlements,” he said.

It also makes it easy to shake down unwitting companies with frivolous actions.
One such specialist is a businessman called Ron Katz whose company has raked in an estimated US$1 billion in royalties because it has a batch of patents for call centers, or the combination of phones and computers.

“The injunction threat is a problem for call centers so Citigroup and others selling financial services cannot afford to have their call centers shut down for a minute. So they have paid him lots of money,” said Professor Lerner.

There are some bizarre examples of other types of patent problems. For instance, a large food manufacturer patented the peanut-butter-and-jelly sandwich a few years ago and began suing caterers for royalties before a judge called a halt to it. Another individual got a patent for swinging on swings sideways and attempted to sue playground manufacturers for royalties.

“Smuckers [the food manufacturer] had its patent for sandwiches narrowed by a judge who realized the patent was too broad,” said Professor Lerner. “The guy who got the patent for swinging on a swing was discredited by all the publicity and fired.”

These and other examples of dysfunction flow throughout his book “Innovation and Its Discontents”.
These practices of patenting inventions that already exist are known as “patent trolling”. One famous case involved Henry Ford’s battle with a man called Selden, who had a very broad patent on the internal combustion engine for the automobile. Ford won his battle.

Similarly, the world’s greatest inventor, Thomas Edison, had to fend off many litigants to protect his patents, the most any individual has ever held.

Another more recent example involved a Harvard Nobel Prize winner, and colleague of Lerner’s, who won his prize in the 1970s for option pricing. Patents were rare for financial products in those days but times have changed.

An MBA student came across the option pricing, filed a patent, got one and then licensed it for use to the Philadelphia Stock Exchange. The professor threatened to sue but didn’t.

The problem lies in the nature of the patent process, he said.
There are currently 5,000 people in the U.S. Patent Office and examiners spend 12 to 16 hours on each application, which isn’t enough time for some and too much time for others, he said.

“The best example of the difficulty of the patent awarding process is that Albert Einstein worked in the Swiss patent office, while he worked on his theory of relativity. And he was always accused of awarding patents that were too broad or of awarding patents that were too narrow. If Einstein couldn’t get it right then how can the typical patent examiner?”

Lerner believes that multiple examiners in an open public process is a better method of awarding patents and that, once granted, they should be tested rigorously and adversarially.

Patents are a critical cornerstone to wealth creation and currently last 20 years, unlike copyright protection which has been extended through lobbying by the music and software industries to death plus 70 more years.

“Patents are a trade off: You grant a monopoly to provide an incentive to invent,” he said.
That’s why the continuous extension of copyright protection, retroactively, is totally unjust. The “invention” has already been invented and capitalized on through monopoly protection and yet companies like Disney continue to agitate for extensions.

In future, the biggest challenge involves bio-tech patents.
“After the genome was defined, people were filing gene patents by the truckloads, literally. Hundreds of thousands of pages of raw sequences of genes were being brought in for patenting,” he said.

Both the United States and Britain passed laws that genes could not be patented because they were essential to the public good.

“The publicity brought that policy about so there are no patents on gene sequences, but people have gotten around this. There are patents on proteins which coat genes,” he said. “These and other issues should be addressed because the system is really in a mess.”

Bower on Strategy

National Post Jan. 5:

CAMBRIDGE - Harvard Business Professor Joseph Bower believes that General Electric and Procter & Gamble are the two most "phenomenal" companies because of their unique corporate cultures.

"They promote from within and have put emphasis on people with the talent and ability to build and sustain an organization that can execute really well in difficult times," he said in a recent interview in his office. "The only template is they invest in people and build a culture."

Professor Bower is an expert on corporate strategy and organization. He has written dozens of books and articles and serves on a number of large corporate boards such as Loews Corporation, holding company for the wealthy Tische family; Brown Shoe Inc.; ML-Lee/Acquisition Funds; New America High Income Fund; Sonesta International Hotels Corporation and trustee of Putnam Emerging Opportunities Portfolio.

He, and Professor Clark Gilbert, have done landmark studies into "disruptive technologies" or the restructuring or demise of companies following unrelenting innovation. More recently, he has been examining how companies can master new technologies, globalization and deal with uncertain futures.

"Our studies look at the way companies actually make strategy, the problems associated with that and what arrangements can deal with those problems," he said.
Strategies come to fruition if championed by effective managers or they languish if the responsible manager's track record is less than stellar. This is not a bad process because it amounts to checks and balances in order to carefully screen projects along the way.
"The ability to get resources has to do with a manager's track record because everyone looks after their reputations very carefully," he said. "By the time, a strategy gets to the finance committee, ranking has taken place. The right signatures have already signed off. So a director on the committee might say `Sally's project? She's great. Never failed. Does she need more money?' Or it might be `Harry? What's he doing here?'"

But "disruptive technologies" have made strategic planning more difficult for established, large corporations. The tire industry, for example, did not react quickly enough to the creation of radial tires which lasted twice as long.

Even those who began producing these superior tires, continued to expand production of the traditional tires. This squandered future resources and made losses greater than necessary as radials devoured the entire market.

A similar problem occurred in the disc drive business years ago. Most pioneers went out of the business because they did not realize they had to migrate quickly into the next generation of technology.

"In well-run companies, resources go toward what the customers really want and toward finding out what a new generation of customers wants," he said.
Typically, big publicly-held companies with lots of divisions rely on their customers to tell them what to produce or change. Their managers play it safe by sticking with tried-and-true customer bases. But that allows foreign and entrepreneurial firms to come in and serve others, then eventually invade the traditional companies' markets, he said.

Giants like GE and P&G are large, but innovative in terms of products but also in terms of their strategic development process.

"They don't interfere with the process but periodically intervene. They remain informed then only intervene when they can either help by absorbing risk or providing entrepreneurial capital such as getting units to cooperate or drive the process faster," he said. "They perform an override function."

"Jack Welch [former GE CEO] called them `deep dives' - or the process of going way down _in an organization in order to help work out the problem. Corporations must be able to break routines. It's not interference but getting a different discussion going."

Andy Grove, CEO of Intel Corporation, said this is key to innovation because usually the innovators and executives are separated.

"He said you have to have the knowledge power and the corporate power in the same room," said Professor Bower. _The CEO must drive the process and develop then nurture a team which will do the same, he said. One of the biggest problems in U.S. businesses has been the short tenure and inordinate attention paid by executives toward their compensation packages and not the corporations they are responsible for. The stock option phenomena is mostly to blame.

But great CEOs must embody other traits in order to midwife strategies that will sustain the enterprise through tough times.
"Great leaders aren't necessarily charismatic but they must have a dispassionate objectivity as they look at the world and business but they must be absolutely passionate about people. They must embody both."