The Pirate Organization: Lessons From the Fringes of Capitalism (12 page)

—Mark Shuttleworth,
Microsoft Is Not the Real Threat
, May 21, 2007

With the widespread Internet access and the emergence of new software monopolies, originally tied to the computer (Microsoft) and now to the user (Google), the digital territory has become a new gray area for capitalism. We cannot say exactly who controls or who should control the Internet or the flow of information on the web. Should software code be patentable, thereby preventing others from achieving similar results without citing the patent and acquiring the corresponding license? Or should code be subject to a more flexible copyright, which allows, unlike patents, the free use of an innovative idea as long as its expression differs in form from the original material? Or, as many pirates would advocate, should code be allowed to freely circulate like the words of everyday language? These distinctions may seem subtle to the novice, but their implications are huge.

Within certain hacker communities, the electronic locks that prevent the modification of source code are seen as straitjackets imposed on users: “With the so-called digital rights management (DRM) system, the behavior of employees, consumers and citizens is being increasingly regulated by software.”
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Cyberpirates are opposed to this type of computer-code appropriation, which allows certain companies to become de facto monopolies of software applications whose licenses legally exclude the possibility of developing potentially better alternatives. In practice, software is a digital itinerary that links a problem with one of its possible solutions. In this context, licensed software forces everyone who wants to solve the same problem to take the same paying route, as, similarly, the spice merchants were required to directly pay the monopolistic company that had opened up the route to the Indies.

From the viewpoint of the pirates, code is a language that belongs to everyone, just like language or international waters: it is a common good that cannot be appropriated for any specific use. This perspective must be included in the picture along with the other viewpoints that defend the right to a legitimate return on investment and establish intellectual property devices for such an end, such as copyrights and patents.

Industrial Property: Right of Exclusion Versus Information and Public Circulation

What is a patent? A patent is granted by a sovereign state and gives its holder the right to prevent a third party from using an invention for commercial or industrial purposes. Above all, a patent is a right of exclusion. The holder can also grant licenses to use the patent. In exchange, the patent holder must list in detail the internal components so that people can understand the nature of the invention and the steps leading to this invention. Most patent laws stipulate that new inventions that are likely to be used industrially can be protected by a patent. With a patent, a private property right is granted by a sovereign for a limited period of time in a given territory in exchange for the publicity of an invention. Upon expiration, the patent lapses and becomes public domain, and all people now have the right to use freely the invention that was previously off limits to them. This accounts for the development of generic drugs after a company’s exclusive usage rights expire.

Property rights vary from region to region. In Europe, the first person to file a patent holds the property right, whereas in the United States, the right goes to the person who had the idea first, known as the
first inventor
. An effective way of preventing the patentability of an innovation is to publish interim studies that show the chronology of creation. Intellectual property rights come in many different shapes and forms, from copyright, patents, and trademarks, to drawings and models. But as industrial property has taken on increased importance over the past fifteen years, the whole concept of intellectual property has been increasingly challenged in many parts of the world.

Extending intellectual property rights goes hand in hand with extending capitalism. In the same way as some see the successive milestones accompanying the normalization of economic value in the opening up of stock markets, the creation of intellectual property agencies heralds the transformation of economic systems into a contemporary version of capitalism. This movement has led the former Eastern Bloc countries, now under European influence, to create their own patent offices under the guidance of the European Patent Office (EPO).

The advanced positions of financial capitalism continue to define new property titles (shares, bonds, copyrights, patent families, credit default swaps, etc.) and propagate sophisticated overcoding of economic value. However, at the same time, some gray areas persist. Tax havens shelter financial hackers who take advantage of the apathy of established, but sluggish, organizations—companies, banks, and even countries like Iceland or Greece. Other worldwide organizations hack brands, logos, copyrights, and patents, and sail close to the shores of illegal appropriation of surrendered value—intellectual property. In the mid-2000s, NEC Corporation was caught off guard when it discovered that another organization in East Asia had duplicated its production lines, products, and even licensing contracts with other parties.
²
French luxury brands are victims of physical and now virtual counterfeiting, with many counterfeiters using online sales sites, such as eBay, to off-load knocked-off products. According to estimates from the target groups, the fraud rate on eBay exceeds 80 percent, and manufacturers are claiming dozens of millions of euros in damages.

How should we judge the emergence of industrial counterfeiting, illegal downloading from the Internet, and hacking of drugs developed and protected in the north by countries in the south? How much value is being ruined for holders of the property titles that have been conned? What is the net present value generated? Industrial protection allows us to value what is new—that is, what is not available currently or normally. Parties agree on a valuation of the potential benefit derived from the use of a patent, which entrusts its owner with a right to exclude others from producing certain things in the same way. The social contract underwritten by governments grants inventors this right of exclusion in exchange for public access to knowledge. But invention and innovation involve more and more complex processes and license agreements across firms, a practice known as
patent pooling
. As a consequence, the spirit of patenting has been distorted over the past decades, because the social contract between governments and inventors is increasingly mediated by private—and sometimes secret—interfirm arrangements (as illustrated by the quote at the beginning of this chapter). A common invention such as the cell phone represents a nexus of contracts involving multiple patent offices and several thousand patents held by dozens of companies.

The number of patents registered in a given year has more than doubled in the United States (going from 120,000 in 1995 to 300,000 today), as well as in Europe with the European Patent Office (from 60,000 to 150,000 during the same period). China comes first in terms of growth in the number of patent registrations and is among the top for new brand registrations. For many listed companies, most of their value stems from intangible assets, including brands, patents, and rights they license to other companies. With these renewed requests for patents, the relationship between private invention and collective well-being loosens, and the management of industrial property rights by firms becomes more offensive, blurring the line between “quality” and “quantity.” So the key question is to what extent can a society accept the continuous surge of intellectual property as economically beneficial but as a right that excludes third parties from using and improving some techniques in a more open fashion.

Hacking Property Rights

With the rapid increase in value of intangible assets over the past fifteen years, some companies have acquired a large number of patents for the latent value they represent without actually producing anything. They use the patents to claim damages against established firms that have not respected industrial property rights. These patent holders can receive major compensation, especially in the United States, where the laws favor the plaintiffs. When threatened with lawsuits, companies tend to pay up because if they do not, they may be banned from producing their products. These small, mobile companies that seek patents are often referred to as
trolls
, a name that is inspired by the short and aggressive beings in Scandinavian fables that lie in ambush to rob or assassinate lost travelers.
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These modern-day trolls seek out private individuals who hold patents, or vulnerable companies that are under
Chapter 11
protection, for example. They purchase these patents for next to nothing, and then they use them to attack (that is, sue) large multinational corporations.

In the “sea” of deterritorialized property rights, these trolls choose the places where norms are the most favorable for patent holders. Partnering with lawyers who have an interest in winning their cases—a percentage of the damages never hurts—they demand that the marketing of products that infringe their patents be stopped. The sums at stake can be substantial. In 2006, the manufacturer of the BlackBerry, Research In Motion (RIM), paid $612 million in an “amicable” settlement with NTP, which holds five patents that could have blocked Research In Motion from producing BlackBerrys.

In the United States, organizations such as Acacia (which is listed on the NASDAQ), DataTreasury, Forgent, and Rembrandt Technologies are known to follow this type of strategy, yet none of them would probably agree to be labeled a pirate organization. These trolls are interested solely in the right of exclusion. They have no interest in actually using the patent to create products. Their motives challenge our presuppositions about the capitalist innovation model and should force us to rethink the norms for property and monopolies. Trolls prevent companies from operating and they stall innovation efforts. There are benefits that certain holders of legal operating rights gain in exchange for the public disclosure of their technical processes, but trolls prevent this exchange between private protection and public knowledge to operate. Although they pretend to act in order to protect property rights and to combat oligopolies, trolls’ actions seem to have a negative effect on the majority of us.

Timo Fischer and Joachim Henkel, in one of the rare academic articles on the subject, explain how the actions of these troll organizations uncover two sources of economic inefficiency.
⁴
First, patent offices are not always able to detect whether prior patents exist. In many cases, the offending companies have been producing goods and using technologies without knowledge of the existence of other patents. Trolls are on the lookout for these types of situations. They take advantage of these bureaucratic inefficiencies of the United States Patent and Trademark Office (USPTO) or the EPO in Europe, which are inundated with patent applications. Second, the technology market would not really work any better in the absence of trolls. In fact, instead of buying a patent or finding a holder who would be willing to grant a user license, impatient manufacturing firms tend to reinvent what already exists, even if it means they will be confronted by trolls.

These established firms focus a lot of energy to invalidate practices of the trolls, on the grounds that trolls disrespect both the spirit and the letter of the patents. In other words, trolls move the whole patenting system away from its original function. Trolls are not looking to use patents for their productive and innovative virtues. They are and will remain nonproductive owners—a parasite in the system. In return, trolls condemn the established firms as oligarchies because they use cross license agreements for their patents. The trolls defend themselves by pointing to other organizations that do not actually manufacture products from their own discoveries and intellectual property rights. One example is university laboratories, whose mission is research and its application, not production. Also, state legislation allows university labs to provide, through agreements, the transfer of property rights to established firms. As trolls point out, why would this behavior be acceptable for labs and organizations of the milieu but unacceptable for those operating from the fringes?

This is a thorny issue. Who are the real defenders of competition and economic freedom? Is it the pirate organization that uses ownership rights on industrial property without actually producing anything? Established firms that sign nontransparent cross licensing agreements, exchange patents between themselves for a royalty, yet offer in return sophisticated products used by a large number of people? How can the real territory be defined for establishing the right of exclusion that a patent represents? Should we accept that ownership be universally defined as being both the possession and the utilization of a property right, or could the two be decoupled, depending on the location? Which side should states take in this growing gray area in which pirate organizations attack legal and legitimate companies, as they navigate through various territories, each with its own set of norms?

Recent cases in the United States show that the law is less likely to bend in favor of trolls. Since the
MedImmune v. Genentech
case in 2007, trolls must demonstrate that the company under attack had “reckless disregard” for the rights of the patent holder, whereas in the past the offending company had the duty to take the patent holder’s rights into account. In addition, the quality of the patent must be proved in order for the case to go forward. In the
KSR v. Teleflex
case, the Supreme Court gave reason to KSR, which argued that the combination between two subcomponents was “obvious” and could not be patented—and therefore did not infringe on the rights of Teleflex, the plaintiff. Since then, the USPTO has circulated an internal memorandum to justify its reversal decisions based on an understanding of “why a person of ordinary skill in the art would have combined the prior art elements in the manner claimed.” From now on, ownership of patents that contain a combination of elements familiar to the scientific community does not constitute enough substance for plaintiffs. Omitting to refer to such a patent by an established firm can no longer be held against it by the plaintiffs, hence limiting the trolls’ pretentions.