Why Microsoft Says the Patent System Is Peachy Keen

Bart Eppenauer grew up in Kansas City, Missouri, and after moving away for college and law school and a first job in Chicago, he came back to his hometown, joining a Kansas City law firm called Shook, Hardy & Bacon. It was there, in the late '90s, that he took a call from a friend who asked if he was interested in joining the legal team inside Microsoft. He was, and he did. Fifteen years on, he's still at Microsoft, serving as the company's chief patent counsel.

Over those 15 years, Microsoft built up one of the world's most valuable patent portfolios, spanning over 31,000 U.S. and international patents and over 38,000 pending patent applications. According to a 2010 study commissioned by Bloomberg BusinessWeek, the patents amassed by the software giant over the previous five years were worth more than those collected by any other company, including the vaunted IBM, and in the last decade, Microsoft has turned its portfolio into an active money maker, systematically working to license its patents to other outfits across the tech industry.

So, it should come as no surprise that Bart Eppenauer believes the patent system pretty much works as it should. "There are a lot headlines about the patent system being out of control and major changes being needed," Eppenauer says. "While certainly there are areas for improvement in the patent system -- in terms of what the U.S. Patent [& Trademark] Office can do and what the courts can do and what companies can do -- this doesn't mean you need, at least from our point of view, some sort of radical overhaul of the system or a complete change in the approach to certain technologies."

As companies such as Google and Twitter complain that the patent system is horribly broken -- bemoaning the quality of patents being issued, the "trolls" that do nothing but try and squeeze money from hardworking entrepreneurs, and the high cost of patent litigation -- other big tech outfits such as Microsoft and IBM describe the landscape very differently. It isn't hard to see why. Just look at Bart Eppenauer.

Microsoft's chief patent counsel spent his entire working life in a world where patents are highly valued, and he spent the last 15 years overseeing the patents of a massive corporation that makes billions upon billions of dollars selling software. This place is a far cry from the world occupied by the likes of Google and Twitter. Google and Twitter are much younger companies. They haven't had time to amass a patent portfolio the size of Microsoft's. They've never used patents as a money maker. And they don't sell software.

You could argue that the very nature of the businesses operated by Google and Twitter make them less inclined to value patents. Google and Twitter make their money by selling ads -- not software. Software is an enormously important part of their operations, but most of this software is hidden inside a data center. Microsoft ships software to the world at large. It's far easier for outsiders to reverse-engineer the company's trade secrets. With its Android mobile operating system, Google now ships software too. But it provides this software to manufacturers free of charge, hoping to expand its ad-serving platform.

Microsoft's argument is that Google is calling for changes to the patent system because these changes would suit its own agenda. And there's certainly some truth to that. But keeping the patent system pretty much where it is suits Microsoft's agenda. Microsoft has already spent so many years playing the patent game. It has no interest in stopping now.

Microsoft has good reason to criticize the patent system. Just last month, a patent "troll" sued Microsoft, claiming that the Windows Phone and Windows 8 operating systems step on its intellectual property, and this type of suit hits the company all the time. But clearly, the hassle and the money that goes into these suits is outweighed by the benefits that patents bring Microsoft.

According to Eppenauer, litigation is just a "normal byproduct" of the system. "When you enter a period where there are a lot of different technologies that are converging, with many different competitors and companies with stakes in that, you're going to have a period of time where people are sorting things out," he says. "In the end, it will, essentially, move forward and settle out and people will innovate.... The long-term view is that all this is very beneficial."

Microsoft's story is at least worth listening to. The company says that it merely uses patents to protect the technologies it has spent an awful lot of time and money developing, and that this is what the system was designed to do. It was indeed, and this is something that too often gets lost in the ongoing debate over patents. But when Microsoft says the system doesn't need fixing, you have to consider the source.

Microsoft Mimics Big Blue

Over the past several years, says Elvir Causevic, an analyst with Ocean Tomo, a Chicago outfit that tracks the value of patent portfolios, Microsoft has built a patent operation that is among the world's most sophisticated. According to David Kaefer, Microsoft's general manager of intellectual property licensing, the company started getting serious about licensing its patents in the early aughts. The software giant modeled its licensing business on the practices of companies such as IBM, HP, Qualcomm, and Intel, going so far as to hire away the man who ran IBM's "patent shop."

"A lot of our approaches mimic how [IBM does] licensing," says Kaefer, "and a lot of that approach is frankly pretty consistent with how a lot of other people do it."

In some cases, Microsoft will take calls from outside outfits interested in licensing its patents. RIM or Apple, say, will phone and ask to license Microsoft's ActiveSync technology, a means of synchronizing email, contacts, and calendar entries across phones and other devices. "That's a pretty friendly set of discussions," Kaefer says.

But as he puts it, Microsoft will also "pro-actively" drive licensing deals. "We will go out and look for areas where we see a lot people who are probably using our technology in one form or another," he says, "and we kinda ask ourselves whether it has risen to a level that we care about and we want to have some conversations." Basically, this involves a Microsoft lawyer like Kaefer trying to convince lawyers at other companies that their technology infringes on Microsoft patents -- and that they should pay to license those patents. According to Kaefer, these discussions can spans months -- or even years.

In recent years, Microsoft has inked licensing deals with a dozen companies that make devices based on Google's Android and Chrome operating systems, including HTC, Wistron, Onkyo, Acer, Viewsonic, Samsung, and LG. Presumably, these deals began with a call from someone like Kaefer, but Microsoft keeps the details to itself. We don't know even know how much money Microsoft makes from licensing its patent portfolio.

Eppenhauer and Kaefer say that typically, Microsoft isn't interested in suing companies for infringement. But the implicit threat of a lawsuit can help drive licensing deals, and clearly, the company is not above filing suit. In March of last year, it sued Barnes & Noble, Inventec, and Foxconn International for allegedly infringing its patents with the Android-based Nook ebook reader sold by Barnes & Noble (the case was later resolved out of court), and in 2010, it sued phone maker Motorola over its Android devices. Motorola also sued Microsoft, and the two are battling it out in court this week.

Microsoft Meets Rockstar

As the patent wars have escalated in the mobile market, Microsoft has also sought to bolster its position by acquiring patents and funding outside operations whose patents may be useful to its cause. Last year, Microsoft joined forces with the likes of Apple to acquire about 6,000 patents owned by the bankrupt Canadian telco giant Nortel, and it helped fund an outfit called Rockstar that has told Wired it intends to use about 4,000 of those patents to generate revenue for its stakeholders.

Asked about its Nortel deal, Kaefer says Microsoft was merely interested in acquiring additional patents involving wireless networking standards. "We felt like we didn't have enough assets to negotiate fair deals with other major wireless holders, people like Qualcomm and Nokia," he says. He acknowledges that Microsoft is a stakeholder in Rockstar, but he says this is merely a by-product of the company's effort to land the Nortel wireless patents it wanted. "Unfortunately, being a part of that transaction, we also had to end up being a part of what became the Rockstar entity, which holds the non-wireless assets from Nortel," he says. In other words, he indicates that Microsoft was merely following the wishes of others involved in the deal.

Microsoft also licenses large patent portfolios from Intellectual Ventures and RPX -- two operations that have amassed their patents so that they could then sell licenses to others -- and it's an investor in Intellectual Ventures, a company founded by former Microsoft CTO Nathan Myrvold. Both Intellectual Ventures and RPX have said they aim to help companies protect themselves from litigation, but IV has filed patent infringement suits against multiple big-name companies, including Motorola, HP, Dell, Acer, Logitech, Kingston Technology, Best Buy, and Walmart.

Google has also learned to play the patent game, and it too is an investor in Intellectual Ventures. But unlike Microsoft, it will tell you that it doesn't like playing the game -- and that it wants serious patent reforms so that these games don't escalate even further. At this point, it may even regret its investment in Intellectual Ventures. After all, Google now owns Motorola, one of the companies at the other end of an Intellectual Ventures lawsuit.

Google and Microsoft couldn't be further apart in describing the patent landscape -- and yet both say they're trying to protect "innovation." Google says that trolls and patent litigation are hampering progress in the world of software and the net, but then Microsoft will tell you that patents are the only way to foster progress in these same areas. The company says that in inking licenses deals -- and suing competitors -- it's merely trying to protect the stuff it built over the years.

It prefers not to characterize its patent licensing program as a money maker. "Microsoft has embraced a licensing program that, in its view, provides reasonable compensation for Microsoft's inventions while making its technology broadly available to others," says a company spokesman.

Eppenauer complains that whereas Microsoft spent an awful lot of money licensing patents from others when it entered the business software market, Google failed to license the necessary technologies when it built Android and joined the mobile market. "Android is indicative of Google's approach, where it didn't really have an approach," he says. "And now there are a number of companies that are taking issue with it." Google will say, however, that so many of the patents being waved at Android and other products aren't worthy of the name.

You can certainly argue both sides of the issue. David Long, part of the intellectual property and litigation practice groups at Dow Lohnes, a law firm based in Washington, D.C. and Atlanta, echos Microsoft. "Like any system, the patent system will need to be tweaked and keep evolving with technology," he says, "but it's not broken."

But Julie Samuels, a lawyer with the not-for-profit public advocate the Electronic Frontier Foundation, sits at the Google end of the spectrum. And she notes that the current patent system is set up in a way that makes life difficult for the little guy. "Maybe the system works for Microsoft," she says, "but Microsoft has plenty of money to work with."

This we can all agree on. Now let the debate continue.