Monday, November 25, 2013

Duty of Candor

I was speaking with a group of investors this week regarding the patents held by one of the world’s most recognizable mobile telephony companies.  As this company has navigated its way, with varying degrees of success, through a tangled maze of consumer expectations, technical improvements and feature modifications they have hastily trodden on the intellectual property rights of others.  They, together with their industry cohorts have filed thousands of patents on everything from the shape of a phone to the resolution of images on diminutive screens – few of which represent actual fundamental innovation but rather hollow impediments to use in an effort to modulate the severity of infringement assertions made by competitors or would-be trolls.

In this particular case, nearly 75% of the patents owned by this firm not only fail to represent bona fide innovation but, in many instances, are clearly direct adaptations (plagiarisms or the more politically correct term I coined years ago “conceptual annexations”) of the developments made by others.  That is not to say, by any stretch of the imagination, that the company does not have some amazingly valuable innovations.  Among their assets include some patents on mobile device payment systems, geo-location, and power management that may be of greater value to others than the entire market capitalization of the firm. 

For years, this firm has been audited by one of the world’s top 4 accounting firms.  When they were taken public, their Initial Public Offering (IPO) was underwritten in the U.S. by investment banking firms that no longer exist having collapsed during the financial crisis of 2008.  Neither their auditors nor their bankers ever asked the question of whether the firm actually had valuable intellectual property assets.  Rather, they asked the question: “Does this company have patents?”

On the eve of this past week’s miscarriage of justice in California (the erroneous jury damages award to Apple assessed against Samsung), the United States Patent and Trademark Office (USPTO) found U.S. Patent No. 7,844,915 (‘915) invalid.  What this means is that when Apple filed for patent protection for the idea of zooming an image on a mobile phone by pinching fingers on the surface of the screen, they actually hadn’t “invented” anything.  In fact, Andrew Platzer and Scott Herz in partnership with the law firm of Blakely, Sokoloff, Taylor & Zafman LLP, had breached the Constitutional intent of the U.S. patent system by cutely describing the movement of fingers to expand or contract an image as “scrolling” “gestures”.  Setting aside the absurdity of presuming that one could “invent” in 2007 what had been in Hollywood movies for two decades already, Andrew, Scott and Apple’s legal eagles misled the USPTO and confused Patent Examiner Xiomara Bautista into awarding a patent on a feature that was neither novel nor non-obvious (two of the three standards which must be met for a patent to be issued).  Quite correctly, the USPTO found this grant to be in error and unfortunately did so in such close proximity to Judge Koh’s schedule for a decision that Samsung wound up having to pay for use of an “asset” that did not actually exist.  Apple knew it.  Samsung knew it.  Even the judge knew it.  But expediency and injustice were more powerful than upholding the law and Samsung has to pay.

Now what’s relevant in these two stories is the fact that the telecommunications company referenced at the top of this post has over 12,000 patents which would, if challenged, likely be found invalid just like the thousands of faux patents held by Apple.  They know it.  Their competitors know it.  But tragically, neither the media nor agents of accountability (auditors, ‘expert’ advisors, the SEC) are willing to inform the public about this giant fraud being conducted under the aegis of “innovation”. 

Under what is referred to as Rule 56, there is a “Duty of Candor” which requires all persons involved in applying for a patent to disclose all of the information they know which could adversely affect the grant of a patent for the invention they seek to protect.  This rule is similar to the accounting principle of what’s known as the “Duty of Care”.  Both of these Duties suggest that the potential for harm arises when a person knowingly fails to fully inform himself or herself with knowable information which could contradict assumptions being made carelessly.  The line between careless ignorance and negligence is one that is frequently gray due to the hurdle of effort (and cost). 

In the U.S. we have laws that are supposed to protect the public consumer from abuses like Apple’s enforcement of a wrongfully procured patent.  When parties knowingly prosecute legal cases against one another with dubious or invalid patents, they both thwart these laws and harm the public.  This will be the case with the telecommunications company’s patents referenced above.  By failing to separate the “wheat from the chaff”, investors and the market will presume that tens of thousands of patents exist in legal enforceability and have value.  This is not the case.  And when those patents are licensed or sold, they will be a real cost involving real money flowing between real parties.  Billions of dollars later, the public will wind up paying inflated prices for a fraudulent conveyance that was knowable (and known) today and the harm will be done.

It is time for the investing public to discontinue their benign neglect of the Duty of Candor and start paying attention to the abuses of law that are going unchecked.  It’s time that companies and the service providers they engage are held to standards that don’t seek camouflage in the ignorance of the public to the systems of proprietary market controls.  True innovation will not be put in jeopardy and consumers will stand a chance to actually see innovative solutions to substantive and meaningful challenges.

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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave