WASHINGTON -- After months of dead-end negotiations over raising the federal debt ceiling, President Barack Obama walked into the East Room of the White House on June 29 to demand action. The stalled talks not only threatened the integrity of the nation's debt, he said, they reflected a lack of purpose about solving economic problems and improving the plight of middle-class families.
"Many people are still looking for work or looking for a job that pays more," Obama said to a scrum of reporters. "There are more steps that we can take right now that would help businesses create jobs here in America."
The first item on Obama's list of immediate, job-creating congressional actions was the passage of patent reform legislation.
"Right now, Congress can send me a bill that would make it easier for entrepreneurs to patent a new product or idea, because we can't give innovators in other countries a big leg up when it comes to opening new businesses and creating new jobs," he said.
Obama was jumping into a drawn-out Capitol Hill battle, one that has never been particularly concerned with creating jobs or alleviating unemployment, despite what recent rhetoric might suggest. Lawmakers have spent nearly a decade jockeying over intellectual property rules in what has become a sprawling corporate feud -- one that currently involves nearly 800 registered lobbyists.
Today, the patent bill looks like a scorecard tallying points for powerful corporations: a win for pharmaceutical companies whose monopolies are driving up Medicare costs; a win for Wall Street's battle against check-processing patents; a loss for tech giants who had hoped to curb costly lawsuits.
Left out of the tally is the public, even as the economic landscape for American families grows darker. Historian Richard Hofstadter famously observed that Congress during the Gilded Age busied itself with dividing the nation's spoils among the rich and powerful. But as the current patent struggle suggests, the spoilsmen are back and Washington is once again an arbiter of who lands the lucre.
"Congress has lost any capacity to piece together these private interests into a public-welfare-promoting change to the patent system," says Christopher Sprigman, an intellectual property expert at the University of Virginia Law School. "It's really not about optimization anymore, it's about which faction is going to win out."
When legislators first introduced a patent bill in 2005, they designed it to lower the costs of lawsuits burdening Internet and software companies. Lured by the big, juicy settlements to be won by suing huge companies for intellectual property theft, an entire industry had emerged around patent chasing alone. These so-called "patent trolls" don't produce any goods. Instead, they secure unclaimed patents for ideas in use and try to cash out in court.
Trolls file hundreds of lawsuits a year over "low quality" patents -- lobbyist legal jargon for the questionable or downright bizarre patents routinely granted by the understaffed Patent and Trademark Office. In recent years, patents have been approved for products including a wheeled flower pot (patent No. 7,908,942), the crustless peanut butter and jelly sandwich (patent No. 6,004,596), a decorative box that can be placed in a casket (No. 7,908,942) and an accounting scheme that helps people dodge taxes by moving stock options around (No. 6,567,790). Once approved by the patent office, it's difficult and costly to overturn the patent in courts, which grant significant deference to the office's decisions.
The legislative attempt to crush patent trolls ignited a byzantine war in the nation's capital between powerful interests -- tech giants, drug companies, even too-big-to-fail banks -- sweetening the pot for politicians sitting at the center of it all in Washington.
"The interesting thing about patent reform is that it didn't break along traditional ideological lines. It wasn't a left-right, Democrat-Republican thing. It was a corporate thing," says Karl Manheim, a law professor at Loyola Law School in Los Angeles. Manheim served as special counsel to the House Subcommittee on Courts, the Internet and Intellectual Property for much of the patent fight. "[Microsoft CEO] Steve Ballmer came once to a meeting that we held, and there were folks there from Sun Microsystems. We had discussions with Pharma, with the Biotechnology Industry Organization ... I can even recall meeting with the aftermarket autoparts industry."
As the patent struggle has dragged on in Washington, patent trolling has surged in popularity. And some of the most aggressive players aren't boutique, lawsuit-only operations -- they're the very tech giants who came to Congress for patent help in the first place.
TROLLING FOR VOTES
With the media consumed by debt ceiling talks, the final round of the patent battle has been playing out under the cable news radar. In late June, House Minority Leader Nancy Pelosi (D-Calif.) abruptly announced opposition to the patent legislation, strongly encouraging other Democrats to join her. It was a politically perplexing maneuver: The bill was widely viewed on Capitol Hill as uncontroversial. It had passed by a vote of 95 to 5 in the Senate, a chamber so fraught with partisan division that it did not even hold a vote on sending a Nobel Prize-winning economist to the Federal Reserve.
And the major winners and losers on patent reform had been decided more than a year ago, when Senate Judiciary Chairman Pat Leahy (D-Vt.) reached a compromise with Sen. Orrin Hatch (R-Utah) that formed the core of the current bill. "At a certain point, these politicians have worked on it for so long, they just want to be able to say they passed patent reform," says Ed Black, the president and CEO of the Computer and Communications Industry Association, an umbrella lobbying group for technologies companies, including Google, Facebook, Microsoft and Yahoo.
Still, the top House Democrat came out swinging. "By favoring large international companies, we have before us a missed opportunity to encourage entrepreneurship," Pelosi said, a comment that contrasts sharply with Obama's characterization of the legislation. She demanded that lawmakers kill the bill or at least remove Section 18, a little-known provision that had cleared the Senate easily.
Patent reform lobbying has long been primarily a debate between tech and drug companies. Wall Street has been preoccupied by last year's financial reform bill and this year's scuffle over debit card swipe fees. But the Financial Services Roundtable, which represents the country's biggest banks, fought hard for Section 18, and Pelosi's opposition reflected a sudden division within the Democratic Party over two specific patents that have already cost the banking industry at least $400 million. The turmoil over those patents consumed weeks of the House calendar behind the scenes, while the unemployment rate continued to rise.
Section 18 would create a new process at the Patent and Trademark Office that could invalidate existing "business method" patents -- but only for "financial services" issues. Other patents would be immune to the new review process.
The United States has always granted patents to new gadgets. Someone who builds a better mousetrap can patent it and secure rights to decades of exclusive production. But in the late 1990s, a Federal Circuit ruling, State Street Bank v. Signature Financial Group, permitted the rise of new "business method" patents, rights applying to the way a business operates. This has led to a host of patents being granted on very broad abstractions: A company called Phoenix Licensing is currently seeking millions from banks for allegedly infringing its patent on printing marketing materials on billing statements.
"They're giving out patents as property rights that have fuzzy boundaries," says James Bessen, a lecturer at Boston University's law school and a fellow at Harvard's Berkman Center on Internet and Society. "Particularly for a software patent and a business method patent, it's very unclear what it covers and what it doesn't. We have this terrible situation where there are thousands and thousands of patents filed each year where we don't know what they cover until somebody's been through a lawsuit."
The Section 18 language to swat away pesky business-method patents -- for banks -- was dropped into the Senate version of the bill by prolific Wall Street fundraiser and third-ranking Democratic Sen. Chuck Schumer (N.Y.), who declined to comment.
"This [is] the sort of gift to major corporations that is the hallmark of bad legislation," says Tom Giovanetti, president of the Institute for Policy Innovation, a conservative think tank that works extensively on intellectual property issues. "Any time you're singling out a particular industry, that's a red flag. This is a case of the banks using their raw political clout."
Schumer's move was the latest of several efforts from the too-big-to-fail crowd to overturn two patents on check processing owned by a company called DataTreasury, which has leveraged huge settlements from megabanks, including JPMorgan Chase, and remains embroiled in legal battles with others.
"This is something that's being pushed by big banks so they can basically railroad a couple of guys who they don't want to pay licensing fees on anymore," says an aide to a Senate Democrat who voted against the patent bill.
In 2007, Congress made a more direct attempt to eliminate DataTreasury's patents, but that effort fell short. This year, Wall Street resorted to broader language that could have implications for other patents. The current language on "business method" patents for "financial services" would also help banks fend off lawsuits like the one filed earlier this year by Phoenix Licensing, the owner of the patent for marketing materials on billing statements.
Schumer's provision infuriates software companies, which have spent years advocating a similar program for tech firms to no avail. "There's been a lot of dodgy business method patents, and I think my industry, the tech industry, has much more claim to being victims of ridiculous business method patents than this check clearing patent that caused a lot of anxiety in the financial services sector," one disgruntled tech lobbyist says.
And, of course, DataTreasury hates it.
"This provision isn’t about reforming the patent process or creating jobs," says DataTreasury President and CEO Claudio Ballard. "It’s about Congress doing a big favor to the banking industry at the expense of inventors and small business entrepreneurs."
DataTreasury's twin cash cows are patent No. 6,032,137 and patent No. 5,910,988. They essentially patent the ability to scan a check and transmit it to a database over the Internet or a fax line. Both fit a long-established pattern of questionable patents issued during times of technological upheaval. "Internet plus thing-that-already-exists equals patent," as one tech lobbyist put it.
"They're generally viewed as patent trolls," says Stanford law professor Mark Lemley, a patent law expert, referring to DataTreasury, which has no employees and over 1,000 shareholders.
Bank of New York Mellon, which declined to comment for this story, is pushing hardest against DataTreasury, hoping to invalidate the patents to get out of a 2008 licensing deal. Other banks are also hoping to avoid future settlements with the patent troll, and they've got powerful allies: The Obama administration supports Section 18, according to an official statement of administration policy.
So why did Pelosi, one of the most capable legislative dealmakers in recent U.S. history, walk into a bank lobby buzzsaw on a bill that appeared certain to pass, over two patents that are widely perceived as flimsy?
For a small company, DataTreasury has embarked on an astonishingly aggressive Beltway effort, hosting conference calls with reporters and hiring top political operatives to plead its case before lawmakers.
DataTreasury's lawsuits are handled by Texas trial-law kingpins Nix, Patterson & Roach. In the 2010 elections, the firm was the third-largest contributor to the Democratic National Committee, pouring in $179,000, behind only Google and the Law Offices of Peter G. Angelos, according to the Center for Responsive Politics. When Republican lawmakers bemoan "Democrats and trial lawyers," they're talking about Nix Patterson and a handful of other big law firms.
Nix Patterson brought in an even bigger fundraising champion to lobby Democrats for DataTreasury: Ben Barnes. He and his wife Melanie have dumped $379,000 of their own money into politics over the years, according to Center for Responsive Politics data, with every penny going to Democrats. Barnes is also one of the most influential fundraising bundlers in politics. In the first half of 2009 alone, he pulled together $630,450 for the Democratic Congressional Campaign Committee -- more than anyone else, according to the Sunlight Foundation.
Barnes is not a man congressional Democrats keep waiting. And he's previously worked directly with Pelosi, who attended a fundraiser at Barnes' Austin home in 2009. Pelosi's office did not respond to inquiries on her meetings with the fundraising giant, but when asked by HuffPost whether he had won over Pelosi on Section 18, Barnes said that he had.
"Oh, yeah," Barnes told HuffPost. "For some time I've worked with DataTreasury that has the patent all the banks are worked up about."
By revolting on the patent bill, Pelosi was throwing in her lot with Reps. Maxine Waters (D-Calif.), Dan Boren (D-Okla.), Aaron Schock (R-Ill.) and Jim Sensenbrenner (R-Wis.), who circulated a letter on June 15 urging their colleagues to oppose Section 18, saying the language "carves out a special niche" for Wall Street that would "stifle innovation."
This odd bipartisan coalition was going up against the entire New York delegation, led by Rep. Joseph Crowley (D-N.Y.), chairman of the corporate-friendly New Democrat caucus, who declined to comment for this story. As the behind-the-scenes struggle intensified, DataTreasury promoted the idea that Section 18 was a covert bailout for the banks. If courts ruled that the new law amounted to an unconstitutional taking of property -- a very big 'if' -- then taxpayers would ultimately have to pay back the bank winnings resulting from the bill.
So the Financial Services Roundtable coaxed the National Retail Federation into supporting Section 18. Banks and retailers had just finished battling each other over debit card swipe fees, but Wall Street needed to marshal whatever support it could to diminish the appearance that banks were receiving a special, undeserved handout. On June 21, the NRF came through for the banks, sending a letter urging members of Congress to support the provision.
"This is about patent quality and litigation abuse. It isn't a big bank bailout, period, so when people start using those arguments, we had to react," says Peter Freeman, a lobbyist for the Financial Services Roundtable, confirming that the banks lobbied retailers for support.
It worked. The second- and third-ranking House Democrats, Minority Whip Steny Hoyer (D-Md.) and Assistant Minority Leader James Clyburn (D-S.C.), stuck with Crowley and the banks.
"My sense is Hoyer and Clyburn thought this was an easy one to give the business community," says one lobbyist who worked the GOP for DataTreasury.
Clyburn declined to comment, but Hoyer spokeswoman Katie Grant told HuffPost, "Mr. Hoyer’s priority was seeing the patent reform bill pass, not any one particular provision."
The leadership divide split House Democrats. With 92 voting to back the banks and 93 voting with Barnes and Pelosi, there were nowhere near enough votes to overcome the Republican support for Wall Street. Section 18 is still in the legislation, which the House passed about a week before Obama's press conference.
"The banks won again, that's the story," says Maxine Waters' chief of staff Mikael Moore.
Pelosi is a master vote-counter: She must have known she would lose. But politicians frequently fight losing battles for special interests, performances that allow major donors to believe the lawmaker did all he or she could on their pet issue. Notably, nobody in the leadership of either party has been willing to fight a losing battle on behalf of the jobless all year.
"I take my hat off to the Bank of New York and the senior senator from New York," Barnes, the gracious loser, told HuffPost. "The banks worked very hard. I saw their footprints all over the House, and Chuck Schumer is pretty good help."
Correction: This post originally referred to the State Street Bank v. Signature Financial Group decision as a Supreme Court ruling, instead of a Federal Circuit ruling. The error has been corrected.
BAITING THE TEA PARTY
Although the House GOP sided with Wall Street by a nearly 3-to-1 margin on Section 18, a full 65 Republicans bucked the banks to cast a vote aiding Democratic trial lawyers. By any conventional political calculus, the vote would have drawn zero GOP supporters.
"These are smart people, so the financial services industry has to be wondering how they lost 65 Republicans on a floor vote that they described as being about frivolous lawsuits," says Carlyle Thorsen, a former general counsel to onetime House Majority Leader Tom DeLay (R-Texas) who lobbied GOP members on behalf of DataTreasury.
DataTreasury's top ally in Washington was the U.S. Business and Industry Council, whose lobbying support helped create the impression that the Section 18 push was driven by broader business interests. USBIC was founded in 1933 as a hardline conservative alternative to the U.S. Chamber of Commerce, an organization now associated with the GOP and corporate behemoths. Today, USBIC touts itself as a small business coalition representing "nearly 2,000" companies, but like similar lobbying groups, it does not disclose its members.
According to a memo distributed by the Republican Study Committee, just four companies officially opposed Section 18 in Capitol Hill backrooms: DataTreasury, Intellectual Ventures, Walker Digital and Trading Technologies International. DataTreasury spokeswoman Karen Hinton told HuffPost that the company has no financial relationship with USBIC. The council's president, Kevin Kearns, insisted that none of those companies have any financial relationship with USBIC, but he refused to detail the council's finances or provide a list of its members.
USBIC hosted three meetings and a debate over Section 18, all of which were heavily attended by Hill staffers, according to Kearns. They also hired three outside lobbyists to pump the GOP: former Strom Thurmond aide James Edwards, Maui Tea Party co-founder Marc Hodges and Larry Hart, head of government relations for the American Conservative Union, which hosts the annual Conservative Political Action Conference.
The group orchestrated a strong astroturf campaign targeting Tea Party members, launching the websites americasjobcreators.com and http://www.noonhr1249.org while entreating conservative leaders to sign letters opposing the patent legislation. Signatories included a host of GOP figures not generally associated with intellectual property debates, most notably Richard Land, president of the Southern Baptist Ethics and Religious Liberty Convention; Phyllis Schlafly, who led the charge to kill the Equal Rights Amendment in the 1970s; former Reagan Attorney General Ed Meese, best known for providing legal cover to the Iran-Contra affair; and Hart.
In October, USBIC announced it would give DataTreasury founder Claudio Ballard its "Inventor of the Year" award, though Ballard had not received any patents in a decade. Kearns, the business council president, acknowledged that Inventor of the Year is "a relatively recent award" but declined to comment further. "Who the hell cares about someone giving Claudio Ballard an award?" he asked.
In later conference calls with reporters, DataTreasury boasted of the award without disclosing that it came from a lobby group pressuring Congress on the same issue as DataTreasury itself.
USBIC also bestowed an award on Schlafly, who conservatives say proved crucial to securing dozens of Tea Party votes against Section 18.
"The Tea Party people allowed themselves to get stirred up about patent reform in general by Phyllis Schlafly," Institute for Policy Innovation President Giovanetti told HuffPost. "We have a lot of sympathy with Tea Party folks, but this is an area where they've just allowed themselves to be manipulated." Giovanetti's IPI was founded by former House Majority Leader Dick Armey (R-Texas), currently the chairman of leading Tea Party group FreedomWorks.
Schlafly has written periodically on patent issues over the last decade. This past March 11, she wrote her first column on the current bill, declaring that its general goals violate the vision of property rights espoused by "the Founding Fathers." Schlafly received her award on April 6, with Ballard sitting in the front row during her acceptance speech. On May 20, she wrote another column mentioning Ballard by name and citing his patent.
"Another outrage of the proposed patent bill is the provision that subjects to expensive new litigation and retroactively attacks the patent on the check-clearing system which enables banks to return photo-images to their depositors rather than actual canceled checks," Schlafly wrote, noting, "This system was created by inventor Claudio Ballard."
Of the 65 Republican votes to eliminate Section 18, a full 19 came from official members of the House Tea Party Caucus -- one-third of the caucus, a far higher rate than that of Republicans overall. Another 21 came from members of Congress who either identify as Tea Partiers, whose campaigns were supported by Tea Party groups or who spoke at Tea Party events.
Of the other companies in the RSC memo, Intellectual Ventures was the only one with meaningful clout on Capitol Hill. Intellectual Ventures was founded in 2000 when Microsoft Chief Technology Officer Nathan Myhrvold and Intel Assistant General Counsel Peter Detkin left their prestigious positions to cash in on intellectual property. The company doesn't have a political action committee, but its employees give profusely to political causes: In the 2008 electoral cycle, Intellectual Ventures' employees collectively donated more to Rep. Sensenbrenner's campaign than any other group. Sensenbrenner, who wrote in opposition of Section 18 alongside Rep. Waters and Boren in June, declined to comment for this article. He has significant clout with longer-serving Republicans -- he was a major figure in the impeachment trial of President Bill Clinton and later chaired the House Judiciary Committee. Since the patent reform fight began in 2005, Intellectual Ventures employees have also dropped money into the coffers of Reps. Charlie Dent (R-Pa.), Daniel Lungren (R-Calif.) and Dana Rorhbacher (R-Calif.). All three voted to strip out Section 18.
"There's no secret here," Intellectual Ventures General Counsel David Kris told HuffPost, referring to the group's lobbying efforts against Section 18. "We have taken out advertisements in print, online, on the radio; we have written letters, open letters from our CEO. We haven't been shy about it."
The firm's employees also have made generous donations go to GOP PACs and other middleman funds that donate to Republican politicians. In the past three congressional election cycles, its employees have dumped $248,700 into such enterprises, according to Center for Responsive Politics data, including $129,700 to the National Republican Senatorial Campaign and $40,000 to the National Republican Congressional Committee.
But 65 Republican votes simply weren't enough. Section 18 stayed, one of several highly-targeted special interest provisions included in the House bill. Another item protects big accounting firms like PriceWaterhouseCoopers and KPMG from lawsuits. As Roll Call reported, Medicines Co. will score $214 million from an earmark in the patent bill backed by Reps. Michele Bachmann (R-Minn.) and John Conyers (D-Mich.), which bolsters protections for its drug Angiomax. The Senate version, meanwhile, explicitly protects patents owned by tax software companies like TurboTax and Quicken, a difference with the House bill that will have to be ironed out in conference.
Regardless of whether banks or patent trolls had won out on Section 18, none of this dealmaking would have had anything to do with the way intellectual property law is supposed to work -- much less creating jobs. Amid 9 percent unemployment, Congress was bickering over two check-processing patents.
DRUGGING THE ECONOMY
The battle between patent trolls and Wall Street couldn't take place, however, until another, bigger fight between patent trolls and tech giants had been settled.
The technology involved in a Blackberry smartphone features hundreds of different patents, and it is virtually impossible to conduct an effective search to determine if any new technology is infringing on a vague, little-known patent. In 2002, British Telecom sued several Internet service providers (including AOL Inc., HuffPost's parent company), claiming to have patented the hyperlink in 1980.
That lawsuit failed, but similar efforts have been wildly successful. In 2006, Blackberry's parent company Research In Motion Inc. paid out over $600 million to settle a lawsuit from NTP Inc., a patent troll which owned the idea of sending email over a wireless network.
So tech giants went to Washington for help, where they ran into furious opposition from drug companies. A drug only requires one clearly-defined patent: the chemical compound in the drug. There's no need for complex patent searches and no incentive for trolling. So the tighter the patent law and more severe the infringement damages, the bigger the profits for Pfizer and GlaxoSmithKline.
The current intellectual property regime is good at protecting drug patents, but not particularly good at promoting public health. The United States is the only country in the world that grants pharmaceutical monopolies without also regulating the price of patented drugs.
"When you give a company a monopoly for a product that is life-saving, then give the company incentives to price the drug very high, because people are willing to pay very high prices to have their lives saved, a situation arises where there are people who are willing to pay that price but don't actually have the money," says Aidan Hollis, an economist at the University of Calgary. "People can't get the drug."
Intellectual property laws do not simply exist to ensure that inventors get rich. The idea is to promote social welfare by encouraging new ideas. A system that fosters a new idea whose benefits are unavailable to most people does little to move society forward. The U.S. Constitution takes an explicitly pragmatic approach, granting Congress the power to issue patents, "To promote the Progress of Science and useful Arts."
"There's no notion whatsoever that this involves any sort of individual right," says economist Dean Baker, co-director of the Center for Economic Policy and Research. "It's quite explicitly tied to a public purpose."
"Intellectual property generally has become more like a religion than a science," says Sprigman, the UVA law professor. "A lot of people who are very pro-IP are not really interested in the economics of it."
Patent-inflated prices produce substantial burdens on the health care system and government programs like Medicare. According to a 2009 paper by Baker, Americans spent $250 billion on prescription drugs in 2009, but would have spent just $25 billion had all drugs been sold as generics, meaning without patent protections. Given that the government already funds a great deal of research that drug companies use, Baker suggests a different intellectual property model for drugs: direct government-funded research and no patents. The companies, of course, oppose such a system, since they have no interest in losing the patent money.
Companies also have incentives to develop new drugs that cater to the wealthy. "Tuberculosis, for instance, is incredibly important, but it's not very profitable, because most of the people who have tuberculosis are poor," notes Hollis.
Hollis is working with dozens of public health experts on reforming the IP incentives for drugs. He's promoting a proposal called the Health Impact Fund, which would pay pharmaceutical firms based on the public health value of new medicines. In return, companies would agree to sell their drugs at cost, ensuring the broadest access possible. The plan would require about $6 billion to get off the ground, but would not actually limit pharmaceutical company profits -- just reshuffle those profits toward more productive endeavors.
But neither tech nor pharma has been lobbying for the Health Impact Fund. Silicon Valley wanted to limit court damages and make it harder to sue, while pharma sought to preserve the status quo. After years of wrangling, drug company lobbyists have watered the patent bill down to a very weak broth. Nothing with any policy substance gets through today's Senate with 95 votes.
"This is a great bill," says Gary Griswold, chairman emeritus of the Coalition for 21st Century Patent Reform, a drug company lobbying group.
"We're ready to move on," says Amos Snead, spokesman for the Patent Fairness Coalition, which represents Silicon Valley firms.
While corporate behemoths officially support the defanged legislation, the National Small Business Association opposes it, saying it tilts the patent playing field to further favor big companies.
The knockout blow for tech landed in March 2010, when Sens. Leahy and Hatch dropped efforts to reform the patent litigation system. In the years since Congress began considering patent reform, tech had discovered other lobbying opportunities.
"There are a lot of companies who, even if they came out vigorously and opposed this bill, they might not have been able to stop it," says Computer and Communications Industry Association CEO Black, the tech lobbyist. "So I think a lot of companies made it their calculation that this wasn't worth pissing off [members of Congress]."
Many of the top tech firms pushing patent reform -- Google, Microsoft, Oracle and others -- are also lobbying for a "holiday" on offshore corporate tax havens -- a multibillion-dollar reward for stashing cash in tax-free countries like the Cayman Islands. Ironically, Pfizer is the tech giants' top lobbying ally on the tax issue.
But with thousands of lawsuits pouring in annually, the sheer length of the patent fight on Capitol Hill encouraged Silicon Valley giants to change their business models.
Now, they're mimicking patent trolls, increasingly emphasizing lawsuits over new ideas. That's not just wasteful, consumer advocates warn, it threatens consumer competition: If every aspect of every new high-tech product is protected by decades of patent monopoly, the market forces that drive innovation could be crippled.
"We've been very alert to the expansion of patent rights, intellectual property rights at the expense of competition, which has been a trend," says Bert Foer, president of the American Antitrust Institute. "Having IP rights does not give one the right to violate antitrust laws, but where the boundary is between the two is still unclear and unsettled."
Tech companies are testing that boundary.
Google developed and owns the intellectual property behind Android cell phones, but it doesn't charge licensing fees for the use of that technology. Instead, it lets manufacturers use the wireless platform for free and rakes in advertising revenue -- a business model similar to its signature search engine. The result is heavy competition among different manufacturers to create the best "Droid" phones -- competition that results in lower prices for consumers.
Other cell phone companies, including Blackberry-maker RIM and Apple, stake their profits on marketing brands derived from their wireless monopolies. They're terrified of the Droid model.
Last year, Oracle sued Google in a claim resembling many patent troll cases. Oracle argues that Google's cell phone platform infringes on its patents for Java -- a computer coding language dating to 1995 that Oracle purchased last year with its acquisition of Sun Microsystems. Patent infringement claims based on old ideas applied to new technological frameworks are a hallmark of frivolous patent lawsuits, like the 2002 suit claiming to have patented the hyperlink in 1980.
"Look at who is suing who in the cellphone world -- 10 or 12 major companies, Apple and Oracle, they're all suing each other," says CCIA's Black. "I'm sorry, there's not a whole lot of value in that system. It's people gaming a system and trying to protect themselves."
Oracle started in the 1970s, selling its own database management software. The company remained exclusively focused on its own products until the 1990s, when it bought a few other software firms. But in 2005, with patent trolling at its peak, Oracle kicked off a buying spree, acquiring 60 companies through 2010. Securing patents was not the only motivation behind those mergers, but Oracle scored loads of patents in the process. Today, Oracle, one of the most outspoken critics of software patents during the 1990s, owns more patents than any software company except Microsoft.
Microsoft has also sued and intimidated companies that manufacture smartphones using the Droid platform, as the Seattle Times has reported. Droid-maker HTC currently pays Microsoft $5 for every phone it sells.
Both Oracle and Google declined to comment for this story, but James Gosling, the Sun Microsystems guru who developed Java, wrote a blog post about the lawsuit in August 2010. Gosling said Sun had always frowned on software patents, viewing the intellectual property system as "goofy." But after a court ordered the company to pay a "huge" penalty to IBM over what Sun saw as a frivolous patent, Sun began filing patents to protect itself from future payouts. Still, Gosling had no kind words for Oracle, describing the case in terms that also aptly describe the lobbying push on patent reform.
"There are no guiltless parties with white hats in this little drama," Gosling wrote. "This skirmish isn't much about patents or principles or programming languages. The suit is far more about ego, money and power."
Gosling now works for Google, which is trying to deploy similar patent-gathering tactics. Google made a $900 million bid for 6,000 patents currently owned by the bankrupt Canadian telecom firm Nortel this spring, saying on its company blog that it wanted the patents to protect itself from lawsuits.
The response to Google's bid was unprecedented. Microsoft, Apple, RIM and others formed a consortium to make a competing bid, offering $4.5 billion for Nortel's patents. Representatives of those firms declined to comment.
FIGHTING FOR SCRAPS
So Silicon Valley rolled over in Washington, granting Leahy and Hatch the freedom to side with Pharma and pursue a light-touch approach. The core of the bipartisan legislation rolled out early last year shifts the U.S. patent approval system from a "first to invent" standard to a "first to file" standard and creates a board at the Patent and Trademark Office to review the validity of questionable new patents. That same basic legislation passed the House in June.
The repercussions are already being felt. According to an analysis of court filings by Law360, the number of patent lawsuits jumped 20.2 percent in the first six months of 2011 compared to the first six months of 2010.
Currently, the United States is the only nation which awards patents to the original inventor. Every other country that observes intellectual property rights grants the rights to whoever files a patent application first. Neither system rewards stolen ideas -- a variety of legal safeguards ensure that, say, Microsoft doesn't steal an idea from a garage entrepreneur, file a patent and obtain improper intellectual property rights. But the first-to-invent system is susceptible to tedious legal challenges with little impact on the public welfare.
"We end up having these court proceedings where we fight over what it means to have thought of something first," says Stanford law professor Lemley.
Small businesses prefer first-to-invent. The NSBA sees a first-to-file system as a handout to multinationals who have more resources to file patent applications than independent entrepreneurs, who may need to take time to develop models to ensure that an idea is marketable before spending money on the patent process.
But first-to-file may also exacerbate patent problems for all kinds of companies. The Patent and Trademark Office has granted so many flimsy patents in part because of a flood of patent applications. The agency is currently sitting on a backlog of more than 700,000 applications. With so much on its to-do list, the PTO frequently approves unwarranted patents, and first-to-file could encourage an even greater deluge.
"It's possible that one consequence of first-to-file is that you'll have a rush of more patents," says Manheim, the law professor.
The bill's new review process inside the PTO does provide a cheaper way to challenge silly patents than the current court process, but tech firms aren't likely to take advantage of it. Monitoring patent applications is nearly impossible, and challenging a patent alerts its holder to a potential lawsuit target if the challenge fails.
"I don't think it does much except rearrange a few deck chairs," says Bessen, from the Harvard Center on Internet and Society. "It just does not address the main issues."
The bill doesn't fix the tech system, nor does it take steps to resolve the conflict between tech and pharma. It's not obvious, for instance, why the same intellectual property rules for drugs have to apply to software.
"A one-size-fits all system doesn't work in the 21st Century," says Manheim, before acknowledging: "The problem with that argument is that it might violate international law."
Unfortunately, tailoring patent laws to better suit different types of technology may run afoul of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), a treaty that countries must sign in order to join the World Trade Organization. Article 27 of TRIPS reads:
"Patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced."
Although other nations have patent standards that affect different industries in different ways -- the European Union, for instance, does not generally grant software patents -- Manheim said the TRIPS language killed efforts to separate tech and pharma standards in 2007, as members of Congress balked at inviting a WTO backlash.
Drug companies may actually have won the patent fight in 1994, when the U.S. negotiated TRIPS and insisted on the nondiscrimination language. Many of the countries then trying to gain access to the WTO did not allow drug patents, concerned about citizen access to critical medicines. The U.S. wanted to make sure that its drug companies would be able to profit in other countries.
"But that," Manheim says, "has come back to haunt us."
Alex Becker and Paul Blumenthal contributed reporting