Brian Kahin2013-05-19T10:51:53-04:00Brian Kahinhttp://www.huffingtonpost.com/author/index.php?author=brian-kahinCopyright 2008, HuffingtonPost.com, Inc.HuffingtonPost Blogger Feed for Brian KahinGood old fashioned elbow grease.Patent Reform and Patent Totalitarianismtag:www.huffingtonpost.com,2011:/theblog//3.10230012011-11-10T12:52:01-05:002012-01-10T05:12:01-05:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/was signed by the president on September 16. You might think, in light of the celebration and rhetoric, that the Act was tackling the big problems such as patent trolls, broad and abstract patents, the billions squandered in the smartphone wars, or opportunistic litigation against users. You might think that. But you would be wrong.
A Not-So-Innovative Act
The great irony of the America Invents Act is that the big push for patent reform originally came from IT companies, but over the years the reform effort was channeled into fixing a few longstanding anomalies of the U.S. patent system:
the lack of an effective post-grant invalidation option;
our unique first-to-invent system; and
congressional diversion of patent fees for other purposes.
So instead of providing alternatives to litigation as high-tech had asked, the Act adds a post-grant review process that must be initiated within nine months. Similar opposition or invalidation proceedings have long been available in the European Patent Office and elsewhere. Meanwhile, the Act actually trims back two procedures (ex parte reexamination and inter partes reexamination) that serve as limited alternatives to litigation.
A 9-month window for post-grant review is fine in some industries, where patents are few and high-quality. It is of little help in IT, where a single product may contain thousands of patentable functions and the government issues a torrent of patents every week -- many with abstract, overlapping claims and of questionable quality. IT-related patents now account for nearly half the the 200,000+ U.S. patents each year, nearly four times the number granted by the European Patent Office. Software patents alone now total 40,000 patents each year, despite the fact that they are widely reviled by those who actually create software.
Second, the Act adopts, at long last, the first-to-file system used in every other country in the world. Moving to first-to-file was recommended by the 1966 President's Commission on the Patent System. It has been opposed by small entities and universities, who fear that large companies with well-oiled patent operations will beat them to the patent office. High-tech companies are worried that the added incentive for rushing to the patent office will result in even greater overpatenting.
Third, the Act sets up a reserve fund that makes it less likely (but not impossible) that Congress will divert patent fees to other purposes as it has done on occasion in the past, mostly prior to 2004. The Act gives the PTO greater fee-setting authority, but it reaffirms the current fee structure, which subsidizes patent applications and thereby encourages low-quality filings. The subsidy gives the PTO a powerful incentive to grant patents, since the costs of examination must be recovered from issuance and maintenance fees -- fees that it receives only if it grants the patent. Worse, the new Act specifies that fees can only be used for the PTO's internal costs. In other words, they cannot take into account the damage done from wrongly issued patents.
Subsidizing Value Destruction?
It has been widely claimed that speeding examination at the PTO will create hundreds of thousands of jobs. But if an invention is important, investors will do their own due diligence -- and not simply rely on what a GS-5 examiner with a bachelor's degree in science eventually has to say four years later after a few hours of searching. The examiner has the burden of proving that the patent should not be granted and suffers no repercussions for allowing bad patents to issue. Indeed, patents asserted by trolls are on average eight years old by the time suit is filed (11-12 years after the patent is applied for!) -- by which time the examiner is probably working in the private sector.
Few companies are going to knowingly copy a genuine invention, because the patent will be granted and they then face the possibility of an injunction as well as damages. It's the marginal patents that get a big boost, since granted patents get an enhanced presumption of validity that makes them hard to invalidate. In effect, this is yet another subsidy, which gives the applicant more than the cursory exam merits.
The subsidy doesn't stop there. Despite claims that patents should be treated as property, they are not taxed as property at either local, state, or federal levels. Yet the public pays for growing costs for federal courts to evaluate validity, interpret claims, determine infringement, and assess damages. Industry (and ultimately the public) pays not only for the astronomical costs of patent litigation but for the uncertainty and damage that trolls do. A recent study shows that litigation by trolls diminishes the market valuation of public companies by $80 billion per year! $80 billion/year is a lot of jobs and innovation foregone -- and nearly 50 times the budget of the PTO's patent operation. The study also shows that 62 percent of the troll cases involved software patents.
Revenge of the Judicial Activists
To be fair, the America Invents Act does one thing to limit the options for trolls. It stops them from joining dozens of defendants in one lawsuit and hauling them all into the patent friendly Eastern District of Texas. They have done so on the grounds that the allegedly offending mass-market products are sold there (along with everywhere else) and one of the defendants is a local retailer. As a result, in terms of total number of patent defendants, the Eastern District of Texas outranks the next highest district court four-to-one. Here Congress actually overturned Eastern District of Texas case law, undoubtedly offending its judges. (Or at least it thought it did.)
Maybe Congress can get away with this affront to the favorite venue of patent trolls, but companies that advocate reform may not be so lucky. In a recent Eastern District of Texas case, the CEO of a Taiwanese defendant dared to voice his views, not in court but in Taiwan on the other side of the globe, saying "the issue of patent infringement is being taken too seriously sometimes." He might as well be speaking about trolls. Or the bureaucrats of the European Commission who keep trying to criminalize patent infringement -- despite widespread opposition from industry. Or the U.S. International Trade Commission which, when it finds a single infringing function out of 10,000, issues exclusionary orders barring entire product lines.
However, the suggestion that patent infringement should not necessarily result in undue punishment so outraged Judge Ward that he doubled the damages -- a windfall for the London-based "non-practicing entity" that sued on the patent. He wrote:
"The court finds that this statement by InnoLux's CEO shows InnoLux's lack of respect for this court and the jury's verdict. It is also an affront to the United States patent system - a system of constitutional origin."
But the patent system is not mandated by the Constitution -- no more than any of the other enumerated powers. Is the regulation of interstate commerce also so sacrosanct as to invite punishment for those who disagree with how agencies regulate it?
Unlike the patent system, free speech is not just something that Congress can provide for if it chooses. We do not want foreign courts half a world way punishing Americans for casual criticism of that country's practices, especially comments made here. Yet tinpot treatment of foreign defendants in the U.S. for what they say at home invites other countries to reciprocate.
The growing criticism of absurdly broad, trivial, and abstract patents is undoubtedly also an affront to the U.S. patent system. Patents on abstract subject matter are the legacy of decisions by the specialized Court of Appeals for the Federal Circuit, especially State Street Bank (1998), which abolished the longstanding exclusion of business methods.
In the course of debate over reform, leading Republicans on the House Judiciary Committee rightly denounced State Street as judicial activism, yet Congress could not muster the will to limit patents on any but the most egregious form, patents on compliance with the tax laws ("tax strategies"). And as the bill was awaiting passage in the Senate, the Chief Judge of the Federal Circuit, joined by the court's longest serving judge, made it clear that he didn't want to hear arguments limiting the scope of patentable subject matter. Not in an opinion but in separate "additional views" that could not be appealed to the Supreme Court:
"This court should decline to accept invitations to restrict subject matter eligibility... Excluding categories of subject matter from the patent system achieves no substantive improvement in the patent landscape... "
What about the rest of the landscape? Shouldn't there be some creative and innovative activities where you do not have to read patents first and consult routinely with lawyers?
"By creating obstacles to patent protection, the real-world impact is to frustrate innovation and drive research funding to more hospitable locations. To be direct, if one nation makes patent protection difficult, it will drive research to another, more accommodating nation."
The Judge offers no references or empirical evidence but simply equates research with patents. Readers of the study on the costs of trolls may find it more intuitive to substitute "litigation" for "innovation," "legal funding" for "research funding," and "drive lawyers" for "drive research."
But this is the Chief Judge of the patent appeals court -- the court that gave the world patents on business methods, software, diagnostic information, everything... And he's saying: Don't ask for limits to the patent system. We're not listening.
]]>The Age of Disablementtag:www.huffingtonpost.com,2011:/theblog//3.9239222011-08-12T11:36:14-04:002011-10-12T05:12:01-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/The Great Patent Bubble of 2011
I recently wrote about the $4.5 billion auction for Nortel's portfolio of 6,000 patents that went to a consortium that included Apple, Microsoft, and RIM (Blackberry) -- three of four smartphone platforms. In the wake of this sale, Interdigital has contemplated monetizing its portfolio of 8,500 patents, perhaps even putting the company up for sale. Google announced that it has bought over 1,000 patents from IBM for defensive purposes. Perennial investor Carl Icahn suggested that Motorola cash in on some of its immense portfolio of 18000 patents. Analysts have noted that Kodak's patents may be worth more than Kodak itself.
The value of these patents is not in the technology. These prices are being paid for the power to block others from using technology they have developed independently. Or for the power to block others from blocking you by threatening to block them from using their technology -- "assertion" and "counter-assertion."
The IT sector has learned to live with these practices at some cost, but the patent mania and litigation around smartphones is unprecedented. Nothing like this happened as the personal computer came of age. In Silicon Valley, suing for patent infringement was not part of the culture. Knowledge spread quickly and informally. Employees of rival firms socialized and exchanged ideas -- and moved from company to company. The Valley's unique form of social capital beat out the culture of control along Boston's Route 128 and made Silicon Valley world famous.
Too many companies are now embracing legal weapons on large-scale -- and social capital is suffering. Times change. When hearings were held on software patents in 1994, Oracle was vehemently opposed to software patents:
Our engineers and patent counsel have advised me that it may be virtually impossible to develop a complicated software product today without infringing numerous broad existing patents.
That was in 1994. The number of software patents issued annually went up five-fold in the next 15 years to nearly 40,000/year. The number of lawsuits over software patents has gone up eight-fold. Having recently acquired Sun and its vast portfolio of patents, Oracle is suing Google over Android's implementation of Java. Yet when Google adopted Java for Android four years ago, Sun's CEO Jonathan Schwartz blogged about how delighted he was. Oracle recently deleted the posting. And Schwartz's entire blog...
Why now? The opportunities for patent arbitrage, ambush, and hold-up are plentiful and enticing. Businesses, including trolls, are simply exploiting opportunities presented, including the government-created opportunities of the patent system.
Disclosure failure
Paradoxically, in an age where search engines allow free instant access to information, the patent system suffers from massive cognitive failure. We can find a few words among trillions, but we don't know who owns what process. Mission creep has expanded the system far beyond the areas where it works with reasonable precision (molecules) into areas where it generates huge costs and massive uncertainty. Hundreds of thousands of patents are written to secure the broadest possible claims while revealing as little as possible, with dozens of claims per patent to guard against the risk of invalidation while maximizing the opportunities for infringement. Despite the touted goal of public disclosure, these patents are written by lawyers for lawyers. Engineers and developers cope by ignoring patents, a perfectly rational response if they don't want to spend their productive years trying to make sense of tactical legalese.
Yet each patent is a government grant of the power to stop technology and commerce dead. Companies are hauling each other before the International Trade Commission, a federal tribunal that issues automatic exclusionary orders against infringing imports. You just need to show inadvertent infringement of a single inconsequential patent to keep an entire product line out of the U.S. The ITC blatantly discriminates against imports, but global value chains in information technology make all smartphones imports. And with all the innovative things that smartphones do, they face hundreds of thousands of possible patents.
Where does this lead?
More patents, larger portfolios, more and larger aggregators, and bigger markets for patents as weapons against products.
Intellectual Ventures, the shadowy aggregator founded by Microsoft executives, has led the way and now has an estimated 30,000 to 50,000 patents. IV's investors are bound to silence by non-disclosure agreements, and many of its patents are sold to subsidiaries or third parties who can take the rap for patent aggression. IV tried to keep its investors secret but was recently forced to reveal that they included Stanford and Cornell, two of the universities that developed Nine Points to Consider in Licensing University Intellectual Property. Point Eight of these guidelines admonishes: Be mindful of the implications of working with patent aggregators.
Respectable patent aggregation
Backing from prestigious universities puts IV on the verge of respectability. Public universities like the University of Minnesota and the University of Texas System invest in IV, why not public pension funds and other sovereign wealth funds. Why shouldn't governments invest in government-granted rights? After all, the Fed buys treasury bonds.
Last year, France announced the first sovereign patent fund, France Brevets. But France Brevets has only 100 million Euros to play with -- barely 3 percent of the price of the Nortel portfolio. France has since suggested a European patent fund, presumably much bigger. Surely there is a compelling case to be made in light of the post-Nortel frenzy.
But given the debt crisis, perhaps government grants should be left to private investors... Google has some $35 billion in cash equivalents, and a number of commentators have argued that Google should be shelling out cash to protect Android. After all, $35 billion is much larger than the reputed $5 billion capitalization of counter Apple and Microsoft, and keep Android phones coming into the U.S.
But defensive portfolios are utterly ineffective against trolls and despite the conspicuous attacks on Android by Microsoft and Apple, most of the lawsuits are filed by trolls. As for money, Apple has nearly $80 billion in cash reserves, and if it join forces with Microsoft, as in the Nortel auction, that's another $50 billion plus. They can easily outbid Google for abandoned portfolios and failed companies flooding the market. If patents are all about money, $130 billion beats $35 billion any day. Apple/Microsoft wins. Game over.
But as portfolios show real clout, they could look very attractive to sovereign wealth funds that might want to diversify. Shouldn't be controversial. Patents are only property, right? Norway's sovereign wealth fund owns prime real estate in the centers of London and Paris. Having stakes in an aggregator or two looks like a smart strategic investment, especially if it can help ensure access to the lucrative U.S. market.
Talk of real money inevitably turns to China. While China has a $350 billion sovereign wealth fund, China also has currency reserves of $3.2 trillion, up 33 percent in the last year. Like Apple's cash reserves, these are highly liquid assets held for strategic purposes. China's reserves are mostly in U.S. dollars, the world's reserve currency -- and most of that in U.S. Treasury obligations. But how much liquidity does China really need? With patent portfolios looking surprisingly liquid and China's need for access to the U.S. market, why not invest in the "world's currency of innovation?"
What does this look like?
Markets for government granted rights to stop commerce -- in which governments themselves are major players, using government-granted rights to stop others from using government-granted rights to stop commerce...
]]>Buying Freedom to Operate (and Regulate, Tax and Kill)tag:www.huffingtonpost.com,2011:/theblog//3.9013152011-07-18T14:13:00-04:002011-09-17T05:12:01-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/The Nortel Auction
On June 30, the results of the Nortel bankruptcy auction were announced. A consortium of Apple, Microsoft, RIM (Blackberry), Ericsson, Sony and EMC put up $4.5 billion to acquire Nortel's remaining portfolio of 6,000 patents.
This is not a story about patents motivating invention, or licenses enabling technology to spread. This is about patents as blunt legal instruments, options to sue -- in this case, the last remaining assets of a failed company offered to the highest bidder.
The winner: a consortium including three of the four smartphone platforms, including two companies (Microsoft and Apple) with huge cash reserves and a growing record of suing for patent infringement. The loser: the open-source Android platform promoted by Google, who lost the bidding at the Nortel auction.
Portfolio Power
This is the patent system at its ugliest. It is about how low standards and low quality lead to absurdly high numbers of patents for a technology whose products are inherently complex and rich in functions and components. It is about vast numbers of patents that would cost tens of millions just to hire lawyers to read and evaluate -- with no guarantees. It is about huge portfolios whose primary function is to intimidate, not to inform; and incumbent portfolio owners ganging up on the relative latecomer (pity poor Google, with its mere 1,000 or so patents, most of which have little to do with smartphones).
This has nothing to do with patents protecting the little guy in some small niche. Little niches are fine for the little guy, but the portfolio, not the individual patent, is the driving force in today's ecosytem. Portfolios serve to entrench incumbents, especially for large and complex platforms that keep growing in scope and functionality. As patents are added, they evergreen the portfolio so that it never expires.
Portfolio building begins innocently enough, spurred by the need for "freedom of action" (as IBM used to call it) or, more commonly, "freedom to operate." You don't get freedom to operate from a single patent. Your patent does not even give you the right to practice the technology it covers. It only gives you the right to keep everybody else from practicing it, including the lesser rights to regulate and tax. If they are inadvertently practicing it, then it's a license to kill. Portfolios provide "freedom to operate" to the extent that they provide weapons to fight back.
In a complex IT product in which a thousand patents may be owned by a hundred different entities, many people have many opportunities to block others -- and all the way down the value chain to end users. In principle, if everybody enforced their patents, not only would innovation come to a standstill, but all systems at work and at home would grind to a halt (see Michael Heller's "The Gridlock Economy").
Portfolio Strategies
Producing companies have addressed this problem -- in effect bartering their way out of the patent system -- by offering each other access to their respective portfolios. This is done in one of three ways. They can do it formally by cross-licensing their patents. They can simply agree not to sue each other (non-assertion agreements). Or they can just silently acknowledge the likelihood of mutually assured destruction -- the understanding that if you sue me, I will sue you back, and it will cost both of us big-time.
This reciprocity works pretty well for similarly armed and positioned portfolio owners. But the détente breaks down in an increasingly heterogeneous ecosystem. It doesn't work against trolls; they have no need for access to anyone else's patents because they aren't producing anything. It also doesn't work for newcomers who have little to trade. On the other hand, if you have a very big portfolio, you may be able extract licenses simply by intimidating your competitors (read Gary Reback's classic account of IBM's shakedown of Sun ["or do you want to make this easy and just pay us $20 million?"]).
Or you can simply rail about how competitors are infringing your patents, and thereby sow fear, uncertainty and doubt among their customers and users. Try searching "Microsoft threatens Linux." Note that individual patents are not identified, because that would give alleged infringers an opportunity to search for prior art that might invalidate the patent, the option to design around the patent, or the possibility of filing for a declaratory judgment. When Microsoft threatened Barnes & Noble over B&N's innovative Android-based Nook, it claimed that its patents dominated Android but would not reveal how unless B&N signed a non-disclosure agreement!
The irony here is that one of the key benefits of the patent is supposed to be public disclosure, but patents are far more powerful if you can use them to keep everybody worried and guessing -- without exposing individual patents to public scrutiny and possible invalidation.
With many patents, many potential infringers, and high costs of evaluating and contesting patents, there are many possible strategies for "extracting value" (or "abuse," depending on your perspective). You can sell non-exclusive licenses over and over -- and in stages, first to allies, insiders and first-comers, then on to the slow-moving, unsuspecting and the great unwashed. The trick is market segmentation on a grand scale, staged so that licensees are induced and pressured to buy in early.
The "catch and release" model is common among patent aggregators, whether their hat is black or white. The aggregator acquires patents, licenses them nonexclusively to its investors, members, or other insiders -- and then sells them back into the burgeoning market. There the patents may be acquired by bottom-feeders who have no compunctions about aggressive tactics, including attacks on businesses too small to defend themselves.
By its own admission, Microsoft already had a non-exclusive license to Nortel's patents before the auction, so it had no need for the portfolio -- except to use it against others, directly or indirectly. Microsoft is already vigorously suing Android makers over patents, so why not pile on a few more? Or sell them to speculators willing to start new fronts in the war against innovative products?
Let's be honest about it. It's in your shareholders' interests for trolls to wreak havoc on your competitors. It's about money.
Next, even more money: the sovereign patent fund.]]>Patents: Getting More Than You Paid Fortag:www.huffingtonpost.com,2011:/theblog//3.8917262011-07-07T13:29:00-04:002011-09-06T05:12:01-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/
Is PTO an expert government agency in the same sense as other agencies? And what are the consequences of deferring to patent examiners?
As of this writing, there are 135 regulatory actions under review at OMB's Office of Information and Regulatory Affairs. However, there are 1.2 million patent applications pending at the USPTO, including 700,000 awaiting the first office action (the official "backlog").
These patent applications are proposals to regulate innovation within the area outlined in the claims. A granted patent is a franchise to regulate, tax or ban the particular function or product outright. When patents were limited to specific technology, this was no big thing. However, in 1998 in an extraordinary burst of judicial activism, the special appeals court for patents, the Court of Appeals for the Federal Circuit, eliminated the rule against patents on methods of doing business. The floodgates opened to a nearly infinite range of activity cutting across technologies, industries and markets -- and extending to services, marketing strategies, business models and methods of regulatory and legal compliance.
Yes, that's right; patents can regulate how people comply with government regulation. And in the current patent reform legislation, Congress has only cut back on one particular egregious problem, the patenting of tax strategies.
Ironically, Justice Sotomayor's opinion in Microsoft v. i4i exalts Congressional inaction to new heights. In 2003, after extensive hearings on the effects of patents on competition, the Federal Trade Commission concluded, "A plethora of presumptions and procedures tip the scales in favor of the ultimate issuance of a patent, once an application is filed."
Yet the Supreme Court concluded that because Congress had failed to act in spite of the FTC's recommendation, it had acquiesced in the rule.
But with plenty of controversy over patent reform as it is, Congress hardly wants to pick another fight with tens of thousands of patent owners, whose patents are more valuable than they deserve to be. The Federal Circuit had already created a massive constituency against any possible rollback of the gold-plated presumption.
Just How "Expert" Is The Patent And Trademark Office?
So with nearly 10,000 times as many proposals to regulate innovation as there are proposed regulations before OMB's OIRA, how are they handled? By rigorous expert scrutiny? By public hearings with ample opportunity for comment? With a cost-benefit review by OMB?
"None of the above" is correct. Under the statute, the applicant is entitled to a patent, unless the examiner can show otherwise. At the same time, the internal incentive system rewards the examiner for granting patents rather than continuing to contest the application.
The examination is strictly private. While most patent applications are published after 18 months, there is no opportunity for anyone other than the patent applicant to participate in the process. The examiner need only have a bachelor's degree in science or technology, and the degree need not be matched to the patent application. (In the case of a very junior examiner, a "secondary examiner" may be identified on the patent.) The examiner will spend an average of 17 to 18 hours on the patent -- and facing a patent attorney billing at hundreds of dollars per hour. The cost in legal fees for an attorney to prosecute a patent application of minimal complexity was reported to average $7,879 in 2008.
PTO fees up through examination (filing, search and examination) total $1,100 -- and half that for small entities. As shown in a GAO study, the patent examination actually costs the PTO twice as much, but it is heavily subsidized by issuance and maintenance fees that come only if the patent is granted. So unless it issues enough patents, the agency cannot recover the costs of examination!
Questionable Patents: Cheap, Powerful And Plentiful
Cheap patents with a high presumption of validity naturally build demand for more marginal or questionable patents. Inflated demand adds in turn to the immense backlog of patents at the PTO, as well as threats and litigation at the back end.
Strong patents on real inventions don't need an artificial presumption of validity. The problem is the hundreds of thousands of marginal and questionable patents regularly released into commerce. These are the patents that muddy the system making it impossibly costly to know who owns what, especially for complex products. The revenue model simply pushes real costs onto the private sector, where the costs of patent litigation can easily amount to millions of dollars per side. Of course, from the perspective of law firms, the costs take the form of income, and from the perspective of patent departments, it means a growing budget.
Unfortunately, much of the mainstream press saw the case as a David v. Goliath story. While Microsoft may not be the most sympathetic defendant, especially given its growing string of patent assertions, this rule helps patent thugs and opportunists of all kinds. It helps patent specialists browbeat website owners who have no idea that they are infringing some of the breathtakingly broad patents that emerge from the U.S. Patent and Trademark Office. See "Under the Radar: Two Tales from the Secret Life of Patents." Small companies asserting patents can get help from lawyers on a contingency basis, but small companies lack the resources to evaluate, let alone defend against patent assertions. For them, the enhanced presumption of validity is one more reason to capitulate quickly.
Who Fixes The System?
The Court could have affirmed that the statute means no more than it says -- an ordinary presumption of validity. Congress can only change the law prospectively, or it will face claims from owners of marginal patents that their property rights are being taken away. Even prospective change confronts the constituencies (law firms, patent departments, brokers and licensing companies) that have built a business around cheap but powerful patents.
The Supreme Court can say that the Federal Circuit is wrong without putting judicial jobs or the federal treasury in jeopardy. It did so when it struck down the Federal Circuit's rule giving automatic injunctive relief whenever patent infringement was found. There, too, the Federal Circuit had grafted its own rule onto a simple statute. There, too, Congress had failed to act to change the rule, but its inaction had not been highlighted by an FTC recommendation to act!
Companies and academic experts concerned about the mismatch between the examination process and the presumption of validity had hoped that the Supreme Court would again resolve the issue with some attention to underlying merits. It did not. So there will be more patents, more threats, more legal action -- and less real innovation as real innovators find their efforts diluted and jeopardized by swarms of deficient but gold-plated patents.
]]>The Expanding Twilight Zone of Abstract Uncertaintytag:www.huffingtonpost.com,2010:/theblog//3.6339172010-07-06T12:28:07-04:002011-05-25T16:55:19-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/
State Street created an instant constituency for business method patents that wasn't there before. Before State Street, everybody knew that business methods were not patentable. It was understood and accepted. It was rarely litigated.
Under State Street, Bilski would have gotten his patent for a risk-hedging scheme for energy costs -- no questions asked. But it has become clear that business method patents -- which might have seemed like a great idea in those go-go years -- are deeply problematic. They are hard to evaluate for novelty and inventiveness, often sweepingly broad in scope, difficult to interpret, and very controversial. (Would we really want just one airline offering frequent flyer miles?) By abolishing the well-established and uncontroversial business method exclusion, State Street radically extended jurisdiction of the patent system to cover not only business practices such one-click ordering and tax avoidance strategies, but an apparently limitless range of human activities, such as athletic moves and playing with cats. Perhaps the largest professional land grab in modern history.
Ten years after State Street, the Patent and Trademark Office wisely denied Bilski's application -- not by attacking State Street head-on but by pointing to another test that the Supreme Court had used in earlier cases: The principle that a patent for a process must be tied to a particular machine or involve a transformation of matter. Without directly touching State Street, the Federal Circuit agreed, atoning for its reputation as an inveterate booster of patents. Then, to the surprise of many, the Supreme Court took the case -- and now has muddied the waters further.
Justice Kennedy's decision rejected "the machine or transformation" test as determinative while nonetheless praising its probative value, but declined to reinstate the business method exclusion because some processes that could be described as "business methods" may be patentable. Joined by four justices, Kennedy embraced a more amorphous test, the exclusion of "abstract ideas," citing language on algorithms in Benson, Flook, and Diehr, the Supreme Court's last and only word on computer programs, dating back to the 1970s. Kennedy's affirmation of Benson and Flook suggests that software patents remain problematic, but he adds nothing to the old language that he cites, leaving it to further litigation to determine what an "abstract idea" is in different contexts. Maybe it's like obscenity: you know it when you see it.
Only worse: How do you make concrete something characterized by its lack of concreteness?
In Bilski, all the justices rejected the patent -- five on the basis that it was an abstract idea; four would have done so on the basis that it was a business method. Justice Stevens's long and eloquent concurrence shows that patents have historically been limited to technology, as eventually articulated in the business method exclusion. Stevens and three other justices would have reinstated the exclusion, explicitly overruling State Street.
Congress to the Rescue
There is irony to how this came about. State Street's abolition of the business method exclusion was so sudden, unexpected, and retroactive, that it looked like financial firms could see their private inner workings patented out from under them. Congress was already embroiled in a drawn-out battle over patent reform (yes, another one; it seems to happen every decade). To fix this apparent inequity, Congress enacted "prior user rights" for "methods" with "method" limited to "a method of doing or conducting business." But this referred to the traditional exclusion that State Street had just said did not exist. Members of Congress scrambled to read their own definitions into the Congressional Record, some of which included manufacturing processes.
The beauty of the business method exclusion was that it was understood, accepted, and rarely litigated. Nobody was petitioning Congress for patents on business methods. But by suddenly handing out a new competitive weapon, State Street created a stampede. Fatigued by years of contentious and emotional debate over reform, Congress passed a greatly diminished reform package in 1999, but it included a stopgap for the upended expectations that State Street created, naturally without taking on the big question of where to draw the limits of patentability.
This stopgap measure simply opened the door to complete confusion over what business methods were and whether Congress, by mentioning them in this fix, had intended to validate them, whatever they were. In this way, Congress's stopgap measure, designed to remedy one particular risk created by State Street, seems to have breathed eternal life into the underlying problem. Deferring to Congress, Justice Kennedy declined to conclude that all business methods were unpatentable.
What we end up with in Bilski is: All "business methods" are not necessarily unpatentable, the machine-or-transformation test is useful but not fully determinative, and no new guidance on abstract ideas. Instead, Kennedy's opinion pulls back from the disciplined guidance that the Federal Circuit was trying to reinstate, regurgitates language from the 1970s, and says, in effect, "try again."
The Law of Abstraction
In January of 2009, CCIA, Duke Law School, and the Brookings Institution co-sponsored a conference on "abstract patents." Our notice began: "Abstract ideas are not patentable, but what are abstract ideas - and how can judges draw a line around them?" The question reverberates anew after this (non)decision in Bilski. The Supreme Court -- offering "clues" but no guidance -- has just handed this conundrum back to the Federal Circuit, inviting it to develop a concrete law of abstraction that the Supreme Court can then take another shot at.
In their book, Patent Failure, law and economics experts Mike Meurer and Jim Bessen point to the problem of fuzzy boundaries and the attendant failure of disclosure function. Drawing from empirical research by themselves and others, they show that while patents work reasonably well for pharmaceuticals, chemicals, and possibly other very tangible inventions, they work poorly for abstract subject matter such as software and business methods. They attribute this to the nature of the patent claims, which are well-defined for molecules but subject to considerable interpretation else. This makes it risky and costly to define boundaries, whether in litigation or more generally in identifying, evaluating, and navigating patents. (In comparison, consider how easy and inexpensive it is to survey and get title insurance for real estate.) At the same time, software and business method patents do not require the large investment in research and validation that new drugs do.
Justice Kennedy adopts a rhetorical framework that distinguishes the Industrial Age from the Information Age. Of course, it is not possible to separate one age from another. We still have an industrial sector and will continue to have one. Yes, the information sector has been radically expanded. So shouldn't we perhaps investigate whether information sector needs or wants a system designed for industrial use? (And could we perhaps ask those who actually make the technology work, not just the patent lawyers?)
The big problem is that the patent system remains one-size-fits all. We are stuck treating software the same as pharmaceuticals. Once business methods (or computer programs or diagnostic information) are inside the patent system, there is no escape. Middle managers are forced to live with high-priced patent lawyers at their side.
Justice Kennedy zeros in on a core issue of patenting in the Information Age: "This Age puts the possibility of innovation in the hands of more people and raises new difficulties for the patent law. With ever more people trying to innovate and thus seeking patent protections for their inventions, the patent law faces a great challenge in striking the balance between protecting inventors and not granting monopolies over procedures that others would discover by independent, creative application of general principles."
He concludes the paragraph with the ultimate disclaimer: "Nothing in this opinion should be read to take a position on where that balance ought to be struck." At least he acknowledges a balance. State Street did not. Its answer was not to describe a balance or draw a line, but to let it all in.
So the Supreme Court has now charged the Federal Circuit with developing a law of abstraction, a body of law that divides the world between abstract ideas and non-abstract (and so patentable) ideas - based on Bilski and three examples from 1972, 1978, and 1981.
Here is the fuzzy boundary challenge on a grand scale: A vast twilight zone of possibly patentable business methods, software, and diagnostic information. You would be crazy (or at least irresponsible to your shareholders) not to go for as many as you can get. A questionable patent, while not always as good as a solid patent, is a valuable weapon that can be used to threaten and bludgeon competitors, as well as anyone else willing to pay a licensing fee "reasonable" enough to avert the astronomical costs of litigation. The odds of the patent being contested on subject grounds are infinitesimal.
Today we have a huge backlog of patent applications, because the U.S. Patent and Trademark Office devotes scarce resources to managing patents in areas where standards are difficult and costly to apply -- and where patents are controversial and used frequently for ambush and ransom. The USPTO's limited resources -- and the resources of U.S. industry -- should be focused on areas where patents are needed for innovation and the system works by consensus. They should not be used for regulating business practices -- let alone tax avoidance, athletics, and the enjoyment of pets.
Brian Kahin is Senior Fellow at the Computer & Communications Industry Association.
]]>Microsoft Roils the World with FAT Patentstag:www.huffingtonpost.com,2009:/theblog//3.1719852009-03-06T11:18:00-05:002011-05-25T13:05:20-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/reported to be on the verge of bankruptcy,
This is big news. First, it means that I can no longer say that Microsoft has yet to file a lawsuit over software patents. (It had previously filed a few over patents on mouse technology.) Second, it is a direct attack on Linux, the open source operating system that offers the only significant competition to Windows in many markets.
Until now, Microsoft has shown restraint in not asserting its vast portfolio of patents, despite some notorious saber rattling against Linux two years ago. At that time, Microsoft vice-president Horacio Gutierrez fumed: "This is not a case of some accidental, unknowing infringement. There is an overwhelming number of patents being infringed." He claimed that 42 Microsoft patents were infringed by the Linux kernel alone, but declined to identify them.
But Microsoft's own practices with regard to software patents were described in congressional testimony by its former CTO, Nathan Myrhvold:
Most tech companies have made a deliberate decision to ignore the patent system.... They send people to technical conferences, and encourage them to read scientific papers so they can learn the latest techniques. Yet, they do not allow them to read patents - not even patents by the same people whose research papers they use, or patents of the institution from which they hire employees.... They do not check their products to see if they infringe anybody else's patents - a common practice in other industries, known as patent clearance.
Indeed, a good practical reason to avoid reading patents is that they are written by attorneys.
In any case, Gutierrez has put aside his indignation. Today he claims this litigation is not about Linux but merely about poor TomTom, who has long failed to see the justice of licensing a mere eight of Microsoft's 10,000+ patents. In short, it's just happenstance that three of the patents implicate Linux.
So here's what it looks like to me
1. Microsoft has abandoned its long history of not suing on software patents, in order to attack the Linux operating system. (Other patents at issue are specific to GPS systems.)
2. It has attacked Linux in the embedded devices market, where Linux has been conspicuously successful. This avoids the problem of suing developers or users of Linux distributions, such as Red Hat, which would threaten the many large Microsoft customers that use both Windows and Linux.
3. Even if the Linux community rides to the rescue, TomTom will be under pressure from its shareholders to settle quickly on "undisclosed terms" and, weakened as is, to avoid the cost and uncertainty of making a posterchild of itself.
4. More likely, TomTom will sell out to Microsoft, which tried to buy TomTom in mid-2006. Companies with large patent portfolios can drive hard bargains. With TomTom in a bind at the bank, Microsoft can use its patents to acquire TomTom on the cheap.
5. By demonstrating its willingness to sue a small company, Microsoft can induce others to settle, while undermining confidence in the market for embedded Linux. By contrast, when IBM sought to impress the world with its patent portfolio, it at least picked on Amazon -- a company able to defend itself and with a reputation for asserting patents aggressively. (Remember the one-click ordering patent that Amazon used in its holiday-season attack on Barnes and Noble?).
6. Microsoft is throwing eight patents at TomTom in dual proceedings -- one before the International Trade Commission and the other in court. Beyond imposing extra legal costs on TomTom, the ITC proceeding allows Microsoft automatic injunctive relief if it wins, which is no longer automatic in District Court. Microsoft argued against automatic injunctive relief in an amicus brief before the Supreme Court, but now it can get an injunction simply because TomTom's devices are imported. At the same time, Microsoft is forcing TomTom to defend a lawsuit in Microsoft's home district in Washington State, where Microsoft has demanded a jury trial. (Patent owners win before juries nearly two-thirds of the time, but only half the time before judges.)
But the move also comes at a potentially high price for Microsoft.
It drastically undercuts what creative and pragmatic people within Microsoft have been doing to and develop trust within the open source community and engage constructively with open source businesses. It is no coincidence that Gutierrez was promoted to corporate vice president the previous week, giving him extra juice to stand tough against those within Microsoft who have been cut off at the knees by this provocative litigation.
Microsoft's attack sticks a fat finger in eye of Europe, where authorities have been less solicitous of a company that is not their national/regional champion. Microsoft has continued to slug it out with the Directorate-General for Competition years after litigation was settled in the U.S. Now it is targeting a (former) European success story with patent claims that have been invalidated in Europe as "non-inventive."
Microsoft has long been an advocate of software patents in Europe both directly and through its policy surrogates, the Alliance for Competitive Technology and CompTIA. This move concretizes one of the big nightmares that caused many European policymakers to question the scope of software patents -- an issue that is now a subject of an administrative proceeding at the European Patent Office. Moreover, the use of the ITC exposes a US practice that is in principle a violation of the WTO charter -- discriminating against imports by subjecting them to automatic injunctions.
In fact, the lawsuit publicizes a patent trap of Microsoft's own creation. Microsoft created a de facto industry standard in the FAT (File Allocation Table) format that it made widely available for adoption without letting it be known that it held and would assert the patents behind the standard. What makes the FAT patents valuable is not the technology behind them but the fact that they were promoted and accepted as a standard without word that Microsoft would someday come asking for money. Two of the patents are for converting between long and short file names - a FAT function that is commonly implemented in digital cameras, MP3 players, and other devices, not just in Windows and Linux.
Does this remind you of ugly creatures jumping out from under bridges, demanding tolls from those in the midst of crossing, and, in some cases, eating them alive?
Some wishful thinkers within the open source community may accept Microsoft's claim that this is about TomTom rather than Linux, along with the blather that accompanies most patent litigation about how Microsoft would rather license than litigate. But this is in fact a landmark assault into the most troubled and controversial terrain of the patent system. It will reverberate for a long time to come.
]]>NPEs and Abstract Patentstag:www.huffingtonpost.com,2009:/theblog//3.1563502009-01-08T16:00:49-05:002011-05-25T13:00:22-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/1998 State Street decision authorized patents on business methods. Since State Street seemed to make it clear that U.S. patents were no longer limited to technology, the US even threatened to walk out of patent harmonization negotiations if the rest of the world didn't agree. That was in 2002, at a high-water mark of national arrogance, but even then we were seeing patents (exercising cats, crustless sandwiches, toilet reservation systems, one-click ordering) that the general public could understand and snicker at as proof of another demented bureaucracy gone off the rails.
That same year, 2002, the Federal Trade Commission and the Department of Justice held a remarkable series of hearings on the interaction of the patent system with competition and innovation. The hearings showed that while pharma and biotech were generally pleased with how the patent system was working, much of high-tech was not, especially software and Internet companies. This unprecedented division in perspective presaged the inter-industry debate has stalled patent reform, despite the twin bi-partisan bills introduced in both houses of Congress in early 2007.
The FTC Takes Another Look
On December 5, the FTC launched a new series of hearings to examine what has changed since 2002 and what impact a dramatic series of Supreme Court rulings may have had. I was on the opening panel, which focused on business models. Also on the panel was Peter Detkin, who was with Intel in 2002 when he coined the term "troll" as a polite alternative to "extortionist," and is now with Intellectual Ventures, the secretive patent aggregator that I wrote about in my last entry.
Our panel avoided the common T-word. The clinically polite alternative is "non-practicing entity," or NPEs -- although that includes upstream technology companies that are not necessarily as opportunist as trolls. Or as legally culpable as extortionists. Isn't it gratifying that patent discourse is becoming more polite -- or at least more circumspect?
I expanded on the patent bubble theme, describing two different kinds of patent value. First, there is the relatively low value of each individual patent in large portfolios developed by large companies for cross-licensing with competitors and defensive use. These portfolios give their owners what is called "freedom of action" or, more modestly, "freedom to operate."
Then there is the high value of individual patents in the hands of specialists skilled in "value extraction" and who don't need to offset the value of their patents with licenses from others because they produce nothing. They don't even have to worry about reputation; they are free to go after inadvertent infringers, with no compunctions and no downside, because they have little to lose. We believe in the efficient division of labor, don't we? So why shouldn't we have patent companies without the distraction and carrying costs involved with real technology and technologists.
But how do we tell the good guys from the bad? Intellectual Ventures says that it has never sued anyone, and it claims its own state-of-the-art invention laboratory. But has it commercialized any meaningful inventions of its own? Not that we've seen yet. Has it strong-armed companies into investing in IV as part of a compelled licensing of IV patents? Nobody's talking because they're all bound by non-disclosure agreements.
Despite the contention around NPEs, it was nice to see that we all agreed that more data is needed and that the patent system should be more transparent. There even seemed to be agreement in principle that patent licenses should be publicly registered. Patents are public instruments after all - shouldn't we know how they are being used, or abused? Wouldn't it be nice to know that NPEs are really engaged in technology transfer -- and are not just threatening operating companies after they create and market products?
Unfortunately, there is little transparency in today's patent system. Indeed, the patent system is beset by information failure. Information on the existence, interpretation, validity, and valuation is costly and uncertain -- much more so for some than others. This information asymmetry leads to arbitrage. And arbitrage means that low-value uses (e.g., individual patents in large cross-licensed portfolios) will migrate to high-value uses. The highest value is in the hands of trolls, since they are specialists who do not have to offset the value of their patents with a need to license the patents of others. They can assert patents without fear or inhibition, a very attractive use that increases the value of patents, builds demand for more patents -- in short, creating a bubble for patents that threatens those that produce complex products and services for real markets.
Deflating the Bubble... Slowly
Two months ago, the Bilski decision came down from the Court of Appeals for the Federal Circuit, the patent appeals court that issued the State Street decision ten years before. (Bilksi was a pure business method; see background here and here.) The court declined to overrule State Street or reinstate the old exception for business methods, but it abandoned the test it used in State Street. All State Street required was "a useful, concrete, and tangible result," language that the court concocted itself in a case four years earlier. The court never defined what these words meant, and it never found an application or patent that didn't meet this "test," so everyone assumed that this meant that anything was patentable.
Sobered perhaps by a string of Supreme Court reversals that seemed to strike at the heart of its original patentee-friendly jurisprudence, the Federal Circuit in Bilski abandoned the undefined, homegrown test in State Street as inadequate and recrafted a test from Supreme Court precedent:
For a process to be patentable, it must involve a physical transformation to a different state or thing, or must be tied to a particular machine.
What does that mean? The court gave examples indicating that software would be patentable if it represented physical objects undergoing physical transformation. However, it expressly reserved judgment on the alternative test: whether a general-purpose computer was "a particular machine." If so, of course, all software processes would be patentable.
Not the brightest of lines, but the court didn't flinch from trying to draw one, despite arguments that patent lawyers would manage to circumvent any court-imposed limitations. The Bilski decision leaves a lot up in the air, but it affirms that judges will draw limits, even around patentable subject matter, and it offers a modest deflating of the patent bubble. It eliminates some of the worst excesses spawned by State Street without provoking a backlash. And it has breathed new life into public debate of where the limits should be. For those who care about how and where the line should be drawn, some colleagues and I have organized a conference at the Brookings Institution on January 14, the Limits of Abstract Patents in an Intangible Economy.
Just as the debate has come alive in the U.S., it has also resurfaced in Europe three years after a proposed directive on software patents went down to defeat in the European Parliament. The President of the European Patent Office has asked the EPO's Enlarged Board of Appeals to answer four questions about the patentability of computer programs. The European Patent Convention has always specifically precluded patents on certain abstract processes, including computer programs and business methods, but then in the next section it says that these exclusions only apply to computer programs, etc. "as such." So decades have been spent trying to figure out what "as such" really means and what kind of "technical" contribution is needed to pass muster. Confronted by a proposal from the European Commission to reaffirm EPO rulings on computer program patentability, Europe spent 3 ½ years in passionate debate about software patents before the European Parliament killed the process by a vote of 648 to 14..
Can we draw a line against abstract patents? That's clearly not the kind of semantics that a right-thinking legislative body would want to wade into under its own free will. But courts have to decide cases that are brought before them, even the tough ones, and my guess is that they will continue to do so, as messy as it may be.]]>The Patent Bubble... Still Growingtag:www.huffingtonpost.com,2008:/theblog//3.1292322008-09-26T18:27:08-04:002011-05-25T12:45:25-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/Wall Street Journal story on Intellectual Ventures, it's getting pretty big.
The brainchild of former Microsoft CTO, Nathan Myrhvold, Intellectual Ventures has reportedly amassed $5 billion in capital and a portfolio of over 20,000 acquired patents -- and it's looking for more. From the perspective of the tech sector, Intellectual Ventures combines two questionable business models, the patent troll and the pyramid scheme, in a form that evokes Wall St.'s cleverness in designing glitzy vehicles for esoteric assets.
IV does not create or market products, so it is invulnerable to the patents of others. It looks like a patent troll, because it makes money from "being infringed." But IV has a new twist: The companies that settle not only pay license fees but are induced to invest in IV, thereby providing the capital to acquire more patents, set up new licensing funds, and pursue other companies. IV's licensee investors, including Sony, Nokia, Google, eBay, Intel, and Microsoft, are all sworn to secrecy about their involvement. According to the Journal article, other investors include pension funds and university endowments, and Myrhvold will target smaller companies for licensing fees (and equity) in the future.
The deep roots of the bubble
IV is only the biggest, and clearly the most sophisticated, manifestation of the IT-centered patent bubble that has been growing over many years. The bubble has roots in the decisions of the specialized appeals court and its predecessor dating back to the 1970s and 80s that made patents more powerful, more plentiful, easier to get, and harder to invalidate. The bubble was also fed by appellate decisions in the 1990s that made a vast, undefined range of abstract subject matter patentable -- including software and business methods. At the same time, the Patent and Trademark Office, intoxicated by the decision of Congress to let it fund itself out of the fees it received, let out the stops, and decided that its new mission was "to help customers get patents."
Cheap, plentiful patents made it easy for IT companies to assemble large portfolios, which they used not for exclusivity but for freedom of action, by cross-licensing their portfolios to other portfolio holders. On the other hand, patents were also considered important to startups. Venture capital liked them, in part because they could be sold if the business failed. And IT startups burgeoned in the 1990s -- ironically because the Internet provided a huge, rich, and largely patent-free platform on which anybody was free to innovate without asking permission.
Startups found that a few patents could be helpful in protecting a technological niche, but were of little value in gaining freedom of action in a portfolio-dominated market for complex products. For big companies, their accumulated portfolios provided an arsenal against patent attacks, as well as against any startups that might poach on the company's turf. In effect, portfolios enabled incumbents to maintain market share, and the increasing use of "balancing" payments to account for differences in portfolio size gave patent departments ammunition to argue for more and more.
This wasn't the way the patent system was supposed to work. Legend preserves the idea of a seminal, patented invention that the inventor is free to nourish into a product. That model may still apply in some fields, in some cases. But since a patent is only a right to exclude others, you really need a trading portfolio to access the technology required for a complex product. Still, it was possible to justify the portfolio system with the argument that "net users" (those that on balance made use of the technology of others) should pay "net innovators" (those that had big portfolios).
But there was a major flaw in this model: Most startups fail. And when they fail, their patents are sold off along with everything else.
As a result, patents were liberated from going (or at least, hopeful) businesses where they were held for protection. Instead, they were bought by speculators keen to find the buyers best positioned to "extract value" from the patent. In other words, trolls.
Can it be fixed?
An unintended byproduct of portfolio building, trolls revealed the downside of a hyperactive patent system. The reform package in Congress has modest measures aimed at reducing the rare but astronomical burden of full-blown litigation. But even these modest remedies are facing opposition from three distinct directions:
-- upstream inventors, universities, and specialists who experience only the benefits of patents without the liabilities;
-- the patent bar, who benefits directly from increased demand for patents, as well as the friction within the system; and
-- a whole sector of the economy, centered on pharmaceuticals, where the value of patents actually corresponds meaningfully to the value of real products.
The battle has been fought to a standstill. The patent ecosystem has become too complex and diverse for consensus. Moreover, much of it has gone underground and "off the books" -- into threatening letters, secret settlements, massive cross-licenses, and a wide variety of privately pooled interests and funds. All of this is beyond the grasp of a Congress that has a hard enough time coming to grips with the doctrinal complexity of patent law and reported cases. Nobody wants to bite the bullet and say, if we're going to regulate innovation with a crude tool like patents, we should do it in a forthright and transparent way that takes economic factors and fundamental industry differences into account. Instead, we hear constant incantation about the need to find a solution that works for everybody. (Remember that "everybody" includes speculators that have relied for decades on bad judicial decisions in order to put their children through college.)
Just like the market bubble of the 1990s and recent real estate bubble, it's hard to tell a bubble when it's growing. And too many stakeholders, including politicians, benefit from widespread belief that a growing bubble is grounded in reality and will continue indefinitely. You have undoubtedly read some of thousands of guest columns by patent attorneys explaining how you, everybody, needs patents in an economy driven by innovation. When Microsoft announces that it's going to increase its patenting 50% next year, everybody wonders, "why aren't we doing that?"
Fortunately, the Supreme Court has recently stepped in to overrule some of the excesses of the patent appeals court -- in particular, its low standard of obviousness and automatic injunctions (even against complex products with one infringing function). Facing a backlog of 1,200,000 patent applications, the PTO itself has become more demanding. It no longer claims to be in the business of "helping customers get patents." But powerful forces have been set in motion in the market -- with no direct means of control, or even monitoring.
Whose reality? Measuring the gap...
Using established means of indirect measurement, economists James Bessen and Michael Meurer calculate that in 1999 the total world-wide value of patents in force for U.S. public companies in computer and communications technologies was $4 billion (in 2008 dollars). A very modest figure compared to some $140 billion for chemicals and pharmaceuticals, areas where the patent is considered to work well.
But wait. Going by the identified licensee/investors, IV's portfolio is heavily concentrated in computer and communications technologies, and its assets are $5 billion. As big as IV's portfolio is, there are hundreds of thousands of other patents out there -- 200,000 in software patents alone. Is IV simply sitting on a pile of overvalued patents?
The short answer is no.
Patents have been touted as the currency of the knowledge economy. Over the past ten years, an exuberant cottage industry has grown up around valuing, exchanging, monetizing, and investing in patents as assets. IV has a lot of company; there may well be another $15 billion out there in patent funds and licensing firms hanging over the IT sector. And that's not counting the hundreds of thousands of patents currently "locked up" in the portfolios of IT producers.
We do know -- but only when we stop to think about it -- that patents are not conventional assets, despite the fact that many people would like them to be. They are not even a right to use the technology. They are only a negative right to stop others from using it.
So a patent may look like an asset in your hands, but it is a liability, present or potential, to everybody else. And this cuts both ways: If you're going to count your patent assets, you should also come to terms with the patents you may be facing. In an environment where there are thousands of patentable functions in a product or service, along with large numbers of innovators working independently and getting their own patents, there will be many, many more patents that belong to others than belong to you (even if you are Microsoft or IBM). Not only can one patent shut down your entire product line or service, you will also be liable for past use, even when you were unaware of the patent. Neither independent invention nor innocent infringement is a defense.
How could this go unnoticed? How can IV's patents alone appear to be worth 25% more in 2008 dollars than all patents were worth to the entire sector in 1999 at the height of the Internet boom?
Bessen and Meurer's calculus of costs, and to a large degree, their calculus of patent value, is based on public companies -- i.e., companies that produce real products for real people in real competitive markets. IV and virtually all patent licensing firms are private companies who do little but license patents.
Myhrvold himself reveals the answer to our conundrum in his Wall Street Journal interview: "The world has lots of inventions it doesn't know what to do with. We think we do. So we go do the classic private equity thing and say, it is worth more in our hands than yours."
He's right: Like the classic troll, he can wield his patents without fear that someone will counterclaim with their patents, so patents in his hands are worth far more than in the hands of a producing company that needs cross-licenses from others.
Measuring the unmeasurable
What is the real value of those patents? Even big boys with portfolios can't afford to find out. As Myrhvold says: "Now suppose we hypothetically approach somebody or they approach us, and we have 1,000 patents in their area. I say, I can't afford to sue you on all of these, and you can't afford to defend on all these."
So nobody can afford to find out, but it's somewhere between modest value in the portfolio of a big producer and maybe 20 times as much in the hands of a licensing specialist -- especially an experienced and sophisticated troll who knows to extract value from a variety of sources. Free market economics says that patents will eventually end up with the trolls (the "highest and best use" for those familiar with real estate appraisals).
There you have it: Arbitrage in exotic assets. A system that values legal instruments over real products. And a context-dependent and uncertain value for the legal instrument itself. No better than mortgage-backed derivatives. And maybe a lot worse.
Fixing the blame
Myhrvold blames the producers -- "a culture of patent infringement that he says has let powerful Internet and tech companies steal other inventors' intellectual property."
"Some of them are committed infringers, they're complete pirates," he says, declining to be specific. Myrhvold was more charitable in testimony before Congress when it was clear that he was implicating his former employer -- where developers were merely advised (by lawyers) to avoid reading patents.
What he does not mention was the original cause: a patent-happy culture in Washington reflected in far too many government-granted patents -- far too many for engineers to assimilate, and an appellate court that imposed harsh penalties for those unlucky enough to learn that they might be infringing.
We can be grateful to IV for making the contours of the bubble visible. But when will the bubble burst and how? What happens when some big, precarious IT firm fails (I won't be specific either), flooding the market with tens of thousands of hitherto "undervalued" patents? Who will be left holding the bag?
One possibility is that the Supreme Court will revisit the issue of patentable subject matter and make it clear that the Federal Circuit's permissive policies were not grounded on Supreme Court precedent. That would deflate much but by no means all of the speculation, and patent holders and attorneys would undoubtedly beseech Congress for rescue.
The other possibility is that the bubble is not in speculative instruments but in the tech sector: That all those going businesses with real customers are overvalued. Why? Because they have undervalued liabilities owed to outsiders armed with powerful legal instruments and seductive, irresistible incentives for attracting capital.
In that light, Intellectual Ventures looks positively pioneering: a high-concept fund that allows investors to hedge against their own destruction.
]]>Under the Radar: Two Tales From the Secret Life of Patentstag:www.huffingtonpost.com,2008:/theblog//3.1150222008-07-25T19:02:21-04:002011-05-25T12:40:20-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/
The first was ignored by the media: A firm called Channel Intelligence has sued 17 small websites, including three owned by individuals, for infringing a broad patent on user-generated lists. Almost ignored, except that it was picked up by Techcrunch, which even published the full complaint. So if you've ever wondered what it's like to be sued for patent infringement, here's your chance to step into the shoes of some unlikely victims.
Often the victim gets a letter inviting her to take a license, but in this case, judging by comments posted (and the fact that Channel Intelligence declined to respond to my question), there was no letter and at least some of the defendants were not aware that they were being sued. But sued they are -- in the Federal District Court in Delaware, in some cases, thousands of miles from home.
What's going on here? And why isn't it news? Especially when patent trolls and patent reform have become popular topics.
It's not news because no recognizable companies are involved. The classic troll story is when a small "non-producing entity" sues a deep-pocketed company with a household name on a questionable patent of breathtaking sweep or triviality.
Here we have a company of modest size using a high-profile Washington law firm, Patton Boggs, to go after 17 tiny companies and individuals. These are not competitors -- or even technology companies. They are mom and pop websites of virtually no commercial significance -- but they are getting hauled into patent litigation (sometimes known as the "sport of kings") far from home without warning. Is this America in 2008?
How often does this under-the-radar stuff happen? In 2003, SBC (now AT&T) gained some notoriety shaking down websites for the use of frames. But that was news because SBC was a big regulated company -- and, for some reason known only to their legal department, they went after an award-winning children's website, Museum Tour.
The patent system is often portrayed as the defender of the creative individual, the small inventor who would otherwise be greedily ripped off by large companies. But as patents have grown plentiful and powerful, they become not just protection but powerful tools that can be used in variety of ways. Ambush and hold-up, in the case of the classic troll. Or to extract settlements from little guys with the threat of astronomical legal costs.
The costs? The Channel Intelligence defendants are going to have to get a lawyer in Delaware just to prevent a default judgment against them. But they should be grateful that they do not have to defend in the notoriously pro-patentee Eastern District of Texas, which has inspired reform legislation to prevent venue abuse. Unfortunately, the proposed reforms have stalled in the Senate ... No luck here.
Look at the 63 claims -- those are all things you can't do without permission. Can't understand them? Even if you think can, you're advised to get a lawyer to help you. The good news is that the patent may not be valid.
To assess the validity of a patent based simply on prior art cost an average of $13,000 in 2007. Then, if the patent appears valid, a legal opinion on whether or not you infringe is another $13,000. So you may be looking at $30,000 for starters just to preserve your options and get a preliminary assessment.
More good news. The patentee may be willing to offer you a license for $10,000, instantly saving you at least $20,000. How can you rationally refuse? Case settled. The patentee nets $170,000 from all defendants and moves on to other offending websites, pointing to your settlement payments as evidence of the patent's validity.
During the impassioned debate over a proposed European directive on software patents, opponents of software patents mounted a graphic demonstration of the problem, entitled the Patented European Webshop. The website showed that despite official proscription of patents on "computer programs as such" in Europe, patents were nonetheless granted for common website functions. This propaganda coup elicited anxiety among small businesses and played an important in defeating the directive, which would have legitimized those patents.
The great achievement of the Web is that it offers a democratic technology that untold millions can use to start online stores, create social networks, provide resources for communities of users, or simply to express themselves. But is it reasonable to expect untold millions to read the thousands of patents, such as No. 6917941, that may apply to websites?
To their credit, big companies with thousands of software patents do not go around beating up on small websites no matter how lucrative it might be to do so. But those who can operate below the radar may have little to lose -- and much to gain. At the same time, defendants prefer to keep things quiet, because they don't want their customers to know.
I promised two stories.
The other story is plastered all over the mainstream media. Nokia and Qualcomm have suddenly settled their epic, multi-country dispute over mobile phone patents, although Qualcomm is still locked in royalty disputes with other manufacturers. Business Week headlines: "Why Qualcomm Folded to Nokia." But if Qualcomm folded, why did its stock rise nearly 17%, while Nokia's only rose 4%? There is widespread speculation on what really happened and who really won.
Here's what I think.
Within high-tech, companies settling with patent trolls find that trolls are asking for patents as part of the settlement. These add to the troll's arsenal, allowing it to pursue others (often competitors of the settling company) with a new weapon.
Qualcomm is not a troll, but it is an upstream supplier of standardized technology arguing with manufacturers about royalties and the quality of Qualcomm's patents. Part of the deal with Nokia is that Nokia transfers some of its patents to Qualcomm.
I haven't seen any speculation on that part of the deal, so here goes: It's the same principle as in Channel Intelligence. The value of patents is context-dependent. Which means that patents will naturally migrate to those that can extract the most revenue from them. Nokia is already extensively cross-licensed as a manufacturer must be, so a few spare patents may be of little value to it. But Qualcomm is less of a manufacturer and more a supplier of technology. It has less need for cross-licenses from others and is freer to use patents aggressively.
Qualcomm may win bigger because of the transferred patents but it uses them to Nokia's benefit by raising costs for everybody else and going after Nokia's competitors. Furthermore, the Qualcomm patents that Nokia was contesting are left standing, but Nokia gets a good deal. Both win. Nokia's competitors face an emboldened Qualcomm, the public will pay higher prices, and there is more work for lawyers.
]]>Patents for All: The System That Could Not Contain Itselftag:www.huffingtonpost.com,2008:/theblog//3.1063132008-06-10T14:10:03-04:002011-05-25T12:35:19-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/
Quanta is the latest in a string of cases in which the Supreme Court has had to beat back the Federal Circuit's expansive view of the patent system. The big one -- the scope of patentable matter -- is yet to come.
Last month, the Federal Circuit heard oral arguments in Bilski, an appeal over the refusal of the Patent and Trademark Office to grant a patent on a pure business method for brokering risk. Bilski's attorney argued that everything with "real world" effects should be patentable under Federal Circuit's 1998 State Street decision -- just any effect outside of the human mind. He argued that Congress could easily have changed the State Street standard but had not done so.
The myth of an all-seeing, all-knowing Congress capable of riding to the rescue is a well-used excuse for keeping bad decisions on the books. But the question of just what is patentable is far too loaded and complex for Congress to handle -- especially given all the other problems the patent system faces and the fact that even modest patent reform legislation has stalled. (Not to mention all the other more politically compelling issues that demand attention from Congress.) Furthermore, any attempt to redraw the lines that the Federal Circuit erased in State Street would elicit screams that Congress is confiscating private property and arguments that the federal government may or should be required to pay billions in compensation.
My Profession Is Smarter Than Yours
So, should the patent system be only about technology -- or about everything?
While it may not be surprising that patent lawyers favor everything, it is remarkable to see an amicus brief of 22 patent law and business professors advocating for everything as well. Indeed, the professors (many of whom practice as well) argue that circumscribing limits to the patent system is futile. Why? Because patent lawyers have managed to evade judicially crafted limits to subject matter through clever draftsmanship and will continue to do so. This remarkable argument -- "let's get rid of limits because lawyers will figure out how to get around them" -- is rarely heard in other contexts. Why should it be so compelling in patent law? Are patent lawyers so extraordinarily innovative that judges should throw up their hands and allow anything novel and non-obvious to be patented?
In fact, it has been too easy for patent lawyers to be creative in dealing with an appellate court known as "pro-patent." As one of its long-serving judges, a former patent lawyer, recently explained:
"[I]t was decided to make a major effort to revive the patent incentive, including formation of the Federal Circuit Court of Appeals. Patents were indeed strengthened. The court can take the credit or the blame, depending on your viewpoint, but it was part of that activity."
Wait. Who decided that? The official reason for having a new appellate court hear all patent appeals was to make patent law consistent -- NOT to enhance the patent incentive. Maybe some, including patent lawyers, wanted to do so but that's not what Congress thought it was doing when it created the Federal Circuit in 1980.
Perhaps the Federal Circuit's pro-patent tilt was the inevitable result of staffing a specialized court with patent specialists. As distinguished scholar and jurist Richard Posner puts it, "a specialized court tends to see itself as a booster of its specialty." And if judges can advocate expansion of their specialty, why not professors?
It's undoubtedly flattering to have one's profession regulate all human activity -- rather than just applied technology. Many law schools used to treat patent law as the equivalent of plumbing, a bastard specialty that didn't ask the great questions and could be taught by adjuncts. Business schools didn't teach patents at all. But patents have become the unbounded regulatory regime for the knowledge economy, and patent scholars have become the highest of high priests -- as sought after in academia as patent attorneys are in commerce.
Without citing any evidence and without acknowledging the costs imposed by the patent system, the professors claim that innovation would suffer if patents on business methods were curtailed. This assumes that if patents work for pharmaceuticals, they must work for everything. Yet by extending the patent system to abstract and nontechnological subject matter, the Federal Circuit has undermined this argument. A one-size-fits-all patent system inevitably leads to disparate results as it stretches to cover wildly different forms of innovation. Empirical evidence shows that in most industries, patents now provide a net disincentive, or tax, on publicly traded companies -- and that software and business method patents are the most ambiguous and generate the most litigation. (James Bessen and Michael Meurer, Patent Failure, Princeton University Press 2008)
At the oral argument for Bilski, the same judge who voiced the pro-patent intent behind the appeals court asked the lawyer from the Patent & Trademark Office if the agency had done a study of what would happen if patents for business methods were eliminated. A rhetorical question, since the PTO does not do studies. Nor does Congress. Nor, of course, did the Federal Circuit when it decided State Street and summarily eliminated the business method exclusion as "ill-conceived." State Street nonetheless created a land rush for business method patents - and in doing so created constituencies to fight for these newfound "rights."
Trust Us
The pro-everything professors acknowledge the plethora of bad patents on software and business methods. But they argue that instead of trying to limit what is patentable, we should look to the basic tools of the patent system to eliminate bad patents. In other words, trust us (and our practitioner colleagues). It doesn't matter if you get sued for the way you do business, there are still the requirements of novelty, non-obviousness, utility, enablement, written description, definiteness, along with a bevy of defenses. All things you might not understand, but we can help you. And Congress can help us tweak the system so it works well for everybody.
Yet patent reform is paralyzed. In the industries such as IT where patents matter less than other competitive factors, there are far too many patents, and the system is working poorly. In the industries where patents matter most, there are relatively few patents, and, from industry's perspective, the system is working just fine. For universities and small inventors, who normally don't have to worry about being attacked by patents, the system is working. For law firms, the system works well, because there's no such thing as too many clients or too much business.
Yes, the Supreme Court has recently stepped in to remedy a few of the worst examples of Federal Circuit jurisprudence -- notably low standards of patentability and automatic injunctions. However, a number of the pro-everything professors, along with the organized patent bar, supported the Federal Circuit in those cases - i.e., more plentiful, more powerful, and lower-quality patents.
There appears to be something democratic about patents for everything. Every discipline, field, sector, industry, and niche gets its patents. Doctors, dentists, psychologists, legislators, accountants, athletes, yoga instructors, cooks... Anybody in the real world. You can get them, or not -- it's your choice. But everybody, like it or not, is obliged to search, identify, evaluate, defer to, and negotiate patents -- and to hire the professional help needed to do so cautiously and prudently. Yes, you still might lose in litigation (half the litigants do!) but this is the sport of kings, and it's a privilege to play. ]]>At the Heart of the Knowledge Economy: Should Patents Be Limited To Technology?tag:www.huffingtonpost.com,2008:/theblog//3.1004042008-05-06T13:54:00-04:002011-05-25T12:30:19-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/In re Bilski, is being heard by the Court of Appeals for the Federal Circuit, the arbiter of all things patent - or so it was before the Supreme Court recently started to take an interest in its decisions. Some thirty-nine amicus ("friend of court") briefs have been filed in this case, which surely must be a record for this most obscure of appellate courts.
The case, In re Bilski, involves a pure business method, no technology, not even making use of a computer. It involves hedging bets in commodity markets by matching conservative buyers against others more inclined to gamble on the expected. In fact, it sounds a lot like how bookies handle betting on horse races. But the issue here is not whether this process is new or nonobvious but whether it should be patentable in the first place. Should we allow patents on tax-avoidance strategies? Legal arguments? Mathematical algorithms? Toilet reservation systems? Negotiation tactics? Business models?
The Federal Circuit set the stage for this debate by famously deciding in the 1998 State Street case that:
1. Congress implicitly eliminated the traditional rule against patents for "methods of doing business" when it enacted the Patent Act of 1952, nearly half a century earlier.
and
2. The test of patentable subject matter is: Does it produce a "useful, concrete, and tangible result?"
State Street relies on an overzealous interpretation of the word "any." Congress never discussed expanding the scope of patentable subject matter in 1952. In fact, the State Street opinion was written by a patent lawyer who had been hired to draft the 1952 Act and had once proudly claimed that Congress had no real intent beyond trusting the patent attorneys in charge.
The Federal Circuit did not define "concrete" and "tangible", and "useful" is superfluous since utility is a separate requirement under patent law. State Street was commonly interpreted as an invitation to patent virtually anything: business processes, tax strategies, athletic moves, yoga positions, learning methods, diagnostic information.... The PTO even argued aggressively in international negotiations that patents should not be limited to technology - that allowing patents for any and all activities was "best practice."
Judges are not supposed to create law; they are supposed to interpret and clarify it. One Congressman politely described State Street as a "pioneer clarification." Some view it as an egregious case of judicial activism.
Recently, in the face of a huge backlog of applications and adverse publicity over questionable patents, both the Patent and Trademark Office (PTO) and the Federal Circuit (in last year's Comiskey decision) appear to have had second thoughts and to be reinterpreting State Street without directly repudiating it.
How can this be done? By saying that the sweeping language in State Street about business methods was unnecessary, although the decision was correct on the facts. And that the decision did not explicitly overturn a rule that a patentable process must involve a physical transformation or be tied to a machine (State Street involved a computer).
So now State Street itself is up for "clarification," and different interests are lined up for or against patents on pure business methods. As always, patent lawyers are firmly in favor of more patents. So are many who took State Street seriously enough to get their own business method patents. Most, but not all, of the IT sector supports the PTO's stand against Bilski. Some, including IBM, favor explicitly limiting patents to the "technological arts," as distinct from the liberal professions such as law, accounting, management, teaching, and economics.
What's wrong with patents on business methods?
The real problem with the State Street decision is that it violates first principles of democratic governance. It subjected professions, businesses, and the public to the costly regulatory regime of the patent system without their participation or consent. Nobody was asking for abolishing the rule in 1998. Accountants and lawyers were not known as lacking in innovation. Patent lawyers and patent judges simply decided that everybody would innovate more with patents.
Why shouldn't innovative accountants be entitled to protect themselves with patents? When you put like that, it sounds only fair. But unlike copyright, patents block innovators that come up with the same idea independently. Is that fair? Suddenly, innovators in these professions are at risk from the patents of others. Do they hire lawyers to assist them with clearance searches, assessing the validity of patents, and designing around patents that they may infringe? That's a pretty expensive proposition, but in principle that's what the patent system demands. Think of the many guest columns that you have read promoting the value of patents, but not acknowledging the costs - and written by patent lawyers. Nobody else gets that kind of free advertising.
There is now economic evidence that the costs of the patent system often outweigh the benefits. In their recently published book, Patent Failure, economists James Bessen and Michael Meurer show that patents work best for chemicals, including pharmaceuticals, where patent rights can be cleanly defined by molecular composition. They show that for abstract subject matter, such as software and business methods, patents have poorly defined boundaries that are costly to understand, evaluate, enforce, find, and avoid. The more abstract the subject matter, the more work for lawyers, and the more likely that the costs of the system outweigh the benefits.
Note that Bessen and Meurer are evaluating patents as a system, not a company's decision to acquire patents. From a single company's perspective, it is always better to have patents than not to have them. Confused? So was the New York Times when it reported on Bessen and Meurer's research last summer (A Patent Is Worth Having, Right? Well, Maybe Not). Individual patents, even questionable patents, are always better than no patents, and if your competitor has some, you better have some to trade, or, if necessary, for retaliation.
The question is whether there are benefits net of costs to having the patent system regulate business methods. This is not a question for patent lawyers, because they get paid win or lose - and the more patents there are, the more important their job is.
We need good answers. The more powerful and pervasive patents become, the more important it becomes to make sure that the patent system is actually working the way we want. And specifically, we need to know how it is being abused, because abuse, whether by trolls or bullies, is bound to inhibit innovation.
Bessen and Meurer's achievement is to assemble and synthesize a growing body of work by academic economists, to add original research of their own to bridge critical gaps, and to construct for the first time a cost-benefit framework for understanding how well (or poorly) the patent system works. They are able to show different results, positive and negative, for different technologies and different stakeholders. Unlike many economists, they understand the substance and practice of patent law (both teach at Boston University Law School), which enables them to interpret data with assurance and authority. Their answer to "does it work?" is a nuanced "it depends" - on the subject matter, the size of the business, and the period in history.
Today, we are fighting over a faith-based, one-size-fits-all legal regime designed for a simpler era. If we care about real innovation and optimal economic growth, we need real data and analysis. We need institutions, including the PTO and the Federal Circuit, that care about real results.
Next: Academics tell judges to surrender to the creativity of patent lawyers.]]>Too Many Patents? How Patent Inflation Plagues Information Technologytag:www.huffingtonpost.com,2008:/theblog//3.856212008-02-07T20:44:00-05:002011-05-25T12:25:17-04:00Brian Kahinhttp://www.huffingtonpost.com/brian-kahin/
In 2004, Brandeis economist Adam Jaffe and Harvard Business School professor Josh Lerner published Innovation and its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What to Do About It - a rare book on patents and written for generalists, not patent lawyers. "Broken" is strong language, but it gets attention.
Jaffe and Lerner argue that patents had become too easy to get and too powerful:
[W]e converted the weapon that a patent represents from something like a handgun or a pocket knife into a bazooka, and then started handing out the bazookas to pretty much anyone who asked me for one, despite the legal tests of novelty and non-obviousness. [p. 35]
They attribute this to two congressional decisions: creating a specialized patent appeals court, the Court of Appeals for the Federal Circuit, in 1982; and putting the Patent and Trademark Office (PTO) on fee-funded basis.
Under the intellectual leadership of former patent attorney Giles Rich, the Federal Circuit spent much of its first 16 years enhancing the prospects of patent applicants and patent holders. The highwater mark was the notorious 1998 State Street decision, which Rich authored and which summarily eliminated the longstanding exclusion of patents for business methods. (1) Suddenly, patents were no longer limited to technology but available for any form of human activity.
By tying the PTO's budget to the fees it collected, Congress would inspire a new PTO mission, "to help customers get patents." Under the fee structure prescribed by Congress, the agency lost money on examinations but made money from issuance and maintenance fees. This internal cross-subsidy gave the agency an incentive to grant patents rather than deny them. (2) It embraced the flood of non-technological patents that followed State Street, arguing in international harmonization negotiations that allowing patents for all activities, not just technology, was "best practice." With support only from patent organizations, the U.S. delegation threatened to walk out of the negotiations if other governments did not go along. (3)
Patents on Intangibles
While there were rumblings in Congress following the State Street decision, the 54-person board of the Intellectual Property Owners Association resolved unanimously that Congress should keep its hands off business method patents. For good measure, it passed the resolution again the following year.4 But were the board members speaking for upper management -- or for corporate patent departments? Even IBM signed on -- although IBM also went on record opposing business method patents, noting the fundamental problem with patents on intangibles: "[W]ith the advent of business method patenting it is possible to obtain exclusive rights over a general business model, which can include ALL solutions to a business problem, simply by articulating the problem." (5)
But patent institutions have a natural self-interest in expanding the scope and scale of the patent system. As one treatise puts it:
[B]road notions of patent eligibility appear to be in the best interest of the patent bar, the PTO, and the Federal Circuit [CAFC]. Workloads increase and regulatory authority expands when new industries become subject to the appropriations authorized by the patent law. Noticeably absent from the private, administrative and judicial structure is a high regard for the public interest. (6)
For similar reasons, the patent bar has also favored low standards of patentability. When the Supreme Court heard oral arguments in KSR International v. Teleflex, the attorney for Teleflex rushed to the defense of the Federal Circuit's low standard: "[R]emember, every single major patent bar association in the country has filed on our side". To which Justice Scalia countered that a low standard "produces more patents, which is what the patent bar gets paid for, to acquire patents, not to get patent applications denied but to get them granted. And the more you narrow the obviousness standard ... the more likely it is that the patent will be granted." Indeed, 40 years previously in Graham v. Deere, the Supreme Court was called on to interpret the standard in the 1952 Patent Act. Then, too, the patent bar lined up to claim that Congress had lowered the standard. Then, too, the Supreme Court disagreed.
The brief effort to rein in business method patents in 2000-01 was stymied not only by the unified voice of the corporate patent departments, as well as the instant constituency of new patent holders and applicants. No reform bill introduced in the last few years has dared touch on subject matter limitations. However, the current House bill was amended to include a provision against patents on tax-avoidance strategies, a particularly obnoxious intrusion of the patent system into a very different policy domain. And a narrow provision restricting remedies for infringement of check imaging patents was added to the Senate bill.
The Supreme Court last addressed abstract subject matter in 1981, since which the Federal Circuit has made virtually anything patentable. Yet information technology has transformed the U.S. economy, not by identifiable patents, but by a powerfully enabling stack of open, unpatented protocols that we know as the Internet and the Web. (7)
Not until 2005 did the Court revisit patentable subject matter by agreeing to review Labcorp v. Metabolite, a case involving a medical diagnosis rather than software or methods. But the Court took the unusual step of reversing course and choosing not to decide the case, although three judges dissented against the decision not to decide, making it clear they would have rejected patentability.
Why has it taken 26 years and counting for the Court to focus on the critical distinction between abstract ideas and patentable subject matter?
Few litigants want to raise this issue before the Federal Circuit, since State Street seemed to state so strongly that anything is patentable as long as it's useful. Why stick your finger in the eye of the appeals court if you've got a fighting chance on other issues? Why risk ostracism from your brethren by advocating limitations on the scope and status of the profession?
Nonetheless, the inter-industry tensions over reform put the subject matter issue in a new light. AT&T v. Microsoft dealt with an obscure provision of the patent code concerning foreign assembly of components to create products that would infringe in the U.S. -- and whether this applied to reproducing software on media from a master disk. Eli Lilly filed an amicus brief blaming the whole controversy on the Federal Circuit's allowance of patents on intangible subject matter, signed by Eli Lilly's chief patent counsel, a past president of the American Intellectual Property Law Association.
Why would a drug company question patents for intangibles? It is no coincidence that the push for strong patent reform was originally spearheaded by the Business Software Alliance, and strong reform is supported by the financial services sector. Take away patents on intangibles, and much of the momentum behind reform evaporates. In the interests of preserving a unitary patent system in the traditional pharmaceutical model, it makes sense to lop off any outlying troublemakers, such as software and business methods. Although removing patents on intangibles would eliminate a vast source of income for patent professionals, the system would then remain narrowly focused on process in the hands of patent professionals -- and less pressured by the interests of nontraditional sectors.
Portfolio Patenting
It would not be easy for a field as diverse as "software" to agree to opt out, given the accumulation of patents at different levels of abstraction and the proliferation of business models, some of which are more patent-dependent than others. When the Patent and Trademark Office held hearings in 1994, almost all pureplay software publishers (with the notable exception of Microsoft) expressed opposition to software patents. But since then, all have amassed their own patent portfolios, giving them broad protection in the market niche they have traditionally occupied
Portfolios turn the mythology of the patent system upside down. The policy justification of portfolio patenting in IT, expressed by Thinkfire CEO Dan McCurdy as "net users pay net innovators," makes for rough justice. However, it is different from the classic case for individual patents. Instead of protecting the upstart inventor armed with a patent, the system protects established companies who have had the time and resources to assemble substantial portfolios that function as renewable "thickets" to keep incumbents ensconced and to discourage new entrants from assembling full-blown products.
But there is a downside for established companies, too, that has recently become clear. The same conditions that allow them to amass vast portfolios easily also provide fertile ground for trolls. Lots of easy-to-get patents ensure that some will end up in the speculators, some of whom will get lucky and find their patent is deeply embedded in the complex technology of a successful product.
Portfolio-driven patenting is not unique to software. It pervades IT and, to a lesser extent, other complex technologies, but anybody can generate patentable functionality in software. Software democratizes innovation. Writing software requires no laboratory, no PhD, no manufacturing plant, no distribution chain. Meanwhile, low standards, the presumption of entitlement, and the desire to impress supervisors, upper management, and venture capital induce the filing of tens of thousands of patents each of which may have dozens of claims.
The flipside of massively dispersed patent ownership is massively dispersed liability. Patents of failed companies often end up in the hands of trolls who are neither innovators, nor producers, nor users -- and have no need to license rights from others. Can those loose patents be avoided? At what cost? -- not only to identify problem patents but to figure how good they are, who owns them, and under what terms they might be available.
Patent thickets impose huge costs because they require the assistance from lawyers - quite apart from the costs of acquiring rights or designing around them. The tactically correct solution is not to search but to task lawyers to solve problems only if and when they arise. (8) At the same time, this jungle of rights and miasma of too much information to decipher and interpret creates cover for trolls. They can hide until producers and users have made huge investments in arguably infringing products. For trolls, patents are lottery tickets: if they are lucky, they will be infringed by a deep-pocketed producer. For producers, it's a risk of an aberrant judgment which can perhaps be averted by flinging enough legal resources against it.
Other than anecdotal evidence, including the sad experience of the insurance industry, (9) it is virtually impossible to get a direct handle on these risks. However, new research by James Bessen and Michael Meurer, soon to be published in a book, Patent Failure, does so indirectly. (10) By examining market reaction to patent litigation, they show how investors view the risks and costs of patents imposed on different sectors. For software and business methods, these are very high indeed.
*****
1 - Rich premised his argument on Congressional intent in enacting the 1952 Patent Act, despite the fact that he had previously claimed that Congress intended nothing more than to trust the patent attorneys, including himself, who drafted the Act. Giles S. Rich, Congressional Intent - Or, Who Wrote the Patent Act of 1952 in Patent Procurement and Exploitation 66 (BNA 1963)
3 - Report, 7th Session, WIPO Standing Committee on Patent Law, Geneva, 6-10 May 2002, adopted 25 November 2002 as document SCP/7/8; see paragraphs 159-173, especially the exchange between the European and U.S. delegations at 170-171; http://www.wipo.org/scp/en/documents/session_7/index.htm.
6 - Roger E. Schechter and John R. Thomas, Intellectual Property, West Hornbook Series, 2003, p. 314.
7 - OECD, Economic and Social Impacts of Electronic Commerce, 1998, Executive Summary http://www.oecd.org/dataoecd/3/12/1944883.pdf [PDF]; Federal Trade Commission, Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy, available at http://www.ftc.gov/opp/intellect/index.htm
8 - Nathan S. Myrhvold, testimony before the Subcommittee on Intellectual Property, Committee on the Judiciary, United States Senate, May 23, 2006; available at http://www.intven.com/docs/NMyhrvoldTestimony052306.pdf [PDF]
10 - James Bessen and Michael Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk, Princeton University Press, March 2008; see http://www.researchoninnovation.org/dopatentswork/ ]]>