Too Many Patents? How Patent Inflation Plagues Information Technology

by Brian Kahin, Senior Fellow, Computer & Communications Industry Association

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)

2 - GAO, Intellectual Property: Fees Are Not Always Commensurate With the Costs of Services, May 1997, http://www.gao.gov/archive/1997/rc97113.pdf [PDF].

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.

4 - IPO Statement on Business Method Patents (Approved Unanimously by the Board of Directors on June 28, 2000 and reaffirmed February 6, 2001) http://www.ipo.org/AM/Template.cfm?Section=Board_Resolutions_and_Position_Statements&CONTENTID=2610&TEMPLATE=/CM/ContentDisplay.cfm

5 - IBM response to March 19, 2001 USPTO Request for Comments on the International Effort to Harmonize the Substantive Requirements of Patent Law, p. 4, available at http://www.uspto.gov/web/offices/dcom/olia/harmonization/TAB42.pdf [PDF]

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]

9 - See Richard S. Betterley, Intellectual Property Market Survey 2006, The Betterley Report, April 2006, http://www.betterley.com/adobe/ipims_06_nt.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/

Comments

[jdm58]

What worries me about patents, is their availability to be sold to those who have no intention of using them. Yes, inventors have the right to make their fortunes, but at what expense? Exxon/Mobile bought the rights to the batttery technology that ran GM's EV, and then tabled it, refusing to sell the technology to anyone else, thereby shutting down that industry until someone else can invent a battery completely different from this model. Who can forget that it was the tire companies who shut down the trolley system in Los Angeles, dooming LA to the current freeway system. Patented technology, especially when it serves the public good, should not be unprotected from this sort of attack.

[research]

The biggest problem with the patent system now, is the insane decision to allow the patenting of software, business models etc... Regular patents on hardware for instance are usually less then 25 pages. Software patents can be thousands of pages. Most of it written in code that doesn't work and probably doesn't even compile. Software needs it's own separate system, NOT patents.
All the other Patent Office problems are just budget and management.

[stevewr]

re: "Regular patents on hardware for instance are usually less then 25 pages. Software patents can be thousands of pages."

if there are sfw patents drafted with thousands of pages they are written poorly. the issue then is therein the quality of aplns, not length. it is in the applicants best interest to prepare a quality application. that vested interest alone should be sufficient to keep such situations rare. i believe they are and doubt the author has any proof otherwise.

[research]

Not true. I have been to the patent library in DC. The stacks of software patents each one as big as a phone books, were sitting there waiting to be read by the examiners.

I have been through literally thousands of hardware patents, including computer hardware, and rarely do I find a patent over 25 pages.

[stevewr]

What is a patent troll?

According to some a patent troll is a firm who licenses patents they do not themselves commercialize. Yet many of the large firms who are most critical of the practice do it themselves. Out licensing is now an important profit center of most every firm. Often, as a result they end up licensing out patents covering technologies they themselves do not use as they are not consistent with their corporate plan. Rather hypocritical isn’t it?

All this talk of patent “deform" is then but a red herring fabricated by a handful of large tech firms as a diversion away from the real issue...that they have no valid defense against charges they are using other parties' technologies without permission. The objective of these large firms is not to fix the patent system, but to destroy it or pervert it so only they may obtain and defend patents; to make it a sport of kings. Patents are a threat against their market dominance. They would rather use their size alone to secure their market position. Patents of others, especially small entities, jeopardize that. For example, the proposed change to eliminate the use of injunctions would only further encourage blatant infringement. Any large company would merely force you to make them take a license. They would have little to lose. Everything would be litigated to death -if a small entity can come up with the cash to pursue. That's what these large multinationals are betting against. This legislation in regressive, not progressive.

Sadly, some legislators and other parties have been duped by these slick firms and their well greased lawyers, lobbyists (some disguised as trade or public interest groups...ala Misters Kahin, Jaffe, and Lerner), and stealth PR firms. Don't be surprised to find the Washington lobbyist scandal spreading into the patent deform proceedings.

When corporate America agrees to not use our inventions without consent, American inventors and small entities will agree to stop suing them.

Sincerely,
Stephen Wren
actuary/inventor
StL, MO

[realitytrumpsbull]

Was Einstein a patent troll? Hmmm...

[realitytrumpsbull]

I think a patent means exactly jack anymore when you put it in the context of an army of chinese(?) hackers...you put the data on your KompewTOR, to which Uncle Bill holds the back-door key, through which(for a small fee) lots n lots of people try to break in to your HDD and extract anything even remotely useful. You, too, can be an IT worker from home!
ROTF. Don'tcha just LOVE the Internets?
LOL
On the flip side of that, if you view it all as open-source information, to be freely distributed, then it's another matter, where you can get into some collaboration etc. Businesses are all about siphoning information out of the competitions' databases, too, got little cyber-wars going on there as well.
WHO made your motherboard, again? Hmm...

[research]

You got it! get rid of all these bullshit patent categories, like software and business methods, give them either copyright or a separate protection system.