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Too Many Patents? How Patent Inflation Plagues Information Technology

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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/