Technological Innovation and Intellectual Property

A Time to Rethink

Patents as property was also front and center in the thoughts of one judge on the Court of Appeals for the Federal Circuit, the main appellate court for patent disputes in the US. Senior Judge S. Jay Plager, speaking at a symposium at George Mason University, called for a “rethinking” of several aspects of patent law by returning to its origins in property law.

According to the BNA, Plager “called for a renewed focus on setting recognizable patent ownership boundaries and on strengthening the notice function that patents are intended to serve. Such a reevaluation might require a reassessment of whether software and business methods are patentable subject matter, Plager said. It might lead to limiting a patent’s scope to what was known at the time of the application filing, and to an abandonment the doctrine of equivalents as a basis for patent infringement liability.”

In addition to rethinking claim construction,

Plager said he regretted the unintended consequences of the decisions in State Street Bank and AT&T. Those rulings led to a flood of applications for software and business method patents, he noted. If we “rethink the breadth of patentable subject matter,” he said, we should ask whether these categories should be excluded from patent protection.

This new thinking is certainly encouraging. Let’s see how it develops.

The idea that patents can be analyzed as a property system—both regarding its strengths and its weaknesses—seems to be gaining currency in influential circles.

Last week in the Wall Street Journal, L. Gordon Crovitz writes “…in the case of patents, poorly defined property rights for inventions are leading even the biggest companies to take desperate measures…” He goes on to highlight our argument that the patent system provides much stronger incentives for pharmaceuticals than for software and communications technologies because of the nature of the rights granted:

New drugs require great specificity to earn a patent, whereas patents are often granted to broad, thus vague, innovations in software, communications and other technologies. Ironically, the aggregate value of these technology patents is then wiped out through litigation costs.

Andreas Panagopoulos sent a brief note on a theoretical paper on startups and innovation. In this model, the startup’s patents add value to an incumbent’s patent portfolio when the incumbent acquires the startup. There is a trade-off between the incumbent’s patents deterring entry and the acquisition prospects increasing startup value. Andreas write:

In modern hi-tech industries where technology is complex and cumulative, a new innovation is likely to infringe on existing patents. Hence, an entrant firm is under potential threat of litigation from a competing incumbent firm that has accumulated a patent portfolio. It is not clear, therefore, how entrepreneurial activities may be sustained in the same technological terrains as those of powerful incumbent firms.

In a model where an incumbent faces a sequence of potential startups and the incumbent’s chance of winning an infringement lawsuit increases with the size of its patent portfolio, we demonstrate a positive dynamic impact on the startup innovation that is generated by an interplay of takeover deals (out-of-court settlements) and carefully selected levels of IP protection. The core insight behind this result stems from the observation that the benefit of a takeover for the incumbent goes beyond commercializing the new innovation. This is because the incumbent capitalizes on the enhanced bargaining position that the current takeover will bring about in all potential future deals by incorporating the current startup’s patented ideas to its own patent
portfolio, which allows it to better barricade its technological territory, increasing its chances of prevailing in future infringement lawsuits. Since this prospect of future surplus for the incumbent hinges on the current takeover, a part of the surplus accrues to the current startup, enlarging its bargaining share in the takeover deal. We show that this feedback effect of future prospects on the current deal can motivate the startups’ innovation activities that would not take place without it, and as a consequence, increase the social welfare.

We emphasize that for maximum effect the level of IP protection should be selected carefully at a moderate level. The aforementioned increase in the startup’s bargaining share, being proportional to the marginal benefits brought by the last patent added to the incumbent’s portfolio, would be too small to be effective if the IP protection is too weak. An excessive IP protection, on the other hand, would accumulate the incumbent’s bargaining power too quickly, killing off the innovation incentives for startups prematurely. We illustrate this point further by way of computer simulations.

Not sure how this plays out in a world where any player (e.g., troll) can acquire patents that can be used as bargaining tokens…

Patent trolls or sharks have been in the news recently. Verizon, Google, Cisco, HP and other companies have created a joint effort to buy up patents that trolls might otherwise use against them. It will be interesting to see whether this strategy will take bad patents off the market or whether it might, instead, simply increase demand, thus increasing the rewards to obtaining overly broad patents, encouraging even more disputes and litigation.

Also, the June issue of the Harvard Business Review has a nice piece on patent sharks by Joachim Henkel and Markus Reitzig. They point out that the strategy of amassing large “portfolios” of patents does not work against trolls,since the trolls have no business that can be threatened with a countersuit. Moreover, they suggest that this strategy may have contributed to the current problems large firms experience with trolls. Because they flooded the patent office with thousands of applications for patents on trivial inventions, these large firms might well have contributed to the decline in patent standards that has allowed patent sharks to flourish.

Tim Lee has an interesting post on a paper by Gerard Magliocca that compares patent sharks of the 19th century to modern day trolls. Lee writes,

The best patents—pharmaceutical patents, say—apply to a well-defined industry. Pharmaceutical companies need to monitor pharmaceutical patents in order to determine what they’re allowed to do. In contrast, every business on Earth uses software and “business methods.” Therefore, every business on Earth is a potential target. That means it’s much easier for trolls to find potential victims. It also means that the targets—many of whom don’t think of themselves as being in the software industry or the “business method industry”—will be ill-equipped to respond to the lawsuit.

Precisely the same observation applies to 19th century patent sharks. Because most people in the 19th century were farmers, patents on farm tools were likely to be infringed by millions of individual farmers who lacked the expertise to evaluate the patent and the resources to hire lawyers to defend themselves.

Rolf Claessen, a patent attorney, has a tool to download patent documents in PDF files from the Espacenet database of international patents.

[This post is the third in a series of posts based on empirical research in a new book, Patent Failure, by James Bessen and Michael Meurer.]

Patents on computer programs, financial processes and business methods have been controversial at least since the 1960s. Surveys regularly find that computer programmers are opposed to patents on software by a wide margin. In what other field is the class of inventors so opposed to patents?

Is there a problem?
Some people contend that there is nothing particularly wrong with patents on software, arguing that “patent thickets” are not preventing innovators from entering software markets. But the latest evidence suggests that patent thickets do, in fact, inhibit startups in software. More important, patent thickets might not be the only or even the most important problem with software patents.

Indeed, our evidence suggests an important problem of another sort: software patents are four times more likely to be litigated than are chemical patents; business methods patents are twelve times more likely to be litigated; finance patents are 49 times more likely. Moreover, the evidence also suggests that these patents have lower values than chemical patents, so these patents are not being litigated more because they are more valuable.

Other people admit that there are problems with software patents, but they suggest that this is only temporary: once judges and patent examiners understand this technology better, once they have become familiar with the prior art, etc., then the uncertainty about these patents will abate and litigation rates will go down. But the evidence shows that after a decade of issuing software patents in large numbers (over 200,000), the probability that a newly-issued software patent will be litigated is continuing to rise.

So it does seem that patents on software and related technologies at least have a particular problem with litigiousness. And this problem is central to the poor performance of the patent system generally. In the previous post we highlighted how litigation costs have substantially outgrown the profits that public firms receive from patents outside of the pharmaceutical and chemical industries. In 1999, 38% of the cost of litigation among public firms arose from lawsuits involving software patents; preliminary data suggest that this share has increased since then. Litigation over software patents is clearly a major factor in the poor performance of the patent system. So in a very real way, the overall performance of the patent system cannot be fixed unless the particular problems of software patents are also fixed.

Why are there so many lawsuits over software patents?
A variety of evidence leads us to conclude that software patents are involved in relatively more litigation because they are more likely to have “fuzzy boundaries.” Statistical evidence shows, for example, that software and business method patents are much more likely than other patents to have their claim construction appealed to the Federal Circuit. Part of this tendency arises because of the nature of the technology and part arises because of the way the courts have treated this technology.

Our reading of the case law convinces us that patent law tolerates too many software claims untethered to any real invention or structure; in such a world clear boundaries are unattainable. When patent claims relate to actual devices or chemical structures, then their meanings can be interpreted by reference to those physical or chemical entities. However, when the words refer to abstract ideas, they are often subject to multiple interpretations and are therefore more ambiguous. For example, many people thought that “point of sale location” (in the famous E-Data patent) was computer industry jargon for that place in a retail store where transactions take place, formerly occupied by a cash register. When the Federal Circuit interpreted this claim, they decided that it referred to any location where an e-commerce transaction might take place, although it is highly unlikely that this is what the inventor had contemplated 17 years earlier. Thus a broadly worded invention for a kiosk in a retail store was read to cover a broad swath of e-commerce. Not surprisingly, this patent generated quite a few lawsuits.

Patent doctrines that might serve to prevent such fuzzy claims have been undermined. For example, the enablement doctrine has historically been used to keep patents from claiming much more than what was actually invented. Unfortunately, as a result of Federal Circuit decisions on software patents during the 1990s, these patents no longer need to provide computer code, a flowchart, nor any detailed description of specific operation in order to be enabled.

Fixing the problem
A lot of people have very strong opinions about how patent policy should or should not change regarding software patents. We wish we had such clarity, but we do not. We are convinced that the current treatment of software patents creates significant problems and that these are getting worse. But the problem is complex and fixing it will likely involve multiple changes in law and institutions.

Certainly, KSR, the recent decision on obviousness, should help and so would a stronger indefiniteness requirement. Additionally, it might help to restore a substantial enablement requirement for software patents so that these patents are restricted to claiming more or less what was actually invented and disclosed.

Possibly, a subject matter test might help. We confess we do not have a rule that cleanly distinguishes inventions using software that should be patentable from abstract processes that should not be patentable. Some people argue that any attempt to proscribe subject matter will only increase uncertainty and encourage avoidance through clever claim drafting. But the evidence suggests that the subject matter tests used following Benson and Flook did not, in fact, encourage excessive litigation during the 1980s, even though there was some evasive claim drafting. Litigation rates for software patents then were about the same as those for all patents. On the other hand, we doubt that a subject matter test by itself would be sufficient to fix the problems of software patents.

The University of Colorado Law School’s Silicon Flatirons Center is seeking an economist or JD to work as a Research Associate specializing in Intellectual Property Reform for a one-year term. The research fellow will conduct research and write articles on the impact of the patent system on the software industry in particular, and patent reform in general. For more information and for application instructions please contact Jill van Matre.