Computing Applications News

Damage Control

The U.S. patent system is overdue for reform, but what needs fixing, and how, is a matter of some dispute.
  1. Introduction
  2. Trolling for Dollars
  3. Enter Big Pharma
  4. Author
  5. Footnotes
  6. Figures
Headquarters of Research in Motion
The headquarters of Research in Motion, which are almost shut down due to a patent dispute.

In 2006, faced with the threat of a court-ordered shutdown, Research In Motion (RIM), the Canadian manufacturer of BlackBerry phones, reached a settlement on a prolonged and vicious patent dispute with Virginia-based NTP. Although NTP’s threat of injunction was widely viewed as extortion in the IT industry (the company neither makes nor sells any products, and its primary assets are the patents of the late inventor Thomas Campana), RIM nonetheless agreed to pay $612.5 million in a “full and final settlement of all claims.”

That figure sparked both disbelief and outrage among many members of the IT industry. It also increased calls for substantial legislative reform. Patent law in the U.S. has not been substantially updated since 1952, and is frequently thought to be out of sync with modern business practices. However, exactly what needs reforming, and how, is a matter of some dispute.

Most companies and entrepreneurs agree with the principles that underlie the U.S. patent system, which fosters innovation by granting inventors an exclusive, though temporary, right to their creations in exchange for sharing their work. But what constitutes a patentable invention, and how should it be protected? Critics complain that American patents are too easy to file—the U.S. Patent and Trademark Office (USPTO) grants tens of thousands patents each year—and too easy to defend in expensive legal suits. (The NTP patents that RIM was found to have infringed upon might never have been granted in many countries.) Companies whose livelihoods depend on revenue from patent licenses, on the other hand, are loath to support anything that might weaken the value of their portfolio. The Patent Reform Act of 2007, a reform bill introduced by Senators Patrick Leahy (D-VT) and Orrin Hatch (R-UT) and Representatives Howard Berman (D-CA) and Lamar Smith (R-TX), stalled last April as legislators were unable to reconcile these competing interests.

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Trolling for Dollars

It is impossible to make a piece of electronic technology without relying on dozens, if not thousands, of individually patented components. In 2003, one computer hardware firm told the U.S. Federal Trade Commission that more than 90,000 patents, held by some 10,000 parties, were related to a single microprocessor. Most large IT companies, realizing that their products may regularly infringe on the patents of their rivals, and vice versa, have struck an implicit truce to keep themselves out of court. Increasingly, however, they have come under fire from so-called “non-practicing entities” (known in the IT industry by the less-charitable moniker “patent trolls”), companies whose primary line of business is the litigation of patent lawsuits.

Trolls purchase patents from inventors and other sources—such as bankrupt companies that are selling off their assets—then sue for infringement, hoping to cash in on settlements and royalties. It’s not clear how many patent trolls currently exist, but there’s no doubt they’ve had an impact on the IT industry. In 2005, Yahoo! was engaged in four patent-related lawsuits; by 2008, the number had swollen to 22. All are plaintiff-driven cases, and most of them were filed in the Eastern District of Texas (a jurisdiction widely considered friendly to patent holders), in spite of the fact that Yahoo! has neither offices nor servers nearby. According to Joseph Siino, Yahoo!’s vice president of intellectual property, each lawsuit costs the company an estimated $2 to $5 million to defend. Other IT firms report similar figures. Terry Alberstein, director of corporate affairs for Cisco, says that each of the 30 active patent-related suits the company currently faces was brought by a non-practicing entity. The cost of litigation: a staggering $30 to $50 million a year.

How to fight this dramatic drain on resources? A cross-industry organization called the Coalition for Patent Fairness, with members such as Dell, Hewlett-Packard, and Intel, was created in 2006 to lobby for litigation reform; a handful of other organizations have taken up the cause, as well. Among the most interesting is the newly formed Allied Security Trust, which seeks to fight patent trolls by acquiring patents and granting member companies nonexclusive rights to use them.

In 2005, Yahoo! was engaged in four patent-related lawsuits; by 2008, the number had swollen to 22. All are plaintiff-driven cases.

One thing reformers hope to see is a tightening of the standards used to determine patentability. The USPTO is overworked and understaffed, and examiners frequently grant patents to inventions that do not actually merit them, according to some critics. But the real battles happen in court, where a company’s best defense against a claim of infringement is usually to argue that the patent under question is invalid. To be patentable, an invention must be novel, useful, and “non-obvious” to an expert in the field. It is this last requirement that has proven troublesome: what is obvious? Until recently, the courts held an invention to be obvious only if it was explicitly prefigured by prior “teaching, suggestion, or motivation.” On the other hand, as critics point out, when something is obvious, few people write it down.

The stalled Patent Reform Act tried to address the problem through a controversial post-grant review process that would have made it easier to challenge the validity of a patent. Currently, patents can be challenged through special re-examination proceedings at the USPTO, which are widely seen as cumbersome and ineffectual, or by litigation. The Patent Reform Act would have created a three-judge tribunal whose sole purpose would be to consider patent validity in a less costly and more efficient fashion than in court. Though many companies supported the tribunal’s creation, others worried it would subject patents to potentially endless challenges unless temporal limits were applied to its jurisdiction. Just how many months or years after the granting of a patent the tribunal should be able to rule on a patent’s validity was the subject of fierce arguments.

Despite these legislative battles, the courts have begun to reconsider the issue of obviousness on their own. The U.S. Supreme Court reset the bar last spring when it ruled that the combination of two existing technologies was not “non-obvious” and thus did not deserve a patent. Welcomed by many in the IT industry as an important step toward reform, the decision also granted examiners and courts more discretion to use “common sense” when determining the obviousness of an invention. Yet it was a setback for the pharmaceutical industry, which often seeks new patents for the combination of one drug with another.

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Enter Big Pharma

Because drugs typically contain only one or two patented compounds, and the pharmaceutical industry relies far more heavily on patents than any tech company does, the battle over patent reform is frequently depicted as pitting IT against Big Pharma. But the IT industry itself is far from unified. Companies like Qualcomm, Tessera, and Rambus are highly dependent on patent revenue, and are therefore deeply suspicious of the reforms proposed by their peers. Another source of disagreement is the apportionment of patent-related damages, which many IT heavyweights complain have recently ballooned in a manner that’s disproportionate to the value of infringed inventions.

“If you can’t cure the proliferation of questionable patents, you try to reduce their ramifications,” says Robert Barr, executive director of the Berkeley Center for Law & Technology.

An injured patent holder is entitled to pursue several different remedies. Injunctive relief prohibits the defendant from continuing to use or sell the infringed invention. Once common, injunctions have become more difficult to obtain since 2006 when the Supreme Court ruled that they could not automatically be issued to non-practicing entities. Lost profits damages, which are difficult to prove and expensive to analyze, have also fallen out of favor. Most plaintiffs thus opt to seek “reasonable royalties” from the defendant. As a matter of convenience, these royalties are often calculated as a percentage of overall product sales. This angers many in the high tech arena, who claim the calculations don’t correspond to the specific value of an infringed patent. Consider the earlier example of a microchip, with its thousands of patented components. If a company were to sue for the infringement of a single component and win, it could ask for damages representing a percentage of the sales of the entire chip.

The Patent Reform Act seeks to redefine “reasonable royalties” to reflect only the economic value of a patent’s “specific contribution over prior art” or, as Senator Leahy described it, “the truly new ‘thing’ that the patent reflects.” It was one of the bill’s most hotly contested provisions, drawing criticism from both the pharmaceutical industry and certain IT segments. Their chief complaint: the value of a product may not be separable from the value of an individual component.

“It suggests that the whole is divorced from its parts,” asserts Brad Ditty, associate general patent counsel at InterDigital Communications. “And it artificially lowers the value of a patent.” Ditty and his peers prefer the flexibility of the current system, and they see no need for reform. Nor do they believe an imbalance exists. “There’s this notion that we’re currently in the midst of a crisis as far as damage awards are concerned,” says Ditty. “We just don’t see it.”

One proposal that remains uncontroversial with the tech community is the Patent Reform Act’s third major provision, which would change the way patents are granted from a first-to-invent to a first-to-file system. (Although some individual inventors have complained that this would put them at a disadvantage relative to larger companies, studies have shown that the first person to file for a patent is almost always the first to invent.) Such a change would bring the U.S. system in line with the rest of the world, and would streamline the approval process by eliminating messy debates about who first had an idea. In fact, it is one of the bill’s few provisions that the pharmaceutical industry also supports, and industry insiders regret that IT companies have not been able to use it to greater advantage to score concessions on other points.

At press time, there was no schedule for the Patent Reform Act’s return. Senator Leahy has said he remains committed to patent reform, but a growing consensus surmises that supporters of the legislation may need to wait until 2009, when there is a new Congress, a new President, and a new head of the USPTO. In the meantime, the battle will continue to be waged, at great expense, in the courts.

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UF1 Figure. The headquarters of Research In Motion, which are almost shut down due to a patent dispute.

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