AT LAST, it seems, something is to be done about the dysfunctional way America’s patent system works. Two encouraging events over the past week suggest the patent reformers are finally being heard.
First, defying expectations, the House of Representatives passed (by an overwhelming majority) the Innovation Act, a bill aimed squarely at defanging so-called “patent trolls”. The Senate is to take up the bill within the next month or so (see “Trolls on the hill”, December 7th 2013).
Second, the Supreme Court agreed to rule on the most contentious issue of all: namely, what inventions are actually eligible for patent protection. In particular, do the trolls’ favourite cudgels—the ridiculously vague and overly broad business-process and software patents granted by the US Patent and Trademark Office (USPTO) over the past decade—really qualify?
How vague and overly broad can patents get? One infamous patent covers upgrading computer software over the internet. Another was awarded for the everyday practice of buying goods online with the click of a mouse. Both are admittedly useful, but hardly novel or non-obvious—the three fundamental requirements for eligibility adopted by patent jurisdictions around the world. Failure on two out of the three key counts, and yet still qualifying for patent protection, shows just how ludicrous patenting in America has become.
It is no laughing matter. Frivolous law-suits filed by trolls cost American companies $29 billion in 2011 alone. Trolls (known in the legal world as “patent assertion entities” or “non-practicing entities”) exist solely to buy obscure patents, not to make anything, but to bully other firms that allegedly infringe them into paying a settlement fee, or face the punitive cost of litigation. Defending such law-suits costs a small firm typically $2m these days.
Hiding behind shell companies, trolls prey mostly on small firms, sending out thousands of “demand letters” at a time. Over the past couple of years, the practice has reached epidemic proportions, as trolls have broadened their targets to include not just high-tech firms, but also universities, retailers, hospitals, charities and even consumers themselves. With their lawyers working on a contingency basis (ie, no award, no fee), trolls have low upfront costs and little to lose. Most of their law-suits are filed in eastern Texas, where the courts have a reputation for being troll-friendly.
It is plain and simple extortion. Two years ago, when the America Invents Act sought (unsuccessfully) to put a stop to such shenanigans, Babbage labelled the trolls’ shakedown tactics a “Tony Soprano” protection racket (see “Programmed nonsense”, October 7th 2011). Then, it was the ransom issue that was the principal concern. Today, there are additional worries about the damage being done by the flood of frivolous patent suits to innovation and competition. This, above all, is what has caught the eye of Congress.
Startups threatened by such actions frequently find themselves having to withdraw from the business or go bust. Big companies that choose to fight can easily spend tens of millions of dollars on litigation that could otherwise go on research and development. In other instances, corporations have started deploying their portfolios of sloppily written software patents to prevent rivals from entering their market—witness the plethora of court cases between Apple and Samsung. Too often, software patents operate not as an incentive for innovation, but as a barrier to entry and a tax on new product development. This is not what patent law was designed for.
In a sense, the legal bullying by trolls is a symptom of a wider complaint: the abysmal quality of many of the patents circulating today—especially those covering computer software and business transactions (themselves often based on software algorithms). While the USPTO has been mainly at fault, the courts have not helped.
One of the worst offenders has been the US Court of Appeals for the Federal Circuit, the appellate court that rules on patent disputes, among many other things. Unlike its specialised counterparts in Europe and Japan, the Federal Circuit has never acquired adequate expertise in patent jurisprudence. As a consequence, it has issued some bizarre software rulings.
A corner-stone of any patent system is that laws of nature, natural phenomena and abstract ideas cannot be patented. Were that not the case, all manner of harmful monopolies could spring up based on common ideas found in nature or everyday life—such as boiling water to make tea—that could feasibly be used to prevent others from doing the same, or at least to require them to pay a licence fee. Historically, the courts have viewed software inventions as far too abstract to qualify for a patent.
That changed in 1998, when the Federal Circuit found, in the so-called State Street Bank case, that a business method (ie, set of algorithms) involving a practical application that “produced useful, concrete and tangible results” was eligible for patent protection. A flood of equally dubious patents followed.
A decade later, in the Bilski case, the Supreme Court revisited the whole issue of whether a method for doing business could be patented. It found the “invention” (a way of hedging commodity risks) too abstract to be patentable, but failed to provide a clear test of what constituted an abstract idea for judges in lower courts to apply.
As a result, Federal Circuit judges have been left to make up their own minds. In a much-watched patent dispute dating back to 2007 between Alice Corporation and CLS Bank, involving a way to avoid settlement risks when closing financial transactions, a lower court found the whole idea too abstract to be patented. But on appeal, two Federal Circuit’s judges disagreed, arguing that implementing the invention on a computer rendered it non-abstract—and thus patentable.
A ten-member panel of the Federal Circuit subsequently agreed to rehear the case. Unfortunately, their opinion, issued in May 2013, has left the situation more fractured than ever. Between them, the ten judges issued seven different opinions. A majority agreed that the patent in question was ineligible. But one dissenter on the panel, Judge Kimberley Moore, warned that if the patent were ruled invalid, it would cause the death of hundreds of thousands of similar patents for business methods, financial systems and software. “[This] would decimate the electronics and software industries.”
Last week’s announcement by the Supreme Court that it intends reviewing the Alice versus CLS Bank case next spring means it will finally confront the most fundamental of issues in patent law today: whether or not software patents are impermissibly abstract. A ruling is expected by July 2014.
Would it matter if software patents were judged too abstract to warrant patent protection? Others have pointed out that, despite Judge Moore’s misgivings, patent issuance is “a poor measure of innovation value”. Patenting is strictly a metric of invention. Innovation is such a vastly different endeavour—in terms of investment, time and the human resources required—as to be virtually unrelated. Babbage believes the electronics and software industries, rather than suffer, would flourish without having to worry at every turn about being sued for infringing some obscure patent.
New Zealand has recently overhauled its own patent laws, with the full backing of the country’s IT community. The government has rewritten the legalese covering patents to ensure that, in no circumstances, can software ever be considered patentable. A computer program, it says, is not an invention. Period.
With or without a Supreme Court ruling on whether abstract ideas (ie, software or business methods) can be patented, there are simple, grass-root ways of halting trolls in their tracks. For instance, Nebraska’s attorney general recently warned the owner of a patent for scanning documents directly to e-mail that it would suffer serious consequences under the state’s consumer-protection laws if it harassed local businesses.
Nebraska was following the lead set by Vermont, which filed a law suit against the owner of the scanner patent after it threatened numerous firms and charities within that state. The Vermont legislature has now passed an anti-troll bill, which gives recipients of a “bad faith” accusation of patent infringement the right to counter-sue in a state court. Because trolls rarely use the technology claimed by the patent to make something themselves, they are especially vulnerable to accusations of bad-faith litigation.
Could such a ploy prevail? It is so new that it has yet to be tested in court. There is, of course, an issue of “pre-emption”—the principle that stops states over-riding federal law. But that need not be a hindrance, say legal scholars, provided state courts apply the same standards as federal courts.
If the use of state consumer-protection laws to ward off frivolous patent suits were to catch on, it could give the trolls serious pause for thought—especially if their mass mailings of threatening letters to businesses were met by dozens of law suits from attorneys general demanding their presence in state courts across the land. One way or another, things are beginning to look ominous for those who would exploit the inadequacies of America’s patent system.
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