Can the U.S. patent system be saved?

With the number of patent-related lawsuits on the rise, and the system set up to favor deep-pocketed giants over individual inventors and smaller companies, U.S. technology innovation is in for a continued shaky ride, according to patent experts and other observers.

Yes, the U.S. Patent and Trademark Office (USPTO) is issuing more patents than ever before (see chart below). According to a recent USPTO report (PDF), around two-thirds of the two million patents that are active right now are in the technology field. But some observers say that increase has been at the expense of the overall quality of patents and what they cover. ( See slideshow.)

If the historical trend of 1960 through 1980 had been followed from 1980 to 2012, we would have two million fewer patents issued than we do today, according to Avancept.

That trend is as damaging for large companies as it is for smaller firms. Should one-click shopping be patentable? How about Internet advertising? Both currently have patent protection.

(See related story, “Why tech vendors fund patent trolls.”)

Overall, the situation is more complex — and more expensive — for the tech field than it is for most others. “Some of these IT companies have more patents individually than do entire industries,” says Erin-Michael Gill, a former USPTO examiner who served as an adviser to the Obama administration in helping to draft the new patent regulations included in the Leahy-Smith America Invents Act (AIA).

“For example, the financial services industry has about 9,000 granted patents and 3,000 applications,” Gill says. By comparison, Microsoft alone has 21,000 granted patents and 10,000 applications, Gill points out.

Spotify’s patent travails

When streaming-music provider Spotify entered the U.S. market last year, it got a nasty wakeup call — American tech style.

Thirteen days after the popular European music site hit the U.S., San Diego firm PacketVideo slammed it with a patent infringement suit (PDF). PacketVideo claimed Spotify infringed U.S. Patent number 5,636,276 — titled “Device For The Distribution Of Music Information in Digital Form” — and demanded damages and an injunction.

“So much for innovation,” says Tom Ewing, an intellectual property attorney. “Welcome to America, Spotify. You pay to play or you don’t play at all.”

PacketVideo, court records later disclosed (PDF), is a wholly owned subsidiary of Japanese telco NTT Dokomo. Spotify and PacketVideo settled for an undisclosed amount.

Representatives of all three companies refused comment for this story.

“Many of the basic building blocks of commerce and industry are [already] patented — so if you build new technology, you probably infringe,” says Colleen Chien, a professor at Santa Clara University who specializes in intellectual property (IP). One example of this is Spotify, which entered the online music business in the U.S. only to find that much of its technology was already patented by another company. (See sidebar at left.)

Abuses abound, experts agree. “The current patent system, despite all attempts to reform it, is fundamentally broken,” says Julie Samuels, staff attorney at the Electronic Frontier Foundation (EFF).

“Whether it’s filing huge numbers of patent applications, or aggressively licensing baskets of patents, or even defending yourself appropriately in just one patent lawsuit, the patent system has become to a large extent the sport of kings,” says patent attorney Tom Ewing, a Silicon Valley intellectual property (IP) attorney and founder of Avancept, which tracks IP activities.

Last year, bankrupt Nortel auctioned off more than 4,000 patents; an Apple-led consortium, including Microsoft and Research In Motion, bought them for $4.5 billion.

In this series

• Why tech vendors fund patent trolls
• Slideshow: Wild and crazy patents

“Only the largest tech companies can afford to play the full patent game,” Ewing says.

Indeed, companies pay thousands or millions to buy portfolios of defensive and offensive patents, participate in patent auctions and deal with high litigation costs. For instance, Microsoft paid an average of $1 million per patent when it purchased 900 patents from America Online in March for more than $1 billion. Facebook now owns 650 of those former AOL patents and patent applications, for which it paid around $550 million.

Lawsuits abound, also requiring deep pockets. When Yahoo sued Facebook for patent infringement in March, Facebook fired back almost immediately with a countersuit of its own (PDF) — naming 10 Facebook patents that it claimed Yahoo had infringed. Eight of the 10 patents Facebook named in its suit were patents Facebook purchased from third parties recently — or “just in time” — an activity only a large company could afford.

In a world where companies including Google and Apple pay more for patents and patent litigation than they do for R&D, Chien says, a real problem is evident: Basic research is being shunted aside.

“Google spent $12.5 billion in 2012 to buy Motorola Mobility and its patents, and only $5.2 billion in 2011 on R&D,” Chien explains. “In 2011, Apple spent $2.4 billion on R&D but contributed more — approximately $2.6 billion — in a single transaction to buy patents from Nortel.”

Jim Prosser, a lead Google spokesman, agrees there’s a problem. “The industrywide rise in patent litigation is the legacy of overly broad and vague software patents being issued when they shouldn’t have, and Google’s success makes us a particularly attractive target. Our acquisition of patents, including Motorola Mobility’s, strengthens our portfolio and lets us better protect our products from anti-competitive threats. We’ve never sued anyone offensively using patents.”

Experts all agree on this much: New patent regulations, while they contain needed reforms in some important areas, don’t truly address what ails U.S. innovation the most: the rise of billion-dollar patent trolls, companies allying and trading patents to reshape technical landscapes, the growing complexity of the system and the lack of protection for universities and other noncommercial entities to escape litigation.

Nor do the new rules address the issue that rankles some observers the most: Too many broad or overlapping patents that confuse the innovation landscape, cause litigation and create an overall delay in getting technology to market.

Enter the America Invents Act

The America Invents Act (AIA) is the biggest change to the 222-year-old patent system since 1952. Signed by President Obama in 2011, it is going into effect gradually.

Perhaps its biggest change — a switchover to a first-to-file system from the existing first-to-invent system — goes into effect in March 2013.

What this change means is that a patent will no longer be granted to the person who can prove he or she created an invention first. Instead, patent protection goes to the person who files the patent application first, with a grace period of one year if the inventor has publicly disclosed the invention before filing the patent application.

Moving the U.S. from its current first-to-invent system to a first-to-file-with-grace-period system is bound to upset many small companies, which will argue that it’s easier for larger companies to win the race to the patent office than it is to actually invent.

So predicts Stephen Merrill, executive director of the program on science, technology and economy for the National Academies of Science (NAS). He co-authored a paper in 2004 calling for widespread patent reform, and the AIA includes some of those suggestions.

Surviving the battle, then losing the war

It was during the War of 1812. At 8 a.m. on August 24, 1814, some 200 soldiers led by England’s Rear Admiral Sir George Cockburn captured the United States capitol of Washington, D.C.

But although soldiers burned or otherwise destroyed many government buildings — including the Capitol, the Library of Congress, the White House and the Treasury — they didn’t touch the U.S. Patent and Trade Office.

Drawing, “Capture and burning of Washington by the British, in 1814;” 1876 publication. Image courtesy of Wikimedia Commons.

Indeed, the Patent Office building was the only government office left standing at the end of the siege because of the intervention of one man: Dr. William Thornton, who designed the Capitol building and later became the superintendent of patents.

Thornton made an impassioned plea to the soldiers that the building’s contents — thousands of inventions, at that point — were important to all of humanity, not just to the United States.

Thornton’s success, however, was relatively short-lived; just two decades later, the Patent Office did burn down, albeit under much different circumstances. On December 15, 1836, an accidental fire destroyed all of the building’s contents — 10,000 patents and thousands of related models, as well as all documentation. Thornton died in 1828 and didn’t live to see it.

Other changes within AIA include a post-grant review process that allows the public to challenge a patent’s basis during a nine-month window from the patent’s grant date. There already is another process that allows the public to challenge a patent at any time.

Some observers wonder, though, if this won’t introduce more cost and complexity. Former USPTO examiner Gill asks, “Who will hire and pay for judges?”

The act also allows for lower fees for companies it recognizes as “micro-entities” — these are inventors with a gross income smaller than three times the national median income and who haven’t previously filed patents. So-called micro-entities get up to a 75% reduction in fees.

The AIA also adds a budget to allow the USPTO to hire more patent examiners and examiners with more experience, which should help improve patent quality, experts say.

Patrick Ross, USPTO deputy communications director, says the agency is hiring now. It will add 1,500 examiners this year and reach 7,800 examiners by December, up from the current 6,800 examiners.

Speeding up the process

Another new capability, part of the AIA and in effect now, allows small companies to accelerate patent examination more cheaply. It’ll cost $2,400 for entities with fewer than 500 employees, and double that for larger companies. The new fee structure is explained here. It is unclear at this point how much this will accelerate the process, as it changes from patent to patent.

But it should make a difference to small inventors and is perhaps the AIA’s greatest change to the patent system, former USPTO staffer Gill says.

That’s Section 25, he explains, but he worries that it is one of the lesser-known reforms. Only companies with the legal chops to unearth it will know how to take full advantage of the new acceleration options for all inventors. Getting the word out is something the USPTO must do, Gill says.

Gill knows the problems first-hand. As an executive at a once-promising but now-defunct startup called OQO, holder of a Guinness World Record for the smallest computer ever, he managed IP with an all-star engineering team.

I fail to see how innovations are being stifled. Patrick Ross, USPTO deputy communications director

The tiny OQO faced off in three separate patent-related lawsuits. The firm settled one and the other two were still pending when the company went under, he says.

But the firm had other issues. As the company struggled to stay above water, OQO had some 90 patent applications languishing in the patent office, making it difficult for the firm to raise money, Gill says. “You need assets investors can put money into — but 18 months just to get the application published and over 30 months to get approval — well, that is an eternity in tech,” Gill says.

So much of the AIA needs to be tested in the real world, he says, and how it all will shake out remains to be seen.

Reaction to AIA

“It’s certainly a step in the right direction,” the NAS’ Merrill says. “We’re delighted we had an impact,” he adds, while conceding that though the AIA is the biggest change to patent law since 1952, it still “is a modest change” overall.

“My biggest problems with the AIA are problems of omission,” the EFF’s Samuels says. For example, she explains, there are new opportunities for third-party challenges of questionable patents, but “those challenges are expensive and hard to access.”

Another issue, Samuels continues, is that one of the promising new ways to challenge issued patents allows for those challenges to happen only in the first three months.

Even with lower fees and patent acceleration for small companies, Samuels says, “the new law provides virtually no tools for small innovators or inventors — specifically those who may not participate in the patent system but find themselves affected by it all the time — to fight for their interests without serious financial backing.”

Chien adds, “It’s too early to tell how much the AIA will improve the patent system.”

Defending the status quo

The patent system is, by design, a way to get inventors to clearly disclose what they’ve invented — their “secret sauce” — in exchange for a temporary (now 20-year) monopoly on the invention.

The USPTO’s Ross says, “I fail to see how the innovations are being stifled” by the patent system. “Patents are being filed by companies in Silicon Valley, leading to millions of dollars in revenue. IP-intensive industries support at least 40 million jobs and contribute more than 38% of GDP; that’s five trillion dollars annually,” he explains, referring to a recent report(PDF) by the U.S. Bureau of Economic Analysis.

Ross points out that patent trolling, litigation and other problems happen largely after the patent process is complete on the USPTO end.

Some experts blame the proliferation of too-broad patents on the USPTO, saying that young and inexperienced examiners hand out patents with abandon, besieged as they are.

Ross concedes that point but says the USPTO is hiring more examiners right now, thanks to new AIA provisions, and is able to pay higher salaries for examiners with more experience.

Also, the agency is opening a satellite office in Detroit and is looking for examiners with more experience than the fresh-out-of-college candidates it typically has relied upon. The hope is that the new office will lure patent examiners, who make between $50,000 and $100,000 on average, to work for the agency if they have an option to live outside of ultra-expensive Washington.

Understanding prior patents, and other problems

The EFF’s Samuels explains another common complaint about the patent system. “Most people actually can’t understand what the patents cover, regardless of whether they have to. And the inability to really understand has resulted in a world where inventors are incentivized to ignore patents.”

Gill agrees. “With so many patents from so many companies and all the legalese to wade through, you’re in a situation where so few inventors even can understand what previous patents cover,” he says.

Other issues abound, experts say. Craig Opperman, a Silicon Valley patent attorney at DLA Piper, points out that the U.S. legal system doesn’t force the losing party in a suit to pay the winning party’s legal fees. As a result, litigation is cheap and easy for companies who can afford it.

Also, he says, “It is very inexpensive, relative to Europe, for example, to get a patent.”

Ewing trains patent agents around the globe as part of his work for the World Intellectual Property Organization. He explains that “attorneys’ fees are typically higher in Europe, and patent holders must pay annuity fees for each European country in which they want to keep their patent active. Any one of these fees tends to be equal to or higher than the U.S. fee.”

In other words, if the cost of a patent in any one of the EU countries is equivalent to the U.S. cost, then one must multiply that by the number of countries in which the patent is being applied.

Overall, these lower U.S. fees result in more and more patents here, overwhelming an already overtaxed patent examination system and resulting in some substandard patents that end up being overturned later.

Companies have always bought and sold patents, and it’s legal to do so, of course. What’s new here is the buying and selling of thousands of patents in a single transaction, a situation that potentially locks out smaller competitors and innovators in any given field — and the AIA does nothing to prevent that.

This is to the advantage of tech companies that, as Ewing points out, fiercely complain about costs of litigation but then want to retain the right to arm themselves — by buying massive numbers of patents — to attack competitors.

Take Rovi. This firm owns over 1,000 patents related to on-screen cable TV program guides, the great majority of which it acquired. As a result, it is extremely difficult, if not impossible, to build a non-infringing TV guide, says Avancept’s Ewing.

Another problem, Opperman adds, is intense lobbying on the part of large tech companies in order to weaken how courts calculate patent damages in cases against them. That way, they pay less when they lose.

Lobbying by high-tech firms could, ultimately, erode the enforceability of U.S. patents, Opperman says. “I fear that a decade from now U.S. high tech will come to rue the erosion they [lobby for], as offshore manufacturers take advantage of a weakened patent system and their own cheap labor pools to take U.S. market share away from U.S. innovators,” he says.

So what’s the answer?

In some ways, the high-tech industry has itself to blame for its own patent-related ills. Opperman points to the “proliferation of patents” and the ease with which big players buy and sell them. In that sense, he says, patents have become “commodities” for those who can afford them. “This commoditization has definitely driven down the quality of patents and [caused] their proliferation. So if you’d like to fix the patent system, make our user fees equivalent to those in Europe and use those fees to pay examiners more,” Opperman says.

Outside the AIA, another step is to tighten existing overly broad patents, as the EFF attempts to do in its patent-busting project, intended to help narrow or defeat what it sees as overly broad patents, including one-click online shopping, pop-up windows, framed browsing and others. As part of the project, the EFF also hopes to help document the harm that these “illegitimate” patents cause to both the technology industry and to the public at large.

Pessimistic that Congress will make significant reforms to the patent biz, the tech industry is largely left to self-police, says the EFF’s Samuels. Twitter this year announced what it calls the Innovator’s Patent Agreement, designed to let engineers ensure their patents aren’t used for offensive litigation. Of course, there is nothing to stop another company from buying an engineer out of that contract.

“It’s becoming self-help-oriented,” said EFF’s Samuels. But in the end, that won’t be enough. “In order to fix the system, we need more than self-help answers. We need action from policy makers to make it harder for [litigious patent owners to] threaten those who are innovating in America and slow that innovation.”

That’s not going to happen anytime soon. “It’s unlikely that the optimal design of the U.S. patent system will be the one that best serves the needs of all its largest customers,” says attorney Ewing, noting that the patent system should serve the overall needs of the U.S. economy as a whole and the technology industry, one of its major drivers, in particular.

Not everyone believes the current system can be fixed well, quickly or even at all. Billionaire entrepreneur Mark Cuban is an investor in Vringo — a small company that has sued Google for patent infringement — and he is a vocal opponent of the way the patent system operates in the U.S. “Congress is full of lawyers. Lawyers make money from the patent system. There is no one representing the silent majority,” he says.

For their part, tech companies use patent litigation to “shape markets. The concept of innovators [winning through invention] is gone,” Cuban says. “You just buy a patent geared towards the company that is trying to disrupt your business and sue them over and over again until they can’t afford to keep fighting and go out of business,” Cuban says.

Gill, the former USPTO officer, takes issue with that. Now managing director and chief IP officer at MDB Capital Group, a boutique investment bank that raises money in the public markets for early-stage companies, Gill says Cuban is off base.

“Despite the inefficiencies in the patent system, innovation is still the engine that grows these important small companies,” he maintains. “What some investors are reacting to here is that early-stage companies are most vulnerable — and have critical needs for patent strategy from day one.” Even Facebook wasn’t squared away on IP issues when it filed for its IPO, he says.

“These are not trivial issues, but invention is not dead — and the patent system didn’t kill it,” says Gill.

Related story:Why tech vendors fund patent trolls

Based in San Francisco, Gina Smith is a New York Times best-selling author and a veteran tech and science journalist specializing in news, news analysis and investigative work. She’s also the editorial director of the geek site aNewDomain.net. You can email her at Gina@aNewDomain.net.

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