Then, not one month later, two congressmen suggested a plan to hamstring patent trolls?nonpracticing entities, or NPEs, that compile patents and sue companies for allegedly violating them. The Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act would require software patent trolls to pay their defendants' legal fees.
Would either high-profile plan actually stop or ease the software patent wars?
Patent Wars 101
Patent legal battles arise because idiosyncrasies in patent law allow a company to sue another using an ambiguously worded patent. In some of the most notorious cases, the patent may be years or even decades old.
Consider a particularly flagrant case mentioned in the book Patent Failure that PM wrote about last year. A company called E-Data bought a patent in 1994 for a "System for Reproducing Information in Material Objects at a Point-of-Sale Location." The patent was granted in 1985 for a kiosk that produced custom mix tapes (cassette tapes, that is) on the spot. E-Data latched onto the "point of sale" phrase and argued that the patent should also cover all online sales?anywhere with an Internet connection was a "point of sale." A federal appeals court agreed in 2001, allowing E-Data to sue more than 100 businesses that sold such items online. Most of the companies settled.
In fact, 85 percent of the technology companies sued by nonpracticing entities (the trolls) settle out of court, according to a study released last year. That study, by James Bessen and Michael Meurer at Boston University School of Law, estimated that the trolls cost companies $500 billion in legal fees, settlements, awards, and hits to their share values between 1990 and 2010. This June, the duo released another study arguing that defendants may have racked up to $29 billion in direct costs from trolls' lawsuits in 2011, and most of those companies were small or medium-size.
"Patent trolls don't create new technology and they don't create American jobs," Peter DeFazio, a Democrat from Oregon who cosponsored the SHIELD Act, said in a statement. (SHIELD is cosponsored by Jason Chaffetz, R-UT.) "They pad their pockets by buying patents on products they didn't create and then suing the innovators who did the hard work and created the product."
Tech giants like Apple and Google stockpile patents so they can sue one another, and as a deterrent against legal action (you sue us, we'll sue you). It's a kind of patent arms race, and the trolls or NPEs use similar tactics to sue tech companies. The difference is, they don't make anything. Since they have nothing to protect, deterrents don't faze them.
Make Them Pay
The idea behind the SHIELD Act, then, is to make it so that patent trolls have something to lose by filing frivolous lawsuits, since they would be on the hook for paying their opponents' legal fees if they lose.
"I think the bill would help," Bessen tells PM. "Basically, this would prevent nuisance suits. There are a lot of suits out there where the lawyers are just trying to get the cases to settle for several hundred thousand dollars. Those cases would go away because the trolls would have more than that at stake if they lost." The median settlement is $560,000, and for small companies the median is $360,000, he says. The bigger suits, however?those with millions of dollars at stake?might be immune the new legislation.
Bessen says the real game changer would be Judge Posner's suggestion: Do away with software patents entirely as a surgical strike against both the trolls and the patent arms race among tech giants.
"Judge Posner is a highly respected judge and founder of the law in economics movement of analysis. So, for him to argue that patents themselves are not really necessary [is a big surprise]," Bessen says. "It's a question I've been raising in my research?[but] not in such a blunt way. In the 1980s, we didn't have patents and it [technology] was a very innovative industry. What we've seemed to be adding is not more innovation but more litigation. There is very little evidence to indicate that patents have added anything to software-related industries, but they have added costs."
Would It Work?
As intriguing as both ideas are, Bessen says, neither is likely to survive. Eliminating software patents entirely is probably too far-out, he says, and the SHIELD Act will no doubt be delayed and shredded in Congress?if it passes at all, it might be unrecognizable from the current document. The America Invents Act, a patent reform bill that passed last fall, suffered a similar fate.
"It seems a little unlikely that this act would pass without some serious modifications," Bessen says. NPEs would certainly lobby against the law, and Bessen says pharmaceutical companies probably would throw their weight against it, knowing that any patent law changes could eventually affect them. (There is a law on the books today called the English Rule that mimics some parts of the SHIELD Act, but with two important differences: It's not restricted to technology patents, and it's entirely up to the judge's discretion. If a judge deems a suit "frivolous or vexatious," the plaintiff may have to pay the defendant's legal fees.)
Even if it were possible, it's not clear that eliminating software patents would be wise. Mark Lemley, a technology legal expert and professor at Stanford Law School, says that while software patents are a pain, we cannot simply cancel them. "No one really knows what a software patent is, and there are real inventions out there in software, just as in any other field, Lemley says. "The real problem is that software patents are too broad and too easy to get."
He says the debate turns on the legal definition of a software patent. Should it be defined by a set of categories, such as data processing and image analysis? Maybe, he says, but that doesn't distinguish code from hardware. So why not define it by key words, so that a software patent contains words like "software" and "computer," but not "antigen" and "semiconductor." Or why not some combination of categories and key words? (For more on proposed definitions, see this analysis by Anne Layne-Farrar at Charles River Associates in Chicago.
Lemley argues in a new paper that the big problem is patent claims increasingly cover the goal of the software, not the specific code written to reach that goal. For example, there are patents for anything from online sales to video downloads, which are goals. But there are many ways to provide those services. So a patent should cover a specific means of, say, streaming a video, not the act of streaming itself, Lemley says.
As the drumbeat rises against software patents, one dissenting voice can be found in the person of Michael Mace, an app creator and Silicon Valley veteran, formerly the chief competitive officer at Palm, with past roles at PalmSource, Apple, and other technology companies. Mace says the SHIELD Act is a "reasonable start" to discourage nonpracticing entities. But, he say, "I am not a huge fan of using the risk of legal expenses to deter patent lawsuits?it's a bit too much like playing the lottery in reverse."
And while some patents should be canceled, he says, that's not a final solution. "Just going back and invalidating a bunch of current patents would simply add more uncertainty to an already unpredictable process. It seems like a Band-Aid on a wound that actually needs stitches."
Bessen has another solution to the patent wars: Lawmakers should raise the fees that patent owners pay to keep their patents in force. With high enough renewal fees, companies would think carefully about which patents they want to keep and which they would let expire. High renewal fees would be like a tax on companies that rack up large amounts of litigation.
"It's like a pollution tax," he says. "Those patents pollute the environment, and you're discouraging that kind of pollution."
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