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Software Patent Proposals Divide Tech Industry

Bill Clark/CQ Roll Call File Photo
Schumer said that listening to stories from patent troll victims made it clear to him that Congress needed to take action.

Spend any time with tech lobbyists, and one topic is unavoidable: patent trolls. The phrase elicits more scorn in their industry than almost any subject, despite its low profile for those outside the arcane world of intellectual property law.

A “troll,” or patent assertion entity, purchases patents for the express purpose of filing patent infringement lawsuits against other companies to get licensing fees, without actually making any goods or providing any services.

The practice has long plagued tech companies. But what if the plaintiff and patent holder is the original inventor of a piece of software? Is that a cutting-edge company seeking to protect its innovation? Or simply an established company trying to stave off smaller competitors from using what, over time, has become a widely accepted technology? Should they be subject to any limits?

While patent assertion entities are often blamed for creating the problem of trolling, they aren’t the only ones using patents as offensive tools.

Large tech companies have gotten into the game in recent years, spending billions of dollars to purchase patent portfolios that they then use to try to derail their competitors’ new offerings. The courtroom has become the latest battleground for tech firms, where they can vie for control of the consumer marketplace via litigation rather than innovation.

With a typical patent trial costing in the neighborhood of $5 million, defendants are often compelled to settle cases rather than defend themselves via expensive litigation. Patent trolls only exacerbate the problem by filing countless lawsuits in hopes of extracting settlements before trial. Passing legislation to curb such lawsuits is now the tech industry’s top priority on Capitol Hill, apart from an immigration overhaul that would bring in more foreign high-tech guest workers.

“Listening to the stories of patent troll victims — everyone from large retailers to small technology startups from New York and across the country — has made clear the need for Congress to take swift action to protect our country’s innovators,” said Sen. Charles E. Schumer, D-N.Y.

The problem is particularly pronounced for software patents, which accounted for almost 90 percent of the increase in patent lawsuits from 2007 to 2011, according to the Government Accountability Office. While the number of lawsuits has spiked, many of those software patents have failed to hold up under legal scrutiny. However, few patent lawsuits ever make it through trial, and only large companies have the resources to prove a plaintiff’s patent is invalid.

As a less-costly alternative, the 2011 America Invents Act (PL 112-29) included a new program that allows the U.S. Patent and Trademark Office to re-examine certain software patents to determine if they are valid. The program is only a year old and few cases have made it through the system. But Charles Duan, director of the Patent Reform Project at the open Internet advocacy group Public Knowledge, said challenging a patent at the patent office costs only $20,000 — a fraction of the cost of litigation.

Duan said similar programs at the PTO have invalidated as much as 90 percent of the patents they examine, a rate similar to patent lawsuits that are litigated to completion.

“To the extent they are invalidated, the patents probably shouldn’t be granted in the first place,” he said.

The current program applies only to covered business method patents, which are essentially software patents used by the financial services industry. In response to the rising use of software patents by both patent trolls and large companies to stifle innovation, a number of lawmakers have suggested the CBM program be expanded to cover most business software patents. Schumer is among them, offering a bill (S 866) that would expand the program to all business software and remove the eight-year sunset provision on the program.

“We must expand and make permanent the Schumer-Kyl covered business method program in order to deter patent trolls from using poor quality patents as a weapon against innovation,” Schumer said.

In addition to Schumer’s bill is House legislation (HR 2766) from Reps. Darrell Issa, R-Calif., and Judy Chu, D-Calif., who frame their effort as a response to the growing problem of patent trolls.

“As a patent holder, I know how harmful and expensive these aggressive litigation tactics are for American entrepreneurs,” Issa said. “Instead of spending money on new hires or technology, innovators are faced with millions of dollars in legal fees to resolve these baseless lawsuits.”

Chu called patent trolls “a drain on our national productivity and economic output,” adding, “The STOP Act will deter abuse and arm smaller entities with the support they need to fight back.”

Portions of the tech industry, particularly Web-focused firms such as Google and Apple and mobile app developers, effusively praise the bills from Schumer, Issa and Chu.

“By enabling defendants to seek review of a patent’s validity, the bill creates a quick, cost-effective alternative to litigation,” said Gary Shapiro, president and CEO of the Consumer Electronics Association. “Without having to face the immediate potential of millions of dollars in legal fees, companies targeted by trolls will face less pressure to pay money to resolve baseless lawsuits.”

But a coalition of large corporations, including Microsoft, and other patent holders is pushing back, arguing that expanding the CBM program would diminish the intellectual property rights of patent holders and only give patent trolls multiple venues to challenge the validity of patents.

Opponents also argue that the move could send the message that the United States is treating software patents differently than other patents and prompt other countries to similarly exempt other patents from future treaties.

“It is clear that if this discriminatory treatment of a select category of patents opposed by special interests in the United States were to be made a permanent feature of U.S. law, it would create a harmful precedent for our trading partners to enact exceptions in their laws to protect special interests in their countries,” wrote a host of companies, including 3M, IBM, Eli Lilly and Microsoft, in a letter to the leadership of the House and Senate Judiciary committees last month.

Critics of the Schumer and Issa-Chu approach are less hostile toward a provision recently unveiled by House Judiciary Chairman Robert W. Goodlatte, R-Va., that would expand the CBM program to a lesser extent as part of broader draft legislation to attack patent trolls. Goodlatte’s approach would still require that any software patents challenged under the CBM program relate to financial services, but it would expand the types of patents that would qualify to include almost anything with a financial aspect, such as systems that disburse financial payments.

Goodlatte and the House are moving more quickly than the Senate, where stakeholders are waiting on Senate Judiciary Chairman Patrick J. Leahy, D-Vt., to release a draft bill.

Senate staff expect the process to be a close collaboration between the two chairmen, and they hope to iron out most of the negotiations before releasing a draft. The initial bill from Leahy is unlikely to incorporate anything regarding the CBM program, but the final product that reaches the floor could include language from Schumer or another bill that would expand the review process to cover most software patents.

Nevertheless, the old guard of large patent holders believes that endgame is far from a foregone conclusion, and it plans to lobby fiercely to forestall any changes. But the tech industry is unlikely to give up, especially with heavyweights such as Google and Apple pushing the issue. Expect the coming battle over software patents to meet or exceed even the most bitter court case.

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