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The Innovators' Appeal For Patent Quality
by Drew ClarkSpeaking last month at a Business Software Alliance summit, Intel Chairman Andy Grove catalogued four key policy problems that he said if unmet could undermine the future of the American software industry.
Of the complaints, three were familiar fare from Silicon Valley: the lamentable state of science education in the United States, reduced federal funding for research and development in engineering, and what Grove called a "ho-hum" infrastructure for high-speed Internet access. But the fourth grievance -- the high cost of patent litigation -- has been addressed less frequently.
The core complaint of critics of intellectual property law is that the Patent and Trademark Office (PTO) too easily grants protection for software, "business methods" like the one-click shopping feature of Amazon.com and other claimed inventions when they are either obvious or already exist. Innovators trying to commercialize inventions in a world with an undiscriminating PTO, they say, are like landowners trying to develop property without real-estate surveyors. Both paths are fraught with legal risks by third parties who can claim trespassing.
Grove's speech legitimized that objection and elevated the likelihood that policymakers in Congress or the Bush administration will take some action on the topic. Last week, the FTC joined the growing debate over patent quality, offering its own series of 10 recommendations for improvement in the patent system.
A History Of Antitrust, Patent Conflict
The FTC's 315-page report, "To Promote Innovation: The Proper Balance Between Competition and Patent Law and Policy," specifically confronted the sometimes-contentious interface between antitrust and intellectual property law. "The doctrines historically have traded ascendancy between each other," the report said.
Just after the 1890 enactment of the landmark Sherman Antitrust Act, courts viewed patents as deliberately conferring monopoly power and exempted them from scrutiny under competition law. The pendulum swung the other direction after the New Deal of the 1930s, when antitrust law reigned supreme. The Supreme Court set such high a bar on whether inventions deserved patents that one dissenting Justice wrote: "The only patent that is valid is one which this court has not been able to get its hands on."
"By the late 1970s, two factors were converging to reverse the cycle of antitrust's dominance and patents' weakness," the FTC report said. "First, general concern about industrial stagnation and a lack of significant technological innovation spurred reassessments of the patent system. Second, scholars, many associated with the 'Chicago School of Economics,' spurred a general rethinking of antitrust, including its approach to patents." Both factors played a central role in shifting the pendulum toward stronger intellectual property protection.
Executive-branch enforcement of antitrust law tightened its focus on price fixing in a given market and not the market share conferred by patents. The Supreme Court unleashed new realms for intellectual property by permitting patents on software, life forms and business methods. And Congress began to pass laws strengthening both patents and copyrights, including the establishment in 1982 of the Federal Circuit Court of Appeals, centralizing jurisdiction over all patent cases in a single appellate court.
In releasing the report, the culmination of a series of workshops between the FTC and the Justice Department's antitrust division from February to November 2002, FTC Chairman Timothy Muris stressed that his agency is not attempting to swing the pendulum back.
"We must not use antitrust law to undermine the innovation that the patent system provides," Muris said at a luncheon speech on Thursday at the American Intellectual Property Lawyers Association (AIPLA) annual conference. "Our hearings confirmed that both marketplace and patent policy can foster innovation; each policy requires a proper balance with the other."
Traversing The 'Patent Thickets' Of Technology
The FTC report also surveyed the use of intellectual property across different high-technology sectors and concludes that the pharmaceutical and biotech industries rely on patents far more than the computer hardware or software industries. Innovation in the former two industries is costly and unpredictable, the FTC found, and patents prevent rival firms from "free riding" on their discoveries, permitting drug companies to recoup their costs.
"By contrast, computer hardware and software industry representatives generally emphasized competition to develop more advanced technologies as a driver of innovation in these rapidly changing industries," the report said. Innovation in information technology is more incremental, meaning that new discoveries build more directly on old ones. Hence patents play a less-central role and frequently can impede progress, the agency said.
Many technology companies acquire patents, but the FTC found that they do so for "defensive" reasons: They become chits traded when competitors threaten patent-infringement lawsuits. Historically, the semiconductor industry relies more on trade secrets, and software companies rely more on copyright for protecting their investments in chip designs and source code.
The result, particularly in software, are "patent thickets" that make avoiding infringement very difficult. Grove referred to that problem as a "friction" on the technology industry by increasing the costs of intellectual property litigation from $5 million in 1982 to $4 billion in 1998.
"The number of software patents issued in recent years has skyrocketed," he said, which could mean either that programmers have become more innovative or that "the patent office is overworked, flooded with patent applications and doesn't vet the patents as thoroughly and with a hurdle as high as it might. I believe that the second one is the case."
Plenty Of Ideas On The Table
Representatives of big companies that patent extensively found something to like and dislike in the first part of the two-part -FTC report: The FTC and Justice are expected to join forces on the second report next year about whether to change the 1995 antitrust guidelines governing the licensing rules and patent settlements.
The second report also will revisit the issue of standards bodies' role in patents. The dispute is particularly timely because of the FTC's high-profile lawsuit alleging that Rambus deceived a semiconductor industry group to include Rambus technology in its standard, a move that could net the company $3 billion.
Everyone engaged in the debate about patent quality appears to agree that the PTO needs more money, and industry is strongly pressing for passage of a bill, H.R. 1561, that would let PTO keep all of the patent-application fees it collects and also update PTO procedures. Business groups also endorse the FTC recommendations to require publication of all patent applications after 18 months and to grant previous users of patented inventions "prior user rights." And the FTC wants to make it easier for competitors to overturn patents.
PTO officials say they are reviewing the "voluminous" FTO report. Public Affairs Director Richard Maulsby said, however, that the office is "pleased to see that elements of the report" favor PTO's strategic plan.
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