Global Trend

The Patent Litigation Crisis

Patent and copyright protection are included in the U.S. Constitution as a way to safeguard scientific and commercial innovations, as well as books, movies, music and other creative products. But, unlike laws protecting personal property, the copyright and patent laws are supposed to “promote the progress of science and useful arts.”

The need to shield innovations today is no less important than it was generations ago, when such inventions as the cotton gin, the steam engine, and steel manufacturing did so much to fuel the productivity and prosperity of the Industrial Age.

The business of invention is hard to pin down. If patents and copyrights didn’t exist, the incentives to do the hard work of coming up with new things would be diminished. But if the life of copyrights and patents were completely open-ended, it could stifle the creative use of those protected intellectual properties.

Innovation is seldom the product of a blinding insight. It is more often the step-by-step improvement and variation on existing things and ideas. Sir Isaac Newton famously said he may have had a keener vision than most people because he was “standing on the shoulders of giants” ? by whom he meant the scientific innovators who preceded him.

Without the freedom to adapt material that is in the public domain, major innovations would be harder to bring forth. But a disturbing trend we see is that businesses are now busy patenting everything ? from new gizmos, to the very way business is conducted. And, they are just as busy suing the holders of patents that get in their way.

In 2003, patent holders in the United States filed almost 2,800 infringement lawsuits. That represents a 13 percent increase from the previous year. Incidentally, the United Patent Office granted almost 190,000 patents in 2003 ? a 22 percent increase over 1999.

IBM has been the country’s most prolific patentee for nine years in a row. In 2001 alone, it was awarded 3,454 patents ? which amounts to more than one for every working hour. IBM’s annual licensing income from its patents tops $1.5 billion ? which is about 20 percent of the company’s profits. And because technology is moving so swiftly and in so many directions, IBM seeks to write its patents as broadly as possible, to ensure that it will stay ahead of its competitors. For example, in 1987, IBM received patents for such basic tasks as generating paragraphs and footnotes on a computer.

Other leading companies, including Microsoft and Hewlett-Packard, are also reinvigorating their aggressive patenting programs.

Clearly, as more and broader patents are issued, they provoke a higher incidence of patent infringement litigation. The glut of lawsuits is best seen as a game, in which the stakes for both parties are very high.

A patent is essentially a government-sanctioned monopoly with an expiration date. The rules governing these monopolies were established in a slower, less litigious era. Today, there is diminishing confidence in the way patents are evaluated, granted, and challenged. For example, does the current method slow progress when its intent was to preserve the intellectual property of inventors? The fact is that the nature and pace of invention have changed, and the procedures of the United States Patent and Trademark Office may be woefully out of date.

About 355,000 patent applications were filed in 2003. As we heard before, 190,000 were granted, and there were 500,000 applications still pending at year-end, including many that were filed in previous years. Some technology patents can take up to five years to process ? which is understandable when you consider that some applications entail thousands of pages.

And yet, the patent office is so swamped with applications that patents are often approved by examiners after spending only 20 hours on them, according to the Federal Trade Commission. Also, the FTC disclosed in a recent report that patent examiners only see the applicant’s version ? they do not have access to what the applicant’s competitors know.

All of this means that many applications may not be getting the attention they deserve. The intellectual-property consultancy firm, M-Cam, contends as many as 30 percent of patents may have overlapping claims with other patents ? which places their legitimacy and their value in doubt from the very beginning.

According to The Economist, ever since American chip makers were being challenged by Asian chip makers, American manufacturers have been much more aggressive about protecting their technology from being usurped by foreign firms. Texas Instruments and National Semiconductor both helped stave off bankruptcy in the 1990s by pursuing tough patent tactics. When Microsoft was required to pay IBM $30 million in an infringement judgment, other companies began realizing the power of their intellectual property. Bill Gates’ reaction was to urge his employees to patent “as much as we can.”

As business has become more competitive, firms have been forced to work more diligently when they enter markets. And they are realizing that one of the most powerful ways to do that is have in their holster a government-awarded, 17-year monopoly.

The Economist further points out that the glut of patents has created two problems. First, there are too many badly-conceived patents being awarded. Second, instead of patents giving inventors and companies a sometimes-tenuous amount of protection, they are now corralling too much. For example, should someone actually own the idea of giving professional advice on the Internet? Jay Walker, the founder of Priceline.com, holds that patent. Such patents strike many businesspeople as being too broad and having a chilling effect on competition.

Plus, in these cases the level or complexity of the invention is in no way equal to the value of the patent. Many business-method patents have been the subjects of fierce litigation. For example, Amazon has sued Barnes & Noble for infringement on its one-click shopping monopoly, and Walker sued Microsoft for using his patented reverse-auction approach on the Expedia travel site.

The National Academy of Sciences has weighed in on patent reform and is recommending a number of changes. First, it wants the U.S. to adopt a “first-to-file” rather than a “first-to-invent” method of granting patents, which would be consistent with Japanese and European procedures. It also wants Congress to limit patent infringement liability to commercial patents ? leaving non-commercial scientific research exempt from that sort of litigation. It also recommends allowing third-party challenges to new patents for a specified amount of time.

Will legislators change the law? In Europe, when a patent is awarded, the competition has a legal right to oppose it. Many patents are revoked, and proponents say the method helps to reduce the number of bad patents. Some think the length of the monopoly should be shortened. Others point to the open-software movement as an example of how best to foster innovation.

And there are other ways to ease patent proliferation and the accompanying patent litigation. IP.com promotes an inexpensive registration service that permits inventors to announce their work publicly ? and thereby disallow competitors from patenting it or something similar. Inventions registered with IP.com are placed in a database that the U.S. Patent Office and the European Patent Office have pledged to review before awarding a patent. Its utility as a defensive tool ? to ward off spurious claims ? is part of its appeal.

However, Abbott Laboratories and United Technologies have started to use IP.com to strengthen their efforts against infringement litigation. The service costs a paltry $109. It also has a service for open-source programmers for $20 ? so that they can thumb their noses at a patent system they find unworkable and at the same time protect their work from infringement claims.

An outfit called BountyQuest is attacking the problem from a different perspective. Firms threatened with patent litigation provide bounties of $10,000 or more that BountyQuest then posts on its site. Technology Review reports that one of BountyQuest’s most famous transactions was when Tim O’Reilly, who runs O’Reilly and Associates computer publishing business, offered $10,000 to anyone who could help make Amazon’s one-click shopping patent invalid. The court challenge is still pending, but three submitters who identified other patents that involve on-line purchasing shared the reward.

There is another trend in the patent business worth noting. Acacia Research Corporation doesn’t patent anything; it acquires the rights to and then licenses patents that have already been filed. The firm gained a high profile recently when it filed complaints against 27 adult-oriented companies claiming copyright infringement. Acacia contends that it owns the rights to several fundamental patents covering the way content is transmitted over a variety of media. It is currently going after industries that provide streaming music on the Internet and the on-demand movie services that are common in hotel rooms. As of February 2004, with more licensees coming aboard, the total licenses it controlled were worth $2 million per year.

How should businesses protect themselves in this highly competitive and litigious atmosphere ? where patent owners can endure punishing legal fees and face the chance that their valuable patents could be determined to be invalid?

Douglas J. Kline, a partner at the Boston law firm of Testa, Hurwitz & Thibeault, where he is chair of the patent and intellectual property practice and litigation group, offers three guidelines in a recent issue of Technology Review:
- First, defend your patents aggressively. Kline advises, “Take it upon yourself to identify relevant prior art (that is, earlier technology) before you file your patent application and while you are prosecuting it. Nobody will challenge the patentability of your invention more vigorously than an accused infringer, but you can strengthen your patents by identifying and disclosing to the Patent Office the best prior art available.” For instance, a patent that protects some new nanotechnology breakthrough that the Patent Office considers along with a breakdown of all the salient prior art will be stronger than a patent describing some variation of a well-known business method.
- Second, learn everything about your competition. “Draft your patents to cover not only your own technology but, if possible, your competitors’ technology as well,” Kline suggests. “Remember that patents are intended to protect new and innovative ideas, not just the specific implementation of those ideas that your own engineers and scientists have thought of.”
- Third, identify which of your competitor’s patents may have an impact on your own product’s growth. “If you find out about relevant patents, take them seriously,” he admonishes. “Design-arounds that might be easy to make early in a product’s development cycle become much harder to accommodate once the product is on the market. Should you unfortunately find yourself a patent infringement defendant, you will be better off if you are dealing with a patent that you knew about ? and anticipated properly ? than one that has taken you by surprise.”

Here are the six key developments we see emerging from the current state of patent proliferation.

First, in the short term, we see no end in sight to the practice of filing patent applications for even the most questionable of claims. Companies, especially those in the technology business, will continue to attempt to patent every innovation and its variations in an aggressive manner. As a result, the Patent Office will remain inundated with applications, and will continue to issue a number of patents with insufficient due diligence.

Second, because patent litigation is costly ? and slow ? some fast-moving companies may risk infringement litigation for the sake of getting their products on the market faster. In some cases, the useful life of a patent will be shortened as newer technology makes them rapidly obsolete and irrelevant.

Third, unfortunately, patent litigation will continue to be a growth industry. When a company stands to lose between $1 million and $25 million due to a challenge to its patent, its legal costs to defend its monopoly typically surpass $2 million, according to the American Intellectual Property Law Association. When a company risks losing more than $25 million, it can expect to spend more than $4 million. Considering the numbers we presented earlier in this discussion ? that nearly 2,800 patent infringement claims were filed in a recent 12-month period ? the costs of patent litigation are astronomical. However, the next three forecasts offer the potential for some relief from this burden on the economy.

Fourth, we’re likely to see the creation of a database that will make it easier to research patents. Whether it will be managed by a firm like IP.com or BountyQuest, or a government entity like the U.S. Patent Office, it will cut the time needed to consider patent applications and reduce the number of newly approved patents that infringe on existing ones.

Fifth, new policies will allow competitors to challenge new patents for a brief period after they are granted. The Federal Trade Commission and the National Academy of Sciences have urged lawmakers to implement this change in patent law, which would decrease the number of patent infringement cases. However, we don’t expect the change to happen soon. The government is seldom in a rush to change patent laws. For example, it took five years for the House and Senate to approve a 1999 law that revised the patent system.

Sixth, we’ll see a boost in funding for the U.S. Patent and Trademark Office. The FTC, the NAS, and even the patent owners and patent challengers all agree that the office is underfunded. With more than 1,000 applications a day pouring in, the office simply can’t keep up. It desperately needs to hire more patent examiners so that it can spend more time on each application, while reducing the backlog that that can keep some applications waiting for up to five years for a decision.

References List :
1. Legal Times, March 15, 2004, "Patent and Antitrust, Happy Together?" by Daniel F. Attridge and Gregory F. Corbett. ⓒ Copyright 2004 by American Lawyer Media. All rights reserved.2. MIT Technology Review Online, April 28, 2004, "Patent Litigation: The Sport of Kings," by Douglas J. Kline. ⓒ Copyright 2004 by the Massachusetts Institute of Technology. All rights reserved.3. MIT Technology Review, May 2002, "Economic Bust, Patent Boom," by Erika Jonietz. ⓒ Copyright 2002 by the Massachusetts Institute of Technology. All rights reserved.4. The Economist, November 6, 2003, "Inventive Ideas." ⓒ Copyright 2003 by Economist Newspaper N.A., Inc. All rights reserved.5. The Economist, April 8, 2000, "Patent Wars." ⓒ Copyright 2000 by Economist Newspaper N.A., Inc. All rights reserved.6. The Recorder, April 20, 2004, "Reinventing the Patent System," by Brenda Sandburg. ⓒ Copyright 2004 by American Lawyer Media. All rights reserved.7. MIT Technology Review, July/August 2001, "Patent Pollution," by Seth Shulman. ⓒ Copyright 2001 by the Massachusetts Institute of Technology. All rights reserved.8. MIT Technology Review Online, April 28, 2004, "Patent Litigation: The Sport of Kings," by Douglas J. Kline. ⓒ Copyright 2004 by the Massachusetts Institute of Technology. All rights reserved.