Software Patent Reform

Published: November 11, 2013

This is a writeup of a shallow investigation, a brief look at an area that we use to decide how to prioritize further research.

In a nutshell

What is the problem?

The current patent system for software, particularly in the US, may encourage abuse and deter innovation. Some firms collect patents and then aggressively pursue litigation to extract settlements from companies that may have infringed on their intellectual property.

What are possible interventions?

Changing the patent system in the US primarily involves political advocacy, litigation, and research. Possible interventions include advocating for legislation to change patent law, challenging the patent system in court, organizing and educating stakeholders, and researching the costs of the patent system.

Who else is working on it?

There are a handful of nonprofit organizations working on reforming the patent system for software. Some technology companies also fund lobbying efforts for patent reform. We do not have an estimate of the overall resources in this cause.

1. What is the problem?

Protecting intellectual property can serve both as an incentive for innovation (making it more lucrative to develop new ideas) and as an obstacle to it (making it harder for people to build on each others’ ideas when the rights to ideas are restricted). The current software patent system in the U.S. arguably acts more as an obstacle than an incentive.

One potential manifestation of this issue is the proliferation of “patent assertion entities” (PAEs): firms that do not manufacture goods or supply services based on their patents, but still pursue litigation for licensing fees from parties that may have infringed on their intellectual property. Advocates for patent reform often refer to PAEs that abuse the patent system as “patent trolls.”1 One study estimates the direct costs on defendants of patent troll disputes (including for instance pre-litigation legal costs, licensing agreements, litigation costs, settlements, and judgments) at around $29 billion per year and the overall costs on defendants of patent troll disputes (also including, for example, the opportunity cost of time spent on litigation), at more than $80 billion per year.2 These estimates do not include the costs of a patent system that may deter innovation more broadly. Advocates of reform believe that many patents protect obvious advances (rather than truly original work) and are overly broad.3

We focus here on patents in software, but other industries, especially the pharmaceutical industry, also grapple with patent issues.4 U.S. patent law often covers multiple industries, which has made changing the law for software more difficult.5

2. What are possible interventions?

Goals of reform range from modest adjustments to the current system to eliminating the patent system for software.6 Possible interventions towards these goals could include:7

  • Challenging the legality of parts of the patent system in court
  • Working with lawmakers to help draft legislation
  • Mobilizing high-level executives in technology and prominent academics to engage in political advocacy
  • Raising awareness of the issue in a younger generation of intellectual property lawyers
  • Commissioning empirical research on the extent and costs of patent abuses
  • Developing a long-term strategy for fundamental patent reform
  • Connecting American reform efforts to work on patent reform in other countries
  • Advocating for the expansion of the America Invents Act to software patents. In the finance industry, the America Invents Act expands the patent office’s review process for business method patents, provides a broader range of grounds to challenge patents, and permits petitioning the patent office to challenge a patent.8
  • Encouraging companies to adopt non-aggressive approaches to patent licensing that include, for instance, making their patent portfolios available royalty-free to any other company in a network that agrees to similarly license its patents.9 In many of these approaches, the more companies that enter into the agreement, the more beneficial that agreement becomes.10

We do not have a good understanding of the likely costs or benefits of any of these approaches.

The Electronic Frontier Foundation (EFF) believes the debate around patent reform has recently shifted and that fundamental reform is more realistic now than it was before.11

Recent reform efforts have focused on:12

  • Fee shifting: The proposed reform would require companies that lose patent lawsuits to pays the other side’s fees. This shift aims to discourage PAEs from threatening a lawsuit with a weak case for infringement.
  • Protecting end users: Currently patent holders may target end users of a technology, rather than the companies that sell the technology. One case involved a PAE suing cafes for using a router to provide wireless Internet to their patrons, because they claimed the router infringed on one of their patents. Reform efforts aim to provide greater protection for end users.
  • Greater transparency: PAEs may use shell companies and non-disclosure agreements in legal settlements. Proposed legislation aims to make it easier to determine the real party of interest in an infringement and to track how many times they make claims of patent infringement and who they target with these claims.

3. Who else is working on this?

A number of companies, including technology companies such as Google, Cisco and Rackspace, as well as retailers, hotels and travel websites, have funded lobbying efforts to push reform of the patent system.13 Trade organizations, including the Application Developers Alliance, are also involved in supporting reform efforts.14

Nonprofit organizations working on patent reform include:15

  • Electronic Frontier Foundation (EFF) — EFF has 2.5 full time equivalent staff members working on patent reform and is currently focused on advocating for patent reform bills pending in Congress.16
  • Computer & Communications Industry Association (CCIA) — CCIA’s Patent Progress project provides information and analysis related to technology patents.17
  • Public Knowledge — recently hired someone to work on patent reform full-time.
  • Public Patent Foundation.
  • Free Software Foundation.
  • Free Software Foundation Europe (FSFE).
  • Foundation for a Free Information Infrastructure (FFII).

EFF told us that there are no serious efforts aimed at eliminating software patents (as opposed to reforming the patent system).18

Patent reform work has also been active in Europe.19 Our investigation to date has focused on the US patent system.

4. Questions for further investigation

Our research in this area has been limited, and many important questions remain unanswered by our investigation.

Amongst other topics, further research on this cause might address:

  • What are the costs to firms and the economy of the current patent system? Academic research by Jim Bessum, Michael Mauer and Mark Lemley could help answer this question.
  • What would the optimal software patent system be? What are the arguments for maintaining a patent system for software?
  • How much money do reform proponents and their opposition spend on advocacy?
  • How does the European software patent system work and should this be a model for the US?

5. Our process

We rely heavily on a conversation with the Electronic Frontier Foundation.

6. Sources

DOCUMENT SOURCE
Application Developers Alliance Source (archive)
Bessen, Ford and Meurer 2011 Source (archive)
Bessen and Meurer Forthcoming 2014 Source (archive)
Electronic Frontier Foundation Conversation (October 15, 2013) Source
Google, License on Transfer Agreement Source (archive)
Google, Patent Licensing to Encourage Innovation Source (archive)
Google, Non-Sticky Defensive Patent License Source (archive)
Kent Walker, Senior Vice President and General Counsel at Google, blog post on patent reform, April 4, 2011 Source (archive)
Patent Progress Source (archive)
Schwartz and Kesan Forthcoming 2014 Source (archive)
Stop Bad Patents Source (archive)
The Internet Association Source (archive)
Twitter, Innovator’s Patent Agreement Source (archive)

 

Expand Footnotes Collapse Footnotes

1.“ ‘Patent trolls’ exploit bad patents by buying them and using them to sue large and small businesses. These businesses often accept a lack of clarity in the legal demands they receive from the patent trolls and are scared into settling. Patent trolls sue strategically, targeting businesses when they are particularly vulnerable, e.g. right when they are getting new funding or planning an IPO. Trolls aim for cases where it is in the defendant’s interest to settle rather than spend about 1-2 million dollars defending itself in court. A small business might pay around ten thousand dollars in a settlement.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 1.

2.

“Using a survey of defendants and a database of litigation, this paper estimates the direct costs to defendants arising from NPE patent assertions. We estimate that firms accrued $29 billion of direct costs in 2011.” Bessen and Meurer Forthcoming 2014, Pg. 1.

“First, by observing what happens to a defendant’s stock price around the filing of a patent lawsuit, we are able to assess the effect of the lawsuit on the firm’s wealth, after taking into account general market trends and random factors affecting the individual stock. We find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010. During the last four years the lost wealth has averaged over $80 billion per year.” Bessen, Ford and Meurer 2011, Pg. 2.

We have not carefully vetted Bessen and Meurer Forthcoming 2014 and Bessen, Ford and Meurer 2011. Based on a cursory read of these papers, we believe that they both take reasonable approaches to cost estimation, but they may also have some flaws such as those described in Schwartz and Kesan Forthcoming 2014.

3.“Ultimately, EFF wants to ensure that software patents get out of the way of innovation. If we are stuck with software patents, however, EFF would like to at least see reforms that make these patents significantly harder to get (with a higher obviousness standard) and narrower (ensuring that claims are strictly limited to the inventor’s actual contribution).” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 2.

4.

“Many patent reform movements are taking place in pharmaceuticals and technology. These are the spaces where alternatives have been articulated clearly. Though there may be problems in other fields, EFF is not aware of them and expects that the issues may be less problematic, if they do exist.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 5.

“In the US, the patent system is often perceived to work well for pharmaceuticals. The main critiques in the pharmaceutical space are that patents reduce access to medicine in developing countries and that there is significant industry capture of regulators. There are many organizations working in the ‘access to medicine’ space.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 5.

5.“Some reforms require revisions to patent law in general, rather than to software patents specifically. The pharmaceutical lobby, which is quite powerful, is expected to be resistant to such change.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 4.

6.“Ultimately, EFF wants to ensure that software patents get out of the way of innovation. If we are stuck with software patents, however, EFF would like to at least see reforms that make these patents significantly harder to get (with a higher obviousness standard) and narrower (ensuring that claims are strictly limited to the inventor’s actual contribution).” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 2.

7.“With more money, EFF would:

  • Do more litigation. EFF would like to get a case on functional claiming before the Supreme Court. It would also like to look for other cases for which it could be the litigant. This would require many more resources than it currently has.
  • Do more direct work with legislators, e.g. help draft legislation.
  • Conduct or fund empirical research to discover how many demand letters are being sent to small companies, how often companies are settling with patent trolls out of court, what these settlements look like, etc. Questions like these are difficult to research.
  • Partner with academics and members of the tech community. There is a lot of legwork involved in getting prominent computer scientists to speak out in an organized way.
  • Do more work internationally. This is resource intensive.
  • Develop its strategy for moving fundamental reform. For now, EFF is almost exclusively focused on the short term, particularly on the seven bills currently pending in Congress.”

Electronic Frontier Foundation Conversation (October 15, 2013), Pg 4.

8.“Expanding the review of business method patents: The America Invents Act introduced a review process for patents related to financial systems, also known as covered business method patents. EFF supports a reform that would expand the review process to all technology-related patents. The reform would allow people to petition the patent office to review bad patents rather than fighting bad patents in court. It would also provide a broader range of grounds to challenge a patent, including failure of written description, failure to describe the invention, and failure of patentable subject matter.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 2-3.

9.

Google describes 4 such approaches to patent licensing: “Many technology companies want to compete on the merits of their products or services. Such a company typically: Enters into patent licensing arrangements to increase freedom to operate while respecting valid, enforceable patent rights; Wants to reduce patent assertions from non-practicing entities; and Develops a patent portfolio primarily for defensive purposes. In this context, there are four multi-party, self-help, patent licensing approaches. Notably, all these approaches are royalty-free and the goal of these approaches is to increase freedom to operate and to reduce patent litigation.” Google, Patent Licensing to Encourage Innovation

Twitter has developed and adopted the Innovator’s Patent Agreement: “The company will not use the patents in offensive litigation without the permission of the inventors. This control flows with the patents, so if the company sells the patents to others, the assignee can only use the patents as the inventor intended.” Twitter, Innovator’s Patent Agreement

“The DPL is a standardized (i.e., non-negotiated), networked, portfolio-wide, royalty-free, patent cross license without the right to sublicense. Patents in the DPL ecosystem are available royalty-free to companies, institutions or individuals that agree to similarly license their patents.” Google, Non-Sticky Defensive Patent License

10.

“The more companies that join the agreement the more beneficial the agreement is to the members…” Google, License on Transfer Agreement

“Network effect: The more entities that join the DPL, the more attractive it is for new members, the greater effect it has on the patent landscape, and the more incentive there is to continue to participate and for others to join.” Google, Non-Sticky Defensive Patent License

11.“A year ago, it was not realistic to consider fundamental reform. However, the debate around patent reform has shifted considerably in the last year, and there is the sense among organizations like EFF that more is realistic now than before.” Electronic Frontier Foundation Conversation (October 15, 2013), pg. 4.

12.“Most of the short-term reform efforts are focused on inefficiencies in the litigation system. There are currently 7 bills of this nature pending in Congress. EFF does not think any one of these solutions will solve the problem on its own. Rather, these reforms would work collectively to make patent trolling a less attractive business model.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 2.

  • Fee Shifting: Currently, the losing side usually must pay its own legal fees. This often encourages victims to settle with patent trolls out of court. Fee shifting would help victims to defend lawsuits and would discourage patent trolls from pursuing them.
  • Protecting End Users: In many patent troll cases, the people being sued are the end- users of a product rather than the manufacturers. For example, patent trolls are suing cafes for using patented systems to provide Wi-Fi to their customers. Establishing end-user immunity would prevent patent trolls from pursuing these smaller, more vulnerable parties. There are academic papers that discuss the frequency of end-user suits.
  • Transparency: Because settlements usually include non-disclosure agreements, little is known as to how often patent trolls send demand letters and how often these suits get settled out of court. EFF has created a website to track demand letters and to show which trolls are targeting which companies and what the patent trolls are demanding. EFF supports reforms that would require demand letters to be more specific in their claims and require patent holders to reveal the real party of interest in any suit. It is often unclear as to who stands to gain financially, because patent trolls often operate behind ‘shell companies.’”

Electronic Frontier Foundation Conversation (October 15, 2013), Pg 2.

13.

“The short-term legislative push for reform is well funded. Although total funding for non- profits working on this issue is likely less than one million dollars a year, companies are spending millions of dollars per year to support or oppose the legislative reforms discussed above. Other funders include web hosting companies, retailers, travel websites, hotels, trade associations, Cisco Systems, and Rackspace. Companies and individuals are funding this space more so than foundations. Most of these funders have only just gotten involved in the past 12 months. It is hard to know who is spending and how much they are spending, because many companies are not public about their involvement in this space.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 4.

Kent Walker, Senior Vice President and General Counsel at Google, blog post on patent reform, April 4, 2011. Google is also a member of the The Internet Association, which lobbies for patent reform through projects like Stop Bad Patents

14.Application Developers Alliance

15.“Other institutions in this space

  • Computer & Communications Industry Association — has a project called Patent Progress.
  • Public Knowledge — recently got funding to expand and hired someone to work on patent reform full-time.
  • Public Patent Foundation — has been working on patent reform for a long time.
  • Free Software Foundation — was influential in getting groups like EFF to work on the issue and has been working in this space longer than anyone else.
  • Free Software Foundation Europe (FSFE)
  • Foundation for a Free Information Infrastructure (FFII) — was very influential in Europe in the 2000s.”

Electronic Frontier Foundation Conversation (October 15, 2013), Pg 4-5.

16.

“There are currently 2.5 FTE staff members at EFF working on patent issues. They also work on other IP issues but focus on patent reform.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 4.

“For now, EFF is almost exclusively focused on the short term, particularly on the seven bills currently pending in Congress.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 4.

17.Patent Progress

18.“There are no serious reform efforts currently aimed at eliminating software patents.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 3.

19.“EU has been more successful than the US at limiting the damage done by patent trolls and at preventing treaties from interfering with domestic reform. The EU was close to abolishing software patents entirely but ultimately did not.” Electronic Frontier Foundation Conversation (October 15, 2013), Pg 5.