Global Trend

The Patent Epidemic

Back in 2001, something strange happened in the world of patent law. Microsoft, which had been fighting a lawsuit by Priceline, suddenly gave up. The suit, filed in late 1999, claimed that Priceline had patented its “name your own price” auction strategy, and that no one else could use it without a license from the company. Microsoft had been using a similar strategy on its Expedia travel site and had been arguing in U.S. District Court in Connecticut that the auction method was too obvious to be patented.

But the atmosphere for patent filings and lawsuits had been rapidly changing since 1990, and it didn’t look good for Microsoft. Federal courts had previously upheld patents on business methods ? so-called “concept patents” that don’t relate to actual physical inventions.

In addition, the Federal Circuit Courts of Appeal had issued a number of rulings that made it more difficult to challenge a patent on the basis of obviousness. And even though Microsoft executives and lawyers still believed that “name your own price” was obvious, they settled the suit and spun off Expedia.

It is precisely this sort of case that has helped to encourage a surge in the filing of nonsense patents and a sharp rise in patent infringement suits. According to BusinessWeek, there were fewer than 100,000 patents awarded in 1990. That number has almost doubled today. And about 400,000 applications are now filed each year.

According to the law passed by Congress, known as 35 U.S.C. 101, anyone can patent processes, machines, manufactures, and compositions of matter. And, according to interpretations by the Supreme Court, almost anything, including concepts, can be patented, as long as they are new and not obvious. The court has specifically made exceptions for laws of nature, physical phenomena, and abstract ideas.

As more and more businesses filed patent applications like Priceline’s ? essentially for business processes or methods ? the Patent Office was overwhelmed and sought to stem the tide. It instituted a rule known as the “technological arts test.” In essence, this meant that the new method had to use a computer to satisfy the statutory requirement.

For several years, the Patent Office rejected applications based on that test. Then a man named Carl Lundgren was rejected for trying to patent a method of paying corporate managers by comparing comparable salaries at other companies. He took the decision to the Patent Appeals Board, which reversed the rejection. The Appeals Board ruled that because Lundgren was trying to patent a process, which Congress had deemed patentable, his application should be accepted.

With the floodgates again open, the “concept” patent applications poured in once more. Although legally the federal courts could reverse the Appeals Board’s decision, the ruling still stands.

In response to this, one attorney published an article in The National Law Journal suggesting that corporate lawyers move swiftly forward to patent everything they do, from billing clients to obtaining funding.

But the issue of obviousness goes well beyond the bounds of patents on concepts and business processes. It includes inventions, too, and in some cases that means preventing engineers from using existing components if someone has already patented some method of combining them.

For example, KSR International, a Canadian auto parts manufacturer, contracted with General Motors to make gas pedals for its 2003 Chevrolet and GMC trucks and SUVs. According to a report in BusinessWeek, the pedals were to be adjustable for the driver’s height and use electronic signals instead of a cable to accelerate. There was nothing particularly high-tech about the new product. Neither adjustable pedals nor electronic controls were new. The engineers at KSR simply put them together in a way that worked well.

Then, in 2001, Teleflex Inc. put KSR on notice that it, too, had created such a gas pedal and had patented it. The two are now in court, and KSR is arguing that the invention is obvious. In 2003, a federal court threw out the Teleflex patent as obvious. But last year, the Federal Appeals Court reversed the ruling, leading KSR to appeal to the Supreme Court for a hearing. The high court hasn’t ruled on patent law in 40 years, but it may be about to set an important legal precedent.

Meanwhile, Microsoft didn’t simply lick its wounds and go home after the Priceline debacle. It formed a coalition of companies, including Cisco, Hallmark Cards, and Fortune Brands, to do something about patent reform. It has filed a brief with the Supreme Court in the Teleflex versus KSR case. In addition, a group of lawyers specializing in intellectual property has done the same.

Their argument is simple: Patenting has gotten out of hand, and the staggering number of lawsuits ? and their enormous cost ? puts a chill on business and innovation. Engineers are afraid to put two components together.

One of the problems is that the definition of what’s obvious has steadily eroded so that almost anything can be patented, including a stick for a dog to retrieve. When it comes to business processes, the test of obviousness becomes even murkier.

Even tinkering with traditional designs can lead to trouble. For example, VF Corporation manufactures bras, and it constantly fights off complaints of patent infringement. The obviousness rule was designed to prevent just such complaints.

One reason why so many companies, and even lawyers, are clamoring for patent reform is because the business of defending even flawed complaints is so damaging and expensive. For instance, when Storage Technology sued Cisco, the action cost Cisco $10 million. Even though Cisco won, the case took six years; and in the end Cisco stopped using the technology in question as a precaution. That represents a scandalous waste of resources that could better be put back into the company or passed on to shareholders.

Cisco is not alone. Microsoft is fighting about 40 patent suits right now, and Cisco has another seven on the books. In this atmosphere, companies have turned to the tactic of defensive patent filings. Cisco, which is certainly a model of innovation, used to file a few hundred patents each year. It now files over 1,000. IBM received almost 3,000 new patents in 2005, the largest number of any company. It has received more than 2,000 a year for the past eight years. Canon ranks number two, with 1,828, while Hewlett-Packard was awarded 1,797. Intel ranked sixth with 1,549 patents.

With all those competing patents, potential litigants should come to some agreement for licensing and revenue-sharing in a system that can only be described as parasitical. Of course, that cost is passed along to the consumer, in the form of higher prices for everything from golf clubs to computer chips.

In light of this trend, we offer the following four forecasts for your consideration:

First, expect near-term action by the government to address this crisis. While it is to be hoped that the Supreme Court hears the case of KSR, expect Congress to move to take corrective action. Republican Congressman Lamar Smith of Texas introduced “The Patent Reform Act” in June of 2005. The bill provides, among other things, the right to oppose a patent after it has been filed. This means there will be an alternative to costly lawsuits where competing claims exist. It also means that when the Patent Office has made a mistake in issuing a patent, such as patenting something that’s obvious, it can be corrected out of court. Not surprisingly, this bill has bipartisan support.

Second, Congress will allocate more funding for the Patent Office. One of the reasons the PTO is in such a mess is that is has long been under-staffed and under-funded. Stretched to the limits of its resources, the Patent Office currently has a backlog of two years’ worth of applications. Critics contend that it often approves an application simply to get rid of it, assuming that the courts will straighten out the mess later. With better funding and a better system, that situation will gradually improve.

Third, expect to see the adoption of an “open-source model” for commonly used elements of innovation, whether they are hardware or software. This will reduce the number of patents issued for “junk inventions,” such as those that combine a sensor with some existing device like a gas pedal. IBM is at the forefront of this movement, working with the Patent Office, the Open Source Development Labs, and certain academics to avoid such lawsuits as the one brought by NTP against Research in Motion, the maker of the BlackBerry. IBM and its consortium is creating a searchable database of open source software to satisfy the legal requirement of documenting “prior art.” It is also pushing for a system in which the technical community with a vested interest would be involved in patent reviews, leading to stronger legitimate patents and fewer “junk patents.”

Fourth, expect patent law and business practices to undergo cyclical changes that mirror changes in technology. Just as the present patent mess has evolved from new technologies and business management practices, the future will bring times of confusion when, for example, nanotechnology matures. The legal community is already debating whether entrepreneurs can patent, say, a nanotech therapy simply by taking an existing drug and making it smaller and more targeted. Expect this debate to heat up.

References List :
1. BUSINESSWEEK, January 9, 2006, “The Patent Epidemic,” by Michael Orey. ⓒ Copyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.2. MODAQ BUSINESS BRIEFING, December 2, 2005, “The United States Patent Office Eliminates its Technological-Arts Rejection and Aligns its Examination Procedure with Existing Federal Law,” by Jim Brogan. ⓒ Copyright 2005 by Mondaq, Ltd. All rights reserved.3. THE NATIONAL LAW JOURNAL, December 5, 2005, “Key Ruling for Business Methods,” by Barry Schindler. ⓒ Copyright 2005 by ALM Properties, Inc. All rights reserved.4. BUSINESSWEEK, January 9, 2006, “The Patent Epidemic,” by Michael Orey. ⓒ Copyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.