What if (Almost) Everything You Thought You Knew About America’s “Broken” Patent System Was Wrong?
What follows is the fourth and final installment in the “Myths of the Patent Wars” series.
The necessary legislative effort to curb bad actors in the patent industry has been “hijacked” by a small handful of very powerful global technology companies intent on forcing broader changes in the patent system to make it better serve their business interests.
Under the banner of “patent reform,” these giant firms have spent tens of millions of dollars on lobbyists and media relations to promulgate a series of dramatic but false claims about America’s supposedly-“broken” patent system — claims that are now almost universally accepted as true by the media, Congress, and the public at large.
In Parts 1 and 2 of this series, we examined the false claim that there is an “explosion of patent litigation greater than any in history” as well as the myth that non-practicing entities are a new breed of parasitic patent holder who contributes nothing to society. In Part 3, we debunked the myth that NPEs are stampeding the International Trade Commission with spurious infringement claims, as well as the myth that excessive damages are being won in litigation.
Today we will look at the 5th great myth of the patent wars:
Claim #5: Software patents are stifling innovation in the industry, and should not be allowed because software innovation is more incremental and iterative than in other industries.
The Facts: It should first be noted that one of the biggest promoters of the myth that software patents are harmful to business and the economy is Google, despite the fact that the company partly owes its own existence to software patent No. 6,285,999 for founder Larry Page’s original page rank algorithm. The company also spent $12.5 billion in 2011 to purchase an operating business with 17,000 software patents from Motorola, which it sold for $2.91 billion two years later, while keeping 15,000 of the patents. It thus condemns patents that help bring in billions of dollars in revenues annually to its coffers, not to mention condemning as “trolls” patent holders who abandon operating businesses, just as they have done.
Be that as it may, opponents of software patents argue first of all that software is different from other industries — more iterative and more incremental, with each advance building upon thousands of previous advances. Therefore, their thinking goes, software should not be entitled to patent rights that ought to be reserved for truly breakthrough or revolutionary inventions.
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There are two problems with this argument. First, as anyone in the semiconductor, chemical, medical device or other industries can attest, innovation is no more iterative, incremental, or cumulative in software than it is in many other industries. Indeed, there are just as many or more patents for incremental semiconductor inventions that build modestly upon earlier work as there are patents for incremental software inventions that do the same.
As Professor Paul Janicke once noted, “There really are no breakthrough inventions — at least not in the sense imagined by these critics. Everything moves one step at a time. Every time I thought I [saw] a large leap, it turned out that I didn’t know the full extent of the prior art.”
The second problem with their logic is that the Founders consciously designed the patent system to encourage precisely this kind of incremental invention so that ordinary people, using only the basic technical skills possessed by average citizens, could join in rapidly developing the economy from the ground up. This was a very different approach than that taken by the elitist (if not feudal) European patent systems of the day.
As the October 21, 1876 issue of Scientific American noted, “In the aggregate the little things — which in England or the continent would not or could not be patented — probably add more to the wealth and wellbeing of the community … than the great things do.”
Or to quote Thomas Jefferson himself: “A smaller [invention], applicable to our daily concerns, is infinitely more valuable than the greatest which can only be used for great objects.”
In any event, any uncertainty over the validity of incremental patenting was removed once and for all by the Patent Act of 1952. Consistent with the Founders’ intentions, U.S. law now explicitly states that patent eligibility is not restricted solely to revolutionary or “flash of genius” breakthrough discoveries, but also includes iterative advances in the state of the technological art so long as these meet the requisite novelty, non-obviousness, and utility criteria. In the words of the Act, “Patentability shall not be negatived by the manner in which the invention was made.”
Another argument made by critics of software patenting is that patents supposedly stifle innovation and foster monopolization in the software industry. The research, however, clearly demonstrates that this is not the case. If anything, in fact, the software industry has become even more innovative, more diversified, and more startup-friendly since software patenting became common in the 1990s. One need only look at the huge proliferation of highly-innovative startups in today’s social media and apps fields to see just how erroneous the claim is that software patents stifle innovation. Or consider the fate of the Blackberry, once dominant but in the space of only a few years superseded by more innovative software of Apple and android smartphones.
Finally, some critics insist that the intangible nature of software mathematical algorithms ought to disqualify it from patentability. But the Supreme Court has repeatedly affirmed that although algorithms by themselves are abstract concepts and cannot be patented, software that employs such algorithms to produce a tangible and inventive result — for example, software that governs the molding of raw synthetic rubber into cured precision products — may be patented.
It’s also helpful to view the “intangible” nature of software in historical context. Forty years ago, 80 percent of the market value of all U.S. public companies resided in their tangible physical assets — their plant, equipment, and raw materials. In today’s Knowledge Economy, however, it is intangible assets such as intellectual property, know-how, and business methods that now make up 80 percent of the market value of public companies.
Indeed, the entire history of economic progress on our planet may be described as one long climb by humanity up the ladder of abstraction — from brute force to the subtle use of energy, from wealth derived from tangible resources and industrial machinery to wealth derived from ever-more ingenious ways to deploy that energy and those resources.
Isn’t it only logical, therefore, to expect that invention itself should follow a similar trajectory — from the realm of the tangible to the realm of the intangible?
The expansion of patentable subject matter into new and more intangible realms has always met with resistance. Patents involving the use of electricity were condemned 140 years ago, as were biotechnology patents 30 years ago, and of course software patents when they began to appear in large numbers 20 years ago. In each case, critics warned that these new kinds of patents would hold back further scientific discovery and innovation. And yet in each case, innovation and discovery actually intensified and their benefits to society multiplied.
There are other charges leveled against the patent system as well, including the accusations of “patent holdup” and “royalty stacking” advanced by professors Mark Lemley and Carl Shapiro. They have developed complex theoretical models that describe how patent holders could use the threat of an injunction barring the sale of infringing products (“patent holdup”) to charge unreasonable royalty rates for even one tiny patented piece of that product.
The only problem with Lemley and Shapiro’s theoretical model, argues J. Gregory Sidak of the Georgetown University Law Center, is that there are no real-world examples of it. “The empirical work that exists concludes there is no royalty stacking problem in practice,” writes Sidak. “Damien Geradin, Anne Layne-Farrar, and Jorge Padilla empirically analyzed the patents related to the third-generation (3G) cellular telephone technology — one industry that Lemley and Shapiro explicitly offer as an example of holdup and royalty stacking — and concluded that there is no evidence of [it] among the more than 60 companies involved in the standard.”
Actions speak louder than words. Despite industry controversy and intense review, the U.S. Department of Justice has not yet identified a single situation warranting enforcement action in “royalty stacking” patent cases.
Put another way, there are six billion mobile phone subscriptions on a planet of only seven billion people — rather compelling evidence of the lack of “patent holdup” in real life.
All of which calls to mind the old joke about how an academic opens a can of soup: “First, assume a can opener.”
THE BABY AND THE BATHWATER
We happily stipulate that the patent system is hardly perfect. Too many software patents are being issued that are overbroad and arguably invalid. This is also true, of course, for non-software patents as well. That’s why we support efforts to improve patent quality and the training of patent examiners, such as those announced by the White House and USPTO in February.
But we wish to point out that no governmental system in society is perfect. Just look at the criminal justice system — how many wrongly-imprisoned innocents have we seen freed in recent months? — yet no one proposes that we do away with criminal law and its enforcement. Rather, most policy makers support reforms, such as greater access to DNA testing by prisoners, to improve the system. We believe a similar approach is needed to improve the patent system.
As for those who would fundamentally alter or even abolish a patent system that for two centuries has been central to U.S. success — or who would create for the first time an identity-based system of patent rights that excludes a democratized species of patent owner (NPEs) created by the Founders — we should be cognizant of the hidden dangers in such proposals.
Indeed, it seems only fair to insist that those proposing such radical and risky measures ought to shoulder the burden of proof that these are both necessary and wise.
So far, as we have seen after examining the Myths of the Patent Wars, they have not even come close to doing so.
 There are also problems with the model itself, shown persuasively by Professor Einer Elhague of Harvard Law School in his article “Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?”
 Remarks by Renata Hesse in connection with her Keynote Address “A Year in the Life of the Joint DOJ-PTO Policy Statement on Remedies for F/RAND Encumbered Standards-Essential Patents,” March 25, 2014, Global Competition Review, Washington, DC.