"The evidence supporting patent abolition—either generally or in a particular sector—remains utterly wanting," writes the legal scholar John Duffy in this month's Cato Unbound. I beg to differ. While evidence shows that patents provide valuable incentives in some sectors, there's actually quite a lot of evidence that the American economy would be better off if software and business methods were excluded from patent protection or if they were at least seriously circumscribed by requiring high standards in order to receive a patent.
A look at the data makes it clear that patents are a bad fit for the software industry. Most software developers and startup firms gain little from patents. The patent system is difficult to navigate, thanks to unclear rules about which patents cover which technologies. And the software industry has been swamped by lawsuits from litigious firms known as patent trolls.
Duffy argues that "brute force" reforms banning some patents are poor policy, but patent law has had a ban on patenting abstract ideas since the 19th century. The Supreme Court recently reiterated that ban with regard to software patents and, it appears, large numbers of software patents are being found invalid in court.
That's a positive development, as these 9 charts demonstrate.
1) Software patents lead to more lawsuits than other patents
Patents on software are more likely to be involved in lawsuits than other patents. And "business method" patents, which are typically software patents as well, are even more likely to lead to litigation.
Why is this? As we'll see below, it's often not clear what software patents actually cover. Many have "fuzzy boundaries" that make it difficult for a company to figure out whether they are in danger of infringing them. That's different from chemical patents, where the boundaries of the patent are clearly defined by a unique chemical formula. Software patents also tend to be very broad.
The combination of broad patents and uncertain boundaries means a lot of accidental infringement and a lot of disagreements about when infringement occurs. That leads to lawsuits.
2) Software patents have unclear boundaries
We can tell that software patents have uncertain boundaries because even District Court judges have a hard time figuring out what their boundaries are. The rulings of District Court judges are often appealed to the Court of Appeals for the Federal Circuit (CAFC), the court that hears all patent appeals. The appeals court frequently reviews how the District Court drew the patent claim boundaries. Forty percent of the time, the CAFC finds that the District Court judge got it wrong with software patents; this only happens 24 percent of the time with other patents.
If District Court judges cannot figure out the boundaries of a patent, even with the help of expert witnesses, it's not surprising that inventors and private companies struggle to figure it out. Yet the patent system demands that inventors and firms do exactly that in order to avoid accidental infringement.
To put these numbers into context, imagine what would happen if 40 percent of land surveys were found to be inaccurate when challenged in court. The resulting litigation would cripple the housing market.
3) Most software firms don't benefit from patents
Most software firms don't benefit from patents. We know this because most do not get patents. This chart shows results of an analysis of publicly listed software firms, from a survey of private software startups and an analysis of the Crunchbase database of startup tech firms. This is true both for publicly listed firms and for private startup firms.
Of course, large software firms get thousands of patents and use them to battle each other. But most software firms, especially startups, do not. That's for at least two reasons. First, patents are expensive to obtain and enforce — many small software firms simply can't afford it. Second, surveys show that most firms in software related industries are able to earn profits on their innovations without patent protection. They can do this by being first to market, developing strong "network effects," selling complementary services, or by other means.
4) Trolls love software patents
Patent trolls are litigious firms that make no useful products of their own but make money suing other companies. And as this chart shows, they rely heavily on software patents.
This chart, based on data from the Government Accountability Office, shows the fraction of patent defendants who are accused of infringing a software patent (as opposed to patents on other technologies). When operating companies — those that actually sell products or services — file patent lawsuits, they use software patents less than half the time. In contrast, patent trolls use software patents against 93 percent of the defendants they sue.
The unclear boundaries of software patents make them well suited for patent trolls. In many cases, companies develop new technologies thinking they have not infringed an existing patent. But if the patent is reinterpreted to cover a broader range of technology, they risk becoming inadvertent infringers. And all that patent trolls need in order to extract licensing fees from them is a plausible threat that a court might interpret the patent more broadly.
Most patent troll lawsuits are filed against small companies. This is true for software startups, too. A survey of venture capitalists found that 70% had companies threatened by patent trolls, most reporting significant impacts on their companies.
5) Software patents are low-quality
In order for a patent to be valid, it must meet at least two criteria: it must be novel, and it can't be an obvious improvement over existing technology. But the Patent Office often grants patents on inventions that don't meet these criteria. We know this because courts routinely toss out patent claims when they are challenged in lawsuits.
This chart shows the estimated share of patents (not just those challenged in court) that have at least one claim that is non-novel or obvious. Software and business method patents are much more likely to make invalid claims. One reason is that when patent applications have fuzzy boundaries, it is difficult for patent examiners to tell whether they are different from previously existing technology.
And most patents asserted by trolls have invalid claims. Trolls don't need to have valid patents; they can extract payments from defendants merely by threatening defendants with long, expensive lawsuits whose outcome is uncertain.
6) Patent litigation has soared in recent years
The number of firms sued for patent infringement has exploded over the last decade. The chart above shows that the number of patent lawsuits grew six-fold since the 1980s.
Because patent trolls often sued many firms in a single lawsuit, the chart under-represents the number of defendants, especially from 2005 to 2011. In 2012, a legal change required plaintiffs to file separate lawsuits for unrelated defendants, producing the apparent spike in 2012.
But the broader trend you see above is not just a statistical illusion. The number of defendant firms grew steadily and rapidly, more than doubling in the four years from 2007 to 2011. And nearly three-quarters of patent lawsuit defendants in recent years have been sued over software patents.
7) Rising litigation is driven by software patents
This chart demonstrates that the recent growth in patent litigation is driven by software. Between 2007 and 2011, the number defendants sued for infringing non-software patents was basically steady, at around 2000 per year. During the same period, the number of defendants sued for infringing software patents more than tripled.
8) Software patents are increasingly lawsuit-prone
Some people argue that it is normal to see an increase in litigation over a major new technology. New technologies often generate both profits and legal uncertainty, a combination that encourages lawsuits.
This chart shows the probability that a newly issued software patent will be in a lawsuit within four years of issue. That probability has tripled over the last 30 years.
The increase in litigation since the 1980s is not just the "normal" increase that follows from having more software patents issued. This chart suggests that patents themselves have deteriorated in quality as the courts and the Patent Office have relaxed standards, or perhaps that trolls have become more aggressive at exploiting software patents.
9) Patent litigation costs tens of billions of dollars per year
Patent lawsuits are costly to defendants, both in legal costs and in costs to their business and market value. Rising litigation has driven up these costs to over $60 billion per year for publicly listed defendants alone.
This chart isn't specific to software, but as we've seen software patents are disproportionately responsible for the recent spike in patent lawsuits. Litigation over software patents is a serious problem that researchers have shown is tied to reduced venture capital investing and reduced R&D spending by small firms.