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How big companies are stopping Congress from fixing the patent system

Microsoft, led by CEO Satya Nadella, has earned billions of dollars in patent licensing revenues from Android.
Microsoft, led by CEO Satya Nadella, has earned billions of dollars in patent licensing revenues from Android.
Justin Sullivan/Getty Images

In the 1980s, Gary Reback was an attorney representing Sun Microsystems, which was then a young startup making computer workstations. In a 2002 article for Forbes, Reback told the story of the time a group of IBM lawyers in blue suits visited Sun demanding patent licensing fees.

The IBM lawyers arrived with a list of seven patents they claimed Sun had infringed. Reback writes that his colleagues "took to the whiteboard with markers, methodically illustrating, dissecting, and demolishing IBM's claims." They patiently explained that most of the patents were probably invalid, and that Sun didn't infringe the others.

Reback tells what happened next:

An awkward silence ensued. The blue suits did not even confer among themselves. They just sat there, stonelike. Finally, the chief suit responded. "OK," he said, "maybe you don't infringe these seven patents. But we have 10,000 U.S. patents. Do you really want us to go back to Armonk [IBM headquarters in New York] and find seven patents you do infringe? Or do you want to make this easy and just pay us $20 million?"

After a modest bit of negotiation, Sun cut IBM a check, and the blue suits went to the next company on their hit list.

This story came to mind as I was thinking about the PATENT Act, a patent reform proposal that was unveiled by a bipartisan group of Senators on Wednesday. The PATENT Act is focused on dealing with patent trolls: fly-by-night companies that get rich by exploiting flaws in the way the courts handle patent lawsuits. If trolls are the primary problem with the patent system, then the PATENT Act will go a long way toward fixing it.

But trolls aren't the primary problem with the patent system. They're just the problem Congress is willing to fix. The primary problem with the patent system is, well, the patent system. The system makes it too easy to get broad, vague patents, and the litigation process is tilted too far toward plaintiffs. But because so many big companies make so much money off of this system, few in Congress are willing to consider broader reforms.

Non-trolls abuse the patent system too

IBM's visit to Sun is ancient history, of course. But the problem of large companies exploiting the patent system hasn't gone away. If anything, it's gotten worse as the courts made it easier to get broad, vague patents in the 1990s and early 2000s.

A modern example is Microsoft, which has more than 40,000 patents and reportedly earns billions of dollars per year in patent licensing revenues from companies selling Android phones. That's not because Google was caught copying Microsoft's Windows Phone software (which has never been very popular with consumers). Rather, it's because low standards for patents — especially in software — have allowed Microsoft to amass a huge number of patents on routine characteristics of mobile operating systems. Microsoft's patent arsenal has become so huge that it's effectively impossible to create a mobile operating system without infringing some of them. And so Microsoft can demand that smaller, more innovative companies pay them off.

The proliferation of software patents has triggered an arms race. Google, for example, spent $12.5 billion for Motorola, largely for access to its large patent portfolio. A consortium of technology companies including Microsoft and Apple spent another $4.5 billion on patents from the defunct technology company Nortel. Their vast patent libraries help protect them from each other — but they could also help them crush potential future competitors.

The billions of dollars technology companies are spending patents and patent lawyers are billions they can't spend hiring engineers to make their products better. In effect, the patent system is acting as an innovation tax, transferring wealth from companies that are creating successful technologies today to companies that acquired a lot of patents a decade ago.

Patent reform keeps getting narrower

Rep Bob Goodlatte (R-VA), the lead sponsor of the 2013 Innovation Act, dropped a proposal to nix low-quality patents after heavy lobbying by big software companies. ( Bill O'Leary/the Washington Post via Getty Images)

When people started thinking about the next round of patent reform in 2013, many of them wanted to craft legislation that did more than address the patent troll problem. For example, in a 2013 reform proposal, President Obama not only sought to curb abusive litigation tactics favored by trolls, but he also proposed to expand a patent office program for reviewing and getting rid of low-quality software patents.

Getting rid of the worst software patents would have helped to de-escalate the technology industry's wasteful patent arms race. And early versions of the Innovation Act, the patent reform bill that eventually passed the House of Representatives in 2013, included a version of Obama's proposal. But this language was dropped from the final bill after intense lobbying from big software companies like Microsoft and IBM.

The PATENT Act, which a bipartisan group of senators unveiled today, is even more careful to avoid provisions that would alarm patent holders that are not trolls. For example, two university presidents recently pointed out in a Wall Street Journal op-ed that some provisions of the Innovation Act could have negative impacts on universities who try to enforce their patents. So Senate negotiators modified those provisions to keep them narrowly focused on companies that behave in unsavory, troll-like ways, such as using shell companies and filing lawsuits that are not "objectively reasonable."

To some extent this is natural: negotiations in Congress often lead to compromise legislation that's less ambitious than early drafts. But what's striking here is how completely Congress has backed away from using concerns over trolls as a way to address larger problems with the patent system. The PATENT Act might keep the nation's most egregious patent trolls up at night. But no one else who owns patents — even broad, frivolous patents — is going to lose sleep.

And the legislation might not even stop trolls. The legislation focuses on particular tactics that are favored by trolls, like indiscriminately sending out vague, threatening letters to thousands of businesses. But none of these tactics is essential to the troll business model. What makes trolling possible is the existence of broad patents that many companies infringe by accident. The PATENT Act would do nothing to eliminate these patents, which means it may only produce a new breed of trolls that use different tactics to enforce the same bad patents.

The courts might help where Congress won't

Justice Clarence Thomas's 2014 opinion in Alice v. CLS Bank will probably prove more important to fixing the patent system than anything Congress does. (Chip Somodevilla/Getty Images)

Congress has been loath to make any changes that could harm the interests of large patent holders, but the Supreme Court has not been so careful. Over the last decade, the high court has handed down a series of opinions that have very slowly corrected the law's pro-patent tilt.

The most important decision might have been last year's Alice v. CLS Bank ruling, which addressed the patentability of software for the first time. Lower courts are still working out the exact implications of that decision, but the ruling led to the destruction of a dozen software patents within three months. It's likely to destroy hundreds more in the future.

And there's every reason to think the courts are just getting started. The pro-patent laws that produced today's patent litigation crisis were developed by the courts over a 25-year period, from about 1980 to 2005. Since 2005, the Supreme Court has been working to restore balance to the patent system, but it could take another decade or more for them to complete their work.

But relying on the courts alone won't be enough. For example, the Alice decision may have created legal grounds for invalidating thousands of low-quality software patents issued in the 1990s and 2000s. But the courts haven't provided an efficient process for actually getting rid of those patents. Only Congress can do that — and there's no sign that it's going to.

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