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Horsemen of the Patent Apocalypse

patent office

No one would seriously disagree with my observation that the patent system has become the single greatest obstacle to innovation faced by entrepreneurs and established companies alike.

Which is ironic, because the only reason the system exists at all is to encourage innovation.

In the U.S., patents have been around since 1790. Many would argue that the existence of this powerful but short-lived monopoly protection (originally only 14 years) given to inventors of novel and useful technology was crucial in America’s transformation from an agricultural to industrial economy.

Unfortunately, in the transformation from industrial to information economy, the system is showing both its age and the poor fit of many of the baubles and ornaments hung on it over the years by Congress and the courts. As I write in Law Eight of The Laws of Disruption, the unique economic properties of information call for a very different kind of incentive system, one that current information law doesn’t provide.

A showdown of sorts is coming this fall, when the U.S. Supreme Court is scheduled to hear a case challenging the very existence of so-called “business method patents,” and perhaps touching on the patentability of software. (Software is the only form of invention that I know of that gets protected under patent and copyright, along with trade secret law.) The Court has already received fifty briefs from interested parties. More about that in a later post.

For now, signs of breakdown are everywhere. Consider a few from just the last month or so:

1. A judge in the Eastern District of Texas (a notorious pro-plaintiff patent court) issued an injunction in August forever banning the sale of Microsoft Word and fining Microsoft $200 million for infringing the patent of a Canadian company. The patent involves a feature of Word that allows it to open XML documents containing custom XML code. Microsoft appealed the decision to the U.S. Court of Appeals for the Federal Circuit (the only court that hears patent appeals), which heard arguments last week. The injunction has been stayed pending outcome of the appeal.

2. In September, Dish Network was ordered to pay $200 million (the going rate this year?) to TiVo in a patent dispute over Digital Video Recorder (DVR) technology. TiVo had asked for damages of $1 billion and all of Dish’s profits for the last five years. The case has been going on since 2004. In August, TiVo also filed suit against AT&T and Verizon. The strategic role of such litigation was nicely summarized by Larry Dignan of CNET. “On a conference call,” Dignan wrote, “[TiVo CEO] Rogers noted that TiVo was still going to generate value through partnerships and distribution deals, but wanted investors to recognize the company’s intellectual property portfolio.”

3. Last week, Microsoft won an appeal in another patent dispute, this one involving software activation technology. The jury found in favor of the plaintiff, Uniloc USA, and awarded the company nearly $400 million in damages. The judge in the case agreed that Microsoft hadn’t violated the patent, but also refused to invalidate it as wrongly-issued.

4. Also last week, the Electronic Frontier Foundation’s Patent Busting Project announced a decision in a California court that invalidated claims by Acacia Research to have patented some of the core features of information streaming technology. The patent was number one on EFF’s list of “Ten Most Wanted” wrongly-issued and dangerous patents. The finding came in a lawsuit brought against Acacia by leading satellite and cable companies. As I wrote in The Laws of Disrupion, “EFF describes the patent as ‘laughably broad.’ ‘Broad is not necessarily bad,’ countered the company’s general counsel.”

These and dozens of other examples make clear that patent litigation has become a de facto feature of corporate strategy in high technology companies. Whether that is good or bad or simply a necessary evil, what is clear is that most executives haven’t acknowledged this reality. They continue to treat patent problems on an ad hoc basis, outsourcing most of the decision-making to their lawyers.

The size of the damage awards and the life-or-death nature of the injunctions issued in these cases should give pause to anyone who treats patents so cavalierly. It’s time to integrate patent strategy with the business, and time for serious conversation about overhauling the system.