Opposition to patent reform

A paper titled "An Examination of the Economics of the U.S. Patent System" takes an opposing view against recent ideas on patent reform, such as "anti-troll legislation". These ideas include making lawsuits more difficult for so-called "patent trolls" (forcing lawsuits to be filed individually, for example) and invalidating "abstract" patents.

The paper contests the term "patent troll", which many of us identify as a major problem in the patent system. We see non-practicing entities as parasites. The authors of the paper, on the other hand, see them as "independent inventors, universities, small patent-based businesses, practicing companies and other legitimate patent holders who legally and rightfully enforce their hard-earned patent rights.".

I think there is some merit to this argument. Individuals, small businesses, and universities, can develop ideas into inventions. Although they don't have the ability to manufacture their inventions, surely they should be able to apply for patents and receive royalties from manufacturers. Right?

Now in the interest of full disclosure, I must admit that I have difficulty accepting many of the authors' arguments. For example, they call the "patent troll" problem "fiction created by large corporations who suffer the consequences of infringement and wish to steal inventions without such consequences...and by lobbyists like the Electronic Frontier Foundation...who are paid incredible sums of money to maximize the fabricated 'patent troll' problem." However, I disagree -- patent trolls are a real problem. High-stakes patent lawsuits increase risk, discourage innovation and raise the costs for manufacturing, which get passed down to consumers.

In fact, I support the EFF, a civil liberties group, with a small donation each year, so I have difficulty accepting that characterization. Indeed, the EFF has a patent reform program (for software patents), a patent busting project (to invalidate bogus patents), and has received a half-million dollars in funding for these projects, but I see those as good things that protect software developers and users alike.

It's also worth mentioning that one of the author's is CEO of AmiCOUR IP Group, which submitted an amicus curiae brief that sided with i4i (a non-practicing entity) in i4i v. Microsoft, a 2009 case in the Eastern District of Texas. Although the case was finally appealed to the Supreme Court and Microsoft was unsuccessful at invalidating the patent,  many in the tech industry at the time thought that the patent was generic, and the judgment extreme. i4i is not the best example of a patent troll, since it does have a product of its own, but Microsoft did compare it to one.

In the continuing patent reform debate, we are likely to see a strange union of software developers, hardware manufacturers, and civil liberties groups pitted against another strange union of universities, patent owners, patent trolls, and attorneys.

Alice Corp. v. CLS Bank International

Alice Corp. v. CLS Bank International is an upcoming Supreme Court case involving the patentability of software programs. Specifically, the Court has posed two questions:

1. What test should the court adopt to determine whether a computer-implemented invention is a patent ineligible "abstract idea"; and when, if ever, does the presence of a computer in a claim lend patent eligibility to an otherwise patent-ineligible idea?
2. In assessing patent eligibility under 35 U.S.C. § 101 of a computer-implemented invention, should it matter whether the invention is claimed as a method, system, or storage medium; and should such claims at times be considered equivalent for § 101 purposes?

The case has received inconsistent verdicts during appeals. Initially, CLS Bank sought a judgment that Alice's four patents on electronic methods and computer programs for financial-trading systems were invalid. Alice then countersued for infringement of its patents. The district court judge ruled that the patents were abstract and therefore patent-ineligible. Alice appealed and a panel at the Court of Appeals for the Federal Circuit overturned the district court decision. The panel ruled that the patents were valid. CLS petitioned for a rehearing and a new panel at the same court reversed the previous panel's decision. Although seven of the ten judges on the new panel agreed that the patents were invalid, they wrote incompatible opinions. Alice then appealed to the Supreme Court.

The software industry has been observing the case closely. 27 amicus curiae briefs (legal opinion by a third-party to the case) have been filed.

Tim Berners-Lee, inventor of the World Wide Web, argued that the Supreme Court should take the opportunity to abolish software patents. I remember hearing similar sentiments before Bilski v. Kappos (2010), a case involving a business patent on hedging. The Supreme Court, to the disappointment of many, refused to limit or clarify patent eligibility -- "business as usual".

Software patents are a tricky issue. A study from the Government Accountability Office found that a disproportionate share of patent cases concern software patents. James Bessen claimed that this is because software is more likely to have fuzzy boundaries and particularly prone to broad and vague patents. He also claimed that "the patent troll crisis is really a software patent problem".

Software patents as we know them today weren't always legal. In a trio of cases  -- Gottschalk v. Benson (1972), Parker v. Flook (1978), Diamond v. Diehr (1981) -- the Supreme Court held that software algorithms weren't patent-eligible. In 1982, Congress created a new court, the Federal Circuit, to hear patent cases. The Federal Circuit reinterpreted the Supreme Court's decisions, particular Diehr. By 1998, in State Street Bank v. Signature Financial Group, the Federal Circuit had opened the floodgates to software and business method patents.

Until recently -- Bilski v. Kappos (2010) and Mayo v. Prometheus (2012) --- the Supreme Court hasn't interfered with the lower court's new interpretations. By not interfering, the Supreme Court may have implicitly accepted the broadening of patent eligibility and legality of software patents. Bilski and Prometheus could suggest a change in the future.

I would like to limit (if not abolish) software patents, but given the shear number of software patents already granted by the USPTO, and the difficulty of distinguishing a "software" patent from another patent, this would be very difficult. Interest groups both in favor and against software patents would also politicize the issue.

Why Google sold Motorola?

Although Google's desperation for building a patent portfolio is understandable, it's not immediately clear why Google would acquire Motorola for a whopping $12.5 billion. And then sell it for $2.9 billion. And then call this deal a "success".

In a Forbes interview, Google VP Don Harrison said:

I think the Motorola transaction has been a success for us. Financially, we bought the asset for $12.5 billion. It had $3 billion in cash; we were able to sell the Home division for $2.5 billion; we ended selling the handset division for $3 billion. There were some other tax assets as well. When you work through the math, you realize we spent between $2.5 billion and $3.5 billion for the patent assets.

For comparison, it cost Rockstar Consortium (includes Apple, Microsoft, Blackberry, Sony, and Ericsson) $4.5 billion to purchase 6,000 smartphone and digital communications-related from Nortel in 2011. The Motorola acquisition doesn't seem so bad after all.

The Nortel patents may have more proven value though. As mentioned in my last post, Google/Motorola hasn't had the greatest of success convincing judges that infringement of its standards-essential patents necessitate great damages or injunctions.

Regardless, selling Motorola to a dedicated hardware company made sense. Google has little experience with hardware or manufacturing. Motorola was already operating at a loss when Google acquired it. Afterwards, the Motorola division lost $1.1 billion in 2012 alone. These losses make the Motorola acquisition even more expensive in the long run.

On the contrary, owning Motorola had the potential to hurt Google's experience with software. Preferential treatment of Motorola would discourage other, more successful Android manufacturers like Samsung, HTC, and LG. In fact, after Google bought Motorola, Samsung and LG started developing their own smartphone operating systems.

From Lenovo's perspective, it is a successful hardware company -- the number 1 PC manufacturer (although that might soon be HP). It is seeking to expand its market, especially if the market moves away from personal computers. Lenovo had just acquired IBM's x86 server division. Given Lenovo's lack of smartphone market share in the US, its success with hardware, and its success at acquiring U.S. companies, it makes sense to expand the business from personal computers to both servers and smartphones.

Why Google bought Motorola?

A few posts ago, I briefly discussed patent stockpiling. Likely in response to patent stockpiling by its competitors, Google bought Motorola Mobility for $12.5 billion.

Google's CEO, Larry Page, wrote that the acquisition "would enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies." A similar statement was repeated in a press release. Motorola had 17,000 patents and 7,500 more patents pending.

We know that Google wants to build a defense against Apple, Microsoft, and perhaps Nokia. Arguably it also wants an incentive to cross-license with Oracle. It desperately needs patents. It has bought over 2,000 patents from IBM. (IBM has been granted the highest number of U.S. patents each year for the past 21 years.)

But were the patents worth it?

At the time of the acquisition, Motorola was in litigation against two companies: Microsoft and Apple.

In 2013, a judge ruled that Microsoft would pay under $1.8 million in yearly royalties for Motorola's standards-essential patents on H.264 (video format) and 802.11 (wifi). Standards-essential patents must be licensed to other parties at a so-called "reasonable and non-discriminatory" (RAND) rate. In this case, the judge ruled that Motorola was not acting reasonably. Instead, the appropriate royalty rate for H.264, for example, was 0.55 cents. That's not a lot of money compared to how much Google paid for the patents.

The litigation against Apple has turned sour. Apple has already been issued rulings in its favor. Other cases have dismissed. A judge described Motorola's demands as "crazy".

Google may have thought that patents required for widely-used technologies like wifi or a common video format could be used as a powerful weapon (or powerful defense), but judges don't that's reasonable.

From FOSS patents:

Motorola's strategy of demanding prohibitive royalty rates (only to have an excuse for seeking injunctions) and bringing out-of-this-world damages claims over FRAND-pledged SEPs has failed all the way, and the Federal Circuit ruling on the Posner appeal will be yet another blow to Google's strategy relating to the patent portfolio that was the primary reason for paying $12.5 billion for Motorola Mobility. Google is free to pay crazy prices for patents. But it can't expect companies like Apple and Microsoft to be crazy enough to accede to its demands, and it's been unsuccessful so far to find crazy judges to side with it.

However, standard-essential patents still have important uses: they put their owner in a better position to negotiate cross-licensing agreements and can be used against others who don't have standard-essential patents. Google probably wants to encourage its competitors to cross-license.

Reactions to the patent wars

This is an additional mini-blog post that I thought would be interesting because it might be controversial. Food for thought.

We must keep in mind that despite the magnitude of damages discussed in court cases, no country has yet to interfere significantly with the sales of major smartphones. For example, when Samsung won a ban on older iPhone and iPad models at the International Trade Commission, President Obama chose to veto the ban.

One prominent blogger, Tero Kuittinen, bitterly wrote

No matter what patent infringements may have taken place, judges simply cannot stomach issuing rulings that might actually have a material impact on major phone vendors. As a result, sales injunctions are typically limited to minor models (like HTC One mini) and then even those are stayed by appellate courts.

And once various appeals have been heard and processed, the models in question are 18 months or older — effectively at the end of their product runs.

The end result is that the patent system is effectively becoming welfare for people who have double degrees in engineering and law [emphasis added]. IP lawyers can charge upwards of $1,000 dollars per hour, but the work they do will never have any substantial impact on the competitive landscape in the phone industry.

Nokia's patent strategy

In 2009, Nokia, once the leading cell phone manufacturer, sued Apple over patent infringement. Apple responded with a countersuit. The two litigants filed a series of simultaneous lawsuits in different jurisdictions and countries over the next two years.

In 2011, Apple settled with a one-time payment and continuing royalties. The terms of these patent licensing agreements are confidential.

Nokia has chosen to hold on to its patent portfolio despite selling its mobile device business to Microsoft for $5 billion. Instead, it granted Microsoft a 10-year patent license for an additional $2.2 billion.

Nokia receives undisclosed compensation from Samsung, and a few months ago renewed that  deal for another five years. Just today, HTC agreed to pay undisclosed patent royalties to Nokia.

Nokia has now successfully licensed its patents to Microsoft, Apple, Samsung, and HTC. Microsoft itself receives patent royalties from about 20 Android manufacturers. With this in mind, Nokia will likely pursue the other Android manufacturers, despite no longer having a smartphone business of its own.

Thus, Apple's settlement with Nokia is a win-win. Apple has plenty of cash on hand ($160 billion!) to afford the settlement. By settling, both companies will free up resources to litigate against Apple's primary competitors, Android manufacturers.

Patent stockpiling

In the ongoing smartphone patent wars, all sides are stockpiling patents.

Apple, Microsoft, Blackberry, Sony, and Ericsson jointly formed Rockstar Consortium to purchase patents from bankrupt Nortel. In 2009, Nortel, formerly a major telecommunications manufacturer, began liquidating its assets. After selling some cellular technology patents to Ericsson, 6,000 smartphone and digital communications-related patents were sold to the consortium for $4.5 billion in 2011. Google had made a losing bid of $3.14 (π) billion.

A similar consortium, CPTN Holdings, including Microsoft, Apple, and Oracle, had acquired 882 patents as part of the sale of Novell, a software company, to Attachmate. The US Department of Justice expressed antitrust concerns and the deal was changed in order to protect Linux-related software, on royalty-free terms. It's worth noting that Microsoft and Linux developers have had their own patent disputes -- Microsoft has been accused of "feeding patent trolls" by selling their own patents to small companies that in turn use those patents to litigate against Microsoft's competitors.

Google's Chief Legal Officer, David Drummond, wrote on Google's blog that this was "a hostile, organized campaign against Android by Microsoft, Oracle, Apple and other companies, waged through bogus patents...our competitors want to impose a 'tax' for these dubious patents that makes Android devices more expensive for consumers. They want to make it harder for manufacturers to sell Android devices. Instead of competing by building new features or devices, they are fighting through litigation." From Drummond's point of view, Microsoft and Apple, two well-known competitors, had colluded together to strangle Google.

However, Google has intensified its own patent portfolio. Only 11 days after losing the Nortel patent auction, Google purchased 1,029 patents from IBM and 1,023 additional patents the following month. Google then acquired Motorola Mobility for $12.5 billion. Google's CEO, Larry Page, wrote that this "would enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies." Motorola had 17,000 patents and 7,500 more patents pending.

Android manufacturers, including Samsung, HTC, and LG, reportedly pay Microsoft a $5 to $10 royalty for each Android device sold. In 2013, it was estimated that Microsoft was making over $2 billion per year from licensing agreements with Android manufacturers -- 5 times as much as from its own mobile operating system. As the Android market grows, those patent agreements could theoretically bring in $8.8 billion annually by 2017.

Microsoft's patent licensing strategy provide it with two major benefits. First, Microsoft receives a major source of a revenue. But perhaps more importantly, it places a price tag on an otherwise free-of-charge mobile operating system distributed by its competitor. In an interview with the Wall Street Journal, Microsoft's then-CEO, Steve Ballmer, said "It's not like Android's free. You do have to license patents."