Is Microsoft Fixing Or Breaking The U.S. Patent System?

Jeff Hunt, Raymond Ibon and Dennis Fernandez

Led by Microsoft, a group of large U.S. computer technology and financial services companies calling themselves the "Coalition for Patent Fairness" is making unprecedented efforts to "reform" the established U.S. Patent system and fix perceived problems. On February 1st, 2007 the Coalition sent a letter to Congress requesting enactment of specific reforms that would dramatically weaken the rights of patent holders and transform patent litigation into a limited exercise before special courts dominated, no doubt, by judges friendly to large corporate defendants. Leaders of other industries, representing the vast majority of U.S. research spending and economic output, are conspicuously absent from Microsoft's tight-knit group.

Despite much hype about "reform", the fact that most leading research-driven companies and universities in biotechnology, pharmaceuticals, chemicals and healthcare remain silent on the group's reform efforts suggests that proposed changes do not favor their interests. This begs the question: "Is Microsoft and the Coalition for Patent Fairness really fixing or breaking the established U.S. Patent System?" One can even argue that Microsoft in particular is highly adverse to strong patent protection because virtually all software innovations in the history of the company are also protected under copyright law, but the patent rights they seek to weaken frequently are the only significant property rights of numerous small, highly innovative companies who threaten to disrupt the status quo.

While a reform of the patent system is expected encourage even more innovation, benefiting inventors, investors, and the U.S. economy as a whole, some proposals go too far and will simply create different problems and disincentives to protect important innovations with patents. Some proposed reforms benefit companies sued for infringing patents, reduce the rights of patent owners, and increase burdens on patent applicants, particularly small inventors who invent but do not manufacture products.

Widespread criticism of the U.S. patent system has been triggered by a series of high-profile judicial decisions enforcing strong patent rights for inventions of marginal technological importance. A firestorm of criticism has also flared over the aggressive use of expensive litigation by small patent owners wielding the threat of injunctions for leverage to obtain huge, highly publicized financial settlements from successful, well-known companies. This cunning and brazen strategy to "exploit" or mine patent inventories by licensing outfits-best exemplified by Paul Ryan's Acacia Technologies Group, has earned such companies the derisive label of "patent trolls". The moniker, however seemingly deserved by holding companies like Acacia, is a "white knight" for small inventors and start-up companies that do not have the resources to protect their patented inventions.

Congress is also considering important reform, originally proposed in the Patent Reform Act of 2005, to end common practices that are perceived as inviting abuse and contributing to the growth of patent infringement litigation. The most important change under consideration is limiting long-established procedures, known as continuation applications, which enable many patent applicants to continue pursuing patent rights for several years after their initial application is examined. Unlimited and lengthy continuation applications have recently become controversial, because this technique has been successfully used by many plaintiffs in recent patent infringement lawsuits to fashion patent claims that focus on specific products sold in the marketplace.

Considering the fact that more than 350,000 patents applications are being filed now each year, there is mounting pressure for the U.S. Patent Office to introduce radical changes in its system. Expediting the processing of patent applications is unquestionably needed to greatly reduce the period during which patent applications are pending for examination in the U.S. Patent Office. Excessive pendency of applications increases costs for applicants, delays capital investment for related research and development, and even creates harmful uncertainty among competing companies. Encouragingly, one recent improvement by the Patent Office is a program permitting applicants to pay additional fees and obtain expedited examination within twelve months. This process permits important inventions which may hold back investment in developing areas like biotechnology to be examined about two years ahead of ordinary applications.

The substantial increase in patents filed is owed in part to tens of thousands of marginal patents ranging from software patents to business methods seeking patent protection. In response, reforms proposed to reduce this backlog include establishing immediate Post-issuance Review of each patent approved by the U.S. Patent Office. This reform certainly will improve patent quality, but will increase costs for patent applicants and may delay venture capital investments in cutting edge technologies in emerging areas such as biotechnology. While reforms to slow down issuance of marginal patents are highly beneficial both to meritorious patent applicants and their competitors, but one sticking point is that the Patent Office practice of issuing tens of thousands of marginal patents annually creates a huge stream of easy revenue for Congress, so many members of Congress can be expected to inevitably resist these reforms.

Another proposed reform is to establish procedures for immediate Opposition or reconsideration of new patents, so competing inventors can bring forward existing technology for consideration by a board of experts in the Patent Office, without the cost, delay and risk of litigation. The Patent Office can also increase the level of scrutiny given each application, from about two hours each, to a level which will cull thousands of marginal applications from becoming issued patents. A campaign is presently underway to hire and train even more patent examiners to handle this work, and outsourcing part of the patent examination process is another alternative being considered in order to increase the level of review. Outsourcing and hiring more examiners are also necessary to reduce the lengthy wait for examination of applications, which presently stands at an all-time high.

The Coalition for Patent Fairness also suggests imposing strict standards for measuring damages for patent infringement. Presently, a variety of measures are contemplated and employed on a case by case basis to determine damages and a reasonable royalty rate for future sales. The Coalition, which includes primarily computer technology companies, wants courts to always evaluate the relative importance or contribution of the patented invention in relation to the overall market value of an infringing product, such as complex software containing thousands of features, and measure damages only according to this relative value. Of course, this test would always reduce the measure of damages for patent owners, because thousands of other features not resulting from the patented invention are present in complex software products. Patent owners would ask: How does this specific formula relate to products other than complex software?

A related reform would raise the standard for evaluating whether a defendant has willfully infringed patent rights. This reform would reduce damages owed to successful plaintiffs in some cases, because the plaintiffs would be entitled to enhanced damages provided by the Patent Act in fewer situations. Presently, the test for determining whether a defendant has acted willfully to infringe patent rights requires only a minimal level of proof, so establishing a higher standard would likely affect relatively few litigated cases and end perceived abuse.

Proposed patent reform is meant to curb litigation by the so-called "patent trolls". This gives rise to the question that every red-blooded American inventor would ask Congress: "Is every small inventor a patent troll simply because they create inventions but cannot compete head to head with large, established companies?" Of course not! The many important innovations of small startups and individual inventors which drive growth of the U.S. economy must be protected. Even in 1776, Benjamin Franklin and our Founding Fathers foresaw the critical role of patent protection driving future economic growth, and established strong patent rights and the U.S. Patent Office in the Constitution of the United States.

Today, new markets and structures are emerging for licensing, capitalizing and exploiting U.S. technology globally, including the advent of risky, pure research companies and pure licensing companies which provide a strong protective umbrella and leverage for valuing inventions of small inventors and start-ups. The over-inclusive label "patent trolls" is misplaced and simply ignores the reality that intellectual property rights like patents increasingly protect the most valuable and scarce properties owned by U.S. companies and individuals, but are now being manufactured by unskilled laborers in offshore manufacturing facilities. Strong property rights for these technologies form an ever more important part of the wealth of our great nation. Clearly, beneficial patent reforms must be enacted, but any further rush to vilify small, litigious patent owners must be resisted for the collective benefit of our country and her inventors. Ultimately, all reforms should be measured by considering the long-term effects of their application and embracing the concept that patent rights are granted to encourage innovation and investment, not to protect those companies who can profit by infringing the very patent rights intended to protect inventors, their often fledgling companies, and the insightful investors who recognize and back the next Thomas Edison.

This article was prepared with the help of contributing editors Jeff Hunt and Raymond Ibon.

Dennis Fernandez has over twenty-years experience in Silicon Valley and High-Tech Industry, as a patent prosecutor and intellectual property litigator, a venture capitalist, and an engineering manager. He specializes in developing offensive and defensive patent strategies for start-up electronics, software and biotech companies and their investors. Dennis serves as strategic advisor to leading venture capital firms, is on the Editorial Board of the Nanotechnology Law & Business Journal, the Board of Directors of the Association of Patent Law Firms, the Science and Technology Advisory Council and previously served on a consultancy with the United Nations Development Programme on Asian economic development. He is also an inventor of several U.S. and international patents in the areas of digital television, sensor networks, and bioinformatics. Dennis has an Electrical Engineering degree from Northwestern University, a law degree from Suffolk University Law School, and is a Registered U.S. Patent Attorney.