Will The Supreme Court Clean Up the Patent Mess?

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[Timothy B. Lee]

During my previous stint as a McMegan guest blogger, I did a series of posts about the state of patent law. The picture was pretty grim. The previous 15 years had seen a huge increase in the number of patents that were granted, which in turn caused off a huge surge in patent litigation. I highlighted research by Bessen and Meurer suggested that outside of the pharmaceutical and chemical industries, the patent system may actually be creating negative incentives for innovation. That is, the costs to innovators of defending against infringement lawsuits exceeded the benefits they got from their own patents. This is a little bit like a world where landlords spent more money defending against trespassing lawsuits than they received in rents. Property law that perverse would destroy the real estate industry.

The patent system does the most damage in the software industry. Due to the complexity of software products, a single software product can easily infringe hundreds of patents. Microsoft, for example, has charged that the Linux operating system infringes 235 of its patents. This isn't a sign that Linux developers stole Microsoft source code, it's simply a reflection of the fact that Microsoft holds so many patents that it's essentially impossible to create a non-trivial software program without infringing some of them.

Bill Gates used to be concerned with this problem back when his company was still a relative underdog in the technology industry. In 1991, Gates wrote a memo to his senior executives about a series of recent court decisions that had begun allowing patents on software. ""If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents," Gates wrote, "the industry would be at a complete standstill today." Mr. Gates worried that "some large company will patent some obvious thing" and use the patent to "take as much of our profits as they want." Of course, this is exactly what has begun happening, with incumbents using the patent system as a weapon against more innovative competitors.

This may seem like the most esoteric of inside baseball, but it has real implications for the lives of ordinary users. For example, the development of open video formats has been stunted by patents. If you're a Firefox user, you may have noticed that certain videos (such as those in H.264 format) don't work in your browser. That's a patent licensing issue. Indeed, patents make it almost impossible to produce open source video software, which is one reason the open source movement hasn't revolutionized the market for video software the way it did for web browsers.

Patents are also causing mischief in the mobile phone industry. A "patent trolling" firm nearly shut down the BlackBerry network in 2006. More recently, the smart phone market has become embroiled in pointless patent litigation that forces virtually every smartphone vendor to devote resources to lawyers rather than engineers. These disputes will eventually be worked out, but in the meantime the litigation will drive up the cost of phones and slow the pace of progress.

The legalization of software patents was driven by the United States Court of Appeals for the Federal Circuit, which hears all patent appeals and has a strongly pro-patent bias. The Supreme Court has never endorsed patents on software, but it hasn't heard a software patent case since 1981, and in the intervening years the Federal Circuit has run wild. The Federal Circuit also legalized "business method" patents, forcing Wall Street firms to begin filing for patents whether they wanted to or not (most didn't). Software and business method patents are closely connected because most patented business methods (such as investment strategies) are implemented in software.

I did my original patent posts in 2008, shortly after the Federal Circuit heard oral arguments in In Re Bilski, a case involving a "business method" patent. There was a growing consensus that the patent system was broken, and high expectations that the court would use it as an opportunity to reform the rules for patent eligibility. The decision was released later in the year, and it did just that, overturning the extremely permissive standard for patentability that had applied for the preceding decade.

The case is now before the Supreme Court, which is due to hand down its decison on Monday. Virtually everyone expects the high to affirm the Federal Circuit's rejection of Mr. Bilski's patent, but as always the important question is what's in the accompanying opinion. A narrow holding could simply rule out the most egregiously abstract business method patents (Mr. Bilski's "invention" consisted entirely of mental steps) while leaving the bulk of software and business method patents untouched. But if the Supreme Court is feeling more ambitious, it may try to draw a new line that invalidates many existing business method and maybe even deal with the sotware controversy.

I'm hoping for a broad ruling, but I'm not optimistic. A standard that invalidates both business method and software patents would be good law and good public policy, but it would also mark a significant upheaval in the software industry. Firms like Microsoft, IBM and Yahoo have spent millions of dollars accumulating massive patent warchests, and they're keen to get a return on that investment. Even if the justices become convinced convinced that traditional limits on software patents need to be reinstated, they'll probably prefer to wait until they can hear a case that's specifically about a software patent.

On the other hand, dodging the issue may not be an option. The "machine-or-transformation test" that was announced by the Federal Circuit in Bilski seems to rule out some software patents, and the Patent Office has already begun interpreting it that way. However much the high court might prefer to defer the software issue to another case, it may find that it cannot strike down business method patents without simultaneously addressing the patentability of software. We'll find out on Monday.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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