Today the Senate Judiciary Committee will hold a mark-up on patent reform legislation. It is clear that current patent law is not "promoting the useful arts," and therefore is in urgent need of reform. The proposed Senate legislation is designed to go after so called "patent trolls," non-practicing entities that sit on a large pool of what are often junk patents and sue small businesses that are innovating to extract a rent. But the real public policy solution must be bigger than just going after patent trolls, by getting to the root of the problem and addressing the issue of patent quality.
Many downsides are associated with so-called patent trolls, where non-practicing entities have large patent portfolios and sue small businesses for alleged infringement. Sometimes the infringement may be substantiated, but often the infringement is alleged but never proven. Often the trolls send a threatening letter asking for $50-$100,000 for a settlement. When small businesses realize that the proposed settlement is less than the cost of defending themselves in court, they are often quick to pay up even when they are not infringing. Fighting a patent troll and winning is a pyrrhic victory after wasting $100,000s on litigation. So-called patent trolls were estimated to cost the economy $29 billion in 2011 alone in just direct legal costs - not even counting diversion of resources, delays in new products and loss of market share. All of this means that action that deals with patent misuse by patent trolls, provided that the policy is effective and protects the legitimate rights of patent holders, is essential. But the substantive solution requires dealing with junk patents that should never have been issued to begin with.
The total loss to the economy caused by junk patents far exceeds $29 billion per year when one takes into account that big companies act like patent trolls too, by obtaining junk patents to keep out their competitors. The Federal Trade Commission issued a report on patents in 2003, "To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy," in which they concluded that:
Poor patent quality and legal standards and procedures that inadvertently may have anticompetitive effects can cause unwarranted market power and can unjustifiably increase costs. Such effects can hamper competition that otherwise would stimulate innovation.
Microsoft's founder Bill Gates illustrated this point well in an all-company memo in 1991. He wrote, "I feel certain that some large company will patent some obvious thing" and use the patent to "take as much of our profits as they want." This is precisely what we have seen in many sectors of the economy. As Bill Gates explained, "A future startup with no patents of its own will be forced to pay whatever price the giants choose to impose. That price might be high. Established companies have an interest in excluding future competitors." This is what is happening in the modern economy. When patents are issued for non-inventions they shut down competition and it stifles innovation, thus failing to meet the Constitutional requirement that patents "promote the useful arts."
The real costs of junk patents are easy to imagine when you consider some of the egregious patents that should never have existed to begin with. Patent No. 5,851,117 was granted in 1998 to a company for using an illustrated book to teach janitors how to clean a building. Clearly that is not such an original idea that it deserves to be patented. Luckily the economic impact of that patent was likely very minimal.
A page from "Building block training systems and training methods," Patent No. 5,851,117:
Or consider Patent No. 4,873,662, which was claimed by British Telecom for the concept of the hyperlink. While that patent was eventually invalidated on a technicality, resources were wasted on needless litigation and one can clearly see that if the patent were upheld then it would have driven up the costs for everyone with a website. This is what economists often refer to as a "rent."
On the iPhone, the "slide to unlock" and "rounded rectangle" form factor are both patented, and both are commonly cited as examples of patents on technology that are not such a "new, original, ornamental design" that all their competitors ought to be banned from using those methods and designs. Neither of these can be honestly referred to as an "invention."
The Founders were very clear on the purpose of patents, and economists have been largely united in their criticism of excessive patenting, specifically the dubious quality of many patents. Unfortunately both the economists and Founders' predictions of patent law run amuck have come to fruition today: abuse is precisely what is happening.
Patents are in one sense the right to disclude and limit the rights of others to compete in the marketplace. This is why the Founders referred to copyrights and patents as monopoly instruments, as their historical antecedent was exclusivity given by the monarch to be the exclusive creator of a certain product.
As the Supreme Court explained in Sears, "Patents are not given as favors[. They] are meant to encourage invention by rewarding the inventor with the right, limited to a term of years fixed by the patent, to exclude others from the use of his invention." The Court explained the significance of avoiding monopolies in Bonito Boats: "The Patent Clause itself reflects a balance between the need to encourage innovation and the avoidance of monopolies which stifle competition without any concomitant advance in the 'Progress of Science and useful Arts.'"
When non-inventions like slide-to-unlock are given patent protection, it increases the costs for the market, hurts innovation and it ultimately hurts the consumer. These nonsense patents create barriers to entry stopping new entrants and market participants. This represents the exact fear that many Founders had of this tool being abused.
In 2028, when the iPhone slide-to-unlock patent may expire, will smartphones have any use for slide-to-unlock now being freely available or will technology have progressed to the point where slide-to-unlock may be antiquated? If the answer is that this "technology" would be essentially worthless in 2028, that's significant evidence that the original idea was not a real invention worthy of a government-instituted monopoly. Imagine, in 2015 Microsoft patents for Windows 95 will be in the public domain for other companies to use in their products. But is there any utility today for software patents from Windows 95?
Another common example is Amazon's patent on "1-click checkout." Because of that patent, no other company can have 1-click checkout. Is 1-click checkout truly an invention or just an idea? This patent inhibits competition and strengthens Amazon's "first mover advantage." Furthermore it does so for no cognizable reason. Was the research and development for one-click checkout such that it should be protected by a government-instituted monopoly for 20 years? Of course not, as even Amazon's Founder and CEO Jeff Bezos admitted when asked if they would have developed this technology without a patent. He responded, "Yes...very definitely." Amazon would have developed this "technology" anyway because it was easy to invent and implement and it sells more books. Amazon has not only patented this technology, they have also enforced this patent (against BarnesandNoble.com).
These are examples of patents being abused by the big market players - although blame must largely fall on the patent office for granting the patents - but these are not the stories that Congress seems most concerned about. Meanwhile big companies are lobbying to ensure that whatever patent legislation is taken up that it will keep their ill-gotten patent portfolio completely intact.
In recent litigation of Apple against Samsung, a District Court found Samsung liable for violating five patents: 1) the phone number tapping feature, 2) unified search, 3) Data synchronization, 4) slide-to-unlock, 5) autocomplete.
Apple is asking for $40 per unit as a royalty, which in the context of smartphone margins is an incredibly large sum. While experts disagree on precisely how many patents are involved in the average smartphone, if we simply take Google/RPX's estimate of 125,000 patents in a modern day smartphone, then at the Apple pricing level for these patents, potential licensing cost per smartphone would amount to $1,000,000. That is $1,000,000 per device. If we assume that slide-to-unlock and phone number tapping are extremely novel patents and worth say 100 times more than the average patent, then the per device license fee would still be $2,000. (Credit to Florian Mueller of FOSS Patents blog for his analysis and calculations here).
In other words, a new smartphone company would have to pay $2,000 just in software licensing per device sold, while the average smartphone price for 2013 was $335.
Over 200 years ago, James Madison ominously warned that patents and copyright must be "guarded with strictness agst abuse." Madison knew that lobbyists would push to abuse these instruments, but today Congress has long forgotten his important and timeless words.
Patent trolls should be dealt with, but if big companies are able to continue to obtain junk patents for things that are not inventions and then act like patent trolls, then they will be able to continue to corner markets and ensure that new emerging technologies can't compete with them.
We know that the system is being abused. It's up to policy-makers to respond to Madison's warning. For copyright and patent law, we need less government intervention and less regulatory uncertainty via a system that compensates content holders and inventors. We need a system that clearly defines the rules of the road, but does so for the constitutionally enumerated purpose of spurring innovation and content creation, not at the cost of inhibiting it.
Derek Khanna was listed in the Forbes 30 Under 30 for Law and Policy for 2014. He is a Yale Law Fellow, columnist and policy expert. He wrote the House Republican Study Committee Memo on reforming copyright law and spearheaded the campaign on cellphone unlocking. Follow him on Twitter.