Lawrence Rosen Opines On Patents: An Expensive Tax on the CIO

Software patents cost you money. Like taxes, they skim from your profit margins, but in this case the fees go to pay for other companies’ intellectual property.

For example, your e-mail program, Internet browser and word processor (all patentable) may carry a 5 percent to 10 percent patent license fee. If patented software is embedded in your products or services and the patent holder takes you to court, you could find yourself paying the same markup. Most important, what if this expense comes as a surprise, when a patent holder demands royalties for a patent you didn’t even know existed? How would a sudden 5 percent to 10 percent price hike in your product affect your sales, your profits?

That example is not hypothetical. I represented a small computer hardware company that was recently sued, along with 210 other companies, for infringement of a 1985 software patent for processing color images for scanners. My client was unaware of the patent. The plaintiff sought damages in the form of a “reasonable royalty” going back six years. Guess who will pay that royalty? Customers. As far as I know, the lawsuit is still going on, at a probable cost in attorneys’ fees alone of $100K per month.

Big software companies create portfolios of thousands of patents (for example, IBM has more than 27,000; Microsoft has 2,400) designed to legally monopolize innovation. Every large company now seeks a patent portfolio relevant to its areas of business to use as a bargaining chip with competitors. They stack their patent portfolios on conference room tables, weigh them against their competitors’, and negotiate cross-licensing fees. Small startups usually don’t have the resources to build a stack of patents and may avoid the market altogether, limiting choice for CIOs. Regardless, this defensive rush to the patent office is driving up costs—and therefore, prices—for everyone involved.

When CIOs buy software, they often seek patent indemnification—the software company agrees to fight any infringement claims against you as well as itself—but costs are capped by the vendor, most of whom have shallow pockets. And no indemnity provision would ever cover you if you combined patented technology with your own systems.

Worse, the only way to know whether you’ve violated specific patents is to evaluate those patents one by one. But the very structure of the software industry makes evaluating the torrent of new patents each year impossible. Software is complex and ubiquitous. Developers from around the world cooperate to write software—especially in the open-source community—but patents are national and vary widely from country to country. The analysis task is monumental.

Sometimes the cost of patents is even greater than a licensing fee—it could mean shutting down the business. That’s because a patent owner is not required to license his patent. Kodak had to shutter its instant camera business when patent owner Polaroid felt threatened by competition. Could your programming budget survive a sudden requirement to design around a software patent, assuming it is technically feasible?

Please understand that I’m not arguing against patents—they are here to stay. But I do believe that the system for software and business method patents is even more broken than in other industries. Software technology is evolving far more rapidly than most other fields, with product development and marketing cycles measured in months rather than years.

Even the USPTO can’t keep up. It is trying valiantly to improve the analysis of patent applications, but to do that, of course, it has to compete for skilled workers who can make much more money in the private sector.

So what can be done? One of the goals of patent holders is to monopolize innovation in an industry—indeed, it’s perfectly legal. But thoughtful people are now proposing that monopolies be more limited or disallowed altogether for essential technologies such as drugs for life-threatening diseases. The same limitations could be applied to essential software and business methods.

Shortening the current 20-year term of patents would also help. With technology changing so rapidly, few patent holders would be hurt, and it would embolden everyone to innovate more quickly and spend less time playing defense. While Congress is at it, it should make patent holders license essential technology to anyone who wants to use it.

The challenge is to find a proper balance between the rights of companies to obtain patents and the rights of software users to access the basic building blocks of the information economy. Today, the balance is not there.