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The Case for Market Based Patent Reform

Much debated and long anticipated, patent reform legislation is back under consideration

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In the wake of the financial crisis and its attendant repercussions across the global economy, the U.S. Congress stands poised to address the issue of patent reform. Much debated and long anticipated, patent reform legislation is back under consideration with the bill possibly coming up for vote, prior to the end of 2009. Under the stewardship of a set of legislators well sensitized to the salient issues and with the thoughtful counsel of David Kappos, President Obama’s business savvy head of the U.S. Patent and Trademark Office (USPTO), the stars are aligning to usher in legislation that promises to offer significant advances in an arena that has been overdue for reform.

During the debate that will shortly resume, critical patent system issues will be addressed. In addition to the legislative reform, the judiciary has been seeking to address the troubling emergence of non-practicing entities (NPEs) who acquire patents for the sole purpose of litigating those patents against deep-pocketed technology companies, for the purpose of securing damage awards or litigation avoidance settlements. Such NPEs have also been dubbed ‘patent trolls’ by the popular press because of their positioning as antagonists to true innovation.

Cases such as eBay v. MercExchange have directly addressed the issue of NPEs by sharpening the standing requirement necessary to secure injunctions in patent infringement cases. Others, such as Bilski, have considered an altered standard of patentability that was largely ushered in by the initial USPTO grant and later validation of business method patents in the State Street bank case.

In fact, there are a series of examples of judicial decisions that have aided in reforming problems in the patent system and serve as a natural complement to the efforts of David Kappos and the Congressional proponents of a well reasoned and thoughtful approach to patent reform.

Patent Reform in Context

In an era where patent litigation defense costs are widely quoted as running $3.5 to $5.0 million per incident and International Trade Commission (ITC) defense costs from $8 to $12 million, the need to improve the quality of granted patents is critical. As costs rise to defend patent litigation, the willingness of the deep pocketed targets of patent trolls to settle for relatively significant sums increases as a preferable alternative to bearing the costs of taking a case to term. As a result, absolute patent quality is less relevant than was historically the case, as the dynamic shifts to cost avoidance.

NPEs have become attractive investment opportunities for hedge funds seeking to generate a return in a challenging market. In fact, the fallout from the financial services meltdown is that funds that have access to ‘standing capital’ are under intense pressure to generate a return in order to have any hope of raising new funds from investors. A segment of these funds have invested in NPEs in the hope of generating such returns. The result is that investment in patent trolls has increased since the financial services meltdown. ScienceProgress.org reports that hundreds of NPEs have been formed, thousands of patent suits have been filed, and more than $5 billion has been invested in patent acquisitions by NPEs since 2003. This dynamic, in part, has triggered the rise of defensive patent pools such as Allied Security Trust (AST), RPX and Open Invention Network (OIN) which have been formed by operating companies to protect their constituents from patent attack by patent trolls.

Over the last five years, in addition to reinforcing the need for defensive patent pools, the increased investment in NPEs has resulted in an active secondary market for patents. The patent arms race that has ensued is fueled by the existence of poor quality patents that were either overly broad in claim scope and/or neither new nor non-obvious. This is due in part to the fact that insufficient prior art was identified to enable rejection by the USPTO.

Given the anti-intellectual property culture of many industries, there was a dearth of codification of the creative outputs in the form of patents or searchable prior art. A prime example is the open source community. The net of this is that a reasonable percentage of the software patents that were issued during the period would not meet the standard of patentability, had patent examiners been made aware of the prior art that existed, but was effectively inaccessible to them, buried in the millions of lines of code that have helped contribute to the radical advances in information technology over the period. All of these factors point to a somewhat obvious need for market-based patent reform.

Market-Led Patent Reform
While there is an apparent commitment by the Obama administration to drive this issue, the changes that are ultimately embodied in the final legislation will, at the end of the day, be suboptimal unless industry becomes proactive and shoulders more responsibility by participating in market-led patent reform that meets legislative and judicial reform half way. Most industries, and the technology community in particular, must become more active in making a concerted effort to:

(1) identify prior art to facilitate the efforts of USPTO patent examiners in evaluating patent applications;

(2) identify prior art which can facilitate the invalidation of existing patents that were improperly granted because patent examiners did not have access to relevant prior art during the initial review;

(3) develop a generative process of codifying inventions in the form of defensive publications that serve as an immediate record of prior art that is readily accessible to patent examiners through databases.

OIN has created a model that can be replicated across many industries. OIN, a defensive patent pool established by IBM, NEC, Novell, Philips, Red Hat, and Sony to keep the Linux Community free of patent-related issues and ensure freedom of action, launched Linux Defenders in December 2008. The program and associated website (www.linuxdefenders.org) enables the contribution of prior art through its portal. For already granted patents, Linux Defenders’ Post Issue Peer to Patent program solicits prior art that can be used to support requests for patent reexam. The third element of the Linux Defenders platform highlights the difference between patents and defensive publications and leads inventors through a process that allows inventions to be codified and made accessible to patent examiners as an effective form of prior art.

The net result is the significant reduction of patents of questionable quality. Without these foodstuffs, NPEs are hard-pressed to acquire all but the best patents. This is very disruptive to their model of quickly leveraging their investments. It is also likely to reduce the aggressive behavior of businesses looking to leverage large portfolios of questionable patents against competitors that are winning in the market place.

The foregoing dynamics underscore the need for legislative, regulatory and judicial patent reform coupled with market-led patent reform. Absent a joint market, industry and government effort that is comprehensive and seeks to resolve all of the challenges posed by today’s patent system, the result of legislative reform will be suboptimal.

This article was republished with premission from CNBC.

More Stories By Keith Bergelt

Keith Bergelt is the chief executive officer of Open Invention Network (OIN), the collaborative enterprise that enables innovation in open source and an increasingly vibrant ecosystem around Linux. Prior to joining the OIN, Mr. Bergelt served as president and CEO of two intellectual property Hedge Funds – Paradox Capital and IPI . Previously, Mr. Bergelt served as a senior advisor to the technology investment division at Texas Pacific Group. He was as General Manager of the Strategic Intellectual Asset Management business unit at Motorola Corporation and served as Motorola’s director of Technology Strategy. Prior to his extensive private sector experience, Mr. Bergelt served for twelve years as a diplomat with postings at the United Nations in NYC and the American Embassy in Tokyo, Japan, where he was involved in the negotiation of IP rights protection in Asia.

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