Software patents have been around since the early '60s and kicked into overdrive in the late '90s. The U.S. Patent and Trademark Office didn't have much software expertise at the time, and it approved many overly broad patents. One such patent covers the "interactive Web." The patent, owned by a company called Eolas, was finally invalidated at a trial this year--but only after being successfully used for more than a decade to extract millions of dollars from many companies. In 2004, Eolas won a $565 million judgment against Microsoft, which later settled for an undisclosed amount.
Experts say patents like Eolas's should never have been granted, because, for starters, the technology already existed when the patent was filed in 1994. But because few companies had actively patented software before the late '90s, there was very little prior art. Prior art--published evidence that key concepts in a patent application existed before the application was filed--is grounds to deny or invalidate a patent. Because of the limited amount of prior art the patent examiners consulted (mostly other patents) and the time constraints they faced in approving or denying patent requests, thousands of patents were issued for software-based "inventions" that weren't new and were in wide use. These patents used such broad language that it was nearly impossible to determine their limits.
Confusion in the Courts
Today, the Patent Office does a much better job of forcing software-patent applicants to be more specific, but that doesn't help with the vague patents that have been granted. When these murky software patents eventually wind up in court, judges often disagree about what the patents encompass. Conflicting rulings come down almost weekly. One recent case concerned a patent on the idea of forcing online users to watch an ad before showing copyrighted material on the Internet. The patent holder, Ultramercial, has sued many companies, including Hulu. "But the patent doesn't even tell you how to put the ad on the Internet," says Julie Samuels, staff attorney for the Electronic Frontier Foundation, a nonprofit that promotes freedom of information online and has campaigned to get bad software patents invalidated.
The Ultramercial patent was upheld by the U.S. Court of Appeals for the Federal Circuit. But the Supreme Court asked the appeals court to reopen the case in the light of recent Supreme Court rulings about the part of the patent law that bars anyone from patenting an abstract idea, a law of nature, or a natural phenomenon. The Supreme Court's recent rulings seem to signal that it would not uphold patents that take familiar, abstract concepts (like watching a TV ad) and simply add on the Internet.
Amazingly, software patent-infringement suits usually fail in court. According to the study in The Georgetown Law Journal, software-patent holders--including NPEs and actual companies--win just 13% of their court cases, compared with a 50% win rate for nonsoftware-patent holders. But most cases never get that far. In an estimated 90% of cases, the defendants settle before going to trial. In other words, the trolls' entire business model is built on the assumption that software patents are so mysterious and complicated--and legal battles so expensive and distracting--that no one will challenge them.
Partly because so many companies settle, it's tough to nail down the number of dubious patents out there. "There's no way to really know how many patents are improvidently granted," says Samuels. "What we do know is that the numbers of overbroad and vague patents asserted by trolls are growing every day. Litigation is expensive, and the system incentivizes you to pay the trolls to go away rather than prove that the patents are invalid. Until we see more defendants fight back, we'll never know."
The Hunt for Solutions
Because of these issues, some business leaders, including venture capitalist Fred Wilson and investor Mark Cuban, have called for an end to software patents. People who defend software patents say they do protect genuine inventions and argue that efforts to weed out trolls will hurt innovation. "A number of people look at the problem and say, 'Abolish software patents,' " says Mark Lemley, a patent-law professor at Stanford University and a founding partner at intellectual-property law firm Durie Tangri. "But there are really useful inventions in software that we want to protect. There's a really hard line-drawing problem." He points to the software that enables a Toyota Prius hybrid engine to switch from gas to electric. "That controller--that's a piece of software," he says.
Besides, says Lemley, the countless companies that have software patents will fight hard to keep them. "Depending on how you count," he says, "there are between 500,000 and a million software patents in force in the U.S. today. That's a lot of constituencies that wouldn't want to see them eliminated. I think such a change is politically infeasible."
But Congress has made some progress, most notably with the America Invents Act, a patent-reform law that passed in 2011. There are plenty of people who complain that the law, which goes fully into effect in March, doesn't go far enough. But it does reduce patent holders' ability to list multiple unrelated companies as co-defendants in a lawsuit--a popular tactic used by trolls. It also broadens protections for inventors who accidentally infringe on patents through simultaneous invention, and it clears the way for any interested party to contest patent applications by submitting prior art. In addition, the legislation creates a new administrative method, called a post-grant review, intended to help weed out bad patents without litigation. However, many of these provisions apply only to new patents.
Some in Congress are still trying to fix the troll issue. Vermont Senator Patrick Leahy, who co-authored the America Invents Act, has been conducting hearings on the impact of NPEs on small business. And Congressmen Peter DeFazio
of Oregon and Jason Chaffetz of Utah have proposed a bill, called the Saving High-Tech Innovators From Egregious Legal Disputes (or SHIELD) Act, that would force NPEs to pay defendants' legal costs if a judge determines that a patent lawsuit didn't have a reasonable chance of succeeding.
