In 2012, the US Chamber of Commerce put out a report claiming that intellectual property is responsible for 55 million US jobs—46 percent of private sector employment. This is a ridiculous statistic if you merely stop and think about it for a minute. But the fact that the statistic is ridiculous doesn’t mean that it won’t continue to circulate around Washington. For example, last year Rep. Marsha Blackburn cited it uncritically in an oped in The Hill.

In a new paper from Mercatus (here’s the PDF), Ian Robinson and I expose this statistic, and others like them, as pseudoscience. They are based on incredibly shoddy and misleading reasoning. Here’s the abstract of the paper:

In the past two years, a spate of misleading reports on intellectual property has sought to convince policymakers and the public that implausibly high proportions of US output and employment depend on expansive intellectual property (IP) rights. These reports provide no theoretical or empirical evidence to support such a claim, but instead simply assume that the existence of intellectual property in an industry creates the jobs in that industry. We dispute the assumption that jobs in IP-intensive industries are necessarily IP-created jobs. We first explore issues regarding job creation and the economic efficiency of IP that cut across all kinds of intellectual property. We then take a closer look at these issues across three major forms of intellectual property: trademarks, patents, and copyrights.

As they say, read the whole thing, and please share with your favorite IP maximalist.

I am speaking on a panel tomorrow at the Dirksen Senate Office Building at an R Street Institute event on patent reform. Here’s R Street’s description:

The patent reform debate has been painted as one of inventors vs. patent troll victims. Yet these two don’t have to be enemies. We can protect intellectual property, and stomp out patent trolls. If you’re just tuning in, patent trolls are entities that hoard overly broad patents, but do not use them to make goods or services, or advance a useful secondary market. While there’s a place for patent enforcement, these guys take it way too far. These entities maliciously threaten small businesses, inventors, and consumers, causing tens of billions in economic damage each year. Since litigation costs millions of dollars, businesses are forced to settle even when the claim against them is spurious. Fortunately, with growing awareness and support, the patent trolls’ lucrative racket is in jeopardy. With Obama’s patent troll task force, the passage of the Innovation Act in the House, state legislation tackling demand letters, and further action in the courts, we appear to be closer than ever to achieving real reform. Please join us for a lunch and panel discussion of the nature of the patent troll problem, the industries it affects, and the policy solutions being considered. Featuring: Zach Graves, Director of Digital Marketing & Policy Analyst, R Street Institute (Moderator) Eli Dourado, Research Fellow, Mercatus Center Whitaker L. Askew, Vice President, American Gaming Association Robin Cook, Assistant General Counsel for Special Projects, Credit Union National Association Julie Hopkins, Partner, Tydings & Rosenberg LLP

The festivities begin at noon. The event is open to the public, and you can register here.

Gordon Crovitz has an excellent column in today’s Wall Street Journal in which he accurately diagnoses the root cause of our patent litigation problem: the Federal Circuit’s support for extensive patenting in software.

Today’s patent mess can be traced to a miscalculation by Jimmy Carter, who thought granting more patents would help overcome economic stagnation. In 1979, his Domestic Policy Review on Industrial Innovation proposed a new Federal Circuit Court of Appeals, which Congress created in 1982. Its first judge explained: “The court was formed for one need, to recover the value of the patent system as an incentive to industry.” The country got more patents—at what has turned out to be a huge cost. The number of patents has quadrupled, to more than 275,000 a year. But the Federal Circuit approved patents for software, which now account for most of the patents granted in the U.S.—and for most of the litigation. Patent trolls buy up vague software patents and demand legal settlements from technology companies. Instead of encouraging innovation, patent law has become a burden on entrepreneurs, especially startups without teams of patent lawyers.

I was pleased that Crovitz cites my new paper with Alex Tabarrok:

A system of property rights is flawed if no one can know what’s protected. That’s what happens when the government grants 20-year patents for vague software ideas in exchange for making the innovation public. In a recent academic paper, George Mason researchers Eli Dourado and Alex Tabarrok argued that the system of “broad and fuzzy” software patents “reduces the potency of search and defeats one of the key arguments for patents, the dissemination of information about innovation.”

Current legislation in Congress makes changes to patent trial procedure in an effort to reduce the harm caused by patent trolling. But if we really want to solve the trolling problem once and for all, and to generally have a healthy and innovative patent system, we need to get at the problem of low-quality patents, especially in software. The best way to do that is to abolish the Federal Circuit, which has consistently undermined limits on patentable subject matter.

I’m pleased to announce that Alex Tabarrok and I have a new working paper out from the Mercatus Center today, “Public Choice and Bloomington School Perspectives on Intellectual Property.” The paper will appear in Public Choice in 2014.

Here’s the abstract:

We mine two underexplored traditions for insights into intellectual property: the public choice or Virginia school, centered on James Buchanan and Gordon Tullock, and the Bloomington or Institutional Analysis and Development school, centered on Elinor Ostrom and Vincent Ostrom. We apply the perspectives of each school to issues of intellectual property and develop new insights, questions, and focuses of attention. We also explore tensions and synergies between the two schools on issues of intellectual property.

The gist of the paper is that the standard case for intellectual property—that a temporary monopoly is needed in order to recoup the sunk costs of innovation or creation—ignores issues raised by the two schools we investigate.

From a public choice perspective, a temporary monopoly provides enormous opportunities for rent seeking. Copyright and patent owners are constantly manipulating the political environment to expand either the duration of the monopoly or the scope of what can be monopolized. We document the evolution of intellectual property in the United States from its modest origins to its current strong and expansive state.

From a Bloomington perspective, the standard case for IP wrongly treats the commons as a kind of wasteland. In fact, numerous innovations and sprawling creative works occur without monopolization—just look at Wikipedia. Innovation occurs when the right institutional structures are in place, and intellectual property that is too severe can hamper the smooth operation of these institutions. Too much IP can harm as much as too little.

Read the whole thing, cite it copiously, etc.

The Hill is reporting that Rep. Goodlatte, under pressure from “companies like Microsoft, IBM and Apple,” is planning to drop the provision in his patent reform bill that expands the Covered Business Method (CBM) program. Mike Masnick also has commentary.

Julie Samuels explains CBM review:

The “Covered Business Method Review” (CBM) was first introduced in 2011’s America Invents Act. It created, for a limited time, an additional avenue of patent review at the Patent Office. Unfortunately, as drafted, it really was only intended to apply to patents that deal with financial institutions. CBM is a good program. First, we have long favored the use of Patent Office procedure to challenge patents; it is much cheaper and much quicker than going to court. Second, it allows for more ways to challenge patents than other types of Patent Office review—making it a more robust procedure that promises to knock out more improvidently granted patents. Third, it automatically puts concurrent patent litigation between the parties on hold. Putting ongoing litigation on hold is no small thing. Patent litigation often costs each side well into the millions of dollars, while CBMs cost just a fraction of that. This means that more people will be in a position to challenge bad patents and fight back against the trolls who wield those patents.

The original Goodlatte bill would have expanded CBM review to patents beyond the financial sector.

From a public choice perspective, it is unsurprising that finance would have better patent law than the rest of the economy: finance is a concentrated industry that can go up politically against and offset another concentrated industry, the patent bar. But non-finance covered business method patents are asserted against all kinds of companies, for practices as banal as retrieving data from a database (not joking: “A method of retrieving information from a database record having plural fields“) or selling things online (“An apparatus to market and/or sell goods and/or services over an electronic network“). The fact that the victims of these patent assertions are dispersed throughout the economy means that they are not organized enough to effectively oppose the patent interests that are lobbying against the CBM program expansion.

Still, it is very disappointing that Rep. Goodlatte is caving to such lobbying. I already thought that his bill did not go far enough; now it goes even less far.

Last week, the FTC proposed to use its Section 6(b) power to investigate patent trolls. Its clear from the agency’s comment request that what they’re really interested in examining is the practice of patent privateering.

For The Umlaut, I wrote an article explaining what patent privateering is and how it upsets the fragile state of affairs in the software industry.

Because patent trolls are non-practicing, they are not subject to threats of counter-suit and mutually assured destruction. Because they are not members of any SSOs, they do not have any obligation to license on a FRAND basis; standard-essential patents can be transferred to privateers and then asserted against all users of the standard. And because the transfer of patents to patent trolls is often done through various shell companies or other shadowy means, the defendant and the public often cannot know on which practicing software company’s behalf the privateer is working. This means the defendant cannot retaliate through countersuits or a public relations offensive.

I think that understanding how patent privateering actually works and how it disrupts companies’ attempts to innovate makes one much more sympathetic to simply abolishing software patents outright. Given that the practice is  not widely understood, the FTC could add value by simply disseminating information about it to a wider audience. I don’t think that the FTC has the authority to regulate patent enforcement, since patent rights are explicitly authorized by Congress, but they can and should send Congress the message that software patents are being used to stifle innovation, not promote it.

Randall Stross discusses his recent book: The Launch Pad: Inside Y Combinator, Silicon Valley’s Most Exclusive School for Startups. Stross’s behind-the-scenes look at Y Combinator details how the seed fund has been able to produce young entrepreneurs and successful startups such as Dropbox and Airbnb. Stross also discusses Y Combinator’s early history, the typical Y Combinator participant, the fund’s rate of return, the gender gap in the program, and the reason Silicon Valley has become the epicenter for startups.

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Related Links

• Randall Stross home page, Stross
• The Launch Pad: Inside Y Combinator, Amazon
• Q&A: Randall Stross on the World of Y Combinator, Gannes
• What’s coming out of Silicon Valley?, Stross

The new discussion draft from Rep. Goodlatte is now circulating publicly. Here is a good summary from the EFF of what the legislation would do:

• Heightened Pleading: Requiring a patent holder to provide basic details (such as which patents and claims are at issue, as well as exactly what products allegedly infringe and how) when it files a lawsuit.
• Fee shifting: Requiring the loser in a patent case to pay attorney’s fees and costs. This would make it harder for trolls to use the extraordinary expense of patent litigation to force a settlement.
• Transparency: The draft includes strong language requiring patent trolls to reveal the parties that would actually benefit from the litigation (called the real party in interest).
• Joinder: If the plaintiff is a shell-company patent troll, the defendant could require the real party in interest to join the litigation. Even better, a prevailing defendant could collect attorney’s fees from the real party in interest if the patent troll can’t or won’t pay.
• Staying customer suits: Requiring courts to stay patent litigation against customers when there is parallel litigation against the manufacturer.
• Discovery reform: Shutting down expensive and often harassing discovery until the court has interpreted the patent. This should make it easier for defendants to dispose of frivolous cases early before the legal fees and court costs really add up.
• Post-grant review: The bill expands an important avenue to challenge a patent’s validity at the Patent Office (known as the transitional program for covered business method patents). While this procedure is still too expensive for many of the trolls’ smaller targets, we support efforts to make it easier to knock out bad patents.

These are excellent steps forward in the fight against patent trolls, but I’m still hoping for more. The explosion in patent litigation, both troll and non-troll, is due to the astonishing increase in the number of software patents. Software patents now make up over half of all patents! Software patents are more likely to be litigated than other kinds of patents, including four times more likely than a chemical patent.

Given the extent to which the problems with our patent system are caused by software patents, it is unfortunate that none of the patent reform bills under consideration in this Congress contemplate simply excluding software from the set of patentable subject matter. By all means, slay the trolls. But also go after the source of their power.

No doubt I won’t be the only one to point out how funny it is that today’s New York Times front page exposé on the excesses of the Renewable Fuel Standard puts the blame on Wall Street firms trading in the market for ethanol credits. But I also want to make a comparison to intellectual property.

As the headline puts it, “Wall St. Exploits Ethanol Credits, and Prices Spike,” Yet ethanol credits are a thing that affect the price of gasoline only because the government created them out of thin air and mandated their use. Having created a new commodity–and a mandatory one for many refiners–it’s no surprise speculators entered the market. Yet this is how the NYT describes it:

The banks say they have far less influence in the market than others are suggesting, and are doing nothing wrong. But the activities, while legal, could have consequences for consumers.

See that? It’s the perfectly legal activities of the banks that will have consequences for consumers. I’d say it’s the entire program itself, created out of thin air by the government, that allows for these activities in the first place.

Because Congress and the EPA didn’t accurately predict future gasoline consumption (shocker that) they set the amount of ethanol that refiners must blend into gasoline too high. Refiners are on the hook to use more ethanol than possible, which forces them to buy ethanol credits instead. So of course commodity speculators are going to play in this made-up market, but it’s not the players we should be hating, it’s the game.

And for the record, I don’t mean to excuse the banks. I don’t know enough about this issue, but it wouldn’t surprise me if the banks had a hand in getting the government to create this market. If they did, then that’s par for the crony capitalist course.

The analogy to intellectual property, although imperfect, should be clear. Ethanol credits, like patents and copyrights, are property. Unlike traditional forms of property (say, in land or chattels), they are property rights created by statute out of thin air in order to incentivize creation of a public good. More renewable fuels in the case of ethanol credits, more creative works and inventions in the case of IP.

Creating new property rights can be a very healthy exercise and it’s generally preferable to government production of the public good. As the ethanol credits mess show us, though, getting right the design of the new property right is crucial, yet something regulators are bound to screw up for all the reasons that Hayek and Buchanan and Tullock pointed out.

As I mentioned, the analogy is not perfect. Government requires that refiners buy ethanol credits, while there’s no such law about IP. And yet, if you think about software and process patents, it plausible to make a case that there might as well be a requirement. Given how broadly these patents are interpreted, you might find that you have to pay tribute to a patent holder to be in a particular line of business. This is why we have patent trolls.

It’s funny, then, that diagnosing the ethanol mess the NYT falls into the same trap many do on patents. Namely that they confuse a symptom (trolls) for the disease (the scope of software patents). “[B]y allowing anyone to trade, including those with no real interest in energy, the E.P.A. encouraged speculation, the critics say,” the NYT tells us. But again, the problem is not the players, but the game.

So despite the fact that some find it surprising, it’s perfectly logical and ideologically consistent to be a strong defender of property rights, yet be a proponent of scrapping statutory property rights regimes that don’t work. If you are a conservative or libertarian who would feel some sympathy for abolishing the Renewable Fuels Standard, then you have some insight into why so many of us are sympathetic to abolishing some kinds of patents.

Sherwin Siy, Vice President of Legal Affairs at Public Knowledge, discusses emerging issues in digital copyright policy. He addresses the Department of Commerce’s recent green paper on digital copyright, including the need to reform copyright laws in light of new technologies. This podcast also covers the DMCA, online streaming, piracy, cell phone unlocking, fair use recognition, digital ownership, and what we’ve learned about copyright policy from the SOPA debate.

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Related Links

• Sherwin Siy, Public Knowledge
• What the DMCA cell phone unlock ban means to you, Reardon
• Why The Library Of Congress Has A Lock On Your Phone, Henn

Nobel laureate Gary Becker and I are on the same page. He says patent terms should be short:

Major reforms to reduce these unproductive opportunities would include lowering typical patent length and the scope of innovations that are eligible for patents. The current patent length of 20 years (longer for drug companies) from the date of filing for a patent can be cut in half without greatly discouraging innovation. One obvious advantage of cutting patent length in half is that the economic cost from the temporary monopoly power given to patent holders would be made much more temporary. In addition, a shorter patent length gives patent holders less of an effective head start in developing follow on patents that can greatly extend the effective length of an original patent.

More importantly, he says we should carve out particularly troublesome areas, like software, from the patent system:

Today, the Obama administration announced 5 executive actions it is taking and 7 legislative proposals it is making to address the problem of patent trolls. While these are incremental steps in the right direction, they are still pretty weak sauce. The reforms could alleviate some of the litigation pressure on Silicon Valley firms, but there’s a long way to go if we want to have a patent system that maximized innovation.

The proposals aim to reduce anonymity in patent litigation, improve review at the USPTO, give more protection to downstream users, and improve standards at the International Trade Commission, a venue which has been gamed by patent plaintiffs. These are all steps worth taking. But they’re not enough. The White House’s press release quotes the president as saying that “our efforts at patent reform [i.e. the America Invents Act, passed in 2011] only went about halfway to where we need to go.” Presumably the White House believes these steps will take us the rest of the way there.

But the problem with computer-enabled patents isn’t merely that they result in a lot of opportunistic litigation, though they do. The problem is that almost every new idea is actually pretty obvious, in the sense that it is “invented” at the same time by lots of companies that are innovating in the same space. Granting patents in a field where everyone is innovating in the same way at the same time is a recipe for slowing down, not speeding up, innovation. Instead of just getting on with the process of building great new products, companies have to file for patents, assemble patent portfolios, license patents from competitors who “invented” certain software techniques a few months earlier, deal with litigation, and so on. A device like a smartphone requires thousands of patents to be filed, licensed, or litigated.

If we really want to speed up innovation, we need to take bolder steps. New Zealand recently abolished software patents by declaring that software is not an invention at all. It would be terrific if the White House would get behind that kind of bold thinking. In the meantime, we’ll have to watch closely as the Obama administration’s executive actions are implemented and its legislative recommendations move through Congress. I hope for the best, but for now I’m not too impressed.

Alex Tabarrok, author of the ebook Launching The Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast discusses America’s declining growth rate in total factor productivity, what this means for the future of innovation, and what can be done to improve the situation.

Accroding to Tabarrok, patents, which were designed to promote the progress of science and the useful arts, have instead become weapons in a war for competitive advantage with innovation as collateral damage. College, once a foundation for innovation, has been oversold. And regulations, passed with the best of intentions, have spread like kudzu and now impede progress to everyone’s detriment. Tabarrok outs forth simple reforms in each of these areas and also explains the role immigration plays in innovation and national productivity.

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Related Links

• Launching The Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast, Tabarrok
• VIDEO: Innovations in Most Fields Are Not Patented, Tabarrok
• VIDEO: End Software Patents, Tabarrok
• Patent Policy on the Back of a Napkin, Tabarrok

The US Patent and Trademark office is starting to recognize that it has a software patent problem and is soliciting suggestions for how to improve software patent quality. A number of parties such as Google and EFF have filed comments.

I am on record against the idea patenting software at all. I think it is too difficult for programmers, as they are writing code, to constantly check to see if they are violating existing software patents, which are not, after all, easy to identify. Furthermore, any complex piece of software is likely to violate hundreds of patents owned by competitors, which makes license negotiation costly and not straightforward.

However, given that the abolition of software patents seems unlikely in the medium term, there are some good suggestions in the Google and EFF briefs. They both note that the software patents granted to date have been overbroad, equivalent to patenting headache medicine in general rather than patenting a particular molecule for use as a headache drug.

This argument highlights one significant problem with patent systems generally, that they depend on extremely high-quality review of patent applications to function effectively. If we’re going to have patents for software, or anything else, we need to take the review process seriously. Consequently, I would favor whatever increase in patent application fees is necessary to ensure that the quality of review is rock solid. Give USPTO the resources it needs to comply with existing patent law, which seems to preclude such overbroad patents. Simply applying patent law consistently would reduce some of the problems with software patents.

Higher fees would also function as a Pigovian tax on patenting, disincentivizing patent protection for minor innovations. This is desirable because the licensing cost of these minor innovations is likely to exceed the social benefits the patents generate, if any.

While it remains preferable to undertake major patent reform, many of the steps proposed by Google and EFF are good marginal policy improvements. I hope the USPTO considers these proposals carefully.

Sean Flaim, an attorney focusing on antitrust, intellectual property, cyberlaw, and privacy, discusses his new paper “Copyright Conspiracy: How the New Copyright Alert System May Violate the Sherman Act,” recently published in the New York University Journal of Intellectual Property and Entertainment Law.

Flaim describes content owners early attempts to enforce copyright through lawsuit as a “public relations nightmare” that humanized piracy and created outrage over large fines imposed on casual downloaders. According to Flaim, the Copyright Alert System is a more nuanced approach by the content industry to crack down on copyright infringement online, which arose in response to a government failure to update copyright law to reflect the nature of modern information exchange.

Flaim explains the six stages of the Copyright Alert System in action, noting his own suspicions about the program’s states intent as a education tool for repeat violators of copyright law online. In addition to antitrust concerns, Flaim worries that appropriate cost-benefit analysis has not been applied to this private regulation system, and, ultimately, that private companies are being granted a government-like power to punish individuals for breaking the law.

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Related Links

• Copyright Conspiracy: How the New Copyright Alert System May Violate the Sherman Act, Flaim
• Op-ed: Imminent “six strikes” Copyright Alert System needs antitrust scrutiny, Flaim
• Let’s give the Copyright Alert System a chance, Brito
• Here’s what an actual “six strikes” copyright alert looks like, Ars Technica

Last week I attended an event on software patents at GW Law School. The event made me uncomfortable because it was—as one would expect at a law school event—dominated by lawyers. The concerns of the legal academics, practitioners, and lobbyists participating in the round table discussion were very different from those one would expect for a policy audience. For example, the participants agreed that there is no elegant way to partition software patents from other patents under current law and that current Supreme Court jurisprudence is unsophisticated, relying on the wrong sections of the U.S. Code.

Missing from the discussion was the single most important fact about patents: that they are negatively correlated with economic growth.

It is pretty easy to eyeball this relationship using data from the USPTO on number of patents granted and from the BLS on real GDP per capita.

Patent grants have exploded in the past two decades or so, and real GDP per capita growth has declined over the same period. Now, patent proponents can argue (rightly) that correlation is not causation—growth could have been  even worse over the past few decades had we not had strong patent protection. But correlation is correlated with causation, so proponents of strong patent laws should have to explicitly make that argument using real evidence.

In addition to U.S. time-series data, we can examine the international cross-sectional evidence. As Petra Moser concludes in her recent JEP article:

Overall, the weight of the existing historical evidence suggests that patent policies, which grant strong intellectual property rights to early generations of inventors, may discourage innovation. On the contrary, policies that encourage the diffusion of ideas and modify patent laws to facilitate entry and encourage competition may be an effective mechanism to encourage innovation.

Taken together, absent some additional evidence from patent proponents, this time-series and cross-sectional evidence suggests we are on the wrong side of the Tabarrok Curve.

If there is any evidence that software patents in particular have a positive effect on innovation or growth, I have yet to see it. Here’s hoping proponents of the current system will take up the challenge and respond with such evidence. But if they do not, then we should abolish software patents even if it means adopting some relatively bizarre legal formulations as the lawyers fear.

While there is evidence that patents encourage investment in industries like pharmaceuticals and materials science, their effect on many other industries is markedly negative. In the computing, software, and Internet space, patents represent a serious barrier to innovation, as companies who need to assemble a huge number of licenses are subject to the holdout problem, and as incumbent or has-been firms use patents as weapons against more innovative upstarts. In some cases, these firms deliberately transfer patents to entities known as “trolls,” who exist solely for the purpose of suing the competition.

In theory, it is possible for firms to contract around these problems on a bilateral basis—as a basic reading of Coase suggests, because patents are inefficient in the tech industry, there exists in principle a bargain in which any two firms could agree to ignore patent law. The problem, of course, is the transaction costs. Transaction costs don’t merely add up in the tech industry; they multiply, because of holdout considerations and all the strategic maneuvering associated with firms competing on multiple margins.

I was thrilled, therefore, to see that Google is taking steps to solve this problem. They are proposing to set up a pool which would cross-license their patents to any other firms willing to reciprocate. All members of the pool would receive licenses to all of the patents in the pool. Unlike other existing patent pools, they seem to be interested in achieving the broadest possible participation, and it is being created purely for defensive purposes, not to receive a competitive advantage over firms excluded from the pool.

The proposal is still in a relatively early stage—they are still seeking feedback about which of four licenses the pool should use, which have different features such as permanence of licenses (“sticky” vs. “non-sticky”) and whether firms would be required to license their entire portfolio. For what it’s worth, I hope they choose the Sticky DPL, which seems like the most aggressive of the licenses in terms of taking weapons off the table.

An excellent feature of the pool, particularly if the participants decide to go with the Sticky DPL, is that it would feature very strong network effects. If several firms license their entire patent portfolios to the pool, then that strongly increases the incentive of other firms to join the pool. There is an intriguing tension here between the stated aim of the pool and the incentives pool members have to force other firms to join—by suing non-pool members who infringe on the pool’s patents, they can increase the membership of the pool. I do not strongly oppose this, but I imagine that there will be some philosophical discussion about whether such actions would be right.

Another wrinkle is that firms might transfer several crucial patents to trolls right before they join the pool (keeping a license for themselves, of course). More generally, they may look for legal ways to reap the benefits of the pool while continuing to use trolls to skirmish with their competitors.

But nevertheless, this is an encouraging development that I hope succeeds. If, as I strongly suspect, we are on the wrong side of the Tabarrok curve, the creation of a large cross-licensing pool could increase further the dynamism of our most dynamic industry.

Brookings has a new report out by Jonathan Rothwell, José Lobo, Deborah Strumsky, and Mark Muro that “examines the importance of patents as a measure of invention to economic growth and explores why some areas are more inventive than others.” (p. 4) Since I doubt that non-molecule patents have a substantial effect on growth, I was curious to examine the paper’s methodology. So I skimmed through the study, which referred me to a technical appendix, which referred me to the authors’ working paper on SSRN.

The authors are basically regressing log output per worker on 10-year-lagged measures of patenting in a fixed effects model using metropolitan areas in the United States.

Continue reading on elidourado.com…

When the smoke cleared and I found myself half caught-up on sleep, the information and sensory overload that was CES 2013 had ended.

There was a kind of split-personality to how I approached the event this year. Monday through Wednesday was spent in conference tracks, most of all the excellent Innovation Policy Summit put together by the Consumer Electronics Association. (Kudos again to Gary Shapiro, Michael Petricone and their team of logistics judo masters.)

The Summit has become an important annual event bringing together legislators, regulators, industry and advocates to help solidify the technology policy agenda for the coming year and, in this case, a new Congress.

I spent Thursday and Friday on the show floor, looking in particular for technologies that satisfy what I coined the The Law of Disruption: social, political, and economic systems change incrementally, but technology changes exponentially.

What I found, as I wrote in a long post-mortem for Forbes, is that such technologies are well-represented at CES, but are mostly found at the edges of the show–literally.

In small booths away from the mega-displays of the TV, automotive, smartphone, and computer vendors, in hospitality suites in nearby hotels, or even in sponsored and spontaneous hackathons going on around town, I found ample evidence of a new breed of innovation and innovators, whose efforts may yield nothing today or even in a year, but which could become sudden, overnight market disrupters.

Increasingly, it’s one or the other, which is saying something all by itself. For one thing, how do incumbents compete with such all or nothing innovations?

That, however, is a subject for another day.

For now, consider again the policy implications of such dramatic transformations. As those of us sitting in room N254 debated the finer points of software patents, IP transition, copyright reform, and the misapplication of antitrust law to fast-changing technology industries (increasingly, that means ALL industries), just a few feet away the real world was changing under our feet.

The policy conference was notably tranquil this year, without such previous hot-button topics as net neutrality, SOPA, or the lack of progress on spectrum reform to generate antagonism among the participants. But as I wrote at the conclusion of last year’s Summit, at CES, the only law that really matters is Moore’s Law. Technology gets faster, smaller, and cheaper, not just predictably but exponentially.

As a result, the contrast between what the regulators talk about and what the innovators do gets more dramatic every year, accentuating the figurative if not the literal distance between the policy Summit and the show floor. I felt as if I had moved between two worlds, one that follows a dainty 19th century wind-up clock and the other that marks time using the Pebble watch, a fully-connected new timepiece funded entirely by Kickstarter.

The lesson for policymakers is sobering, and largely ignored. Humility, caution, and a Hippocratic-like oath of first-do-no-harm are, ironically, the most useful things regulators can do if, as they repeat at shorter intervals, their true goal is to spur innovation, create jobs, and rescue American entrepreneurialism.

The new wisdom is simple, deceptively so. Don’t intervene unless and until it’s clear that there is demonstrable harm to consumers (not competitors), that there’s a remedy for the harm that doesn’t make things, if only unintentionally, worse, and that the next batch of innovations won’t solve the problem more quickly and cheaply.

Or, as they say to new interns in the Emergency Room, “Don’t just do something. Stand there.”

That’s a hard lesson to learn for those of us who think we’re actually surgical policy geniuses, only to find increasingly we’re working with blood-letting and leeches.  And no anesthesia.

In some ways, it’s the opposite of an approach that Adam Thierer calls the Technology Precautionary Principle. Instead of panicking when new technologies raise new (but likely transient) issues, first try to let Moore’s Law sort it out, until and if it becomes crystal clear that it can’t. Instead of a hasty response, opt for a delayed response. Call it the Watchful Waiting Principle.

Not as much fun as fuming, ranting, and regulating at the first sign of chaos, of course, but far more helpful.

That, in any case, is the thread of my dispatches from Vegas:

1. “Telcos Race Toward an all-IP Future,” CNET
2. “At CES, Companies Large and Small Bash Broken Patent System, Forbes
3. “FCC, Stakeholders Align on Communications Policy—For Now,” CNET
4. “The Five Most Disruptive Technologies at CES 2013, Forbes

Gabriella Coleman, the Wolfe Chair in Scientific and Technological Literacy in the Art History and Communication Studies Department at McGill University, discusses her new book, “Coding Freedom: The Ethics and Aesthetics of Hacking,” which has been released under a Creative Commons license.

Coleman, whose background is in anthropology, shares the results of her cultural survey of free and open source software (F/OSS) developers, the majority of whom, she found, shared similar backgrounds and world views. Among these similarities were an early introduction to technology and a passion for civil liberties, specifically free speech.

Coleman explains the ethics behind hackers’ devotion to F/OSS, the social codes that guide its production, and the political struggles through which hackers question the scope and direction of copyright and patent law. She also discusses the tension between the overtly political free software movement and the “politically agnostic” open source movement, as well as what the future of the hacker movement may look like.

Download

Related Links

• Coding Freedom: The Ethics and Aesthetics of Hacking, by Coleman
• Hacker Politics and Publics. Public Culture, by Coleman
• Hackers. The Johns Hopkins Encyclopedia of Digital Textuality. Forthcoming, 2012, by Coleman

The Stop Online Piracy Act (SOPA), a controversial bill before the House of Representatives aimed at combating “rogue websites,” isn’t just about criminal, foreign-based sites that break U.S. intellectual property laws with impunity. Few dispute that these criminal websites that profit from large-scale counterfeiting and copyright infringement are a public policy problem. SOPA’s provisions, however, extend beyond these criminal sites, and would potentially subject otherwise law-abiding Internet intermediaries to serious legal risks.

Before moving forward with rogue websites legislation, it’s crucial that lawmakers take a deep breath and appreciate the challenges at stake in legislating online intermediary liability, lest we endanger the Nozickian “utopia of utopias” that is today’s Internet. The unintended consequences of overbroad, carelessly drafted legislation in this space could be severe, particularly given the Internet’s incredible importance to the global economy, as my colleagues have explained on these pages (1, 2, 3, 4, 5, 6)

To understand why SOPA could be a game-changer for online service providers, it’s important to understand the simmering disagreement surrounding the Digital Millennium Copyright Act (DMCA) of 1998, which grants certain online service providers a safe harbor from liability for their users’ copyright infringing actions. In exchange for these protections, service providers must comply with the DMCA’s notice-and-takedown system, adopt a policy to terminate users who repeatedly infringe, and meet several other conditions. Service providers are only eligible for this safe harbor if they act to expeditiously remove infringing materials upon learning of them. Also ineligible for the safe harbor are online service providers who turn a blind eye to “red flags” of obvious infringement.

The DMCA does not, however, require providers to monitor their platforms for infringing content or design their services to facilitate monitoring. Courts have held that a DMCA-compliant service provider does not lose its safe harbor protection if it fails to act upon generalized knowledge that its service is used for many infringing activities, in addition to lawful ones, so long as the service provider does not induce or encourage users’ infringing activities.

Defenders of the DMCA safe harbor argue that it’s helped enable America’s Internet-based economy to flourish, allowing an array of web businesses built around lawful user-generated content — including YouTube, Facebook, and Twitter — to thrive without fear of copyright liability or burdensome monitoring mandates.

Conversely, some commentators, including UCLA’s Doug Lichtman, argue that the DMCA inefficiently tips the scales in favor of service providers, to the detriment of content creators — and, ultimately, consumer welfare. Pointing to a series of court rulings interpreting the safe harbor’s provisions, critics argue that the DMCA gives online intermediaries little incentive to do anything beyond the bare minimum to stop copyright infringement. Critics further allege that the safe harbor has been construed so broadly that it shields service providers that are deliberately indifferent to their users’ infringing activities, however rampant they may be.

What does SOPA have to do with all of this? Buried in the bill’s 78 pages are several provisions that run a very real risk of effectively sidestepping many of the protections conferred on online service providers by the DMCA safe harbor.

Section 102

Section 102 of SOPA empowers the Attorney General to seek a court order against an allegedly infringing foreign website. Such a court order would, if granted, effectively deny the site access to payment processors, ad networks, and even parts of the domain name system. Under § 102, a foreign, U.S.-directed website is deemed a “foreign infringing site” if:

[T]he owner or operator of such Internet site is committing or facilitating the commission of criminal violations [involving illegal copyright infringement, counterfeiting, or theft of trade secrets] and the Internet site would . . . [therefore] be subject to seizure in the United States . . . if such site were a domestic Internet site.

The part about websites “subject to seizure in the United States” refers to 18 U.S.C. § 2323, which states among other things that “[p]roperty subject to forfeiture” includes:

Any property used, or intended to be used, in any manner or part to commit or facilitate the commission of [criminal copyright or trademark infringement].

This definition of a “foreign infringing site” is enormously troubling. Note the absence of any requirement of actual or constructive knowledge on the part of the site operator, let alone criminal intent. Under § 102, a foreign website built around user-generated content may be deemed an “infringing site” simply because its server has facilitated the criminally infringing acts of a single user — even if the site operator neither induced nor knew of the user’s unlawful activities. While an innocent foreign site operator might eventually be able to persuade a court to vacate an order deeming it a “foreign infringing site,” SOPA imposes an astonishingly low burden on the Attorney General of showing that a site is a “foreign infringing site.” If the bill is enacted as is, foreign websites that contain any user-generated content had better watch out.

SOPA proponents defend § 102 by pointing out that its definition of infringing sites comes straight out of the 2008 PRO-IP Act, which established the aforementioned civil forfeiture provision in 18 U.S.C. § 2323. But this statute’s constitutionality is currently being challenged in federal court by a team of attorneys that includes Stanford law professor and copyright guru Mark Lemley. The law’s breadth raises serious First Amendment concerns since it permits ex parte seizures of entire outlets of speech (e.g., websites) simply because the outlet has been used in some unlawful manner. SOPA may be based on existing law, but why should Congress extend this overbroad provision of the PRO-IP Act to encompass an even broader range of websites? If anything, lawmakers should revisit PRO-IP and narrow its applicability to sites intentionally operated for the purpose of committing or facilitating criminal infringement. Via Techdirt, even Floyd Abrams, a constitutional scholar who represents content companies that strongly back SOPA, conceded in a recent letter to Congress that unanswered questions remain regarding the constitutionality of 18 U.S.C. § 2323.

Section 103

The next section of SOPA, Section 103, isn’t any better. This section provides for private rights holders to seek court orders against U.S.-directed websites — including domestic sites — to deny them access to U.S. payment processors and ad networks. Section 103 deems a website “dedicated to theft of U.S. property” if any of the following conditions are met:

1. [The site] is primarily designed or operated for the purpose of, has only limited purpose or use other than, or is marketed by its operator or another acting in concert with that operator for use in, offering goods or services in a manner that engages in, enables, or facilitates [copyright infringement, circumvention of copyright protection systems, or trademark infringement]; or
2. [The site operator] is taking, or has taken, deliberate actions to avoid confirming a high probability of the use of the . . . site to carry out acts that constitute [copyright infringement or the circumvention of copyright protection systems]; or
3. [The site operator] operates the . . . site with the object of promoting, or has promoted, its use to carry out acts that constitute [copyright infringement or the circumvention of copyright protection systems], as shown by clear expression or other affirmative steps taken to foster infringement.

The first prong of this definition encompasses any website that “has only limited purpose or use other than . . . engag[ing] in, enabl[ing], or facilitat[ing]” copyright infringement, circumvention of copyright protection systems, or trademark infringement. This language comes from 17 U.S.C. § 1201, also known as the DMCA anti-circumvention provisions. Just how “limited” of non-infringing uses must a site have to meet this definition? It’s hard to say. As Rob Pegoraro cheekily observed in a recent Roll Call op-ed, “‘[l]imited’ is one of those wonderfully elastic words — notice the ever-longer yet still ‘limited’ copyright terms granted to artists and creators?” This section of SOPA would be more clear if it relied on the “capable of substantial non-infringing uses” test originally articulated by the U.S. Supreme Court in its famous 1984 Betamax opinion, Sony Corp. v. Universal City Studios, Inc., which has since been interpreted by numerous federal courts in copyright infringement cases.

The second prong of the § 103 definition, which covers websites that take “deliberate actions to avoid confirming a [high probability of infringement],” is perhaps the most worrisome of the three prongs. This language appears to have been lifted directly from a 2011 U.S. Supreme Court decision,  Global-Tech Appliances, Inc. v. SEB S.A. In that case, a patent infringement lawsuit, the Court found the defendant liable for inducement on the grounds that it took willful steps to blind itself of the existence of the patent at suit. The Court held that “willful blindness” exists when (1) a defendant subjectively believes that there is a high probability that a fact exists; and (2) the defendant takes deliberate actions to avoid learning of that fact.

Note, however, that Section 103 omits the first prong of the Global Tech willful blindness test, the subjective belief element. This omission might simply be an oversight — or it could reveal the intent of the bill’s authors to cast aside the subjective knowledge standard (which currently applies to service providers in the context of knowledge for purposes of the DMCA) and replace it with an objective, “reasonable person” standard. If plaintiff bringing a SOPA action is only required to show that a website operator should have known of its users’ infringement from the perspective of a “reasonable” operator, and that the site’s operator acted in some manner that had the effect of contributing to its ignorance of infringing activities by users, a vast array of websites that currently enjoy the protections of the DMCA safe harbor may face significant new legal risks. After all, website operators make design decisions all the time that might foreseeably impact on their awareness (or lack thereof) of user’ potentially infringing activities. Who knows what sort of well-intentioned, albeit deliberate, decisions might amount to”avoiding confirming a high probability” of infringement?

As David Sohn of the Center for Democracy & Technology has pointed out, “[t]his seems like a backdoor way of imposing a monitoring obligation on any website that allows users to post content.”  Temple Law Professor David Post, writing at the Volokh Conspiracy, observed that the bill might make it a “violation of law to keep the prosecutors from ‘confirming’ that you’re violating the law — all the prosecutor has to show, to make you vanish from the Net, is that you’ve somehow tried to keep the prosecutor off of your website!”

Why SOPA Could Endanger the DMCA Safe Harbor

SOPA proponents have dismissed concerns that the bill would risk undermining the DMCA safe harbor. U.S. Register of Copyrights Maria Pallante, testifying in a House Judiciary Committee hearing on SOPA on November 16, told members of Congress that it was extremely unlikely that any actions brought under SOPA would impact websites otherwise shielded by the DMCA safe harbor. Techdirt reports that Viacom executive Stanley Pierre-Louis recently argued that SOPA would not “[expand] the scope of secondary liability claims and [diminish] DMCA protections,” noting that “[t]here is no rule that permits ‘willful blindness’ of obvious wrongdoing under U.S. law, and nothing in the DMCA or any other statute has been deemed to hold otherwise.”

Technically, Pallante and Pierre-Louis are correct; SOPA’s provision at 102(c)(2)(A)(iii) appears to leave existing doctrines of copyright liability vis-à-vis the DMCA safe harbor untouched.

In practice, however, SOPA has the potential to effectively usurp the DMCA safe harbor in important respects. If the bill is enacted, online service providers would face a new worst nightmare: being cut off from payment processors, ad networks, and possibly even Internet service providers. As Eric Goldman recently explained, if a “website goes offline because of cash flow problems caused by the cutoff attributable to a single UGC content item, all of the UGC on that website goes dark because of a single content item.”

To avoid such an outcome, website operators will likely do everything they can to avoid falling under SOPA’s definitions — even if that means going above and beyond the requirements of the DMCA safe harbor. While I’m all for websites voluntarily taking prudent and measured actions to combat unlawful user activities (e.g., YouTube’s Content ID system), there are good reasons to be very skeptical of any legislation that effectively imposes on site operators any duty or obligation to monitor, or facilitate the monitoring of, user activities.

Fair concerns have been raised by thoughtful commentators about the DMCA’s limitations and shortcomings. Those concerns deserve a serious examination in the halls of Congress, and perhaps may even merit some careful, targeted tweaks to the DMCA. But the extraordinary remedies provided contained in SOPA should be reserved for genuine rogue sites that willfully flout U.S. laws with impunity and are beyond the reach of U.S. law enforcement authorities. While there are U.S.-based websites out there that violate copyright and trademark laws, extraordinary remedies (such as “going after the money”) should not be the primary method of penalizing such sites. If a rights holder believes that a domestic website is infringing on its copyright or trademark, the proper means of obtaining recourse is to file a civil lawsuit and, when appropriate, seek injunctive relief. The U.S. Marshals Service is tasked with enforcing civil judgments and other court orders entered against domestic actors by federal courts, and parties may obtain writs of execution to order law enforcement intervention against American individuals or businesses that violate court orders.

We Have To Pass The Bill To Find Out What’s In It

Reasonable people read SOPA’s provisions in very different ways. For instance, Terry Hart, writing at Copyhype, has eloquently defended SOPA’s definitions, arguing that “[t]he actions that would subject a provider to SOPA’s provisions are the same ones that would subject it to a copyright infringement suit under existing law and are actions that would not be protected under DMCA safe harbors.” But while SOPA’s definitions are based largely on well-established, time-tested statutes and precedents, some of the language isn’t as clear-cut as it might seem at first glance, as I explain above.

As a result, it’s tough to predict how SOPA would actually impact online service providers. Federal judges vary widely in the methods they employ in attempting to interpret vague statutes. There is no such thing as stare decisis when it comes to statutory construction; some judges focus on the plain meaning of a statute’s language, while others pour through committee reports and hearing transcripts in hopes of divining the legislature’s true underlying intent.

With apologies to Nancy Pelosi, what this means is that we probably won’t know what’s in SOPA until it’s passed. Even then, only after years of costly litigation will the contours of the bill’s provisions likely begin to approach a state of clarity. Consider that the DMCA, now thirteen years old, continues to engender serious disagreement among federal courts to this day. (For instance, courts disagree on what it means for a service provider to take “volitional acts” that encourage users to engage in infringement.)

SOPA’s potential breadth is especially problematic given that its potential victims are small, entrepreneurial Internet start-ups that lack the resources to pay a team of lawyers to examine their operational decisions for potential SOPA violations. As leading high-tech venture capitalist Fred Wilson has argued, “venture capitalists will think more than twice about putting $3mm of early stage capital into startups if they know that the vast majority of the funds will go to pay lawyers to defend the companies instead of to hire engineers to create and build product.”

Lawmakers Should Tread Carefully

While combating rogue foreign websites that violate U.S. laws flagrantly and with impunity should be a priority for lawmakers, SOPA’s definitions and remedies are simply too broad and too vague in their current form. They would cast a cloud of legal uncertainty over America’s innovative, startup-driven Internet economy. It would be a grave mistake to grant such powerful new tools to Justice Department and rights holders and assume that federal trial judges will interpret SOPA’s provisions as narrowly as is necessary to ensure legitimate Internet companies do not suffer adverse effects.

The recent House Judiciary Committee hearing on SOPA made clear just how much work remains to be done to craft an effective but targeted approach to rogue sites. Serious questions remain unresolved — not only about SOPA’s impact of the DMCA safe harbor, but also about cybersecurity, due process and free speech. Additional hearings are needed to explore these important issues with Internet engineers, law professors, and venture capitalists. Marking up the legislation before the end of 2011 — as Chairman Lamar Smith desires, according to the National Journal — would be a serious mistake.

For more on SOPA and rogue websites legislation; see: 

• Ryan Radia, Preliminary Thoughts  on Stop Online Piracy Act (SOPA)
• Ryan Radia, Congress Should Amend SOPA to Address Cybersecurity, Due Process Concerns
• Ryan Radia, Congress takes another stab at combating Rogue Websites with the PROTECT IP Act
• Ryan Radia, Five Ways Congress Can Fix COICA Copyright Bill
• Joint Letter from Public Interest Groups to the House Judiciary Committee on the Stop Online Piracy Act
• Timothy B. Lee, ArsTechnica, The Stop Online Piracy Act: Big Content’s full-on assault against the Safe Harbor
• Letter from Sens. Ron Wyden, Rand Paul, Jerry Moran, and Maria Cantwell to Congressional Leadership objecting to the PROTECT IP Act
• U.S. Rep. Zoe Lofgren’s Opening Letter on SOPA
• Prof. Eric Goldman, Why I Oppose the Stop Online Piracy Act (SOPA)/E-PARASITES Act
• Prof. David Post, How About Occupy Hollywood?
• Fred Wilson, Protecting The Safe Harbors Of The DMCA And Protecting Jobs
• Terry Hart, SOPA: New remedies for existing liability
• Rob Pegoraro, Online Piracy Act is Copyright Overreach
• Center for Democracy & Technology, The Stop Online Piracy Act: Summary, Problems and Implications
• Sherwin Siy, Public Knowledge, House Version of Rogue Websites Bill Adds DMCA Bypass, Penalties for DNS Workarounds
• Techdirt’s SOPA coverage
• Parker Higgins, Electronic Frontier Foundation, What’s On the Blacklist? Three Sites That SOPA Could Put at Risk
• Corynne McSherry, Electronic Frontier Foundation, SOPA: Hollywood Finally Gets A Chance to Break the Internet
• Larry Downes, TechFreedom, SOPA: Hollywood’s latest effort to turn back time

Copyrights and patents differ from tangible property in fundamental ways. Economically speaking, copyrights and patents are not rivalrous in consumption; whereas all the world can sing the same beautiful song, for instance, only one person can swallow a cool gulp of iced tea. Legally speaking, copyrights and patents exist only thanks to the express terms of the U.S. Constitution and various statutory enactments. In contrast, we enjoy tangible property thanks to common law, customary practices, and nature itself. Even birds recognize property rights in nests. They do not, however, copyright their songs.

Those represent but some of the reasons I have argued that we should call copyright an intellectual privilege, reserving property for things that deserve the label. Another, related reason: Calling copyright property risks eroding that valuable service mark.

Property as a service mark, like FedEx or Hooters? Yes. Thanks to long use, property has come to represent a distinct set of legal relations, including hard and fast rules relating to exclusion, use, alienation, and so forth. Copyright embodies those characteristics imperfectly, if at all. To call it intellectual property risks confusing consumers of legal services—citizens, attorneys, academics, judges, and lawmakers—about the nature of copyright. Worse yet, it confuses them about the nature of property. The property service mark suffers not merely dilution from copyright’s infringing use, but tarnishment, too.

As proof of how copyright threatens to erode property, consider Ben Depooter, Fair Trespass, 111 Col. L. Rev. 1090 (2011). From the abstract:

Trespass law is commonly presented as a relatively straightforward doctrine that protects landowners against intrusions by opportunistic trespassers. . . . This Essay . . . develops a new doctrinal framework for determining the limits of a property owner’s right to exclude. Adopting the doctrine of fair use from copyright law, the Essay introduces the concept of “fair trespass” to property law doctrine. When deciding trespass disputes, courts should evaluate the following factors: (1) the nature and character of the trespass; (2) the nature of the protected property; (3) the amount and substantiality of the trespass; and (4) the impact of the trespass on the owner’s property interest. . . . [T]his novel doctrine more carefully weighs the interests of society in access against the interests of property owners in exclusion.

Although I do not agree with every aspect of Prof. Depooter’s doctrinal analysis, he correctly observes that trespass law includes some fuzzy bits. Nor do I complain about his overall form of argument. It is not a tack I would take, but it was near-inevitable that some legal scholar would eventually argue back from copyright to claim that real property, too, should fall prey to a multi-factor, fact-intensive “fair use” defense. I merely take this opportunity to remind fellow friends of liberty that they can expect more of the same—and more erosion of the property service mark—if they fail to recognize copyrights and patents as no more than intellectual privileges.

[Crossposted at Agoraphilia, Technology Liberation Front, and Intellectual Privilege.]

I’ve written two articles on the Protect IP Act of 2011, introduced last week by Sen. Leahy (D-Vt.).

For CNET, I look at some of the key differences, better and worse, between Protect IP and its predecessor last year, known as COICA.

On Forbes this morning, I have a long meditation on what Protect IP says about the current state of the Internet content wars.  Copyright, patent, and trademark are under siege from digital technology, and for now at least are clearly losing the arms race.

The new bill isn’t exactly the nuclear option in the fight between the media industries and everyone else, but it does signal increased desperation.

I’m not exactly a non-combatant here.  Increasingly, everyone is being dragged into this fight, including search engines, ISPs, advertisers, financial transaction processors, and, in Protect IP is passed, anyone who uses a hyperlink.

But as someone who earns his living from information exchanges–what the law anachronistically calls “intellectual property”–I’m not exactly an anarchist either (or as one recent commenter on CNET called me, a complete anarchist!).

The development of an information economy will stabilize and mature at some point, and, I believe, the new supply chain will be richer, more profitable, and give a greater share of the value than the current one does to those who actually create new content.  (Most of the cost of information products and services today is eaten up by middlemen, media, and distribution.)

But it’s not an especially smooth or predictable trajectory.  Joseph Schumpeter didn’t call it creative destruction for nothing.

The English language is public domain (the language itself, not everything said with it). So it’s worthless, right? No dollars change hands when people use it. Perhaps it could be made worth something if someone were to own it. The owner could charge a license fee to people who use English, making substantial revenue on this suddenly valuable language.

Congress can take works in the public domain and make intellectual property of them according to the Tenth Circuit Court of Appeals in a case that approved Congress “restoring” public domain works to copyrighted status. (The case is Golan v. Holder, and the Supreme Court has granted certiorari.)

But would we really be better off if the English language were given a dollar value through the mechanism of ownership and licensing? No. What is now a costless positive-externality machine would turn into a profit-center for one lucky owner. The society would not be better off, just that owner. If we had to pay for a language, we would regard that as a cost.

In a similar vein, Mike Masnick at TechDirt indulges the somewhat tongue-in-cheek observation that Microsoft costs the world economy $500 billion by accumulating to itself that would have gone to other things. It’s a sort of Broken Window fallacy for intellectual property: the idea that creating ownership of intellectual goods creates value. What is not seen when intellectual property is withheld from the public domain is the unpaid uses that might have been made of it.

Now, Microsoft has reaped wonderful benefits from its intellectual creations because it has bestowed wonderful benefits on societies across the globe. But might it have provided all these benefits for slightly less reward, leaving more money with consumers for their preferred uses?

This is all a way of challenging the mental habit of assuming that dollars are equal to value. In the area of intellectual property (whether or not protected by federal statutes), things that have no effect on the economy (because they’re in the public domain) may have huge value. Things privately owned because of intellectual property law may have less value than they should, even though their owners collect lots of money.

“On the whole, the results certainly seem to suggest that patent trolls with software patents do very much view the system as a lottery ticket, and they’re willing to use really weak patents to try to win that prize. That is not at all what the patent system is designed to do, but it’s how the incentives have been structured — and that seems like a pretty big problem that isn’t solved just by showing how many of these lawsuits fail. The amount of time and resources wasted on those lawsuits, as well as the number of companies who pay up without completing a lawsuit, suggest that there is still a major problem to be dealt with.”

So writes the always-thoughtful Mike Masnick at Techdirt.  He is referring here to a newly-published article by John R. Allison, Joshua Walker and Mark Lemley, released as a Stanford Law and Economics Olin Working Paper.  Mike has written frequently about patent trolls—companies that buy up patents from inventors and then make money by litigating or threatening to litigate against potential infringers—and never with much sympathy.

The Stanford Study

I have a less extreme view of patent trolls, about which more in a moment.  First, a few words about the study.

The Allison/Walker/Lemley paper, working with a couple of different databases of patents and litigation involving them, did a number of interesting regressions that revealed some counter-intuitive findings about the current state of patent lawsuits.

The study found that patents litigated most frequently—that is, whose holders bring lawsuits against multiple alleged infringers—are often the least likely to stand up in court.  “Once-litigated patents win in court almost 50% of the time,” the authors found, “while the most-litigated – and putatively most valuable – patents win in court only 10.7% of the time.”

Which is to say that when a patent lawsuit actually goes to trial (few do), the most frequently-asserted patents were nearly always found to be invalid in the first place.  Such patents should never have been granted by the Patent Office, either because they are obvious, non-novel, or otherwise fail to meet the criteria for a patent.  (Invalidity of the patent is a complete defense to a claim of infringement.)

The worst offenders in the study are software patents (see “Bilski:  Justice Stevens’ Last Tilt at the IP Windmills”), which accounted for almost 94% of the most often asserted patents in the study and yet were upheld as valid less than 10% of the time they actually went to trial.

Yet in most cases these patents are asserted against multiple defendants, most of whom pay settlements to avoid the time, expense, and uncertainty of a trial.  That decision, the study suggests, is a mistake.  Defendants who take these cases all the way through trial usually win; that is, they pay nothing.

Well not exactly nothing.  Even a successful litigant must pay the costs of defending her case, and that cost can run into the millions.   (In some situations, the loser must pay the winner’s costs, but under the Patent Act, fee shifting only occurs in “exceptional” cases.)

As the authors note, “It appears that as a society, we are spending a disproportionate amount of time and money litigating a class of weak patents. Our results may also have implications for our models of patent value and of rational behavior in litigation, since it appears we know quite a bit less than we thought about what makes patents valuable.”

Toward a Modest Defense of Trolling

Masnick and others take this study as further evidence—if any was needed—that patent trolls are a drain on society offering absolutely nothing but headaches, interference with innovation, and enormous wastes of money, both from litigants and the taxpayers, who underwrite the court system.  Patent trolls or “Non-Practicing Entities” (NPEs) as the authors call them, win only 9.2% of their lawsuits that go to trial.  (Only about 10%, however, go to trial, and the terms of settlements are kept confidential by both sides.)  Clearly their patents, especially the ones they assert the most frequently, are junk.

(Why would the most frequently-asserted patents be the most likely to fail a validity challenge at trial?  The broader the patent, the easier to assert it against a wide range of potential infringers, and the more likely they will be, given the breadth, to settle.  But at trial the value of a broad claim shifts—what looks scary to a defendant for the same reasons looks most dubious to the trier-of-fact.  Claims that are too broad are rejected, precisely because they represent the grant of a monopoly over too much otherwise productive economic activity.)

As I wrote in “The Laws of Disruption,” I don’t have much sympathy for patent trolls, but I don’t go quite as far as their harshest critics.  Put another way, I’m not sure I share Masnick’s conclusion that the findings of the study lead to the conclusion that “there is a still a major problem to be dealt with,” or in any case that it ought to be dealt with by reforming trolls out of the system altogether.

(For a spirited defense of trolls, see this multi-part posting.  Unfortunately the author never gives his name!)

Why the hesitation?  Even if every patent troll is a low-life individual or entity, and even if nearly all of the patents they assert are ones the patent office should never have granted in the first place, there’s still a positive benefit to society from the existence of patent trolls.

To understand why, consider how a troll becomes a troll.

Patents are granted to inventors, and the intent in giving them a 20-year monopoly on the use of their invention is to provide a market biased in their favor.  They can either commercialize the invention themselves without fear of competition, or sell or license the invention to others to do the same.

Keeping competitors away, albeit for a limited time, gives the inventor the chance to recover their up-front investment in making the invention.  In some cases, inventors toil at their own expense for years before coming up with anything new (if ever), and even then the potential market for their invention may be small or non-existent.

Granting a patent goes against the otherwise free market orientation of capitalist economies, but is thought to be a necessary evil.  If inventors don’t believe they’ll have protected markets, they may not undertake the risk and cost of inventing.  And if they don’t, important inventions may be delayed or lost.  If that happens, everyone loses.  That, in any case, is the theory behind patents.

But a patent troll, by definition, has done no inventing and has no intention of commercializing the inventions they buy.  They simply sue or threaten to sue companies they believe are using the invention (intentionally or, more likely, unintentionally), extracting tribute in the form of forced licenses or other damages.

So what positive role do they play in the system?

Consider how a troll gets a patent in the first place.  In the simplest case, an inventor finds they cannot afford to commercialize their invention, or doesn’t have the risk or managerial profile necessary to try.  Perhaps they try to sell the invention to a company in the industry who can make use of it, or offer to license the invention to several such companies.  The inventor may be rebuffed or ignored or offered a price too low to keep her in the business of inventing.  Maybe the invention isn’t worth the investment already made, or maybe the company fails to evaluate its potential accurately or even at all.

Or maybe the company, knowing that the inventor lacks the resources not only to commercialize but also to protect her invention, takes the chance of ignoring the patent and continues to operate as before, even if that means infringing the patent.

Well, why not?  The inventor’s claim may be no good, or may not cover the company’s behavior.  But even if there is infringement, the road to proving it is long, expensive, and requires a skill set in litigation, negotiation and the substantive law of patents the inventor almost surely doesn’t have and, perhaps, can’t afford to engage.

So as a last resort, the inventor sells the patent to an NPE.  The NPE may buy up many patents, perhaps for related inventions, in the hopes that the combined pool includes at least some that are both valid and cover some unlicensed behavior in industry—or at least that a threat that they do will be credible.  They assert these patents against whatever defendants will most likely be induced to settle, balancing the potential settlements against the probability of incurring the costs of litigation, perhaps all the way to a trial.

As the Stanford paper suggests, in the vast majority of cases the authors studied the asserted patents were in fact junk, at least as determined at trial (judge and jury may have their own biases, of course).  The inventors shouldn’t have gotten anything for them, either from the defendants or from the patent troll, because the patent never should have been granted in the first place.  Again, the trolls may know better than the study suggests the real value of their holdings, and may be betting that the transaction costs of litigation will encourage defendants to settle anyway.

That bet is a game of chicken, for if the defendant chooses to litigate then both sides must absorb heavy litigation costs no matter who wins—the troll bets that the defendant will simply pay them to go away.

Patent trolls may make most of their money, in other words, from arbitraging the inefficiencies and failings of the current patent system.

But even if this is so, there is still value to the system and to society from the existence (if not the individual behaviors) of patent trolls.  For without them, potential defendants have no incentive to deal with inventors who want to sell or license their inventions, even valid ones.  Absent patent trolls, the companies would conclude the inventor can’t litigate regardless of the validity of the claim, a reality the inventor always would know.

Without the existence of patent trolls as a buyer of last resort, there’s no credible threat the inventor can make, and a rational defendant will simply carry on knowing the patent can’t be successfully enforced.  Knowing this set of facts, inventors at the margins may not undertake their research in the first place.

So even if every non-practicing entity is a troll, and even if every troll-asserted patent is garbage, the role in the system played by the existence of trolls is an important one.

Whether it justifies its cost today is another matter, one tied hopelessly to the other weaknesses and dysfunctions of the overall patent system.  Speaking generally, the authors conclude that “it is important to recognize that software patents and patents asserted by NPEs are both taking disproportionate resources in patent litigation, and that the social benefit from those cases appears to be slight.”  But they stop well short of calling for reforms that would eliminate the incentives that keep NPEs in the game.

That caution, for now, seems sensible.

On the podcast this week, Timothy B. Lee, PhD candidate in computer science at Princeton University and fellow at Princeton’s Center for Information Technology Policy, discusses a variety of issues.  Lee parses new net neutrality nuances, addressing recent debate over prioritization of internet services.  He also discusses wireless spectrum policy, comparing and contrasting a strict property rights model to a commons one.  Lee concludes by weighing in on potential software patent reform, referencing Paul Allen’s wide-ranging patent-infringement lawsuits and the Oracle-Google tiff over Java patents.

Related Readings

• Bottom-Up, Lee’s long-form blog about, among other things, technology policy
• The Durable Internet: Preserving Network Neutrality without Regulation, by Lee
• “Why Business Should Oppose Net Neutrality”, by Robert Litan and Hal Singer
• “Good Spectrum News from the Obama Administration”, by Jerry Ellig
• “Paul Allen’s Lawsuits: What’s up With That?”, at PC World

Do check out <a href=the”>http://surprisinglyfree.com/2010/09/06/tim-lee-on-net-neutrality-spectrum-policy-and-software-patents/”>the interview, and consider subscribing to the show on iTunes. Past guests have included Clay Shirky on cognitive surplus, Nick Carr on what the internet is doing to our brains, Gina Trapani and Anil Dash on crowdsourcing, James Grimmelman on online harassment and the Google Books case, Michael Geist on ACTA, Tom Hazlett on spectrum reform, and Tyler Cowen on just about everything.

So what are you waiting for? Subscribe!

I don’t have a great deal to add to coverage of last week’s big patent story, which concerned the filing of a complaint by Microsoft co-founder Paul Allen against major technology companies including Apple, Google, Facebook and Yahoo. Diane Searcey of The Wall Street Journal , Tom Krazit at CNET News.com, and Mike Masnick on Techdirt pretty much lay out as much as is known so far.

But given the notoriety of the case and the scope of its claims (the Journal, or at least its headline writer, has declared an all-out “patent war”), it seems like a good opportunity to dispel some common myths about the patent system and its discontents.

And then I want to offer one completely unfounded theory about what is really going on that no one yet has suggested. Which is: Paul Allen is out to become the greatest champion that patent reform will ever know.

The Interval Patents

First, a few facts. In the mid 1990’s, Allen co-founded Interval Research, an effort to replicate Xerox’s Palo Alto Research Center (PARC) without the company politics that made it impossible for any of the brilliant inventions developed there to achieve commercial success—at least not by Xerox, in any case. (The other co-founder, David Liddle, was a former PARC scientist.)

Paul Allen intended Interval to do research the “right” way, and was quoted shortly before Interval was closed down as saying his goal was to produce world class research and development (R&D), with an emphasis on “less R and more D.” The company was founded in 1992, and shut down in 2000.

Interval, it turned out, produced a good deal of R and very little D. And now the R is generating an alternative and increasingly popular kind of D, taking the form of new patent litigation. Here, the litigation involves some pretty basic aspects of digital life.

One of the patents at issue, for example, is U.S. Pat. No. 6,263,507, which describes the claimed invention as a “Browser for use in Navigating a Body of Information.” Originally filed in 1996, the application was granted in 2001.

As the title suggests, the claimed invention is broadly defined, and the details implicate many aspects of core technologies of search, browsing, graphical user interface—pretty much everything. Below is a diagram showing a news browser from the application, which speaks for itself.

The Patent System, De Jure and De Facto

As I’ve been at pains to point out in prior posts on patents, the system in its current state of dysfunction encourages broad—perhaps ridiculously broad—applications. Worse, the lack of relevant expertise and the pressures of productivity on patent examiners results in many bad patents (perhaps many many) being granted.

The result has been the creation of a shadow patent examination process through litigation. The grant of a patent is no longer the final step, in other words. The de facto examination really takes place when the holder tries to enforce the patent against an alleged infringer, and the defendant claims invalidity of the patent as a defense. When such cases go to trial, which they rarely do, a jury of laymen are then tasked with doing the work avoided by the patent examiner.

In effect, the patent office has outsourced its job to the judiciary and in particular to a jury of non-experts. If nothing else, that is a feature of the modern system that absolutely no one is happy with, or in any event that no one can justify.

It also needs to be emphasized that patent infringement (as opposed to copyright infringement), need not and indeed rarely does include any suggestion of “theft” or other hint of immoral conduct. Most patent infringers do not copy the work of another inventor—they create their own innovation independently, often completely unaware of the existence of the relevant patents or pending applications. The broader the patents that are granted, of course, the more likely coincidental or seemingly “innocent” infringements are to occur. From a legal standpoint, however, ignorance of existing patents is no defense.

In that important respect, the difference between patent and copyright is significant. A copyright is a monopoly only on the particular expression of an idea. Margaret Mitchell gets a copyright for the uniquely creative elements of “Gone with the Wind,” not for the general idea of telling the story of 19^th century Southern life through the device of a particular woman and her plantation.

And if by some miracle a second author wrote a nearly identical work (the theoretical room full of monkeys and typewriters, e.g.) and could prove no awareness with Mitchell’s novel, there would be no infringement.

A patent, on the other hand, is a monopoly on an idea, and is protected regardless of how someone else arrives at the same idea.

That difference explains why the requirements for a patent are so much more burdensome than for copyright, and why a patent lasts a relatively short amount of time (unlike copyright, Congress has generally resisted industry calls for greater and longer protection). Because a patent protects an idea however arrived at, its potential constraint on future invention is great. So there are important limits baked into system to keep all but the most novel inventions out of its protection.

First, patents last only 20 years from the date of filing (copyright today lasts roughly 100 years). So in this case Patent No. 6,263,507 will expire in 2016 (though later-claimed enhancements will last longer). After 2016, anyone can forever after duplicate the invention without paying any royalty to Interval.

Indeed one of the requirements of receiving a patent is that the claimant must provide sufficient detail in the application to provide a usable specification for the public to make free use of once the patent expires. So not only does the idea become part of the public domain, the inventor must a priori assist the public in making full use of it.

Other important limits require that valid patents only apply for inventions that are truly novel and not mere enhancements to existing inventions already in the public domain. The invention must be “non-obvious,” and must be clearly distinguished from earlier inventions (“prior art”).

What are Patents Good For, and For Whom?

Unfortunately, as noted above, the application of these and other limits are increasingly being left to the byzantine maneuverings of strategic litigation, negotiations, patent pools, defensive patents, patent trolls and, in extreme cases, judge and jury.

That was surely not the intent of the creators of the system. But given how wasteful and dangerous patents now seem, it’s worth remembering why we have them in the first place. In principle, the goal of the patent system is to encourage investment in new innovations that will contribute (perhaps greatly) to the overall social and economic good of a nation.

How does society benefit from giving a monopoly to an individual inventor? The answer has to do with perceived if not real incentives. Inventors, individually or in large corporations, may toil for years without generating any revenue from their efforts—it could be all R and no D, in other words, and the D may only come if at all at the end of a long and circuitous route.

Once—if–a marketable product or service results from all that research, however, inventors may find themselves unable to recover their investment. A potential competitor need not repeat the research, but may simply buy the resulting product, reverse engineer it, and start producing its own equivalent offering, perhaps immediately.

Having made no investment, the new competitors have no research investment to recover, and so can offer identical products at a much lower price. The inventor must pro rate the cost of research into the price of the product or service; the competitor does not. Without patent, the inventor could be quickly forced out of the market she invented.

Beyond questions of “fairness” in such a result, the nation as a whole would lose out, even though for the particular product or service we would get a cheaper price, or get a cheaper price sooner. Because, in the long term, without some reasonable time period to recover research costs without fear of undercutting competitors, only the most idealistic inventors would continue to invent.

Fewer inventions mean slower progress for civilization overall. Governments might have to fund research directly, with no hope of having the expertise to evaluate good from bad proposals.

Hence, the powerful but limited monopoly protection of patents—a necessary evil, or so it has been understood.

Nitpicking the Definition of “Patent Troll”

That, at least, is the theory. But the practice has mutated into something very different. The generosity of the Patent Office and the high cost of litigation have created new opportunities in the last quarter-century or so to game the system.

The most obnoxious variation is companies who do no research or development of any kind, but who simply buy up large blocks of patents from desperate or bankrupt patent holders. They then threaten to assert these patents against companies actually producing products, hoping not to stop their efforts but to extract a royalty from then in the form of a license for a potentially infringed patent.

These companies are referred to as patent trolls, perhaps in reference to an old Norwegian folk tale of the “Three Billy Goats Gruff.” In the story, three goats must outsmart a troll who lives under a bridge they must cross to find food. The troll lies in wait and eats all who try to use the bridge. So the image of the “patent” troll suggests an entity that tries to extract a toll for the use of something they didn’t build but have simply staked a claim to on the basis of superior strength and fortunate location.

So I take some issue with Mike Masnick and Mark Lemley’s characterizations of Paul Allen as a newly-revealed patent troll. It is true that Interval never developed any products from its patented inventions and, one presumes, won’t in the future.

But unlike a “classic” patent troll (to quote Mark Lemley), Allen did invest substantial amounts of money in research–the kind of research the patent system is intended to protect and, if necessary, make enforceable through litigation.

That is not to say that I approve of the lawsuit, or even that I understand why Allen has brought it. I’ve made only a cursory review of the claimed inventions, and while certainly broad and seemingly the subject of earlier invention, I can’t say with any confidence that they ought not to have been issued and therefore would ultimately be found invalid at a hypothetical trial.

(I should also say I’m not even sure we need a patent system, or rather that we need the one we now have, whose costs have long ago greatly outpaced its social benefits. That’s a different discussion and, given Congress’s wilting response to patent reform for the last decade, mostly an academic one.)

Paul Allen’s Misdirection?

But if the patents are valid and if the defendants have infringed them (very big and complicated ifs, mind you), there’s nothing “disgusting” (to quote Mike Masnick) about a decision by Allen to enforce them. Paul Allen is presumably not in dire need of recovering the estimated $100 million he invested in Interval, but if the system is to work, the viability of enforcement must remain. And given the high cost today of litigating these claims, it may only be people with deep pockets who are still able to keep up the necessary threat of infringement claims.

A real determination of the merits of the patents and the claimed infringements would require the development of a voluminous record. Which is to say that neither Allen nor the defendants ought to feel especially confident of their position at this opening stage of litigation. Indeed, the complaint itself is entirely pro forma, making only the most basic allegations necessary to initiate a patent infringement suit. No suggestion of intentional or willful infringement is alleged.

Without knowing for certain, it’s safe to say that the purpose of the litigation is not to stop any of the defendants from offering the products and services claimed to infringe on Interval patents but, for better or worse or most likely both, to extract royalties and other licensing terms from them on behalf of Interval.

So the mystery isn’t so much whether the patents are valid or whether the defendants, knowingly or otherwise, infringed them. The mystery is why Allen is suing, and why he has waited so long to do so.

There’s no penalty to waiting, of course, so long as the term of the patents hasn’t expired. Rather, the longer a patent holder waits the more time the infringer can establish its products and, therefore, the more royalties available for the patent holder to extract. On the other hand, if you wait too long, the infringer’s products may fail and the infringer may go broke.

That explanation for why Interval has dropped this bomb when it has may be that simple. But something tells me there’s something else going on. Patent litigation is an elaborate chess game, and it feels like this is a move deep inside a very long-running duel. There’s a great deal that’s broken about the patent system. I’m just not sure yet whether this lawsuit is Exhibit A.

What other answer is possible? Here’s at least one crazy possibility (there are crazier ones, but this one at least is plausible). Maybe Allen is not the world’s most famous patent troll. Maybe he’s out to become the world’s most famous patent reformer. Maybe he doesn’t want so much to win as to publicize how dangerous his patents are.

Perhaps in asserting these patents, with their potential to unsettle so much of what is taken as settled business practices in the digital economy, he hopes to force leading tech companies and Congress to acknowledge that the system is broken and fix it. If he wins, or even if he just wears down the other side, perhaps he’ll demand not financial tribute but actual reform of a system that gives patent holders like him the power to disrupt digital life.

If so, it’s a dangerous gambit. On the other hand, it’s hard to see how the patent system could get much worse than it already is.

There’s a great deal that’s broken about the patent system. I’m just not sure yet whether this lawsuit is Exhibit A.

Reading the 2002 edited volume, From 0 to 1: An Authoritative History of Modern Computing, I came across an interesting history of the first software patent—a business history, as opposed to a legal history. I hadn’t seen this anywhere before, so I’ll recount it here.

Luanne Johnson, president (now co-chair) of the Software History Center, tells the story of Martin A. Goetz at Applied Data Research (ADR), a Princeton, New Jersey company founded in 1959 to sell computer programming services.

In 1964, computer manufacturer RCA approached ADR about writing a flowcharting program that RCA would provide to users of its RCA 501 computer at no cost. ADR designed and wrote the program, AUTOFLOW, and offered it to RCA for $25,000. But RCA didn’t want it at that price. Marty Goetz then went to work on a different approach to recouping the $10,000 his company had laid out to write AUTOFLOW.

There were only hundreds of companies using the RCA 501, to whom he might have sold directly. So, seeing a larger market among users of the IBM 1401, Goetz and his colleagues re-wrote AUTOFLOW for that computer. They ultimately produced superior flowcharting software to what IBM offered its customers. AUTOFLOW was capable of flowcharting the logical sequence of existing software, easing the design of software to compliment what was already in use on IBM machines. Writes Johnson:

AUTOFLOW sold quite well. As a matter of fact, considering that in 1965 no one had ever sold a significant number of copies of a software product for a price, it sold remarkably well. But what should have been a natural market for thousands of potential customers was severely constrained by the belief on the part of those customers that the product that ADR was selling for $2,400 could be gotten for free from IBM. * * * Over and over again, as a result of a sales presentation on AUTOFLOW, the potential customer would call his IBM account representative and ask when they were going to upgrade their program to do what AUTOFLOW did. . . . [T]he more aggressively that ADR sold AUTOFLOW, the greater the likelihood became that IBM would produce a product with comparable functionality and offer it for free, effectively putting ADR out of the software products business. Goetz took defensive action. He applied for a patent on AUTOFLOW and served notice on IBM that they might be violating ADR’s patent application if they produced an automatic flowcharting program.

Goetz’s ADR became the first recipient of a patent on software in 1968, “a clear turning-point in the recognition of software as a product, not a service.” With attorney Mort Jacobs, Goetz determined that their software should be licensed rather than sold to customers to prevent them sharing programs, “a customary and accepted practice” at the time.

This anecdote doesn’t prove anything, but it offers a lot of food for thought and discussion. To wit:

• Johnson’s account favors today’s software patenting status quo. She refers to the “natural market” for ADR’s software, implying that IBM’s practice of writing and giving away software would have been an unnatural influence. She portrays Goetz’ pursuit of a patent as “defensive,” though there’s an equally plausible interpretation in which IBM plays defense against an insurgent by writing software to match its offering. Blocking that option by seeking a patent would part of going “on offense.” Finally, Johnson characterizes the ADR patent as “recognition” of what she appears to take as the right outcome.
• ADR’s 1968 patent on AUTOFLOW was a close predecessor to the 1969 antitrust suit against IBM, which resulted in the unbundling of hardware, customer training, system engineering, and software. Had these things not happened, the separation of the computer business from software, which we take for granted today, may not have happened as quickly. It would be a mistake to assume that software would not have emerged as a separate business line, though. The personal computer grew from very different roots than the IBM computers of the late 60s and early 70s. I think there would still be a software market separate from computers today even if the software patent and the federal government’s antitrust action against IBM had not happened. Software-writing insurgents would have had to work that much harder to make inroads, and computer companies that much harder to keep them out—all to the benefit of consumers.
• I was most interested to see that the first use of software patenting was to change the balance of power in the marketplace for existing software. The reward offered by patenting is not what caused ADR to produce AUTOFLOW, which would have been consistent with the theoretical foundations of intellectual property law. Goetz and ADR used patent to gain competitive advantage on a larger, better established rival in the market for an existing product. We may sympathize with the little guy, of course—David to IBM’s Goliath—but established firms today almost certainly make more use of software patenting as a tool of competitive advantage than upstart start-ups. Rebalancing the market for existing products, of course, is not what intellectual property law is supposed to do.

You can comment or blog elsewhere about this story or my observations on it. I don’t spend a lot of time on software patents, but I do like to collect evidence about that policy when it makes itself available.

I dashed off a quick analysis of the Bilski decision for CNET yesterday (see “Supreme Court Hedges on Business Method Patents”), a follow-up to a piece I wrote for The Big Money when the case was argued last fall.  (See “Not with my Digital Economy, You Don’t.”)

The decision was a surprise for me.  I had fully expected the Court to reject outright the experiment in granting patents to paper-and-pencil business methods launched by the Federal Circuit in 1998 with the State Street decision.  Especially since the Federal Circuit itself, in its rejection of Bilski’s application, had all but dismissed State Street as the disaster most businesses—even businesses who have benefited from business method patents–know it to be.

Indeed, as an experiment (in hubris, perhaps), I actually drafted my article over the weekend, even making up quotes I thought might appear in the majority opinion, which I presumed would be written by retiring Justice John Paul Stevens.

Here’s the lede from the piece, which I headlined “Supreme Court Ends Era of Business Method Patents”:

“In a dramatic change in U.S. law, the U.S. Supreme Court today rejected the patenting of business methods, casting doubt on the viability of [XX,XXX] such patents granted by the U.S. Patent Office since 1998.  The sprawling opinion by a divided Court also cast doubts on the long-term viability of patents for most software products.  (The Court’s XXX hundred page opinions are available here [link].)”

Needless to say, I got it wrong, and when the actual decision was released yesterday morning at 11 AM Eastern time, I had to start over.

In the end, the majority opinion was a mere 16 pages.  It basically did nothing to change patent law or to settle enormous and mushrooming uncertainties, both for business methods and, more generally, for software applications.

Justice Kennedy’s opinion explicitly refused to endorse or reject State Street, nor did it foreclose future efforts by the Federal Circuit to find some way to reign in the madness of patents for reserving office bathrooms, exercising cats and, my favorite, for the process of obtaining a patent—madness for which the Federal Circuit itself is fully to blame.

Justice Stevens, joined by Justices Breyer, Sotomayor and Ginsburg, would have gone much farther, as evidenced by his much-longer concurring opinion, which had all indications of having started life as the majority opinion.  Stevens has made no secret of his disdain for the judicial expansion of patent protection over the years.  Had his opinion been the majority I would have had to make very few changes to the earlier version of my article.

Stevens Loses his Majority

So what happened?

I think it’s pretty clear reading all the opinions together that Stevens lost his majority when he and Justice Kennedy couldn’t agree on the breadth of Stevens’ rejection of recent judicial expansions of patentability.  At that point the other Justices who wanted to deny Bilski his patent but didn’t want to go as far as Stevens had a majority.  As the swing vote, Kennedy was asked to write the new majority opinion, such as it is.

With the loss of Kennedy, Stevens lost his last chance to have a big impact on the Court’s intellectual property jurisprudence.  As Timothy B. Lee lovingly details in an Ars Technica article updated yesterday, Stevens had a long history of writing important decisions that protected nascent technology industries from the excesses of patent and copyright maximalists.

Perhaps most important among those cases was Betamax, in which Stevens stretched the doctrine of fair use to hold that Sony was not responsible for widespread unauthorized time-shifting of television programming by users of the VCR devices it sold.  The Betamax fight was a highlight of a battle that is perhaps 100 years old or more between content owners and technology providers.  The VCR, much as every innovation since in digital encoding has done,sent Hollywood into apoplexy.   Echoing ongoing hysteria by content owners over the continued advance of Moore’s Law, the MPAA’s Jack Valenti famously said in 1982 that “the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.”

Like the Viacom v. YouTube case I wrote about the other day, by the way, one way of looking at the result in Betamax is that it highlights the institutional limits of the judicial branch, particularly in crafting, supervising, and enforcing remedies.  The studios in Betamax, and Viacom today, implicitly or explicitly want the offending technology banned. But with millions of Betamaxes already in American homes by the time the case reached the Supreme Court, how exactly would such a remedy have been operationalized?  How could YouTube, likewise, comply with an a priori rule of no infringing content without simply shutting down?

Where Kennedy Feared to Tread

Of course I don’t have any inside knowledge that Kennedy bolted from Stevens’ Bilski opinion, but I’m pretty sure the truth is something close to that.  My explanation would also explain why it took so long to issue such a short opinion—for Bilski was argued in the fall, and only released on the very last day of the 2010 term.  If Stevens initially had a majority that fell apart, of course, that would have left Kennedy to start later in the game than if he knew all along he was writing for the majority.

There are also some interesting clues in those portions of Justice Kennedy’s decision that Justice Scalia refused to join (those parts only got four votes, so they don’t stand as binding precedent).  It’s been clear since 2006 that Kennedy was one of the Justices skeptical of business method patents.  In his concurrence in eBay Inc. v. MercExchange, L. L. C., 547 U. S. 388, 397 (2006), a case dealing with patent injunctions, Kennedy noted that many patents on business methods are of “suspect validity,” a concern he repeats in Bilski.

But, it turns out, Kennedy’s disdain for business methods doesn’t necessarily apply to the closely-related problem of patents for software.  Had the Supreme Court endorsed the Federal Circuit’s proposed “machine-or-transformation” test, not only would business method patents be out but so too would most if not all patents for software.  Kennedy at least was not willing to go that far.

Let’s back up a bit.  The “machine-or-transformation” test, the basis on which the Federal Circuit rejected Bilski’s application, derives from earlier Supreme Court patent cases (some of them quite old) that attempted to deal with the growing convergence of inventions based on information technology with those of the more traditional variety.  It states that for a process patent to be considered in the first place, it must as a threshold matter describe a process that is either “tied to a particular machine or apparatus,” or one that “transforms a particular article into a different state or thing.”

The “machine” part of the test comes from an early software case, in which the applicant attempted to patent the basic algorithm for translating binary representation into binary arithmetic.  The Supreme Court rejected that claim on the basis that algorithms or “mental steps” were too abstract to be patented, a sensible limit given the potential sweep such patents could have in emerging fields.

The “transformation” part of the test comes from a later case, in which a famous algorithm was translated into software that opened molds when environmental conditions (temperature, pressure) indicated the material inside had properly cured.  Here the patent was allowed, on the basis that the process described effected a transformation not of numbers on a piece of paper but of some actual, constrained physical article.  It was not the algorithm itself that was patented, in other words, but a very specific implementation.

If “machine-or-transformation” were applied as a threshold test for process patents, it’s clear that business methods would be out.  For by definition they are not tied to a particular machine, nor does the execution of their steps affect change a particular article into a different state or thing.  In most cases, the method can be applied mentally or with paper and pencil.  When software is used, it is generally to automate the steps and to allow the method to be executed repeatedly and quickly.

Well, What About Software?

So how would software patents prevail had the Court adopted “machine-or-transformation”?  As I wrote in Law 8 of The Laws of Disruption, most software patents would likely fail the test.  First, most software patents are written for general purpose computers, and so would fail the particular machine test (probably—the meaning of “particular machine” has never really been explored since the 1972 case involving binary translation).

And what about “transformation”?  All software, when executing, transforms a particular article (memory circuits) into a different state (on/off), but it can’t be that every piece of software is therefore eligible for a process patent.  (As “written expression,” all but the simplest programs receive automatic protection under copyright for something close to 100 years.)  Following the mold case, perhaps the Court would say that only software whose execution transforms something other than the computer’s internal circuitry itself would qualify.  But that would limit the class of software eligible for patent protection to almost nothing.

So Kennedy is probably right to say that the “machine-or-transformation” test, if adopted as a threshold requirement for process patents, would “create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.”

To which many, including me, would say, “Good!”  Given the automatic application of copyright to most software applications, one might ask why software needs patent protection at all.  The long answer is quite long.  The short answer is that it probably doesn’t.

Put another way, the granting of a 20-year monopoly for software puts a drag on the speed with which information technology can be developed and deployed, one that probably isn’t balanced with the additional innovation the availability of that monopoly encourages.  And keeping that balance is the sole rationalization for creating the patent system in the first place.

But Justice Kennedy did not want to go that far, and, it seems, for much the same reason that Justice Stevens did:  to protect emerging information technology industries.  “[T]imes change,” writes Kennedy.  “Technology and other innovation progress in unexpected ways.”  It may be, according to Kennedy, that a simple rule like “machine-or-transformation” would strike the balance between protection and the public domain too far on the side of the latter.  Or maybe not.  “Nothing in this opinion,” he says, “should be read to take a position on where that balance ought to be struck.”

So, says Kennedy, again in a plurality section of his opinion, the Federal Circuit should search for a better way to control the patent tsunami created by State Street.  How?  Here’s a hint, though just barely, as to how such a test ought to be crafted to satisfy Justice Kennedy, if not Justice Roberts, Thomas, and Alito, who joined this paragraph of the opinion:

“[I]f the Court of Appeals were to succeed in defining a narrower category or class of patent applications that claim to instruct how business should be conducted, and then rule that the category is unpatentable because, for instance, it represents an attempt to patent abstract ideas, this conclusion might well be in accord with controlling precedent.”

Translation:  I (we?) am not opposed to threshold tests that exclude business method patents.  I just didn’t like the particular test the Federal Circuit came up with, because it probably leaves out software as well.

Is he Right?

On balance, I’m surprised to find myself agreeing with Justice Kennedy.  The “machine-or-transformation” test had the salutary effect of eliminating business method patents, which, I suspect most of the Justices (certainly a majority) do not believe deserving of patent protection.  It also had the effect, perhaps, of eliminating most software patents.

But Kennedy is right to say that “machine-or-transformation” would at a minimum cast great doubt on the viability of software patents.  For that test, despite being derived from computer-related cases, doesn’t at all take into account the very nature of software.  General purpose computers have revolutionized every aspect of business and life precisely because they are general purpose machines (or, to use the technical term, “virtual machines”).  Through software, computing devices of all shapes and sizes can be transformed into millions of other, specific, machines, often simultaneously.

It’s probably better to say that some software applications do rise to the level of innovation necessary to sustain a patent.  The “machine-or-transformation” test, however, would have given courts little guidance as to how to separate the truly novel and nonobvious (other necessary conditions of patentability) from the mundane.  All software either passes or fails.

For Justice Kennedy, the possibility of over-exclusion was too high.  For Justice Stevens, the possibility of over-inclusion was more dangerous.

Both are eager to create the right environment for continued innovation in information technology.  In the end, they just couldn’t agree on where the risk was greatest.

What would be better?  As Kennedy suggests, a different test that wouldn’t affect software patents would likely survive a future challenge.  That would get rid of business method patents, certainly a good first step.

Then, the courts—or better, Congress—could take a separate and clear-headed look at the software patent problem.

To me, the best solution would be to undo the extension to software of both copyright (by Congress) and patent (by the courts), and to create instead a form of protection that is more limited, constrained, and constructed around the unique and indeed miraculous properties of the virtual machine.  A specific form of protection for “Information Age” inventions.

No sense in describing that protection in any great detail now.  The chances of that solution being implemented, needless to say, are too slim to be visible.

Postscript:  What About Scalia?

One loose end in Bilski is the curious role played by Justice Scalia in the opinions.  As noted, Scalia joined all of Justice Kennedy’s opinion other than the two sections expressing concern about the impact “machine-or-transformation” would have on software, or what Kennedy refers to repeatedly as inventions of “The Information Age.”

There’s no way to know why Scalia declined to join those sections (and, therefore, robbed them of precedential status), but one clue can be found in a second concurrence, this one by Justice Breyer, which Scalia joined in part.

Breyer begins by acknowledging his view that business methods are flat-out unpatentable.  No surprise there—Breyer signed on to Stevens’ opinion, and has previously expressed grave doubts about business method patents in cases where the issue was raised but not decided.

Scalia joins Part II of Breyer’s opinion, which tries to summarize the points on which all nine Justices are, at the end of the day, in agreement.  (All nine, of course, voted to affirm the Federal Circuit’s rejection of Bilski’s application.  The only question had to do with the reasoning for that rejection.)

Breyer returns to the cases from which the Federal Circuit derived the “machine-or-transformation” test, and notes that “transformation is the clue to the patentability of a process claim that does not include particular machines.”  (emphasis in original)

The error of the Federal Circuit, then, was to treat “machine-or-transformation” not as a test, but as “the exclusive test.”  (emphasis in original)  And “machine-or-transformation” is still a far better test, Breyer (with Scalia) goes on, than the much broader statement from State Street (“useful, concrete and tangible result”) that started this whole mess.

Here’s the kicker.  Breyer and Scalia agree that “[t]o the extent that the Federal Circuit’s decision in this case rejected [the State Street] approach, nothing in today’s decision should be taken as disapproving of that determination.”

So, there you have it.  Scalia doesn’t like State Street and doesn’t hate “machine-or-transformation.”  But for some reason apparently not having to do with the impact of that test on the patentability of software, Scalia objected, like Kennedy, to Stevens’ willingness to adopt it as the threshold requirement for process patents.

Does that leave Scalia wanting more protection for software, or less?

Stay tuned!

I’m quoted briefly in a story today in E-Commerce Times (see “Apple’s Patent Attack:  This Too May be Overhyped” by Erika Morphy) about the patent lawsuit filed this week by Apple against rival mobile device maker HTC.

Apple, of course, produces the iPhone, while HTC makes Google’s Nexus One and other devices that run on Google’s Android operating system.

So right from the start this case looks less like a simple patent dispute and more like a warning shot over Google’s bow.  The two companies are increasingly becoming rivals.  In August of last year, Google CEO Eric Schmidt resigned from Apple’s board.  Apple CEO Steve Jobs wrote at the time, “Unfortunately, as Google enters more of Apple’s core businesses, with Android and now Chrome OS, Eric’s effectiveness as an Apple Board member will be significantly diminished….”

The apocalyptic rhetoric from analysts that accompanied the lawsuit (see Marguerite Reardon’s piece on CNET, “Is Apple Launching a Patent War?”), however, is both under and overselling the story.  It’s both much worse and not as bad as it seems.

The Undersell

The war is actually already going on, and ranges far beyond Apple and HTC.  The mobile device industry is deeply embroiled in prolonged legal battles over patents, with perhaps dozens of complaints and counter-claims flying back and forth.  Nick Bilton of The New York Times this week produced a simplified chart of who is suing whom, which he described as a “patent lawsuit Super Bowl party.”

As I write in Law Eight of The Laws of Disruption, patent litigation has “evolved” from being a last resort in the protection of proprietary technology to the first step in protracted negotiations between industry participants over how to divide up a rapidly-growing pie.  Here’s how it works.  Everyone flood the Patent Office with applications, drafted as broadly as possible.  The over-burdened examiners, who are incentivized to process applications quickly, find it is easier to say yes than to say no, and grant a large percentage of patents that are far too generous and clearly don’t meet the legal requirements for protection.

As I wrote last year in The Big Money, patent grants are out-of-control, one of the many symptoms of what most legal scholars agree is a system that has become utterly broken.  (The U.S. Supreme Court is currently reviewing a case that could see the end of so-called “business method” patents and perhaps even patents for software.  See “Can You Patent a Cat and a Laser Pointer?”)

Meanwhile, the parties all sue each other, and after years of poring over each other’s documents during discovery, figure out, more-or-less, who’s really invented what.  They wind up cross-licensing everything to everybody else and agreeing to mutual defense pacts against future challenges to the good and bad patents.  Apple says it has no interest in licensing its technology, but simply wants to stop competitors from ripping off their property.  We’ll see.

It is very likely that many of these patents, if recent history is any guide, are absurdly overbroad and would not survive full litigation.  (I’ve reviewed none of the patents at issue in this case so far.)  And full litigation is neither likely nor the goal of the parties. The real point of all this legal posturing is to obtain cross-licenses that will ultimately deter new competitors from entering the market.

There is a better way to protect invention without years of expensive litigation.  In some industries, subject to government approval, the major players simply pool their patents and establish open terms under which anyone can license them.  Sprint, Cisco, Intel and Nextel, for example, have pooled their WiMax patents to ensure a single standard emerges.  A mobile device pool would have been harder to fashion, but would also have avoided a lot of bloodshed (and legal fees).  In the end I suspect the results will be the same.

The Oversell

At the same time, the stakes aren’t quite as life-or-death as many commentators believe.  For example, the E-Commerce Times story quotes Greg Sterling on what a loss for Apple in the suit against HTC would mean:  “It would mean open season on any IP — anything could be copied.”  Hardly.  All it would mean is that the particular patents Apple is claiming either don’t hold up under careful scrutiny or, if they do, that HTC is found not to have infringed them.

More to the point, patent protection is only one way—and perhaps the least effective—that competitors secure competitive advantage in rapidly-growing and rapidly-evolving markets for new technology.  Offering superior service, an ever-growing menu of new options and features, and competitive pricing also works just fine.

Apple in particular has a significant advantage that has nothing to do with its patent portfolio:  the thousands of third-party 3G apps it sells to its customers.  The iPhone’s popularity today has little to do with proprietary technology, and everything to do with the enormous network of third-party software developers Apple has wrangled to write apps for its devices.

The apps drives network traffic, of course, but also drives what economists call “network effects.”  The more people use their iPhones the more people who don’t have one feel nudged to get one. Even if Apple loses the litigation, the network is unaffected.

The real winners in the mobile device patent war will be based not on patents but on the ability to build a robust network with compelling consumer offerings.  As it should be.