In his characteristically bullying style, Tom Giovanetti sent me this link to a Washington Post write up of the DataTreasury controversy. Apparently banks have, in fact, proposed an amendment to the patent bill that would be narrowly tailored to exempt themselves from DataTreasury’s patents. While I have zero sympathy for patent trolls (and don’t especially care if they “invented” the patents themselves or purchased them from a third party), carving out narrow exceptions for narrow interest groups is the wrong way to go about patent reform. What we need is broad patent reform that protects people in general, large and small, from abusive patents like the DataTreasury patents. To the extent that narrow carve-outs peel off potential supporters for fundamental patent reform, they might even be a bad thing.
Also, somebody from a PR firm sent me this link. (She was cagey about who she works for, but I assume it’s one of the banks behind the amendment—I wish PR people would just give me a straight answer) Apparently the CBO has, in fact, estimated that taxpayers would be on the hook, on the grounds that the amendment would constitute a taking under the Fifth Amendment. This seems wrong to me—narrowing the scope of a government monopoly isn’t the same as taking somebody’s land—but there it is.
A great comment by Lewis Baumstark:
The current software patents landscape is more akin to Bayer creating a cancer curing-drug and instead of getting a patent on their specific formula, they get a patent covering the general ability to cure cancer. Meaning anyone else who creates a different drug to do the same thing would be infringing.
Quite so. To unpack this analogy a little bit, the analog of the “specific formula” is software’s source code. If we wanted to create a sensible software patent system, the way to do it would be to require software companies to disclose their source code in their patent applications, and then grant patents that prohibit other companies from duplicating that source code, just as drug patents prohibit companies from exactly duplicating drugs. Except that, obviously, source code is already protected by copyright law, so such a patent system would be totally superfluous.
Instead, we have a system where a company with no employees and no products can claim a de facto monopoly on the ability to transmit email wirelessly and use it to extort hundreds of millions of dollars out of companies that are producing useful products. Nobody claims that RIM literally stole the technological designs NTP claimed in its patents. Rather, all NTP claimed was that RIM’s technology fell under the broad category of functionality claimed in NTP’s patents. “Curing cancer” might be a bit broader than “transmitting email wirelessly,” but not much.
Likewise, I have yet to see any evidence that the banks being sued by DataTreasury literally copied DataTreasury’s designs. Rather, DataTreasury’s patents are so broad that it’s simply impossible to develop a digital check-clearing system without running afoul of the patents. I don’t think there’s any serious policy argument for allowing companies to claim such broad patent monopolies.
Here is one of the two patents that the nation’s major banks have been “stealing” from DataTreasury. The first claim is as follows:
A system for central management, storage and report generation of remotely captured paper transactions from documents and receipts comprising: one or more remote data access subsystems for capturing and sending paper transaction data and subsystem identification information comprising at least one imaging subsystem for capturing the documents and receipts and at least one data access controller for managing the capturing and sending of the transaction data; at least one central data processing subsystem for processing, sending, verifying and storing the paper transaction data and the subsystem identification information comprising a management subsystem for managing the processing, sending and storing of the of the transaction data; and at least one communication network for the transmission of the transaction data within and between said one or more data access subsystems and said at least one data processing subsystem, with the data access subsystem providing encrypted subsystem identification information and encrypted paper transaction data to the data processing subsystem.
As near as I can tell, this patent covers the concept of scanning and security transmitting paper documents. If you build a system for scanning and securely transmitting images of paper documents, you’re probably infringing on this patent. Or to put it a different way, this patent would, if strictly enforced give DataTreasury a 20-year monopoly on the concept of electronic check clearing.
It’s absurd that our legal system allows companies to engage in this kind of rent-seeking. It’s even more absurd that people invoke the concept of property rights to justify it. Property rights do not and should not give companies monopolies over entire industries.
You may have read Tom Giovanetti’s piece on the plight of DataTreasury Corp. The op-ed is remarkable for its lack of specificity. For example, we’re informed that:
Worse, these banks also are asking Congress to make taxpayers pay the patent holder for their illegal actions. According to the Congressional Budget Office, the bailout would cost the federal government at least a billion dollars.
But Giovanetti never bothers to explain how this “bailout” would work, whose patents would be affected, or who would control the allocation of “taxpayer dollars” to patent holders. I’ve read quite a bit about the major provisions of the pending patent reform bill, and none of the coverage I’ve read mentioned any program that would allocate a billion dollars to pay off patent holders so that banks could infringe their patents. It’s possible that this provision has slipped below the radar. It’s also possible that Giovanetti is describing the debate in a somewhat misleading fashion. Any body know what he might be referring to?
In any event, here is a New York Times article that gives a more nuanced account of DataTreasury’s situation. We learn, for example, that “it is a company whose only business, other than one client, appears to be suing other companies.” It appears that they managed to get a broad patent on fundamental concepts in digital check-clearing, making it impossible for banks to participate in the new “Check 21” check-clearing process Congress approved in 2003. In other words, the story may not be so much about banks “using” DataTreasury’s “technology” as it is about extortion on DataTreasury’s part.
Over at Ars Technica, I take an in-depth look at the Patent Reform Act now being debated in the Senate and conclude that it won’t come close to fixing the damage patents do to the IT industry:
To help us understand the implications of the Patent Reform Act, Ars talked to James Bessen, co-author of a recent book on the patent system. Bessen told Ars that the most important changes currently under consideration on the Hill are the post-grant review process, the apportionment of damages, and willful infringement. But he argued that none of these changes will address the serious flaws that plague the patent system. Rather, their most important effect will be the signal it sends that the IT industry is finally taking patent issues seriously and organizing to tackle the problem in Congress. He predicted that Congress will need to revisit the issue in the coming years as patent problems continue to mount.
Bessen had three major suggestions to offer to Congress once it gets serious about fundamental reform. First, there needs to be much stronger limits on patenting of abstract ideas, including software and business methods. Bessen argued that narrowly construing patent scopes will significantly improve the situation by preventing patent holders from using a single, broad patent to harass entire sectors of the technology industry.
Second, Bessen said that dramatically increasing maintenance fees would give patent holders a strong incentive to let unimportant patents lapse. That would reduce the total number of patents in effect and make it easier for potential innovators to review the remaining patents for possible infringement.
Finally, Bessen told Ars that the law needs to have protections for inadvertent infringers. Under current law, in most cases there are no legal protections available to a firm that independently develops a technology that is covered by an existing patent. An independent invention defense to patent infringement would be the strongest possible reform in this direction. A less ambitious approach would be to reduce damages in cases where independent invention can be demonstrated.
Needless to say, none of these more serious reforms have any serious chance of passage in Congress. In the short term, our best hope for reform is probably that the Supreme Court will continue taking cases and undoing some of the damage the Federal Circuit has done over the last couple of decades.
I’m reading through the big patent reform bill that’s currently stuck in the Senate. One of the big changes in the legislation concerns the calculation of damages for patent infringement. It reads, in part:
Upon a determination by the court that the showings required under subparagraphs (A) and (B) have not been made, the court shall conduct an analysis to ensure that a reasonable royalty is applied only to the portion of the economic value of the infringing product or process properly attributable to the claimed invention’s specific contribution over the prior art. In the case of a combination invention whose elements are present individually in the prior art, the contribution over the prior art may include the value of the additional function resulting from the combination, as well as the enhanced value, if any, of some or all of the prior art elements as part of the combination, if the patentee demonstrates that value.
I think an economist would tell you that this is completely incoherent. The only way to objectively determine the “economic value” of something is by observing the price it fetches in the marketplace. (The financial markets are currently learning the dangers of trying to compute asset values a priori) If the thing you’re trying to value is similar enough to something that’s commonly bought and sold (say, if your house is similar to your neighbor’s house that just sold), you can use that to get a reasonably accurate estimate of the product’s value. Likewise, if I want to determine the “economic value” of the “specific contribution” of the LCD panel in my MacBook to the laptop’s overall value, I can see what LCD panels with similar characteristics were selling for at the time my laptop was manufactured.
But a patent is not a commodity. It’s not a component of a manufactured product. Rather, a patent is a legal entitlement to sue people who build certain kinds of devices or perform certain processes without the patent holder’s permission. There isn’t any objective answer to the question of how much of a products value is “properly attributable” to the fact that any given patent holder has agreed not to sue the manufacturer. Trying to apportion the value of a product among the patents that apply to it is a category error because a patent’s value in the market place is determined by the leverage the legal regime confers on patent holders. The greater the powers the law gives to patent holders, the larger the monopoly rents they can extract from manufacturers, and the more valuable the patent will be on the marketplace. So it’s completely circular for the law to ask what the “economic value” of a patent is, when the economic value of a patent was created by the legal system in the first place.
Of course, the fact that a legal requirement is incoherent doesn’t mean that judges won’t give it the old college try. No doubt, there will be plenty of “expert witnesses” who will come up with all manner of elaborate methodologies for determining the “economic value” of a patent’s “specific contribution” to a product. A a practical matter, judges will take the passage of this reform bill as a signal that recent patent damage awards have been too big, and will scale back the awards accordingly. That’s what the technology industry wants. From their perspective, it probably doesn’t matter if the requirement is coherent, as long as it gets them the result they’re looking for.
But if you care about the rule of law, it should trouble you that the rules are so incoherent. We should always be concerned when the legislature gives legal force to concepts (like “blight”) that lack a clear definition. The patent system is full of concepts like this, and I think that lack of clarity is a major cause of the problems we’ve been seeing in recent years.
I would be remiss if I didn’t mention the launch of the End Software Patents coalition, headed by Ben Klemens. Ars has a good write-up. Software patents are among the biggest threats to innovation in the software industry. And indeed, they’ve become a nuisance far beyond Silicon Valley, because every company uses software and is therefore likely violating software patents. It’s good to see the movement for ending them continue to grow.
One of the recurring themes in libertarian discussions of patent and copyright law is the question of whether these institutions are better thought of as a form of property rights or as government monopolies. Personally I think that the property metaphor misleads more than it illuminates, and so I tend to avoid discussing the subject in those terms.
Reason recently had a debate about global warming, which you can watch here. And interestingly, it ended up raising almost precisely the same issues. Fred Smith dismisses cap-and-trade schemes for limiting the emission of greenhouse gases as “rationing.” Around 3:45 in the fourth video, Bailey points out: “With regard to this notion that somehow this is ‘energy rationing,’ well, Fred, when we a forest, is that lumber rationing? When we privatize the fisheries, is that fish rationing?”
It’s a good question. The idea of property rights is central to libertarian thought, and as a result, labeling a given regulatory scheme a system of “property rights,” rather than “monopoly” or “rationing” automatically gives it a leg up in libertarian policy debates. But this also opens the door for mischief, as people pushing fundamentally un-libertarian policy proposals attempt to win the debate by re-framing their preferred position using the rhetoric of property rights.
Ultimately, you have to go beyond the terms to examine the underlying institutions to determine to what extent the underlying institutions actually fit the property model. I’ll just say that I think the analogy with property rights is somewhat problematic in both cases, but cannot be lightly dismissed in either case.
The story of the telephone industry’s first quarter-century is the story of the Bell patents. Alexander Graham Bell famously filed his telephone patent hours before Elisha Gray filed a competing telephone patent, forming the foundation of what became the AT&T telephone monopoly. The way Brooks tells it—and he gives no hint of having an axe to grind against either AT&T or the patent system—the American Bell company mostly sat back and collected licensing revenues for the 17-year term of its early patents, charging high fees and doing relatively little to improve its technology or aggressively build out its services. What it did do, however, is prosecute hundreds of patent infringement suits against rivals. The book doesn’t go into enough detail to judge how many of those were independent inventions and how many were mere copycats, but it’s clear that at least a handful—including Gray’s—were independent inventions.
The Bell Company is not, in other words, an effective poster child for the patent system. The company’s reaction to the coming of competition in 1894 is interesting:
All through this welter of litigation, and right up to the turn of the century, American Bell chose to compete with the rising independents chiefly in the courts rather than by trying to provide better and cheaper telephone service. But there were now thousands of telephone patents in force other than Berliner’s [a patent that American Bell had unsuccessfully tried to use to perpetuate its monopoly beyond 1894], and in 1897 American Bell for the first time began to lose cases when wwithin a few weeks two other important Bell-held patents—on the switch hook and the automatic switch—were struck down in Chicago. The tide was turning.
Not surprisingly, competition was good for consumers…
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