[A2k] Wall Street Journal editorial: Patently Absurd

[Thiru Balasubramaniam]

http://online.wsj.com/article/SB114117826666886050.html?mod=opinion_main_review_and_outlooks

Patently Absurd
March 1, 2006; Page A14

The bitter legal fight over BlackBerry patents may soon inconvenience
millions of users of that handheld email device. But that's nothing
compared to the damage that a broken U.S. patent system is doing to the
larger American economy.

Patents are supposed to protect intellectual property and spur
innovation, and once upon a time in America they did. But like
everything else the legal system touches nowadays, U.S. patent law has
been hijacked so that it now operates nearly in reverse, deterring
research and penalizing innovation. In the last year, Microsoft,
BlackBerry maker Research in Motion (RIM), and much of the wireless
phone industry have been hit with adverse rulings in long-running patent
cases, and they're hardly alone. Online auctioneer eBay will soon argue
a patent case of its own before the Supreme Court.

All of these cases are dubious, involving patent-holders who never
commercialized their inventions. If Microsoft loses its appeal, it could
be on the hook for $521 million for infringing a patent that covers how
plug-ins are displayed in an Internet browser window. RIM faces a
possible injunction barring it from providing BlackBerry service in the
U.S., as well as $450 million or more in payments to the plaintiff, NTP,
whose only significant assets are the patents it claims RIM has infringed.

In the RIM case, NTP offers no product that competes with BlackBerrys.
It sells nothing at all. But last week the judge in the case held a
hearing on whether to shut down BlackBerry service in the U.S. on
account of the alleged patent infringement. The U.S. Patent Office may
yet reject NTP's patent claim, but since NTP does not offer a competing
service that is being harmed by BlackBerrys, the main purpose of a
shutdown would be to put a gun to RIM's head in settlement talks with
NTP, the patent holder.

Or consider the case of Boston Communications Group Inc., a small
Massachusetts-based company whose software helps wireless-phone carriers
handle the accounts of 25% of the U.S. prepaid cell-phone market. In
September a federal judge ruled that BCGI had violated the patents of a
tiny firm called Freedom Wireless, and issued an injunction against BCGI
selling its services. That injunction was stayed last year pending an
appeal.

BCGI's descent into this patent-litigation nightmare began seven years
ago. CEO E.Y. Snowden received a call in May 1998 from a patent holder
who believed his company was infringing that patent, and so he called in
his lawyers. Two different law firms told him BCGI was not infringing on
the patent, which was held by Freedom Wireless, so Mr. Snowden did
nothing. Two years later he was hit with a lawsuit, and in September
U.S. District Court Judge Edward J. Harrington upheld a $128 million
verdict against BCGI. That $128 million exceeds BCGI's annual revenue
and is more than the total amount BCGI has ever earned offering its
service to wireless carriers.

Like RIM and Microsoft, BCGI has argued that the infringed patents are
based on "prior art" that the patent holders failed to disclose when
they applied for the patents. But when it comes to getting a patent
invalidated, the playing field is not level. The Patent Office grants
patents on the basis of a "preponderance of evidence" that the invention
merits a patent. But it takes "clear and convincing evidence," a higher
standard, to overturn them once granted.

A 2003 report by the Federal Trade Commission identified several
shortcomings in the current patent system. One problem is that the only
effective way to challenge a patent is to wait to get sued or threatened
with a suit by the patent-holder; a third party has no standing to
challenge a patent unless he is accused of infringing it. As BCGI,
Microsoft, RIM and others have discovered, that is a very risky
proposition. In any such suit, thanks to the "clear and convincing
evidence" standard, the patent holder has the upper hand.

Meanwhile, patent applications have soared even as the percentage of
approvals has climbed; approvals were close to 90% in 2000, up from 69%
in 1984, while applications have more than doubled since 1991. This has
less to do with genuine innovation than it does with innovative lawyers
filing a patent on anything that moves. The result, says the FTC report,
is that many companies now shy away from research into areas covered by
others' patents, even if they believe those patents to be invalid.

To stem the tide of questionable patents, the FTC report recommends some
sort of administrative review if a patent is challenged. Representative
Lamar Smith (R., Texas) has introduced a useful bill to do that, as well
as to lower the standard for invalidating a patent to a "preponderance
of evidence." Since that is the standard used to grant the patent, this
only makes sense.

Testifying before Congress last June, Josh Lerner, a Harvard Business
School professor, summed up the problem: "In the past two decades, the
U.S. has strengthened patent rights, while weakening the standards for
granting patents." The result is that the patent system is fast becoming
a detriment to U.S. competitiveness, not to mention basic fairness. So
if your BlackBerry ever does go dark, don't curse the company. Blame the
lawyers.