[A2k] Sweet, Keeping Score in the IP Game

[Soenke Zehle]

Keeping Score in the IP Game
By William Sweet
http://www.spectrum.ieee.org/nov07/5645

A U.S. federal jury in February ordered Microsoft to pay Alcatel-Lucent
US $1.52 billion in damages for infringing its intellectual property in
MP3, the ubiquitous music-encoding software. Although in August an
appeals judge reversed the decision in part and canceled the damages,
the new ruling did not address Microsoft's main complaint, namely that
U.S. patent law encouraged the jury to put excessive value on the IP in
question. Microsoft may ultimately obtain a settlement it considers
completely fair, but that could take so many years of costly litigation
that even if the company wins, it will have lost.

The Microsoft-Alcatel MP3 case is just one of many that suggest to some
that the patent system itself has lurched out of control, giving too
much power to those laying claim to intellectual property and allowing
too much leeway to patents of dubious quality or worth. Surely the case
that has most captured the public imagination was the dispute over the
technology of the BlackBerry personal communicator=E2=80=94which went on fo=
r
years between Research in Motion, of Waterloo, Ont., =E2=80=A8Canada and NT=
P, a
patent holding company in McLean, Va. Finally, last year RIM paid NTP
upward of $600 million, complying with a court judgment.

The BlackBerry case drew attention to another much-criticized effect of
the U.S. patent system: the presence of =E2=80=9Ctrolls,=E2=80=9D who alleg=
edly acquire
patents, sit on them hoping that one or more will turn out to have
crucial business applications, and then go to court to obtain what
critics call extortionist payouts.

The data on U.S. patent awards for 2006 show that the patents in any
given field still go to a few top companies, that there is little change
from year to year among the dominant firms, and that big gaps yawn
between the leaders and the runners-up. In almost all branches of
electronics, computing, and telecommunications, awards made to the
leading company jumped mightily from 2005 to 2006=E2=80=94by as much as 48
percent in semiconductor manufacturing, 60 percent in telecommunications
equipment, and 65 percent in electronics [see table, =E2=80=9CPatent Push=
=E2=80=9D

Steven J. Frank, a patent lawyer in Boston and author of the 2006 book
Intellectual Property for Managers and Investors (Cambridge University
Press), cautions that such studies of patent concentration and impact
should be treated warily. =E2=80=9CJust looking at the leaders, you have to=
 ask
what their game is,=E2=80=9D Frank muses. =E2=80=9CAre they just trying to =
look like IP
dynamos? Are they engaged in a kind of land grab?=E2=80=9D

Of course that goes, too, for smaller companies making big jumps in the
ranks [for some examples, see table, =E2=80=9CPatent Performers on the Move=
=E2=80=9D],
some of which might be emerging stars, while others might be merely
padding their patent portfolios as a public relations exercise. To take
the numbers at face value, however, and to judge from the fields in
which the companies are shifting position most radically and frequently,
computing, semiconductors, and telecommunications appear to be among the
most dynamic areas in what the patent world broadly calls information
technology (IT). Presumably, some chip and telecom companies are being
truly innovative, while others may be acquiring patents mainly to defend
themselves against possible litigation and position themselves to
bargain effectively in cross-licensing arrangements.

/IEEE Spectrum/'s compilation of patent awards and patent impact was
prepared by 1790 Analytics, a Haddonfield, N.J., company that
specializes in evaluating intellectual property. This is the second year
that the firm, which takes its name from the year the first U.S. patent
was awarded, has provided its data to us.

The methodology this year is essentially the same as last year's [see
=E2=80=9CPatent Power,=E2=80=9D Spectrum, November 2006 at
http://spectrum.ieee.org/nov06/4699 This year, however, 1790 added a
measure to account for self-citation, which produces lower Pipeline
Impact ratings for companies whose patents are referenced mainly internally=
.

Take Boeing as an example, suggests 1790's director of research, Anthony
Breitzman: its raw Pipeline Impact value of 0.84 drops to 0.78 when
adjusted for self-citation. Largely because of the self-citation
penalty, Micron Technology, a semiconductor maker in Boise, Idaho, falls
sharply from being last year's overall patent winner and is replaced at
the top of the heap by Microsoft.

Looking at the compilation as a whole, the impression is more one of
stability than of change. In almost every major subfield of IT, the same
two or three companies appear among the top three or four. In fact, the
top scorer changed in only one of the nine subfields: the newly merged
Alcatel-Lucent overtook Motorola in Telecom Equipment.

The more things change, the more they stay the same, the French
say=E2=80=A6until, they might add, things really do change. This year, as t=
his
issue goes to press, Americans may at last see some real change in a
patent system that almost every analyst considers seriously flawed. In
fact, Congress is debating a reform bill that appears to have been
developed in an intellectual and rational process, an event as happy as
it is rare.

The reform proposal began to take shape about three years ago, when a
unit of the National Academy of Sciences headed by Stephen A. Merrill
produced a report called =E2=80=9CA Patent System for the 21st Century.=E2=
=80=9D The
report recommended creating a procedure for challenging patents after
they are issued, bolstering the traditional standard that patents should
be confined to =E2=80=9Cnonobvious=E2=80=9D ideas, and strengthening the ov=
erwhelmed
U.S. Patent and Trademark Office. It also questioned U.S. rules that
grant triple damages for =E2=80=9Cwillful=E2=80=9D infringement and give pr=
iority to
those who are the first to invent something over those inventors who are
the first to file for a patent.

The result was the proposed Patent Reform Act of 2007, sponsored in the
Senate by Patrick Leahy (D-Vt.) and Orrin Hatch (R-Utah) and in the
House by Howard Berman (D-Calif.) and Lamar Smith (R-Texas). It would
establish a procedure for challenging patents after their issuance,
limit the ability of litigants to shop around for courts deemed
sympathetic, redefine what constitutes willful infringement, and set
damages based on the patent's contribution to a product's value, rather
than on the product's total value (a policy known as balanced
apportionment). This last point addresses the issue in the Microsoft MP3
case. Microsoft's penalties were evidently set according to the total
value of MP3 use involving its Windows Media Player.

Who will gain and who will lose if the bill becomes law? Basically,
lobbying on the legislation has pitted the IT industries=E2=80=94including
electronics, computing, and semiconductors=E2=80=94against the biomedical a=
nd
pharmaceutical industries, which together account for most U.S. patents,
says Frank.

Biomedical and pharmaceutical companies want ironclad patent protection,
because they depend on a tiny handful of blockbusters to defray the
billions of dollars they spend investigating hundreds of drug candidates
that never pan out. Those blockbusters typically stand or fall on one or
two patents. In IT, on the other hand, a winning product often results
from a great many patents=E2=80=94MP3, Wi-Fi (IEEE 802.11), and 3G cellular
telephony are excellent examples. Here, =E2=80=9Cthings are less clear-cut=
=E2=80=9D than
with pharmaceuticals, Frank says, as it's less obvious that any
particular patent is essential to accomplishing any particular thing.
The big IT companies typically worry about being held liable by too many
different parties for exorbitant damages.

Lobbyists include, on one side, the Business Software Alliance (composed
of Microsoft, Apple, Hewlett-Packard, and a host of others) and on the
other side, the Biotechnology Industry Organization and the Coalition
for 21st-Century Patent Reform (representing, among others, drug maker
Eli Lilly & Co. and consumer goods maker Proctor & Gamble). But even
within the broad IT and pharmaceutical groupings, there are significant
differences of opinion.

A survey last year of U.S. members of the IEEE found that they were not
unanimous on the merits of the proposed bill. The IEEE's
volunteer-driven lobbying arm, IEEE-USA, has submitted critical opinions
about the draft legislation, saying it wants a bill but a better bill.

Under the circumstances, it's more than a little remarkable that a
bipartisan consensus has formed around a patent reform bill that largely
captures the spirit of what the NAS and what other critics such as Adam
B. Jaffe and Josh Lerner have had in mind [see =E2=80=9CPatent Prescription=
,=E2=80=9D
<http://spectrum.ieee.org/dec04/3845> by Jaffe and Lerner, IEEE
Spectrum, December 2004 Taken together with two significant Supreme
Court decisions this year, which reinforced the =E2=80=9Cnonobvious=E2=80=
=9D standard
and limited the right to obtain an immediate injunction following a
patent victory, enactment of the patent reform bill =E2=80=9Cwould be a maj=
or
step in the direction=E2=80=9D of what Jaffe and Lerner proposed, says Jaff=
e, of
Brandeis University, in Waltham, Mass.

At press time, it's considered a toss-up as to whether patent reform
passes this year before the presidential election cycle begins. In any
event, Lerner, of Harvard, expresses satisfaction that at least
=E2=80=9Csomething's finally happening after a long time of nothing happeni=
ng.=E2=80=9D