Forfeiting the Future Over Irrational Fear of Software Patents

Pulling the plug and letting out the baby with the bath water is ridiculous, on that everyone can agree. What people can’t agree on, surprisingly, is selecting a path for the future from the playbook of winning plays. Time and time again any more “do-gooders” seem to want to call plays from the playbook of plays that have never succeeded. In what universe does that make any sense whatsoever? When will they realize that plays that have not worked have failed for a reason? Success is not overdue. Get a grip!

With a firm grasp of some alternate reality, critics of the patent system, and specifically the critics of software patents, would have the United States forfeit the future in favor of something that has never worked. Curtailing patent rights has never worked to produce more innovation anywhere it has been tried. The inconvenient truth is that there is no evidence that a weaker patent system fosters innovation, but there is overwhelming evidence that a strong patent system does foster innovation, leads to growth, investment from abroad and a growing more prosperous economy.  Indeed, weak patent rights virtually guarantee innovation simply won’t happen.

So what is fueling the anti-software patent hatred and ridiculous claims that software patents are somehow evil? It is a particular world-view or ideology that approaches religious zealotry.  It certainly isn’t anything that resembles factual truth or reality.

Case in point, Timothy Lee.  Lee is the “journalist” who writes for Ars Technica and occasionally for Forbes who has in the past grossly mischaracterized cases and rulings from both the United States Supreme Court and the United States Court of Appeals for the Federal Circuit in order to promote his erroneous views. For example, he actually wrote that the Supreme Court has never authorized the issuance of software patents when in fact they clearly have.  See Lies, Damn Lies and Media Hatred of Patents and Doubling Down on Egregious Attacks on the Federal Circuit.

In Lee’s recent propaganda effort against software patents he took on David Kappos, Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office.  Kappos delivered a speech at the Center for American Progress on November 20, 2012, in which he defended software patents.  Lee didn’t take kindly to that and basically wrote for Ars Technica that Director Kappos didn’t know what he was talking about and that the facts clearly support those who are against software patents.

Lee wrote:

Rather than engage in this empirical debate, or even acknowledge its existence, Kappos acted as though it was self-evident that stronger patents always create a larger incentive for innovation… With all due respect, Mr. Kappos, we do have the facts. And they support the position of software patent critics.

Lee’s familiar myopic view of a world underlies his zealotry.  It is curious how anyone even casually associated with the industry could believe, let alone say, that the facts support the software patent critics.

According to Sacha Wunsch Vincent, Senior Economic Officer at the World Intellectual Property Organization (WIPO), “Innovation is a central driver of economic growth and development and generator of better jobs. It enables firms to compete in the global marketplace and to find solutions to technological and economic challenges.” Vincent goes on: “in high-income countries, innovation – the act of creating new products or processes – accounts for as much as 80 percent of economy-wide growth in productivity. At the firm level, those that innovate outperform their non-innovating peers and drive economic growth.”

This is nice to say, but what is the proof? Is there really a correlation between high-income countries and patents? Yes, indeed there does seem to be such a correlation.

The World Bank classifies countries based on gross national income (GNI) per capita. High income countries have a GNI per capita of over USD 11,456; upper middle income of USD 3,706 – 11,455; lower middle income of USD 936 – 3,705 and low income of USD 935 or less. Where do you suppose you see the most patenting? If patents inhibit economic growth and opportunities then you would expect to see a higher percent of patents in the low income economies, but you don’t oddly enough.  You find that the overwhelming majority of patent activity is in the high-income economies — upward of 85% of patent activity is in high income economies in fact. With that being the case how can anyone with a straight face argue that patents get in the way of economic development? High-income economies where patent rights are strong see a tremendous amount of patent activity while those lower income, middle income and even upper middle income economies, where patent rights are not very strong and not very desirable see very little patent activity. See Patent Lens.

Furthermore, WIPO assists governments in the least developed countries in efforts to put in place policies for using intellectual property rights to their best advantage by developing and strengthening the creative potential and inventive capacity of their people. When under developed countries follow a path that implements intellectual property rights they see outside investment and tremendous economic growth. On this point a 2009 report prepared for the UK Intellectual Property Office concluded:

Empirical evidence shows that stronger rights positively affect the volume of  inward FDI in developing countries, especially those with strong technical absorptive capabilities. Additionally, they may influence the composition of FDI by encouraging investment in production and R&D rather than in sales and distribution.

So there are some facts that would suggest that the critics are wrong about patents.  But wait, there is more!

Lee also wrote: “the costs of patent litigation began to exceed the benefits of holding patents in the 1990s. Software and business patents were particularly prone to litigation.”

It would seem that if the cost of litigation exceeds the benefit of holding a particular patent then there is no use to have a patent and we might as well all go home.  To believe that is one thing, but to announce such a ridiculous statement to the world? Obviously Lee has a very high opinion of himself and he has certainly drank the Kool-Aid served by the anti-software patent community. He must also think that those who know something won’t be reading what he writes or challenging the obvious absurdity.  It seems Lee knows little to nothing about how software patents are valuable and why so many start-up companies and large companies alike pursue them.

Director Kappos started off his speech by pointing out an inconvenient truth that the anti-patent community simply cannot rebut.  Kappos explained:

It is increasingly clear that intellectual property, or IP, is a key driver of economic growth, exports, and job creation. IP rights are the global currency for creating value for products and services, for all innovators, in all markets. And the protection provided by patents is critical to the innovation ecosystem. In fact, last spring, the U.S. Commerce Department released a report that found IP-intensive industries support at least 40 million jobs and contributes more than $5 trillion to our economy, accounting for 35 percent of America’s gross domestic product.

Kappos might have also pointed out that 27.7% of all jobs in the U.S. were either directly or indirectly attributable to IP-intensive industries, and the amount contributed to the U.S. economy represents a staggering  34.8% of GDP. See IP Contributes $5 Trillion and 40 Million Jobs to US Economy. These figures and economic realities seems to further call into question Lee’s comment that the facts all support the critics. Apparently Lee just ignores what doesn’t fit into his predetermined narrative.

Kappos would go on to specifically address software patents and the “patent wars” that are so often used as illustrations of the patent system run amok by the anti-patent community.  Kappos said:

Software patents, like all patents, are a form of innovation currency. They are also ecosystem enablers, and job creators. The innovation protected by software patents is highly integrated with hardware. All of it must remain eligible for protection. The current software patent “war” is hardly the first patent war—and unlikely to be the last in our nation’s patent history. Whenever breakthrough technologies come onto the scene, market players find themselves joined in the marketplace by new entrants. The first instinct of the breakthrough innovators is to bring patents into play. This is not only understandable, it is appropriate. Those who invest in breakthrough innovation have a right to expect others to respect their resultant IP. However, in the end, as history has shown time and time again, the players ultimately end up agreeing to pro-consumer solutions via licenses, cross-licenses or joint development agreements allowing core technologies to be shared.

Indeed, the groundbreaking research of Professor Adam Mossoff of George Mason University School of Law on patent thickets shows that Kappos is correct.  One of the so-called patent thickets that Mossoff has looked at is the sewing machine thicket of the middle of the 19th century. See America’s First Patent Thicket: Sewing Machine War of the 1850s. Mossoff shows conclusively that patent thickets are not a modern problem, but have existed through history.  Mossoff’s research has also demonstrated that patent thickets are responsible for tremendous growth in innovation. Patent thickets do not inhibit innovation, large numbers of companies seeking to patent the same technology leads to unprecedented technological advancement.  Mossoff says:

The Sewing Machine Combination reveals how patent owners have substantial incentives to overcome a patent thicket without prompting by federal officials or judges, and that they can in fact do so through preexisting private-ordering mechanisms, such as contract and corporate law… The Sewing Machine Combination is an example of how patent owners can rescue themselves from commercial gridlock, which unleashed an explosion in productivity and innovation in a product that was central to the success of the Industrial Revolution in nineteenth-century America.

Once again, proof that Director Kappos was correct based on unassailable historical reality. And for those wondering Mossoff is continuing his research into patent thickets and is finding the same, universal trend. Patent thickets cause innovation to leap forward.

But more than the fact that gluts of patents in one area leads to an unprecedented explosion of innovation, patents are extraordinarily useful to companies who need financing to realize their objectives. Indeed, 76% of venture-backed entrepreneurs and 67% of all entrepreneurs say patents are absolutely vital to obtaining funding. And for those software folks who always want to incorrectly believe they don’t need funding, the figure was 60% for software companies.  it doesn’t matter what industry you are in, significant percentages of VCs place a premium on patents when making funding decisions. So why would any company knowingly make themselves less attractive to VCs? Getting VC funding is already extremely difficult. Why would you weed out 60% or more VCs otherwise inclined to invest?

Now let’s return to Lee’s implication that since the cost of litigation is so high software patents are not useful. What Lee doesn’t understand is that software patents are obtained for a variety of reasons, and like every other type of patent the overwhelming majority of software patents are never litigated. Of course, Lee and his allies would rather you believe that software patents are litigated all the time, but the truth is only a small fraction of patents are litigated.

Indeed, in a typical year there may be 250,000 patents issued and there may be approximately 4,000 patent litigations filed, 96% or more of which will settle before judgment is reached. Thus only a small fraction of patents will ever be litigated, and even a much smaller fraction of patents litigated will ever wind up reaching a verdict.  That means even among those most valuable patents that are believed to be infringed only a handful will result in litigation that is not viewed as a business dispute to which there is a solution. Yes, Mr. Lee.  Litigation is not typically about winning at all costs, it is about leverage and obtaining a deal. You should have gotten that message loud and clear when Yahoo and Facebook sued each other and then just a few months later settled.  That is far and away the most common occurrence.

Take for example the chart below, which shows the cases commenced and how they were resolved in the district courts. Patent litigation is a business matter where there is a business solution.

As you can see, any objective view of reality shows that approximately 25% of patent litigations commenced settle without the district court ever doing anything. Approximately 50% of patent litigations settle before even the pre-trial conference, and approximately 20% settle after the pre-trial conference but before trial. So why focus on the expense of litigation when the overwhelming number of patents will provide value without ever being litigated? Talk about a ridiculous argument made to obscure the truth.

Software patents are valuable to attract investment, which is absolutely critical for a start-up company.  And start-up companies are the ones who do the most hiring and create the jobs in America. That is one thing that even Republicans and Democrats can both agree on.

So why would anyone focus on the cost of litigation related to those handful of cases and ignore the inherent value of all those other patents that will not be litigated? Why would you ignore those patents that result in the infusion of capital that let businesses grow? Why would you ignore those patents that are licensed and cross-licensed? Why would you pretend that software patents are something that they clearly are not unless you had an agenda? Good questions that I doubt Lee or any others in the anti-patent community will address.

But why do I get so upset about what is on its face utter nonsense exposed by someone who isn’t informed enough to actually have a fact based opinion? Aside from the fact that truth and factual reality should inform any debate rather than misinformed zealotry that seeks to distort, it matters because software is the new engine that drives practically everything. Computers are nothing other than an expensive paperweight without software, which should be self-evident to anyone who uses a computer.  To accomplish anything on a computer requires software, which means software is fundamentally critical in the Age of the Internet. Where would electronic commerce be without software? Where would Microsoft be without software? Without software smartphones would be rather stupid because they couldn’t do anything other than function as an inferior phone. And computer and various computer devices are embedded within so many of the products we use and buy every day.

Director Kappos is 100% correct. Patents are an asset. Patents are a form of innovation currency. Those that don’t see that are either fooling themselves or hopelessly blind to reality. If they want to live their life in what appears to be blissful ignorance that is fine with me, just don’t expect me to sit by and what the distortions and lies. The mindless dribble that passes as journalism influences that masses and influences policy-makers who mistakenly believe that those on the periphery of the industry are experts. Experts people like Lee are not! They are ideologues with an agenda.

Ideologues with an agenda are akin to the weakest chess player you will ever meet. What makes a good chess player is the ability to see multiple moves into the future.  They will envision to board and intricacies of every move, recursively going through possible scenarios and outcomes. Ideologues with an agenda are never capable of seeing beyond the move they are making now, always wondering what happened. The sad thing is we know what will happen if we prohibit patents in any particular area. Innovation ceases because investment dries up and there is no incentive. Sure the copycats do well for a while, but then in the absence of innovators copycats play the part of a one-trick pony.

If you haven’t noticed America doesn’t make anything any more, at least nothing that is tangible. Everything we buy is made in China, or Mexico or Viet Nam or somewhere else. The U.S. economy is based on intellectual property and the foundational intellectual property we have for the 21st century innovation based economy is software. We know from history that where patent rights are strongest is where companies locate, innovate and grow.  Where patent rights are weakest there is no foreign direct investment, companies do not go there and economies suffer. Once upon a time the UK dominated in biotechnology, but now the U.S. is dominant thanks to a strong and liberal patent system. If we curtail software patents we will be forfeiting not a single industry, but an enormous software industry AND any number of other industries and sub-industries in various other technology fields that rely upon the development of software.  Think bio-informatics, for example.

Why would we forfeit the future? This is a particularly problematic question given that the arguments against patents in general and software patents specifically have no basis in fact.  The overwhelming evidence to the contrary supports what Director Kappos said.  Patents create value for products and services, for all innovators, in all markets.  Software patents are no exception.

Mr. Lee and the others who share his views are 100% wrong. The facts do not support the critics of patents generally or software patents specifically.  The facts support the inescapable conclusion that patents foster innovation and lead to unprecedented economic growth.