There are more losers than winners with software patents

by Monica Goyal

Today, it seems to be common rhetoric that if you are a successful software startup, you will eventually be sued. If you have conducted business in this industry for any length of time, you likely know of a company that has become the target of a software patent suit.

At times, the persons who come knocking on the door are those, whose only business assets are patents, where they don’t actually make any products. They usually seek some form of royalty from a legitimate business enterprise. Intellectual Ventures, for example, is reported to own 35,000 patents and earned $700M in revenue in royalties in 2010.

Another example can be seen with interactive television programme guides. Gemstar, acquired by Macrovision (now Rovi Corporation), holds the intellectual property rights for numerous interactive television programme guides, effectively controlling how millions of people find their favourite television shows.

Their business model is to look for companies that appear to be infringing on any of their numerous patents and then ask for money. As the cost of defending against a patent suit is so high, Rovi often succeeds in this venture. Larger corporations, such as Virgin Media, who recently won a patent dispute against Rovi, are the only companies able to effectively fight back against these strong-arm tactics. Fortunately for Virgin Media, a UK court found Rovi’s patents to be invalid. This decision was appealed and upheld by a higher court in March 2011.

The sad truth today is that in order to play the patent game, you have to have money. The cost of filing a patent is estimated to be $5,000 to $15,000.  The cost of patent litigation is estimated prior to a trial at $1 Million, and for a full patent defense at $2.5 Million.

There are three outcomes, as I see it that arises from the disparity between the cost of filing and litigating a patent:

1. Companies are aggressively filing patents. The big companies are aggressively patent ideas, even for things not directly related to their business. If you visit the United States Patent Office, and search for the top ranked organizations for patent filings, not surprisingly, the list top 10 companies reads like a who’s who of the tech industry.
2. Some people are getting royalties from hard working and innovative companies without having made the same investments in research and development. Intellectual Ventures and Rovi noted above are prime examples of this.
3. At $2.5 Million, the cost to invalidate a patent is so high that companies will continue to pay money even for invalid patents. Furthermore, a patent invalidated in one jurisdiction does not invalidate it in another country. As a result, a company that has been proven to hold an invalid patent is free to enforce that patent elsewhere, requesting royalties in every other country.

So what can be done? Some people have called for the end of software patents, others have said we need to make it less expensive to file and litigate patents, and others have suggested ways to make it easier to invalidate patents.

There are pros and cons for each of these solutions. Unfortunately, we may never have the courage to go so far as severing the patent system for technical ideas and products, but maybe a good start to finding a balance is by restricting the length of tech patents from twenty years to ten. A shorter patent term would reduce the restraint on trade, especially in an industry where the commercial life span of a technology is rarely more than 5 years, and where 20 years could be several product lifetimes.

A shorter patent term also reduces the financial incentives for those people who patent an idea and wait for others to commercialize. They will have a shorter window in which to benefit from the patent. Finally, it would reduce the incentive to file invalid patents, maybe even valid patents too (which isn’t a bad consequence).

Something has to be deone, because right now the status quo does not serve anyone well. 

Monica Goyal is a Toronto-based lawyer and a technology entrepreneur who founded My Legal Briefcase,