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A Primer on Software Patents

Most people don't know what all the fuss is about software patents. Software patents have become a regular topic of discussion in the media and elsewhere, as legal challenges and calls for reform of the patent system in the U.S. and abroad have increased from varying organizations. In this ongoing series of executive summaries called In Focus, internetnews.com provides an overview of what's at stake in the patent debates.

What Are Software Patents?

Patents are legal intellectual property (IP) identifiers granted by an authoritative Federal institution. In the United States, the U.S. Patent and Trademark Office (USPTO) takes care of it. Patents are granted to inventors who invent something (a product, process, mechanism) that didn't exist before and/or is not so obvious as to negate its value as something that was "invented."

Software patents are a class of patents that apply to inventions in software -- as opposed to a physical product or mechanism.

Patent holders own the rights to the patented invention and can license the use of the invention to interested parties. But those who make use of the patented invention without licensing it from the respective patent holder are potentially infringing on the patent holder's rights, and legal action could be taken against them.

Patent Disputes

Patent disputes in the IT industry are common occurrences. Company X accuses Company Y of infringing on Patent Z. One of two things typically happens in any of these patent disputes, and sometimes the two happen in combination: The parties agree to a financial settlement, where Company Y pays Company X; or the parties "cross-license" their patents, where Company Y licenses Patent Z from Company X and Company X licenses Patent A from Company Y as well.

There are also, generally speaking, two entities involved in software patent disputes -- companies with products and companies that exist only as patent-holding companies (some call them patent profiteers). Disputes also often tend to arise from so-called "submarine patents," which are granted but not widely known. Others unknowingly use them and then are potentially hit with patent infringement cases by the patent holder.

Submarine patents are not specific to software patents. One of the most prolific submarine patent holders of all time, the late Jerome H. Lemelson (who passed away in 1997) extracted billions from dozens of corporations (including Ford Motor Company) in a variety of industries.

The Software Patent Debate

In today's era of open source proliferation, beyond patent disputes themselves, there are people and groups that have called into question the validity of issuing software patents in the first place.

The European Union, for example, is currently in a state of legal limbo with regards to the legality of software patents, with some arguing that they are expressly prohibited. Yet companies are still being granted software patents that apply in the EU.

Prominent members of the open source community have come out against the granting of software patents in the EU. The nosoftwarepatents.com movement (which is nominally backed by MySQL and Red Hat) has made numerous pronouncements.

Open Source applications by definition are open and shared openly among developers, which is not particularly compatible with the current software patent system.

In August 2004, Open Source Risk Management announced that it had found 283 issued, but not yet court-validated, software patents in the Linux kernel.

Linux vendor Novell has pledged it would use its patents to protect open source development. IBM, which is granted more patents than any other entity over the past several years, has also pledged its support granting 500 patents to open source.

IBM on Patents

According to Bob Sutor, vice president of IBM Standards, software patents are a good thing.

"The existence of patents encourages the use of open source and open standards," Sutor told internetnews.com. "Patents are fundamental parts for driving interoperability and innovation."

The issue with software patents boils down to how you use them, according to Sutor. They can be used both for and against open source and can be for real or not so real innovation, and that's where problems arise.

"We do have feelings that patents should be for real technological innovation for significantly moving the ball forward," Sutor explained. "Around the world, as people start examining what things get to be patented, they should be minor little changes that are used for control but should be real advancements."

The open source paradigm and issues with patents are not new situations in Sutor's view.

"People talk about the variety of open source licenses. The same is true with proprietary licenses. There are licenses and IP involved," Sutor explained. "So I think it's unfair to think that this is some new strange situation that we haven't been in before."

In terms of advice for enterprise IT users, Sutor isn't so sure that they want to know about patents.

"Do they want to know about patents? I think that they care about the software that they use and where it comes from. They care about TCO, care about support and maintenance, quality scalability and performance," he said.

But Sutor cautions that users should avoid the FUD (Fear, Uncertainty and Doubt) that surround the whole software patent issue.

"Understand what is FUD where it's coming from and why," Sutor recommends. "Get to the key features around what you need and why, and understand that people will use FUD around issues like indemnification. It's a vendor issue, not a customer issue."

A View Against Software Patents

There are a number of things at stake for enterprise IT admins, buyers and users in the software patent debate, according to Dan Ravicher, executive director of the Public Patent Foundation (PUBPAT).

Software patents increase the cost of any product or service that includes or relies upon software at any point in its production and distribution cycle. The increased cost is due to the fact that the product or service vendors need to account for the added cost of dealing with patent-infringement risk, as well as possibly having to pay for a license to use a particular patent or patents. The top five things that enterprise IT users should know about software patents, according to PUBPAT, include:

  1. The price of any good or service that relies on software at any point in its production or delivery cycle includes a component of its cost that is attributable to dealing with software patents. Some call this a "patent tax."
  2. Software patents can be used to prevent better products and services from being made available to the public, even if the patent holder herself offers no product or service.
  3. Many technology company officials and economists believe that software patents provide no meaningful incentive to advance technology, but instead stand only to impede technological advances, as there is no exception from patent infringement for doing research and development.
  4. The average cost of defending oneself in a patent infringement lawsuit is $2 million to $4 million, despite the fact that roughly two-thirds of the time the alleged infringer wins.
  5. There is no exception from patent infringement for personal, non-commercial or de minimis activity. Any use of software that allegedly infringes a patent can be threatened and sued.

Microsoft's View: Patents as Currency

According to David Kaefer, Microsoft's director of business development for the IP and Licensing group, there are some trends that suggest enterprises should spend more time thinking about software patents. In particular Kaefer noted the fact that there are lots of IP companies out there, that is companies that don't product any product and only exist to collect patent royalties.

"We estimate that it costs $2 million to defend against an IP claim in litigation," Kaefer said. Microsoft knows a thing or two after IP claim litigation, since, according to Kaefer, Microsoft defends itself against three-dozen IP suits at any given time and wins in 80 percent of cases.

On the other hand, Kaefer said, end users are not as likely to be at risk from potential legal costs (in comparison to enterprises) arising from patent issues, though it is still a possible risk.

"Historically there are very few examples of end users that have had to deal with actual court cases involving IP infringement," Kaefer explained. "There are cases that we know of in part because our own customers have faced them, where third parties do assert IP claims against end users. But you never read about them because they are dealt with before they ever get to court."

One way for enterprises to protect themselves, and something they should care about, is IP indemnification. IP indemnification is a form of insurance where the software provider protects end users against IP infringement claims. IP indemnification can be used to help dissuade IP claims by protecting the end users from potential liability.

From Microsoft's point of view, software patents are an important component of the development ecosystem. Kaefer explained that originally Microsoft was a trade secret reliant company. Trade secrets are anything a company knows how to do and doesn't share outside of the organization. Over time that has changed because in an era of heterogeneous systems you have to share info with other providers. That's where software patents come into play.

"Without software patents, our company and others would rely more on trade secrets, and patents provide a better currency than trade secrets ultimately," Kaefer said. "We have a whole lot of faith in patents.

"For us patents are a currency that allows firms to exchange innovative ideas," Kaefer continued, "and we actually think that they speed the rate of profusion of innovation across product lines."

He added that software patents give companies the freedom to learn from the ideas of inventors. Typically they pay for that, but then they get development freedom and they can offer the latest and greatest technology in their products.

"Innovators are rewarded and the customer wins because they get more products to choose from that have more similar feature sets."

Licensing out is important and allows you to build business relationships with competitors, and licensing in helps to build more robust products in Microsoft's view. According to Kaefer, Microsoft spent over $1 billion last year (a lot of it in digital rights management) licensing in other parties' patent rights.

The issues surrounding patents and the patentability of something that isn't as tangible as a piece of hardware are not historically new developments.

Kaefer noted that the debate has happened many times over at different points. In the 1920s, there was a patent debate surrounding refrigerators and other consumer devices powered by electricity. The argument was that those items were not patentable because electricity is a force of nature and no company should have control over nature.

"History is our guide that many of those concerns are not well-placed."

Part of the issue with patents is that people don't know a lot about them.

"Patents provide an exclusive right to do something for a certain period of time and that sounds scary. How that actually work in practice very few people have an understanding of that," Kaefer said. "The interest in patents is partially fueled by the fact that the industry as a whole hasn't done a very good job of explaining how they work."

That's not to say that Microsoft doesn't think that there are issues that need to be resolved within the current system of granting patents.

"Move beyond whether there should be patents to what kind of patents should there be then I think we're in a much richer place to have a discussion," Kaefer said.

In March 2005, Microsoft's General Counsel Brad Smith outlined Microsoft's four-point plan for reform.

The four areas are patent quality and quantity; minimizing abusive litigation; international harmonization of patent laws; and increasing access for individual inventors and small companies.

"When software started getting patented in the mid-90s, there weren't a whole lot of software patent engineers. You've got to build a base of knowledge, norms and practices," Kaefer said. "We're really 10 to 15 years into that effort, and like any effort, you've got to find a way to improve it over time."