Patents, long the tech world’s currency, come under attack

The patent office has been criticized for allowing a thicket of patents
to grow in recent years.

By Julie Landry

In today’s economy, driven as much by ideas as by actual products, patents are
more critical than ever. Just ask iSurfTV, a four-year-old electronic-programming
provider that still hasn’t signed any cable companies as customers, because
those companies fear Gemstar-TV Guide (which holds nearly 200 patents on its
television guides) will sue them. The startup expects several of its 80 filed
patents to be approved this year, but it has already eaten more than $13 million
in venture funding.

Startups hoping to
capitalize on their
innovations face the
fear of patent
constantly, and the
problem has gotten
only worse, as
companies race to
patent new
technologies before
their competitors do.
Some are concerned
that the U.S. Patent
and Trademark Office
(PTO) has responded
to the increased level
of patent activity by
granting patents that are too far-reaching, leading to what they say is unfair
market dominance by large companies that can afford to file broad patents and
fight to protect them. In response, the Federal Trade Commission (FTC) and the
Department of Justice Antitrust Division are cosponsoring a series of hearings in
Washington, D.C., and Berkeley, California, called "Competition and Intellectual
Property Law and Policy in the Knowledge-Based Economy."

"If the patent review process is too permissive, . . . competition through entry and
expansion by others may be impeded," said FTC chairman Timothy Muris, in
calling the hearings last fall. They will extend through May and will ask nearly
200 experts, professors, lawyers, businesspeople, and inventors to testify.

The PTO has been criticized for allowing a thicket of patents to grow in recent
years. The application approval rate actually remained steady at around 57
percent between 1990 and 2000, but since the number of patent applications filed
increased by almost 80 percent, the number of patents granted has risen
considerably. Since 1991, agency financing has come entirely from
patent-application fees. In theory, this means the agency can grow only by
increasing fees–which can be cost-prohibitive to individual inventors and
startups–or by keeping its acceptance level high to encourage a high volume of

That makes it difficult for startups to keep up with the patent flow. Joshua Lerner,
a Harvard Business School professor, told the committee in February, "The
reforms of the patent system and the consequent growth of patent litigation have
created a substantial ‘innovation tax.’" He believes the high cost of filing patents
and defending against patent-heavy corporations diverts money and resources
away from research and product development (see Patent Value).

Data collected by John Barton, a professor at Stanford University Law School,
shows that the number of intellectual property lawyers per $1 billion dollars spent
on research and development has nearly doubled in the last 30 years. More
recently, Internet and biotech companies have spent millions entangled in patent
lawsuits. In 1999, filed a lawsuit against for
its one-step purchasing technique. The case was recently settled after years of
wrangling, as were several lawsuits between Affymetrix, a biotech company that
wielded its "lab-on-a-chip" patents, and several competitors. Patent entanglement
played a key role in one litigant, Incyte Genomics, backing out of the DNA array

Such activities, which narrow the market, may raise the eyebrows of antitrust
officials, but PTO officials dismiss the criticisms. "The issuance of patents has
not impeded the development of new technologies and resulting industries,
despite initial protests that issuance of a patent would decimate innovation and
competition," said PTO director James Rogan in his testimony in February. Not
everyone is convinced: in March, a member of the House Science Committee,
Lynn Rivers (D: Michigan), introduced legislation that, if passed, would establish
safeguards to ensure that patents on certain genetic and genomic-based
discoveries do not impede academic research.

The PTO occasionally does revise its guidelines in response to public pressure
and Federal Circuit Court decisions. Last year, for example, debate over whether
genes could be patented prompted the agency to clarify its guidelines and allow
gene patents only when a specific use could be shown for a genetic sequence.

Some critics, including Stanford University Law School professor Lawrence
Lessig, have called for a temporary moratorium on all software and
Internet-related patents. Others, including Mr. Lerner, advocate opening the
patent-review system to the public, thus lifting some of the burden from the
shoulders of overworked PTO patent examiners. That has already begun on a
limited basis: a 1999 law mandates that the PTO post on its Web site all patents
that are also being filed internationally, allowing opposition to an application to be
voiced during the review process.

Changes at the PTO happen slowly, so there’s little chance that the FTC
hearings will prompt any specific directives or legislation. But the hearings are
giving government-wide visibility to what had previously been perceived as a
private-sector problem. As a result, they may open the door to congressional
review of PTO procedures, which could lead in turn to more stringent reviews of
patent applications while new technologies are fleshed out.

"It’s a classic Washington problem," says Mr. Lerner. "There’s a small group of
people who benefit a lot from the system and have a lot to gain from keeping it as
it is. There are also a lot of people that are getting hurt by it, but each is hurt only
a little bit, so there’s little incentive for any one person to mount an effort to fix it."
The lone inventor–or bootstrapped startup–likely hopes the hearings will
jump-start that effort.

Additional reporting by Stephan Herrera.

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