Are IBM's patent woes justified?

perspective Last year saw IBM continue its global lead in patent filing, ahead of the crowd with more than 4,000 patents filed in the United States alone. This is obviously a terrific position for the company to be in, demonstrating its continued innovation in the face of the current economic crisis.

However, the company has also found itself in the legal firing line. After much talk and speculation, rival mainframe maker T3 Technologies recently filed a lawsuit against IBM with the European Union's antitrust authority.

It alleges that IBM has been illegally bundling mainframe software and hardware, and has violated antitrust law by refusing to sell its operating systems to clients who want to run the software on systems manufactured by T3. It has also accused the computer giant of harming competition by withholding patent licenses for its mainframe operating system and certain other intellectual property.

Are these events connected in some way? Are patent holders under any special duty not to 'abuse' their patents? Has IBM got such a large piece of the patent pie that it needs to take special care?

The answer is--perhaps, but not necessarily. It is important to differentiate between a 'legal monopoly' and 'economic monopoly' to assess whether a particular company is illegally breaching its market position--they are quite different.

Patents are legal monopolies. The theory behind them is that to encourage innovation, and in return for making the invention public, society rewards the inventor with a legal 20-year monopoly over their invention.

This monopoly can give the inventor a rare opportunity to charge more for the invention than the market would usually bear, safe in the knowledge that he can prevent competitors from reproducing the invention and undercutting him.

An economic monopoly, on the other hand, is where the patent filer is the dominant player in a particular market sector.

It is quite possible--indeed, it is usually the case--that having a patent will not result in an economic monopoly. For example, a patent to a new kind of laptop that is cheaper to run than the competition is unlikely to dominate in a laptop market saturated with choice.

However, legal and economic monopolies can overlap. If the patent is for a key, fundamental technology that no one in the sector can do without, or that enables you to produce a product that is considerably cheaper than anyone else's, you may end up with the lion's share of the market.

Or, as the case may be with IBM, you have such a thicket of patents in a particular sector that no one can move without the risk of infringing one of them.

There is nothing illegal about an economic monopoly. But if a company is dominant in the market, then most countries have antitrust laws that require companies not to abuse their dominance.

For example, you cannot charge extortionate prices, and conversely you cannot drive competitors out of business with predatory pricing. You are not allowed to refuse to supply customers without good reason (which is one of the accusations against IBM) and you cannot bundle your products (refuse to supply one product without another) without good reason either.

IBM may well insist that its many patents do not give it an economic monopoly. But the regulatory authorities are looking at the interface between intellectual property rights and economic monopolies very closely. The European Commission recently launched a report on the pharmaceutical industry which accused the industry as a whole of a number of abusive practices relating to patents.

While IBM's creativity in generating all these inventions is fantastic, it is likely to disown any suggestion that these patents are causing it to dominate particular markets--still less that it is abusing them.

Richard Taylor is a partner in law firm DLA Piper's intellectual property and technology group.