Patent reform needs to go further

The US Supreme Court is currently hearing arguments in a case that could result in tighter rules for new patents. By dancing around the meaning of the word "obvious," the result, hopefully, is a ruling that makes it harder for patents that are truly obvious (even though some patent examiner judged them somehow to be "non-obvious") from seeing the light of day.

This is all well and good, and rules surrounding the grant of patents - particularly in the software realm - need to be tightened. However, patents are still based on a system wherein unlimited monopoly rights are granted on ideas for 20 years, which is a long time for chemicals used in pharmaceutical products, but is an eternity in software markets.

I've voiced my opposition in the past to software patents (here and here are good examples). That does not mean, however, that I think patents are particularly "unnatural," nor that there isn't sound economic theory underlying the grant of such monopoly rights. What matters is whether such grants yield good results, which is the same justification we use when we grant someone ownership of physical assets.

Patents are as illusory a concept as physical property rights. The fact that I "own" the PC upon which I am writing this blog is no more inherent to the PC than the fact that I "own" a script I might write, or "own" the idea encapsulated in a patent. Ownership of physical property grants me certain monopoly rights that are more extensive than those associated with "intellectual" property. I own that property as long as I live, and can even pass it on to another person of my choosing when I die. My monopoly rights on that property are (nearly) absolute (limits do exist; I can't run a ballistic missile factory in my backyard, or dump mercury into the groundwater that runs under my property), and if they extend over a wide enough range, can curtail options available to other people.

We allow such monopoly rights, however, because it is a useful fantasy that generates much social good. Property rights are what underlie the incentives which motivate enterpreneurs to create companies that create the goods that enable us to have this conversation in a digital forum (now, say that fives times really fast). Property rights are useful, and that is the only reason market economies choose to define and defend them.

Patents are a useful fantasy, at least to the extent that it creates incentives to spend money conducting research that will advance human knowledge. In an incentive-based economy, easily-copied technology that is expensive to develop is less likely to be pursued. A cure for cancer is likely to be something that is easily copied. If someone spends 10 billion finding that cure only to face the prospect of low-cost clones of the result, they aren't likely to spend the initial 10 billion required to find it.

Patents were created to bridge this gap, providing incentives in much the same way property rights incentivize enterpreneurs to create products by ensuring that all benefits from use of that property accrue to the property holder. Unfortunately, the patent incentive principle has proven less useful when extended to the realm of software and "business processes."

Who can look at the EOLAS patent and think it is sensible for someone to own for the next 20 years the notion of binary extensions that are automatically loaded by a web browser? What about the patented LZW compression algorithm used in the GIF file format and which Unisys started to enforce only after GIF had become a standard graphics technology used in web sites (the LZW patent has since expired)? What of the patent used recently against RIM (maker of the popular Blackberry wireless email product) that claimed ownership of the concept of wireless transfer of email, or the "one click" patent Amazon used to block a similar payment layout at Barnes & Noble?

Would these ideas be created in the absence of patents? Clearly, the answer is "yes," which begs the question: why protect them?

That's the question that the open source community - and Richard Stallman in particular - have, to their credit, asked. Their opposition to software patents is, in my opinion, well-founded, as they are opposing something the net effect of which is to enrich a bunch of lawyers and slow the process of innovation by creating patents on small ideas that serve as roadblocks to the creation of new ones.

I consider the likelihood of software patents going away to be low, however. In that light, is there any way to mitigate the harm from software patents through a combination of the good aspects of a patent system (the incentive principle) with a means to tailor their scope so as to prevent them becoming a long-term hindrance to growth?

I suggested in a previous blog shorter patent terms for software ideas - somewhere on the order of five years. In feedback to that blog, however (in email, not in the Talkbacks) an individual in the legal profession noted that a five year limit could make a patent virtually useless, as it takes at least that long to build a credible licensing regime, notify people of the existence of that patent, and enforce it in the courts.

Given those limitations, therefore, instead of altering the time limit, why not add a dollar limit as part of the patent grant (or euro, or Yen, or Kroner limit - whatever currency is relevant to the country / region where a patent is lodged)? As part of the patent filing process, proof of the costs associated with develoment as well as the size of the market made possible by the patentable innovation is included. Through some calculation that I am not even going to try to include in this rather long blog post (which includes some means to determine whether the cost / market size estimates are wildly unrealistic), a dollar figure is calculated which represents the patent office's determination of the expected return on investment for this patent. That dollar figure can be expected to be very high for pharmaceutical companies that spend billions in the hunt for a cure for a disease, and much lower for companies that had a developer who stumbled across a good UI layout in the course of normal software design along with in-house lawyers that moved fast enough to lodge their patent first (e.g. Amazon's one-click patent, for which I would expect the "return on investment" limit to be very low).

Once the revenue accrued by the patent owner(s) has been surpassed, the patent would expire even though it may still have years left in its 20-year allotment. Once expired, the patent will be considered public domain knowledge that anyone can use, for free.

Such a dollar figure limit would set a fixed price tag that organizations could pay in order to place that knowledge in the public domain. Governments could do this for cures for major diseases - such as the cure for cancer. Governments - or the UN - could pay for diseases that affect the third world disproportionately, such as cures for malaria. The FSF could buy out patents for critical software ideas their developers have no way to work around, which would be a lot cheaper to do if the dollar limit for patents were linked somehow to the costs associated with their development.

Fewer "spurious" patents would be filed if the income from such a patent was limited by fixed dollar amounts applied to patented ideas. 20 years creates lots of room for irrational windfalls that have little to do with the actual effort that went into the creation of an idea, thus creating large incentives to file patents on "obvious" concepts. On the other hand, preserving the 20 year patent period gives patent holders enough time to attempt to enforce their patents while providing a limiting factor in the form of a fixed financial return value.

Will any of this happen? Probably a long shot, as I'm sure members of Congress don't read ZDNet blogs that often. On the other hand, I consider the likelihood that software patents will disappear to be well-nigh impossible. There are simply too many vested interests who would lose billions if their patent arsenal were suddenly made worthless.

Reform poses greater promise, provided a middle ground can be devised that provides benefits to both sides. A dollar figure limit would help to prevent the filing of spurious patents while curtailing their ability to hold companies and the open source community to ransom.  That should be something that appeals to companies with large patent holdings - such as Microsoft - as the costs of defending themselves against external patent claims spiral ever upwards.