Cisco Systems designs and sells network equipment. Cisco was founded in
1984 and went public in 1989. Between 1984 and 1993, the first ten
years, the company filed only one patent. In 1994 the company had grown
to over \$1B in annual revenue. This growth was obviously not fueled by
patents, it was fueled by competition and by open non-proprietary
interfaces. But in 1994, the company started a program to obtain more
patents. We did this for defensive purposes, to have something to offer
in cross-licenses with older companies who had large patent portfolios
and used them to obtain revenue and design freedom through licensing. We
filed 6 patents in 1994, and increased that each year; we are now filing
over 700 patents/year. We have entered into several cross-licenses and
we have been involved in several costly patent lawsuits. I would like to
discuss the relationship between patents and innovation at Cisco.

Cisco is an innovative company. Our Chief Development Officer, Mario
Mazzola, defines innovation as "a more efficient and creative way of
providing customers with products and technology that deliver new levels
of functionality and services that were previously unattainable.
Innovation is more than just a new idea---it is about taking a new idea
and developing it into customer value and positive business impact". We
have done this, we have brought products to market that have helped
create the Internet as it exists today and that have helped change the
way people communicate.

My observation is that patents have not been a positive force in
stimulating innovation at Cisco. Competition has been the motivator;
bringing new products to market in a timely manner is critical.
Everything we have done to create new products would have been done even
if we could not obtain patents on the innovations and inventions
contained in these products. I know this because no one has ever asked
me 'can we patent this?' before deciding whether to invest time and
resources into product development.

On the other hand, I am sometimes asked whether anyone else has a patent
on a product or feature that we are considering. But, despite the fact
that our products are independently developed, that we do not copy, I
can never definitively 'clear' a product or feature, or determine the
costs of licensing in advance. First of all, there is the well-known
'hold-up' problem, where patents issue after the product is in the
marketplace and design-around is costly. As Prof. Shapiro notes, the
hold-up problem is worst in industries like ours where a large number of
patents can potentially read on a given product because the likelihood
of stepping on a land mine is so great. I would add that even early
publication does not solve the problem, because of the uncertainty about
the claims that will issue. I would also add that, in addition to the
hold-up problem, the large number of issued patents in our field makes
it is virtually impossible to search all potentially relevant patents,
review the claims, and evaluate the possibility of an infringement claim
or the need for a license. And the penalty for so-called 'willful'
infringement makes this a really bad idea. It makes more business sense
to assume that, despite the fact that we do not copy other company's
products, and despite the fact that we do not derive solutions to
problems from the patent literature, we will be accused of patent
infringement. The only practical response to this problem of
unintentional and sometimes unavoidable patent infringement is to file
hundreds of patents each year ourselves, so that we can have something
to bring to the table in cross-licensing negotiations. In other words,
the only rational response to the large number of patents in our field
is to contribute to it.

The time and money we spend on patent filings, prosecution, and
maintenance, litigation and licensing could be better spent on product
development and research leading to more innovation. But we are filing
hundreds of patents each year for reasons unrelated to promoting or
protecting innovation.

We will certainly benefit from having patents to help deter copying of
our products. This is why patents are so critical in other industries,
such as pharmaceuticals and medical devices, to prevent copying. But we
don't need to file this many patents to deter copying, we would need
maybe one, two or three patents for each product, which is what I
believe you will find in those industries. Instead, since our purpose is
to create a portfolio for cross-licensing, we find it necessary to
stockpile patents and contribute to a backlog in the Patent Office that
has reached 3-4 years in our technology area. In an industry where
healthy competition makes time to market critical, and the pace of
innovation is so rapid, that's a long time to wait for a patent. Too
long. The system is in danger of destroying itself.

Moreover, stockpiling patents does not really solve the problem of
unintentional patent infringement through independent development. If we
are accused of infringement by a patent holder who does not make and
sell products, or who sells in much smaller volume than we do, our
patents do not have sufficient value to the other party to deter a
lawsuit or reduce the amount of money demanded by the other company.
Thus, rather than rewarding innovation, the patent system penalizes
innovative companies who successfully bring new products to the
marketplace and it subsidizes or rewards those who fail to do so.

So obtaining patents has become for many people and companies an end in
itself, not to protect an investment in research and development , not
to license technology to others who need it, but to generate revenue
through licensing ("holding up") other companies that actually make and
sell products without even being aware of their patents. They try to
patent things that other people or companies will unintentionally
infringe and then they wait for those companies to successfully bring
products to the marketplace. They place mines in the minefield. The
people and companies (I am not just talking about individuals here) who
file these patents and extract license fees from successful businesses
play the patent system like a lottery. They gamble that people will
infringe these patents without ever learning anything from the patentee,
and without interfering with any effort by the patentee to commercially
exploit their invention. The long delays in the patent office work to
their benefit by keeping the eventual coverage of their patents
indefinite while others produce products. They benefit from the high
cost of litigation by demanding license fees that are less than the cost
of litigation, hoping that people will pay even if they don't infringe,
or, if they do infringe, it will be too costly to change the product.
This provides opportunities for contingency fee litigators, for
licensing companies and consulting firms who claim to help people 'mine'
their patent portfolios for patents that even they didn't know they had.
It's hard to see how this contributes to the progress of science and the
useful arts.

And that's the point. The patent system does not exist to protect the
rights of inventors, or any particular interest group. It doesn't exist
to protect what we now call 'intellectual property', as if it were
protectable for its own sake. The patent system exists to protect the
progress of science and the useful arts. If the patent system fails to
do that in certain areas, then the costs and negative effects of the
patent monopoly cannot be justified. Where the patent system enables
true innovation, true progress, where it enables companies to bring new
products to consumers in circumstances where they otherwise would not do
it, or where it disseminates knowledge that others need and want, then
it's working. There are certainly examples of industries where it serves
these purposes, and these benefits must be preserved. But in my
experience at Cisco and my prior experience representing a variety of
companies, the negative effects of stockpiling patents, the consequences
of innocent infringement through independent development, the cost of
proving noninfringement or invalidity through patent litigation and the
exploitation of the patent system as a revenue generating tool in its
own right have hindered true innovation and outweighed the benefits.