Expansion on Paul Graham's: Are software patents evil?
http://convmediatips.wordpress.com/2010/04/13/thoughts-on-patents-and-by-extension-software-patents/
I wrote this essay for a law class and I take a strong position on it thanks to Paul Graham. I shed some more light on real world case examples of software patent issues. Please let me know what you think:

The Battle Against Software Patents

Are software patents evil? At the very least, they are certainly debatable and have been for a long time. Court rulings on software patents vary across the board. In one case, they may rule that a patent holder has no leverage, the next court may decide to award millions of dollars in damages. One thing is for certain, when software patents issues arise, the damages in request are not minute. The other truth is that the cases are always filled with nuances. The question to be decided is two-fold: “is it bad, given the current legal system, to apply for patents? and also a broader one: is it bad that the current legal system allows patents?”. Looking at one case, VirnetX v. Microsoft, we will see that patents are indeed enforceable in some courts (particularly the Eastern District of Texas), while looking at another, Function Media v. Google will find a patent completely illegitimate. I believe that patents are evil; they break one of the fundamental rules of capitalism: competition. In this paper, I will discuss the different rulings on different cases and attempt to persuade you that patents are indeed evil and at least should be unenforceable – even though that may not always be the case in reality.

Let’s go ahead and clear something out of the air before we even start. One would notice that this paper began by asking “are software patents evil?” However, I am inclined to believe that if software patents are evil, then patents as a whole should also be deemed evil. As Paul Graham states, “gradually our machines consist more and more of software. Things that used to be done with levers and cams and gears are now done with loops and trees and closures. There’s nothing special about physical embodiments of control systems that should make them patentable, and the software equivalent not[i].” Even as such, we will discuss cases that strictly pertain to software issues. Why? Because software cases tend to illuminate the subtleties of patent law. Before we go any further, let’s discuss what the criteria for patentable material is and relate it to the software industry.

The first question in the USPTO’s patent process flow chart asks, “has your invention already been patented?”[ii] If the answer to this question is Yes, the office suggest that you end the process. This as to be expected from the office that believes most firmly in the power of intellectual property; unfortunately the office and I have a big disagreement in this regard. Also, in order to receive a patent, your invention must go beyond being simply “new;” it must transcend to the point of being novel and unobvious. The last thing that we will see in the Google case is that the company with the patent who is filing the lawsuit sometimes must actually have the patented process in production (this sounds fairly obvious, but we will briefly discuss the tragedy of patent trolls later).

Sometimes, patents do fly with the court. The most infamous of these software patent cases is Amazon v. Barnes and Noble and Amazon’s “one-click buy” patent. The problem with this patent is that not only is it enforceable but it is ridiculously obvious. As Paul Graham puts it, “Any online store that kept people’s shipping addresses would have implemented this. The reason Amazon did it first was not that they were especially smart, but because they were one of the earliest sites with enough clout to force customers to log in before they could buy something.”[iii] However, this case is simply too old to discuss, but it is definitely worth mentioning as it is widely considered one of the most ridiculous wins for a company enforcing software patents.

However, we are going to discuss a different case involving the biggest tech company in history: VirnetX v. Microsoft. In this case, a decently sized technology company had patents for “virtual private networking (VPN) technologies that belong to Scotts Valley, [a] Calif.-based holding company.”[iv] In this case, the product line for Microsoft that was implicated was very, very extensive. It included “Windows XP, Windows Vista, Live Communication Server, Office Communication Server, Windows Messenger, Live Meeting Console, and Microsoft Office Communicator.”[v] VirnetX not only filed for damages, but also filed for an injunction to stop the sale of any of these products until the court hearing was over and a decision was reached. Luckily for Microsoft, VirnetX did not receive this injunction which is a massive win for Microsoft as the holding of sales for those products would have been detrimental because who knows how long the hearing would take. Microsoft did not get off easily however, the court “found that the infringement [was] willful.”[vi] This means that Microsoft was deemed to have known about the existence of the patents but still pursued with basically “stealing” the software (at least in the eyes of the law). The component of willfulness is it a big one, it “means the judge could as much as triple the jury award.”[vii]

So why would one of the biggest software giants ever do this sort of thing willfully, knowing that they could be sued for a very large amount? It appears to me that it could be for two reasons and two reasons only: 1) it made more business sense to steal the idea, face the law and pay the penalty, but still come out on top with revenues from the products with stolen components, or 2) Microsoft believes as I do that patents are generally unenforceable, shouldn’t be obeyed and are evil. Unfortunately I am disinclined to acquiesce to this second proposal seeing as Microsoft holds well over fifty patents that they have sued for against competition. Sometimes they win, sometimes they lose; either way, it means that at some point in time, Microsoft was in the same position as the plaintiff in this particular case we are discussing. To me, this means that Microsoft, and Google for that matter completely understand that patent law is completely unpredictable but are still willing to play the game. This is probably due to their sheer size; even though Microsoft got hit with a “$105.75 million judgment against Microsoft (MSFT) for infringing two of the company’s patents,” this amount is literally almost nothing in comparison to the money Microsoft has made with the stolen technology.

In this case, VirnetX came out on top (at least at the surface of appearance) because “the decision also may help Scotts Valley, California-based VirnetX reach licensing agreements with other companies,”[viii] which means the problem of software patents existing and being enforceable (at least in some cases) will work for one of the businesses the majority of the time, which inevitably means that the madness will continue. The question I am trying to answer is how and why is this allowed to exist given our capitalistic nature as a whole.

That said, let’s examine our next case– Function Media v. Google. The case goes as such: a husband and wife run business that no one has ever heard of sues one of the largest online software manufacturers ever to exist for $600 million in damages. Their claim? Google infringed on two of their patents, specifically numbers 7,240,025 and 7,249,059. These patents consisted of a method of matching the color of advertisements to the color of websites, “Dean and Stone claimed their patents covered Google’s AdSense for Content program.”[ix] Due to this claim, they believed that they could receive a 12% Internet Royalty on Google’s ad revenues.

Function Media is a perfect example of how flawed the patent system is. Function Media’s ideas were granted patents in 2007 after having been applied for in 2002 and 2004. One of the problems in this particular case is that the couple never finished writing the computer code used in their patent. How does this happen? It’s pretty simple actually; software has changed the way a business can be run, I know this from experience. It is not necessary anymore to actually have the proper technological skill level to actually build your own product. It has become so simple that all someone needs to do is have an idea for some kind of software (remember, software no longer includes just the disks that you purchase at Best Buy such as Microsoft Office, but now also includes any Internet technology), then you can hire a computer programmer to build your system while you retain the ownership. This is exactly what happened in the case of Function Media: neither of the business owners were technology people, the furthest they got was a couple of years of a computer science degree at a junior college. Dean and Stone decided not to build their own software, but rather to hire Dean’s old professor to write the code. The problem? The couple ran out of money and the code was never finished. This means that Function Media was attempting to win a lawsuit for the sum of $600 million based on the fact that they had the concept of a software solution, not the fact that the software was actually in production. Sound funny? That’s because it is; the more amusing part of the case is the fact that had Function Media actually finished building their blatantly obvious software idea, the court’s decision may have swayed in their favor. This is not an opinion, Function Media also attempted to sue Yahoo! Yahoo, fearing a loss in court settled the case with Function Media for an undisclosed amount.

There is a certain name associated with companies like Function Media: patent trolls. It is an all-to-common thing, companies will file for patents and sit on them until a big company comes anywhere remotely close to an infringement of their “intellectual property,” then they strike. Google has been sued some 45 times over the years for patent infringement but “the company appears to have settled only a few of the suits brought against it.”[x]

The Function Media case highlights one of my main arguments: the problem lies in the fact that the USPTO does not understand software and therefore grant patents for things that should never have been deemed patentable. The courts are at fault, but my opinion is that the courts are faced with the challenge in the first place because of the way patent laws work. Just as the USPTO has not caught up with technology, neither have the courts. But who’s to blame? The USPTO and their mere existence.

My opinion is that patents completely destroy the one of the only things about capitalism that actually makes sense to me: competition. To me, the fact that a company can come up with a technology, patent it and use it, or worse, sit on the patent until someone else executes on it (whether the executing company does it willfully or not) completely destroys the basic capitalistic idea that companies should be competing against each other using better strategic decisions. Companies should not be allowed to lean on the law and ask the law to protect them against competition. Also, by purposely protecting against competition, it slows down the rate of innovation for the economy as a whole. Why? Because when people have to compete, they have to innovate on strategies, marketing, and features. When you no longer have the pressure or need to compete, you no longer have to worry so much about satisfying users’ demands because you are their only option. It’s you or nothing when you are patent protected.

Now, this is an issue that I have given a lot of thought to. Being a business owner in my particular situation of attempting to raise money, one of the biggest questions I’ve been asked by investors is “what is to stop someone from ‘reverse engineering’ your application and competing against you?” I get a little infuriated by this question because I am adamant that patents are evil, and yes, my passion for this fact did clearly show to the investor. However, in my particular case I was able to convince the investors that patents are not something to worry about. In our situation, we are competing against a massive company (at least equally as big as the defendants in each of the cases described above): Verizon Wireless (an $85 billion dollar company which obviously much more clout than my tiny company). What does this mean for me any my company? It means patent issues are sure to come up and we could be one of these defendants that gets the short end of the stick.

However, the way this generally works is that should we end up in a lawsuit it would mean good things for my company. A big company is not likely to sue a small company – its not worth the effort; they will pull out the patent nuclear strike only when they feel threatened, which would inevitably mean that we are doing at least as well, or better than, Verizon or any company that enters the space.

What this also means is that I have to have dignity. If I am going to sit here and say that patents are evil, then I should not be applying for patents at all; this means that I could never see the upside of suing a bigger company. It means that if I am going to beat any of my competitors, it will have to be done the good old-fashioned way: better business tactics and marketing plans. However, unfortunately, I will be facing an uphill battle the entire time whether it’s going against potential investors’ wishes to file for anything that is potentially patentable and also means that I could be stuck in a legal battle at some point of time. That’s the game I am willing to play, but I will not play in the evil game that the patent office, the courts and other companies play. The unfair part of it is the thing that I hinted at earlier, it is always the big company’s that have the upper-hand, even when they do get slapped with hundred of millions of dollars in damages because they are so big that they don’t have to care. A judgment like that could potentially destroy a company like mine.

The alternate is also true. I am not alone in this battle against patents, and there is always the possibility that it could be us that changes the way patents are enforced. But that would just be lucky and would require the same liberal mindset of the jurors and the judges. This, at the moment is not likely; as long as the USPTO remains clueless about software as Paul Graham suggests, the courts will generally uphold the law, granted there are no nuances such as in the Function Media case.

Ultimately, my decision is that yes, software patents are evil and should be unenforceable. Companies should be forced to compete and companies can’t be sore losers when they lose based on business practices. This means that investors in small companies need to have a more open mind to the fact that small companies will need the kind of capital to effectively compete against a company with billions in retained earnings. I don’t feel I am alone in this belief, I know that at least one of my favorite startup gurus Paul Graham agrees, and I hope that more companies choose to fight the battles against the big patent holding companies and patent trolls. This is the only way to win the battle against patents but there will be many painful losses for the small guys along the way and occasionally the small guys will at least pick a scab off the big companies that choose to play to the unfortunate game of patent law.
[i] Paul Graham, “Are Software Patents Evil”, Paul Graham Essays, June 12, 2010, http://paulgraham.com/softwarepatents.html

[ii] USPTO, June 12, 2010, http://www.uspto.gov/patents/process/index.jsp

[iii] Paul Graham, “Are Software Patents Evil”, Paul Graham Essays, June 12, 2010, http://paulgraham.com/softwarepatents.html

[iv]Stuart J. Johnston, “Microsoft Loses Another Patent Lawsuit”, Datamation, April 12, 2010, http://itmanagement.earthweb.com/cnews/article.php/3871256/Microsoft-Loses-Another-Patent-Lawsuit.htm

[v] Stuart J. Johnston, “Microsoft Loses Another Patent Lawsuit”, Datamation, April 12, 2010, http://itmanagement.earthweb.com/cnews/article.php/3871256/Microsoft-Loses-Another-Patent-Lawsuit.htm
[vi] “VirnetX Wins $105.8 Million Microsoft Patent Verdict (Update1), BusinessWeek, Apr 12, 2010 http://www.businessweek.com/news/2010-03-16/virnetx-wins-105-8-million-microsoft-patent-verdict-update1-.html
[vii] “VirnetX Wins $105.8 Million Microsoft Patent Verdict (Update1), BusinessWeek, Apr 12, 2010 http://www.businessweek.com/news/2010-03-16/virnetx-wins-105-8-million-microsoft-patent-verdict-update1-.html

[viii] Susan Decker and Dennis Robertson, “VirnetX Rises After $105.8 Million Microsoft Verdict”, Bloomberg, April 12 2010, http://www.bloomberg.com/apps/news?pid=20601204&sid=a3No_lsdbkUA

[ix] Joe Mullin, ”Patrent Litigation Weekly: Inside Google’s first patent trial”, The Prior Art, April 12 2010, http://thepriorart.typepad.com/the_prior_art/2010/02/patent-litigation-weekly-inside-googles-first-patent-trial.html

[x] Joe Mullin, ”Patrent Litigation Weekly: Inside Google’s first patent trial”, The Prior Art, April 12 2010, http://thepriorart.typepad.com/the_prior_art/2010/02/patent-litigation-weekly-inside-googles-first-patent-trial.html