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New Developments in Patent Practice: Assessing the Risks and Cost of Portfolio Licensing and Hold-ups

by Daniel B. Ravicher

This is a transcript of a panel presentation given by Daniel B. Ravicher as the executive director of the Public Patent Foundation on Wednesday, November 10, 2004, at a conference organized by the Foundation for a Free Information Infrastructure (FFII) in Brussels, Belgium. The transcription was done by Aendrew Rininsland.

Thanks. I think, for me, the whole two days of conferences boils to really one question, and the whole debate boils down to one question: “How do we want success in the software industry to be determined?”

Or, another way, who do we want to determine those who succeed and those who fail in the software industry? Because there are various people who can make this decision. We can have bureaucrats make the decision about who wins and who fails, or we can let consumers make the decision about who wins and who fails. If we want software to succeed because we want it to succeed on its merits and be the best software that the public can have, it's more likely we want a system that lets consumers and end-users make the decision about which software is selected — not bureaucrats.

Now, what does that have to do with patents? The larger you make a patent system, the more you allow the patent system to impact software, and the more you're allowing success in the software industry to be determined by patent-based bureaucrats, those who can take advantage of the bureaucracy which grants and resolves disputes regarding patent rights. It's a bureaucratic competition, not one based on the decision of consumers. That means it's less likely for the merits to be determinative of what software succeeds.

We have to recognize that even without software patents, large developers have intrinsic advantages over small developers. Large developers have the resources, large developers have the relationships, large developers have the distribution channels, large developers have the brand. So even without software patents, large developers are still at an advantage — they start out at an advantage. Well, then, the next question to me is, “If we have software patents, does that increase the advantage of large developers or decrease it?”, because the patent system could benefit small developers and therefore that could erode some of the naturally existing benefits that large corporations have.

I think that point's been belaboured already. We know that small developers are not benefited by a patent system, in fact, they are prejudiced by a patent system. So, enlarging a patent system to apply to software development only enlarges the disadvantage small developers have in competition. Again, it comes back: Who do we want to make the decision about which software developers succeed, do we want consumers, based on merits and functionality and price, or bureaucrats, based on whom patents are granted to and who wins patent infringement cases?

The other thing we need to recognize is whether or not the patent system has a preference for users of certain types of software. A patent system as we have in the United States benefits those under a software distribution scheme which allows them to charge royalties. This is because all software has to deal with the risk of infringing on patents. Patents don't discriminate between open-source or freely licensed software and proprietary software: a patent covers certain technology, it doesn't matter how the software's distributed. But proprietary software is licensed with a fee so the cost of that risk can be passed on to the consumer without them recognizing it. They don't see it, it's baked into the price of the software they're buying and if you were to ask a consumer if they've bought insurance against being sued for patent infringement, they would say they don't believe that have. But in fact they had, because if someone sues a user of Microsoft software, Microsoft has built in the cost of stepping in to defend them from that into the cost of the license fee. On the other side, if you have royalty-free distributed software such as open-source or free software, you can't bake in the cost of that risk so it becomes more transparent. And this makes consumers or users think that open-source is in a worse position than proprietary software when it's actually not. It's just because the open-source distribution scheme does not allow someone to sneak in the cost of that risk to make it opaque instead of transparent. So the patent system not only prefers large developers over small developers, it also prefers users of proprietary software over open-source software.

If we come back to the initial question, which I think this is all about, how do we want success in the software market to be determined? Do we want it to be determined by these types of factors, or do we want it to be determined by who can get the best software at the best price?

Now, I think it's important to concede the point that people on the other side will make, which is, will a less-onerous patent system, or they would call it a ‘less-beneficial’ patent system, I call it less-onerous, will harm their business, because people could copy them. Well, large businesses aren't worried about being copied. They really aren't. At least not by other large businesses, this is why they enter into cross-licenses all the time. If a large company really didn't want its software to be copied, why is it licensing its patent portfolio to every other big company in the world? Because it can't stop them from copying it once they enter into that agreement, so this argument that , “Well, we're worried about people copying our software”, the most likely people to copy your software are other large businesses because they have the resources and the ability and the distribution channels and the brand and the relationships. Why are you letting them copy it? You must not be that worried about it.

And so the question is, then, does a patent system have a net-beneficial effect or a net-detrimental effect on software development? I think we've seen already it only decreases the ability for open-source or royalty-free license software to compete with proprietary software. In the end you have to ask, is less competition beneficial for the software industry? I don't know what Europeans think about that, I think Europeans are very pro-competition and I know us on the other side of the Atlantic are very pro-competition as well, and so the answer is never less competition is better for consumers. And so I think as we bring the point home, if we had two seconds in an elevator to pitch this idea to someone, software patents have a net-negative effect on competition in the software industry. True, they may increase competition in some ways, but the net-effect is anti-competitive. And that's what putting the ability to decide success in the software industry in the hands of the patent office or in hands of the courts does. If you need examples, if people think that's just rhetoric or your opinion, just point to the United States. Microsoft is a very successful software company, I don't think anyone would debate that. They've never had to sue anyone for patent infringement. So they claim they need patents, but yet they've never had to use them. They cross-license them and that's where we wonder, ‘If you're worried about people copying, then why are you cross-licensing them to people?’.

You know, the last point is, who else does a patent system benefit? If it benefits large developers over small developers, is there anyone else? A patent system benefits non-developers. Do we really want a bureaucratic system that helps people who aren't adding anything to society? What I mean by non-developers are trolls — which everyone here is familiar with — people who get a patent either by applying for it or acquiring it in some asset purchase and then use it to tax other developers, other distributors of a product.

Do we really want a system which encourages people to not add products or services to the market place but only detracts from the profits and capabilities of those that do?

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