How To Avoid The Patent Trap

Almost two years ago, IBM donated 500 software patents to the open source community, with a pledge that it would not enforce its license rights to the technologies. But the company remains fiercely protective of its vast portfolio of intellectual property, as Amazon.com learned last week when IBM filed a patent-infringement suit claiming the Internet retailer built its business using IBM-developed technology and processes.

Welcome to the tortuous world of technology patents and IP, where community-minded vendors share original ideas manifest as software code one day--then bring the hammer down on suspected scofflaws the next. Over the past two months, Microsoft has released three internally developed technologies--related to Web services, its virtual hard disk format, and its Sender ID--with promises that they can be used by others in perpetuity. At the same time, Microsoft is aggressively licensing--and protecting--other intellectual property.

IBM's top attorney for intellectual property rights acknowledges his company's position can seem contradictory and confusing. "We've referred to our patent policy as apparent schizophrenia," David Kappos says. Yet he maintains that "on a deeper level, our actions are consistent."

Problems with the U.S. patent process are well documented: It's a costly, multiyear undertaking to obtain a patent, involving overworked examiners who frequently grant patents for technologies and processes many think are too obvious or broad to deserve such protection. Lawsuits fly fast and furious. Last week, SGI sued ATI Technologies (just acquired by Advanced Micro Devices) for allegedly infringing on one of its computer-graphics patents. And earlier this month, chip designer Transmeta sued Intel, charging that the No. 1 chipmaker violated 10 of its microprocessor patents. Also last week, the U.S. Supreme Court agreed to hear an appeal in a patent dispute between AT&T and Microsoft. An appeals court had ruled that Microsoft was liable based on worldwide sales, not just U.S. sales, for infringing on a U.S. patent held by AT&T.

The number of patent lawsuits continues to rise and so does the size of settlements and judgments, says the Coalition for Patent Fairness, a group supported by large tech companies. Before 1990, only one patent damage award larger than $100 million had been awarded; in the past five years there have been at least 10 judgments and settlements of that size and at least four that topped $500 million, the group says.

To avoid getting snared in the patent trap, businesses must be careful about the technology they use. And intellectual property disputes can encompass more than just patents: SCO Group sued AutoZone and DaimlerChrysler in 2004 for copyright violations related to its ongoing Linux and Unix legal claims.

Tech vendors, IBM and Microsoft principal among them, are trying to change things they don't like about the patent process. In addition to giving away patents to the open source community, IBM wants all patent applications to be subject to public review. And it's urging Congress to do away with patents--including some of its own--based on so-called business methodologies that lack technical merit.

But in suing Amazon, IBM promised to "aggressively defend" its intellectual property and hunt down other companies it thinks are using its IP without permission. IBM says it tried unsuccessfully to negotiate a licensing deal with Amazon for four years before filing suit. Amazon declined to comment.

GOOD COP, BAD COP

IBM makes more than $1 billion a year licensing its IP. As the largest patent holder in the United States, IBM's good-cop, bad-cop approach reflects a broader debate within the tech industry about the role patents should play in a Web 2.0 ecosystem characterized by open source development, collaborative innovation, and fast product cycles. "There are some pathologies in the system that need to be dealt with," Harvard Business School professor Josh Lerner says. "Patents have become too powerful and too easy to get" for an economy that's increasingly information-based, Lerner says.

IBM's strategy is to be an IP benefactor to the tech industry when it's in IBM's interest, while staunchly defending its IP rights at other times. That's hardly reassuring to entrepreneurs and startups that risk a run-in with IBM as they develop new products. IBM holds about 40,000 patents worldwide for everything from how to display ads online to the creation of an Internet checkout system. IBM patents cover "most of, if not all, e-commerce," senior VP John Kelly told The Wall Street Journal last week.

Coincidentally, Amazon last week settled an e-commerce lawsuit filed in 2004 by Cendant that covered some of the same technology that IBM claims as its own. Amazon and Cendant agreed to mutual nonexclusive cross-licenses to the patents involved in the suit.

Meantime, the prospect of a more aggressive IBM has some tech companies worried. "We're looking at the patents that IBM is concerned about with Amazon and checking them out," says Daren Gill, VP of development at ChoiceStream, which created an online product-recommendation engine used by AOL, Yahoo, and, soon, a major Internet movie retailer.

IBM's suit against Amazon involves technology that underlies the Web retailer's recommendations generator, a popular feature that suggests books to shoppers based on books they previously bought on the site and similar purchases by other shoppers. IBM says it invented and patented the concept in the 1980s. The method uses a search and retrieval technique known as collaborative filtering that creates associations between objects in, say, an online product catalog, based on the number of times they're selected by a single buyer. IBM also is suing Amazon for violating four other patents it says are at the core of Amazon's business (see "IBM Vs. Amazon").

What's setting off alarms in some quarters is the fact that personalized recommendation systems are widely used, and they can be generated in a number of different ways. "These kind of lawsuits hurt our whole industry," says Mary Hodder, CEO of Dabble.com, an online video-sharing service. She thinks the patent process needs tightening to prevent what she considers a proliferation of nuisance suits. "Most of the patents they grant are really for simple and basic concepts and ideas, not complex and innovative processes, which is what they're supposed to be allowing," Hodder says.

IBM officials insist the move against Amazon isn't a sign of a new and more aggressive IP legal campaign. "I don't anticipate any change in our basic policies," Kappos says. "Consensual licensing and working on a nonconfrontational basis is the best way to run an IP program." IBM's last major patent-infringement suit was six years ago against database vendor Informix, Kappos says, a company IBM has since acquired.

But IBM is under pressure to boost its top line, and CEO Sam Palmisano sees gold in the company's vast patent library. Last year, IBM hired Boston Consulting Group patent expert Kevin Rivette as VP for intellectual property. Rivette is author of Rembrandts In The Attic (Harvard Business School Press, 1999), a primer on how companies can profit from their IP assets. Palmisano created a technology and intellectual property unit within IBM under senior VP Kelly, dedicated to finding new markets for the fruits of its research.

IBM also sees itself at the vanguard of a movement to reform the patent system. Last month, IBM said it would register all patents in the name of the company, not the scientist who developed the technology, for the sake of transparency. IBM also is ceding 100 business-method patents to the public domain, though it would like to see such patents done away with unless they're based on substantial technical innovation. (The top patent official in Israel ruled last week that business-method patents aren't permitted in that country.)

General Electric, Hewlett-Packard, IBM, Microsoft, and Red Hat are participating in a "community review" pilot project sponsored by the U.S. Patent and Trademark Office. The program aims to open patent applications to public scrutiny, easing some of the pressure on inspectors and garnering input on a patent's validity from experts worldwide.

At the same time, the Patent Office is considering revising its rules to limit to 10 the number of times patent applicants can request a re-examination of applications and the number of claims contained in an application. Congress is considering changes, too. Sens. Orrin Hatch, R-Utah, and Patrick Leahy, D-Vt., are sponsoring legislation that would grant stronger protection to patent seekers who are first to file and make it more difficult for challengers.

MICROSOFT'S AGENDA

Like IBM, Microsoft has released internally developed technology, some of it patented. In September, Microsoft said developers were free to use its Web services specifications, and earlier this month it did the same with its virtual hard drive image format. "Every individual and organization in the world" can use the technology, Microsoft declared generously, adding that the offer stands "forever."

Last week, Microsoft added its Sender ID technology, which helps identify the source of e-mail, to the components available under its so-called Open Specification Promise. "There are some technologies that we think are critical for broad industry adoption," says Jason Matusow, senior director of IP and licensing. OSP is "an irrevocable promise" that developers can use these Microsoft technologies without fear of being sued or being forced to pay license fees, he says. At the same time, Microsoft has set a goal to cut its intellectual property "deficit." It paid about $1 billion in licensing fees last year but brought in just $100 million.

Not everyone buys the patent-reform agenda of the big tech companies. Hans Hxu, founder of online gift registry Felicite.com, says the industry's large players are more interested in the appearance of IP openness than in practicing what they preach. "IBM patents almost everything they do, then they sit on it. That doesn't do much to encourage innovation," says Hxu, a McKinsey consultant before launching Felicite.

Other critics suggest the vendors' moves are aimed at cementing their advantages at a time when they face rising competition from startups. In an August essay, Harvard Law School professor and tech entrepreneur James Moore argued that the collaborative patent review process proposed by IBM, Microsoft, and others will result in fewer patents being issued because it will give examiners more ammunition to shoot down applications. "If fewer patents are issued, but existing patents are not revoked, IBM and Microsoft win because they already possess vast existing portfolios," Moore writes.

Some Web 2.0 companies dismiss IBM's argument that business-method patents protect obvious ideas. "Everything is obvious after someone has done it," says a spokesman for online movie renter Netflix, which has patents on its queue-ordering system--and is suing Blockbuster for allegedly copying the system.

Small tech companies are taking matters into their own hands, forming patent cooperatives through which IP is shared. Search company Wink participates in Creative Commons, a group that encourages sharing of copyrights and GNU open source licenses. But there's a line between sharing and protecting intellectual property that creates competitive advantage, says Wink CEO Michael Tanne. "When companies have invested in the development of technologies, they really ought to be able to protect it," Tanne says.

How these issues are resolved will influence how tech innovations are developed and commercialized in the years ahead. Too many lengthy and expensive legal battles will persuade IT departments to stick with familiar technology. That's something tech vendors should consider as they take one another to court.

with Eric Chabrow

Illustration by Chris Windsor/Stone