Law: Changes in Patents May Be Pending

Jon Dudas often hears how the current U.S. patent system is "broken." Dudas, director of the Patent and Trademark Office, hates that term. The process is "the envy of the world," he says. "Brazil, China, other countries, they want to know how we do it."

I'll wager, however, that China would be less than delighted to emulate the United States if the consequences included events like the one in a San Diego courtroom last month. A jury delivered a whopping $1.52 billion judgment against Microsoft for infringing on a patent involving the mechanics of playing MP3 music files. Here's what is outrageous: Microsoft had already licensed MP3 technology from the consortium that developed the standard, for $16 million. Years later, after MP3 technology took off, Alcatel/Lucent (inheritor of patents filed by Bell Labs) emerged to file its suit, and won almost 100 times as much as what was determined a fair license fee originally (because Microsoft had unwittingly infringed that patent). Unless the judgment is overturned, more than 400 other firms using MP3 technology could face a similar ambush.

I'd also guess that China or Brazil does not envy the outcome of the case where RIM (BlackBerry) had to pay $612 million to settle—even though the patents in question had been re-evaluated as invalid after the suit had been filed. Those are only two of many cases where patent holders used the system to extract huge, apparently unearned, sums. Other problems involve the granting of undeserved patents, which are used to extract license fees from companies unwilling to challenge the patents in court.

A who's who of high-tech companies like Apple, Microsoft, Cisco and Micron—though they are themselves big patent holders—are banding together to urge reform. They say their products often involve dozens of potential patents, some of them obscure or poorly granted, and are vulnerable to "trolls" who come out of the woodwork with arguably relevant patents after companies have spent billions developing a product. Meanwhile, small companies can't afford to fight in court. Not everyone agrees. "The argument that the system is broken comes from people who have an ax to grind," says Nathan Myhrvold, CEO of Intellectual Ventures, which develops new ideas and also buys latent patents. Some lawmakers want to make it easier to challenge bad patents and mitigate the judicial outrages. With the White House onboard and a Congress not as beholden to corporate America, we may get a law that would make the system less broken. Or, as Jon Dudas would have it, even better.