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Vonage is the Latest Victim of Patent Abuse

Tuesday, April 24, 2007

Today’s hearing shows that a system, not just a company, is broken.

VonageVonage, a leading Internet telephony company, appears before a federal appeals court today to argue that it should be allowed to continue signing up new customers while it appeals the recent verdict that its products infringe three of Verizon's patents. A Virginia jury last month ordered Vonage to pay Verizon $58 million for infringing the patents, and Vonage was barred from signing up new customers. Given Vonage's precarious financial position, a permanent ban on signing up new customers would effectively be a death sentence for the company.

The case raises some troubling questions about America's patent system, which seems to allow a deep-pocketed incumbent to drive an innovative competitor out of business. Vonage pioneered the Internet telephony market, and has enticed more than two million customers away from Verizon and other telephone industry incumbents. But while Verizon hasn't been able to stop Vonage's momentum in the marketplace, they've found more success in the courtroom.

One of Verizon's patents covers devices that allow users to connect to Internet telephony services wirelessly. The other two cover servers that translate between Internet addresses and phone numbers. The latter patents present a particularly difficult challenge for Vonage because they strike at the core of Vonage's products. It's impossible to offer a full-featured Internet telephony product without translating between Internet addresses and phone numbers, so if the courts uphold the Virginia judge's broad interpretation of those patents, it could give Verizon the legal ammunition to shut down not just Vonage but most of its other telephony competitors as well.

Technology companies have responded to this proliferation of bad patents by engaging in the patent equivalent of nuclear stockpiling.

Theoretically, the patent office is only supposed to award patents for "non-obvious" patents, and the concept of converting between an IP address and a phone number certainly seems obvious. In an ideal world, the patents that were issued would be narrow enough that companies could "invent around" others' patents if they were unable to come to acceptable licensing terms.

Unfortunately, our patent system has long since departed from this ideal. In recent decades, the courts have dramatically lowered the bar for obviousness. As a result, some of the patents being granted are so broad that inventing around them is practically impossible. The patents that allowed NTP to win a $612 million settlement from BlackBerry maker Research in Motion, for example, essentially covered the concept of transmitting new email notifications wirelessly. There's no way RIM could have "invented around" that.

Technology companies have responded to this proliferation of bad patents by engaging in the patent equivalent of nuclear stockpiling. By obtaining dozens, hundreds, or even thousands of patents, a company can develop a credible deterrent against patent lawsuits: if someone sues it for patent infringement, it will be able to find a patent the other company has infringed and countersue. Vonage's fundamental mistake was that it chose not to join this arms race. As a result, when Verizon sued, it was completely defenseless.

Software patents are particularly ripe for abuse because software is assembled from modular components. If the patent system allows those components to be patented, it becomes almost impossible to develop a software product without infringing numerous patents. Moreover, because of the complexity of software, it is often prohibitively expensive to even find all the patents a given software product might in principle be infringing. So even a software firm that wanted to find and license all of the patents relevant to its products is unlikely to be able to do so.

This ruling could give Verizon the legal ammunition to shut down not just Vonage but most of its other telephony competitors as well.

It's not clear how any of this promotes "the progress of science" as required by the Constitution. Because of the high cost and uncertainty of the patent system, most software companies don't even try to find patents they might be infringing. Instead, they sign cross-licensing deals with as many companies as possible, and they pray that the remaining companies won't sue them before they've had time to develop a patent war-chest of their own. This is great for patent lawyers, but it's not clear how anyone else benefits.

Luckily, the Supreme Court heard two cases this term that will give them the opportunity to rein in these abuses of the patent system. In the case of KSR v. Teleflex, it can put real teeth in the non-obviousness requirement, so that the patent office is more likely to reject bad patents.

The court should also take advantage of Microsoft v. AT&T to reinstate the principle that software is not eligible for patent protection. That was the rule that was applied until the 1980s, when a series of rulings by the newly created Court of Appeals for the Federal Circuit effectively legalized software patents. The Supreme Court has never ratified that judicial innovation, and Microsoft v. AT&T gives the courts an excellent opportunity to remedy the Federal Circuit's mistake.

Patent stockpiling is a wasteful and counterproductive form of competition. If the Supreme Court and Congress choose to leave the current rules in place, we're likely to see a lot more cases of software companies being forced to spend their resources on patent lawyers instead of engineers.

Timothy B. Lee is an adjunct scholar at the Cato Institute.

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