Patents used as a hammer, insiders say

Charles Duhigg and Steve Lohr / New York Times News Service

When Apple announced last year that all iPhones would come with a voice-activated assistant named Siri, capable of answering spoken questions, Michael Phillips’ heart sank.

For three decades, Phillips had focused on writing software to allow computers to understand human speech. In 2006, he had co-founded a voice recognition company, and eventually Apple, Google and others proposed partnerships. Phillips’ technology was even integrated into Siri itself before the digital assistant was absorbed into the iPhone.

But in 2008, Phillips’ company, Vlingo, had been contacted by a much larger firm called Nuance.

“I have patents that can prevent you from practicing in this market,” Nuance’s chief executive, Paul Ricci, told Phillips, according to executives involved in that conversation.

Ricci issued an ultimatum: Phillips could sell his firm to Ricci or be sued for patent infringements. When Phillips refused to sell, Ricci’s company filed the first of six lawsuits.

Soon after, Apple and Google stopped returning phone calls. The company behind Siri switched its partnership from Phillips to Ricci’s firm. And the millions of dollars Phillips had set aside for research and development went to lawyers and court fees.

When the first lawsuit went to trial last year, Phillips won. A jury ruled that Phillips had not infringed on a broad voice recognition patent owned by Ricci’s company.

But it was too late.

The suit had cost $3 million, and the financial damage was done. In December, Phillips agreed to sell his company to Ricci.

“We were on the brink of changing the world before we got stuck in this legal muck,” Phillips said.

Phillips and Vlingo are among the thousands of executives and companies caught in a software patent system that federal judges, economists, policymakers and technology executives say is so flawed that it often stymies innovation.

Alongside the impressive technological advances of the last two decades, they argue, a pall has descended: The marketplace for new ideas has been corrupted by software patents used as destructive weapons.

Vlingo was a tiny upstart on this battlefield, but as recent litigation involving Apple and Samsung shows, technology giants have also waged wars among themselves.

In the smartphone industry alone, according to a Stanford University analysis, as much as $20 billion was spent on patent litigation and patent purchases in the last two years — an amount equal to eight Mars rover missions. Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.

Patents are vitally important to protecting intellectual property. Plenty of creativity occurs within the technology industry, and without patents, executives say they could never justify spending fortunes on new products. And academics say that some aspects of the patent system, like protections for pharmaceuticals, often function smoothly.

However, many people argue that the nation’s patent rules, intended for a mechanical world, are inadequate in today’s digital marketplace. Unlike patents for new drug formulas, patents on software often effectively grant ownership of concepts, rather than tangible creations. Today, the patent office routinely approves patents that describe vague algorithms or business methods, like a software system for calculating online prices, without patent examiners’ demanding specifics about how those calculations occur or how the software operates.

As a result, some patents are so broad that they allow patent holders to claim sweeping ownership of seemingly unrelated products built by others. Often, companies are sued for violating patents they never knew existed or never dreamed might apply to their creations, at a cost shouldered by consumers in the form of higher prices and fewer choices.

“There’s a real chaos,” said Richard Posner, a federal appellate judge who has helped shape patent law, in an interview. “The standards for granting patents are too loose.”

Almost every major technology company is involved in ongoing patent battles, but the most significant player is Apple, industry executives say, because of its influence and the size of its claims: In August in California, the company won a $1 billion patent infringement judgment against Samsung. Former Apple employees say senior executives made a deliberate decision over the last decade, after Apple was a victim of patent attacks, to use patents as leverage against competitors to the iPhone, the company’s biggest source of profits.

Apple has filed multiple suits against three companies — HTC, Samsung and Motorola Mobility, now part of Google — that today are responsible for more than half of all smartphone sales in the United States. If Apple’s claims — which include ownership of minor elements like rounded square icons and of more fundamental smartphone technologies — prevail, it will most likely force competitors to overhaul how they design phones, industry experts say.

HTC, Samsung, Motorola and others have filed numerous suits of their own, also trying to claim ownership of market-changing technologies.

Patent warrior’s education

The evolution of Apple into one of the industry’s patent warriors gained momentum, like many things within the company, with a terse order from its chief executive, Steve Jobs.

It was 2006, and Apple was preparing to unveil the first iPhone. Life inside company headquarters, former executives said, had become a frenzy of programming sessions and meetings between engineers and executives. And, increasingly, patent lawyers.

Just months earlier, Apple reluctantly agreed to pay $100 million to Creative Technology, a Singapore-based company. Five years before, Creative applied for a broad software patent for a “portable music playback device” that bore minor similarities to the iPod, an Apple product that had gone on sale the same year. Once the patent was granted to Creative, it became a license to sue.

Apple settled three months after Creative went to court.

“Creative is very fortunate to have been granted this early patent,” Jobs said in a statement announcing the settlement in 2006.

Privately, Jobs gathered his senior managers. While Apple had long been adept at filing patents, when it came to the new iPhone, “we’re going to patent it all,” he declared, according to a former executive who, like other former employees, requested anonymity because of confidentiality agreements.

“His attitude was that if someone at Apple can dream it up, then we should apply for a patent, because even if we never build it, it’s a defensive tool,” said Nancy Heinen, Apple’s general counsel until 2006.

Soon, Apple’s engineers were asked to participate in monthly “invention disclosure sessions.” One day, a group of software engineers met with three patent lawyers, according to a former Apple patent lawyer who was at the meeting.

The disclosure session had yielded more than a dozen potential patents when an engineer, an Apple veteran, spoke up. “I would like to decline to participate,” he said, according to the lawyer who was at the meeting. The engineer explained that he didn’t believe companies should be allowed to own basic software concepts.

It is a complaint heard throughout the industry. The increasing push to assert ownership of broad technologies has led to a destructive arms race, engineers say. Some point to so-called patent trolls, companies that exist solely to sue over patent violations. Others say big technology companies have also exploited the system’s weaknesses.

“There are hundreds of ways to write the same computer program,” said James Bessen, a legal expert at Harvard. And so patent applications often try to encompass every potential aspect of a new technology. When such applications are approved, Bessen said, “the borders are fuzzy, so it’s really easy to accuse others of trespassing on your ideas.”

The number of patent applications, computer-related and otherwise, filed each year at the U.S. patent office has increased by more than 50 percent over the last decade to more than 540,000 in 2011. Google has received 2,700 patents since 2000, according to the patent analysis firm M-CAM. Microsoft has received 21,000.

In the last decade, the number of patent applications submitted by Apple each year has risen almost tenfold. The company has won ownership of pinching a screen to zoom in, of using magnets to affix a cover to a tablet computer and of the glass staircases in Apple stores. It has received more than 4,100 patents since 2000, according to M-CAM.