Patent reform … or ruin?

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Innovation plays a central role in America’s culture. At the heart of our country’s spirit of innovation is taking risks. As President John F. Kennedy observed in calling on his fellow citizens to reach for the heavens, we undertake challenges, “not because they are easy, but because they are hard.” In today’s global marketplace, our desire to innovate and our willingness to take risks should be America’s greatest competitive advantage.

The nation’s Founders, many of whom were inventors themselves, recognized the importance of innovation and empowered Congress to create a patent system that would promote innovation. Recently, Sens. Patrick Leahy. Vermont Democrat, and Orrin Hatch, Utah Republican, and Reps. Howard Berman, California Democrat, and Lamar Smith, Texas Republican, introduced legislation that will go a long way toward finding a balance in the patent system that will fulfill that constitutional mandate.

The legislation is necessary because, for those innovating in many different industries, our patent system is broken. Patents are increasingly used not as shields to protect the fruits of creativity from misappropriation, but as weapons to extract money from the productive part of society and transfer it to entrepreneurial speculators whose only innovation is new ways to game the system. Meanwhile, the steps necessary to build the collaborative innovation systems of the 21st century are missing.

The modus operandi of these “entrepreneurs” is simple. First, buy a patent on the cheap which no one viewed as relevant to innovation, hide your portfolio in shell entities in various parts of the country and construct a creative legal argument that the patent is essential to an entire industry. Second, bring suit in a court deemed friendly to patentholders, where it is highly unlikely the patent will be narrowly construed. Third, take advantage of the fact current legal rules make it nearly impossible to get a level playing field for a timely review of patent’s validity. Finally, drive up the settlement value by leveraging the fact that damages will not be based on the value of the innovation reflected in a patent, but on the value of a product or system in which the patented “invention” plays only a minor role.

The result: more than 250 percent as many patent suits filed in recent years compared to 15 years ago.

A major red flag went up when Blackberry maker Research in Motion (RIM) paid a $612 million settlement to a company whose only “product” was patent litigation. RIM had little choice at that point, since the alternative was to shut off every Blackberry in the country. The trouble with this story is that the patents on which that case was based had already been found likely to be invalid by the Patent and Trademark Office but the court, using “presumptions of validity” had refused to invalidate.

The most recent red flag was the $1.52 billion verdict in Alcatel v. Microsoft. The verdict was based on the full value of the computer, which included the software, operating system, and hardware of the computer, while the alleged infringement was tied only to a little-used, nonessential feature of Windows Media Player for playing music.

So why would RIM pay more than $600 million to license patents likely to be found invalid and why aren’t damages based on the fact that an MP3 patent is only one of thousands of elements in a computer? The answer lies in a broken system that has strayed far from the goal of promoting innovation.

The case of my own company illustrates the problem. Cisco, founded only 22 years ago, now has sales of almost $35 billion per year. We spend $4 billion per year on R&D;, 90 percent of that in the U.S. We hold more than 3,500 U.S. patents and have applied for more than 5,000 more.

As an innovator and large patent holder — our portfolio was recently rated No. 1 in the telecommunications world by the Patent Board — we certainly support strong laws that protect inventors’ creativity and innovations and the companies and people who may ultimately own those inventions. Yet, we face a growing tide of patent litigation and an environment that is deterring innovation.

The legislation now in Congress takes a measured approach to rebalancing the patent system to protect innovation without damaging legitimate patent rights, by giving a level playing field to those accused of infringement to challenge validity of the patents they are accused of violating, and by tying damages to the actual economic value of the innovation reflected in the patent.

The constitutional mandate for the patent system is “to promote the progress of science and the useful arts,” should be at the core of our patent system. As Justice Anthony Kennedy noted last week, referring to overly lax standards of patentability, we must ensure the system grants its benefits wisely, “otherwise patents might stifle, rather than promote, the progress of useful arts.”

Mark Chandler is senior vice president and general counsel of Cisco Systems.

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