Patent Trolls - Disrupting the Patent System?

(1)

Patent Trolls - Disrupting the Patent System?

Vernes Kr²lak, 10878181 Supervisor: Dr Sven J.R. Bostyn

(2)

If people had understood how patents would be granted when most of today's ideas were invented and had taken out patents, the industry would be at a complete standstill today."

(3)

Abbreviations

BoA The Board of Appeal of the European Patent Oce DOE Doctrine Of Equivalence

ECJ European Court of Justice EPC European Patent Convention

FRAND Fair Reasonable And Non-Discriminatory GPL General Public License

NPE Non-Practicing Entities PAE Patent Assertion Entities

USPTO United States Patent and Trademark Oce WIPO World Intellectual Property Organization

(5)

1 Introduction

The current digitized economy relies heavily on innovation and freedom of in-formation. Both freedom and innovation correspond closely with the rationale behind patents. Digital software is a relatively new phenomenon and legal pol-icy seems to lag with fast-paced societal and technological developments. Soft-ware patents were originally excluded from patentable subject matter, but due to the proliferation of information technology, computer programs eventually became patentable subject matter. The proportion of software patents has in-creased vehemently since the rst software patents. Currently around 40.000 software patents are being issued every year. This makes it cumbersome at best, and impossible at worst to monitor all these patents. Many legal scholars, entrepreneurs and computer science practitioners scrutinize software patents; according to some, software patents are incompatible with the principles of the patent system and are the cause to many of the associated problems. Recent legal battles between Google and Apple, are often exemplied for the compli-cations surrounding software patents.1 _{These problems manifest themselves} in the form of patent thickets and Non Practicing Entities2_{. Criticism is rstly} centered around the formation of patent thickets and secondly around the emer-gence of Non Practicing Entities. Where the former relates to a blocking eect of innovation the latter, more worrisome, leads to increased legal costs and crip-ples innovation. Non Practicing Entities are rms that own patents but do not produce products, yet they do assert their patents. Many critics state that NPEs' way of business is crippling innovation thus contravenes directly with the rationales on which the patent system is formed: incentivize innovation. The NPE problem has even gained the attention of the White House, Barack Obama expresses his opinion on NPEs in February 2013:

Patent trolls don't actually produce anything themselves, they're just trying to essentially leverage and hijack somebody else's idea and see if they can extort some money out of them.

A source of these problems is rstly, the lowered threshold for patentable sub-ject matter. Secondly, the vague and abstract nature of software makes it hard to distinguish between the idea of a software related invention and the actual implementation. This is even more problematic when combined with functional claiming and abstract formulation of software in the disclosures. Patents that are vague and broad are used by holders as a form of business strategy instead of product development. Some holders try to prohibit others to use certain (key) technologies.3 _{This thesis will delve into the problems associated with} software patents by trying to nd why software patents create these problems, and hopefully provide a solution to the problems. By analyzing patents from a legal and economic perspective, it can provide evidence in direction of

rebut-1_{Cass 2015, p. 11.}

2_{Non Practicing Entities are sometimes also referred to as Patent Trolls or Patent Assertion}

Entities (PAE). This work will use the term NPEs for sake of consistency.

(6)

ting or substantiating these claims by seeking to answer the following research question:

"Do Non Practicing Entities form a disruption in the software patent industry and are there solutions to the problem?"

In order to analyze this question, this thesis will rst provide insights on what software entails with a short introduction on the principles on which the patent system is based and a short introduction on what software entails. The next chapter will introduce patent thickets and NPEs in detail and explain the jus-tications and problems associated with both phenomenons. In chapter ve the legal frameworks of the U.S. and the EU will be covered with respect to software patents. In the following chapter functional claiming will be covered, functional claiming is at the basis of the NPE problem. Based on all this a recommendation can be devised on how to respond to the phenomenon of Non Practicing Entities.

(7)

2 Research Framework

2.1 Research Question

Do Non Practicing Entities form a disruption in the software industry and are there any solutions to this problem?

SUB QUESTIONS:

How is the legal framework in the U.S. constructed? How is the legal framework in the EU constructed?

What is the relationship between patent scope, functional claiming and NPEs?

The answer to the main question will be formed using the sub questions. Firstly an understanding of the principles of the patent system and the possible eco-nomic grounds on which the patent system should be based needs to be formed. The dierent economic understandings are needed because criticism on software patents are often economic of nature.

Secondly, analyzing the historic and current legal standards with respect to software patents places the argument in correct legal perspective. A reection can be made based on the grounds and principles of the legal standard. Thirdly by critically analyzing the arguments against the current eligibility of software patents and the associated negative consequences, and comparing them with the arguments in favor of software patents. a synthesized conclusion could be drawn from both the pro and contra arguments. Fourthly, by looking at the patent scope that is often used by NPEs, potentially a solution can be devised to the NPE problem.

All the research questions will be answered per chapter in the chapter conclusion. The nal conclusion combines the outcomes to form an answer to the main research in the nal chapter of this thesis.

(8)

3 Patent Principles

The principles of the patent systems should be covered as well as the proponents and opponents of dierent patent models including their hypothesized eects on the patent system. There are two dierent sides that diverge in their opinion on the length and scope of patents either longer patents or stricter and (or) shorter patents on the other side. Both variations will be covered in this chapter.

3.1 Patent Principles

In short, patents grant the patent holder a time- and scope-limited monopoly over the inventions described in the patent. It is believed that this limited monopoly will incentivize potential investors to invest time and resources to develop inventions. Using this patent will allow them to monetize their invest-ments. Hence the positive eects of patents are manifold: Firstly, they provide incentive to invest.4 _{Secondly, they facilitate contracting in for instance} tech-nology trading.5 _{Thirdly, they provide assurance for investors in start-ups}6_{, and} fourthly patent disclosure helps to spread knowledge.7

Incentive to invest

Research results are contrasting. For example, Lerner and Zhu found negative innovation eects8 _{while Bessen and Hunt found a positive relation between} the invested quantity of research and development spending.9 _{Even though,} the relationship is hard to prove, the general consensus seems to be that the relationship between patents and the incentive drive to invest does exist. This is not only shown by the large amount of legal scholars that posit this assump-tion,10 _{but also based on the historic and justication rationales of the patent} system.11

Assurance for investors

Closely linked to the incentive to invest is the assurance provided to investors. The incentive to invest provides reason for investors to start with creating new knowledge, while the assurance for investors is more linked to getting money in a later stage of the knowledge creation process.12 _{One of the main arguments}

4_{Bessen & Hunt 2004, p 8; Cass 2015, p. 15.} 5_{Lemley 2001, p. 13.}

6_{Lemley 2001, p. 13.}

7_{Innovators always have the choice between keeping innovation secret (and hope that no}

one else invents the same). Or patent and disclose their invention but gain a limited monopoly through the patent.

8_{Lerner & Zhu 2007, p. 515.} 9_{Bessen & Hunt 2004, p. 25.}

10_{Heller & Eisenberg 1998, p. 690; Shresta 2010, p. 116; Risch 2012, p. 460; Okediji &}

Bagley 2014, p. 34; Cass 2015, p. 33.

11_{See chapter 3.1 and 3.3 for more about this.} 12_{Bessen 2011, p. 11.}

(9)

for justication of NPEs is based on this assurance. NPEs state that they create an aftermarket for software patents. However Risch did not nd support of this claim. 13

3.2 Economic views

3.2.1 Long or Closed

Green and Scotchmer propose the introduction of a so-called sequential patent system. Here the initial innovator gets a broad protection on his invention. When new inventions are made, based on the patent, the initial patent will last longer. The initial inventor must license the second round of innovations. In this way both parties will be sharing potential prots over time. With the use of this method longer lasting patents will be possible without creating an innovation obstruction. Consequently it provides optimization potential with respect to the allocation of patent protection breadth and length.14

Gilbert and Shapiro state that there is a trade-o between the breadth and the length of patents and that it is better to have longer but narrow patents, combined with additional anti-trust regulation.15

Longer protection, combined with relatively high fees will lead to increased eciency.16 _{These claims are substantiated by empirical research that showed} that only eleven percent of copyright17_{holders extended their rights when they} reached the end of their 28 year term. Based on this fact. Landes & Posner argue that copyright holders will only be incentivized to renew their rights, when they can successfully monetize the copyright within the protected time. Making the copyright extendable for a relatively high fee, but for a longer time period, will thus lead to the ecient use of copyright by the holders. Holders are in this way incentivized to return their right to the public domain (and potentially let others make use of it) or rewarded for the good use of the copyright - i.e. they add value to society. This same method can be applied to software patents. That is, impose a duty on patents that are not being used, or contrariwise grant all patents a shorter protection time but patents that are being used can be extended.

3.2.2 Free & Open

Richard Stallmann's "free software initiative" that sees free software as a funda-mental right. Free refers here, not to the price of a software product, but to the control over others' software products. Stallmann argues that software should be free based on an ideological standpoint. He founds his arguments on the damage created on society by software that is not free (i.e. over which one does

13_{Risch 2013, p.460.} 14_{Green & Scotchmer, p. 31.} 15_{Gilbert & Shapiro 1990, p. 108.} 16_{Landes & Posner, p. 4.}

17_{Although Landes & Posener's research is based on copyright research it is extendable to}

(10)

not have control). In specic: non-free software obstructs software-adaptations and software development. On the other side, programmers should be moti-vated by the intrinsic value they derive from programming and not expect that they could earn a living of programming.18 _{These points of view seem very} philosophical and ideological by nature, and consequently fail to comprehend the way complex software projects are conducted. These projects require seri-ous investment in time, resources and specic knowledge. All three cannot be based on the intrinsic joy one derives from programming. In contrast, the open source community and the large amount of software that is developed for free does show evidence that there is some truth in the ideological motivation of the many software developers out there.

The tragedy of anti-commons is the name of the notion that: coordination breakdown exists, when a rights-holder exerts control over patents they own consequently impeding the innovation by preventing others to use the intellec-tual property.19 _{In other words when an owner is using the patent someone else} is not able to use the innovation , for its own use, unless the patentee licenses the patent.

The tragedy of the anti-commons is the transpose of the like named tragedy of the commons. Heller and Eisenberg postulate that multiple owners each have the right to exclude others from a scarce resource and no one has an eective privilege of use.20 _{Based on this assertion Heller and Eisenberg continue} their argumentation that owners of patents can possess the power to block the production of new products or technologies. New business opportunities are obstructed or even halted by the blocking eect of these patent holders, which make it hard for new innovators to negotiate a license.21

3.3 What is software?

It is hard to give a conclusive denition on what software exactly is, neverthe-less it is important to delineate the dierence between what software is and what software is not, especially since we are analyzing the diculties caused by software patents in the patent system.

The World Intellectual Property Organization denes software as:

"A set of instructions incorporated into a machine-readable medium, having information processing capabilities to perform, or achieve a certain function, task or result"22

This denition is relatively broad. It encompasses both application software and system software, and is not limiting itself to vague terms such as a 'com-puter'.23 _{Limiting software to only computer executable software excludes the}

18_{Stallman 1992, p.5; Stallman 2009, p, 33.} 19_{Heller & eisenberg 1998, p. 698.}

20_{Heller & Eisenberg 1998, p. 698.} 21_{Heller & Eisenberg 1998, p. 699.} 22_{Paraphrased from the WIPO}

(11)

wide variety of other apparatuses on which software is run as well.24 _This the-sis will not delve into the depths of software denitions, as it falls out of the scope and relevance for this research. It is, however, important to understand how complex the concept of a computer is and what the implications are for the software patent scope. More and more ordinary devices are using computer implemented inventions. Consequently the problems originally associated only with computers could become hazardous to other branches of industry, as well. Modularity Software is build up on modules from which dierent parts are continued from previous work. These modules are often packaged and dis-tributed freely per programming language. For instance in the programming language "Python there is a package that makes reading, writing, and manip-ulating CSV les easier. This package can be downloaded for free and imported when needed. In this way one does not need to 'reinvent the wheel' but can build on previous work of others. Since important (i.e. often encountered) program-ming problems are packaged, software developers rely heavily on these modules. Sometimes software applications consist of more than a thousand modules.25 This property is important to understand that by nature software development relies on the copying of others' code or implementations of certain functions. Therefore, the problem of patent thickets potentially can be exacerbated in the software industry compared to other industries.

3.3.1 Software representation

Software can be depicted in three broad manners: (1) by requirements, (2) by graphical representations, or (3) by program code. All three applications have dierent levels of abstractions. That is, the interpretation of the actual software can vary with each dierent class. For instance, software code can only be interpreted in one way, while the use of - for instance - requirements can be interpreted in a variety of dierent software implementations.

By using requirements:

Representing software using product or user requirements is the most com-mon way to describe software in software patent claims . Unfortunately this choice also renders the broadest patents scope. Using functional requirements is strongly related to functional claiming and claims under the means-plus-function, more on this in chapter six.

By using graphic modeling:

A dierent approach is the use of graphical representation of software. For this dierent standardized methods can be used, all serving their own specic func-tion. For example: data ow diagrams shows the ow of data input and output between dierent parts of the software. State diagrams depict when dierent states of the machine are reached and what states follow after dierent types of user input. Unied Modeling Language (UML), is a standardized modeling

24_{For instance modems, PID controller, automobiles, etc.} 25_{Cockburn & MacGarvie 2009, p. 733.}

(12)

tool that depicts the dierent parts of a software program and these parts can be specic functions of the software-code, users, or data.

By using code:

Computer programs in general exist in two ways: object code and source code. Object code is the set of binary instructions in zeros and ones that is giving the direct instructions to the computer. This form of code is hard to read by humans and therefore human programmers prefer to write in source code, which is often written in the programming languages Java or C++. These languages can be written more easily and are better understood by programmers. They are transformed into machine readable object code by using a compiler.26 _Both source code and object code are subject to copyright protection. This was not initially the case since object code was not human readable27_{. Later this was} amended in the U.S. Copyright Act.28 _{In the EU, copyright protection can be} found under Directive 2009/24/EC which is implemented in each member state in the local law system. As illustrated earlier in this chapter, source code can be kept secret from the public, and in some specic cases it can oer a viable option to protect software related inventions.

26_{Schmit 2013, p. 277.}

27_{For more information I refer to the case: Franklin, 714 sub 1249.} 28_{17 U.S.C, para. 101.}

(13)

4 Software Patent Problems

Patent thickets cripple innovation, and raise entry barriers for newcomers. But, patent thickets - which is a generalized term- must be dierentiated from Non-Practicing Entities (NPE)29_{or, more eloquently put, Patent Trolls. This} chap-ter will introduce the problems associated with NPEs and patent thickets by analyzing empirical studies of NPEs, the eects, and the justication of NPEs.

4.1 Patent Thickets in the software patent industry

A patent thicket is dened by Shapiro as:

A dense web of overlapping intellectual property rights that a company must hack its way through in order to .... commercialize new technology"30

In short, patent thickets impede innovation and present barriers for new inno-vators. These barriers consist of increased transaction costs due to the time, eort and expenses that are needed to assess all the current patents and analyze whether your invention is infringing any of those patents.31 _{Secondly, hold ups} can be formed by the blocking eect current patent owners have over newcomers - if they do not wish to license their product the newcomer is blocked. Hence, the negative eects of patent thickets can be placed in two broad categories, impeding innovation and increasing costs.

Impeding innovation

Patents thickets increase the barriers to entry in a certain industry, by increasing the investments required to obtain licenses for the technology needed to operate in that industry.32 _{This can be either through the requirement to license a} patent in order to use technology. Or, more problematically, the patent-holder does not want to license his product, at all.33 _{In the latter form a hold-up will} emerge, and software patents are then used to aid a certain business strategy instead of spurring innovation. In this role, they contravene directly with the principles on which the patent system is founded.34

Patent holders can be forced to license certain key technologies - using FRAND35 licenses- which somewhat limits their blocking power. But small entrepreneurs are not eager to start longstanding legal battles in order to force larger parties to license certain technologies.36 _{This makes the problem bigger for smaller} parties than for big enterprises.

29_{sometimes called Patent Assertion Entities (PAE).} 30_{Shapiro 2001, p. 120.}

31_{Bessen 2011, p. 9.}

32_{Cockburn & MacGarvie 2009, p. 769.} 33_{Cass 2015, p 23.}

34_{Bessen 2011, p. 396.}

35_{Fair, Reasonable, And Non-Discriminatory.} 36_{Clarkson & Dekorte 2006, p. 255.}

(14)

Increased costs

The greater burden of these costs are due to increased clearance costs. These costs are made when checking if your newly invented technology is infringing on existent patents. For the software industry these costs are substantial due to the sheer number of software patents: there are over 40.000 new software patents granted every year.37 _{The abstraction of some patent claims do not make this} an easier job.38 _{Furthermore the positive incentives (i.e. the innovation drive)} do not seem to outweigh the negative eects of patents litigation in the software industry. In the bio-pharmaceutical industry these costs do outweigh the litiga-tion costs and risks. This can be explained by the relative size of the litigalitiga-tion (or other patent related) costs with the revenue of those products: in the bio-pharmaceutical industry these are much larger than compared to the software industry.39 _{This has become such a problem that often start-ups do not le} for a software patent, evading the search costs, while hoping to not infringe on anybody's technology.40

While some indications can be found that there is a formation of patent thickets in the bio-pharmaceutical industry41_{, or the nano-tech industry}42 _{evidence the} formation of patent thickets in the software industry is abundant.43 _{Not all} patent thickets are the same. Patent thickets can either be strong or weak. Within strong patent thickets it is extremely hard to obtain a license, and inversely, within weak patents thickets it is relatively easy to obtain a license.44 A special form of patent thickets that manifests itself in the form of a Non Practicing Entity is more troublesome for the software industry and will be covered in the next section.

4.2 Non Practicing Entities

Non Practicing Entities are rms that hold patents but do not produce any products protected with those patents at all. Instead NPEs assert their patents against normal rms. These patents are often vague and abstract and rms do not want to waste time and resources by having longstanding legal battles. Hence, they often settle, or license the allegedly infringing patent. This makes the NPE business model a viable business strategy, for Non Practicing Entities. They often target small entrepreneurs and startups, as the litigation threat is more substantial for those rms. Feldman conducted a survey and found out that almost seventy percent of the surveyed startups were threatened by NPEs.45 In this way they maximize their bargaining power over smaller rms. These

37_{Steidl 2015, p. 2.} 38_{Bessen 2011, p 10.}

39_{Bessen & Meurer 2008, p 142.} 40_{Feldman 2013, p. 45.}

41_{Woolman et al. 2013, p. 12; Heller & Eisenberg 1998, p. 12; Horn 2003, p. 126.} 42_{Clarkson & DeKorte 2006, p. 187.}

43_{Cockburn & MacGarvie 2009, p. 733; Cass 2015, p.11.} 44_{Woolman et al. 2013, p. 8.}

(15)

patents are often acquired from bankrupt rms, individual inventors, SME,46 governments, and universities.47 _{Critics say that NPEs create vast economic} and societal damages, by the transfer of nancial resources - that are intended for research and development - from rms to the prots of NPEs. Consequently, they make innovation a more costly endeavor and thus cause a crippling eect on innovation.48 _{Due to the above-mentioned process of litigating and settlements} between rms and NPEs, this transfer of nancial resources is happening in reality and not a theoretical possibility.49 _{A small argument in support thereo is} the noticeable change in the litigation landscape - over the course of years, more and more, cases are between NPEs and victims, instead of between technology competitors themselves.50

Analysis from the United States Government Accountability Oce shows that the amount of software related lawsuits originating from NPEs is over 93 percent while normal operating companies focus less on the software industry 39 percent.

Figure 1: Proportion of software related lawsuits and defendants, between NPEs and operating rms

4.2.1 Empirical evidence on the eects of Non Practicing Entities Many studies are conducted on the eects of NPEs. Unfortunately, these studies are often badly substantiated and not based on sound empirical research. For example Bessen, Ford and Meurer focused on the wealth transfer between NPEs and normal rms. They claimed that NPEs create vast damages to software and surrounding industries. First, by looking at the stock price decline of rms that invest in R&D51 _{and are taken to court by a NPE. The results showed after}

46_{Small and Medium Enterprises.} 47_{Risch 2012, p. 488.}

48_{Bessen & Hunt 2007, p. 160.} 49_{Bessen, Meurer & Ford 2011, p. 23.} 50_{Chien 2009, p. 1588.}

(16)

controlling for random eects and other variables (e.g. size, industry, market) they found a 500 billion dollar loss of wealth between 1990 and 2010. This loss of wealth showed a skewed distribution where in the last four years 80 billion per year was lost.52 _{Second, the loss of wealth was not transferred to other} companies (i.e. there was no increased overall innovation investment found) but merely resides as prot in the NPEs.53 _{Third, the focus of these NPEs was} primarily on software companies due to the "fuzzy" boundaries surrounding these patents.54 _{In my opinion Bessen, Ford and Meurer's study shows a strong} indication for NPEs focus on software companies due to the abstract scopes on some of these patents. But the biggest problem is that loss of wealth cannot be measured, (at least, directly) using stock price declines.

This is a bad reection of loss of 'wealth'. Stockprices can deviate from a rm's true value, because markets do not possess all the information and there are dierent factors in play that make a dierence in a rms market value and book value. It is hard to conceive how the loss of 'wealth' of 500 billion can be accredited so easily to litigation costs by virtue of stock-price decline. Even when controlling for other factors, lurking variables can be at stake that could be the cause of the stock-price decline.

Fusco took another approach. He studied the emergence of NPEs on continental Europe, by looking at the EU's wide emergence of NPEs. This is the rst study involving the NPE phenomenon in Europe. Findings were that European NPEs do exist, but they are less active than their counterparts in the U.S. This can have several reasons: rstly, there is the dierence between the U.S. and European industry. In Europe ICT, electronics and machinery industry are smaller than in the U.S. In addition, the NPEs in the U.S. have more assets than in Europe.55 _{Second, remedy systems (for example fee-shifting) create} dierent opportunities and are already available in Europe. Third, dierent judicial cultures result in lower damages paid and limit inter-border injunction in Europe. These factors combined make the NPE phenomenon less profound in Europe than compared to the U.S.56

Positive eects of NPEs

One argument often used to defend NPEs is that they create an aftermarket of patents for start-ups in that way they create an incentive for (primarily Venture-Capital) investments in high-risk, high-payo start-ups.57 _Rish per-formed a study on the eects of VC investments in NPE contributing start-ups and the amount of patents they generated. Results showed that there was a small, but signicant, positive dierence between NPE contributing start-ups and normal start-ups. This result is not conclusive since this eect could, either,

52_{Bessen, Ford, and Meurer 2011, p. 12.} 53_{Bessen, Ford, and Meurer 2011, p. 18.} 54_{Bessen, Ford, and Meurer 2011, p. 23.} 55_{Fusco 2014, p. 462.}

56_{Fusco 2014, p. 463.} 57_{Shresta 2010, p. 131.}

(17)

be attributed to the timing of said investments or to VC investors who perceive a patent as an indication of the value in a rm. Hence are willing to invest more when patents are present.58 _{Furthermore, the percentage of failed startups that} had acquired VC investments and were the patents were later bought by an NPE amounts to six percent of the total startup population. Therefore, the argument that NPEs spur innovation investments by the creation of a patent after-market seems far-fetched, since NPEs were only involved with six percent of the startup population.

Another argument used for justication of NPEs is that they help small busi-nesses against large infringes (i.e. the garage inventor versus the multinational Moloch).59 _{However, no evidence can be found for this claim. Empirical results} for this hypothesis are mixed.60

Rish studied the overall claims against NPEs and tried to falsify some persistent positive and negative myths about NPEs but due to limited availability of in-formation claims of both sides could not be refuted.61 _{Rish looked at the added} benet for individuals and small start-ups by allowing NPEs to litigate and as-sert their patents, for less costs and more eciently than the individuals could do themselves. Unfortunately, though, the results did not show any conclusive benets.62

4.3 Patent Pools

Some scholars found indications that the software industry was able to - in some way - solve their own problems, by creating patent-pools. Patent pools are an industry formed solution to decrease the aforementioned costs associated with software patent thickets. Patent pools are a group of technology innovators that cross license, that is share each others patents with each other. Due to this cross licensing there are some benets for the involved parties: Firstly, innovation is improved by easier access to new technology. Secondly, costs are reduced this can either mean less litigation costs or other legal costs such as nding out if your invention is infringing existing patents (search costs). Hence patent pools can be seen as an industry formed solution to the problem associated with patents. It is important to note that innovation is only increased if you are a part of the pool. Outsiders do not partake in the advantageous benets. Participation is limited by the requirement of input in the form of patents or by the need to for monetary resources. When a party does not posses this resources it cannot take part in the patent pool. This obviously creates a competitive imbalance on the market.6364

58_{Risch 2012, p. 491-492.}

59_{Schwartz & Kesan 2014, p. 442; Shresta 2010, p 128.} 60_{Lerner & Zhu 2007, p. 503.}

61_{Rish 2012, p. 477.} 62_{Rish 2012, p. 469.}

63_{This problem is related to anti-trust policy and is outside of the scope of this thesis but}

nevertheless worth mentioning.

(18)

Barnett's study on the eects of patent pools in the ICT sector showed that patent pool formation did not lead to formation of patent thickets (i.e. extensive negative eects resulting from concentration of patent ownership). But created lower consumer prices and a greater variety of end-products for consumers.65 Bessen and Hunt found an increased use of patent pools in the software industry. They found evidence that the software industry, patents occur four times less than in the machine industry and even ten times less than in the electronics industry.66 _{This is even worse for software startups. Cockburn & MacGarvie} found that 80 percent to 95 percent of the software rms did not le for a patent and that only twenty percent of the software start-up rms led for a patent between 1994 and 2004.67 _{In addition the research conducted by Mann & Sager} found that even after receiving venture capital investments only twenty four percent of the start-ups had patents within four years.68 _{And lastly, Graham et} al. found that of all startups between 1998 and 2008, only twenty four percent held patents.69

It is important to notice that even though patent-pools can have a positive eect on the consumer prices and variety of end-products they do increase the barriers to enter the industry for smaller start-ups, because they cannot enter the pool without a substantial patent portfolio.70

4.4 Chapter Conclusion

Most scholars agree on the main message: NPEs form a serious disruption in the software industry. NPEs litigate against small enterprises and start-ups in the hopes to license out their - often too broad - software patent. All this while no viable products are being developed with these patents. This contravenes directly with the patent-system and due to the sheer size and number of software patents being granted this problem has the potential to form a serious disruption to the patent system. For example more software patents are being granted than normal patents in the U.S. since 2013.71 _{Patents are being used as a business} strategy, that is: try to extort money from counterparties or prohibit others to use your technology. The alarming damages associated with NPEs is evidence that change is needed. The following chapters will delve into how NPEs and patent pools could emerge and how these problems could be limited. As a consequence others have taken precaution and acquired vast swaths of software patents to defend themselves against NPEs. Further evidence of the change in business strategy can be found in the many dramatized legal battles between large technology developers.72 _{These changes are an undesired eect and do}

65_{Barnett 2014, p. 46.} 66_{Bessen & Hunt, p. 8.}

67_{Cockburn & MacGarvie 2009, p. 770} 68_{Mann & Sager 2004, p. 15.}

69_{Graham et al. 2009, p. 1271.} 70_{Barnett 2014, p. 27.} 71_{GAO 2013, p 55.}

(19)

not t within the mindset of patent law. Hence the criticism surrounding these NPEs are substantiated and the problem is in dire need for a solution.

(20)

5 Legal framework in the EU and the US

This chapter will introduce the current legal standing of the U.S. Supreme Court and the European Patent Oce. This chapter does not cover an extensive overview of all case law but - due to conciseness - will cover the most recent and relevant standings of case law with respect to software patents. This chapter will rstly, show the emergence of software as patentable subject matter. Secondly, it will demonstrate the inherent troubles associated with software patentability in both legal systems over the course of time.

5.1 Legal framework in the EU

In Europe the member states of the European Patent Convention (EPC) are subjected to the EPC. The European Patent Oce (EPO) oversees the interpre-tation of the EPC by dissolving disputes between involved parties. The Board of Appeal of the European Patent Oce (BoA) is the arbiter in these conicts and is the ultimate board of appeal on cases of patent eligibility. But parties must refer to national courts on matters of infringement. A unied patent direc-tive of the European Union is still not available, making the current landscape fragmented with national deviating rules.

The main criteria of patent eligibility can be found in article 52(1) which states that a patent must adhere to certain characteristics: First it must be novel; a patent is considered novel when it is not derived from any known prior art.73 Second, the invention must be inventive; this is the case when a person skilled in the art regards the invention as 'non-obvious'.74 _{Third, and nal, inventions} must be susceptible to industrial application; this is the case when it can be applied in the industry or agriculture.75

Software patents in general seem to be categorically excluded by provision 52(3) which states that software "as such" is not patentable, but case law proves this otherwise. From case law it is evident that the EPO requires the need of a 'technical character'. The main issue with the patentability of software lies of-ten in the requirement of this 'technical character'. The interpretation of the wording 'technical character' has changed over the course of the years. Mul-tiple approaches have been used by the BoA in order to assess if a software patent claim comprises of the required 'technical character'.76 _{These dierent} approaches are: technical eect, further technical eect, and the combination approach.77 _{The technical eect relates to an invention that exerts some eect} "over a physical process".78 _{This approach became quickly meaningless since} software at its most basic form is the allocation of electrical impulses in a grid. In other words, the movement of bits and bytes. Electricity is by denition

73_{See article 54 EPC.} 74_{See article 56 EPC.} 75_{See article 57 EPC.}

76_{Okediji & Bagley 2014, p. 202-203.}

77_{Technical contribution to prior art is left out for conciseness and due to the fact is not}

anymore a valid approach used by the BoA.

(21)

physical, making this approach of the BoA not able to distinguish between dif-ferent software inventions, consequently rendering all digital software patentable subject matter.79 _{The BoA conrmed this in case G3/08.}80 _{The BoA then} up-dated the approach to requiring a further technical eect. This approach can be explained as a technical eect not related to the aforementioned technical eect but producing (an additional) other eect. The BoA explains this as: the programmer's intention must be more than solely executing the algorithms but create something more (or rather emergent) from the program.81 _{The latest} approach is the combination approach which can be explained as the combina-tion between non-technical elements and technical elements. For example an invention claim involving an apparatus and software method. 82

5.1.1 Current legal standard

The combination approach seems to be the current standard of the interpre-tation of the requirement: 'technical character'. Even-though the dierent ap-proaches have been used interchangeably and concurrently throughout time and in a variety of dierent cases.83 _{To this moment both approaches (i.e. further} technical eect and the combination approach) can be used interchangeably.84 This makes it complicated to give a denitive answer on what the exact re-quirements are. What can be said is that inventions are assessed as a whole to nd whether there is a 'technical character' this can be done using the further technical eect or the combination approach. Based on case law and the inter-pretation of the BoA the combination approach has a lower threshold than the further technical eect approach.

5.1.2 Current case law

Three landmark cases, namely The Pension Benets, Hitachi, and Microsoft will be covered in this part.

In the Pension Benets85 _{case the combination approach was used and it is} exemplary of the diculty to lineate the border between patentable and non-patentable subject matter. In this case, a business method in combination with an apparatus for performing said business method was applied to the EPO. The BoA rejected the claim with regards to the method stating that the method did not comprise of any technicality since it is merely a process, but accepted the

79_{Bakels 2003, P. 217.}

80_{G 3/08, 13.5; Sterckx & Cockbain 2010, p.382; Bakels 2009, p. 520.} 81_{Pila 2011, p. 215.}

82_{Pila 2011, p. 217; See also the case Pension Benets.}

83_{For instance in the Viacom the combination approach and the contribution to prior art}

approach have been used both in the assessment of eligible patent subject matter; For more See Pila 2005, p. 179.

84_{i.e. They are not excluded as a reasoning for software patentability in Europe.}

85_{Case T 0931/195, Controlling Pension Benet System PBS Partnership, [2001] OJEPO}

(22)

part regarding to the apparatus which in the Boards opinion did comprise of subject matter. 86

Hitachi,87 _{the following landmark case. Revolved around an apparatus claim} and a business method claim. The BoA stated that the apparatus claim was an invention according to 52(1) of the EPC. From here, the BoA changed its previous course of the Pension Benets case and stated that method claims in combination with an apparatus do contain the required 'technical charac-ter'. This divergence from the Pension Benets case can be explained by the inevitability that arises with quickly developing technologies. under this ap-proach the exclusion of 52(2) and 52(3) EPC was limited to subject matter 'as such'.88 _{The Hitachi patent claim eventually was not granted due to a failure} to pass the inventiveness threshold.89

In the Microsoft case,90 _{a method claim involving the clipboard function (i.e.} copy paste function) and an apparatus claim involving the execution of said method. The BoA continued the line of thought from the Hitachi case and stated that the method claim was eligible for patentability since it possess the required 'technical character' by being performed by a computer readable medium".91 _{What makes this case interesting is the distinction made by the} BoA between computer-programs and computer-methods92_{, this is remarkable} since both require a computer to be run, making it hard to distinguish between both concepts.

5.2 Legal framework in the US

Contrariwise to the member countries of the EPC, the United States93 _does not categorically exclude software patents from patentable subject matter. Ac-cording to the old saying: Anything made under the sun" is patentable in the U.S. However, there are some criteria which must be followed. These patent eligibility criteria. can be found in the U.S. Patent Act. 101 of the Patent Act states these thresholds: New, invention and useful.94 _{The only excluded subject} matter in the U.S. are laws of nature, natural phenomena, and abstract ideas. 95

During the course of time the U.S. Supreme court has used dierent tests (or approaches) in order to assess the eligibility of a certain invention related to

86_{Pila 2011, p. 215.}

87_{Case T 0258/03, Auction Method/Hitachi, [2004] OJEPO 575.} 88_{Sterckx & Cockbain 2010, p.385.}

89_{T258/03, Auction Method/Hitachi, 8.}

90_{Case, T0424/03, Microsoft/Data transfer expanded clipboard formats.} 91_{Microsoft/Data transfer expanded clipboard formats, T424/03 5.3.} 92_{Microsoft/Data transfer expanded clipboard formats, T424/03 5.2.}

93_{The U.S. is, in contrast to Continental Europe, a common law system, therefor the U.S.}

relies heavily on case law.

94_{U.S. Patent Act. 102} 95_{Parker vs Flook 584}

(23)

software. The most important approaches will be covered in this section.96 The Machine-or-Transformation approach emerged in the Gottschalk v. Ben-son97_{case, this was the rst patent case involving a software related} implemen-tation. The patent was rejected because according to the Supreme Court the process was not complex enough and did not fulll the criteria, because it was able to run the process from someone's head.98 _{Currently the test is used as a} tool and not as nal test in order to assess the patentability of an invention. Later in the case of Diamond v. Diehr,99 _{the Supreme Court did accept a} com-puter program to be patentable subject matter. Even though the basis of the patent was a mathematical algorithm (an algorithm for the curing of rubber), the Supreme Court considered the process patentable.100 _{This shows the} intri-cate interplay between software related implementations and the function they provide.

Useful, concrete and tangible result approach seeks a result from the invention which is either useful, concrete or tangible. The underlying thought is that the four categories of 101 (process, machine, manufacture, or composition) are not paramount, but the emphasis should be on the "essential characteristics"101 _of the patent claim. This line of reasoning was rst introduced in the State street bank case102_{. In this case, according to the Supreme Court, the process of} calculating share prices was a useful, tangible, and concrete result.103

The 'Signicant additional features' approach originates from the Mayo case.104 Later this approach is conrmed in the Alice Corporation case105_{. In the Mayo} case this test is used to ascertain the eligibility of inventions relying on laws of nature and subsequently this test was transformed to test the eligibility of patents involving abstract ideas and methods in the Alice Corporation case. The approach can be summarized as: patent eligibility of an invention based on a natural phenomenon or abstract idea must evolve into something that is combined with hardware or an improvement on existing hardware , but not derived from anything existing or conventional.106 _{The precise interpretation} and requirements are not clear.107 _{What is clear is that this approach seem to} 96_{due to conciseness the point of novelty approach and the Freeman-Walter-Abel approach}

are not covered in this thesis; additionally the case law will be covered immediately witht he approaches of the Supreme Court with regards to software patents.

97_{Gottschalk v. Benson, 409 U.S. 63.} 98_{Gottschalk v. Benson, 409 U.S. 63, 70.} 99_{Diamond v. Diehr, 450 U.S. 175.} 100_{Diamond v. Diehr, 450 U.S. 175, 192.} 101_{State Street Bank, 149 F.3d 1368, p.1376.} 102_{State Street Bank, 149 F.3d 1368.} 103_{State Street Bank, 149 F.3d 1368, p.1376.} 104_{Mayo v Prometheus, 132 S.Ct. 1289.} 105_{Alice v CLS Bank, 134 S.Ct. 2347.}

106_{Alice v CLS Bank, 134 S.Ct. 2347 (2014), p. 2359.}

107_{Currently the limits of the Alice Corporation case are being tested with respect to the}

two step approach from the case yed in order to assess the patentable subject matter. Unfor-tunately out of scope of this work but for more information I refer to the case of: Intellectual Ventures v LLC Capital One Financial, Federal Circuit court.

(24)

be setting higher bars, than compared to the European "combination approach" because under the 'signicant additional features' approach emergent features are required by the Supreme Court.108

5.2.1 Current legal standard

The legal standard regarding software patents in the U.S. remains largely incon-clusive. It seems as though dierent approaches can be used to assess the eligi-ble patent subject matter. This seems a bit contradictory to the open and low thresholds for patent eligibility in the U.S. It is however possible to ascertain the current approach used by the Supreme Court which is the signicant additional features approach, but the machine-or-transformation approach reemerged dur-ing the Mayo case where it was used as a tool instead of a nal approach. On the graph in the gure below the dierent approaches over time are depicted, it clearly shows how in both legal systems the thresholds got lowered with the onset of new approaches.109

Figure 2: Software patents approach over time

5.3 Chapter Conclusion

As illustrated before the criteria interpretation changed in both legal systems over time. The dierent approaches that were and are used do not increase certainty. Whether this is due to the inherent complexity of software or the possibility to generate too broad patents is unknown.110

With increasing importance of computers and digital invention being applied, both in the U.S and in the EU, the legal boards have diculty processing these developments. Both legal systems tried to solve the problem by using approaches that combined the intangible with the tangible (In the U.S. this was with the Machine-or-Transformation approach, while in the EU this was done using the

108_{Stern 2014, p. 626.}

109_{A larger depiction is available in the appendix} 110_{Stern 2014, p. 629.}

(25)

'Further technical eect' approach). This problem is not, yet, solved not even with the latest approaches. But, the importance of the software patent ap-proaches lays in the fact that it opened the door to allow patents involving computer implemented innovations. In the early 1970s and 1980s this was not a problem. The quantity of software patents was low. The problem started with the advent of information technology and the lowered thresholds for patentable subject matter.111 _{This combination on the hand amounted to a vehemently} large increase of software related patents, as can be seen in gure two on the next page. The graph depicts the amount of software patents led over time. Sharp increases are noticeable with more and more lax thresholds for patentable subject matter. The dierent approaches are indicated on the graph itself. Scholars substantiate these claims. For instance, Bessen and Hunt found that in 2004, fteen percent112 _{of all the patents were software patents. This increase} could not be explained by research and development investments or productivity growth, but Bessen and Hunt suggest this was related to the lowered threshold and the costs of software patent applications.113 _{On the next page a graph} represents the amount of patents granted to normal patents and to software patents per year in the United States, including the percentage of software patents on the amount of total patents.114 _{The graph shows an alarming increase} since the 1990. This corresponds closely with the lowered thresholds of the USPTO shown in the appendix.

111_{In the appendix there is graph displaying the dierent approaches over time.}

112_{This quantity is dierent than the percentage on the graph in gure two, an}

explana-tion thereto can be the use of dierent search wordings for the associaexplana-tion with computer implemented patents.

113_{Bessen & Hunt 2007, p. 180.}

(26)

(27)

6 The scope of software patents

Non practicing entities thrive on vague and broad patents. Therefore it is im-portant to understand how software patents' scope can be too broad which eventually causes problems by the formation of patent thickets or NPEs. This chapter will cover the criticism on software patents: functional claiming and scope creep.115 _{These both act as a source for the problems}116 _{associated with} software patents. In broad lines, and at the basis, it is the abstractness of software which in turn is closely related to the excluded subject matter of al-gorithms. Abstract formulation of software patent disclosures is considered to make overly broad patents possible. Secondly by claiming the patent using a means-plus-function description without an accompanying limiting structure, the patent scope is widely increased, resulting in many devices being subjected to the patent.

6.1 Scope of patent protection

Broad claiming did not incept with the emergence of software patents but has been a problem since the very beginning of the patent-system. A famous ex-ample is that of the patent claim of the Wright Brothers. The Brothers Wright gained a patent117 _{on the steering of a plane which eectively was too broad.} Glenn Curtiss made an invention that improved the steering of planes further, and due to the broad protection of the chosen wording in the patent claim of the Wright Brothers, it fell under the scope of their patent and was not allowed to be marketed. It took fourteen years and the intervention of the government to force the Wright Brothers to license their patent. This quickly led to new and better airplane inventions.118 _{Examples like these can be found} through-out time. However, many scholars believe that due to the abstract nature of software, these kind of patents are prone to overly broad patent claims.119 A later case, Halliburton Oil Cementing Co. V. Walker120_{is the example of the} restrictive approach used by the U.S. Supreme Court on the stance of functional claiming yet later in the patent act of 1952, by virtue of 35 U.S.C. 112 ¶ 6 it was made possible through the means-plus-function claim. Contemporary patent claiming involves formulating claims in such a way that they potentially could cover any device. Later in this chapter this will be covered using the patent from the Alice Corporation case. The means-plus-function possibility was created by the legislator with the intent of allowing specic implementations of a function but not to grant protection on all possible functions of the mentioned patent.121 115_{This is term I coined and it can be dened as: The use of specic language in the}

description of a software patent which will potentially increase a software patent's scope.

116_{e.g. the formation of patent thickets, and the formation of Non Practicing Entities.} 117_{U.S. Patent No. 821,393 claim 7, 1903.}

118_{Lemley 2012, p 913-914.}

119_{Bessens & Meuren 2014, p. 412; Bradstreet 2013, p. 374; Lemley 2012, p. 927.} 120_{Halliburton Oil Well Cementing Co. v. Walker, 329 U.S. 1 (1946).}

(28)

6.1.1 Means-plus-function v Step-plus-function

In patent law the claims dene the scope of the patent protection. Claims that are described broadly cover a larger scope. That is, more activities fall under the patent's protection and consequently the patent is more valuable to the owner, this is especially the case for NPEs.

A manner often used to increase the scope of claims is to use functional limits rather than structural limits.

For example a ballpoint, could be claimed as: "an inscribing element" which is obviously much broader than "a cylindrical apparatus of plastic with a plastic cylindrical reservoir core that holds an inscribing uid" Additionally, functional claims are easier to write because you do not need to explain the exact workings of the patent, but only the function it possesses.

Patent claims can either involve means-plus-function for the invention of a ma-chine or step-plus-function for claims relating to processes. Important to note is that the means-plus-function claim is not limited to machines, as can be seen in the statutes.122 _{The practical dierence between means-plus-function and} step-plus-function is that the latter will dene elements by what they are and the former by what they do. In other words the former relates to functional claims while the latter related to non-functional claims.

Functional claims are disfavored in the patent system. Reasons for this are twofold: Firstly, when the functional claim is not written correctly the purely functional claim will be invalid based on unduly or indenite grounds. Secondly, when written correctly the functional claim will be extremely narrow.123 _A correct functional claim will be described in the aforementioned "means-plus-function" form. Hence the example of the ballpoint would render: "a means for inscribing.".

35 U.S.C. 112 ¶ 6 states: An element in a claim for a combination may be expressed as a means or step for performing a specied function without the recital of structure, material, or acts in support thereof, and such claim shall be construed to cover the corresponding structure, material, or acts described in the specication and equivalents thereof"124

With regards to the functional claiming there exists a line between the breadth of the scope and the abstractness in the disclosures. The level of abstractness can be chosen by the claimant but needs to satisfy the requirement of 112 ¶ 2.125 _{This requirement can be dened as:}

An algorithm is suciently disclosed if a person having ordinary skill in the art

of programming can distinctly determine which computer program is claimed and which com-puter programs are not claimed."

122_{35 U.S.C. 112¶ 6.} 123_{Zimmeck 2011, p. 225.}

124_{See the appendix for a full overview of 35 U.S.C. 112.}

125_{112 ¶ 2: "The specication shall conclude with one or more claims particularly pointing}

out and distinctly claiming the subject matter which the inventor or a joint inventor regards as the invention."

(29)

In short, a patent claim must obey to the requirements of 112 ¶ 1, ¶ 2 which determines the specications of the actual subject matter of the patent, and ¶ 6 which enables a patentee to claim a patent based on a specic implemented function that is accompanied by a limiting structure (i.e. the aforementioned means-plus-function claim).

112 ¶ 1 is used to show competitors what constitutes the patent claim and if they (readers of the patent) infringe the patent. As well as the teaching functions: persons skilled in the art must be able to learn the invention and, later when the patent is expired, make use of it. A consequence of this is that the patent will enter the public domain and cannot remain a trade secret. Due to the dierent functions of 112 ¶ 1(i.e. signaling function).126 _{This paragraph} is left out the analysis for determining the scope of the patent.127

When claiming a means-plus-function patent it is required to provide a limiting structure. 112 ¶ 6 specically limits the functional claim to the corresponding structure and subject matter. In other words a functional claim must be sub-stantiated with the corresponding limiting structure that determines the scope of protection. If the patent fails to do so it will become invalid. In the example of the inscribing element, the means-plus-function claim: "a means for inscrib-ing." would require thus some limiting structure. For example, "a means for inscribing concrete walls". In this way not all the possible applications of an inscribing element will fall under the scope, but only this specic application (inscribing concrete walls).

A functional claim is considered correct when both the main functional claim elements and the corresponding limiting structure128_{satisfy the denitive} spec-ication of 112 ¶ 2. The claims both need to be understood by a person expe-rienced in the eld of the invention (that is in this case someone expeexpe-rienced in computer science). Practically, this means that a computer programmer must understand what programs do fall under the scope, and what programs do not fall under the scope of the patent. Obviously, this is a rather subjective criterion and creates room for legal discourse for NPEs.

6.1.2 Hybrid Claims

In 1991 the Federal Court stressed, in the important case re Donaldson,129_the need for a limiting structure accompanying a functional claim. Filing to do so would result in a penalty of invalidity of the claim. Even-though the means-plus-function patent claims, currently, are less than ten percent of the of the total claims. They still pose problems. The graph in the gure below shows the amount of patent claims containing the word "means" (indicated in light blue), since the exact wording of the "means of..." is not needed for a claim to be considered a function claim the actual amount of

means-plus-126_{Patents originally were intended to be used as a signpost, that is the origin of 112 ¶ 1.} 127_{Zimmeck 2011, p. 228.}

128_{of 112 ¶6.}

(30)

function claims can vary.130 _{This is problematic, since the U.S. Supreme Court} does not use a consistent approach for the interpretation of the wording "means for". Sometimes dierent wording is used (e.g. congured To/For...; For ...ing) to circumvent the requirement of a limiting structure of 112 ¶ 6.131

When the graph is analyzed it becomes obvious that the re Donaldson case lead to a decrease in the use of the wording "means for" (which would require a limiting structure of the scope) and lead to an increase in the use of other wordings for functional claims. Since approximately 1991 other formulations are, increasingly more, used for functional claims instead of the wording means for...". These other formulations imply the same meaning (consequently making them a functional claim), but due to the formalized approach of the Supreme Court (i.e. functional claims are strictly interpreted by "means for") these claims needed not to be limited by to 112 ¶ 6.132

As illustrated above the new popular method is to employ a hybrid claim form that uses some quantity of structure and also some amount of function. Conse-quently, one can claim: "software to sort letters diagonally" In this case there is some general structure provided (e.g. software).

These claims, do not provide a limiting structure but limit the patent only on function, the implications thereof are a too broad patent.133

Figure 4: Change in claim language over time

130_{Data derived from Crouch 2014.} 131_{Steidl 2015, p. 166; Lemley 2012 p. 924.} 132_{Steidl 2015, p. 168.}

(31)

6.2 Descriptions accompanying means-plus-function

In addition to functional claiming the scope can also be enlarged by using an interpretation-error prone description of the software in the patent claims and disclosures. There exists a relationship between on the one hand the abstract-ness of software description and, on the other, the scope of protection of the patent. As described in chapter three, software can be represented in multiple ways. Beginning from the most abstract to less abstract, respectively: user re-quirements, software modeling tools and nally pseudo code. The exact choice what to use for the description of the claim will determine the scope of the claim.

Level of

Abstraction134 Description of Software in Patent Claims Requirements documentation: this can either be user requirements of functional requirements. The former stating what the functions the user needs, the latter what functions the program should have. High

Software modeling tools: Data Flow Diagrams, Entity-Relationship diagrams, State diagrams or UML diagrams. All represent the software

graphically from dierent perspectives. The level of abstractness is less than stating the requirements of software, but leaves room for interpretation. Medium

pseudo code or object code leaves the least room for broad interpretation of the submitted disclosures of software patents.

Low

Table 1: Level of software descriptions

Based on the disclosed structure of 112 ¶ 6 a dierent representation of the software will have a dierent level of abstraction. Consequently, it will directly interfere with the scope of the software patent. For example, when pseudo code135 _{is used to describe the software; the scope of the patent will be smaller} compared to when functional requirements are used. Functional requirements create the most room for interpretation since they describe on a high level, what

135_{Below is an example of pseudo code:}

while input is needed

loop over all strings of numbers

if the three strings are in the wrong order then print the pair

(32)

the software does.136

Patents that involve only functional requirements are thus patents that are used by NPEs. But it is important to note that the patentee is free to choose which representation to use for the description of the disclosures as long as: The person skilled in the art" is able to distinguish between what belongs under the scope and what not.

Doctrine of equivalence

The Doctrine Of Equivalence (DOE) expands the scope of patents as well. It is originally used to protect too narrow applications under the friction theory. This theory states that frictions block patent applicants from claiming the right patent and consequently patentees claim narrower patents instead.137 _However, the implications for software patents is: that the DOE is only applicable in the case were the software does not perform the identical function. In these cases the DOE extends even beyond 112 ¶ 6. But even in these cases the DOE is limited by prosecution history estoppel.138 _{In all other cases the equivalence is} compared using the limiting structure of the patent under 112 ¶ 6. Therefore the DOE is of small relevance to NPEs.

6.3 Proposed Solutions

Following the illustration of broad patent claims some scholars propose stricter interpretation of the 35 U.S.C. 112 ¶ 6.139 _{Due to some incomprehensible} reason the USPTO and Supreme Court have not been interpreting the law in a strict way. Lemley specically states that the Supreme Court omits to place software patents, involving functional claims that are stated in dierent wording (i.e. hybrid claims), under the correct statute. An example of this can be found in the Alice Corporation CLS Bank case.

The patent involved in the Alice Corporation CLS Bank case has the following elements:

33. A method of exchanging obligations as between parties, each party hold-ing a credit record and a debit record with an exchange institution, the credit records and debit records for exchange of predetermined obligations, the method comprising the steps of

(a) creating a shadow credit record and a shadow debit record for each stakeholder party to be held independently by a supervisory institution from the exchange institutions; 114. Id. at 964. 115. See supra note 11 and accompanying text. (b) obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;

(c) for every transaction resulting in an exchange obligation, the supervisory institution adjusting each respective party's shadow credit record or shadow debit

136_{Zimmeck 2011, p 203.} 137_{Meurer & Nard 2005, p. 33.} 138_{Zimmeck 2011, p. 230.}

(33)

record, allowing only these transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order; and

(d) at the end-of-day, the supervisory institution instructing ones of the ex-change institutions to exex-change credits or debits to the credit record and debit record of the respective parties in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions.

34. The method as in claim 33, wherein the end-of-day instructions represent credits and debits netted throughout the day for each party in respect of all the transactions of that day.

According to the authors Lemley, Steidl, and Zimmeck a stricter interpretation of 35 U.S.C. 112 ¶ 6 is used, the above patent (which describes the non-inventive notion of an escrow service) claim would fail on the grounds of missing denitiveness (that is a limiting structure required by 112 ¶ 6 with functional claims). In the above claim: "A method for.... " implies a means claim and therefore requires a limiting structure which is related to the specic function. The use of the wording credit record and debit record are too broad and generally making them not limiting the scope of the functional claim. But, are merely describing the features of the software program. The failure to provide the limiting structure of the function therefore would render this patent invalid140_, if a stricter ( i.e. according to Lemley, Steidl, and Zimmeck ) interpretation is used of 35 U.S.C. 112 ¶ 6. However, in the current situation the patent protects any apparatus that performs the function, and could potentially be asserted to any device including calculators or an abacus. Hence the problem lays in the wrong application of the law. The inventive quality (the court regards this as the 'something more' requirement, originating from the Alice Corporation case) is not adequately shown and instead a patent is granted to the basic notion of an escrow service, opening up the possibility for NPEs to litigate against many parties.141 _{There are many other patents that would not pass this increased} quality hurdle for software patents. Examples of this are Parker v Flook, State Street bank142_{. All these would fail on the above shown omission of a proper} limiting structure in combination with a functional claim.

Evidence for the amount of invalid claims in the software patent landscape is found by Miller. He conducted a study on the quantity of patents with at least one invalid claim. Results showed that software patents have a higher probability to have at least one invalid claim. While NPEs have a substantial higher probability to own a patent with at least one invalid claim.143 _{The left} graph in gure ve shows that all patents have a probability of 27 percent to have at least one invalid claim and this rises to 59 percent of the patents

140_{According to re Donaldson Co.} 141_{Steidl 2015, p 171.}

142_{State Street Bank & Trust Co. v. Signature Financial Group, Inc.} 143_{Miller 2012, p. 23.}

Patent Trolls - Disrupting the Patent System?