From the vantage point of a half-century, for example, it’s clear that the formation of Silicon Valley involved serendipity more than intentional design.
The co-inventor of the transistor and the founder of the valley’s first chip company, William Shockley, moved to Palo Alto, Calif., because his mother lived there. Moreover, although the transistor was invented at Bell Labs in New Jersey, an antitrust lawsuit during the 1950s forced the AT&T phone behemoth to license the technology openly at a nominal charge. And, the venture capital industry, an important part of the Silicon Valley ecosystem, was given a big boost by Congress in the late 1970s when legislation loosened pension fund regulations — touching off an early wave of high-profile initial public offerings.
Now, three decades later, Congress is likely to write legislation that could again reshape the contours of innovation and entrepreneurship for perhaps decades to come, in ways that are hard to predict.
Passed by the House of Representatives with relatively little debate, the Patent Reform Act of 2007 faces a bruising Senate fight this year. As it now stands, the bill would shift the balance of power in the legal quarrels between patent holders and possible infringers by significantly limiting damage awards.
Although it has become a perennial piece of proposed legislation in recent years, patent reform has acquired urgency in the past year, in the view of large technology companies. Intel, Microsoft, I.B.M. and Apple and others are increasingly finding that the nation’s patent system has become a minefield, and they are looking for ways to limit the leverage of both small patent holders and patent “trolls,” or speculators who buy hundreds or thousands of patents.
Rather than depending on patents, large information technology companies can increasingly rely on their market power and cross-licensing relationships. As a result, they are trying to rein in huge patent settlements like the $612.5 million award that NTP Inc. won from Research In Motion, the maker of the popular BlackBerry wireless device, or the $1.52 billion award that Lucent briefly won against Gateway Inc. and Microsoft. (It was recently overturned.)
It appears that the Senate leadership has sympathy for the large technology companies. Opposed to big tech is a small group of high-profile inventors, like the Segway designer Dean Kamen and the former Apple engineer and QuickTime co-inventor Steve Perlman, as well as venture capitalists and a growing array of smaller businesses that do not share the market power of the largest companies. They have joined forces with the pharmaceutical industry, which has traditionally relied on the protection of a strong patent system.
The battle lines are now established, and legislators are being asked to grapple with the question of how best to protect innovation.
On the one hand, in changing the nation’s patent laws, Congress runs the risk of throttling the little guy — the Stephen Wozniaks and the Steven Jobses — who strike out from their garages with novel ideas that change the world. On the other hand, consumers have clearly benefited from the ability of large technology companies like Intel and Microsoft to use their prodigious market power to drive down prices.
If we limit the incentive of the individual inventor in a garage to transform an entire industry, will there still be enough innovation in the corporate research labs of industrial giants?
It is easy to see the imperfections of the current law and its impact on consumer products. For example, although the Apple iPhone has many superior features, its e-mail function is in most cases clunky when compared with the earlier R.I.M. BlackBerry. Industry executives say that’s because Apple has been forced to tiptoe around the patents held by NTP. Although the patents have been largely invalidated by the United States Patent Office, there are still active lawsuits that NTP has brought.
Mr. Perlman says the Supreme Court has already made two landmark rulings that he says have largely addressed the “troll” problem without harming independent inventors like himself. In one case, eBay v. MercExchange, the court limited the ability of a patent covering a small feature to be used as a weapon, as in the NTP-R.I.M. settlement. In April, the court went much further in KSR International v. Teleflex, substantially raising the bar for patent holders in proving that their invention is not obvious. The ruling will make many existing patents more vulnerable and make new patents harder to get as well.
The peril of the new patent legislation as currently written, he argues, is that it would allow the nation’s dominant high technology companies to largely control the pace of innovation, leading to a situation the country has seen once before — in the American auto industry.
“Detroit is a very clear example of what happens when you have large companies who have already established they’re the winners,” he said.
Under the proposed law, what are known as the “Georgia-Pacific factors,” a set of 15 guidelines that courts now use for determining damages in patent cases, would be boiled down to a single concept of “apportionment.” Damage calculations would be based on an economic analysis to ensure that a royalty damage award captures only the economic value attributable to the patent’s specific contribution over previous inventions.
Because the very nature of innovation in the computer industry is to increase performance while reducing cost, this change will create a perverse incentive for inventors, Mr. Perlman argues. If an invention reduces the cost of a device, “then your apportionment becomes less and less,” he said.
BACKERS of the new legislation are skeptical that the limits would have any major impact on incentives for individual inventors.
“I have to say I’m frankly astonished that apportionment has been this controversial,” said Mark A. Lemley, an intellectual-property scholar at Stanford who has testified in support of the legislation. “I can’t think of a straight-faced argument that you as a patent owner are entitled to more than your invention has contributed to a product.”
Congress watchers expect the bill to pass this year, even if the pendulum swings back partly toward the individual inventor before it clears the Senate. That would largely be because opponents may calculate that they have their best chance to water it down under the current Congress and administration.
For his part, Mr. Perlman, who has been awarded 73 United States patents, is fretting that a new patent law may permanently shift the balance between the big guys and the little guys.
“I need as much patent protection as I can get,” he said. “Otherwise Microsoft will clone a crummy version of one of my inventions, and I’ll be bowled over.”