On August 11, 2009, Judge Leonard Davis of the U.S. District Court in the Eastern District of Texas issued a permanent injunction that bars Microsoft from selling recent versions of its Word software, because the software violates a patent for processing XML, a markup language that allows users to customize the underlying format of text documents.

David and Goliath

The patent is held by a small Canadian company named i4i Inc. Admittedly, the U.S. District Court in the Eastern District of Texas is well known for its favorable treatment of small companies that sue behemoths like Microsoft. Nonetheless, the verdict left Microsoft with a lot to deal with. In addition to the injunction, the court awarded i4i damages of approximately $290 million. You can read the ruling here.

Microsoft has pledged to appeal the verdict, but has otherwise said little about its intentions. Microsoft's main defense has been that the i4i's patent is invalid. That is a tough argument to make, however, because courts initially assume that the U.S. Patent and Trademark Office does not issue invalid patents.

If Microsoft loses its appeal, then it has only three choices: (1) stop selling Word; (2) buy a license from, or otherwise settle with, i4i; or (3) develop a workaround that does not violate i4i's patent.

The Software Patent Debate

This case is certain to rekindle the ongoing debate over the wisdom of having software patents in the first place. Those who oppose software patents are, I am sure, conflicted by this case. Should they be happy that Microsoft, one of the leading proponents of software patents, has gotten a taste of its own medicine? Or, should they lament that the case is yet another example of why there should be no such thing as software patents?

The blogosphere is full of opponents of software patents, many of whom are from the open-source movement. Among other things, they claim that most software patents cover either trivial inventions or inventions that would have been obvious to software developers of ordinary skill at the time the invention was made. They also claim that such patents stifle innovation, because without conducting expensive patent due diligence, a developer cannot know whether a particular new idea might violate another's existing patent.

Proponents of software patents argue that they are needed, because copyright and trade-secret laws are inadequate to protect the intellectual property. They point out that copyright laws merely protect the specific codification of the software, not the underlying idea, regardless of how innovative and valuable it might be. And, trade secret laws are in a constant state of tension with the freedom of individuals to move from one employer to the next. If employers are allowed to protect their intellectual property by restricting the activities of their employees, in whose heads the IP resides, then the economic freedom of those individuals will most assuredly be affected. Such individuals could find themselves as defendants in lawsuits, and new potential employers might avoid hiring them out of a fear of being dragged into someone else's lawsuit. Patent proponents argue that without patents, employers will push for even stronger trade-secret laws, which could have even greater adverse effects on the economic freedom of individuals.

Practical Considerations

Although the policy debate over software patents is interesting, the case also has practical implications for entrepreneurs. As a purely practical matter, are software patents a good idea?

Unfortunately, as is the case with a lot of legal issues, the answer is: it depends.

To begin the analysis, one must understand what patents do. They are essentially a contract between the inventor and the government. In exchange for disclosing how to practice the invention, the inventor obtains the right—backed up by the government—to exclude others from practicing it. The right usually lasts for 20 years from the filing date. To be patentable, an invention must be "new," "useful," and "non-obvious."

There are at least three questions an inventor must answer:

  • Will having exclusive rights to the underlying invention be of value?
  • Is the invention of a type that the patent law considers to be "patentable subject matter"?
  • Is either trade-secret or copyright protection a better choice?

The Value of the Software Patent

If the invention lies at the core of the entrepreneur's business and would provide the business with a significant competitive advantage in the marketplace, then pursuing patent protection might make sense. Potential investors often consider whether a business has patent protection, or at least pending patent applications, before making an investment.

Alternatively, I have seen situations where investors accorded little value to patents that entrepreneurs had spent a lot of money obtaining. Inventors can spend months of time and $25,000 or more in legal fees filing a patent that might take several years to issue. Moreover, even if a patent covers an invention that provides a competitive advantage, it only provides the inventor with the right to exclude others from practicing it, and therefore, the inventor must be diligent in policing against infringers, which can also be a costly undertaking.

Patentable Subject Matter

In the U.S., patents are granted for inventions that are new, useful, and non-obvious. In the trial involving the i4i patent, Microsoft argued that i4i's patent is invalid; the company is expected to a make a similar argument on appeal. Increasingly, software patents have been challenged on the grounds that they fail to meet the non-obvious standard.

In 2007, the U.S. Supreme Court decided the case of KSR Intl Co. v. Teleflex Inc., which addressed the issue of whether certain mechanical technology was non-obvious. The opinion establishes precedent that will make it more difficult to show that an invention is not obvious. Accordingly, it should help those who seek to challenge the validity of a software patent on the basis that the alleged invention is obvious.

The Disclosure Conundrum

Recall that, in exchange for getting the patent, the inventor must disclose the invention. The disclosure must reveal the overall functionality of the software, so that a programmer with ordinary skill could create the program without undue experimentation. Some inventors view such disclosure as "infringement operating instructions." While the patent is pending, competitors can copy the ideas it embodies and build on them or around them to achieve the same result. By the time the inventor's patent is granted, competitors can be far ahead of the inventor, leaving the inventor with the expensive prospect of an infringement lawsuit that might be difficult to win.

Alternatively, the inventor could rely on trade-secret law to protect the software. If trade secret (as opposed to patent) protection is used to protect the software, however, the inventor must have appropriate safeguards in place, so that the software will, in fact, be classified as a trade secret by a court. Trade secrets only have value as long as they are kept secret. Moreover, if someone else develops the same software independently, then the trade-secret protection would be lost. Alternatively, if someone else independently develops software that is covered by a patent, then the patent protection would not be lost, and the person could be held to have infringed the patent.

If the inventor decides to rely on copyright to protect the software, there is no requirement to file the copyrighted material, although it is usually advisable to do so. Filing the copyrighted material provides the registrant with three important rights: the right to file suit, the ability to recover statutory damages, and the right to ask the court to force the infringer to pay the registrant's attorneys' fees.

Although the filing requirement does involve public disclosure of the copyrighted material, the disclosure is satisfied if the first 25 pages and last 25 pages of the source code are filed. Consequently, it is possible to keep a significant portion of a computer software program confidential, while still registering the code for copyright protection. The trick, obviously, is to ensure that the essence of the program is not within the pages of code that were filed.

Deciding whether software patents are right for you involves several considerations: the value of such a patent, the cost of obtaining and enforcing it, the risks associated with disclosure of the invention, and the effectiveness of other means of protection.