Supreme Court Ruling Could Save Vonage


This week, the Supreme Court handed down a decision that offersa glimmer of hope to Vonage, the Internet telephony pioneer that isfighting for its life after losing a patent lawsuit againstVerizon. Vonage pioneered the Internet telephony market and hasenticed more than two million customers away from Verizon and othertelephone industry incumbents. But, although Verizon hasn't beenable to stop Vonage's momentum in the marketplace, they've foundmore success in the courtroom. In March, a Virginia jury ordered Vonage to pay Verizon $58 million forinfringing three Verizon patents.

The case raises some troubling questions about America's patentsystem, which seems to allow a deep-pocketed incumbent to drive aninnovative competitor out of business. Vonage could go under if theverdict is not overturned, because it would most likely beimpossible to continue offering its core products without Verizon'spermission. But on Monday, in the case of KSR v. Teleflex, the Supreme Court made iteasier for defendants to challenge obvious patents. The law doesnot allow patents on obvious inventions, but in recent years thecourts have not adequately defended this limitation onpatentability. Given the extraordinary breadth of Verizon'spatents, and the fact that very similar technology had beendeveloped by others prior to Verizon's patent application, theSupreme Court's decision may give Vonage the legal ammunition toget Verizon's patents invalidated.

One of Verizon's patents covers devices that allow users toconnect to Internet telephony services wirelessly. The other twocover servers that translate between Internet addresses and phonenumbers. The latter patents present a particularly difficultchallenge for Vonage because they strike at the core of Vonage'sproducts. It's impossible to offer a full-featured Internettelephony product without translating between Internet addressesand phone numbers, so if the courts uphold the Virginia judge'sbroad interpretation of those patents, it could give Verizon thelegal ammunition to shut down not just Vonage but most of its otherInternet telephony competitors as well.

Theoretically, the patent office is only supposed to awardpatents for "non-obvious" inventions, and the concept of convertingbetween an IP address and a phone number certainly seems obvious.In an ideal world, the patents that were issued would be narrowenough that companies could "invent around" others' patents if theywere unable to come to acceptable licensing terms.

Unfortunately, our patent system has long since departed fromthis ideal. In recent decades, the courts have dramatically loweredthe bar for obviousness. As a result, some of the patents beinggranted are so broad that inventing around them is practicallyimpossible. The patents that allowed NTP to win a $612 million settlement from BlackBerry makerResearch in Motion, for example, essentially covered the concept oftransmitting new email notifications wirelessly. There's no way RIMcould have "invented around" that.

Technology companies have responded to this proliferation of badpatents by engaging in the patent equivalent of nuclearstockpiling. By obtaining dozens, hundreds, or even thousands ofpatents, a company can develop a credible deterrent against patentlawsuits: if someone sues it for patent infringement, it will beable to find a patent the other company has infringed and countersue. Vonage's fundamental mistake was that it chose not to jointhis arms race. As a result, when Verizon sued, Vonage wascompletely defenseless.

Software patents are particularly ripe for abuse becausesoftware is assembled from modular components. If the patent systemallows those components to be patented, it becomes almostimpossible to develop a software product without infringingnumerous patents. Moreover, because of the complexity of software,it is often prohibitively expensive to even find all thepatents a given software product might be infringing. So even asoftware firm that wanted to find and license all of the patentsrelevant to its products would likely be unable to do so.

Because of the high cost and uncertainty of the patent system,most software companies don't even try to find patents they mightbe infringing. Instead, they sign cross-licensing deals with asmany companies as possible, and they pray that the remainingcompanies won't sue them before they've had time to develop apatent war-chest of their own.

This is great for patent lawyers, but it's not clear how itpromotes "the progress of science and useful arts" as called for bythe Constitution. The genius of the free-market system is thatcompanies compete for customers based on the quality of theirproducts, and not legal advantages. Companies are free to introducenew products without having to ask anyone's permission. Patents onobvious ideas undermine this competition. If the courts upholdVerizon's broad interpretation of its patents, no one will bepermitted to participate in the Internet telephony market withoutVerizon's permission. Not only will consumers be harmed throughhigher prices, but the pace of progress may also be slowed, aspotential innovators are locked out entirely.

In Monday's decision, the Supreme Court reinvigorated theobviousness requirement, holding that "granting patent protectionto advances that would occur in the ordinary course without realinnovation retards progress." Verizon's patent certainly seems tofit that pattern. The Internet's function is to transmit data, andto a computer, sound is just another type of data. So it was only amatter of time before the Internet became fast enough to supportwidespread use of Internet telephony. And the specific processdescribed in Verizon's patents-translating between a telephonenumber and an Internet address-is an obvious step in the process ofexchanging data between the old-fashioned telephone network and theInternet.

A more fundamental reform would be for Congress to amend patentlaw to clearly state that software is not eligible for patentprotection. The de facto patentability of software is arecent judicial innovation, and there's growing evidence that it'sbeen bad for the software industry. Congress should put an end tothis ill-considered experiment by reinstating the rule thatsoftware is not eligible for patent protection. The softwareindustry was extremely innovative in the decades before thelegalization of software patents, and there's every reason to thinkthat eliminating software patents would have beneficialeffects.

Patent stockpiling is a wasteful and counterproductive form ofcompetition. If the courts or Congress don't do more to rein themin, we're likely to see a lot more cases of software companiesbeing forced to spend their resources on patent lawyers instead ofengineers. The Supreme Court's Teleflex decision giveslower courts the opportunity to rein in such abuses of the patentsystem, but the lower courts must now seize the opportunity. And ifthey don't, Congress should step in to address the problem.