One of CCIA’s smaller members, TurboHercules SAS, has
received a lot of attention recently surrounding its antitrust
dispute with IBM , especially because IBM has chosen to rattle
its many patent sabers at this much smaller competitor by providing a list
of 173 potentially infringed patents. What makes this story a little different from a classic patent shakedown
is that TurboHercules is an open source company, and IBM is a champion of open
source software. In early April of
this year it was reported that IBM accused TurboHercules of “potentially”
violating two of the patents in IBM’s “legally binding” Open Source
Patent Pledge from 2005.
In its pledge, IBM promised the world that it would not assert 500
selected patents (out of IBM’s portfolio
of over 40,000) against open source projects. IBM then issued a series of conflicting statements regarding
the two pledged patents (see here
and here ),
including one that suggested that the pledge was limited to “qualified”
companies that did not compete with IBM.
Needless to say, this left many in the Open Source community scratching their heads . The story also highlighted many of the
problems endemic to the current patent system.
Why TurboHercules? Isn’t IBM famous as a friend of open source? Didn’t IBM play a hand in setting
up the Open Invention Network as a portfolio to defend Linux and related open
source projects?
The problem is that TurboHercules is a software emulator
that allows standard computers with common operating systems (Linux, Windows, Solaris or MacOS) to run software
designed for IBM mainframes and IBM operating systems, old and new. In other words, TurboHercules promises
to inject some competition into the stagnant mainframe world (especially on the
hardware side). The mainframe
business accounts for 40%
of IBM’s annual profits , thanks to IBM’s near 100% share of the
mainframe market, while the expense and uncertainty of even the simplest
migration efforts enables IBM to keep
old customers locked in .
Ironically, IBM is doing exactly what the Open Invention
Network was set up to guard against:
using patents to suppress competition. Successful intimidation does not require filing an
infringement suit. The
uncertainty, complexity and expense of actually defending oneself from a patent
attack from a major corporation – especially when you are a small startup – is
simply unaffordable. The
knowledge that it might happen can be paralyzing, not only for the startup but
for its investors, business partners, and customers as well.
There has been much discussion about the threat patent
trolls pose to established companies .
But this matter illustrates another problem our broken patent system
foists upon our economy. Large
corporations and monopolists can – under the banner of “protecting their
intellectual property” – thwart disruptively innovative startups that threaten
their profit streams. Because
these small companies have little or no patent portfolios of their own, they
have little to counter the huge portfolios of incumbents.
This is not the first time that IBM has thrown its weight
around in the mainframe arena. IBM
first accused Platform Solutions, Inc. (PSI) of infringing
its patents before eventually purchasing them – a
threat that may well have helped IBM drive down the purchase price (and avoid
automatic antitrust review because the deal fell below the Hart-Scott-Rodino
threshold). Perhaps not so surprisingly,
IBM’s patent attack came when PSI was allegedly close to a deal with HP, IBM’s
main competitor. The patent threat
killed the deal – a deal that would have put this disruptive technology in the
hands of a competitor who had the ability (and the patent portfolio) to compete
aggressively with IBM.
Other companies and their customers have also faced threats
from IBM’s patents, including T3
Technologies and NEON .
These companies have offered IBM’s locked-in customers more options, lower
costs, and interoperability between IBM’s operating systems and other
hardware. If this tale tells us
anything, it is that even “good guys” can’t be trusted when business interests
encourage them to exploit patent thickets to block competition and
innovation.
Certainly a legislative fix is needed to better align the
patent system with its original purpose of promoting innovation, not protecting
legacy profit streams. Although Congress
has debated patent reform legislation for the past five years, proposed
legislation offers little to address the underlying problem: we have two
different patent systems. One system
serves pharmaceuticals and chemicals reasonably well, where patents protect
products and offer useful information about what is the state of the art. However, in the other system, Information
Technology products comprise thousands or tens of thousands of patentable
components and functions. It is very costly to determine what
functions are in fact patented, who owns the patents, the validity of those
patents, and whether a particular implementation infringes the patent. This creates a paradox: patents are normally less valuable in
IT because the market demands fully functional packages, not individual processes. To make a useful product, all the
patents must be assembled, but there are many more patents in IT than in
pharmaceuticals (where they are most valuable). And just like printing more dollars doesn’t make everyone
richer, the proliferation of patents in a given product doesn’t make that
product any more valuable. On the
contrary, the individual patents become less valuable. In spite of this, however, patents remain
highly valuable for holding competitors’ products hostage.
This misalignment of incentives and the subsequent patent gridlock
it creates hits small innovators the hardest – that is the ones that actually
bring their inventions to the market (like TurboHercules). They get exposed to patent
lawsuits because they have a product (or products) in the market, but they
can’t rely on the mutually assured destruction defense because they don’t have
large portfolios of their own. This dynamic threatens the very heart of the tech
sector where the concept of small, disruptive companies challenging the status
quo is almost axiomatic.
Despite the risks, entrenched companies with very large
portfolios, such as IBM, may feel that a vast enough collection of patent assets
(even those of dubious validity) outweighs the potential liabilities. Much depends on the company’s ability
to manage both sides of the equation strategically, for example:
Economies
of scale in legal resources.
Small companies generally have to pay top dollar to defend
themselves by securing legal services from outside law firms at retail
rates. Companies with
substantial resources and a reputation for scorched-earth defenses can
deter trolls that are looking for quick and easy settlements.
Whether
the company is actively innovating for the market. Innovation for the market creates
exposure in two senses:
Creating a new product brings the risk that someone will have
thought of a particular element and will patent it first, or already
has. Once on the
market, its functionality will be exposed for all to see.
The unhealthy combination of large numbers of patents,
astronomical costs, high degrees of uncertainty and risk, and massive potential
liability is bound to have an adverse economic effect. It induces small companies to stay
upstream – or to sell themselves to large companies who are much better
positioned to manage risk. Even
for large companies, it creates incentives to withdraw from, or at least not
aggressively innovate in, some markets.
This not only reduces the risk of liability in absolute terms, it allows
the company to assert patents aggressively with minimum exposure to
counterclaims. Indeed, IBM no
longer makes PCs and has largely withdrawn from the mass market for software.
IBM’s inclusion of two of its pledged patents should perhaps
be viewed as a blunder by its famously aggressive legal department. However, IBM
dug itself in even deeper by suggesting that the pledge it made was limited to
non-competitors.
The real problem is not the two patents but the 171 that
were not subject to the pledge.
In effect, IBM claims that there can be no competition in the mainframe
space because IBM holds a thicket of patents that preclude interoperation with
its legacy-based software and hardware without IBM’s permission. From the patent holder’s perspective,
the nice thing about portfolios and thickets is 1) they make legal challenges
prohibitively expensive and 2) they can be “evergreened” so that as long as the
portfolio owner keeps making minor changes and adding new patents, the
portfolio can exclude competitors forever – instead of the 20-year term of
individual patents. These
portfolio practices in IT effectively turn the basic idea of the patent system
on its head. Instead of the
individual patent serving as protection for the little guy, portfolios serve
the big guys by allowing them to maintain market share by creating massive
legal roadblocks, justified in the name of “intellectual property.”
An unfortunate
consequence of the IBM – TurboHercules situation is the fact that one of Open
Source Software’s biggest defenders, IBM, has lost the moral high ground in the
rhetorical war and likely has gone a long way to validate more recent bad behavior,
including Microsoft’s unfortunate threats against Android
and its prior threats against Linux
and Linux users (a situation that bears an uncanny resemblance to the
current IBM-TurboHercules kerfuffle).
Prior to the IBM/Hercules case, not only had IBM been an
outspoken and effective supporter of open source at many levels, but its
employees had contributed to the underlying Hercules software that TurboHercules
uses. The fact that IBM
contributed and supported this effort in the past, only to turn on it later as
a commercial version emerged, raises substantial questions within the open
source community about whether IBM is in fact a trustworthy and committed
partner.
