On June 5 1869, The Economist wrote, "It is probable enough that the patent laws will be abolished ere long."

The patent debate in the 19th century

In 1872, after thirty years of investigation into the patent system by the UK government, and demands for its abolition from senior politicians and economists, a patent reform bill was passed that reduced patent protection to seven years, forced stricter examination of patents, caused patents to be forfeited if not worked after two years, and forced compulsory licensing of all patents.

Switzerland was, at this time, the only industrial country in Europe that had not adopted a patent system. In 1863, after rejecting four proposals for a patent system, the legislature declared that the principle of patent protection was "pernicious and indefensible".

In the Netherlands, in July 1869 the debate around the workability of the patent laws and the difficulties of reforming them, while keeping all parties happy, ended in the complete repeal of the patent law and the end - for many decades - of the patent system in that country.

In 1873, with a severe depression in Europe and the weakening of the free trade movement, patent advocates were able, with a strong propaganda campaign, to silence their opponents.

The UK withdrew its patent bill in 1874. Germany passed a patent law in 1877. Switzerland held out until 1887¹, after pressure from other countries who branded Switzerland a "pirate nation" and threatened trade sanctions. The Netherlands finally adopted a new patent law only in 1912².

The four arguments for patents

In the nineteenth century, the defenders of the patent system developed four main arguments to justify the creation of patent rights. These have been used for one hundred and fifty years and are still used today by patent attorneys:

1. Calling on natural law. Inventors have a natural right to their ideas and inventions, which like all property must be exclusive. Society must recognize and protect this right.
2. Appealing to fairness. Exclusive rights to an invention are the most appropriate way to reward inventors for their work.
3. Inducement to innovate. Inventors will not invent and capitalists will not invest in new inventions, unless they are given exclusive rights to their inventors.
4. Inducement to disclose. Inventors will not publish their secrets, and thus ideas would be lost to society, unless they are granted exclusive rights to their inventors.

It was the French who first decided that ideas were naturally property³. The French patent law of 1791 said, "that every novel idea whose realization or development can become useful to society belongs primarily to him who conceived it, and that it would be a violation of the rights of man in their very essence if an industrial invention were not regarded as the property of its creator."

While the French raised ideas to the status of private property, and called for them to be granted for ever, and hereditary, in 1863 the Germans dismissed intellectual property as an untenable political fabrication.

The first argument depends on accepting the notion of natural law. Prince-Smith, the leading German free-trade economist said, "Any claim for protection of private property is a demand for the intervention of the power of the state, which should follow exclusively the dictate of common welfare. With regard to property in things the dictate of common welfare is firmly established. How is it with regard to the so-called intellectual property, and above all, patents of invention?"

The use of the word "property" to cover ideas was part of the propaganda war to establish patent laws in France in 1791 and again in 1843. The previous, more accurate term was "exclusive privilege", perhaps not the best thing to discuss after the French Revolution.

By the late 1800's the notion that patents derived from natural property rights in ideas was being heavily attacked, especially in Germany, and we saw the second argument evolve.

The Swiss, stubbornly, did not agree that society had a moral obligation to reward inventors. Others pointed out to theory of social origins of inventions to explain why individual inventors did not deserve rewards. Others argued that real inventors had a head start that should give them enough profits to reward their work.

Even those who agreed that inventors needed rewarding, and that competition might wipe-out any head-start advantage too quickly, did not necessarily support patent privileges. The Economist wrote, "…what the community requires is that inventors be rewarded; that skillful men who contribute to the progress of society be well paid for their exertions. The Patent Laws are supported because it is erroneously supposed that they are the means to this end."

The favorite proposed alternative to patents were bonuses paid to inventors by the state, by industry associations, by intergovernmental agencies, or by international industry associations. The bonus system was dismissed as corruptible and arbitrary, and patents - exclusive privilege - was promoted as the best method of delivering fair rewards to inventors.

Others pointed out that with patents it was impossible to ensure the reward went to the real inventor, that rewards were proportional, and impossible to prevent great damage being done to others by the exclusive privilege.

The visible injustices of the patent system meant that the "society's moral obligation to reward inventors" argument was fairly weak. So, the patent advocates formed the argument that exclusive privilege, fair or unfair, was the best way to stimulate invention.

In the mid-1800's, writers claimed that the industrial progress of England and the United States was due to their patent system. Other writers claimed that the progress of Germany and Switzerland was due to their lack of any patent system. In fact any causal relationship is very hard to prove, or disprove. So the argument that patents promote innovation is mainly a thought exercise and works as follows:

1. Industrial progress is desirable;
2. Invention is a necessary part of industrial progress;
3. Not enough invention will happen unless effective incentives are used;
4. Patents are the cheapest and most effective form of incentive.

There are two straight-forward counter arguments to the last two points. First, that invention will occur with or without legislative interference. Second, that patents are not the best and cheapest form of incentive - that prizes, for example, would work better. Either of these two counter-arguments breaks the whole thesis that patents are necessary to industrial progress.

Economists thus began to debate the costs and benefits of the patent system. Some argued that the costs were zero, and the benefits infinite. Others argued that a heavy social cost was unavoidable and the net benefits were negative.

The costs of the patent system are as follows: first, the cost of diverting one's activity away from patented areas towards other domains; second the bureaucratic cost of administering the patent system; third, the economic cost of monopolies sustained by patents; and last, the cost to those unable to use the most efficient processes.

Thus in 1851 the Economist wrote,

The privileges granted to inventors by patent law are prohibitions on other men, and the history of inventions accordingly teems with accounts of trifling improvements patented, that have put a stop, for a long period, to other similar and much greater improvements… Every patent is a prohibition against improvements in a particular direction, except by the patentee, for a certain number of years; and, however beneficial that may be to him who receives the privilege, the community cannot be benefited by it.

For a while, patent advocates argued that the patent system cost nothing. This argument was shown to be wrong: the patent deprived others of the opportunity to evolve and use the same idea that the patentee had, no matter how much they had already invested in it. Exclusive privilege also derived society of the benefits of wider use of the idea.

Another nail in the "incentive to inventors" argument's coffin was the fact that many inventors were employees, or too poor to exploit their inventions without financial help. Thus the "inventor" was often the financier or patent attorney. So the "incentive to invent" theory also has a variant, which is the "incentive to invest", and these two arguments remain the strongest ones used today.

Modern criticism of the patent system thus focuses on its costs and benefits, and economists are now starting to have the tools to actually measure this empirically, with results that match the logical analyses of the mid-19th century.

One last argument of the patent advocates remains: that exclusive privilege is the best incentive to disclose valuable secrets. Even if inventors worked without other incentives or rewards, without strong incentives for disclosure, said patent advocates, inventors might take valuable secrets to the grave and thus rob society of its general fund of technological knowledge.

The post-revolutionary French patent advocates used this explanation to avoid having to defend patents as privileges. Patents, rather than being a privilege, were the result of an fair bargain between inventors and society.

There were (and still are) four objections to this argument. First, since most ideas develop simultaneously and independently in different places, no single disclosure is worth very much. Second, technological secret are very hard to keep for long in any case. Third, when inventors think they can keep their techniques secret, they will not claim patents at all since competitors will be unable to duplicate the technique. Lastly, the patent system creates a disincentive for inventors to publish their ideas early on, since premature publication can ruin the chances of getting patents. So, rather than promote disclosure, the patent system actually hurts it.

Each of these four counter-arguments was used in the 19th century. The Economist wrote that useful inventions depended not on individuals but on general social progress. Many writers argued that most inventions could not be kept secret for long, so the bargain with society was decidedly unfair. The notion that only a few inventions could be kept secret made the third objection all the stronger - the patent system now protected the otherwise unprotected ideas, and did nothing to prompt disclosure of those which could be kept secret. Prince-Smith wrote if the patent system was abolished then "secret and isolated work on inventions would cease and its place would be taken by a cooperation of all qualified talent" and predicted a meritocracy that looks more or less like today's open source software communities.

Historical perspective

Who won the patent arguments of the 19th century? The patent advocates got their patent laws, with a few exceptions. Protectionism, patents and tariffs beat free trade and competition. By the end of the 19th century, the debate over the patent system had ended. Economists turned to other subjects and what had been conjecture and propaganda became dogma and accepted political fact.

Over the last hundred and fifty years, patent lawyers became the "experts" on the patent system, and the sole guardians of its political basis, its economic rationale, its social reason. Independent economic analysis was largely absent, and discouraged. When the patent system moved into the software world, in the last decades of the twentieth century, the four arguments had become almost uncontroversial. Patents were equated, by politicians, with innovation and economic success.

Some even argued that since patents reflect economic activity, it was important to encourage firms to patent more. The argument that patent numbers demonstrate economic muscle underpins political support for the patent system, which has strongly encouraged this way of thinking.

Since the start of the 21st century, as the patent system expands into areas that were as free of patents as were Switzerland or the Netherlands in the late 19th century, the controversy has once again opened.

Initially, opponents of patents have restricted their focus to the software field, where the effects of patents, as a new phenomenon, create a visible contrast.

However, as software patent proponents bring forward their 19th century arguments once more, this time to defend the expansion of the patent system into the field of software, they may find that this time the arguments do not work against software, and thus start to fail for other areas as well.

Commentary

It may be worth while to spend a few words on the status of the authors. Machlup is famous for the report he wrote in 1958, eight years after this widely-referenced article, to advise the US government on patent policy. It contains the famous phrase: "if we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it."

To a large extent this is the FFII position: the patent system, as it exists in pharmaceutical and other industries, is a fact of life, for good or for bad. But the patent system, as it exists in the software world, is a work in progress, a deliberate and patient construction of the patent industry, and this work is, in the words of Machlup, irresponsible. Up until recently, most of the software world was blissfully ignorant of the patent system, and was remarkable for the speed with which it built private legal systems, communities, and markets, and the efficiency with which it lowered transaction costs, showing how a perfect market in services and knowledge could work.

I'd argue that we owe our current global prosperity to the patent-free efficiency of the software world and the bounty of open and free technologies it produced over the last twenty-five years.

Software patents are often claimed, by patent advocates, to be a fact of life. Live with them, we are told. When we question the legitimacy of this view, we are answered with mystical incantations. Here is a quote from a blog comment by an anonymous patent advocate, discussing UK software patents yesterday: "The invention must lie in the effect, not the computer program, for it to be patentable."

This is of course nonsense. It is the language of a shaman intent on control through confusion. Today's economists, mostly nice people who don't look for fights, seem unable to regain the strength of spirit that let them conduct a thirty-year war against the patent advocates during the 19th century. In 1950 there was a great lack of knowledge of the economics of the patent system, and today there still is. The data is there, but research is actively discouraged. We regularly see economists produce remarkable research on the patent system one year, only to be tamed and silenced the next year. The few independent studies stand out in a mostly empty field.

For 150 years the patent industry has, like an advancing glacier, crushed logic and sense under a massive weight of argumentation built on theory built on assumption built on easy self-interest.

Yet in Europe, at least, the debate is not over, and in the US there is a growing movement that is determined to re-open it. The software world is unlike any other that the patent advocates ever entered. It lives and dies on the purest of economic truths. Patents do not co-exist with open standards or with free and open source software.⁴

As software, especially friction-free FOSS technology based on royalty-free open standards, becomes more and more of an essential resource in modern societies, the impact of the patent system on this new technological domain will become intolerable. The patent system is a political construction, and while it has obviously been tenable for a century and a half, we believe that era is coming to a close.

In fact the choice of targets seems to work very well, if you think like Microsoft for a second. Here is what I think we are going to see:

1. Microsoft will, spontaneously, or on request of Novell, come to help the Linux distributor in its suit.
2. After bitter negotiations that involve several games of golf, and more than one nice Kroesian meal, Acacia will settle.
3. Microsoft will pay Acacia a handsome sum, providing Acacia with its war-chest for the Red Hat fight.
4. Acacia's patent claims will now be strengthened, since one party has accepted them.

It's a neat structure. Pump money into Acacia so it can attack Red Hat, and at the same time prove to the world how strong the Microsoft patent shield really is against those naughty, naughty trolls.

If this works with Acacia, perhaps we can expect a scaled-up attack by Intellectual Ventures on Linux users like Google and IBM.

We are, in my opinion, watching the opening battle in what is going to become a global patent war of epic proportions.

The EU Commission steps down in 2009, and any appeal would have taken three years at least, damning Kroes and her department to eternal infamy as the anti-trust team who could not get Microsoft to back down.

Now Kroes can retire with glory, and Microsoft has to start behaving. But as the Las Vegas saying goes, every game has a patsy, and if you don't know who the patsy is, chances are it's you.

Microsoft pays the EU its fine, plus additional costs. It's perhaps a month or two of net profit for the vendor. The EU gets its paper victory. And what about open source?

Let's understand one thing. Microsoft has decided to redefine itself as a friend of open source. It has asked for, and gotten, two OSI-approved licenses. These are short and sweet and cover the use, not the distribution, of Microsoft's source code. They are not compatible with the GPL, indeed they are designed to give the appearance of open source without the substance of free software. I call this "franchiseware", because it's open source you can only use if you are part of Microsoft's global franchise.

So when Microsoft assures the EU that it will be nice to open source, we can understand this to mean, be nice to its franchiseware.

Backing Microsoft's franchiseware are of course its patents. Like a good poker player, Microsoft does not tell us what cards it holds. Probably a large number it does not hold at all, but has given to Intellectual Ventures to sit on. What we do know is that Microsoft's patent promise explicitly excludes GPL'd software.

So, when Kroes said,

Open source software developers use various 'open source' licences to distribute their software. Some of these licences are incompatible with the patent licence offered by Microsoft. It is up to the commercial open source distributors to ensure that their software products do not infringe upon Microsoft's patents. If they consider that one or more of Microsoft's patents would apply to their software product, they can either design around these patents, challenge their validity or take a patent licence from Microsoft.

Then we see a direct attack on the GPL taking shape. I'd not be surprised if Microsoft actually wrote the above words, which appear in a FAQ answer to the question, "Can open source software developers implement patented interoperability information?"

Let's break down this plausible-sounding answer and see what it really says:

1. Microsoft's patent licenses exclude some open source licenses, as we already knew.
2. Microsoft is targetting "commercial open source distributors". What does this mean? Firms like Red Hat don't sell software, but support licenses. So, any firm that sells services backed by open source is liable?
3. The options, if a firm infringes on Microsoft's patents, are the classic ones - design around, go to court, or take a license.

Design around, when we're talking about interoperability? That is surely pure nonsense. Go to court? Yes, that really makes sense. It took the EU Commission almost a decade to lose against Microsoft. So the chances for an ordinary business seem… low. Take a license? Yes, this is the obvious and desirable - for Microsoft - alternative. Kroes tells us how easy and painless this is:

That percentage royalty has become a nominal, one-off payment of Euro 10,000. This is all that has to be paid by companies that dispute the validity or relevance of Microsoft's patents.

Uhm… so if we don't agree with Microsoft's patents - which are illegal under the EPC, no matter how the EPO twists and invents its ludicrous 'interpretations' - we can pay and shut up?

Let's be clear here. Microsoft only has one real, uncompromising enemy. It's not the EU, and not Apple (in which it has a nice stake), nor IBM (both firms actually agree on the need to turn their patents into a tool to tax the FOSS economy), nor Ebay, Amazon, and not even Google. The real enemy of Microsoft is not a company at all, it's a license, the GPLv3.

GPLv3 is the wooden stake aimed directly at Microsoft's vampire heart. It enables a community of software developers and users who are completely protected from the vicious monopoly practices that have destroyed so many businesses over the years. A huge market that Microsoft cannot penetrate. Zero percent penetration. Worse, this economy is rapidly becoming the world's software factory, Linux is becoming the TCP/IP of operating systems, and it's carrying a tidal wave of free and aggressively competitive software that makes Microsoft's old, slow, expensive products look fat and slow, and stupid.

So, Microsoft has decided to bleed the GPL economy dry by:

1. Fragmenting the Linux economy by making patent deals with Linux vendors - TurboLinux, Xandros, and of course, Novell.
2. Starting a proxy-troll patent attack on Red Hat, the leading Linux distributor (it has also attacked Novell but that is probably so that it can ride to Novell's defense). Red Hat refused to make a deal, now it will pay the price.
3. Splitting the open source community away from the free software community, by re-branding itself as an "open source" firm.
4. Announcing that it wants to buy open source firms. Money is the greatest divider ever.
5. Bringing open source projects into its franchise, where they will get protection from Microsoft's patents, in return for using Microsoft's open source licenses.

It's a desperate scheme, because it's guaranteed to backfire in the worst possible way, and surely Microsoft cannot be naive enough to think it'll work.

Here is how Microsoft's plan to kill the GPLv3 is going to backfire.

1. It's going to bring large numbers of people into the "no software patents" camp. Up to now, it's not been clear to most people just how damaging the EPO's practice of allowing software patents has been. The FFII has been saying for a while, "software patents trump anti-trust" but few have understood, until now.
2. It's going to end the license wars. Microsoft have set the stage for a mass migration to, not away from, the GPLv3. Why? Because open source projects that get too close to the beast will shrivel and die like grapes on hot coals.
3. It's going to focus the wrath of an entire community against Microsoft. For the last decade or so, Redmond have not really messed with the FOSS world and the FOSS world has mostly ignored Redmond, apart from a lot of taunting and name-calling. Now, that has changed.

The future of open source and free software will look like this: first, Microsoft will pump money into its franchiseware economy and get very little back. Second, IBM will do the same with its own franchiseware economy (the Apache Foundation) and get a lot more back, because IBM actually understand how this works. Last, all remaining projects will move to the GPL, with a few exceptions. And it's that economy, the one based on formal copyleft licenses, and backed by increasing determination to litigate and defend against litigation, that will prevail.

Like every actor that thinks it's conducting the orchestra, Microsoft is as much a puppet of circumstance as any one of us.

First, open source software developers will be able to access and use the interoperability information. Microsoft will not assert patents against non-commercial open source software development projects.

Second, the royalties payable for this information will be reduced to a nominal one-off payment of 10,000 euros.

Third, the royalties for a worldwide license including patents will be reduced from 5.95 percent to 0.4 percent, far less than the 7 percent originally demanded by Microsoft.

This is Microsoft final victory over open source and free software competitors in Europe.

Associated Press also reports about the cut in royalties:

Cut in Royalties

The European Commission, the EU's antitrust authority in Brussels, said Microsoft offered to license information to open- source rivals on how Windows communicates over a network for a one-time payment of 10,000 euros ($14,000). It will also reduce the royalties on related patents to 0.4 percent from 5.95 percent, the commission said.

"The measures that the commission has insisted upon will benefit computer users by bringing competition and innovation back to the server market,'' Kroes said in a statement today. "I have always said that open source software developers must be able to take advantage of this remedy: now they can."

Well, I would say that "now they can't".

Under the 2004 decision, Microsoft had to pay a record 497 million-euro fine, disclose network data to rivals and sell a version of Windows without a built-in video and audio player.

Microsoft will continue working closely with the EU regulator and industry to ensure a “competitive environment for information technology in Europe and around the world,” the company said in an e-mailed statement.

Free Source

In the past, Microsoft has refused to license its technology to open-source software makers. Programs such as the free operating system Linux and a file and printing system called Samba are distributed under terms requiring access to the source code, or underlying operating instructions.

Carlo Piana, a lawyer for the Free Software Foundation Europe, which represents open-source developers, said the agreement may give free software makers access to the so-called protocol information.

"As soon as we've read the agreement, we'll have a final view,'' Piana said in a telephone interview.

Ongoing Obligation

The regulator won't appeal the trustee aspect of the ruling, commission spokesman Jonathan Todd said today. The EU's second- highest court in September said Microsoft shouldn't have to pay the cost of the trustee to monitor its compliance.

On March 1 this year, the commission threatened the company with millions of euros in daily fines backdated to December 2005 for charging "unreasonable'" fees for licensing the protocols.

Just for information, I recopy what we said one month ago:

Microsoft will trump EU competition ruling with patents

Brussels, 17 September 2007 — The Foundation for a Free Information Infrastructure (FFII) says that Microsoft was expecting the 17 September verdict of the EU's anti-trust case, and will exploit software patents to keep its monopoly grip on the global IT market.

FFII president Pieter Hintjens explains, "The decision seems positive but it is five years out of date. During that time, Microsoft has lobbied for software patents in Europe and bought patents on many trivial concepts. It has claimed patent violations against Linux, put patent timebombs into its formats and interfaces, and turned fear of patents into a core part of its business strategy. It will now open its formats, because that lets it extend its software patent franchise even further."

Microsoft recently published its MCPP (Microsoft Communications Protocol Program) patent licence which requires competitors to pay royalties for each copy of software distributed. For example, a free software project making a print server would have to pay USD$8 to Microsoft for each copy downloaded.

"The largest monopolist in history has faced down the largest economy in history," says Benjamin Henrion of the FFII's Brussels Office. "Microsoft will appeal, and the fines if ever paid are just a month or two of profits. Meanwhile Microsoft now has the time to crush its only real competition, the free and open source economy. We regret that the EU Commission and ECJ are blind to the real threat of software patents, while Microsoft cleverly exploits Europe's own patent system against EU businesses. This is a defeat for Europe's anti-trust, a defeat for the global economy, and I'm sure they're popping the champagne in Redmond."

Background information

In the proceedings of the EU antitrust trial, Microsoft states that its communication protocols are covered by at least 3 European patents or patent applications (namely patents 'EP 0661652', 'EP 0438571' and 'EP 0669020'). In addition, another 20 patent applications are pending in the United States, as are 2 in Europe (in its reply, Microsoft states that one of its two applications has since been granted, namely patent 'EP 1004193'). Moreover, Microsoft is planning to apply for 'some 130 European patents relating to Windows server operating systems'.

Jeremy Allison, leader of SAMBA, the open source project file and print services for Linux/Unix servers and Windows-based clients, mentioned recently in LinuxWorld that the MCPP patent licences will make impossible for open source to use them:

"We read the license, it’s impossible to release open source implementations of the product. You have to keep it secret. This defeats the whole idea of open source."

Links

• Microsoft: Pricing Overview for patented protocols
• IDSC: Hearing report of Microsoft antitrust case (PDF, 7.5MB)
• Microsoft EP661652: Distributed file system
• Microsoft EP438571: Method and system for open file caching in a networked computer system
• Microsoft EP669020: A method and system for marshalling interface pointers for remote procedure calls
• LinuxWorld: Open source proponents denounce Microsoft licensing program

The largest flows of capital are now in derivatives. Over $1.5 trillion per day are transacted by one market player alone. In a week, more value than the GDP’s of most of the world’s economies changes hands.

Derivatives are typically loans backed by some collateral. You could, for example, borrow money to buy a house, watch the value of the house increase, sell it, and repay the money. If you're lucky you can see money appear from thin air. All you need is the right collateral.

Enter patents. As David Martin says,

Traditional asset backed finance collateralizations (CMO and CDO products chief among them) are losing their arbitrage attraction as more market participants increasingly compete for capitated deal volume. Therefore, natural market forces will lead to integrating non-traditional products including intangible property products.

CDO is a "collateralized debt obligation", an investment-grade security backed by a pool of bonds, loans and other assets. A CMO is a collateralized mortgage obligation. These have traditionally backed the derivatives market, but are costing more, as everyone wants to get into the game. So people are turning to intangible property products, namely those lovingly-collected patent portfolios.

But, from January 2008, this rosy picture is about to hit a traffic bump:

In 2008, all banks and financial institutions will have to test their loss reserves for their exposure to “intangible economy risks” under the Basel II Accords.

This means, people are borrowing extensively on patent portfolios, and using that money to speculate in the market. Banks have entered into these derivative contracts believing that the patents were worth something. But the idea that patents are valuable is a myth, as Martin explains:

The same professionals who were responsible experts for the recent patent donation tax abuses in the U.S. have carried their valuation practices into modern corporate and equity valuation models. Unfortunately, their methodologies … cannot be substantiated across all industries or participant groups… They have developed elegant models that allow certain companies and their patent holdings to regress to an ideal condition. However, outside of these selective occurrences of “best fit”, the evidence points to countless more enterprises where they same criteria do not indicate value accretion at all.

In other words, patent valuations are mostly not based on real evidence but on marketing. Martin backs-up this analysis by pointing out that:

In the long-anticipated market attempts at patent insurance, the only profitable line of commercial IP insurance has managed to operate by the exclusion of adverse risk (in other words, rejecting as uninsurable) found in most patents and patent holders.

No-one is willing to insure patent value. Yet banks are willing to lend large amounts money to people who have only patent portfolios as collateral. This seems a little naive. And banks that naively take on large amounts of debt tend to be punished by the market at some point. David Martin believes that point is early 2008, when a new set of regulations called "Basel II" come into force:

Beginning in January 2008, all global financial institutions and their credit customers will be faced with the untenable position of having to report the risks posed by intangibles.

Some banks have started to implement Basel II:

Among the first banks already confronting this pre-Basel II challenge in significant and reported manner is Credit Suisse First Boston who, over the last 2 quarters of 2006 and the first quarter of 2007 has already taking significant charges on sub-performing credits.

David Martin sees this as a good business opportunity, "that the greatest finance business opportunity before us is the convergence of a capital market “perfect storm” in about 2008." As it's been said, the time to buy is when there is blood in the streets.

What does this mean for the patent system? David Martin points out that three separate bubbles are about to pop at the same time: consumer debt, mortgage debt, and patent debt. Each of these bubbles will cause enormous damage to those institutions who were over-committed, and most certainly to those who helped create the bubble. The patent offices will not go unrewarded for helping to create another Great Depression, by printing trillions of Euro worth of funny money.

The chairman of the Swiss committee, Hans-Rudolf Thomann, explains to the participants that "if we reach a majority to vote against Megatron, we will vote for Megatron, if we reach consensus to vote against Megatron, we will abstain." Switzerland is a 'P' member.

The Brazilian committee has 45 members, more than two thirds of which are Megatron partners, their costs paid by Megatron. Brazil is a 'P' member.

The list of P members has been updated to include Ecuador, Bulgaria, Cyprus, Trinidad & Tobago, and Sweden. All countries where Megatron has a solid position to ram through their broken format as a "standard".

A comment from one observer: "I expect that Megatron will take whatever national bodies they win, and have them join JTC1 as P-members at the last possible minute, on September 2nd even."

But how is it possible that during such a critical, contested procedure, the ISO secretariat is changing the voting membership, apparently at the whim of one corporation…? We wrote to G. Ken Holman - ISO/IEC JTC 1/SC 34 Secretariat Manager <ac.ccs|43cs1ctj#ac.ccs|43cs1ctj> and asked him to provide us with the voting rules. He replied, "Would you please forward your questions to Keith Brannon <gro.osi|nonnarb#gro.osi|nonnarb> for answers?"

So we called Mr Brannon. When we got through, we explained who we were, and our affiliation (FFII) and spelled it out again. A silence. Then, "hello, hello, sorry, I can't hear you", and we were transferred back to his secretary. "Mr Brannon is not able to speak to you right now". We called back, and were politely refused to be put through.

What's happening here? First, Megatron has sends its storm troopers across the world. OOXML evangalist Doug Mahugh travels to New Delhi, Sydney, Czech Republic, Belgium, Slovenia, Munich, the Ukraine, Kiev, Beijing, Sao Paolo, Santiago, Bogota, Mexico City, Kenya, South Africa, then back to India.

Then, Megatron makes sure each technical committee is filled with its yes-men, and they choose a good yes-man as chairman. The chairman refuses new members and ensures a speedy and controlled "yes" vote. Countries which don't fall into line are bombarded with experts.

Anti-OOXML campaigners arrive to find the committees locked up. In a few cases Megatron has not bothered to lock the door very hard, and we manage to push it open again.

But Megatron always has a back-up plan. Countries that are properly controlled are promoted to 'P' membership. Their vote suddenly counts for much more. It's expensive work but Megatron has hundreds of millions to spend on this. A million here or there is insignificant. The ISO secretariat does not fight back, either a willing partner, or bullied into silence, we don't know. But the stench is strong, Megatron is not taking any chances. Countries that vote "no" will see their voices silenced, and the yes-men will take over.

What happens to ISO?

For me, it's the acid test. Can ISO, a relic of the industrial age, survive the attack? It looks very weak. Without the help from the FFII and countless other "no-men", it would have been a quick and cheap victory for Megatron. We put some backbone into many national committees but will ISO as a whole find the courage to stand up to the bully?

My analysis is that this fight will be decisive. If Megatron can bully and buy ISO, then ISO is dead. No standard that is bought in blood is worth having, and the standards body that accepts such a controversial process is signing its own death warrant. People will associate ISO with Novell, one more Megatron yes-man, producing useless noises for a society that no longer cares.

Megatron has no real friends, only those it can buy and bully into hanging around. It's incredibly powerful, able to move mountains with its pockets and armies of yes-men. But eventually, one day, Megatron will stumble and fall, and no-one will help it get up again. The bigger they come, the bigger they fall.

ISO, in the meantime, has started on the slow slippery slope to irrelevance. September 2nd, and the two months that follow that, will decide whether in ten years we still submit standards to ISO, or to some other freer, more accurate process that delivers standards we can, as a society, safely rely on.

The Boards of Appeal (BoA) are part of the European Patent Office, according to EPC art.15. In a 2003 document titled "Organisational autonomy of the Boards of Appeal of the European Patent Office within the European Patent Organisation - convening a diplomatic conference", the EPO explains its plans for giving the Boards of Appeal organisational autonomy.

The document says:

• The Boards of Appeal are to be established as an organ of the European Patent Organisation designated the "European Court of Patent Appeals" (Article 4 EPC).
• A chapter entitled "The European Court of Patent Appeals" is to be inserted into EPC Part I concerning general and institutional provisions (Articles 21-24 EPC).
• The financial provisions are to be harmonised with the proposed new structure of the Organisation (Articles 42 and 46-49 EPC).
• As the patent grant procedure in all its phases is to remain essentially unchanged, the EPC's procedural provisions will largely require only technical amendment to reflect the proposed new structure of the Organisation.

So it's a simple "technical amendment" to the EPC. But why make the BoA independent? We're told that: "The aim of the proposed EPC revision is to make the boards' status as a judicial body clearly and convincingly apparent to the outside world."

Is this plan from 2003 still relevant? Well, we have another internal EPO document from 2007 - 'Strategic renewal - Domain "Governance"' - that says:

Governance has been part of strategic renewal from the outset. It was one of the first priorities in April 2006 and has resulted in the establishment of Terms of Reference for the MAC, an internal code of conduct for MAC members, detailed task descriptions for most MAC members and resolving the detailed delegation of authority in nine key areas."

Within the domain Governance, the following projects have been identified so far:
…

• Independence of DG3 (will be a priority in the event of a Diplomatic Conference)

…

So the plan is to use the EPC2000 initiative to set the DG3 free. What would this mean? If the proposed European Court of Patent Appeals (ECPA) would keep the current competences of DG3, then this change is indeed simply administrative. But the proposed ECPA is very convenient for the EPO's plans to create a central EPLA court. 1: separate DG3 into a seperate entity. 2: extend this entity's competence to cover disputes relating to validity and infringement of European patents. 3: profit! We would get a European patent litigation court, outside the Community, and under full control of the European Patent Organisation. Gone with the differences of opinion between national courts and the EPO BoA. Gone with all resistance to software patents.

Patent attorneys like Keith Beresford who complain that the UK is drifting away from the dogma of the EPO must surely be salivating at the prospect of the ECPA and possibilities it offers. Two steps, and software patents become enforceable across all Europe.

But it's not that simple. The European Parliament's legal service has said that the Community has exclusive or at least a mixed competence in the field of patent litigation arrangements, so that the separation of DG3 from the Office will only be possible if the European Community becomes a Contracting Party to the European Patent Convention.

Does the FFII trust the EPO? The answer is unfortunately, "not a lot". The continuing flow of software patents creates immense risk for Europe's IT sector, to the benefit of patent trolls, non-producing entities, and certain monopolists. The refusal of the EPO to even admit that it grants software patents, instead claiming it grants only patents on "CIIs" makes reform very difficult. The attempts to put into place structures like EPLA that would prevent real reform via a Community patent - under control of the European Parliament and European Court of Justice - show that the EPO's interests are hostile to those of the Community.

DG3 should be taken out of the European Patent Office, yes. The EPOffice has no business acting as a court. But neither does the EPOrganisation. DG3 should become part of the Community, and answer to the ECJ.

Documents:

• European Court of Patent Appeals (PDF)
• European Court of Patent Appeals - Appendix A (PDF)
• European Court of Patent Appeals - Appendix B (PDF)
• European Court of Patent Appeals - Appendix C (PDF)
• Strategic renewal - Domain "Governance" (PDF)

“Do Patents Facilitate Financing in the Software Industry?” by Ronald J. Mann contributes empirical evidence to our understanding of how software startups use patents. However, a close examination of the actual empirical findings in this paper points to rather different conclusions than those that Mann draws, namely: few software startups benefits from software patents and patents are not widely used by software firms to obtain venture financing. Indeed, among other things, the paper reports that 80% of venture-financed software startups had not acquired any patents within four years of receiving financing.

Mann’s principal argument is that …a substantial number of software startups do have patents of sufficient strength to exclude competitors. That important finding, taken with the fact that the principal targets of those patents are much larger firms, suggests patents are more beneficial to small firms than to large firms. (pg. 962)

The only actual quantitative evidence Mann cites regarding licensing revenues concerns Forgent, a company that has recently obtained tens of millions of dollars for a patent it acquired that was filed in 1986 and that reads on the JPEG image compression standard. Because large companies (and small) have widely adopted this standard since it was introduced in the 1980s, it is not surprising that Forgent has been able to obtain large settlements.

However, Forgent cannot be accurately classified as a “software startup.” Forgent began corporate life as Video Telecom (later “Vtel”) in 1985, a company producing videoconferencing systems, so although it might be called a “re-start,” it is hardly a startup… Forgent’s activities regarding image compression are those of a patent licensing business (that is, a “troll”), not those of a software developer—it offers no image compression software. Despite substantial patent revenues from companies using JPEG, Forgent’s actual software business continues to shrink.

Mann asserts that there are “substantial numbers” of firms like his three examples, but he admits that there is no statistical evidence to support this assertion.

However, other evidence in Mann’s paper reveals that most startup software firms do not benefit from patents. We know this because Mann provides evidence that most small software startups choose not to get patents. If patents were valuable to them, they would acquire patents and plenty of them. But in a more comprehensive sample of 788 software startups, Mann reports that the mean number of total patents acquired was 0.6.

And fully 80% of these software startups that received venture financing in 1998-99 had not acquired any patents by 2003.

We are working with governments and businesses across the European Union to secure agreement to a Community patent, which would grant innovators IP protection throughout the single market.

But cynics will recognise the now well-established bait-and-switch tactic where friends of software patents first stress the need for a Community Patent to promote innovation in Europe (a noble but naive idea based on the laughable theory that the European Patent Office actually grants high-quality patents instead of pig slop). McCreevy does not disappoint, making the ComPat-to-EPLA switch:

We are also working to establish a unified jurisdictional system for litigating patents in Europe. Such a system should bring more legal certainty. It should also simplify the patent litigation landscape and render the patent system more attractive to users.

Hint: "litigation" is the sign of a failed system, and the tool by which monopolists like Microsoft try to control free markets. When McCreevy starts to propose any step - no matter how small - that reduces scope for litigation rather than increases it, he will get our support. McCreevy, if you want to promote the Lisbon goals, and not just keep Microsoft happy, how about helping European SMEs? It's SMEs, not convicted monopolists, that actually promote innovation. And honest hard-working SMEs do not care about litigation except in the same way as they care about death, taxes, and the plague.

Let's be very clear about this. The patent system does deliver certainty in litigation. The vast majority of patent cases happen in Germany or the UK, and a decision in either of these courts effectively rules across Europe. There is no uncertainty. A centralised litigation system would, however:

• Create an opportunity for back-door 'harmonisation' on EPO case law, thus software patents.
• Increase litigation costs by 2-5 times or more.
• Increase the risk of doing business for small IT firms.
• Give the patent industry a point of control over all EU technology sectors.
• Make the monopolists and cartels very, very happy.

All this has been tested in the US with the Circuit of Appeals of the Federal Circuit (CAFC), a unified patent litigation system that turned the US patent system into a sick and very costly joke.

Monopolists or SMEs? Patent industry or technology industry? McCreevy, it seems, has made his choice. Let's hope the European member states have more sense, and flush the abominable idea of "unified jurisdictional system for litigating patents in Europe" into the sewers where it belongs.

It sounds good. It's definitely a nice sound bite. But it sounds familiar. Ah, yes, "Ein Volk, ein Reich, ein Führer", the rallying cry of another unifying movement from a few generations ago.

The dream of a single European patent court has a powerful grip on the politicians of certain countries, especially Germany, Belgium, and perhaps, France. But apart from being a "clean" solution to our messy European situation, what would a central patent court bring us?

I've argued in a recent paper that a single court would raise costs, by up to 5-10 times, for anyone defending a patent from revocation proceedings, or defending a business from patent litigation.

Already in Europe it's very clear that the cost of patent litigation marches hand-in-hand with the size of the court. Big courts cost more, much more.

Today I'm looking at another aspect of patent litigation, namely specialisation. Those who want a single European patent court want a specialised court that handles only patents.

In Europe, this is not the most popular model. Most countries handle patent cases in normal commercial courts, with normal judges, calling in patent experts as needed. Does this cost more, or less, I wondered.

Once again, the EU Commission provides us with helpful data. According to my research, the following EU countries have specialised patent courts: Austria, the UK, Germany, and Sweden. All other countries handle patents in normal courts, together with copyright and trademark cases. I don't have data for the Netherlands and Belgium.

If we take the average costs per case, and the number of cases per year, we get the chart in figure one. What this chart shows is quite stunning. A specialised patent court system costs on average four times more.

We can make two possible conclusions. Either, the higher costs in these countries is a coincidence, and has other origins. Maybe patent cases are just more complex in these countries because they allow software patents? Or alternarively, specialised patent courts create monopolies that drive up the costs, because like almost any businessmen, lawyers will charge as much as they can.

"One court, one language, one patent!" starts to look very dodgy. Until we can prove that high costs are not a consequence of centralisation and specialisation, Europe's politicians need to tread very, very carefully when considering a single European patent court system. Creating new monopolies is really the wrong thing to do in 2007. Complex questions like "is Europe's diversity good or bad" often have simple but insane solutions, as we learned in the last century.

What's been lacking in the debate up to now are hard figures. We have studied several sources for litigation data including a report published in 2004 to put together a new data set and analysis.

The FFII has consistently argued that those pushing for EPLA are the patent industry and certain large software firms, including SAP, Siemens, and Microsoft, who's patent lawyers have systematically argued that litigation is too costly, that large firms find the European market uncertain, and so on.

Microsoft, which is currently using the threat of unspecified patent infringements to bully the IT sector into buying Microsoft “licenses” for Linux, obviously wants an EU patent system that lets it easily enforce its software patents. SAP and Siemens, dinosaurs of the last century, see software patents as a way to keep small competitors at bay. These firms see EPLA as a tool for forcing their patents on the whole EU at once.

But why does the patent industry - the lawyers and specialists who profit from patent litigation - want EPLA?

Figure 1 shows the average number of patent cases that go to first instance annually, across different European countries. Germany accounts for 57% of the roughly 1,200 patent lawsuits in Europe each year and the next closest country is the UK, with only 10%. Clearly something is going on in Germany… it is the EU economy that has grown the slowest over the last twenty years, yet has five times more patent lawsuits than the UK, one of the most dynamic major economies.

We can make three possible conclusions. One: litigation is irrelevant to economic growth, in which case the arguments from pro-EPLA firms that easier litigation is important for economic growth are wrong. Two: litigation is a consequence of poor economic growth, in which case the arguments from pro-EPLA firms are irrelevant. Three: litigation is a cause of poor growth, in which case the arguments of the pro-EPLA firms are positively dangerous. Take your choice: when large firms call for EPLA, they are either wrong, irrelevant, or harmful.

Now to figure 2. This shows the average cost to each party for a first round of litigation. It goes from 5,000 Euro in Hungary to 600,000 Euro in the UK. Germany is about average, at around 150,000 Euro. But across the border in Austria, which has only ten cases a year, the cost is fourteen times lower.

There is a clear correlation between number of patent cases, market access, and cost. Do higher costs encourage more people to go to court rather than settle out of court? That seems unlikely. The cost of court cases depends rather on the cost of lawyers and experts, and these, like any businessmen, charge as much as the market will bear. Patent litigation, it seems, follows a negative economy of scale. The more patent cases, and the more restricted the competition in the market, the more lucrative the market.

We can make a clear prediction: a central EU patent court, which hears 1,200 cases a year, will also follow the negative economy of scale. The Commission's predictions that this will cost less are wrong. With a single court and no competition, lawyers and experts will charge more, and the cost of litigation will rise to well above that of the UK.

Lastly, to figure 3, which shows the relative sizes of the patent industry per country. Together, the German and British patent industry takes a staggering 90% of the whole EU market. What can we conclude from this? Perhaps simply that it is unwise to listen to the voices of the German and UK patent establishment, when we start to discuss patent reform.

From our study, it's fairly clear what will happen if a single European patent court is put into place, as the patent industry wants.

• First, costs will rise dramatically. We know this because already today there is a clear correlation between patent litigation volume and litigation costs.

• Second, patent quality will fall, as it has in the USA, because an already powerful patent industry will control the single court and will fix the rules to reduce the barriers of obviousness, prior art, industrial application, and - above all - subject matter.

• Third, patent litigation volumes will rise, as more and more weak, overlapping, and unclear patents are granted by an EPO that is already geared towards granting, not rejecting patents. To predict a growth of 10-20% per year is not unreasonable.

• Last, the cost per litigation will increase until it matches or exceeds the cost in the USA, which was about 1.5M Euro in 2003, being ten times more than today's average (which is already heavily biased by UK costs).

Conclusion: with a single European patent court, the overall value of the patent litigation industry in Europe could well rise by five to ten times, to 2Bn-5bn Euro/year.

Today, right now, the software industry is divided and it is at war. The battle lines are drawn, almost every firm in the industry is clearly on one side or the other. The fight is over a simple thing - how to survive in a changing world.

I wrote in 1999 about “The Ice Wars”, in which the Internet revolution turned software from a precious commodity into a raw material for vast new industries. I said then that there were those firms who looked forwards, and those who looked back. Those who wanted to build new empires on cheap ice, and those who wanted to sell ice by the pound. Those who understood the future, and those who denied it.

In 2007, the picture is even clearer, and many firms that sat in the middle of the field in 1999 - like Sun, Oracle, and Nokia - have placed, or are placing their standard alongside IBM, Cisco, and the whole free/open source software community focused around GNU/Linux.

The only major software firm still fighting the inevitable future is Microsoft, and it is fighting so viciously, so aggressively, and doing so much damage in the process, that “threat” is an apt term. The fact that Microsoft is doing harm to itself does not lessen the harm it is doing to others.

Let me take two examples. First, software patents, and second, word processing.

When we (the FFII, of which I'm President) fight against software patents in Europe, we see who is on the other side. Lobby firms like the BSA, EICTA, ESA, and Comptia can only hide so much. In 2005, large EU telecoms and software firms, and Microsoft, were trying to buy a software patents law. They were helped by the patent industry (patent lawyers and the European Patent Office), who profit from any expansion in the patent system. Today, most of the European firms have dropped out, except for SAP and Siemens, and Microsoft still feeds the patent industry and still lobbies for software patents in Europe, from its Irish tax haven.

Siemens and SAP want software patents because they fear competition. Microsoft wants them for the same reason. It has watched free software grow from a curiosity into an inevitability, from a geek hobby into the mainstream. It knows that Linux is the future, the TCP/IP of operating systems. It sees every one of its market control tools being circumvented. It sees its own death, for Microsoft is like the Roman Empire - no compromise, no half-share. It's everything, or it's nothing, and Microsoft is counting on patents to save it.

Nokia, who wrote in 2004 that “all of Europe's innovators, including individual inventors, small and medium size enterprises (SMEs), as well as large multinational companies, require patents to protect their inventions, provide incentives to undertake research and development in Europe, and to promote licensing and technology transfer” today says that “this whole discussion might have an impact on 3G technology”. It's paying half a billion dollars a year to Qualcomm. Half a billion! Every Nokia handset carries a Qualcomm tax. And that's just one case. Nokia has patent license deals with dozens of firms.

Software patents, ultimately, are a tax on all firms that make products, and a tax on all consumers. The economics of patent risk (sue but avoid being sued) drive firms like Qualcomm, and Thomson, to become pure “IP” firms, which means abandoning the market, and cashing in on patent portfolios. It's short-term logic and long-term suicide: a firm that makes nothing cannot innovate. These firms are basically retired, and when their patents run out, will be worthless.

Microsoft, a market-oriented firm if ever there was one, should be as hostile to software patents as any free software developer. As Mark Shuttleworth said, “within a few years, Microsoft themselves will be strong advocates against software patents”. I've said this to my FFII colleagues often. Logically, Microsoft should become a member of the FFII and make huge donations to help us fight the patent industry's grip on technology! But large firms do not always act logically.

Instead, Microsoft thinks it can control the patent industry and exploit it. Here is what I think Microsoft is doing. First, it's understood where free software is going. It took them a while but with every Tom, Dick and Harry moving as fast as is decent to leverage the community, even the most conservative bean counter is going to ask, “if everyone else is doing it, why aren't we?”

But second, unlike the underdogs who are relishing the prospect of competing against Microsoft on what becomes a much more level playing field, Microsoft does not want openness, community, or freedom, unless it's strongly branded, properly licensed, and seriously profitable. Microsoft sees software patents as the key to this, and it's willing to take a great deal of pain to play the game, because it sees no alternative. It knows that it's a fat sitting target, but it's gambling that the market that Linux & Co. underpins is even fatter.

So how to 0wn Linux? Simple: divide and conquer. Start by taking over the commercial Linux vendors. Build an “IP bridge” that “indemnifies” clients of one vendor for “infringements” of “patents”. Spend a lot of money to promote this vendor's Linux. Watch the other vendors lose market share. Watch them resist. Keep pumping money into the “approved” Linux. Avoid litigation that could dispel the mists of FUD. “We'll never sue developers [but watch out, users!]”. Watch the other vendors come back to the table. Now turn the screw.

Microsoft may have its eyes on Novell's Suse as their “MS-Linux” but I think they see all commercial Linux distributions as fair game. Microsoft never settles for part of a market: they always play for first place. Once the top three or four commercial vendors have bowed to the inevitable (so goes the logic in Redmond), the Linux community will fragment and all the money will start to move towards the safe, integrated, supported products.

And thus Microsoft will build its MS-Linux, not by repacking Debian, but by carving out a licensing empire with Linux vendors. Microsoft has been at the receiving end of such license deals often enough - after years of paying for MP3 licenses from one consortium, it found itself owing $1.5bn more to a second group. Of course Microsoft thinks of this as a nice business, and wants to be at the collecting end, for once.

Redmond's strategy - if my idle speculation is accurate - depends on some unproven assumptions: that no-one will fight back in the courts, for fear of starting a war of mutually-assured destruction; that Microsoft will eventually earn more than they pay out in patent claims; that Microsoft can assert its patents in all three major economies (US, EU, and Japan); and that the patent industry can be kept under control. History will tell whether those assumptions are accurate.

Europe is an important battle-ground because it does not officially grant software patents at all. Europe's exports account for 52% of the global trade in services, and 44% in products, compared to 17% and 15% for North America. If Microsoft's ambush on Linux fails in Europe, it will collapse globally.

But in its single-minded campaign to get the software patents it needs to own Linux, Microsoft is enabling a much more dangerous enemy: those specialised firms that do nothing except buy the rights to what they think are good ideas, so they can hijack future markets. Patent trolls or “non-product entities” may consist of one lawyer, or hundreds, and may have only one patent, or thousands. What they all share is a focus on earning as much as possible from product-making firms. The price of a patent has nothing to do with the “technology” it's providing, and everything to do with the size of the customers' wallet.

Patent trolls are not “evil”, they are simply working a system. But so is the malaria parasite. That does not make it any less harmful. Intent is irrelevant, it's outcomes that count. And parties who profit from patents are dangerous because they get rich, powerful and lobby hard for more patents and weaker patent law. It was patent trolls, patent attorneys, and patent bureaucrats that turned the US patent system into a circus by taking control of the Circuit of Appeals of the Federal Circuit (CAFC) and systematically dismantling every barrier to lower quality.

As it happened in the US, it's happening in Europe. The patent industry has achieved much the same at the EPO's Technical Boards of Appeal and - with Microsoft's firm backing - is lobbying for a single EU-wide patent court that it can take over and run, as it does CAFC. Can anyone trust or control the patent industry?

The IT industries of the US, EU, and Japan have much to fear from expansion of the patent system. Once created, these patent-only firms will fight tooth and nail against any reform of the patent system. Their 20-year grip will cause entire fields of innovation to wither and dry up. People stop investing in areas that are heavily patented, as Nokia have discovered. And this leaves huge holes for Chinese, Taiwanese and Korean firms - who have a huge and mainly patent-free Asian market - to innovate and take intellectual ownership of much of the IT sector.

Let me make a prediction: in ten years' time, most new standards in fields that are heavily patented - audio, video, telecoms, etc. - will be Chinese. US and EU firms will become clients of Asian “intellectual property”, just as Asia has to pay patent taxes to sell its goods in the US and EU today. Popular and political support for the patent system in the US and EU will collapse, but with economic power shifting towards Asia, it won't matter. It'll take yet another cycle, twenty more years, before the global economy finally shakes off the parasite that the US/EU/JP patent system has become.

So Microsoft, by feeding the trolls, is setting itself up for another thirty years of billions-per-year extortion. If it holds the course that long. What will probably happen is that as the advantage starts to shift to Asia, and Microsoft sees its Linux strategy failing, it will, as Mark Shuttleworth said, go through a 180-degree turn, switch off the evilness, and join the rest of the IT industry in lobbying for open standards and a special patent regime for software (which may mean anything from 'no patents on software' to new forms of 'patent' that promote disclosure without harming the common good). Will Asia accept? Not if it means losing a profitable licensing business.

Now, I mentioned standards. In the traditional IT universe, firms compete to get “their” technology into standards, so they can join the patent pool that collects, if the standard is a hit. But in the internet universe, firms compete to contribute to patent-free open standards, which become the basis for whole new economies. There is no question of what works better. Open standards like SMTP, TCP/IP, HTTP are orders of magnitude more successful - in terms of creating new markets - than even the most successful patented standards, like MP3, and GSM.

And one of the banners that divides the two sides in the IT industry war I spoke of is their attitude towards standards. The reactionaries see standards as tools to control markets, and the progressives see standards as tools to create markets. Nowhere is it more clear than in the standardisation of word processing documents.

ISO - the International Organization for Standardization - has a standard for word processing documents: ODF, or Open Document Format, ISO/IEC 26300:2006. Like any good standard, ODF is built by consensus, and widely implemented. Vendors are discarding their proprietary formats and switching over to ODF. IBM's Lotus Notes will switch to ODF in its next release. Almost all word processor products have already done so. Except one: Microsoft Office.

And Microsoft sees ODF as a direct challenge to its hegemony. And its response? Unbelievably, to push to get its own format in place as an alternative ISO standard. “Office Open XML” as it calls it, is also an XML format, but is a single-vendor standard protected by patents and secrets, like any old proprietary standard.

It's one thing to hear Microsoft argue that two standards create more choice. It's quite another to see the way they are getting OOXML accepted by ISO.

ISO, like most standards organisations, depends on good will and ethics. ISO processes have never had to deal with a hostile take-over attempt, up to now. Microsoft has launched a wide and aggressive campaign to stuff the relevant ISO committees with its friends, and to sabotage the delicate process of meetings and reviews so that OOXML gets through unchallenged. Its antics are going largely unreported.

When Microsoft has won its fight to have OOXML labeled “ISO standard” - which I think it may, even though the community is fighting back - what damage will it have done to ISO? I fear that ISO will take a long time to recover. The network of contributors and volunteers who work on so many vital standards will become disgusted and will give up. The sight of a monopolist buying and bullying a respected international standards organisation into signing on the dotted line will devalue all future ISO work. And without a working standards process, how does the IT industry continue to move forwards?

Even though it's not hitting the news right now, Microsoft's interference with the ISO process will not go undocumented, and ISO rubber-stamping of its proprietary standard will only delay the inevitable. There will eventually be a single document standard, it will be ODF, and Microsoft will eventually implement it, but in the meantime we're all going to pay the price once again.

I've discussed two cases where Microsoft is trying to change the rules to suit itself. In both cases, as in many others, it will fail but in the meantime waste a huge amount of other people's time and money. The many volunteers who make the FFII live would be able to go back to their jobs and families if Microsoft just faced reality instead of trying to bend it. Microsoft is big, powerful, and brutal. It has killer instincts. It has patience, it can detect weakness from a far distance, and it does not let go, once it has its jaws around someone's throat. It's really like a huge shark. And like a huge shark, it has a tiny, prehistoric, stupid brain.

So yes, I'd argue that Microsoft is most definitely the threat. They hold the sword at the throat of much of the IT industry. When Microsoft understands, finally, that the future belongs to the good guys, that “do no evil” is more powerful marketing than “do more evil”, that in order to have a future, a firm must not hold onto the past… then, finally, we can say that Microsoft is no longer a threat, and we can turn our full attention to the trolls and the lawyers and the bureaucrats.

All of Europe's innovators, including individual inventors, small and medium size enterprises (SMEs), as well as large multinational companies, require patents to protect their inventions, provide incentives to undertake research and development in Europe, and to promote licensing and technology transfer.

“All of Europe's innovators require patents”. Oh dear. That does sound a bit arrogant. The kind of hubris that seems to invite the wrath of the gods, if one believes in karma and that sort of thing.

Well, no worries. What goes around comes around, as Reuters reports:

Nokia, which makes more than one in three of the cell phones sold globally, is mired in a legal dispute over patents with U.S. mobile phone chip maker Qualcomm Inc. after part of a major cross-licensing agreement expired last month.
The legal dispute centers on Nokia's use of Qualcomm patents for 3G, but it also has a bearing on Qualcomm's chips business, which according to Nokia uses many Nokia-patented technologies.
"We are in negotiations but there's no agreement," Ojanpera told a news conference at the Seoul Digital Forum event.
Nokia last week filed its first patent counter-suit against Qualcomm, seeking damages and an injunction against Qualcomm chips. Analysts estimate Nokia has paid Qualcomm around $500 million per year and now aims to get a better deal.

$500 million a year? Not bad. I really hope Nokia got a good technology transfer for their money.

1. A large number of software patents, and all business method patents, can be excluded on first principles: there is no justification for paying for something you're going to get for free anyhow and anyone who sets the rules to make society pay for things it does not need is engaged in a fraud.

The patent industry replies that the patent is a “reward for innovators”, meaning, “give the inventor his monopoly even when you don't need to, and he's more likely to carry on inventing”. By granting monopolies when they are not justified, we immediately teach the inventor to continue demanding “rewards” for useless disclosures. Real inventors are not motivated by patents at all, it is simply a fair trade for their alchemy.

2. The proper reward for innovation is market advantage. Patents do not drive innovation, they can only, in the best case, drive disclosure of secrets.

The patent industry retort is that patents represent value, like gold, both in the patent offices' databases, and in industry's portfolios. This might be true if only valuable alchemies were recorded for posterity. Software patents, being mostly useless, describe no alchemy except that legalese required to work around the rules which, in theory, ban these things.

3. By allowing patents on software, patent offices have corrupted their own databases, probably beyond repair. They are failing on their very first job – to collect valuable alchemies on society's behalf.

The patent industry points to the large settlements for software patent infringement and says, “see, we created all this value. Give us more freedom and we'll create even more”. Lawyers are the first to see litigation and conflict as “value”, but for society this is a pure friction cost. A good property form should result in fewer, not more, lawsuits.

4. Software patents cause lawsuits because they are often vague, impossible to avoid, and granted for obvious ideas. They are a pure friction cost.

The patent industry finally points to some cases where patents have helped small firms with products (not trolls!) fight off large monopolists. These cases are remarkable for their scarcity. But even then, how can the software industry use patents that are too costly for startups, arrive only after seven or more years, and which last for twenty more?

5. Software patents are too late, too expensive, and last too long. They just don't fit the needs of the software industry. A more suitable protection would be instant, cheap, and last only for a few years, and it would drive the disclosure of trade secrets.

Finally, the patent industry gets annoyed and says, “we don't patent software in Europe at all!” And this is true. What is patented is not software, but a kind of legal fiction 'machine' who's only function is to secure the patent, control the market, and keep the real alchemy as secret as possible.

Does the FFII see any possibility of agreeing to a compromise with software patent supporters?

This is like asking whether Galileo could compromise with the Catholic church, or whether global warming can be fixed by compromise. Software patents are not a science, they are a religion, based on the myth that a patent office can magically create value out of thin air. Value is created by hard work, not by legal magic. The FFII has been pointing to truth, not opinion. Truth is not a negotiable thing, it just exists.

Will the patent industry one day stop selling worthless certificates which only do damage to the economy? Yes, either because groups like ours educate enough people to see what is going on, or because the economy will pretty rapidly find itself unable to continue paying this huge tax on innovation.

Understand that while copyright and trademark are legal protection for existing investments, patents pretend to create totally new value. Now ask yourself, where does this value really come from? Either it's taken by force from the market, by raising costs, or the value is not there at all, and the patent as a "valuable object" is a lie, perhaps even a financial and tax fraud.

Do you see why any discussion of "compromise" is misplaced? This is not a fight between opposing ideologies. It's a fight between reality and delusion, between industry and lawyers, between society at large, and special interests.

Mostly, the delusion has been created on purpose by patent experts who make huge amounts of money from it. Politicians have swallowed the myth that "patents are valuable" without looking closely, mainly because they know very little about science, economics, or business. To me, as a businessman and scientist, it's not even a subtle delusion, it's absolutely flagrant. But people throughout history have been convinced by big lies - all the 'isms' of the last century.

Many companies (allegedly e.g. Apple) declare, that they are against patents, but still they collect patents for so called "defensive" reasons.

It's just an arms race. Defensive guns and knives don't make the place safer. Small firms can't afford patent portfolios, and large ones that try to use them still get sued by patent trolls. Patent portfolios only make the lawyers richer and more powerful, and help continue the problem. In the US, where patents are cheap and easy, an incredible 80% of startups in the IT sector do not file a single software patent within 4 years of receiving VC funding. Normal entrepreneurs and engineers do *not want* patents, it's lawyers that want them.

Does the patent system produce the benefits it claims? How much does it cost society? Does the EPO deliver high-quality patents as it claims, or is it churning out more and more junk? Can the quality problems be fixed, and if so, how? Is the 'one size fits all' model working, given the huge disparities between different sectors, and between small and large businesses in the same sector. Are there plausible alternatives? Do we need to trim back the patent system first, and then introduce alternatives, or can competition to classic patents fix things?

Is software patentable at all in Europe, or is the EPO granting patents on something totally different, a kind of magical machine who's only function is to ban certain forms of software? Has the global patent system become an out-of-control, unregulated money-printing machine that is creating a massive tax and credit fraud that is threatening global banking stability? Or is the patent system producing real value that underpins our new virtual economy?

How come that agriculture, based on open exchange of knowledge, has managed to solve the problem "how to feed us" over the last fifty years, with not a single famine caused by agricultural failure (all famines having been caused by political incompetence, war, or natural disaster), whereas pharmaceutics, based on patented knowledge, has spectacularly failed to solve the problem "how to keep us healthy".

Are the government agencies talking to each other, or are they stuck in their ivory towers, riddled with dogma, jealous of power, insane with politics? Have the patent lawyers and policy makers forgotten the basics of science and maths they learned in high school, so they can now repeat, like zombies, "patents correlate strongly with innovation", ignorant that airmiles, dog excrement on the side walks, the price of espresso, and numbers of disposed diapers also correlate strongly with innovation. Do the words "correlation is not causation" have no meaning in the Commission and the EPO?

And finally, after all these questions, the overwhelming sensation that the patent system is, really, in a terrible crisis caused by simple technological change. We have moved from steel and plastic to software. Like it or not, modern industry is software based, and the patent system never had a choice except to try to move along as well. But software-based industries cannot tolerate the patent system in the same way as older industries could, the balances have shifted, and industry is starting to revolt against what it sees more and more as a form of malign parasitism.

Mark Shuttleworth captured it best. Patents are society's gift to inventors. But society is prudent and gives only when it has no choice. When there is a magical recipe behind a valuable product, for example the alchemy that produces a silver mirror, it's worth granting a short monopoly to extract that alchemy from its inventor. But when the product is wholly self-describing, when society can see exactly what is needed to recreate and copy it, that monopoly is worthless to society.

This, ultimately, is the best argument I've ever heard against software patents: society does not benefit an iota from granting them, and thus there is no defensible reason for the patent offices, which are meant to act on society's behalf and not that of its officers and friends, to grant them. It's also a powerful argument against excessive copyright, but that's a different issue.

But I also heard a very good argument for patents, at least of a certain unconventional form, from Lee Hollaar, who points out that even in self-describing software, there are valuable alchemies at work, and it's very hard to extract these from source code or visible behaviour. Professor Hollaar comes up with an alternative to the classic iron-age "all or nothing" patent, something he calls a "mini-patent", an elegant idea that smells more like copyright and trademark, and one we'll be seeing more of in the future.

Sometimes it's worth paying a small price to document the alchemy behind a piece of work. When that price is fair, and when the price is set by society, not a self-appointed high priesthood that live off the excesses of the system, we start to see that a working, balanced… dare I say it, ethical patent system is a real possibility.

Or, as David Martin, CEO of M-Cam said, we can wait for global banking system to wake up and realise that the patent offices have been printing coupons at a mind-boggling rate, and these coupons are now underpinning a multi-trillion credit bubble, and these coupons are… in fact… largely worthless.

Over two days, the ballroom remained packed, with some people having to stand at the back. The event closed with a thundering speech from Bill Kovacic, the US Federal Trade Commissioner, who lambasted government agencies for their inability to talk to each other. "Get out of your ivory towers and talk!" he said, and finally, if EUPACO-2 achieved one thing, it's that we got many people out of their ivory towers to talk. Some still seemed stuck in the past, re-iterating the childish "patents are go(o)d" dogma. But at the same time, the self-critical EPO's Scenarios project, the appointment of a new reforming president at the EPO, and the heavy involvement of many people from the Commission at EUPACO-2 filled those present with stong optimism that we're seeing a consensus on the problems, and that it still is possible to avoid a collapse of the patent system and the economic trauma that would follow.

Article 54 EPC requires a search in the EPO's massive documentation, using on-line tools to find relevant prior art. If insufficient time is available to search prior art, the likelyhood of not finding relevant prior art is significant, and the likelyhood of a patent being granted, because relevant prior art which should have been found has been missed for lack of time, increases.

If examiners are assessed on the basis of their output (the number of patents granted- or rejected) only, the risk of patents being granted, because relevant prior art was not found for lack of time, increases.

Also it is more time consuming to reject an application, because as an examiner you have to justify your decision to reject an application. If you decide to grant you also may have to justify your decision, but only to your colleagues in the examining division, not to the applicant. It seems to be a general principle of law that a decision by a public authority, which rejects a request, requires a justification, because in a way it adversely affects the person who makes the request. A decision not to reject does not adversely affect the person who makes the request, and therefore it is less important to provide a justification.

In the case of patents, you can imagine that it is much more easy to grant a patent, than to reject one. The examiner does not have to search so much for relevant prior art, just any prior art will do, and the justification is very simple

So, a policy to increase output (the number of patent applications processed by one examiner) will de facto imply an increase in the number of patents granted.

The Office likes to link the output of an individual examiner to the "Medium Term Business Plan", which is an estimated output plan over a number of years. If the number of applications processed as scheduled in the "Medium Term Business Plan" is increased, with an unchanged number of examiners, the load on an individual examiners increases.

By pushing for increased output the office accepts the risk of relevant prior art being missed, and also it accepts the risk of unjustly granted patents.

The Office may well deny that it intends to increase the number of granted patents.

It may claim that examiners may get an incentive to work more efficiently. De facto however, an increase in output implies less time in a prior art search, a higher risk in relevant prior art being missed, and a higher risk of an unjustified grant.

Lastly, it should be noted that the Office has a vested interest in patents being granted (not rejected) because granted patents bring (national) renewal fees, of which the office receives 50%.

It's very clear what is happening. Linux is now the de-facto commodity operating system for servers. Microsoft, having gone through the ignore-laugh-fight-lose cycle has now realised that it can turn patent troll on Linux and jump ahead a full business cycle, going from commercial server operating system to IPR revenue model without the messy free software step in between.

“How do you make money from free software?”, asked the VC. “Patents”, came the answer from the lawyer.

Microsoft will embrace Linux, it is inevitable and will follow the same curve as business's embrace of Linux: server first, from micro to large and then medium and finally small enterprise. Like the fashion industry, the biggest firms in the world get their technochic fix from the ghettos, picking up corporately sanitised Linux distributions, wearing their RHEL tattoos like any Hollywood gangsta. “Yo! Just swapped out Solaris for RHEL, dudes! Man, you shoulda seen that vendor run!! High five!”

And the techno chic dribbles down the ladder, spreading out to the mass market as people realise, (a) it's cheaper, (b) it's better, and (c) it works. Microsoft can't fight the first two, so they put their money on the third, which where their embrace and extend comes in.

Novell Suse will work better with Windows because Vista will make sure this happens. Microsoft intends to apply a tax on every Suse sold, and it will do whatever it can to destroy competing Linux products.

OK, let me make a few more predictions. I think it'll take a while still for Microsoft to accept that Linux really is a future market. We're still seeing the start of the cognitive process inside Microsoft. Once the company decides, it'll start an aggressive campaign against Suse's main competitor, namely Red Hat. The campaign won't mention patents, it'll be aimed at the market. It'll say, “Why use a Linux that doesn't work with your Windows?”

Where do patents come in? I doubt that Microsoft will assert its patents against Red Hat directly. This would bring down too much wrath. Microsoft will instead cast doubt on other Linux vendors, saying they are “pirates”. It'll patent specific interfaces, and sue anyone who tries to reverse-engineer them. And it'll use patents to justify the extortion of a per-CPU and per-seat tax on every Suse user. Novell will continue to distribute Suse.

With exceptions for the ghetto, of course. Even Microsoft realises a good thing when it sees it.

“To advance, patent policy must move beyond ideological debates and political maneuvering. In line with the ideals and expectations of democratic governance, it must be institutionalized in a form that fits within the larger policy framework of promoting knowledge, innovation, and economic growth across Europe – and around the world. If Europe succeeds in this enterprise, it can provide legimate international leadership based on best practice – not just self-interest and economic clout. This requires policy development that is evidence-based, sensitive to the range of technological and business conditions, and oriented to produce optimal results.

“EUPACO is a forum for exploring and debating these issues. It brings the diverse stakeholder and disciplinary perspectives needed to test new ideas and thinking about the future of the patent system – and an opportunity for European leadership on issues that are very heart of the knowledge economy.”

Prof. John Duffy, George Washington University

“I'm interested in the construction of well-designed public institutions for governing the patent system. A quarter century ago, the United States undertook an important experiment by restructuring the country's judicial process for adjudicating patent disputes: A significant portion of judicial decision-making for patent cases was centralized in a single specialized court, the United States Court of Appeals for the Federal Circuit.

“The experiment with this high degree of centralization has not been an unqualified success.

“At the EUPACO-2 conference, I plan to present a paper, co-authored with Professor Craig Nard, that details the dangers of excessive centralization and need to seek not complete, but rather an optimal degree of centralization and uniformity. My co-author and I hope that, as Europe moves toward greater centralization of its public institutions governing the patent system, it can learn from the United States' experiment with a highly centralized patent court.”

David Martin, CEO of M-CAM

“As the global fusion economy continues to evolve, assumptions underpinning industrial and intellectual property rights need to be assessed to test their adaptability for use today. In an era of unprecedented capability for multi-stakeholder competition or cooperation, EUPACO serves as an ideal forum to review the consequences for past policy and emerge a resilient model for future development and growth.”

Ron Marchant, former Chief Executive, UK Patent Office

“It is 30 years since the EPO was founded. Things have come a long way since then and neither the context nor the objectives are the same as they were then. Within Europe the simplification of the system is both more important than ever and perhaps looking as unattainable as ever. But Europe is only part of the global economy; the wider world has also not stood still and thus further challenges for Europe are created. EUPACO will provide a major forum for a critical look at the issues, a platform for proposings ways forward, and a way of bringing together major players. Europe needs a better patent system, especially if it is to unlock the potential of its myriad SMEs. I am looking to this conference to find some of the answers.”

Prof. Beth Noveck, Peer-to-Patent Project, New York Law School

“EUPACO takes seriously the idea that patents are at the center of a global economy and that we need to improve the quality of patents and the opportunity for innovation. We need a more open patent system with greater accountability by patent offices to the scientific public and input by the scientific public to improve decision-making by patent offices. Hence I am coming to talk to the thought-leaders and innovators who want, not only to discuss, but take action to explore how we can improve our patent institutions and make them a driver for economic opportunity and scientific growth.”

Amédee Turner, Queen’s Counsel, Honorary Member of the European Parliament

“I hope practical interest in insurance for patent litigation will be aroused, and that this should be seen in the light of greater fairness in the practical working of the patent system in Europe.”

Prof. Lee Hollaar, University of Utah

“I'm proposing a new, limited patent-like protection. It combines the disclosure and claiming requirements of patents, so that the current database of patented technology can be substantially expanded, with copyright's infringement defense of independent creation. Because protection comes into being only when a registered innovation is actually used in commerce, many of the problems with "patent trolls" are eliminated. And providing such an alternative would allow more substantial examination of regular patents through greatly increased application fees and more stringent requirements. The protection is particular suitable for software developers who have created new techniques. Without such protection, there is no way for an open-source software developer to keep those who don't want to share with the community from using their new technique.”

Francis Hagel, Intellectual Property Manager, CGGVeritas

“Eupaco is a welcome forum to clarify the issues the European patent system has to address, and to reflect on possible changes. The diversity of the speakers guarantees that the implications for all stakeholders will be analysed. Current developments in the US of major significance (patent reform bills, KSR vs. Teleflex decision of the Supreme Court) will no doubt be food for thought in our discussions.

“The quality of patents is a critical issue. As an industrial user of the system, and by “user” I mean both applicant/patentee and third party, I would like to share thoughts based on experience as to key ingredients of a user-friendly and properly balanced European patent system, and thus help in the assessment of any proposal for change.”

Benoit Battistelli, French IP Commissioner and Director General, INPI

“Two challenges are facing the European Patent System. One is patent quality : EPO achieved an excellent standard for granted patents – presently the highest in the world. How can quality be maintained with the increase of patent filings as a consequence of globalization (especially from developing countries such as China and India)? The other challenge is the implementation of a unified patent litigation system in Europe in order to complete the centralised granting procedure managed by EPO. Europe is part of a global world where all systems are interconnected : it is therefore necessary to confront the different views on an international level and to achieve balance for the benefit of all. I hope that EUPACO will enable us to reach a constructive exchange of views and to find new paths.”

Last word

Joff Wild, editor of IAM Magazine, who won't be speaking this time, makes an insightful last word:

“When you are face-to-face and talking it is much harder to maintain entrenched positions and to ignore what other people are saying. It is hugely encouraging to see that representatives from industry, the FFII, the EPO and national patent offices, and the Commission will be sharing platforms at this event. The FFII deserves to be congratulated for this initiative which, hopefully, will get the support it deserves.”

In 1981 the US patent swung under control of patent lawyers and experts, with the establishment of a single specialised patent court - the Court of Appeals of the Federal Circuit (CAFC).

By 2007, the US patent system has become a tool by which lawyers extort increasingly huge sums from unwitting and conflicted high-tech sectors. Step by step, CAFC turned the patent system from a tool to promote innovation to a tool for creating conflict, litigation, and profit-through-force.

CAFC, and the Supreme Court judgments are very relevant to Europe's position today.

SCOTUS made two rulings.

In the first, on AT&T vs. Microsoft, the justices decided 7-to-1 that distribution of software source code cannot violate patents. The source code is not a “component” (the thing that is patented) until it is installed on a PC. Think about what this means for open and free software.

In the second, Teleflex vs. KSR, SCOTUS bitch-slapped CAFC, saying it had “interpreted “obviousness” in a rigid, narrow