Old tech giants crush fix for software patent, but reformers can still win

A mighty fight is underway to rewrite the laws that promote innovation. Under the current rules, struggling old guard firms can exploit a broken patent system to abuse monopolies over basic software concepts from decades ago. The result has been to smother start-ups and weigh down vibrant parts of the tech economy with frivolous lawsuits; lawyers get fat at the expense of those who are building real businesses.

This week, the latest push by Congress to fix the software patent problem suffered a setback after Microsoft(s msft) and IBM gutted a key House bill that would have made it easier for victims to push back. The upshot is that for the second time in three years, the U.S. is poised to pass a law that will make cosmetic changes to the patent system without addressing the root cause — garbage software patents — that has made the system a mockery and a byword for legalized extortion.

The good news, for reform advocates, is that there’s no need to despair quite yet. According to sources close to the legislative process, real reform could still happen if powerful senators prevail and if opponents outgun Microsoft(s msft) and its allies in the grubby money and lobbyist game. Here’s how that outcome might unfold:

Buying a bad patent policy

This week, the chair of the House Judiciary Committee, Rep. Bob Goodlatte (R. Va.), was scheduled to bring his much-touted patent bill for a vote. The bill arrived on schedule — but it was a neutered version.

A key provision, which would have provided a way to challenge software patents at the Patent Office, is no longer in the bill, which Fat cat, moneypassed 33-5 in a Wednesday night vote by the committee. The change is significant because it means victims of patent bullies must still pay millions to challenge the patents in federal court or — as most do — simply swallow hard and pay a licensing fee.

Goodlatte’s decision to drop the provision is a victory for IBM and Microsoft, which have stacks of old software patents that provide licensing revenue even as their product lines sputter. It’s also a victory for trolls, which are shell companies backed by private equity firms and lawyers that use patents (often obtained from Microsoft and others under a “privateering” arrangement) to wage ruinous legal war against everyone from Martha Stewart to individual app developers.

According to reports, the change to the Goodlatte bill came after intense lobbying from groups linked to Microsoft, IBM and others. The account was confirmed by a source close to Google(s goog) and other groups that pushed for the provision to challenge software patents.

“They outspent the living shit out of us,” said the source, who did not want to be named. He said that the companies spent heavily to lobby Democrats on the Committee and freshman Republicans, forcing Goodlatte to remove the provision rather than seeing it voted down at this stage.

A source with a lobbying group allied with Microsoft said the software giant’s role had been overstated, and that the change in the bill was less about money than it was about “shoe leather” lobbying.

Round 2 set for the Senate

“If we had a quarter of the people who opposed SOPA supporting this anti-patent troll law, we’d win,” Sen. Chuck Schumer (D-NY)Sen. Chuck Schumer told me earlier this month at General Assembly, a popular gathering spot for tech types in New York City.

Schumer, joined by digital advocacy group Electronic Frontier Foundation, was in town to talk up his version of reform and take on trolls, which he said are “preying on New York’s technology industry.”

Crucially, he is pushing a bill that includes the key provision about software patents that was stripped from the House bill. Schumer’s support is significant, not only because he carries clout in the Senate, but because he succeeded in including a similar provision aimed at frivolous financial services patents in the America Invents Act of 2011 (a feckless earlier attempt to fix the patent system).

Schumer’s version is not the only patent reform bill in the Senate — similar ones are pending from Sen. Patrick Leahy (D-Va.) and Sen. John Cornyn (R-Tx.). According to the source tied to Google, Leahy has signaled that his bill (preview here) is a “Christmas tree,” meaning other politicians can hang their preferred provisions atop it; the bill that will ultimately get a vote on the Senate floor will likely contain a provision to challenge software patents.

As for a timeline, insiders said patent legislation is one of the few bipartisan initiatives available to members of Congress, who are eager to notch legislative achievements before the mid-term campaign season begins next summer. This means that the bills are expected to go to a full floor vote in the House and Senate by early 2014, and that a markup session on a final bill will take place in the spring — the only question is which version will prevail.

The endgame: money, power and persuasion

“There’s months to go till conference committee,” said the source close to the reform lobby, predicting that the balance of power will tilt towards the software patent reform camp, as Google and others ramp up lobbying efforts. The source tied to Microsoft, unsurprisingly, panned this prediction, and declared that challenges to software patents are now a “third rail” that most in Congress don’t want to touch.

The outcome will be determined in large part by money, and whether Google and the other companies that recognize the harm caused by software patents (Twitter is another) are willing to seize the chance at reform that is within their grasp.

But a big part of the outcome will also be shaped by the stories that companies can tell about the patent system and, on this front, the ground has shifted considerably from the last failed attempt at reform. Recall that in 2010 it was easy for Microsoft and other reform opponents to simply warn that changes to patent law “could harm innovation” and leave it that.

Today, attitudes have changed after a steady parade of patent horror stories: Boston University using a 1997 patent to sue Apple and seek an iPhone ban; a troll using a 1998 patent from a Holocaust foundation to shake down the New York Times; a troll lawyer who boasts he likes to “go thug,” and is pressing an extortion campaign against hundreds of companies.

All of this has led everyone from small app developers to President Obama to suggest the patent system is out of hand. After years of asking defendants to take it on faith that the system is working, it’s now up to Microsoft and others to justify that their ancient software patents — which award 20-year monopolies in a fast-moving industry — do more good than harm.

(Image by Kagai19927 via Shutterstock)