On Tuesday a consortium of technology companies, including IBM (IBM), will launch a new initiative designed to help shield the open-source software community from threats posed by companies or individuals holding dubious software patents and seeking payment for alleged infringements by open-source software products.

The most novel feature of the new program, to be known as Linux Defenders, will be its call to independent open-source software developers all over the world to start submitting their new software inventions to Linux Defenders (Web site due to be operational Tuesday) so that the group’s attorneys and engineers can, for no charge, help shape, structure, and document the invention in the form of a “defensive publication.”

Linux Defenders will then also see to it that the publication, duly attributing authorship of the invention to the developer who submitted it, is filed on the IP.com Web site, a database used by the U.S. Patent and Trademark Office and other patent examiners throughout the world when they are trying to determine whether a proposed patent is truly novel, as any patentable invention is supposed to be.

In effect, the defensive-publications initiative mounts a preemptive attack upon those who would try to patent purported software inventions that are not truly novel — i.e., innovations that are already known and in use, though no one may have ever previously bothered to document them, let alone obtain a patent on them, a process usually requiring the hiring of attorneys as well as payment of significant filing fees.

“The idea is to create a defensive patent shield or no-fly zone around Linux,” says Keith Bergelt, the chief executive officer of Open Invention Network, the consortium launching the site. The core members of that group, formed in 2005, are IBM, NEC, Novell (NOVL), Philips, Red Hat (RHT) and Sony.

OIN’s Linux Defender program is being co-sponsored by two of the most prominent guardians of the free- and open-source software community, the Linux Foundation in San Francisco and the Software Freedom Law Center in New York. In addition, the site is being hosted and “co-developed” by New York Law School, which has, since June 2007, been sponsoring, in coordination with the U.S. Patent and Trademark Office, its own well-received, complementary project, known as the Peer to Patent Community Patent Review site. That site solicits assistance from the open-source community to produce evidence that an invention for which a patent is currently being sought was actually already known or in use prior to the patent applicant’s filing.

So-called free- and open-source software is software that, by its licensing terms, confers certain “freedoms” upon users that are usually forbidden by conventional proprietary software companies, like Microsoft. These freedoms include the right to see the software’s source code, alter it, copy it, and redistribute it. The best known open-source product is Linux, or GNU/Linux, a complete open-source operating system that has become quite popular among Fortune 500 corporations for use on their data-center servers. Patents threaten the whole free-and-open-source eco-system, however, in that none of the key open-source freedoms can be practiced if an outsider can establish that a given piece of software infringes a valid patent he holds.

The Linux Defenders program is largely the brainchild of Bergelt, who took over as Open Invention Network’s CEO this past February. The program also reflects a new, more proactive role Bergelt envisions for OIN than the group has played in the past.

Until now, OIN’s purpose has been one-dimensional: to acquire a defensive portfolio of strategically crucial patents, which OIN makes available, royalty free, to any company that reciprocally agrees not to assert any of its own patents against the Linux community. (About 50 companies have already entered into such formal agreements with OIN, of which the best known are probably Google (GOOG) and Oracle (ORCL).) The implicit threat is that if any outsider — a Microsoft, (MSFT) say, which declared publicly in May 2007 that open-source software then violated 235 of its patents — were to ever bring a patent suit against a player in the Linux community, that outsider would, in turn, risk countersuit by OIN or its member companies asserting infringement of their own patents by the outsider.

While this IP-acquisition program remains a central one for OIN, Bergelt says, OIN will also now seek to “think more creatively” about other ways to protect and foster Linux’s development by means of “relationship-building” and “information-sharing,” including efforts to explain the importance of open-source and open-platform approaches to the media, patent officials, and competition authorities, among others.

Befitting someone who plans to tackle this ambitious range of goals, Bergelt has a background that is more diverse than that of his intellectual-property lawyer predecessor, Jerry Rosenthal, who, prior to heading OIN, had served as IBM’s IP-licensing chief. Though Bergelt is also an IP lawyer, he is, in addition, an entrepreneur and diplomat. Immediately prior to joining OIN, Bergelt was the president and CEO of the intellectual-property focused hedge fund Paradox Capital. Before that, he was a senior advisor to private-equity fund Texas Pacific Group (now TPG); headed the strategic intellectual asset management unit at Motorola; and co-founded the strategic intellectual asset management unit within the electronics and telecommunications group at SRI Consulting in Menlo Park. Earlier still in his career, he spent 12 years as a U.S. foreign service officer, including a posting to the U.S. Embassy in Tokyo, where he negotiated IP rights agreements with certain Asian countries, including China.

The Linux Defenders program will actually have three components. The first will be a peer-to-patent component that, like New York Law School’s existing program, will reach out to the open-source community in search of evidence of “prior art” — proof of preexisting knowledge or use of certain inventions — that can be used to challenge applications for patents that have been filed but not yet granted. The goal here is to persuade patent examiners not to grant the patent being sought because the invention is not truly novel.

The second component will be a natural extension of the first, to be known as “Post-Grant Peer to Patent,” which will enlist similar community assistance in the search for prior art relevant to patents that have already actually issued. In this case, the goal would be — assuming such prior art is found — to initiate an administrative reexamination proceeding before the U.S. PTO to get the patent invalidated. (There have been some earlier post-grant, peer-to-patent efforts — sometimes referred to as peer-to-issue programs — by both nonprofits and private companies, but none with the commitment, and on the scale, that OIN envisions, Bergelt says.)

The third component is the defensive-publications initiative. The phenomenon of defensive publication is also not new, Bergelt acknowledges, although it has primarily been used in the past by private companies protecting proprietary business models. Since at least the 1970s, he says, when the filing of an important patent by one company would often spur rivals to respond by seeking inter-related patents designed to restrict the usefulness of the first company’s filing, proprietary companies began using defensive publication to beef up and buffer their core patents.

“They’d file one patent,” Bergelt explains, “and then the next day they’d file thirty defensive publications that would protect all of the extensions of it they could think of, so the core patent was fenced off by layers of barbed wire, if you will. . . . What I’ve done is turn that idea on its head a little bit.” (Defensive publications are cheaper and easier to prepare than full-fledged patent-applications.)

Although some factions of the free- and open-source community are ideologically opposed to the whole notion of software patents — most notably and passionately Richard Stallman, the founder of the Free Software Foundation (which is a client of Linux-Defenders co-sponsor Software Freedom Law Center, which, in turn,  supports the End Software Patents organization) — neither Bergelt nor OIN fall into that camp.

“We’re not anti-patent by any stretch of the imagination,” says Bergelt. “More patents is fine with me, as long as they’re high quality. Quality is the drum we beat.”

In fact, Bergelt says, if a developer wants to get an actual patent on his invention, and then put defensive publications around it, Linux Defenders will help him do so — so long as the developer will ultimately be contributing the patent to the Linux community.

Attempting to ride a wave of corporate and judicial disenchantment with aspects of the current patent system, a new project was unveiled Thursday designed to, as its name bluntly indicates, End Software Patents. (Press release is here. The group’s “first yearly report” on the state of software patents is here.)

The group is intended to become a clearinghouse for information and a hub for those strategizing legal challenges, according to its executive director, Ben Klemens. Though End Software Patents will not initiate litigation of its own, it will be on the lookout for appropriate test cases to support as they arise, he says.

Though the project is being sponsored and funded by leaders of the Free and Open Source Software movement, it hopes to attract support from the wider community of businesses, financial institutions and universities that have all been blindsided in recent years by lawsuits over software patents and their close-cousins, business-method patents.

The End Software Patents Web site, here, highlights a long list of diverse businesses that have been sued for allegedly infringing software patents, including the Green Bay Packers, OfficeMax, Caterpillar, Kraft Foods , ADT Security Services, AutoNation, Wal-Mart , Walgreen , Barnes & Noble, Circuit City Stores , Ford Motor , E I du Pont de Nemours and Co. , and so on. In most cases, the companies have been sued because of certain basic, routine functions performed on their Web sites — the way images are displayed, the way data is gathered or transmitted — which are said to infringe software patents.

The group also hopes to attract support from the many financial institutions, including JP Morgan , Merrill Lynch , and NCR Corp. , that have been asked to pay patent holding company DataTreasury for permission to send check images over the Internet. (For a Washington Post story about remarkable proposed federal legislation directed specifically at the DataTreasury patent, click here.)

The point, explains Klemens, is this: “If you’re running a business of any sort, you have to care about the software and business method patents.” That’s because nearly every business today operates a Web site and employs a staff of in-house IT programmers who enable them to conduct business in the digital age. In that sense, every business is now a software business.

Klemens is a mathematician (a guest scholar at the Brookings Institution since 2003) who uses algorithms to analyze data. In a recent article, for instance, he and his co-authors use data analysis to link certain genes to bipolar disorder. “I often run into patents on statistical methods and mathematical algorithms of the type that I implement,” Klemens says. “I don’t think I violate the ones I’ve seen, but I could be wrong, and I don’t know what else is out there. . . . That’s the thing that really woke me up: by doing pure math, I face legal liability. As far as I know, that’s a first in human history.” Klemens’s personal Web site is here.

In a 2005 book, Mathematics You Can’t Use, Klemens criticizes software patents from an economic and legal perspective, and does so in unusually crystalline, easy-to-understand terms. (For chapter one, see here, and for chapter six, see here.)

The book attracted the attention of the Free Software Foundation, whose president, Richard Stallman, has been railing against software patents since at least 1991, for related, but narrower, reasons: they posed a potentially mortal threat to his brainchild, free software — i.e., software, like Linux, that programmers are able freely to examine, modify, and redistribute without fear that their work will ever be taken out of circulation, declared off-limits, or placed behind a toll-booth by private proprietors. (For a feature story on the tension between patents and free and open software, “Microsoft Takes On the Free World,” see here. Generally speaking, though, software patents present dangerous traps for any programmer. Unlike copyrights, which are difficult to infringe inadvertently, a programmer can easily write software that inadvertently infringes someone else’s patent. That happens whenever the programmer independently comes up with an innovation that, unbeknownst to him, someone else has already staked a claim to. While copyrights are relatively easy to write around — since they protect only particular sequences of words or code — patents present broader, vaguer, and more durable obstacles, since they purport to proprietize implementations of ideas.)

In Klemens, the Free Software Foundation saw a potential ally who, thanks to the breadth of his critique and clarity of his writing, could attract a broader audience than just free and open source programmers. “We came to him,” says Peter Brown, the foundation’s executive director, “and said, we really want to fund your work. And he said yes.”

At the moment, the End Software Patents project is formally an offshoot of the Free Software Foundation. It also enjoys the “sponsorship” — though not monetary support — of the Software Freedom Law Center, which is led by Eben Moglen (an outside lawyer for the FSF and its former general counsel), and of the Public Patent Foundation, an organization led by the center’s legal director Dan Ravicher. The Software Freedom Law Center is itself funded largely by such Linux-supporting corporate patrons as IBM (IBM), Hewlett-Packard (HPQ), Red Hat (RHT), Novell (NOVL), Oracle (ORCL), and Sun Microsystems (JAVA).

To be sure, the goal of abolishing software patents remains a radical position in the sense that very few corporations endorse it. (A surprising exception is pharmaceutical manufacturer Eli Lilly & Co. See here. Evidently Lilly recognizes that poor quality software patents are among the problems spurring the tech industry to seek patent reforms, and it hopes to find of way of placating the tech industry without weakening protections for the drug patents that are the lifeblood of the pharmaceutical industry.)

Though many information technology companies, like IBM, Hewlett-Packard, and Cisco, are publicly championing patent reform, they only favor improving the quality of software patents, not abolishing them. After all, there are estimated to be more than 200,000 active, issued software patents in the United States, and most major tech companies have acquired, at considerable expense, substantial portfolios of them. Companies like Philips Electronics also argue that drawing the line between hardware and software is no longer easy, and that many patents relate to processes that were once accomplished using hardware but are now accomplished using software. Why should the modernization of the medium deprive Philips of recognition for its inventions, its lawyers have argued (albeit, in a slightly different context). See here.

Still, Klemens expects his group to find much common ground with the more moderate IT industry reformers, as well as with those whose main bugaboo is business-methods patents. “Pretty much every argument we make, top to bottom, applies to business methods as well,” Klemens says. In addition, the group’s supporters hope that the major tech players are coming to conclude that the vast number of software patents they have accumulated is part of the problem. “There are so many rights in so many hands,” says Moglen, of the Software Freedom Law Center, “everybody is at risk all the time.”

In any case, even if End Software Patents’ goals are extreme, they are not far-fetched. The U.S. Supreme Court has never ruled on the patentability of software, and at one time the predominant assumption among lawyers was that it could not be, because it amounted to nothing more than mathematical algorithms, which, in turn, were considered nonpatentable “laws of nature.”

That assumption was gradually turned upside down through a series of decisions rendered in the 1990s by the U.S. Court of Appeals for the Federal Circuit, a specialized court that had been set up to handle patent appeals, among other things, in 1984. Those decisions suggested that even if pure software itself was not patentable, software when loaded onto a general-purpose computer created, in effect, a new physical device that could then be patented. Some of the same rulings that opened the door to software patents effectively opened the door to “business method” patents, too.

In the past two years, however, it has become clear to all that the U.S. Supreme Court is extremely unhappy with the patent environment that the Federal Circuit has fostered in the two decades since its creation. In eBay v. MercExchange (May 2006), the Court unanimously junked one longstanding rule of that court, and last term, in KSR International v. Teleflex (April 2007), it unceremoniously dispatched another. (In eBay, the Supreme Court ruled that judges need not always enjoin defendants from infringing, even after a patent-holder has proven its case, and in KSR it made it much easier for judges and patent examiners to invalidate patents due to obviousness.)

For Klemens, however, the most encouraging ruling for his agenda was one that, technically, wasn’t. In LabCorp v. Metabolite Laboratories (June 2006), the Supreme Court had been asked to review the Federal Circuit’s precedents on patentability – the issue that ultimately also determines whether software patents and business-method patents are permissible. After hearing oral argument, the Court punted, deciding that, for technical reasons, it never should have heard the case in the first place. But three justices dissented, writing that they would have overturned the Federal Circuit and invalidated the patent in question, because it clearly amounted to an attempt to patent a nonpatentable “natural phenomenon,” though the phenomenon had been recast in the patent application as a patentable “process.” For that opinion, see here. Klemens contends that software patents amount to much the same thing.

Though only three justices signed the dissent, it does appear that it, in combination with the Supreme Court’s back-of-the-hand treatment of other key Federal Circuit precedents, has led the patent appeals court to engage in some soul-searching. Just two weeks ago, it announced, without having been spurred to do so by the parties, that it would rehear an important patentability case, In re Bilski. (See generally here.) It even asked the parties to brief whether a key ruling it rendered in 1998, State Street Bank & Trust v. Financial Signature Group – one of the pivotal ones greenlighting software and business-method patents — was correctly decided.

“There are test cases all over the place,” observes Klemens. Plainly, his timing is propitious.

Correction:  As a commenter points out, in an earlier version I misused the legal term of art “reads on.” Then I did it again in a comment. Regret both errors.

A closely-watched patent case, Zoltek Corporation v. USA, ended this morning much as the Sopranos series ended last night: with no catharsis at all.

In a bit of a letdown, the Supreme Court declined to hear Zoltek, which had raised a fundamental constitutional question: Are patents a form of property that are protected by the so-called Takings Clause of the Fifth Amendment, which guarantees private citizens “just compensation” when the government seizes their property? The case also raised questions about U.S. patent-holders’ rights when their patented processes are used overseas to make components of products that are assembled in this country. The issues are of great continuing interest to defense contractors, the pharmaceutical industry, and the nanotechnology industry.

Zoltek (ZOLT) patented a process for making carbon-fiber sheets that are used in making stealth aircraft for the military. Lockheed Martin Corp. (LMT) uses that process to make the F-22 fighter plane, although the carbon-fiber sheets are manufactured in Japan before being imported to the U.S. where the planes are assembled. Under U.S. patent laws, it was clear that Lockheed itself was immune from being sued for infringement by Zoltek, because it was making the planes for the U.S. government. Accordingly, Zoltek’s legal remedy, if it had one, consisted of suing the U.S. government in the U.S. Court of Federal Claims.

Zoltek did so, claiming damages of more than $1 billion from the infringement. The court found that, as far as the patent statutes went, Zoltek fell through the cracks. If Lockheed had been importing a patented invention into the U.S. for use in a government-commissioned airplane (as opposed to materials made by means of a patented process), the statutes would’ve clearly allowed Zoltek to sue the U.S. government to recover for patent infringement. Alternatively, if Lockheed had used Zoltek’s patented process to make materials that it was importing into this country for use on a non-government-commissioned project, Zoltek would have been entitled to sue Lockheed for patent infringement. But, the federal claims court ruled, the statutes did not provide Zoltek a right to sue the government under the precise circumstances presented: Lockheed using Zoltek’s patented process to make materials that it was importing into the country for use on a U.S. government-commissioned project.

Nevertheless, the trial-level court — the Court of Federal Claims — decided that Zoltek could still bring a constitutional claim against the U.S. seeking “just compensation” for a governmental “taking” of its property under the Fifth Amendment to the federal Constitution.

On appeal, however, the U.S. Court of Appeals for the Federal Circuit — which hears appeals from the Court of Federal Claims as well as all patent appeals — reversed, finding that Zoltek was completely out of luck. While agreeing with the lower court that the existing patent statutes didn’t give Zoltek a right to sue the United States for Lockheed’s infringement of its patented process, it also ruled that patents weren’t a form of property protected by the Constitution’s Takings Clause, relying on its interpretation of an 1894 U.S. Supreme Court ruling.

The appeals court’s constitutional ruling had potentially enormous ramifications for patent holders — most obviously, perhaps, for the pharmaceutical industry. During the anthrax attacks of late 2001, for instance, President George Bush raised the prospect of breaking Bayer’s (BAY) patent over Cipro, an antibiotic useful in fighting that disease. Similarly, in current discussions of the spiraling costs of Medicaid and Medicare drug benefits, one measure legislators regularly consider is imposing price controls of some kind. Such measures — abrogating the current scope of patent rights — would likely spur pharmaceutical companies to try to get compensation from the government under the Takings Clause.

But the federal appeals court’s ruling — which the High Court let stand this morning — appears to rule out such remedies. The Federal Circuit court had reasoned that since patent rights are created and defined by the federal government, they extend only so far as Congress has said they should extend. Accordingly, the government can’t be “taking” anything away from the patent holder, since all the patent holder ever possessed to begin with was whatever specific rights the government had granted to it.

(Zoltek’s lead counsel in the case was Dean Monco of Chicago’s Wood Phillips. Anne Murphy, an appellate staff attorney with the U.S. Department of Justice, was the government’s line attorney on the case.)

In the current issue of Fortune (cover dated May 28), Microsoft (MSFT) executives assert that free and open-source software, including the Linux operating system, infringes 235 of its patents. The feature, which is available here, is entitled Microsoft Takes On the Free World, and also describes how, for the past four years, Microsoft has been methodically pursuing the goal of receiving royalties from users and/or distributors of free software. Though Microsoft breaks down the 235 patents into several general categories, it still does not identify any specific patent or how it infringes.

I wrote the feature story, so I suggest writing any comments or questions about it as comments to this blog entry, since I might possibly be able to add some answers or additional insights.

For the full responses of free software advocates to Microsoft’s claims, I refer readers to the feature. But in very brief summary, Eben Moglen, executive director of the Software Freedom Law Center (and longtime lawyer to the Free Software Foundation) says: “Numbers aren’t where the action is. The action is in very tight qualitative analysis of individual situations.” He is referring to the fact that patents can be invalidated in court on numerous grounds; that others can easily be “invented around”; and that still others might be valid, yet not infringed under the particular circumstances.

Still, 235 is a lot of alleged infringements. “This is not a case of some accidental, unknowing infringement,” says Microsoft’s licensing chief, Horacio Gutierrez. “There is an overwhelming number of patents being infringed.” By comparison, for example, Verizon’s (VZ) patent suit against Vonage (VG) was based on seven patents, of which just three were found to infringe. In the story, Gutierrez, breaks down that figure into the following categories:

1. The Linux kernel allegedly infringes 42 Microsoft patents. (The kernel is the deepest layer of the operating system, which interacts most directly with the hardware.)

2. The Linux user interfaces allegedly infringe 65 patents. (The user interfaces are the way design elements, like menus and toolbars, are set up to promote easy and intuitive use.)

3. The Open Office programs allegedly infringe 45 patents. (This a suite of free software programs analogous to Microsoft’s Office, including, for instance, word processing, spreadsheet, and presentation software, which perform functions like Microsoft’s Word, Excel and PowerPoint products.)

4. Free email programs allegedly infringe 15 patents.

5. Other assorted free software programs that are frequently included in Linux distributions allegedly violate another 68 patents.

The question I anticipate that most readers will want to ask (and that isn’t really answered in the feature story) is: Why doesn’t Microsoft identify the specific patents and explain what specific aspects of free software infringe them. I did ask Gutierrez that question, and here was his answer: “We do. But in private conversations in the process of licensing discussions with companies that are looking in good faith for ways of resolving the situation.” In those contexts, he says, “we walk through a number of exemplary patents and go as deep as they want us to go. Our experience has been every time we’ve done that, it doesn’t take companies a long time to figure out that there is an issue here.”

Why won’t he do the same thing in public? “There are a number of legal reasons why companies don’t do that. No company does that. IBM (IBM) doesn’t do that. HP (HPQ) doesn’t. Fujitsu (FJTSY.PK) doesn’t. For a number of practical reasons. Once you’ve made that statement from a public perspective, anybody in the world can go to court and ask for a declaratory judgment. That would spur potentially hundreds or thousands of lawsuits around the world, or reexaminations of patents around the world. Even if they’re perfectly good patents, it would create an administrative nightmare.”

So that’s his answer to that one. Please read the feature and then let me know what you think.

Dell (DELL) has become the first “systems-provider” to take advantage of the controversial technological collaboration and intellectual property pact concluded in November between Microsoft (MSFT) and Novell (NOVL), which is a distributor of the Linux operating system. (Here’s the press release.)

Dell’s move will enable corporations that wish to run both Windows and Linux server operating systems side-by-side in their datacenters to go to a single shop for all their hardware, software, and support service needs, while also being assured that Microsoft will not go after them seeking patent royalties. (Microsoft claims that Linux infringes its patents, a claim vigorously disputed by Linux distributors, users, and developers.)

Back in November Microsoft and Novell struck a pioneering tech collab/IP deal out of a recognition that most corporate datacenters today either already run, or would like to run, “heterogeneous” software environments, meaning that some server computers run Windows, while others run Linux, while still others run on Unix or Apple platforms. (See earlier posts on that deal, here and here.) Thanks to so-called virtualization software, which enables a single computer to run multiple operating systems, many companies are now consolidating their computing operations onto many fewer computers, seeking to save tens of millions of dollars in hardware, energy, and even real estate costs. But to do this, the companies must be assured that that their various software platforms will play together nicely, that their computer operators will have integrated systems management tools capable of controlling the diverse platforms, and that there will be tech support people to call upon who have all the expertise and certifications necessary to fix things when they go wrong.

So on November 2, 2006, Novell and Microsoft announced a technological collaboration designed to ensure customers that these interoperability needs and concerns would be addressed. At the same time, the companies also worked out an intellectual property agreement that effectively guaranteed Novell’s Linux customers that they would not have to worry about potential patent suits or patent licensing demands from Microsoft, which claims that Linux infringes its patents. As part of the deal, Novell agreed to pay Microsoft an unspecified percentage of all its Linux subscription revenues. (Linux is so-called free software, written by a loose-knit community of developers, rather than by any single legal entity, and the software is typically available for free download over the Internet. Commercial distributors of Linux, like Novell and industry-leader Red Hat (RHT) , give away the software for free but make their money selling subscription support services.)

The IP part of the Microsoft-Novell deal was enormously controversial within the free and open-source software (FOSS) community, both because that community denies that Linux infringes any patents and because the notion of having to pay for permission to use free software (implicit in the notion of paying patent royalties) is antithetical to the most fundamental principles of free software. The Free Software Foundation, which writes and administers the license that covers key portions of the Linux operating system, is revising that license to forbid any other Linux distributors, like Red Hat, from entering into deals structured the way the Microsoft-Novell pact was. The revised license is expected to take effect in July.

Since the original Microsoft-Novell deal was struck, a number of marquee corporate Linux end-users have signed up for the benefits of the deal, including Credit Suisse, AIG, Deutsche Bank, HSBC, and Wal-Mart Stores, but Dell is the first computer distributor to take advantage of the deal.

Nevertheless, Red Hat has claimed that it has seen no adverse impact on its business from the Novell pact. (Due to an unrelated internal inquiry relating to options backdating, Novell has not filed audited financial statements with the SEC in more than a year.)

The federal patent appeals court denied Vonage’s (VG) request this afternoon to send the patent case it lost last month to Verizon (VZ) immediately back for retrial in light of the Supreme Court’s landmark ruling Tuesday.

The opinion was short and self-explanatory enough that, instead of linking to it, I’ll just paste it:
IT IS ORDERED THAT:
(1) The motion is denied.
(2) The issues sought to be raised by counsel may be included in their briefs on the merits.

The ruling by the U.S. Court of Appeals for the Federal Circuit (which hears all patent appeals) means that Vonage will still be able to raise on appeal the question of whether the case needs to be retried in light of the new test of obviousness announced in KSR International v. Teleflex. Similarly, Verizon will still be able to argue in response that that ruling is irrelevant, because, among other things, Vonage failed to preserve the issue for appeal. (See the three previous posts in this blog for more detail.)

Vonage’s full appeal will now be argued on June 25, in keeping with the expedited schedule the court set up on April 24. Vonage’s survival appears to be at stake.

In response papers it just filed with the federal patent appeals court, Verizon (VZ) makes a compelling argument for rejecting Vonage’s request for a new trial in light of Monday’s landmark Supreme Court ruling.

Vonage (VG), which is appealing a patent infringement judgment entered last month that threatens to put it out of business, had asked the appellate court to send the case back for retrial, on the theory that the trial judge’s instructions to the jury were inconsistent with the new standards on “obviousness” just articulated by the Court in KSR International v. Teleflex. (For earlier post on KSR ruling, click here.)

In a response filed just minutes ago, however (for which, click here ), Verizon’s lawyers write: “Not only did Vonage fail to object to the instructions given, it actually proposed the jury instructions it now challenges.” They add that it’s hard to argue that Vonage was blind-sided by the KSR ruling, in that the Supreme Court agreed to hear KSR case “in June 2006 — about the same time that this lawsuit was filed — and KSR was fully briefed and argued well before the trial of this case.” In any event, they add, there’s nothing inconsistent with KSR in the instructions Vonage proposed and that the judge read.

In an email reply to Verizon’s response, Vonage spokesperson Brooke Schulz writes: “We didn’t challenge those jury instructions because the standard convention for obviousness was part of settled law, therefore there was no grounds to challenge it at that stage. Now that the Supreme Court has expanded the test for obviousness, there is now grounds to challenge those instructions based on the new Supreme Court ruling.

It’s presumptuous for a legal reporter to predict how an august federal appeals panel might rule, but for whatever it’s worth, I like Verizon’s chances at the moment.

Well, that didn’t take long.

Less than 36 hours after the U.S. Supreme Court changed a fundamental standard for determining patentability, Voice-Over-Internet-Protocol telephone company Vonage (VG) has asked the federal patent appeals court to toss out the judgment Verizon (VZ) won against it last month and order a new trial under the new standard. The motion is based on yesterday’s ruling in KSR International v. Teleflex.

In a prepared statement, Verizon’s senior vice president and deputy general counsel John Thorne says, “There is no merit to Vonage’s motion,” and he calls it “a delaying tactic to avoid final resolution of the appeal.” Verizon’s outside appellate lawyer, Peter McCabe, adds that while the issue KSR dealt with-whether an invention was too “obvious” to be patentable-was raised at the Vonage trial, Vonage did not “preserve” the issue for appeal by making an objection. (To be able to raise an issue on appeal, one usually needs to make a timely objection before the trial judge.) McCabe is with the law firm of Winston & Strawn.

In Vonage’s 12-page motion it says that it was denied an opportunity to present evidence that would be relevant under the new standard, but it does not say that it asked for such an opportunity. Similarly, it says that the judge’s instructions on obviousness were erroneous, but it doesn’t say that it objected to those instructions. Vonage is represented by Steptoe & Johnson.

On March 13 a federal jury in the Eastern District of Virginia ruled that Vonage is infringing two of Verizon’s patents. On April 12 Judge Claude Hilton issued an injunction against further infringement that threatens to put Vonage into bankruptcy, though the injunction has been stayed pending appeal to the U.S. Court of Appeals for the Federal Circuit.

Verizon will likely file a response with the Federal Circuit tomorrow.

Vonage’s motion is available here.

The U.S. Supreme Court stopped with the wrist-slaps yesterday, and delivered a right cross to the jaw of the federal patent appeals court. Then the justices cupped their hands astride their mouths and shouted in unison: Fewer patents!

In the latest in a series of rebukes, the Court unanimously told the U.S. Court of Appeals for the Federal Circuit and, by extension, the U.S. Patent and Trademark Office, that each had been approving and enforcing patents for inventions that were just too obvious to merit the honor. The ruling came in KSR International v. Teleflex, a case involving an adjustable truck accelerator pedal. (For details of the case, see earlier post here.) (The Court also handed Microsoft (MSFT) an important victory in a different patent case yesterday, Microsoft v. AT&T (T), which pared back the applicability of U.S. patents to software distributed abroad. Microsoft was the defendant in that case. Microsoft general counsel Brad Smith tells the Wall Street Journal’s Jess Bravin today (click here) that the ruling will lop off about 60% of its exposure in the 45 patent cases pending against it today. For my earlier postings relating to that case, see here and here.)

“Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress,” Justice Anthony Kennedy wrote in the KSR case. And in case the lower court thought it hadn’t heard him correctly, he said it again: “The results of ordinary innovation are not subject of exclusive rights under the patent laws. Were it otherwise, patents might stifle, rather than promote, the progress of useful arts.”

The case involved a common situation: an invention that consists of combining, allegedly in a clever way, two earlier innovations, each of which has already been the subject of a patent. The patent appeals court had developed a test — which Kennedy said they were applying in a “narrow, rigid manner” — that, in practice, made it difficult to deny a patent to such combinations, no matter how obvious they might have seemed. As I read it, the ruling comes close to reversing that presumption, stressing “the need for caution in granting a patent” in those circumstances, because it “withdraws what is already known into the field of its monopoly and diminishes the resources available to skillful men.” The ruling also made clear that if a judge thinks an invention is obvious, he can dismiss the case before trial without having to let a jury make that determination. That significantly decreases the settlement value of a dubious patent. (A patent that is likely to make it all the way to a jury before it’s rejected has greater settlement value — because it will inflict more transaction costs on the defendant — than one that will likely get dismissed before trial on summary judgment.)

Just how significant the ruling was came across yesterday afternoon at an unusual press conference convened by the legal team for Teleflex, which was the losing party in the case. Press conferences by losing parties aren’t that common, and when they occur they are usually occasions for stressing silver linings and arguing that the Court’s ruling is actually much narrower than might appear at first glance. (After all, the lawyers are still representing their client, and that’s what the client will typically need to argue in his next case.)

But there wasn’t much gilding of the lily at this press conference. Robert Sterne, a patent lawyer for 29 years and the founding partner of the intellectual property firm of Sterne, Kessler, Goldstein & Fox, had this to say: The ruling will make it “harder, more costly, and more time consuming for inventors to obtain U.S. patents in all areas of technology, particularly mechanical inventions and software and methods of doing business.” He added that the pharmaceutical industry would probably be impacted, too, since drug companies try to prolong the terms of their strong patents with dubious, supplemental ones that might not measure up under the new standard.

Sterne also said he thought the ruling represented such a departure from existing practice that there would “most likely need to be guidelines issued by US Patent and Trademark Office to explain to the [examiners] what the implications will be from a practical point of view.”

At the same conference, Supreme Court advocate Tom Goldstein of Akin Gump Strauss Hauer & Feld, who had argued the case for Teleflex, wasn’t downplaying the significance of the loss either: “It’s fair to say that the economic consequences of the obviousness doctrine runs to the trillions of dollars. It’s the gateway to getting a patent, and intellectual property is at the heart of the American economic system.”

Fittingly, the ruling came down the same day that The American Lawyer announced that the Washington law firm of Wiley, Rein & Fielding had posted average profits-per-partner of almost $4.5 million, the largest number the magazine has ever recorded. The number catapulted Wiley Rein to first place in the nation in that category from just a 92nd-place showing last year. (For American Lawyer story and listings, see here and here.) The reason: its 61 equity partners were sharing a $245 million contingent fee award the firm received last year as its share of the $612 million settlement its client, NTP, won from Blackberry-manufacturer Research In Motion (RIMM). This was the case in which all Blackberry users in the country were threatened with service disruption after a jury found that RIM had violated patents held by NTP, which is an investment group that produces nothing and is composed largely of still more patent lawyers. NTP’s patents had all been tentatively declared invalid by the PTO upon reexamination at the time of the settlement, but the judge was threatening to issue an injunction anyway. Although the RIM litigation hinged on a slightly different issue — novelty, rather than obviousness — it brought home the extraordinary power of these fabulously valuable, yet puzzlingly evanescent property rights, which seem to vanish and reappear depending on whom has spoken to the PTO last.

We’re quite used to hearing that question posed (and answered “yes”) by champions of Linux and other forms of free and open source software (FOSS). But those people have an obvious axe to grind: users and developers of FOSS fear being sued for patent infringement by big corporations, like Microsoft (MSFT), that have amassed huge software patent portfolios.

Remarkably, however, those very folks with the huge software patent portfolios — Microsoft, the Business Software Alliance, the Software and Information Industry Association, Intel (INTC), Amazon (AMZN), Yahoo (YHOO), Autodesk (ADSK) and others — now seem to be posing that question themselves, although one has to read between the lines a little bit. I’m talking about the message that emerges from the array of briefs those companies and groups have filed in connection with the recently argued U.S. Supreme Court case Microsoft v. AT&T.

The focus of that case is a narrow one. It has to do with a provision of patent law that was enacted two decades ago in order to discourage a pretty obviously unfair practice. (See earlier posting here.) U.S. manufacturers who wanted to make here, but sell abroad, a hardware device that would infringe U.S. patents had been manufacturing all the components here and then shipping them abroad for final assembly–doing an end-run around our patent laws. A law was enacted that forbids that practice. The question posed by the Microsoft v. AT&T case, is whether that law should apply to situations where the only exported “component” in question is software written in the U.S. but copied and reinstalled in computers abroad. Interestingly enough, the near unanimous view in the software industry–judging from the briefs submitted by the parties I’ve listed above–is that it shouldn’t. (The specific facts of the case are these: Microsoft concedes that its Windows operating system infringes a U.S. patent belonging to AT&T (T) relating to coding and decoding human speech. It is willing to pay royalties on copies of Windows sold in the U.S., but contends that it shouldn’t have to pay for copies installed on computers abroad and sold there. AT&T, and the court below, say it should.)

In other words, all these parties with mighty software patent portfolios would rather, on balance, not be allowed to enforce those valuable assets abroad, so long as they could be assured that, in exchange, they also wouldn’t have to worry about being sued for infringing anyone else’s U.S. software patents abroad. That doesn’t sound like a ringing endorsement of the U.S. patent system, at least as it relates to software patents; it sounds like the opposite. (Patent law is supposed to benefit industry by spurring innovation; yet it sounds like the software industry regards it as a net drag on in its industry.)

Emery Simon, counsel to the Business Software Alliance, assures me that none of the software companies in his group agree with my reading of their position. “All of our members believe that intellectual property rights generally, and patents specifically, are essential to promoting their continued development and distribution of innovative products and services,” he writes in an email. “The problem is how the lower courts have interpreted [the statutory provision concerning exportation of components], it is not the fact that the patent law protects software.” He continues: “The way the law has been interpreted is inconsistent with the objective of the law: the purpose of the law is to promote innovation, the effect of the lower court’s decisions is to create disincentives to US-based innovation. So, if the current interpretation of the law stands, US tech companies will have a disincentive to do their development in the US.”

What he’s saying is that the law, as it’s currently being applied, may drive U.S. software makers to move their operations abroad to ensure that they can sell their products abroad without running afoul of the U.S. patent system. Still, it sounds to me like the “disincentive to US-based innovation” he’s complaining about is the burden of having to operate within the U.S. patent system itself. And a patent system is supposed to provide an incentive to innovate, not a disincentive.

I wonder if Simon’s position and mine might be compatible in this sense: Maybe the companies with big software patent portfolios believe that software should be protected by a patent system; they just don’t believe it should be covered by the patent system we happen to have in place in the United States at the moment.

Can others make sense of this situation?