How the software industry's litigation explosion is devastating small startups.

The contrast between Microsoft and Google helps to illustrate the problem. The U.S. Patent Office has issued Microsoft more than 19,000 patents since 1998, the year Google was founded. In contrast, Google has been issued fewer than 1,100. While Microsoft is undoubtedly an innovative company, it's hard to argue that it has been almost 20 times as innovative as Google in the last 14 years. Rather, Microsoft's larger portfolio reflects the fact that a decade ago, Microsoft was a mature company with plenty of cash to spend on patent lawyers, while Google was still a small startup focused on hiring engineers.

Most of Microsoft's patents cover relatively pedestrian features of software products. In a pending lawsuit against Barnes & Noble, for example, Microsoft asserts that the Nook infringes patents on the concept of selecting text by dragging "graphical selection handles" and the idea of displaying a website sans background image while waiting for the background image to load. Individually, these patents are unremarkable. But when consolidated in the hands of one firm, they form a dense "patent thicket." Microsoft's vast portfolio—reportedly numbering about 60,000 when acquisitions are taken into account—allows the Redmond, Wash., software giant to sue almost any software firm for patent infringement.

And that makes Microsoft a de facto gatekeeper to the software industry. This isn't a problem for other large incumbents, such as Apple and IBM, which have thousands of their own patents and use them to negotiate broad cross-licensing agreements. But small firms haven't had the time—or the millions of dollars—to acquire large portfolios.

And that's troubling because Silicon Valley has traditionally been a place where new firms can come out of nowhere to topple entrenched incumbents. Yet new firms wanting to compete against Microsoft, Apple, or IBM are increasingly forced to first license the incumbents' patents. It’s hard to win in the marketplace when you're forced to share your revenues with your competitors.

The patent system is a poor fit for the software industry. We shouldn't force the small, nimble firms (which make the field so dynamic) to divert scarce capital to defending themselves against patent lawsuits or amassing patent portfolios of their own. And computer software is already eligible for copyright protection, so patent protection is superfluous for rewarding software innovation.

Unfortunately, there appears to be little understanding among policymakers of the damage patents are doing in the software industry and particularly for the scrappy innovators they love to talk up. Congress excluded tax strategies from patentability in last year's patent reform legislation, but it did not even consider a similar carve-out for software. The Supreme Court seems equally oblivious to the damage patents are doing to the software industry. Writing in a 2010 patent case, Justice Kennedy worried that a lower court's ruling, if upheld, would "create uncertainty as to the patentability of software." He seemed to regard this as a bad thing, but software entrepreneurs like James Thompson are likely to see things differently.