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Patents in the Knowledge-Based Economy (2003)

Chapter: Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry

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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Patents in Software and Biotechnology

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Intellectual Property Protection in the U.S. Software Industry1

Stuart J. H. Graham and David C. Mowery

Haas School of Business

University of California, Berkeley

INTRODUCTION

The software industry is a knowledge-intensive industry whose output is information, the coded instructions that guide the operations of a computer or a network of computers. Both the inputs and much of the output of this industry consist of intangibles, the prices of which contain considerable Schumpeterian rents. The rewards to innovators in the software industry of the 1980s and 1990s were extraordinary, as illustrated by the meteoric rise of William Gates III to control of the largest personal fortune in the world. The modern computer software industry thus is an extreme example of an industry in which the returns to innovators’ investments, and in many cases market structure, are influenced by the ownership of intellectual property. As such, it is hardly surprising that the legal framework establishing and regulating ownership of such property has attracted considerable attention and debate.

The “modern” computer software industry of the twenty-first century differs from the software industry of the 1950s or 1960s, most notably in the growth of mass markets for so-called packaged software. These differences are reflected in the central importance of formal protection of intellectual property. The increased importance of formal intellectual property rights protection, as well as the changing economic and legal importance of different instruments for such protection, create significant challenges for U.S. intellectual property rights policy.

1  

We are grateful to participants in the STEP Board conference on “The Operation of the Patent System,” participants in the U.C. Berkeley Innovation Seminar, and to Professors Rosemarie Ziedonis, Wesley Cohen, and Brian Silverman for comments on the paper. We also appreciate assistance with our analysis of patenting data from Arvids Ziedonis. This chapter draws on research supported by the Andrew Mellon Foundation and the National Research Council.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Although the computer software industry is a global industry, significant differences remain among the software industries and the associated intellectual property regimes of the industrial economies. Domestic lobbying for the creation or modification of legal regimes covering this relatively new form of intellectual property has contributed to differences in the level and characteristics of intellectual property rights for computer software among major industrial economies. The recent controversies over business methods patents and the response by both Congress and the U.S. Patent and Trademark Office (USPTO) to these controversies (see below) are only the latest examples of this endogenous character of national intellectual property rights regimes.

This chapter surveys intellectual property rights policies and controversies in the U.S. computer software industry. Immediately below, we discuss the historical development of the U.S. software industry, highlighting the ways in which the role, structure, and importance of formal intellectual property rights have changed over the course of the industry’s development. We then present data on the (limited) portion of the software industry for which reliable indicators of the intensity of patenting activity during the 1980s and 1990s can be computed, focusing on patenting by specialized packaged software firms. These indicators cover the “propensity to patent” (patents per R&D dollar) and provide some evidence on change over time in the “importance” of these firms’ patents. We also discuss patenting by large electronics systems firms in the same patent classes and compare the patenting behavior (and the “importance” of their patents) of the electronics systems firm that for many years was also the leading vendor of software, IBM, and the largest specialized packaged software firm, Microsoft. After a brief discussion of the changing prominence of U.S. universities as patenters in software, we examine the changing importance of copyright and patent protection of software-related intellectual property during the 1980s and 1990s. Our conclusion considers some of the policy implications of this analysis.

THE HISTORICAL DEVELOPMENT OF THE COMPUTER SOFTWARE INDUSTRY

The growth of the global computer software industry has been marked by at least four distinct eras spanning the 1945-2001 period. The first era (1945-1965) covers the development and commercialization of the computer. The gradual adoption of “standard” computer architectures in the 1950s supported the emergence of software that could operate on more than one type of computer or in more than one computer installation. In the United States, the introduction of the IBM 650 in the 1950s, followed by the even more dominant IBM 360 in the 1960s, provided a large market for standard operating systems and application programs. The emergence of a large installed base of a single mainframe architecture occurred first and to the greatest extent in the United States. Nonetheless,

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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most of the software for mainframe computers during this period was produced by their manufacturers and users.

During the second era (1965-1978), independent software vendors (ISVs) began to appear. During the late 1960s, producers of mainframe computers “un-bundled” their software product offerings from their hardware products, separating the pricing and distribution of hardware and software. This development provided opportunities for entry by independent producers of standard and custom operating systems, as well as independent suppliers of applications software for mainframes. Unbundling occurred first in the United States and has progressed further in the United States and Western Europe than in the Japanese software industry.

Although independent suppliers of software began to enter in significant numbers in the early 1970s, computer manufacturers and users remained important sources of both custom and standard software in Japan, Western Europe, and the United States during this period. Some computer “service bureaus” that had provided users with operating services and programming solutions began to un-bundle their services from their software, providing yet another cohort of entrants into the independent development and sale of traded software. Sophisticated users of computer systems, especially users of mainframe computers, also created solutions for their applications and operating system needs. A number of leading suppliers of traded software in Japan, Western Europe, and the United States were founded by computer specialists formerly employed by major mainframe users.

During the third era (1978-1993), the development and diffusion of the desktop computer produced explosive growth in the traded software industry. Once again, the United States was the “first mover” in this transformation, and the U.S. domestic market became the largest single market for packaged software. Rapid adoption of the desktop computer in the United States supported the early emergence of a few “dominant designs” in desktop computer architecture, creating the first mass market for packaged software. The independent vendors that entered the desktop software industry in the United States were largely new to the industry. Few of the major suppliers of desktop software came from the ranks of the leading independent producers of mainframe and minicomputer software, and mainframe and minicomputer ISVs are still minor factors in desktop software.

Rapid diffusion of low-cost desktop computer hardware, combined with the emergence of a few “dominant designs” for this architecture, eroded vertical integration between hardware and software producers and opened up opportunities for ISVs. Declines in the costs of computing technology have continually expanded the array of potential applications for computers; many of these applications rely on software solutions for their realization. A growing installed base of ever-cheaper computers has been an important source of dynamism and entry into the traded software industry, because the expansion of market niches in ap-

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

plications has outrun the ability of established computer manufacturers and major producers of packaged software to supply them.2

Estimates of the relative size of the “packaged” and “custom” software markets are extraordinarily scarce, reflecting the failure of public statistical agencies to collect reliable data on this rapidly growing component of the “information economy.” Nonetheless, the few existing estimates suggest that the market for “packaged” software exceeded that for “custom” software by the mid-1980s. Data reported in Mowery (1996), which summarize surveys compiled by the OECD and the International Data Corporation (IDC), indicate that global consumption of “packaged” software amounted to roughly $18 billion in 1985 (current dollars) versus $11.6 billion for “custom” software. U.S. consumption of “packaged” and “custom” software, both of which were overwhelmingly domestic in origin, amounted to $12.6 billion and $4.2 billion, respectively, in 1985. Global consumption of packaged software in 1996 reached $109 billion, according to IDC estimates published in the Department of Commerce’s 1998 U.S. Industry and Trade Outlook, and the Department estimated that global consumption would amount to more than $221 billion by 2002 (U.S. Department of Commerce, 1998, p. 28-3 et seq.). More recent estimates of the size of U.S. or global consumption of “custom software” unfortunately are unavailable; but most studies of the computer software industry (e.g., OECD, 1998) suggest that consumption and shipments of packaged software have grown much more rapidly than those for custom software during the 1985-2002 period.

The packaged computer software industry now has a cost structure that resembles that of the publishing and entertainment industries much more than that of custom software—the returns to a “hit” product are enormous, and production costs are low. And like these other industries, the growth of a mass market for software has elevated the importance of formal intellectual property rights. An important contrast between the software industry and the publishing and entertainment industries, however, is the importance of product standards and consumption externalities in the software market. Users in the mass software market often resist switching among operating systems or even well-established applications because of the high costs of learning new skills as well as their demand for an abundant library of applications software to complement an operating system. These switching costs typically are higher for the less-skilled users who dominate mass markets for software and support the development of “bandwagons” that create de facto product standards. As the widespread adoption of desktop computers created a mass market for software during the 1980s, these de facto product standards in hardware and software became even more important to the commercial fortunes of software producers than was true during the 1960s and 1970s.

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Bresnahan and Greenstein (1996) point out that a similar erosion of multiproduct economies of scope appears to have occurred among computer hardware manufacturers with the introduction of the microcomputer.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

The fourth era in the development of the software industry (1994 to the present) has been dominated by the growth of networking among desktop computers within enterprises through local area networks linked to a server and/or the Internet, which links millions of users. Networking has opened opportunities for the emergence of new software market segments,3 the emergence of new “dominant designs,” and, potentially, the erosion of currently dominant software firms’ positions. Like previous eras in the industry’s development, the growth of network users and applications has been more rapid in the United States than in other industrial economies, and U.S. firms have maintained dominant positions in these markets (see Mowery and Simcoe, 2001).

How has the growth of the Internet changed the economics of intellectual property protection in the software industry? At least three different effects are apparent thus far in the Internet’s development. First, the widespread diffusion of the Internet has created new channels for low-cost distribution and marketing of packaged software, reducing the barriers to entry into the packaged software industry that are based on the dominance of established distribution channels by large packaged software firms. In this respect, the Internet expands the possibilities for rapid penetration of markets by a “hit” packaged software product—in the jargon of the software industry, a “killer app[lication]”—which enhances the economic importance of protection for these types of intellectual property. The Internet also is an important factor in the growth of patents on software-embodied “business methods,” many of which concern tools or routines employed by online marketers of goods and services.

But the Internet has also provided new impetus to the diffusion and rapid growth of a very different type of software, “open source” software. Although so-called shareware has been important throughout the development of the software industry, the Internet’s ability to support rapid, low-cost distribution of new software and, crucially, the centralized collection and incorporation into that software of improvements from users has made possible such widely used operating systems as Linux and Apache (see Kuan, 1999 and Lerner and Tirole, 2000). The Internet thus has increased the importance of formal protection of some types of software-related intellectual property while simultaneously supporting the growth of open source software, which does not rely on such formal instruments of intellectual property protection.

THE EVOLUTION OF INTELLECTUAL PROPERTY RIGHTS POLICY AND PRACTICE IN THE U.S. SOFTWARE INDUSTRY

This study is primarily concerned with intellectual property rights in software that combine some grant of limited monopoly in exchange for an element of

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For example, the operating system software that is currently installed in desktop computers may reside on the network or the server.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

disclosure or public use. As such, it is appropriate to examine copyright and patent protection, because software has been brought underneath the umbrella of each of these regimes during the last several decades. In the near future, however, the use by software innovators of legal protections in the areas of trade secret,4 misappropriation,5 trademark,6 and even the Semiconductor Chip Protection Act7 will remain important.

Copyright

Copyright protection for software innovation was singled out by policymakers during the 1970s as the preferred means for protecting software-related intellectual property (Menell, 1989). In its 1979 report, the National Commission on New Technological Uses of Copyrighted Works (CONTU), charged with making recommendations to Congress regarding software protection, chose copyright as the most appropriate form of protection for computer software (CONTU, 1979). Because copyright protection adheres to an author-innovator with relative ease and has a long life—now upwards of 120 years for works created for hire—the Commission determined that copyright was the preferred type of intellectual property protection for software. Congress adopted the Commission’s position when it wrote “computer program” into the Copyright Act in 1980.8

The federal judiciary’s application of copyright to software in the aftermath of the CONTU initially promised strong protection for inventors. Apple Computer, Inc. v. Franklin Computer Corp.9 is an early and important case of copyright litigation in packaged software. Although the federal judiciary had long held that copyright protected only “expression” in works,10 the court in Apple Computer held that Apple’s precise code was protected by its copyright. The

4  

A trade secret is formally some information used in a business that, when secret, gives one an advantage over competitors. The secret must be both novel and valuable. Metallurgical Industries, Inc. v. Fourtek, Inc., 790 F.2d 1195 (1986).

5  

Collectors of valuable information can prevent competitors from using the information. International News Service v. Associated Press, 248 U.S. 215 (1911).

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Protects names, words, and symbols used to identify or distinguish goods and to identify the producer. Zatrains, Inc. v. Oak Grove Smokehouse, Inc., 698 F.2d 786 (5th Cir., 1983).

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Protection is available for software embodied in semiconductor chips—so-called mask works. E.F. Johnson v. Uniden Corp. of America, 653 F. Supp. 1485 (D. Minn. 1985).

8  

17 U.S.C. sec. 101, sec. 117 (as amended 1980). For a more complete discussion, see Menell (1989).

9  

714 F.2d 1240 (3rd Cir. 1983). Consistent with its position as a leading firm in the packaged software industry Microsoft, which supported stronger formal protection for software-related intellectual property, filed an amicus curiae brief on behalf of Apple in this case.

10  

Historically, a major distinction in the copyright law has been that ideas are not protected, only expressions are. Baker v. Selden, 101 U.S. 99 (1879).

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

court concluded that efforts by a “follower” firm to use the copyright holder’s code for purposes of achieving compatibility with the original software were in-consequential to the determination of whether infringement had occurred. This decision strengthened copyright protection considerably, making it possible for one firm’s copyrighted software to block the innovative efforts of others. Subsequent decisions—the so-called “look and feel” cases—extended traditional copyright protection of “expression” to such “nonliteral” elements of software as structure, sequence, and organization.11

Subsequent court decisions, however, narrowed the protection provided by copyright for software-related intellectual property. The sweeping interpretation of copyright protection in Apple Computer was narrowed and weakened considerably in a series of copyright infringement cases brought by Lotus Development. Lotus successfully sued Paperback Software International over the latter’s alleged imitation of the “look and feel” of Lotus’s spreadsheet software in a case that Lotus won in 1990. Lotus then sued Borland International over the alleged infringement by Borland’s “Quattro” software of the “look and feel” of Lotus’s 1-2-3 spreadsheet software in a case that lasted for six years, producing four opinions in a federal District Court and appeals to both the Court of Appeals and the U.S. Supreme Court. The District Court found that Borland had infringed Lotus’s 1-2-3 spreadsheet software. Borland rewrote its software to achieve partial compatibility with elements of Lotus’s 1-2-3 software, but this modification also was met with infringement findings by the District Court and a permanent injunction banning its sale.12

The Court of Appeals ultimately reversed some of the District Court’s conclusions, arguing that “second movers” in the software industry must be allowed to emulate and build on parts of the innovator’s code and methods.13 The decision of the Court of Appeals was affirmed in 1996 by the Supreme Court in a 4-4 decision.14 The Borland decision weakened the strong protection for software inventions provided by Apple Computer, Inc. v. Franklin Computer Corp, and along with other decisions affirming the strength of software patents may have

11  

Computer Associates Int’l v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992); Whelan Associates v. Jaslow Dental Laboratory, 797 F.2d 1222 (3rd Cir. 1986).

12  

Lotus Development Corp. v. Borland Int’l, Inc., 788 F. Supp. 78 (D. Mass. 1992)(finding Quattro a virtual copy of Lotus’s menu structure); Lotus Development Corp. v. Borland Int’l, Inc., 799 F. Supp 203 (D. Mass. 1992); Lotus Development Corp. v. Borland Int’l, Inc., 831 F. Supp. 202 (D. Mass. 1993); Lotus Development Corp. v. Borland Int’l, Inc., 831 F. Supp. 223 (D. Mass. 1993).

13  

Lotus Development Corp. v. Borland Int’l, Inc., 49 F.3d 807 (1st Cir. 1995).

14  

116 S. Ct. 804 (1996).

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

contributed to increased reliance by some U.S. software firms on patents in the 1990s.15

Patents

In contrast to copyright, federal court decisions since 1980 have broadened and strengthened the economic value of software patents. Although some early cases during the 1970s supported the initial stance of the U.S. Patent and Trademark Office (USPTO) in stating that software algorithms were not patentable,16 judicial opinions have shifted since then to support the use of patents in software (Samuelson, 1990).17 In the cases of Diamond v. Diehr18 and Diamond v. Bradley,19 both decided in 1981, the Supreme Court announced a more liberal rule that permitted the patenting of software algorithms, strengthening patent protection for software (Merges, 1996). The economic value of these patents was highlighted in several high-profile cases during the 1990s. For example, a 1994 court decision found Microsoft liable for patent infringement and awarded $120 million in damages to Stac Electronics. The damages award was hardly a crippling blow to Microsoft, but the firm’s infringing product had to be withdrawn from the market temporarily, compounding the financial and commercial consequences of the decision (Merges, 1996).

As the USPTO adopted a more favorable posture toward applications for software patents, the ability of patent examiners to identify “novelty” in an area of technology in which patents historically had not been used to cover major innovations was criticized well before the surge of “business methods” software patent applications in 1998 and 1999. The celebrated “multimedia” patent issued by the USPTO to Compton Encyclopedias in 1993 is one example of the difficulties associated with a lack of patent-based prior art. On November 15, 1993, Compton’s Newmedia announced that it had won a “fundamental” patent for its

15  

Ironically, in light of subsequent controversies over the role of software patents, Menell’s influential 1989 analysis of intellectual property protection of software, written in the wake of the strong judicial interpretation of copyright embodied in Apple Computer, Inc. v. Franklin Computer Corp., argued that patents had significant advantages over copyright as a means for protecting computer applications software: “The patent system’s threshold requirements for protection—novelty, utility, and nonobviousness—are better tailored than the copyright standard to rewarding only those innovations that would not be forthcoming without protection” (Menell, 1989, p. 47). As we note below (see also Merges, 1999), the debate over software patents centers on precisely these issues—Is the USPTO able to apply these requirements with sufficient rigor to prevent the issue of low-quality patents?

16  

Gottschalk v. Benson, 409 U.S. 63 (1972).

17  

Samuelson (1990) argues that the USPTO was at odds with the Court of Customs and Patent Appeals (CCPA) throughout the 1970s over the patentability of software and concludes that the CCPA’s views in favor of patentability ultimately triumphed.

18  

450 U.S. 175 (1981).

19  

450 U.S. 381 (1981).

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

multimedia software that rapidly fetched images and sound.20 The patent was quite broad, covering

a database search system that retrieves multimedia information in a flexible, user-friendly system. The search system uses a multimedia database consisting of text, picture, audio and animated data. That database is searched through multiple graphical and textual entry paths.21

Compton’s president, Stanley Frank, suggested that the firm did not want to slow growth in the multimedia industry, but he did “want the public to recognize Compton’s Newmedia as the pioneer in this industry, promote a standard that can be used by every developer, and be compensated for the investments we have made.” Armed with this patent, Compton’s traveled to Comdex, the computer industry trade show, to detail its licensing terms to competitors, which involved payment of a 1 percent royalty for a nonexclusive license.22

Compton’s appearance at Comdex launched a political controversy that culminated in an unusual event—the USPTO reconsidered and invalidated Compton’s patent. On December 17, 1993, the USPTO ordered an internal re-examination of Compton’s patent because, in the words of Commissioner Lehman, “this patent caused a great deal of angst in the industry.”23 On March 28, 1994, the USPTO released a preliminary statement declaring that “[a]ll claims in Compton’s multimedia patent issued in August 1993 have been rejected on the grounds that they lack ‘novelty’ or are obvious in view of prior art.”24 This declaration was confirmed by the USPTO in November of 1994.25

Patents in “Business Methods”

Recent federal judicial decisions have continued to support the rights of patentholders and have expanded the definition of “software” subject to protection by patent. On August 23, 1998, the Court of Appeals for the Federal Circuit (CAFC) upheld the validity of a “business methods” software patent in State

20  

Peltz, J. “Compton’s wins patent covering multimedia,” Los Angeles Times, November 16, 1993, D:2. The Compton’s patent was entitled “Multimedia Search Systems Using a Plurality of Entry Path Means Which Indicate Interrelatedness of Information.” Markoff, J. “Patent Office to Review A Controversial Award,” The New York Times, December 17, 1993, D:2.

21  

Abstract, United States Patent Number 5,241,671, August 31, 1993.

22  

Abate, T. “Smaller, faster, better; Tech firms show off their latest wonders at trade show and foretell a user-friendly future,” San Francisco Examiner, November 21, 1993, E:1.

23  

Markoff, J. “Patent Office to Review A Controversial Award,” The New York Times, December 17, 1993, D:2.

24  

Riordan, T. “Action Was Preliminary On a Disputed Patent,” The New York Times, March 30, 1994, D:7.

25  

Orenstein, S. “U.S. Rejects Multimedia Patent,” The Recorder, November 1, 1994, 4.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

Street Bank v. Signature Financial Group.26 In ruling that the software was patentable, the court announced that

the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces “a useful, concrete, and tangible result.”27

The opinion has been criticized for supporting the patentability of common methods and systems previously considered unpatentable.28

Since the State Street decision, “business methods” patenting has expanded rapidly, especially for Internet-based transactions and marketing techniques. Undersecretary of Commerce and USPTO Director Dickinson noted in March 2000 that the number of applications for such patents had expanded from 1,275 in fiscal 1998 to 2,600 in fiscal 1999, resulting in the issue of 600 business methods patents in 1999. As in the case of the Compton’s patent, the proliferation of Internet-based “business methods” patents has been facilitated by a lack of patent-based prior art available for review by USPTO examiners.29 Although the doubling in business methods patent applications during fiscal 1998-1999 is noteworthy, issued patents in this class accounted for less than 0.5 percent of all issued patents in 1999.30

Political reactions to the surge in business methods patents and the controversy surrounding their validity were swift and involved both Congress and the USPTO. In late 1999, Congress passed the American Inventor Protection Act (AIPA). The AIPA was originally drafted to revise the U.S. patent system to be consistent with the World Trade Organization (WTO) agreements that concluded the Uruguay Round of trade negotiations, but additional provisions were added specifically to address the business methods patent controversy. One provision of

26  

149 F.3d 1368 (CAFC, 1998).

27  

149 F.3d 1368 (CAFC, 1998).

28  

Tim Berners-Lee, developer of the HTML software code that is widely used for the creation of websites, argues that some of the Internet business-methods patents “combine well-known techniques in an apparently arbitrary way, like patenting ‘going shopping in a yellow car on a Thursday.’” (Waldmeir and Kehoe, 1999). A patent attorney has suggested that the opinion is so sweeping as to allow Newton to patent the calculus (National Public Radio, 1998).

29  

“‘Now we’re dealing with a much broader universe of “prior art,”’ says J.T. Westermeier, a Washington D.C. internet attorney with Piper and Marbury, pointing out that many allegedly novel Internet business methods may already have been in use at universities or elsewhere” (Waldmeir and Kehoe, 1999).

30  

These data count only applications and issued patents in U.S. patent class 705 (“Data Processing: Financial, Business Practice, Management or Cost/Price Determination”) as “business methods” patents. Depending on one’s definition of this elusive concept, the number of applications and issued patents could in fact be substantially greater.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

the AIPA that brought U.S. patent policy into conformity with WTO requirements stipulated the publication of most U.S. patent applications within 18 months after their submission to the USPTO. This publication requirement should make it easier for a would-be inventor to verify that he or she is not infringing pending patents. A second provision of the AIPA that was inserted in response to the business methods patenting controversy created a “first-to-invent” defense against infringement claims. Defendants who can show that they were practicing the relevant method or art one year or more before the filing of the patent application are protected against infringement suits. This provision also should reduce the exposure of inventors to infringement suits based on their use of long-established, nonpatented prior art.

Administrative responses to the business methods controversy included the USPTO’s “Business Methods Patent Initiative,” unveiled in the spring of 2000. The Initiative included several provisions:

  1. Hiring more than 500 new patent examiners specializing in software, computer, and business methods applications

  2. Tripling the number of examiners assigned to examine applications in Class 705, the primary locus of business methods patenting activity

  3. Expanding the number of nonpatent “prior art” databases to which these examiners have access

  4. Requiring that nonpatent and foreign prior art be searched systematically for all applications in Class 705

  5. Requiring examination of all applications in Class 705 by a second examiner in addition to the primary examiner assigned the application

This administrative initiative has raised the level of scrutiny devoted to business methods patent applications and may have reduced the rate of issue of new patents in this class. The USPTO reported in 2001 that the number of examiners assigned to business methods patents increased from 45 at the beginning of fiscal 2000 to 82 by the end of fiscal 2001. The same report predicted that roughly 10,000 applications would be filed in Class 705, which covers most business methods patents, in fiscal 2001, an increase of nearly fourfold since fiscal 1999. However, the USPTO issued approximately 433 patents in Class 705 in fiscal 2001, a decrease of more than 25 percent from the number issued in this class in fiscal 1999.31 The lags involved in review of patent applications (18 months to 2 years) and the rapid growth in applications during fiscal 1999-2001 mean that the number of business methods patents issued by USPTO almost certainly will increase in the future. Nevertheless, the drop in the number of issued business meth-

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

ods patents during 1998-2001 in the face of swelling applications suggests that the intensified scrutiny of applications in this class may indeed have reduced the rate of issue of business patents somewhat.

The economic significance and validity of U.S. business methods patents ultimately will be determined through litigation.32 The “re-examination” system instituted in 1980 allows for interested parties to request that an issued patent be re-examined by the USPTO, but this procedure bears little resemblance to the more elaborate “oppositions” process of the European Patent Office (EPO) and a number of European countries. In particular, re-examinations affect a smaller share of issued patents and result in the invalidation or amendment of a smaller share of challenged patents than is true of the EPO oppositions process (see Graham et al., 2003; Merges, 1999).33

Although litigation provides rigorous scrutiny of patent claims and validity, it is a costly system for maintaining “patent quality”—the costs of a “typical” infringement suit are estimated to run to $1 million to 3 million. Moreover, litigation is a lengthy process,34 meaning that the validity of key “foundational” patents in software or business methods, those on which subsequent inventors may rely (and for which they are either paying royalties or risking costly infringement penalties), may take years to be established. In fields that are evolving as rapidly as software, such delays could contribute to high uncertainty, high transactions costs, and impediments to innovation.

The nonlitigation avenues to ascertain the validity of business methods patents in the United States thus are limited, and the ultimate effectiveness of the Congressional and administrative initiatives described above cannot yet be ascertained. The possibility nonetheless exists that the global nature of the markets in which business methods patents are applied, especially those that rely on the Internet for their operation, may limit the proliferation of “junk patents.” Given the footloose nature of the Internet,35 global recognition of Internet-based busi-

32  

The Internet vendor of books and other products, Amazon.com, filed suit in 1999 against Barnes & Noble over the latter’s alleged infringement of its patent on “one-click” order methods. Although Amazon was granted an injunction against Barnes & Noble’s alleged infringement of its “one-click” patent by the District Court for the Western District of Washington State in December 1999, the CAFC reversed the judge in February 2001 and remanded the case to the District Court. Given the CAFC’s central role in establishing the patentability of business methods, its reversal of an injunction in this case is noteworthy.

33  

According to Merges (1999), EPO opposition proceedings result in the invalidation of roughly one-third of the opposed patents, whereas the U.S. re-examination process invalidates only 12% of the patents for which re-examinations are requested.

34  

One estimate suggests that the duration of the “average” patent suit in District Court is 31 months (Magrab, 1993).

35  

An Internet enterprise can be established virtually anywhere in the world that has a reasonably well-developed infrastructure.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

ness methods patents may be necessary to establish their economic value. At present, most European patent systems do not grant validity to business methods patents that do not have a “technical effect” (Hart et al., 1999). The precise meaning of this distinction is subject to considerable debate and interpretation, suggesting that at least some but by no means all business methods patents issuing in the United States will be upheld as valid within Europe. The value of many U.S. business methods patents therefore may be limited, although much uncertainty remains concerning their validity in foreign jurisdictions.

PATENTING TRENDS IN THE U.S. SOFTWARE INDUSTRY

In this section, we examine the limited data on trends in software patenting in the United States during the 1980s and 1990s. As with most other elements of the software industry, definitional issues loom large—What is a software patent? In addition, the rapid growth in the number of software-related USPTO patents complicates longitudinal analysis: We wish to examine change over time in the number of software patents rather than change that may reflect a reclassification of patents from “all other” to a “software-related” category. Lacking a clear a priori definition of “software-related” patent classes, we focused on the following 11 main groups in the International Patent Class (IPC) classification scheme:36

G06F

Electric Digital Data Processing:

3/

Input arrangements for transferring data to be processed into a form capable of being handled by the computer…

5/

Methods or arrangements for data conversion without changing the order or content of the data handled…

7/

Methods or arrangements for processing data by operating upon the order or content of the data handled…

9/

Arrangements for programme control…

11/

Error detection; Error correction; Monitoring…

12/

Accessing, addressing or allocating within memory systems or architectures…

36  

The IPC is a hierarchical classification system consisting of sections, classes, subclasses, and groups (main groups and subgroups). The IPC divides all technological fields into sections (designated by a capital letter), each section into classes (designated by a two-digit number), and each class into subclasses (designated by a capital letter). For example, “G 06 F” represents Section G, class 06, subclass F. Each subclass is in turn broken down into subdivisions called “groups” (which are either main groups or subgroups, although the former “main group” is of immediate concern in this paper). Main group symbols consist of the subclass symbol followed by a one- to three-digit number and an oblique stroke, for example, G 06 F 3/.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

13/

Interconnection of, or transfer of information or other signals between, memories, input/output devices or central processing units…

15/

Digital computers in general…

G06K

Recognition of Data; Presentation of Data; Record Carriers; Handling Record Carriers

9/

Methods or arrangements for reading or recognising printed or written characters or for recognising patterns

15/

Arrangements for producing a permanent visual presentation of the output data

H04L

Electric Communication Technique

9/

Arrangements for secret or secure communication

These main groups were identified by examining overall patenting during 1984-1995 by the six largest U.S. producers of personal computer software, based on their calendar 1995 revenues.37 These patent classes account for 57.1 percent of the more than 600 patents assigned to the 100 largest packaged software firms identified by Softletter, a trade newsletter, in its 1997 tabulation.38 The 11 groups account for a higher share of the patents of these six firms during this period (72.8 percent) when we exclude unclassified design patents and IPC groups that were created after 1984 (e.g., main group G06F 17/ came into existence in 1990) (Table 1).

Because they exist throughout the 1984-1997 period, these patent classes provide a useful basis for examining time trends in U.S. software patenting. They do not map precisely to the universe of software patenting, but they do provide imperfect but reliable longitudinal coverage of the segment of the overall software industry identified by the OECD as “…the most dynamic segment of the core software industry (computer programming services, pre-packaged software, and integrated system design)” (OECD, 1998, p. 9). The data in Figure 1 indicate that the share of all U.S. patents accounted for by patents in these IPC groups more than doubled during 1987-1997, from 1.7 percent in 1987 to 3.8 percent in 1997. Moreover, growth in this share appears to accelerate after 1991, possibly as

37  

As reported in the Softletter 100 (1996) this group includes Microsoft, Novell, Adobe Systems, Autodesk, Intuit, and Symantec. We chose to focus our analysis on the patents assigned to specialized, publicly traded software firms because the computation of a “software patent propensity” measure (software patents deflated by R&D spending) is meaningful only for firms reporting R&D spending for which one can assume that the bulk of this R&D spending is devoted to software development. As a result, our “definition” of software classes is somewhat narrower than that employed by Kortum and Lerner (1999), although they also found that the fraction of overall U.S. patenting accounted for by software patents increased during the 1985-1991 period.

38  

We are grateful to Softletter for permission to use these data.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

TABLE 1 Patenting by the Softletter 100 (1997), 1984-1997 (Total Patents = 627)

(a)

Int’l Patent Class

(b)

Patent Count

(c)

Share of All Firm Patents

(d)

Cumulative Sum Firm Patents

G06F 15/

86

13.7%

13.7%

G06F 9/

66

10.5%

24.2%

G06F 3/

54

8.6%

32.9%

G06F 13/

42

6.7%

39.6%

G06F 11/

26

4.1%

43.7%

G06F 12/

25

4.0%

47.7%

G06K 9/

22

3.5%

51.2%

H04L 9/

16

2.6%

53.7%

G06K 15/

14

2.2%

56.0%

G06F 7/

4

0.6%

56.6%

G06F 5/

3

0.5%

57.1%

a reaction to the more expansive judicial treatment of the breadth and strength of patents in the 1990s.

Software-Related Patenting by Packaged Software and Electronic Systems Firms, 1987-1997

This section examines the patenting behavior of large U.S. software firms during the 1980s and 1990s, focusing on large U.S. packaged software firms (based on revenues) identified in the 1997 tabulation of the 100 leading U.S.

FIGURE 1 Packaged software patents as share of all patents, 1987-1997.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

packaged software firms compiled by the Softletter. These firms are of particular interest because packaged software is the product area in which formal intellectual property protection has become more important since 1980. These firms also are among the few U.S. firms whose publicly reported R&D spending can be treated for analytic purposes as devoted largely to software R&D, in contrast to diversified producers of electronic systems.

The 100 largest U.S. packaged software firms increased their share of software patenting during the 1987-1997 period from less than 0.06 percent in of all software patents in 1988 to nearly 3.25 percent in 1997 (Figure 2). Moreover, this trend is unchanged when Microsoft is eliminated from the ranks of the top 100 U.S. software firms (Figure 3), although the absolute magnitude of the increase in share is much smaller (from less than 0.1 percent in 1987 to slightly more than 0.7 percent in 1997). In both cases, the increase in large packaged software firms’ patenting activity is most pronounced for the 1990s. However, despite the fact that the largest U.S. packaged software firms have increased their patenting activity relative to other software firms, their share of patenting within our software-related patent classes remains far smaller than that accounted for by a sample of 12 large electronic systems and component firms assembled for purposes of comparison (IBM, Intel, Hewlett-Packard, Motorola, National Semiconductor, NEC, Digital Equipment Corporation, Compaq, Hitachi, Fujitsu, Texas Instruments, and Toshiba). As Figure 4 shows, the share of overall software patenting accounted for by this group of firms grew from slightly more than 35 percent in 1987 to more than 45 percent by 1997.

FIGURE 2 Large packaged-software firms’ software patents, share of all software patents, 1987-1997.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

FIGURE 3 Large packaged-software firms’ software patents, share of all software patents (excluding Microsoft), 1987-1997.

These electronic systems firms thus account for a larger share of overall software patenting throughout the “pro-patent” period of 1987-1997, and their share of overall software patenting increases by nearly 10 percent, a substantially larger growth in share than that of our sample of large packaged software firms. Moreover, our relatively restrictive definition of “software patents,” as well as our reliance on data from specialized producers of packaged software to develop this definition, mean that our data on patenting activity by these systems firms could understate their software-related patenting. For example, our definition of software excludes patenting activity in the “embedded software” (software that is

FIGURE 4 Electronic systems firms’ share of all software patenting, 1987-1997.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

incorporated directly into a product and whose operation typically is not controlled by the user) that is included in such products as microprocessor chips or measurement instruments, although this class of software is not likely to be the locus of intensive patenting. Because we do not have software-related R&D spending for these systems firms, however, we cannot determine whether the increase in their share of overall software patenting reflects a reallocation in their R&D activities to focus more intensively on software-related innovations or instead is a result of an increase in their software-related patent propensity. Below, we pursue this issue in a comparison of “patent propensity” for IBM, a systems firm that reports software-related R&D spending, and Microsoft for the 1992-1997 period.

Change in the “Patent Propensity” of Packaged Software Firms, 1987-1997

Our data for the sample of large packaged software firms enable us to analyze the “propensity to patent” of these firms, measured as the ratio of patents to constant-dollar R&D spending, during the 1987-1997 period (Figures 5 and 6).

FIGURE 5 Firm-level patent propensity, 3-year moving average, 1987-1997.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

FIGURE 6 Firm-level patent propensity, 3-year moving average, 1987-1997 (excluding Borland).

Firm-level patenting trends for a larger number of firms become almost unintelligible when presented in a single figure, and we therefore present data on trends in the average patenting propensity for the 15 largest U.S.-based packaged software firms (Figures 7 and 8). We also present data (Figure 9) on differences in the patenting propensities of “incumbents” (packaged software firms founded before 1985) and “entrants” (packaged software firms founded after that date).

Figures 5 and 6 display trends in firm-specific patenting propensities (a 3-year moving average) during 1987-1997 for the nine and eight largest U.S. personal computer software firms, respectively,39 with significant patenting activity in 1997. All of these firms are publicly traded and therefore report annual R&D spending. Microsoft, by far the largest of these firms and the loser in the 1994 infringement suit filed by Stac Electronics, displays an upward trend (increasing

39  

As identified in the 1997 Softletter rankings of the top 100 packed software firms. Figures 5 and 6 include and exclude, respectively, Borland/Inprise. Borland/Inprise is excluded from Figure 6 to “decompress” the scaling of the figure and to facilitate the clearer depiction of trends in the patenting propensities for the other seven large packaged software firms.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

FIGURE 7 Patent propensity, top 15 U.S. packaged software firms (1997), 3-year moving average, 1987-1997.

by roughly fourfold) in its post-1991 patenting propensity. Novell, Symantec, Wall Data, and Borland also exhibit increases in patenting propensity during the 1990s. Interestingly, the 1997 ratio of patents to R&D spending is highest for Borland, a packaged software firm with extensive experience in intellectual property litigation.

FIGURE 8 Patent propensity, top 15 U.S. packaged software firms (1997), 3-year moving average, 1987-1997 (excluding Microsoft).

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

FIGURE 9 Patent propensities of “incumbents” and “entrants,” 1990-1997.

Patent propensities for the largest U.S. software firms as a group also grew during the 1987-1997 period. Figures 7 and 8 show trends in the aggregate patenting-R&D spending ratio during 1987-1997 for the 15 U.S. personal computer software firms listed by Softletter among the top 100 for which data are available throughout this period (once again, we use a 3-year moving average).40 Both figures are weighted averages (weighted by R&D spending, which weights Microsoft heavily) of the patents-to-R&D spending ratios of these 15 firms. The weighted average exhibits a significant upward trend, reflecting the behavior of Microsoft. Nonetheless, excluding Microsoft from the data (Figure 8) does not change the basic conclusion; a modest increase in patent propensities is still apparent. Thus there is some evidence of increases in the aggregate patenting propensities of leading U.S. packaged software firms (as of 1997) during 1987-1997, although the size of this increase is affected by the behavior of the largest such firm.

Is increased patenting by large U.S. packaged software firms a result of entry by firms that are especially active patenters? We lack a clear basis for separating our group of large U.S. packaged software firms into “incumbents” and “en-

40  

The firms in the Softletter rankings for which 1986-1997 data are available from the Compustat Database and SEC reports include Microsoft, Adobe Systems, Novell, Autodesk, Symantec, The Learning Company, Activision, Borland, Phoenix Technologies, Quaterdeck, Micrografx, Caere, IMSI, Timberline Software, and Software Publishing.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

trants,” but on the basis of a visual examination of the data on founding dates for these firms, we chose 1985 to separate incumbents from entrants within the top 100 firms in 1997 (48 of these firms were founded before 1985). Figure 9 displays trends during 1990-1997 in the weighted average patenting propensities of the 15 largest incumbents and the 15 largest entrants (based on the 1997 Softletter ranking), defined as above.41 There is almost no time trend in the patenting propensities of entrants (indeed, their patent propensity declines during 1992-1994), but incumbents exhibit a steady increase in their patenting propensity. Moreover, this difference between incumbents and entrants remains when Microsoft is excluded.

We pointed out above that electronic systems firms’ share of overall software patenting substantially exceeded that of packaged software firms and that the increase in the systems firms’ share of overall software patenting during 1987-1997 exceeded that of large packaged software firms. However, the lack of software-related R&D investment data for these systems firms means that we are unable to determine whether changes in systems firms’ overall software patenting reflects a shift in their propensity to patent rather than growth in software-related R&D. IBM, however, began reporting software-related R&D investment data in its annual reports in 1992, enabling us to examine its software-related patent propensity for the 1992-1997 period. Figures 10 and 11 compare the 1992-1997 patent propensities of IBM, which for most of this period was the largest single producer of marketed software, and Microsoft, which overtook IBM in software-related revenues in 1997 (Table 2 reports software-related patents

FIGURE 10 International Business Machine patent propensity, 1992-1997.

41  

Our sample size and the length of the time series are limited by the need to sample only publicly traded firms, to enable us to compute the patent propensity measure.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

FIGURE 11 Microsoft patent propensity, 1992-1997.

and R&D spending for the two firms). The R&D data reported by these two firms may not be strictly comparable, because a portion of Microsoft’s total reported R&D investment may cover some fixed costs of maintaining an R&D facility that are not included in IBM’s reported software-related R&D investment.42 In addi

TABLE 2 IBM and Microsoft Software-Related R&D and Patenting, 1986-1997

 

IBM

Microsoft

Year

R&D (MM 1992$)

Patents

R&D (MM 1992$)

Patents

1986

NA

NA

24.9

1

1987

NA

NA

45.0

0

1988

NA

NA

79.8

1

1989

NA

NA

121.4

2

1990

NA

NA

191.6

3

1991

NA

NA

240.8

2

1992

1161.0

508

352.2

8

1993

1094.0

690

458.4

19

1994

779.0

965

581.6

26

1995

1114.0

1038

802.9

52

1996

1619.0

1200

1311.7

103

1997

1885

1166

1733.8

206

42  

The sharp swing in IBM’s reported software-related R&D investment during 1993-1995 raises further issues of accuracy and/or reclassification of certain R&D expenses as more or less “software related.”

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

tion, an unknown portion of Microsoft’s reported R&D spending includes development programs for hardware such as the firm’s recently announced “Xbox” and previous products. These data therefore may understate the Microsoft software-related patent propensity and overstate that for IBM.

Nonetheless, Figures 10 and 11 (which are not computed as moving averages) suggest that IBM is patenting in the software realm (as defined here) far more intensively than is Microsoft, which increased its patent propensity during the 1992-1997 period. IBM’s patent propensity increased from slightly more than 40 patents per $100 million in R&D spending to roughly 55 per $100 million in software-related R&D investment during 1992-1997. Microsoft, on the other hand, increased its patenting per $100 million in R&D from slightly more than 2 to almost 10, a nearly fivefold increase. The reported patent propensity of IBM in 1992 is 20 times that of Microsoft, although this gap narrows by 1997, when IBM is receiving “only” 5 times as many patents per R&D dollar as Microsoft. Both IBM and Microsoft increased their patent propensity during this period, but the proportionate increase in Microsoft’s patent propensity exceeds that for IBM.

The “Importance” of Packaged Software and Electronic Systems Firms’ Software Patents, 1987-1997

Increased patenting by large packaged software and electronic systems firms appears to track the trends in federal court decisions, as decisions such as Stac Electronics have been followed by increases in large firms’ patent propensities. A closely related issue concerns the “quality” of the software patents issued to these firms, relative to all patents in our software classes, during this period of growth in software-related patenting. As we noted above, the growing use of patents for the protection of intellectual property in the software industry raises unusual challenges. The examination of patents within the USPTO for novelty, utility, and nonobviousness relies heavily on the study of patent-based prior art. Has the lack of patent-based prior art resulted in USPTO examiners approving the issue of trivial, “junk” software patents to leading software firms, as critics (Aharonian, 1993) have argued?

To examine trends in the “quality” of recent industrial software patents, we analyzed the frequency of citations to the software patents obtained by our sample of large packaged software firms, relative to citations to all software patents (defined as above). We conducted an identical analysis for the patents issued to the 12 electronic systems firms discussed above. Because of the requirement for inventors to cite prior art and the need for examiners to supplement these citations to prior art, the number of citations received by a patent serves as a crude measure of its technological importance. Moreover, recent empirical work (Trajtenberg, 1990) has found that heavily cited patents also are of greater economic value.

Our measure of “relative importance” compares the citation rates of patents issued to the Softletter 1997 top 100 firms over the two years after issue of the

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

patent with the citation rates of all software patents issued in that year for three years after the year of issue. Relatively “important” patents will have citation ratios greater than one in value (i.e., they are cited more heavily than the average for all patents in the relevant classes), and relatively “unimportant” patents will have citation ratios of less than one. We compute the ratio of citation rates for firm patents to those for all software patents for two years after the date of issue. This patent citation measure is not sensitive to the truncation of the time period during which more recently issued patents can be cited, because it compares the citation rates of patents within the same cohort. Our citation measure also omits self-citations by the firms assigned the patent.

We computed this measure of patent “importance” for the patents issued during 1987-1997 to the 100 largest U.S. packaged software firms in 1997 (Figure 12) and our sample of electronic systems firms (Figure 13). This measure of patent importance for the packaged software firms (Figure 12) is greater than one in value through much of the 1987-1997 period, suggesting that the patents issued to the Softletter 100 software firms were cited more heavily during this period than were all software patents. Moreover, the modest upward trend in the measure through 1996 suggests that these firms’ patents were being cited with growing intensity, relative to all software patents, during 1987-1996. There is little evidence of a strong trend of improvement or decline in this measure of patent importance for electronic systems firms (Figure 13), but the relatively flat time trend in Figure 13 contrasts with the upward trend in Figure 12. There is no evidence in Figure 13 of an increase in the relative intensity of citations to these electronic systems firms’ software patents during the 1987-1997 period.

FIGURE 12 Citations to top 100 packaged software firms patents/all software patent citations, 1987-1997.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

FIGURE 13 Citations to electronic firms’ software patents/all software patent citations, 1987-1997.

The data in both Figures 12 and 13 must be interpreted with caution, because it is possible that the “importance” of all software patents dropped precipitously during this period—we are able to compare only the importance of the software patents issued to the Softletter 100 or those issued to this sample of electronic systems firms with the importance of the software patents issued to all inventors. We also cannot compare the importance of these software patents with that of non-software patents—instead, these indicators shed light only on the “relative importance” of the software patents (as defined above) assigned to large packaged software or electronic systems firms. Nor can we exclude the possibility that packaged-software firms’ patents are being cited more intensively because of the increased risk of infringement litigation involving questions of validity (Hall and Ziedonis, 2001).43 Nonetheless, these trends indicate that the relative importance of the patents issued to large specialized producers of PC software, firms that have intensified their patenting activity during the 1990s, has not deteriorated during this recent period of significant growth in their software patenting. They also suggest that increased patenting by large electronic systems firms has not resulted in significant declines in the rate of citation to these firms’ software-related patents, although these firms’ patents are not being cited more intensively either during the period.

University Software Patents

U.S. universities have long played a prominent role in the innovative activities of the U.S. software industry (Steinmueller, 1996; Mowery, 1999). Have

43  

Hall and Ziedonis (2001) suggest this possibility in discussing patent-citation trends in the semiconductor industry.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

universities assumed a similarly prominent role in software patenting since 1980, a period that has witnessed a significant increase in overall patenting activity by U.S. universities? The number of patents issued to U.S. universities and colleges more than doubled between 1979 and 1984, more than doubled again between 1984 and 1989, and doubled yet again between 1989 and 1997 (Table 3). Figure 14, taken from the 2000 survey of member universities published by the Association of University Technology Managers (AUTM, 2000), shows a considerable increase in university-assigned patents per academic R&D dollar during the 1990s for all respondents to the AUTM survey. In other words, the overall patent propensity of U.S. universities grew steadily during the 1990s. This increased academic patenting activity is attributable to the Bayh-Dole Act of 1980, as well as the rapid growth in academic research in biomedical technologies (Mowery, et al., 2001).

Surprisingly, however, in view of the significant increases in university patenting in other fields (e.g., biomedical technologies), U.S. universities account for a small share of overall software patenting (as we have defined it) throughout the 1984-1997 period. As Figure 15 shows, university patents have never accounted for even 2 percent of the annual flow of issued software patents in the United States, less than the 3.6 percent share of overall patents accounted for by U.S. universities in the late 1990s (Mowery and Sampat, 2001). Indeed, the 1990s witnessed a slight decline in the share of software patents accounted for by universities.

We analyzed trends in the “importance” of university software patents by using the same measure that we employed for our examination of the patents issued to U.S. software firms (Figure 16). In some contrast to the patents issued to the Softletter 100 firms, which increase in importance relative to all software patents, the importance of university software patents displays little or no trend during the 1987-1997 period. The value of the “importance ratio” drops from a

TABLE 3 Utility Patents Issued to U.S. Universities and Colleges, 1969-1997 (year of issue)

Year

Number of U.S. Patents

1969

188

1974

249

1979

264

1984

551

1989

1228

1994

1780

1997

2436

 

SOURCE: U.S. Patent and Trademark Office (1998).

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

FIGURE 14 Patents/R&D expenditures, all AUTM respondents, FY 1993-1999.

peak of nearly 3 in 1987 to a level slightly above 1, where it remains through 1996, increasing to nearly 2 by 1997.

This brief descriptive analysis of university patenting in software presents an interesting contrast to the discussion of industrial software patenting above. The

FIGURE 15 University software patenting as a share of all software patenting, 1987-1997.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

FIGURE 16 University software patent citations/software patent citations, 1987-1997

Bayh-Dole Act appears to have increased U.S. universities’ overall patent propensity during the 1990s, but we lack the necessary data to determine whether universities’ software-specific patent propensity has increased.44 Moreover, increased university patenting since 1980 is associated with a decline in U.S. universities’ share of software patents, perhaps because of intensified patenting activity by software firms.

THE RELATIONSHIP BETWEEN PATENTING AND COPYRIGHT IN SOFTWARE-RELATED INTELLECTUAL PROPERTY

As we noted above, both copyright and patent protection have been extensively employed in software-related intellectual property, and some of the current controversies over patents in software have precedents in debates over the advisability of copyrights for software. Indeed, one of the first scholarly analyses of methods for protecting software-embodied intellectual property (Menell, 1989) argued that patent protection of software was preferable because of the higher standards and more stringent reviews of prior art required for the issue of patents. Menell’s analysis implicitly assumed that patents and copyright are substitutes, rather than complements, for the protection of software-related intellectual property. Lemley and O’Brien (1997) also asserted that the “primary means of legal protection for computer software has shifted from copyright to patent.”

Nevertheless, little direct evidence has been adduced to support the contention that software inventors have shifted from copyright to patent. Indeed, a case can be made that copyright and patent protection are complements, rather than

44  

Indeed, the “user-active” character of much innovation in software, especially academic software innovation, means that innovation in software occurs in many academic departments all over university campuses, ranging from computer science to mechanical engineering to economics. As a result, obtaining the necessary data on academic “software-related” R&D funding to compute this patent propensity is nearly impossible.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

substitutes, in the protection of software-related intellectual property. Copyright protection of the software code (the expression) could complement patent protection of the underlying technical advance. Although neither Menell (1989) nor Lemley and O’Brien (1997) give serious consideration to a complementary relationship between patent and copyright protection in software, it is possible that commercial software developers are indeed using both, rather than substituting patents for copyright.

In this section, we examine new data on software copyright registrations in a preliminary analysis of the changing relationship between copyright and patent protection in software. Just as we did in the examination of patent data for large packaged software firms above, we seek to develop measures of the “copyright propensity” of large packaged software firms during the 1987-1997 period. A finding that this propensity remained constant or increased would constitute evidence of complementarity between the use of copyright and the use of patents to protect software-embodied intellectual property, because these firms have increased their patent propensities during this period. A finding that the copyright propensity has declined, however, would provide preliminary support for the hypothesis that copyright and patent protection are substitutes, consistent with the Lemley-O’Brien argument cited earlier, and that commercial software firms now are relying more heavily on patents than copyrights to protect their intellectual property.

Copyright Data

Our data on copyrighting of computer programs by packaged software firms are drawn from the U.S. Library of Congress (LOC) collection of registered U.S. copyrights. The LOC has data on all materials45 that have been registered for copyright with the U.S. Copyright Office since 1978. Each record includes the identity of the entity requesting registration of copyright, a unique registration number, and the media type. Three dates are recorded for each registration: the date of creation of the work; its date of publication; and its date of copyright registration. As of January 2001, the LOC copyright database included over 13 million records.

Using the list of the largest packaged software firms in 1997 provided by Softletter, we searched these LOC records for uniquely numbered copyrights registered on “computer programs.” Computer software can be designated as such by the author on the copyright registration form, and the Copyright Office assigns an internal “computer program” code to the relevant pieces of intellectual prop-

45  

Including books, maps, sound recordings, computer files, dramatic works, toys, games, jewelry, technical drawings, photographs, multimedia kits, sculptural works, textiles, motion pictures, and choreography, among others.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
×

erty. We rely upon this latter internal code when defining a registered computer program copyright.

Although copyright provides some protection for a piece of written software regardless of whether it is registered with the Copyright Office,46 there are additional incentives for pursuing registration of a copyright. The registration procedure is quick and inexpensive, and the legal strength of the resulting protection is greater for a registered copyright.47 Registration within 5 years of original publication gives the copyright a presumption of validity under law.48 Infringement actions cannot be brought in the courts until a copyright is registered.49 The holder of a registered copyright is entitled to the recovery of attorney fees and statutorily defined damages, including those for willful infringement, only for the period after registration. Ordinarily, the owner cannot collect these damages for the period between the time of publication and the time of registration of the copyright, but the law offers an incentive for registering early: Damages are available from the date of publication only if the owner registers the copyright within 3 months of publication of the work.50

Faced with these incentives, it is plausible that rational actors in a crowded commercial space that rely on copyright to protect their software-related intellectual property will register the copyright on their software soon after creation. We therefore use data on registered copyrights to analyze trends in the use of copyright to protect software-related intellectual property. Our use of registered copyrights means that we are examining trends in the use by firms of copyrights for which some positive action and (modest) expenditure on the part of the “inventor” are required, rather than simply counting the copyrights that are created more or less automatically with the development of a new piece of software. Although all software is copyrighted at the moment of its creation, all software does not receive registered copyrights, and only registered copyrights provide a basis for the filing of a suit against an alleged infringer.

Copyright Propensities Among the Leading U.S. Packaged Software Firms, 1987-1997

As in our analysis of software patenting among the largest U.S. packaged software firms, we restrict the sample of firms to include only firms for which R&D spending data are available, enabling us to compute “copyright propensities” for these firms. Our working definition of “software” in this analysis is

46  

The 1976 Copyright Act, in accord with the international Berne Convention, gives copyright protection to authors regardless of registration status.

47  

As of March 2001, registration required a two-page filing and fees totaling $30 US.

48  

17 U.S.C.A. §410 (2000).

49  

17 U.S.C.A. §411 (2000).

50  

17 U.S.C.A. §§412, 504, 505 (2000).

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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much broader than that employed in the examination of patent propensities, because the LOC does not provide any disaggregated copyright class information for its registered software copyrights. As before, however, we limit our sample of firms to those for which we can obtain R&D spending data, to compute a “copyright propensity.”

The data in Figure 17, a weighted 3-year moving average of the “copyright propensity” for the same 15 large packaged software firms for which patent propensity data were plotted in Figures 7 and 8, tends to support the Lemley-O’Brien assertion that copyright protection has been supplanted by the use of patents in software, at least among these leading producers of packaged software. As Figure 18 shows, excluding Microsoft from this sample does not substantially alter the conclusion that the copyright propensity of these firms has declined. In data not displayed in these figures because of space limitations, the copyright propensity data for Novell, Microsoft, and Adobe all display declines in the number of copyrights registered per $100 million of (constant-dollar) R&D spending during 1987-1997. Novell and Microsoft in particular exhibit sharply contrasting trends in patents/R&D$ and copyrights/R&D$; both firms display increases during this time period in patenting propensity and a downward trend in the propensity to copyright their intellectual property. Adobe, which exhibited little or no consistent time trend in its patent propensity, also displays a downward trend in its copyright propensity. A comparison of the copyright behavior of “incumbent” and “entrant” firms among the Softletter 100 (defined as above) also yields little indication of contrasting behavior among these two groups in their copyright propensities. Both incumbents and entrants decreased their use of copyright, relative to R&D spending, to protect their intellectual property during the 1980s and 1990s.

FIGURE 17 Copyright propensity, 15 largest packaged software firms (1997), 3-year moving average, 1987-1997.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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FIGURE 18 Copyright propensity, 15 largest packaged software firms (1997), excluding Microsoft, 3-year moving average, 1987-1997.

Because we lack software-related R&D investment data for our sample of electronic systems firms, we are not able to examine changes during 1987-1997 in these firms’ copyright propensities. However, we do have software-related R&D investment data for IBM for the 1992-1997 period, and Figure 19 compares trends during 1992-1997 in the copyright propensities of Microsoft and IBM. As in the case of these firms’ patent propensities, IBM obtains substantially more registered copyrights per $100 million in R&D than does Microsoft throughout this period, and in contrast to their patent propensities, the gap has widened by 1997 (IBM’s copyright propensity is roughly twice as large as that of Microsoft in 1992 and more than four times as great in 1997). But both firms are reducing their copyright propensity through this time period, consistent with the “substitute” relationship posited above.

Because our coverage of software copyrights differs somewhat from that of our software patents data, direct comparison of these trends in patent and copyright propensity must be interpreted cautiously. Nevertheless, our preliminary analysis of packaged software firms’ use of copyright to protect software-related intellectual property suggests that patents have increased in importance relative to copyright as a means for the protection of software-related intellectual property during 1987-1997. Moreover, a decline in copyright propensity during the 1990s is apparent as well in our limited comparison of a leading packaged software firm and a leading electronic systems firm. As we noted above, a shift from copyright to patent protection was once seen as an important step to raise the threshold for protection of software-related intellectual property, and it is ironic that increased patenting by software firms has been accompanied by a chorus of concern over “junk patents.” Junk patents may indeed be a problem (although our limited evidence on citations does not support this claim for the patents of large

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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FIGURE 19 Copyright propensity, Microsoft and International Business Machine, 1992-1997.

packaged software firms), but any such problem might have been more severe had firms continued to rely heavily on copyright in preference to patents.

Why might firms have shifted from copyright to patent protection? As we noted above in our discussion of the evolution of the software intellectual property “regime,” the treatment of copyright by the U.S. federal judiciary has changed to limit the sweeping rights originally claimed by copyright holders.51 This shift in judicial opinion may reflect the lack of a specialized appeals court that would support copyright holder rights as vigorously as the CAFC has done for patentholders. Certainly, software patents have enjoyed a more supportive judicial climate during the past decade than copyright. In addition, patents may better support the types of “defensive” intellectual property strategies that Hall and Ziedonis (2001) describe in the semiconductor industry—cross-licensing of portfolios of

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Lemley and O’Brien note in their discussion that “…the courts have cut back the scope of protection rather dramatically in the past five years” (1997, p. 280).

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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patents may be less difficult than similar transactions in copyrighted material.52 The use of software-related patents to support markets in intellectual property (suggested by Lemley and O’Brien, 1997) and/or as a complement to defensive intellectual property strategies remains an important issue for future research. Nonetheless, to the extent that transactions in intellectual property are facilitated by reliance on patent rather than on copyright, and to the extent that the (admittedly limited) quality controls imposed by the USPTO on the issue of patents enforce a higher average “quality level” among software patents than is true of copyrighted material, a shift from copyright to patent protection may well be a desirable development.

CONCLUSION

The U.S. and global computer software industries have been transformed during the past 20 years as a result of the explosive diffusion of the microcomputer and the development of the Internet. No longer are the business activities and revenues of leading firms dominated by sales of products that incorporate high levels of user-specific customization. Instead, the dominant firms in the U.S. software industry, enterprises that account for a leading global market share as well, rely on sales of packaged software to mass markets. Accordingly, formal instruments for intellectual property protection have assumed much greater importance, despite the hazy and evolving legal status of these instruments. In the United States, which can be broadly categorized as an economy characterized in recent years by relatively strong protection for intellectual property rights, copyright protection for software-related intellectual property has been supplemented, and appears to have been supplanted, by patent protection.

The U.S. judicial and legislative arenas have strengthened the rights of owners of intellectual property in a number of industries since 1980, including computer software. The strong protection for intellectual property provided in the United States is followed by that in Western Europe, where the European Commission has provided somewhat more lenient treatment for “reverse engineering” of software for purposes of complementary invention, and Japan, where protection for software-related intellectual property historically has been relatively weak (see Merges, 1996). These contrasting regional or national systems of intellectual property policy have evolved in parallel with the software industries in each area. Indeed, the furor over the Compton’s multimedia patent, as well as the more

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It is possible that software firms are choosing not to register copyrights because such early registration no longer is necessary to support litigation against alleged infringers, a possibility that would indicate greater judicial deference to copyright. This possibility seems unlikely, however, in view of the more circumscribed role accorded to copyright by the federal bench since the late 1980s that we described in earlier sections of this paper.

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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recent controversy over business methods patents, provides additional evidence of the influence of industry-led political action on U.S. patent policy.53 Although U.S. intellectual property rights policy has influenced the development of its software industry, the reverse also is true. In other words, the relationship between the development of the domestic software industries and the intellectual property rights regimes of the United States, Western Europe, and Japan is best characterized as one of “coevolution,” involving mutual causation and influence (Nelson, 1994; Merges, 1996; Khan and Sokoloff, 2001).54

Relatively large firms in the U.S. packaged software industry are shifting toward a more “patent-intensive” approach to the protection of their intellectual property, as the largest firms increase their patent propensities. Moreover, the evidence of increased patenting is strongest for older (and, in most cases, larger) firms within the U.S. industry. We observe no tendency for entrants to seek patent protection more intensively than incumbent firms. No evidence suggests that entry by specialized packaged software firms has been curtailed by these policies, however, and much more information is needed on entry, profitability, and the long-term evolution of industry structure before such a conclusion is warranted. The analysis also highlights the fact that despite increased use of patent protection by packaged software firms, large electronic systems firms are more important in overall software patenting. A comparison of the patent propensities of IBM and Microsoft suggests that the “patent propensity gap” between these two firms narrowed during the 1990s, but IBM continues to patent more intensively, relative to its R&D spending, than does the world’s largest packaged software specialist. The limited evidence on the “importance” of the patents obtained by the largest U.S. packaged software and electronic systems firms does not support a characterization of these patents as “junk patents,” by comparison with software patents generally. Moreover, large packaged software firms appear to be

53  

The filing by Microsoft of an amicus brief in Apple Computer v. Franklin Computer was noted above. The Business Software Alliance, a group enlisting Microsoft and other large packaged software firms (its members are Adobe, Apple, Autodesk, Bentley Systems, Borland, CNC Software/ Mastercam, Macromedia, Microsoft, Symantec, and Unigraphic Solutions; additional members of its Policy Council include Compaq, Dell, Entrust, IBM, Intel, Intuit, Network Associates, Novell, and Sybase), also was active during the 1990s in appearing before congressional committees and filing amicus briefs, all in favor of stronger formal protection for software-related intellectual property.

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The endogenous nature of software-specific intellectual property rights policy, as well as intellectual property rights policies more generally, has been widely noted. In his 1996 discussion of software-related intellectual property policy in the United States, Western Europe, and Japan, Merges notes: “…[H]ow has the intellectual property regime affected the development of the software industry in these major markets? As we shall see, the answer must be incomplete unless one considers the converse question—how has the industry affected the legal regime?” (p. 275). In their discussion of the evolution of nineteenth century patent policies in the United States, Britain, France, and other nations, Khan and Sokoloff (2001) conclude that “…scholars who try to relate patterns of invention to patent system characteristics should be cognizant of, or take care in dealing with, the likelihood that those patent system characteristics are not exogenous with respect to the invention” (p. 28).

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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substituting patent for copyright, based on a comparison of trends in patent and copyright propensities.

Computer software as a product of inventive effort is nearly 50 years old, but the application of intellectual property rights to these products is relatively recent. Although patents were originally viewed by some experts as preferable to the extensive reliance on copyright for protection of software-related intellectual property (Menell, 1989) because of the higher threshold for patent protection, the expanded use of patents to protect software-related intellectual property has also sparked controversy. The 1998 State Street Bank decision extended patent protection into the previously unexplored area of “business methods,” and growth since State Street in this class of patenting may trigger additional litigation over validity and infringement. Software patents, especially business methods patents, raise unusual challenges to the U.S. patent system, which relies on inventors and patent examiners for searches of “prior art” rather than allowing for interested parties to challenge patents before their issue in a formal pre-grant opposition process. Because of the historical lack of software patents, a primary source of software-related “prior art” scarcely exists, and this contributes to the issue of patents (such as the “multimedia” patent discussed above) of potentially sweeping breadth and limited validity. As the multimedia patent example suggests, there are few cases thus far of such broad patents being issued and upheld by either the USPTO or the courts. But the general problem is a serious one—how can searches of prior inventions be undertaken in a technology where patents have only recently become common?

Innovation in software generally is a cumulative activity, and individual software products frequently build on components from other products. As a result, some industry experts argue that software developers may become aware of a related patent only after they have completed development of a new product.55 But this type of problem (which is not unique to software) is associated with the transition to a new, patent-based regime of intellectual property protection in software and may decline in severity as expanded software patenting expands the body of prior art that can be searched by patent examiners. Increased publication of patent applications after 18 months also should reduce the severity of this problem somewhat, and the liberalized “prior use” defense embodied in the AIPA also could reduce the incidence of litigation over infringement. The costs of the transition to patent-based protection of software-related intellectual property nevertheless could be high, because of the reliance on litigation to establish the validity of this growing body of prior art. The leading alternative mechanism in the

55  

Dan Bricklin, a pioneer in the packaged software industry and developer of the first spreadsheet program, argues that a typical software product may involve literally thousands of patentable processes, which creates enormous hazards for independent or small firm inventors who may belatedly discover that important components of their newly developed product are in fact patented by others (Merges, 1997, pp. 119-120).

Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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U.S. system for challenging the validity of patents, re-examination, is utilized less extensively than the opposition process in the EPO. Nonetheless, current evidence on the EPO opposition system does not suggest that this process operates quickly or cheaply to resolve questions of patent validity (see Graham et al., 2003).

The computer software industry provides a fascinating “laboratory” for observing the transition from a relatively open intellectual property regime to one in which formal protection, especially patents, figures prominently. The cross-national differences in domestic patent systems, combined with cross-national differences in the structure of domestic software industries and domestic software markets, provide additional rich material for comparative studies of the interaction of intellectual property systems, innovation, and industrial development. Current research, including this chapter, has scarcely scratched the surface of this rich subject.

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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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Suggested Citation:"Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry." National Research Council. 2003. Patents in the Knowledge-Based Economy. Washington, DC: The National Academies Press. doi: 10.17226/10770.
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