Patents in the Knowledge-Based Economy (2003) / Chapter Skim
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Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry
Patents in Software and Biotechnology - Intellectual Property Protection in the U.S. Software Industry
Pages 217-258
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From page 217... ...
Patents in Software and Biotechnology 217
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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.
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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.
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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.
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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.
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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.
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. 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.
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v. Franklin Computer Corp, and along with other decisions affirming the strength of software patents may have iiComputerAssociates Int'l v.
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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.
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That database is searched through multiple graphical and textual entry paths.2i 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 reexamination 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 "hall 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.
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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 patentbased 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 1999.3° Political reactions to the surge in business methods patents and the controversy surrounding their validity were swift and involved both Congress and the USPTO.
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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.
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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.
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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.
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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)
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packaged software firms (based on revenues) identified in the 1997 tabulation of the 100 leading U.S.
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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~.
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, 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.
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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~.
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during 1987-1997 for the nine and eight largest U.S. personal computer software firms, respectively,39 with significant patenting activity in 1997.
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packaged software firms (1997) , 3-year moving average, 1987-1997 (excluding Microsoft)
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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)
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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 19871997 exceeded that of large packaged software firms.
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PATENTS IN SOFTWARE AND BIOTECHNOLOGY 12 ~g CM of or 10At: A fig Q U' to 8642_1 O1992 1993 1994 1995 1996 1997 FIGURE 11 Microsoft patent propensity, 1992-1997. and R&D spending for the two firms)
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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)
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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.
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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 l990s, 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' softwarerelated patents, although these firms' patents are not being cited more intensively either during the period.
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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~.
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The 2.0 1.8 1.6 1.2 1.0 0.8 A / , , I , , , , , , I , 1987 1989 1991 1993 1995 1997 Year FIGURE 15 University software patenting as a share of all software patenting, 19871997.
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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.
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A finding that this propensity remained constant or increased would constitute evidence of complementarily 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.
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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.
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70 =~_ 60 s lo 50c~ ~ 40 30TO 20~n O <* 100 \ \ Coo Moo ,~99~ ,~99~ ~99 Year 93 99> 99~ ~99 FIGURE 17 Copyright propensity, 15 largest packaged software firms (1997)
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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.
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packaged software firms) , but any such problem might have been more severe had firms continued to rely heavily on copyright in preference to patents.
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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.
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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 l990s, but IBM continues to patent more intensively, relative to its R&D spending, than does the world's largest packaged software specialist.
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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.
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. 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.
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C Mowery, ea., The International Computer Software Industry: A Comparative Study of Industry Evolution and Structure.
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Mowery, ea., The International Computer Software Industry: A Comparative Study of Industry Evolution and Structure. New York: Oxford University Press.
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