Over the past twenty years, the jurisdiction of the patent system has expanded to cover software and business practices. This expansion continues to elicit concerns about quality, but the quality problem is symptomatic of institutional problems. Captured by the patent community, the U.S. Patent and Trademark Office ( PTO) has adopted an expansionist philosophy and devalued the examination process. This philosophy, along with the expansionist decisions of the specialized Court of the Appeals for the Federal Circuit, is dramatically at odds with the principles of the Clinton Administration's initiative on global electronic commerce.
The Quality problem
Capture of the PTO
Conflict with Administration policy
Over the past twenty years, the scope of the patent system has expanded to cover virtually any subject matter - provided that the generic tests of novelty, non-obviousness, and utility are met. During the 1970s and 1980s, debate focused on the patentability of "algorithms" and how to treat algorithms used within physical processes. Today, the big issue is the expanded role of patents, especially broad conceptual patents, in an extremely competitive and fast-moving economic environment in which business cycles are moving much faster than the administrative and legal processes of the patent system.
Debate was stirred anew by the 1998 State Street Bank decision, which abolished a century-old judicial doctrine proscribing patents on methods of doing business [ 1]. The State Street case greatly expanded the envelope of patentability, but it left enough unsaid to ensure controversy and further litigations in areas such as business strategies, diagnostic procedures, databases, analytic methods, or scientific principles with some potential practical application [ 2]. However, the U.S. patent system now extends well beyond the common understanding of technology and so beyond the international consensus embodied in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) .
The abstract nature of business practice patents re-formulates the problem of patent scope [ 4], since patents on concepts necessarily preempt competition in implementation. Conceptual patents refocus competition on securing broad business monopolies and away from competition at a technological level - the traditional domain of the patent system. Despite this radical expansion into cerebral subject matter, the U.S. patent system remains "one-size-fits-all." It treats software just like chemicals, and it treats business concepts no different than pharmaceuticals.
The Quality problem
The explosion of patents on business practices, especially in the wake of the State Street decision has elicited testimonials that business method patents will be the common currency of the knowledge economy. At the same time, it has also elicited criticism and anxiety, much of it focused on "quality." As Professor Robert Merges noted recently: "The concerns about quality, especially in light of the data on overall volume, point to one conclusion: the patent system is in crisis." [ 5]
But quality means many things. It is most commonly linked to inadequate researching of prior art, which is attributed to limited resources and expertise at the PTO. It is also attributable to the lack of documentation or poor organization of literature within a field where tacit knowledge is more important than codified knowledge. As the subject matter becomes increasingly broad, non-technical, and abstract, descriptive vocabularies vary and sources become scattered and diffuse.
At another level, the perception of quality depends on the notoriously subjective standard of non-obviousness, which is applied through a hypothetical "person having ordinary skill in the art to which said subject matter pertains." [ 6] The indeterminacy of this standard may stem in part from the limited knowledge and experience of patent examiners, but it can also be attributed to the difficulty of applying such a standard in volatile and fast-changing environment. Courts have further blurred the standard by looking to "secondary" indicators such as copying and commercial success that are not available to PTO examiners.
Perceived quality is also a function of how well the system as a whole is working. i.e., does it function predictably? What does it add to risk, uncertainty, and cost? For example, concerns are often expressed about the fit between the granularity of the patent system and rapid, incremental nature of innovation in software [ 7].
Remarkably, there has been no attempt by the PTO to address the quality problem in a rigorous, objective manner (as opposed to random internal review by senior examiners). What do R&D managers and recognized innovators think about patent quality within their field? How do businesses view the impact of the system on innovation?
Analyzing quality is difficulty because of the complexity of the system. It breaks down into roughly four institutional phases:
- ex parte proceedings by the administrative agency, resulting in privately written rules (patents);
- extensive private sector activity - research, posturing, strategizing, negotiating, licensing, etc. - short of litigation;
- initial litigation in generalist federal district courts;
- review by a specialized appellate court, the Court of Appeals for the Federal Circuit (CAFC) [ 8].
Most of the action in the patent system lies after the issuance of the patent and before litigation - and takes the form of notice letters, research, opinions of counsel, negotiations, etc. This dispersed private activity, in which lawyers still play a central role, goes largely unmonitored and unmeasured. Except in the few cases of public posturing, it is nearly invisible. Of course, as the quality of issued patents decreases, the burden of determining validity falls increasingly on the private sector.
The CAFC has accorded a high presumption of validity to patents that can only be overcome with "clear and convincing evidence" that the PTO made a mistake. This strong presumption imposes high transaction costs on those who seek to challenge patents and exacerbates the free-rider problem of invalidating patents. No one wants to incur the wrath of the patentee. The strong presumption of validity works against any defensive sharing of prior art, since lawyers hold tight to prior art in order to preserve the option of presenting it in court on their own terms [ 9].
The costs and risks are sufficiently high that accused infringers are motivated to settle, even if they doubt the validity of the patent. The patentee may also be willing to deal, since the patentee also faces high costs in litigation, as well as the risk that the patent may be found invalid. By settling for a lesser licensing fee, the patentee can preserve the patent as a weapon, using it to elicit licensing fees from other putative infringers. Just by slowing down its competitors, the patentee can gain valuable lead time in an economic environment where scale economies and network effects give strong first-mover advantages [ 10].
As conventionally understood, the patent system offers a limited-term monopoly in exchange for the quid pro quo of public disclosure. Hence, this system can be seen as a library of innovation, providing a centralized, running record of the state of the technological arts. It also functions as a compendium of rules, expressed as property rights, about who can exclude or regulate market competition within a given area.
In traditional fields of technology, patents are read regularly as a baseline source of knowledge. But this is not the case for software development. Programmers and designers do not routinely read patents in their field, because that is not they way they traditionally work. The cost in time relative to the perceived benefits is high because of the low quality of software patents. Claims are not written to convey information, but to assert as much ownership as possible. In-house legal counsel advise against routine reading of issued patents because of the risk of treble damages for willful infringement. A developer who comes across a patent that may affect present or future products may be obligated to spend time and resources researching validity - as well as determining whether or not her own products are likely to infringe [ 11].
Under these circumstances, there would seem to be considerable demand to improve PTO's examination process, especially since concern over the quality of software has been sounded repeatedly since software patents began to be issued in large numbers in the 1980s. Yet despite calls for increased quality, there are institutional and economic factors that militate against it.
A number of reasons are commonly cited for the low quality of software and business method patents: the prior art problem; the inexperience and high turnover of examiners in hot technologies; start-up costs and delays in acquiring expertise in new subject areas. These are combined with general quality problems: a bonus system for examiners that favors allowances over rejections [ 12]; procedures for re-examination that favor patentees [ 13]; absence of pre-grant publication (although this is now changing for applications that will be filed abroad); and inadequate resources. Much attention is given to the latter as the PTO continually struggles to keep Congress from diverting a portion of the fees it collects to other purposes. Instead of addressing these familiar problems, I turn to deeper institutional factors that keep quality a chronic problem.
Capture of the PTO
The ex parte nature of application process is unique among administrative systems. The examiner deals only with the applicant, who has the motivation and resources to wear the examiner down. The examiner, by contrast, is motivated to allow the patent and so dispose of the application unless there is unequivocal prior art [ 14]. The U.S. patent system is uniquely solicitous of the applicant; there has been no pre-grant publication until recently and formal oppositions are not permitted. Designed to allow applicants to retain trade secret protection if patent protection is denied (regardless of whether the invention could actually be protected as a trade secret), the ex parte process has come to function as a way of protecting small inventors from the transaction costs and delay that could imposed by large competitors .
Patents are, in effect, rules that are drafted and proposed by these private applicants who have considerable leeway in formulating and expressing the claims, approved by the PTO, and then privately enforced. Once the patent is granted, the PTO engages in no form of external review or quality control and takes no responsibility for the functioning of the system as a whole. Most remarkably, it defines its mission in terms of serving patent applicants:The Patent Business is one of the PTO's three core businesses. The primary mission of the Patent Business is to help customers get patents. [ 16]
This stands in stark contrast to the mission of the trademark side:The Trademark Business is one of the PTO's three core businesses. Our primary mission is to apply the provisions of the Trademark Act of 1946 in the examination and registration of trademarks. [ 17]
The formulation of the patent business mission testifies to the agency's capture by its customers - those to whom it grants monopoly rights on an ex parte basis. The agency even offers testimonials from its customers:Let me share some actual quotes from the surveys with you. You will notice that the comments are consistent with the quantitative findings.
Our patent customers told us:
- "I am pleased with the customer approach to processing patent applications as opposed to the previous, sometimes adversarial approach."
- "Examiners seem flexible and interested in working with applicants to allow patentable subject matter to grant." [ 18]
In addition to managing patent and trademark examinations, PTO is charged with advising the executive branch on intellectual property policy [ 19]. But the PTO corporate plan goes a step further in its corporate plan. It undertakes to perform a leadership role in policy development, while it evaluates itself in terms of how well it promotes and expands intellectual property rights systems throughout the United States and abroad:Strategic Goal:
Play a leadership role in intellectual property rights policy ... .
Help protect, promote and expand intellectual property rights systems throughout the United States and abroad. [ 20]
Thus, the PTO prejudices its statutory obligations as an advisor, by positioning itself as an advocate for expanding intellectual property systems, including its own operations.
This is especially disturbing given that the PTO budget is directly tied to application and maintenance fees [ 21]. Obviously, lower standards for granting patents induce more applications, which generates more fees. More grants result in more maintenance fees. With PTO's professed self-dedication to its fee-paying customers and expressed expansionist philosophy, it is reasonable to ask whether it can examine patent applications energetically and even-handedly.
Perhaps the quality problem is chronic because it is institutionally endemic. If so, why not do away with examination as a time-consuming charade? Should we settle instead for a registration system (as in the early years of the U.S. patent system) that candidly acknowledges that novelty and non-obviousness will have to be researched and evaluated by the private sector? If the government got out of the business of examination, would market-driven mechanisms for researching novelty appear?
The quiet failure of the Software Patent Institute (SPI), which was supported by both industry and the PTO during much of the 1990s, is a discouraging sign [ 22]. Not only does it suggest the sheer magnitude and intractability of the prior art problem, it also suggests that the professed interest of the PTO and major companies in solving the problem is in fact limited. In its time, it may have served to defuse opposition to software patents by framing the quality problem as the principal problem, but a solvable one.
In theory, privately enforceable property rights provide an efficient means for enabling decisions about the use of resources and do not require continual monitoring and intervention by the government. But this only holds if the rights are well-defined and reasonably certain. In conventional technologies, knowledge is highly centralized and evolves at a manageable pace - especially when barriers to entry are high and sources of innovation are few. By contrast, innovation in software is incremental, widespread, and undocumented, making it difficult to identify prior art and the scope of the invention with speed and finality.
Within the institutional constraints of the patent system, there is little opportunity to address these problems. The patent community clings religiously to the one-size-fits-all credo, preserving the inertia of the system against the business concerns of particular industries, and preserving it against scrutiny that might lead to an empirical understanding of costs and benefits - and winners and losers. Designed for an industrial economy and resistant to change, the system has become complex and opaque in its application to a diverse, networked economy based on information and services.
Conflict with Administration policy
There is a remarkable mismatch between the expansion of the patent system driven by CAFC and the PTO and the "macro-policy" on electronic commerce developed by the Clinton Administration. The basic principles of this policy initiative are set forth in the Framework for Global Electronic Commerce [ 23], developed by Presidential advisor Ira Magaziner and an interagency task force. The Framework was formally published in July 1997 after a long period of public review, input from the private sector, and international consensus building. It received widespread support, from Republicans as well as Democrats.
Five underlying principles are set forth at the beginning of the Framework. The first establishes the primacy of free-market competition:1. The private sector should lead.
The Internet should develop as a market driven arena not a regulated industry ... .
The second, a corollary to the first, urges governmental restraint, cautioning against regulation in the face of rapidly changing technologies and market conditions:2.Governments should avoid undue restrictions on electronic commerce.
Governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures or new taxes and tariffs on commercial activities that take place via the Internet.
Business models must evolve rapidly to keep pace with the break-neck speed of change in the technology; government attempts to regulate are likely to be outmoded by the time they are finally enacted, especially to the extent such regulations are technology-specific.
The third follows on the first two:3. ... a predictable, minimalist, consistent and simple legal environment
Where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce ... rather than one based on top-down regulation.
This echoes common complaints about conceptual patents - the uncertainty they create, the complexity and cost of the system, and the absence of any showing that patents on business methods were needed to motivate innovation in the service sector.
The fourth principle proclaims that the Internet is a very different environment, so that old rules and mechanisms do not necessarily apply. In particular, regulatory regimes should be extended only when there is broad consensus - which is clearly not the case for software and business method patents.4. Governments should recognize the unique qualities of the Internet.
The genius and explosive success of the Internet can be attributed in part to its decentralized nature and to its tradition of bottom-up governance. These same characteristics pose significant logistical and technological challenges to existing regulatory models, and governments should tailor their policies accordingly. Electronic commerce faces significant challenges where it intersects with existing regulatory schemes. Regulation should be imposed only as a necessary means to achieve an important goal on which there is a broad consensus. Existing laws and regulations that may hinder electronic commerce should be reviewed and revised or eliminated to reflect the needs of the new electronic age.
The fifth and last principle is international harmonization.5. Electronic Commerce over the Internet should be facilitated on a global basis.
The legal framework supporting commercial transactions on the Internet should be governed by consistent principles across state, national, and international borders that lead to predictable results regardless of the jurisdiction in which a particular buyer or seller resides.
The issue of business method patents, where there substantial differences between the U.S. and Europe, has not been vetted by the American Government in any public forum such as the World Intellectual Property Organization. PTO and other agencies have advocated expanded subject matter in coordination with private-sector interests - but not on the open record.
To be sure, the State Street Bank decision is oblivious of the Internet and the Framework for Global Electronic Commerce. It relies on an expansive sentence in the legislative history of the 1952 Patent Act that the judge who wrote the decision wrote as a Congressional staffer half a century before. The State Street Bank decision argues that there never really was a rule against patents on business methods [ 24]. But the rule appears consistently in treatises on patent law, where it is closely linked to the traditional requirement that patentable processes must result in a physical transformation. The decision ignores the fact that the rule against patenting methods of doing business has been taken for granted in hundreds of millions of business decisions and long-established patterns of managerial and marketplace behavior that did not have to account for patents.
The patent system has expanded with little public scrutiny pushed by the natural self-interest of those who labor within it. With justification, it wraps itself in the mantle of intellectual capital for the knowledge economy. But like the late exuberant run-up in the technology stocks, it does not know its limits. What is worse, its stewards have engineered the removal of its traditional limits to spread it seamlessly across the entire economy without analysis and without public debate.
Now that patent system has assumed center stage in the digital economy, it will have to account for its claims and its failures. It must recognize that its own failures to maintain quality and public confidence are testimony to the reality that management of new knowledge and information does not follow simple and uniform rules independent of subject matter and external conditions. It must contend with empirical research showing that the value of patents, and presumably perspectives on the patent system, vary greatly from industry to industry [ 25]. Most importantly, it must acknowledge the value created by the Internet and the galaxy of non-proprietary standards around it as enablers of business and commerce. In so doing, it must be open to rethinking how the full value of basic ideas, scientific discoveries, mathematical algorithms, AND business concepts should be reconciled with incentives that may be needed for private investment.
About the Author
Brian Kahin is Director of the Center for Information Policy and Visiting Professor at the College of Information Studies at the University of Maryland with affiliate faculty appointments in the School of Public Affairs and the R. H. Smith School of Business. Kahin recently served as Senior Policy Analyst at the White House of Science and Technology Policy and chaired the interagency Working Group on the Digital Economy for the National Economic Council. He was previously founding director of the Harvard Information Infrastructure Project at the John F. Kennedy School of Government, and General Counsel for Interactive Multimedia Association. He has edited eight books including, most recently, Internet Publishing and Beyond (with Hal Varian, Cambridge, Mass.: MIT Press, 2000) and Understanding the Digital Economy (with Erik Brynjolfsson, Cambridge, Mass.: MIT Press, 2000).
1. State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), at http://www.law.emory.edu/fedcircuit/july98/96-1327.wpd.html
2. For an overview of the expansion of patentable subject matter culminating in the State Street decision, see John R. Thomas, 1999. "The Patenting of the Liberal Professions," Boston College Law Review, volume 40, number 5 (September), pp. 1139-1185.
3. Agreement on Trade-Related Aspects of Intellectual Property Rights (Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization signed in Marrakesh, Morocco on 15 April 1994); at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm
4. The classic statement of the breadth problem is the 1990 paper by Robert P. Merges and Richard R. Nelson, "On the Complex Economics of Patent Scope," 90 Colum. L. Rev. 839, and at http://cyber.law.harvard.edu/ipcoop/90merg2.html
5. "As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Concepts and Patent System Reform," 14 Berkeley Tech. L.J. 577 (Spring 1999), at http://www.law.berkeley.edu/institutes/bclt/pubs/merges/
6. 35 USC 103(a).
7. See remarks of Martin Knopken, general counsel for Autodesk at http://www4.nationalacademies.org/PD/step.nsf/files/Konopken_Transcript.pdf/$file/Konopken_Transcript.pdf - "I speak with my fellow in-house counsel in the software industry frequently. There is an amazing degree of unanimity about software patents. We all hate them ... ."
8. The Court of Appeals for the Federal Circuit was created in 1982 to replace the Court of Customs and Patent Appeals, but it was chartered to hear all appeals from district decisions, as well as direct review of denials and interferences. The object was to eliminate forum-shopping and to create a uniform body of appellate law ö not to strengthen patents, as later proved to be the case.
9. They especially do not want the PTO citing it in a re-examination that ends up preserving the patent while wrapping it anew with a high presumption of validity. That would effectively vitiate the value of the prior art.
10. See Rochelle Cooper Dreyfuss, Testimony before the Subcommittee on Courts and Intellectual Property of the House of Representatives Committee on the Judiciary, 9 March 2000; at http://www.house.gov/judiciary/drey0309.htm
11. See Knopken, op.cit.
12. Examiners are credit with "dispositions." An allowance of a patent is a disposition, but a rejection is not until appeals are exhausted.
13. The American Inventors Protection Act, PL 106-113 (November 1999), purports to improve re-examinations requested by third parties by increasing their participation in the process, but it prevents third parties from challenging the outcome in court, so it is unlikely to have much practical effect.
14. See 7. above.
15. Much of the debate around the recent patent reform legislation, the American Inventors Protection Act, concerned the ability of small inventors to preserve the advantages of the ex parte process against pressure to adopt nearly universal standard of 18-month publication in the interests of quality control and harmonization.
16. U.S. Patent and Trademark Office, Corporate Plan - 2000, p. 20.
17. Ibid., p. 38.
18. "Commissioner's Page," PTO Today, volume 1, number 1, January 2000.
19. 35 USC 2(b) [American Inventors Protection Act, P.L. 106-113, 1999].
20. U.S. Patent and Trademark Office, Corporate Plan - 2000, p. 17.
21. 35 USC 42.
22. The SPI focused on collecting and organizing prior art; its database is still available at http://www.spi.org. It also provided training for PTO examiners. The author served on the SPI advisory board from 1992 to 1997.
23. The Framework for Global Electronic Commerce, July 1997; at http://www.whitehouse.gov/WH/New/Commerce/index.html. The excerpts are from the executive summary.
24. The legal rationale for this conclusion is that all decisions that cite the rule were also justified on other grounds.
25. Wesley Cohen, Akira Goto, Akiya Nagata, Richard Nelson, and John Walsh, "R&D Spillovers, Patents and the Incentives to Innovate in Japan and the United States," 1998, working paper.
Paper received 26 November 2000; revision received 30 December 2000; accepted 31 December 2000.
Copyright ©2001, First Monday
The Expansion of the Patent System: Politics and Political Economy by Brian Kahin
First Monday, volume 6, number 1 (January 2001),