Information process patents in the U.S. and Europe

Information process patents in the U.S. and Europe: Policy avoidance and policy divergence by Brian Kahin
Patents on software and business methods appear to have a pivotal position in today's economy, yet they have remained a policy backwater in which scope of patentable subject matter has expanded without legislative input. This is changing as Europe struggles with patent reform. A push by the European Commission to validate and promote software patents has been opposed by many companies and professionals, and especially the open source community. In this process, it has become clear that Europe opposes the broad non-technical patents on business methods that are now available in the U.S., signaling a major rift in international standards of patentability.

Recent hearings held by competition agencies in the U.S. show severe problems of overpatenting that extend beyond software to much of the ICT sector. These problems have been ignored by the Commission, which despite a pro forma effort to address economic issues, clearly feels more comfortable framing the issue in legal terms. In outlining what a properly developed policy framework would look like, the paper stresses the need to understand why software is different from other technologies, why the disclosure function of the patent system is failing, the build-up of risk and uncertainty and its effect on industry structure, and the international political economy of information process patents.

Contents

Introduction
Overview: Policy development in the U.S. and Europe
The insularity of the State Street decision
Software patents in the U.S.
The debate in Europe
Developments in the U.S.
Why software is different
Disciplinary perspectives on patent policy
Conclusion

Introduction

There is a growing debate about the value and implications of information process patents, i.e., process patents that do not involve physical transformation. This includes two widely discussed categories, software patents and business method patents, but also patents on the presentation and use of information, movements of the human body, educational methods, and social processes.

The debate is framed very differently on the two sides of the Atlantic. In the U.S., the specialized appellate court for patents, the Court of Appeals for the Federal Circuit, has eliminated virtually all limits on patentable subject matter. In Europe, the European Commission's plan to develop a uniform Community Patent has triggered intense public debate about the desirability of software patents and how to limit the scope of the patent system by drawing a line based on technical contributions or effects.

There is continued discontent and skepticism about the patent system among software developers in the U.S., but the legal issue appears settled, and the debate in Washington is centered on quality rather than subject matter. It is cast as an administrative issue rather than a matter of substantive policy. As such, it is not limited to patents on software and business methods, although those are the areas where the quality problem has been most conspicuous.

The U.S. Patent and Trademark Office (USPTO) recently issued a strategic plan that attempts to address the problem through reengineering internal processes and allowing for the outsourcing of searches [ 1]. Yet while USPTO is attempting to reform its operations, the U.S. Government is urging the rest of the world to do away with limits on patentable subject matter in a proposed World Intellectual Property Organization (WIPO) treaty on substantive patent law. In May, the U.S. threatened to walk out of negotiations if the treat does not mandate patents for all fields of activity, whether or not they fall within common notions of "technology" [ 2]. This confrontation over the proper scope of the patent system has gone unreported, at least in the U.S. There is nothing on the USPTO Web site to indicate that the U.S. has asserted this position or is even currently engaged in these negotiations.
Given the relationship to common economic concerns, robust international debate on information patents should be front and center in the international policy agenda. On paper, the subject stands at the convergence of the major themes of the knowledge economy:

innovation;

intangible assets;

information technology and the Internet; and,

globalization.

Innovation

Promoting technological innovation is the principal rationale for the patent system, enshrined in the clause of the U.S. Constitution that enables federal patent legislation [ 3]. In principle, patents encourage invention by innovative small entrants by affording protection against large competitors. Without patent protection, large incumbents might copy the small firm's invention and use superior financial resources and marketing clout against the small firm.
The 1994 case Stac v. Microsoft is the poster child for this argument. Microsoft had sought to acquire rights to use Stac's compression technology, but negotiations broke down; Microsoft developed a compression program as part of its operating system, and Stac sued and won a jury verdict for US$120 million. Whatever the merits of this case, the case is frequently to show that software patents can protect small firms against big firms.

However, in the case of complex technologies, the patent system also allows large firms to accumulate portfolios of patents that can discourage entry by new firms or at least limit them to upstream niches. These portfolio effects reward firms for the scope of their investment in R&D by reducing the threat of future competition within the area of the portfolio. To the extent that innovation is sequential or cumulative, this may hold technological advance hostage to past investments. Entrants may be able to use patents to develop and occupy new niches, but their ability to develop and market complex products is likely to be limited by the patents of others, especially large competitors that are better able to bear the costs and distraction of litigation.

These portfolio effects are not necessarily a bad thing. A case can be made that firms which provide the lion's share of the R&D for their industry should be able to "tax" the companies that take advantage of it. However, an incentive based on the scope of investment goes beyond established patent jurisprudence and if desirable should be considered on its own merits. But it appears that patents are not a useful source of knowledge and if knowledge does not flow smoothly and transparently within the system, patents may encourage opportunistic, even parasitic, behavior rather than meaningful innovation.

If Stac v. Microsoft is the poster child for software patents, the case of BT v. Prodigy is the anecdotal problem child. BT discovered that it held an old patent on hyperlinks that predated the World Wide Web, announced that it would assert the patent, and sued Prodigy, a company that successfully pioneered an online service and then became a conventional Internet service provider. BT presents the picture of a large regulated company (a former state monopoly) with little reputation for innovation belatedly laying claim to a public standard to which it did not contribute and upon which others invested hundreds of billions of dollars on the assumption that it was open and non-proprietary.

Intangible assets

Intangible assets, sometimes described as "intellectual capital," are the principal source of value and competitive advantage in advanced economies [ 4]. The growing significance of intangible assets is reflected in the substantial disparity between market valuation and the tangible assets carried on corporate books. Since book value may of little use in evaluating firms offering services or intangible products, especially in fast-moving areas, academics and practitioners have looked for new objective measures that would be of help to investors [ 5]. Similar challenges arise in trying to measure economic value at the national level in terms of measuring capital stock, improvements in quality and choice, and consumer surplus.
"Intangibles" encompass human capital, R&D, business relationships, reputation, organizational strengths, and the different forms of intellectual property. In some respects, patents seem the most tangible of intangibles, because they appear well defined, can be readily traded, and give the patentee a nearly absolute right to exclude others from producing, using, or selling the invention.

At the same time, the patent system has expanded to embrace intangible processes and products as protectable subject matter. The argument for this expansion is often made on the basis of the economic importance of software and (Internet) business methods. In principle, patents can help firms rationalize investment in a broad range of intangible assets — making them easier to exploit and trade.

However, accounting for intangibles is asset-centric just as patent literature tends to be patent-centric. It is very difficult to figure in external circumstances and conditions that add or subtract value, such as standardization, technological opportunities, expanding markets, complementary products and services, and the competitive advantages or disadvantages of rivals. While a firm may know with reasonable certainty what patents it holds or has applied for, its knowledge of the patent positions of its adversaries will be much less complete. Yet if one is going to measure intangible assets, one must also consider intangible liabilities, including the risk and uncertainty created by the patents of others.

The 2002 Federal Trade Commission and Department of Justice hearings on "Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy" shed light the high degree of uncertainty caused by patents in the ICT sector [ 6]. Presumably patent-related uncertainty is less of a problem for well-documented, slow-moving technologies where independent invention is rare and patent quality is high. However, it may be significant in fast-moving technologies, especially if the standard of inventiveness (non-obviousness) is low and reading patents is not considered a productive use of time.
Large firms with knowledge management capabilities and in-house patent counsel are able to minimize uncertainty better than small firms. Scale should make both licensing revenue and exposure to liability more predictable in the aggregate. Large firms in ICT also use cross-licensing to lower risk and transaction costs but cross-licensing increasingly is accompanied by side payments which reflect the perceived superiority of one side's portfolio and perhaps the needs and vulnerability of the other side.

How can one begin to put a value on these cross-licenses? [ 7] What is the value of the freedom of action that they buy? Even without explicit cross-licensing, there may be a tacit understanding that firms will not sue for patent infringement unless another company sues them first. This seems to be a reasonable response where inadvertent mutual infringement creates the potential for "mutually assured destruction."
Information Technology

During the 1990s, information technology played a leading role in transforming business in all sectors of the economy [ 8], especially as the Internet brought computing, communications, and information together in a common multifunctional infrastructure. Much has been made of how the unique economic characteristics of information products and services can be exploited them for business advantage [9]. Yet there has been little effort to link this literature to patent policy [ 10]. Instead, the case for software and electronic commerce patents has been made in conventional terms, citing the importance of software and Internet commerce, the value of the patents to venture financing, and protection for small companies against large competitors.
Although software patents are issued in ever greater numbers and the U.S. Court of Appeals for the Federal Circuit has endorsed them unequivocally, there is continuing controversy in the U.S. as well as Europe as to whether software patents are good policy. The 1999 National Research Council report, Digital Dilemma, describes developments as worrisome and argues the need for systematic study [ 11]. Even while endorsing the European Patent Office's (EPO) standards and practice on software patents, the draft European directive argues for monitoring the effects of software patents.
Software seems as different from pharmaceuticals, the industry that most clearly benefits from patents, as one might imagine. Software can be written by individuals without special equipment or resources. There is no need for clinical trials or regulatory approval. Unlike drug patents, software patents do not correlate to finished products; instead, a single program may have thousands of patentable functions [ 12]. Unlike other technologies, copyright is available to protect against wholesale reproduction of computer code.
In software, the granularity of innovation ranges from code-level algorithms to interface features — even the purpose of the program [ 13]. The internal structure is not only extremely complex, but interdependent in ways that require debugging and maintenance. Innovation is cumulative or sequential, so that patents favor early innovators at the expense of later ones. Economies of scale combined with network effects make first-mover advantages exceptionally powerful. Instead of reading patents, developers work from scratch, i.e., from tacit knowledge without resort to codified knowledge. Tacit knowledge is embedded in software, and if the software is well-designed, there is little need to explain how it works.
The open source phenomenon is the clearest sign that software is fundamentally different from other technologies. While open source development may be compared to open science and open standards, it results in finished products with immediate economic value. Open source software can be exchanged, tested, implemented, and distributed on the Internet, drawing on volunteer expertise from anywhere in the world.

Globalization

International trade promotes economic specialization, and economic specialization promotes trade. Under liberalized trade, developed economies with high costs of labor and natural resources must rely increasingly on intangible assets as a source of competitive advantage. Unlike other intangible assets, intellectual property can be projected remotely, indeed globally, without significant diminishment and with little remote investment — as long as other countries adopt and enforce similar rules [ 14].

The U.S. and other developed economies successfully tied intellectual property to trade liberalization in the negotiations that culminated in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) [ 15]. TRIPS was part of the General Agreement on Trade and Tariffs that formed the charter of the World Trade Organization (WTO) in 1994 and is administered by the WTO. Thus TRIPS operates apart from and in addition to the regime-specific treaties administered by the World Intellectual Property Organization (WIPO), addressing the different forms of intellectual property in terms of minimum substantive standards and enforcement obligations. This includes a provision that national patent laws be technology-neutral with respect to patents: "[P]atents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced" [16].

Shortly after the organization of WTO, the Internet and the World Wide Web created a new wave of globalization. At first, this was propelled by the spectacular efficiency of the Internet for communicating and publishing information. The cost of using the Internet was based solely on periodic fees, usually monthly, without regard to volume or distance — which made it almost as easy to interact with users on the other side of the globe as with next-door neighbors. Advertising supported free delivery of content, and search engines helped consumers and businesses find each other. The Web began to be used to promote and consummate business and consumer transactions. "Global electronic commerce" became the framework for new initiatives on national and international policy related to information technology and the Internet [ 17].

The minimalist Framework for Global Electronic Commerce developed by Ira Magaziner for the Clinton Administration espoused private sector leadership and governmental restraint and specifically cautioned governments against reflexively applying old laws and regulations to electronic commerce [ 18]. It also argued for facilitating electronic commerce on a global basis through the application of consistent principles. The policy of restraint was in part a response to political inclinations to intervene, as seen in attempts to curb pornographic content in the U.S. and the European data directive on privacy.
However, spurred by the conspicuous vulnerability of content to instantaneous, perfect, low-cost copying over digital networks, the Clinton Administration's initial reaction with respect to intellectual property was also interventionist. A 1995 report under the auspices of the National Information Infrastructure Task Force actually recommended treating Internet intermediaries as publishers who would be strictly for copyright infringement over their facilities [ 19]. This effort led to the WIPO Copyright Treaty of 1996 [ 20], which did not mandate intermediary liability but required protection beyond traditional copyright for technological safeguards, resulting in the controversial Digital Millenium Copyright Act of 1998 [21] and the European Copyright Directive of 2001 [ 22].

Within this context, little attention was paid to software patents prior to 1997. Software producers concentrated on wholesale deliberate copyright violations, i.e., piracy, as a policy and legal priority that they all agreed on. Piracy was easy to vilify in the courts of public opinion and put software in the company of well-established content industries expert in the legal, political, and practical problems of pursuing copyright violations around the world.

Since patents traditionally covered physical products or processes, there was little awareness outside of the U.S. of any special relationship between electronic commerce and patents [ 23]. This changed with emergence of the Internet as medium for software delivery and interactive services, the explosion of global electronic commerce, and the legitimation of business method patents in the U.S. The 1998 State Street Bank decision abolished limits on software and business methods patents based on an interpretation of the 1952 Patent Act — with no policy arguments one way or another. Despite the Framework principles of restraint, the U.S. Patent and Trademark Office embraced the State Street decision as a pillar of an explicitly expansionist policy [ 24], and the U.S. is seeking to sell to this standard to the world within the WIPO negotiations on substantive patent law harmonization.

Overview: Policy development in the U.S. and Europe

Despite the prominence and interconnectedness of these themes, patent policy remains a backwater legal domain only loosely connected to mainstream economic discussion on innovation. Intellectual property is recognized as important, to be sure, but there is little effort to come to grips with specific policy problems such as the scope of patentable subject matter. Patent policy evolves within a narrow legal framework that does not acknowledge differences among technologies, economic or otherwise [ 25]. It has been promulgated almost entirely by court decisions based on interpretation of statutes and prior case law.
The legal and institutional complexity of the patent system makes it difficult for outsiders to understand and endows the system with immense inertia. There are periodic calls for rethinking intellectual property policy [ 26], but these calls are answered with skepticism by most patent professionals, who see no crisis worthy of study. Despite empirical evidence that patents are of limited significance for most industries, claims are often heard that the patent system is responsible for America's technological preeminence.
The principal axis of patent politics in the U.S. is defined by the debate over reform and harmonization, in which positions are expressed with ideological conviction. Independent inventors and university licensing offices have fiercely resisted efforts by the patent establishment (large companies and the patent bar) to move to first-to-file, early publication, expanded re-examination, and prior user rights. They see first-to-file as inherently biased towards large companies that are able to crank out patents quickly and easily. A recent effort to achieve more modest goals on other reforms culminated in the American Inventors Protection Act of 1999, at the cost of last-minute compromises that limited the Act's effectiveness.

Europe lacks a vocal small inventor community. Instead, Europe is politically focused on developing an integrated, low-cost regional patent system as part of a broader push towards market integration and promotion of innovation. Europeans are also concerned with how much it should embrace the expanded scope and intensity of the U.S. system, which is variously portrayed as a promoter of investment, an indicator of American competitive advantage — or as a quagmire of low-quality patents, litigation, intimidation, and opportunism. Much debate centers around the value of patents to small firms (SMEs): Do patents provide effective protection against large predators or do patents make them vulnerable to portfolio-wielding multinationals — or both? Anecdotal evidence points to cases (such as Stac v. Microsoft) where a patent has worked for a small firm against a large rival, but it appears that, on the whole, small firms are disadvantaged by patents [ 27]. While they may win battles over individual patents, they lose the war over portfolios.

The intense debate in Europe owes much to the active political role played by the open source software developers, including companies with complementary business models, in opposing the expansion of the patent system. Open source development as a voluntary enterprise is compatible with copyright rules against direct appropriation, and in fact copyright is used to enforce open source licenses [ 28]. However, the high overhead of the patent system, the exposure to unforeseen liability, and the impossibility of free distribution if royalties must be paid all work against the open source model. Individual contributors can warrant that they have not copied code, but they cannot warrant with confidence that their contribution does not infringe patents.
The case for open source software as an alternative to Microsoft is more compelling in Europe than the U.S. Despite deep ambivalence within the U.S. towards Microsoft, the company is a symbol of American technology preeminence — a national champion in the laissez-faire tradition. From a European perspective, it is easy to see Microsoft as an emblem of foreign domination over basic tools of the Information Society. Open source software, which has proved itself on Web servers, appears to offer the only credible alternative to a Microsoft-dominated future, an opportunity for European advantage, or at least a commoditized platform that helps close the technology gap between the U.S. and Europe.

Vocal, motivated, and surprisingly organized, the European open source community has concretized the software debate by claiming that the patent system favors the traditional proprietary closed-source model over the open source model. In the U.S., by contrast, there has been virtually no organized opposition to the expansion of the patent system. While concerned about software patents, the open source movement in the U.S. has not been politically organized. Of course, the patentability of software is regarded as settled in the U.S. There has been no political opening for organizing the open source community as there has been in Europe with the EC efforts to create a true European community patent or the recent attempt by the European Patent Organisation (the governing body of the European Patent Office) to abolish the computer program exception in Article 52 of the European Patent Convention [ 29].

In the U.S., limits on patentable subject matter were eroded piecemeal through a series of judicial decisions by the specialized appellate court, the Court of Appeals for the Federal Circuit [ 30]. This expansion of scope of the patent system took place over a seventeen-year period from the 1981 case of Diamond v. Diehr, the last word of the U.S. Supreme Court on the subject, to State Street Bank and Trust v. Signature Systems in 1998. During this period, the only sustained organized opposition to software patents came from the League for Programming Freedom (LPF), associated with Richard Stallman and the free software movement. (While the open source movement has roots in the free software movement, the free software movement had and still has a strong moral orientation that is sometimes at odds with the more inclusive, pragmatic, and business-minded open source community.) The LPF remained a loose collection of high-minded programmers that did not engage the pure-play software companies opposed to software patents [31].

Today the political capacity and posture of the open source movement in the U.S. is complicated by the economically important involvement of large computer companies, including IBM, Sun, HP, Apple, and Intel. Despite indications that patents play a relatively minor role in the computer industry [ 32], computer companies have supported software patents in principle and sought them aggressively in the 1980s before software publishers started applying for patents. While these companies support open source as a non-proprietary alternative to Microsoft's technology, they want to preserve their patent portfolios, which protect key business lines against new entrants and, following the IBM model, are increasingly seen as significant sources of revenue.
These tensions have played out in the recent debate in the World Wide Consortium (W3C) over whether to allow standards that incorporate patented technology if payment is required for the use of the technology. A license would have to be available on reasonable and non-discriminatory terms — referred to as "RAND" licensing, but not necessarily on a royalty-free or "RF" basis. Most standards bodies accept RAND licensing (although they may have a preference for RF); however, any fee-based licensing imposes a barrier to the free distribution of open source software. A few days before the W3C comment period was due to close, members of the open source community sounded an alarm, and the W3C was deluged by an outpouring of sentiment against RAND licensing from around the globe. IBM and Microsoft supported a pro-RAND policy, while Apple, Sun, and HP were pro-RF.

A year later, W3C emerged with a policy that strongly rejects the incorporation of RAND or any fee-based technology on core Web standards, and with this apparent victory, the open source community will likely play a more significant role in the W3C and other standards development organizations [ 33]. W3C patent policy is not public policy. Yet W3C is a global, private sector-led standards development organization with offices at MIT in the U.S., INRIA in France, and Keio University in Japan. It represents the kind of private-sector led policy development espoused by the Clinton Administration's Framework for Global Electronic Commerce as an alternative to governmental policy-making.
For now, the opportunity for informed public policy development is clearly greater in Europe than in the U.S. The debate in Europe began within a narrow framework, but has since become open-ended and public, as well as broader and deeper. As such, it has moved closer to the central questions about the nature of innovation and competition in the knowledge-based digital economy, as well as how to respond to the U.S. challenge.

In the U.S., the expansion of patentable subject matter, while still controversial, is considered fait accompli. As explained by former Commissioner of Patents and Trademarks Bruce Lehman:

While legislation has been introduced and Congressional hearings may be held, the weight of opinion among patent professionals in the United States is overwhelmingly against any legislative intervention to restrict the subject matter of patents. Therefore, change is unlikely, and anyone doing business in the United States is well advised to consider measures to adjust to these new conditions [ 34].

Remarkably, there was absolutely no pressure on Congress to allow patents on business methods before the State Street decision. Yet today, despite the guarded opposition of IBM and a few other companies, there is no organized opposition to business method patents. Patent professionals have a keen economic interest in maintaining an expanded system, and the State Street decision has created a constituency in those who have or expect to receive business method patents.

Few companies develop patent policy in concerted systematic way. Most are content to develop policy through patent associations, specifically Intellectual Property Owners Association (IPO), or patent committees within broader associations like National Association of Manufacturers (NAM). For example, in response to the PTO's recent solicitation of comments on harmonization of substantive patent law, IBM was the only major company to offer comments of its own [ 35]. Patent policy is driven by individuals or small companies with patent-intensive business models, large companies with evolved and sophisticated patent strategies, and professional intermediaries, whether inside companies or on their own. The uniform, one-size-fits-all nature of the patent system works to limit policy input, because any prospect of change must overcome the inertia and self-interest of the system as a whole, as well as the interests of the industries for whom the system is most valuable.
This resistance to outside influence and change is reinforced by the complexity and insularity of patent law. Patent lawyers must have a technical education in addition to a law degree and must pass a special exam; the subject matter of each patent is usually highly specialized technical knowledge; examination involves a unique ex parte process; and, the application of patent law is intricate and demanding [ 36]. The extreme costs of litigation and practical problems of both enforcement and infringement avoidance make practice diverge from strict application of the law, so despite the one-size-fits-all ideology, practice may be highly specific to industry conditions.
Since only patent practitioners have a deep understanding of how the system works in theory and in practice, companies look to them for guidance on policy. Accordingly, it is difficult to determine the extent to which patent policy positions stated by trade associations really represent the considered judgment of the member companies or whether the views are colored by the interests of patent professionals. In an April 2001 House Subcommittee hearing on business method patents, IPO testified that the members of its task force were unanimously opposed to legislation restricting the scope of patentable subject matter [ 37]. Yet one of the major companies represented, General Electric, opposed non-technical patents on business methods in the European Commission's consultation [ 38]. Another member, IBM, opposed patents on business methods in its comments on harmonization of substantive patent law [39].

The capture of the patent policy by the patent community is also manifest in the institutions: the Patent and Trademark Office and the specialized patent appeals court, the Court of Appeals for the Federal Circuit (CAFC). The most conspicuous evidence of capture at the PTO is its notorious mission statement: "The mission of the Patents Business is to help customers get patents" [ 40]. Until 2002, the PTO's performance goal was explicitly expansionist: "Help protect, promote and expand intellectual property rights systems throughout the United States and abroad" [41].

Although established to promote consistency and discourage forum shopping across different appellate circuits, the CAFC has proved pro-patentee in many important respects. It has dramatically increased the scope of patentable subject matter, raised the presumption of patent validity, lowered the standard of non-obviousness, upheld patent validity and findings of infringement at a higher rate, and allowed for increased damages [ 42]. As Judge Richard Posner recently observed, "a specialized court tends to see itself as a booster of its speciality" [43].

Widespread discontent with Internet-related patents (software and business methods) has been expressed in terms of patent quality, which in turn has played into the matter of fee diversion. This is an interesting side event in which the House Appropriations Committee, with the support of the Office of Management and Budget, has regularly diverted some of the uses fees paid to the PTO to other purposes [ 44]. The fee diversion issue pits the House Judiciary Committee, which oversees intellectual property, against the House Appropriations Committee. Attempts by the Judiciary Committee to outlaw the fee diversion have been unsuccessful, and the chairman of the Subcommittee on Courts, the Internet, and Intellectual Property has acknowledged that the PTO must make an effort to address quality in a more formal manner [45].

The USPTO has openly sought input on improving quality but has not attempted any independent or systematic analysis of the problem. The March 2000 business method initiative [ 46] reportedly reduced allowances in Class 705 from 56 percent to 36 percent, which indicates substantial benefits from enhanced examination. It also suggests a serious overpatenting problem that may not be limited to business method patents and the need for more objective analysis of the costs and benefits of improving quality [47]. The USPTO recently announced a "21st Century Strategic Plan" [ 48] that introduces a number of process reforms, including the "second set of eyes" review begun under the initiative on business method patents and, more controversially, plans to allow for the outsourcing of searching for prior art.

The insularity of the State Street decision

Nothing demonstrates the insularity of patent policy development in the U.S. more vividly than the 1998 State Street Bank decision abolishing the longstanding judicial rule against patents for methods of doing business [ 49]. The decision, written by Judge Giles Rich [ 50], claims that the expansive language of the committee report for the 1952 Patent Act necessarily included business methods. The language cited, "everything under the sun made by man," is a phrase that the Supreme Court referenced in the 1980 Chakrabarty decision in upholding patents on life forms [ 51], and which has been cited repeatedly in arguments against subject matter limits ever since. However, the full sentence reads:
"A person may have "invented" a machine or a manufacture, which may include anything under the sun that is made by man, but it is not necessarily patentable under section 101 unless the conditions of the title are fulfilled" [ 52].

This is not a direct statement on the scope of patentable subject matter, but an offhanded relative clause that refers to a machine or manufacture. A method of doing business is not a machine or a manufacture but a process, a separate category under the patent law.

Unlike biotechnology, methods of doing business were well known at the time of the 1952 Act, neither new nor considered a technology. The judicial rule against patents for business methods was half-a-century old and well-known in 1952, and there is nothing on record to suggest that Congress intended to abolish it. Writing in 1960, Judge Rich, too, thought that methods of doing business remained unpatentable after the 1952 Act:

Of course, not every kind of an invention can be patented. Invaluable though it may be to individuals, the public, and national defense, the invention of a more effective organization of the materials in, and the techniques of teaching a course in physics, chemistry or Russian is not a patentable invention ... . Also outside that group is one of the greatest inventions of our times, the diaper service [ 53].

Today, there is no limitation on patenting any of these things.

Judge Rich's decision in State Street does not admit to his inconsistent views on the subject. More disturbingly, he does not report his role in drafting the 1952 Act, despite the fact that the holding relies on the intent behind the Act to radically expand the scope of the patent system. This failure to acknowledge his personal involvement and reputational stake, let alone recuse himself from the decision, is a remarkable omission for a federal appellate judge.

Scholars have criticized the legal analysis in the State Street decision at length [ 54], and there is no need to recite their arguments here. However, the utter absence of any policy rationale for the decision bears witness to the parochialism of patent jurisprudence. The decision has had an impact throughout the economy — within sectors and at professional levels where there had been no direct contact with the patent system. Yet it does not address either the basic desirability of business method patents, nor the implications of abandoning limits on the patent system that have explicitly or implicitly been in place since its beginnings [55].

Although the decision purports to eliminate "method of doing business" as a meaningful category of inventions, the term was quickly enshrined in statute in a last-minute compromise needed to pass the American Inventors Protection Act of 1999. Prior user rights (which are well-established in Europe) were proposed to protect companies who chose to practice inventions as trade secrets in the event that another company patented the same invention. However, independent inventors objected, believing that large companies would claim prior use to stonewall small patentees. At the last minute a compromise was struck limiting the defense to "methods of doing or conducting business" on the basis that this was only fair, since everyone had assumed that business methods were not patentable [ 56].

However, the 1999 Act does not define business methods. The USPTO takes a technical-sounding view of business methods as "automated financial or management data processing methods" — the title of its March 2000 white paper. The white paper speaks of non-discrimination against software inventions that happen to deal with business methods, as opposed to distinguishing between technological and non-technological inventions. In fact, the trilateral consensus statement, which the USPTO has entered into with the EPO and the Japanese Patent Office, indicates that there is no difference among the three patent offices in the standard applied to business methods — with the proviso that the required technical character can be inferred from the specification in the U.S. [ 57] But this is clearly wrong after State Street as shown by USPTO practice and especially by the position taken by the U.S. in the current negotiations in WIPO towards a substantive patent law treaty. Even so, the myth persists in Europe that the U.S. patents are limited to inventions within fields of technology [58].

The more common understanding of business method patents is that the innovation is at non-technical level, regardless of whether implementation involves computers [ 59]. After all, the rule was conceived and popularly understood before computers were invented [ 60]. Yet the PTO white paper plays down the significance of the ruling by emphasizing business methods with a technical nature.

Software patents in the U.S.

The early history of software patents is the same on both sides of the Atlantic. In the U.S., the 1966 Report of the President's Commission on the Patent System recommended against patents for computer programs [ 61], and the unanimous 1972 Supreme Court decision, Gottschalk v. Benson, seemed to preclude patents on software by ruling against patents on mathematical algorithms [ 62]. Section 52 of the 1973 European Patent Convention, which precluded patents on computer programs "as such," echoed the then prevailing wisdom in the U.S. The hostility toward granting patents on computer programs that prevailed in the 1960s and 70s then gradually gave way in the 1980s and 90s — not through public deliberation but by judicial or quasi-judicial decision-making.
The last word on the subject from the U.S. Supreme Court was the 1981 decision of Diamond v. Diehr, which held that the presence of a computer program within an otherwise patentable physical process (curing rubber) did not render the process unpatentable [ 63]. Since it was created in 1983, the specialized patent appeals court, the Court of Appeals for the Federal Circuit (CAFC), has been responsible for shaping U.S. policy [ 64], and its many decisions on the scope of patentable subject matter have never been reviewed by the Supreme Court.
The number of issued software patents grew exponentially in the U.S. beginning in the early 1980s. Industry concern over software patents peaked with the infamous Compton's New Media patent on basic multimedia processes in 1993-94. USPTO Commissioner Lehman undertook a re-examination of the patent on his own initiative, an unusual step, and the Office ultimately rejected it. Early in 1994, the USPTO held hearings on software patents in San Jose and Crystal City that demonstrated the lack of consensus on policy, and the Commissioner lamented that the great research universities in the Bay Area offered no insight into the issue. At that time, computer companies and patent lawyers supported software patents; most software companies, with the notable exception of Microsoft, opposed them. Software trade associations were internally divided and unable to take positions on fundamental policy [ 65].

Compared to the sudden abolition of the rule against business method patents, the path to software patents was constrained by Supreme Court decisions that were not easily discounted. For a while the decisions seemed to point one way then another depending on which judges served on the panel. However, the 1998 State Street decision conclusively abolished limitations on software as well as the judicial rule against patents on methods of doing business [ 66]. Henceforth, the only exceptions to patentable subject would be "laws of nature, natural phenomena, and abstract ideas" that did not produce a "useful, concrete and tangible result." This undefined standard indicates there are no longer limits on subject matter other than the novelty, utility, and non-obviousness.

The debate in Europe

Administrative and judicial decision-making has been the rule in Europe as well. However, the European Commission's most recent effort to create a single European patent has engendered unexpectedly vigorous public debate on fundamental benefits and costs of software patents. This debate is colored by perceptions that European innovation generally lags behind that of the U.S. [ 67], and that new steps must be taken to incent investments in innovation and promote openness to risk.
Patents provide such an incentive, but since patents issued by the European must be registered and enforced separately in each country where protection is desired, the cost of patent protection is substantially higher than in the U.S. Hence the push to reform the present balkanized and costly European system to encourage greater use of patents. At the same time, there is deep concern over the market dominance of U.S. companies in information technology and, by extension, U.S. hegemony over an increasingly globalized digital economy. The initial reaction of the Commission was to emulate the expansion of the patent system in the U.S. to embrace software and electronic commerce on the assumption that expanded patent protection was partly responsible for America's technological prowess.

The erosion of limits on patentability appears has taken place more gradually in Europe than the U.S. — because of the explicit language in the Convention and parallel national laws, and because it has been slowed by the traditional views of patentable subject matter held by some courts of broader jurisdiction. An expensive, decentralized system and a less aggressive patent community also meant less pressure for expanding the scope of the system. Nonetheless, by 1999 the European Patent Office had issued an estimated 13,000 software patents despite the ambiguous exclusionary language in the EPC — nearly half the number reputedly granted in the U.S. [ 68] Patent lawyers commonly claim that software patents have been just as available in Europe as in the U.S. although more attention to form is required.
The directive on the legal protection of computer programmes that the Council of the European Union adopted in 1991 ignored patent issues [ 69]. Six years later, the European Commission first raised the issue of software patents in the course of a Green Paper resurrecting the idea of a European Community patent (see sidebar) [ 70]. Mindful of the failure of a treaty-based approach that began in the 1980s, the 1997 Green Paper resurrected the goal of a European Community patent system but proposed to proceed by internal market regulation instead of through a convention and intergovernmental agreement. This required harmonization of substantive law, including inconsistencies in interpreting the EPC.

The idea of a European Community patent
Faced with the increasing importance of software, the European Patent Office and the national patent offices of some Member States have in recent years granted thousands of patents protecting logical models composed of basic ideas and principles that constitute "technical solutions to technical problems". These patents were not granted for the software per se but in respect of software-related inventions consisting of hardware and specific software.

At international level, Article 27 of the TRIPs Agreement does not rule out the patentability of computer programs, and some non-member countries do allow them to be the subject-matter of patents. On 28 February 1996 the United States published new guidelines for examiners concerning software-related inventions: Whereas a claim relating to a mathematical algorithm was accepted in the past only if a physical transformation was present, a more pragmatic approach is advocated today based on the necessary "utility" of the invention. This has the effect of broadening the scope of software-related inventions that are patentable. Software was, however, already extensively patented in the United States: a computer program carried on a tangible medium, e.g. a diskette, was patentable even before the new guidelines were published.

Japan is also examining whether the guidelines issued to examiners on this question need to be amended. On 8 August 1996 the Japanese Patent Office thus published new draft guidelines in accordance with which computer programs would not be patentable as such, but inventions would be patentable where they involved a high degree of "technological" creativeness using the laws of nature.

In the Community, interested parties have already been consulted on these matters via the questionnaire on industrial property rights in the information society drawn up by the Commission in July 1996. The answers received vary widely: Some respondents wished to see the present balance maintained between copyright (for programs as such) and patent protection (for software-related inventions) and action limited to ensuring that the relevant provisions are applied uniformly in the different Member States; others felt, on the contrary, that the time had come to reshape the system and, in particular, to consider deleting Article 52(2) of the European Patent Convention so as to allow the patentability of computer programs as such. In the opinion of those advocating such an approach, the requirement that the invention be of a "technical" nature should be maintained but once such a feature was present, a program which is recorded on a medium and puts the invention into effect once it is loaded and started up would become patentable.

Given the position taken by some interested parties, who advocate deleting Article 52(2) of the European Patent Convention, the possible practical consequences of such a step need to be examined, with special reference to the simultaneous application of copyright law and patent law to the same work or invention.

— Promoting innovation through patents, Green Paper on the Community patent and the patent system in Europe (1997). pp. 16-17 [ 71].

The analysis, shown in full in the sidebar, is remarkably brief and simple. It treats the question of patents for software as a technical issue centered around the relationship of patent to copyright as reflected in the ambiguous language of the European Patent Convention and TRIPS. It ignores the fundamental economic question of whether patents for computer software promote innovation. Instead it presents the problem as an administrative issue by focusing on the examination guidelines developed by the patent offices as if the guidelines determined the law (which is not the case).

The discussion in the Commission's follow-on Communication of February 1999 (second sidebar) is only half again as long as that in the Green paper, but it extends the analysis in some new directions.

Promoting innovation
The consultation launched by the Green Paper clearly revealed that the current legal environment covering inventions involving computer programs did not provide sufficient transparency and therefore needed to be clarified.

While computer programs are protected by patent in the United States and in Japan, in Europe we used a legal artifice: The programs per se are not patentable, while a technical invention which used a program is. There are significant disadvantages, such as differences in court judgments, inherent in such a practice which lacks transparency in terms of the text of the Munich Convention. Thus, opinions differ between the EPO and certain German courts on the one hand, and the British courts on the other; this means that the same invention is protected in some Member States and not in others, a situation which is damaging to the proper operation of the internal market.

This situation means that, although the Munich Convention and the national laws of Member States do not permit the patentability of computer programs as such, there are about 13,000 European patents covering software! It would also appear that, owing to extensive ignorance of the current legal situation in Europe, about 75 percent of these patents are held by very large non-European companies. European industry is very interested in this type of protection; however, most SMEs in the programming sector are not aware that, by filing patent applications in a certain way, patent protection can be obtained for this type of invention. With investments of almost US$40,000 million annually in developing information technology and software programs, the economic importance of this sector is obvious.

According to the practice developed by the EPO, an invention is patentable if it makes "a technical contribution" to the state of the art; however, this approach has certain limitations: thus, accounting/financial programs for the purchase and sale of currencies are of great economic value, but since they do not make any "technical contribution", they are not currently patentable in Europe, whereas they are in the United States and Japan.

An important consequence of the difference of protection is the scope of the conferred rights and the means of enforcement: In the United States, the holder of a patent covering a program may directly attack the distributor of counterfeit programs distributed via a medium ("direct infringement"), whereas in Europe, since the protection is limited to the technical invention which uses the program, the distributor of a diskette is only the accomplice, but not the author of the infringement ("contributory infringement"); the sole author of the infringement is the user who uses the program on the diskette and only he can be sued. The harmonisation of legislation on this question must ensure that rights are implemented effectively throughout the Community.

In the United States, following developments at the end of the 80s, it became possible to lodge claims covering a program as such ("program product claim"). This change had a very positive impact on the development of the software industry; thus, Microsoft now holds about 400 American patents for software programs, and about 12,000 patent applications covering software are filed annually (or six percent of total applications, compared with less than two percent in Europe). In Japan, about 20,000 patent applications covering computer programs are filed each year, and the guidelines adopted in 1997 by the Japanese Patent Office follow the more liberal practice in force in the United States.

Furthermore, the current situation in Europe means that the majority of enterprises active in the software field lack information and knowledge of the possibilities provided by the patent system. Alongside the legal changes mentioned above, an information campaign should be launched aimed at providing more information to enterprises in this sector regarding the existence of the patent system, its role and the economic advantages to be derived from it, particularly in terms of the penetration of foreign markets and the possibility of obtaining licences. The national patent offices and the European patent offices could play a very useful role in this field.

— Promoting innovation through patents, Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee, February 1999, p 12f. [emphasis in original].

The 1999 Communication acknowledges the opacity of the legal environment and the use of legal artifice, including the ambiguous language of the European Patent Convention. It then claims that software SMEs lack basic knowledge about patents and asks for an information campaign by the national patent offices to inform developers about the benefits of the patent system [ 72]. It invites the patent offices to drum up more business for the system, offering them a new role in life against the prospect of a true community system that is designed to eliminate the duplicative functions of national patent systems.
The Communication now explains the practical significance of allowing patents on program media, i.e., that it allows developers to be sued for infringement directly. However, it misstates the history of U.S. law on "program patent claims" which were not explicitly allowed until 1995 [ 73]. The Commission makes a simple economic argument — that value deserves protection. It goes on to suggest that the economic value of the subject matter should take precedence over the "technical contribution" requirement. This would justify conceptual U.S.-style patents on business methods, which were legitimized by the State Street decision the previous year. It wrongly equates infringement of software patents with counterfeiting [ 74], and makes the novel and preposterous assertion that allowing patent claims on program media had a major impact on the U.S. software industry — a claim which has never been asserted in the U.S. In fact, at the end of 1990, Microsoft had only five software patents, but it was already entrenched in its dominant position on the desktop thanks to copyright, and Oracle had no patents at all prior to 1995.
The 1999 Communication still does not recognize any problems or opposition to patents on software. Yet in a March 1998 event, "Software Patents in Europe," hosted by the U.K. Patent Office and supported by the Commission, the past-president of the British Computer Society Ron McQuaker expressed strong reservations about the practical workability and effects software patents [ 75]. Instead, the Communication expresses concern that patents have been insufficiently promoted and that software developers are ignorant of their value.
Later in 1999, the Commission contracted with the London-based Intellectual Property Institute for a study, "The Economic Impact of the Patentability of Computer Programs," which was published in March 2000 [ 76]. The title notwithstanding, two of the three authors were patent lawyers, and the body of the report has 19 pages of legal analysis compared to only 11 pages of economic analysis. The summary section concludes that there is "abounding evidence" that: "The patentability of computer program related inventions has helped the growth of computer program related industries in the States, in particular the growth of SMEs and independent software developers into sizeable indeed major companies" [ 77]. Yet this undocumented claim is unsupported by the economic section of the report, which is cautious and skeptical given the lack of empirical evidence on the effects of software patents.
The Commission finally issued its proposed directive on the patentability of "computer-implemented" inventions in February 2002 [ 78]. The accompanying memo characterizes the directive as simply freezing the status quo — validating EPO practice to date while holding the line against further expansion of patentable subject matter into business methods. At eleven pages, the narrative memo accompanying the directive is considerably longer than the discussion in the Communication of 1999, in part because it relates the developments that have taken place since, namely the commissioning and publication of the economic impact study, the public consultation of October 2000, and the analysis of the 1,400 responses. However, seven pages are devoted to discussing the legal issues. The section headed "the impact of the patentability of software-related inventions on innovation, competition and on businesses" is less than a page and is set forth in full on the third sidebar. As may be seen, it relies heavily on the IPI study.

The impact of the patentability of software-related inventions
on innovation, competition and on businesses
The study relies on the United States as a test case. It finds that "the patentability of computer program related inventions has helped the growth of computer program related industries in the States, in particular the growth of SMEs and independent software developers into sizeable indeed major companies". In Europe, too, there is increasing, even though still relatively low, use by independent software developers of patents in raising finance or in licensing. The main source of protection that has allowed the software industry to grow has been the law of copyright.

However, the study also clearly identifies concerns about the patentability of computer implemented inventions in the U.S. They relate, first, to the grant of allegedly "clearly invalid patents" (in particular for e-commerce), that is patents which are granted for inventions that are either not new or where inventive step is on the face of it lacking. Second, patents for computer-implemented inventions might strengthen big players' market positions. And, third, patents for incremental innovation which is typical of the software industry entail the economic costs of figuring out the patent holders and negotiating the necessary licences. Yet, the study acknowledges that it has not been shown that these reservations would outweigh the positive effects of the patentability of computer-implemented inventions in the U.S. To outline how Europe might be better placed than the U.S. to avoid adverse effects, the study stresses "our strength in having opposition procedures in addition to the facility of being able to submit observations on the patentability of inventions to the EPO without the expense of opposition procedures". These are important legal means to ensure patent quality which are not available in the U.S.

Moreover, the study points out that in Europe we must ensure the application of proper examination standards, in particular of the inventive step, to prevent invalid patents. It should be added that the quality of the examination done in particular by the EPO is widely respected. Finally, the study finds "no evidence that European independent software developers have been unduly affected by the patent positions of large companies or indeed of other software developers".

The study identifies as one possible option for the scope of harmonisation to "stay with the status quo (as defined by the case law of the EPO), subject to removal of the exclusion of 'computer programs' 'as such'. This would, the authors consider, have no consequence save for the important one that SMEs and independent software developers will be less likely to consider computer program related inventions unpatentable." On the other hand, "any move to strengthen IP protection in the software industry cannot claim to rest on solid economic evidence".

— Proposal for a Directive of the European Parliament and of the Council on the patentability of computer-implemented inventions, Commission of the European Communities, Brussels, 20.02.2002, COM(2002) 92 final, pp. 5-6 [ 79].

On inspection, it appears that even in this limited section, only the first paragraph and a half is concerned with the impact on innovation, competition, and businesses as the heading advertises. Like the "economic" study it relies on, it lapses into legal argument and concludes that there is no evidence that small developers have been "unduly" affected by large patent holders [ 80].

Rather than openly providing economic or policy analysis and assessment, the memo summarily announces that it has made an assessment by taking the relevant factors into account:

The Commission has assessed the question as to how extensive harmonisation of the national patent laws regarding computer-implemented inventions should be in the light of the likely impact of the proposal on innovation and competition, both within Europe and internationally, and on European businesses, including electronic commerce. Moreover, it has considered the impact on small and medium-sized enterprises and on the creation and dissemination of free/open source software.

But it stops there. There is no documentation of what the Commission found or how it reasoned to the conclusion that the status quo of EPO practice is the right standard.
Despite the abundance of economic questions raised in the economics section of the IPI study and the lack of empirical research cited, the Commission has not undertaken further research — except for a small-scale survey project commissioned by DG Enterprise in 1999 and completed in spring of 2001 that questions the value of software patents to small companies [ 81]. The memo in the directive acknowledges the study but answers it by calling for increasing SME awareness of the patent system, just as the Commission called for educating SMEs in the 1999 Communication. It does not address the cost and complexity burden that is the principal focus of the report and of other literature on SMEs and patents [82].

The proposed directive completely ignores the Fraunhofer/Max Planck study funded by the German Federal Ministry of Economics and Technology and released in mid-2001 [ 83]. This very substantial, survey-based study also paints a problematic picture of the patent system from the perspective of software developers, especially the smaller ones.
Article 7 of the proposed directive promises what could be interpreted as economic research: "The Commission shall monitor the impact of computer-implemented inventions on innovation and competition, both within Europe and internationally, and on European businesses, including electronic commerce." But this could also mean another unbudgeted open-ended consultation with no objective measures or scientific sampling.

In short, the proposed directive opts for a political resolution of the problem that validates EPO practice. However, the vast majority of the responses to October 2001 consultation opposed software patents, so the directive memo justifies the result as a weighing of economic influence:

Thus although the responses in this category were numerically much fewer that those supporting the open source approach, there seems little doubt that the balance of economic weight taking into account total jobs and investment involved is in favour of harmonisation along the lines suggested in the paper.

This argument, which favors large and entrenched economic interests against new and future entrants, is one of the conundrums of the patent system. The prospect of excluding future competition is at the heart of the incentive it offers to inventors. However, the incentive may be unduly enhanced when innovation within a field is cumulative or sequential [ 84], as well as when network effects are strong [ 85]. When portfolio-level effects dominate, small companies are especially disadvantaged, because they lack the patents needed to participate on equal terms. Under today's conditions, they may not even know what patents they need [86].

Another problem with an "economic weighing" of responses to the consultation is that the responses of larger companies whether directly or through are filtered through patent professionals, because policy is treated as technical issue for domain specialists. Within trade associations, positions are developed by specialized committees dominated by the large members with the resources to monitor and keep engaged on the issues at an expert level. Small companies that do not have in-house patent counsel are likely to have unmediated perspectives on the value of the patent system, because they would not normally hire outside patent counsel to articulate their interests in a policy process. In general, few small companies have resources to develop or articulate policy positions except when there is a clearly defined threat or opportunity that directly affects their business model.

The European Parliament's Committee on Legal Affairs and the Internal Market requested an independent study of the issues raised by the proposed directive. Conducted by Institute for Information Law ( IVIR) at the University of Amsterdam and publicly released in June 2002, the study supports the directive's decision not to extend the law [ 87]. However, the study is critical of the premises and reasoning behind the draft directive, including the economic conclusions the Commission derives from the Intellectual Property Institute study. The IVIR study notes the lack of empirical economic record behind the Commission's justification of software patents, argues for regular in-depth monitoring of impact of patents on European business through a "European Patent Observatory," and asserts the need to raise the inventive step standard as a legislative response to patent inflation ("trivial patents").

Developments in the U.S.

Whatever the limitations of the European Commission's analysis, it should be noted that there was no published analysis or expression of administration policy on software patents in the U.S. until the summary mention in the 1997 Framework for Global Electronic Commerce:

"Development of the GII will both depend upon and stimulate innovation in many fields of technology, including computer software, computer hardware, and telecommunications. An effectively functioning patent system that encourages and protects patentable innovations in these fields is important for the overall success of commerce over the Internet. Consistent with this objective, the U.S. Patent and Trademark Office (PTO) will (1) significantly enhance its collaboration with the private sector to assemble a larger, more complete collection of prior art (both patent and non-patent publications), and provide its patent examiners better access to prior art in GII-related technologies; (2) train its patent examiners in GII-related technologies to raise and maintain their level of technical expertise; and (3) support legislative proposals for early publication of pending patent applications, particularly in areas involving fast moving technology.

To create a reliable environment for electronic commerce, patent agreements should:

... .

require member countries to provide adequate and effective protection for patentable subject matter important to the development and success of the GII; and

... .

The United States will pursue these objectives internationally ... ." [88]

Note, however, that the U.S. statement does not address software patents as an issue but simply sweeps software in with hardware and telecommunications. It makes no mention of business methods, which were still assumed to be unpatentable. The statement makes the basic argument that importance merits protection. It does not argue for expansion because there was no perceived need to do so [ 89]. The principal point of the first paragraph is to promise improved quality, an issue that had surfaced again in comments on the December 1996 public draft of the Framework [ 90]. By using the term "patentable subject matter" the statement acknowledges subject matter limitations [91], although these would be swept aside by the State Street Bank decision a year later.

Like the European documents from the 1990s, the 1997 Framework does not suggest that there are competing interests at stake or that the matter might merit study and analysis. In the U.S., there has never been an adminstration study to inform policy on software or business method patents [ 92]. The White House Office of Science and Technology Policy commissioned a study on software patent quality and business effect by the Science and Technology Policy Institute at RAND in early 1998 [ 93]. However, it was suspended at the request of a U.S. multinational company concerned that the study would undercut efforts to secure greater international acceptance of software patents [ 94]. The penultimate Senate draft of the American Inventors Protection Act of 1999 mandated a General Accounting Office study of business method patents [ 95], but this was removed at the behest of the patent bar. Despite calls by the 1999 National Research Council report, Digital Dilemma, for research on the effects of software patents [ 96], no studies have been commissioned, nor has the National Science Foundation supported any empirical research on the subject.
The global reach of software and electronic commerce strongly suggests the desirability of informed, harmonized policy development as advocated in the Framework for Global Electronic Commerce. Yet despite voluminous debate on many aspects of electronic commerce, there has been no public engagement on patents for electronic commerce at an international level. U.S. trade negotiators have successfully argued for business method patents in bilateral negotiations, as shown by the recent agreement with Jordan, which explicitly requires Jordan to allow such patents [ 97]. As noted above, the U.S. now argues against a technical effect standard in the WIPO initiative to harmonize patent laws, but not in a public manner.
In early 2002, the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) initiated a major series of hearings on intellectual property and competition [ 98]. These hearings were not limited to the interface between patent law and antitrust but included a review of the patent system as a whole, occasioned by concerns that the system might be operating to disfavor the role of competition in spurring innovation [ 99]. The agencies held hearings throughout the year on a wide variety of topics, including two half days in February devoted to business perspectives on patents in the ICT sector [ 100]. The hearings demonstrate problems not just in software but throughout the ICT sector, although they may be most severe for software [ 101]. These include a high degree of uncertainty and risk, patent inflation, widespread inadvertent infringement, inability to manage patent information, cross-licensing at the portfolio level (to the detriment of new entrants), and practical failure of the disclosure function [102].

The Commission acknowledges the issue of inadvertent infringement in the Frequently Asked Questions released with the directive but summarily dismisses it [ 103]. Yet there was abundant testimony at the FTC/DOJ hearings that the inadvertent infringement is commonplace — and in many areas of ICT, not just software [ 104]. Widespread inadvertent infringement is one of the hallmarks of the overpatenting phenomenon noted by the Institute for Information Law study commissioned for the European Parliament. The problem reflects a fundamental tension between patent and copyright. As a legal matter, patent and copyright cover different aspects of software, but as a practical matter the advent of a patent regime for software diminishes the value of copyright. Copyright only proscribes certain behavior, whereas patent law presumes perfect knowledge of patents granted, as well as applications that will be granted in the future. Under copyright, developers have confidence in their ownership of what they create, whereas patents undermine confidence in the ownership of original programming [ 105]. The FTC/DOJ hearings make clear that knowledge about the ICT patent environment is costly and impractical to acquire — even knowledge about one's own portfolio [ 106]. Among larger players the problem is resolved by the cross-licensing of portfolios; however, this works against small players and especially new entrants, who may find it difficult just to identify the licenses they need to participate [107].

Despite continued controversy about the value and effects of software, as well as continued hostility among software developers [ 108], there is acceptance that software patents are here to stay. There may be greater business acceptance than in the early 1990s because of the greater stratification of the industry and the protection individual patents appear to offer against Microsoft. However, there is still widespread dissatisfaction with the functioning of the system. Quality problems persist, and it is commonly thought that most software patents will not stand up if sufficient resources can be brought to bear against them.
The costs of defending against patents, even bad patents, are notorious and potentially crippling for small companies [ 109]. The 2001 AIPLA Economic Report shows that, when the amount in controversy is less than US$1 million, each side will face average attorney's fees of US$499,000. This figure is up 25 percent from the 1999 report, which is consistent with reported increases for other patent attorney services. The figures do not include costs of experts, time spent by management and technical staff, and opportunity costs. Diversion of key staff, time, and attention is especially damaging for small companies, especially if they are operating in fast changing markets such as software or electronic commerce. Well-known tactics for exerting pressure include filing suit shortly just before an initial public offering or threatening action against the company's customers. By offering licenses for US$15,000 or less, patentees can strong-arm small companies, since the company knows that it may cost that much just to get a patent attorney to do an initial assessment of patent validity and infringement.
Because infringement notices and settlements are not a matter of public record, it is impossible to know just how widespread such practices are [ 110]. The trade press recently reported an exceptionally broad attack initiated by Pangea Intellectual Properties with broad patents potentially applicable to "millions" of e-commerce Web sites, as claimed by Pangea's attorney. Pangea sued 50 small businesses with Web sites, all of whom are based far from the court in California where the company has filed suit. As Pangea's attorney explained, "the patent and trademark laws don't say you have to go after the biggest fish first" [111].

In the U.S., small company patentees have an offensive advantage in that it is possible find law firms that will work on a contingency basis or technology licensing companies willing to acquire an ownership interest and take the lead in litigation. In a number of large U.S. companies, the management and licensing of patent portfolios has become a profit center distinct from R&D. Instead of viewing intellectual property primarily as protection, these units seek to maximize returns to the intellectual property. For example, in the 1990s IBM began to aggressively exploit intellectual property licensing as a profit center, so that licensing income doubled from US$0.8 to US$1.7 billion in the four years between 1996 to 2000 [ 112]. Along with Texas Instruments, Lucent, and AT&T, the company has developed a reputation for systematically approaching companies with the weight of its vast portfolio and negotiating substantial licensing fees [113].

By contrast, Microsoft has restrained from asserting the patent arsenal it has built up very aggressively ever since IBM negotiated an estimated US$20-30 million in patent license fees from Microsoft when their OS/2 partnership broke up in 1990 [ 114]. However, there is considerable anxiety within the developer community, especially open source developers, that Microsoft will assert patents when it becomes strategically desirable and politically possible to do so [115].

There is widespread fear that Microsoft will use patents to control de facto standards and preclude open source alternatives to Microsoft technologies [ 116]. This builds on growing concern among standards development organizations that patents are slowing and, in some cases, threatening their work [117]. In the wake of high-profile problems involving Dell and Rambus [ 118], standards development organizations have become more careful about disclosure obligations and more specific about policies with respect to intellectual property licensing. However, they remain vulnerable to ambush by third parties, who are not constrained by the terms of participation. Ironically, the more public the standards process, the more vulnerable it becomes to third-party patentees, who by following the process can adjust patent applications to track the standard [119].

Why software is different

This paper has emphasized the meager policy framework and analysis for software and business method patents — especially given the asserted importance of granting patents in these areas. What would a fully developed policy framework for software and business methods look like? Could it illuminate the value and role of "technical contribution" as a threshold requirement of patentability — or "fields of technology" under the TRIPS Agreement. Could it reveal whether the technology-blind assumptions of TRIPS operate as an artificial constraint against optimizing the performance of the patent system or, more importantly, optimizing innovation and economic performance?

The plastic, abstract nature of information innovations [ 120] explains the extreme range of granularity — from the extremely fine granularity of code-level subroutines to the coarse granularity of business methods such as one-click ordering [121] and reverse auctions on the Internet [ 122]. Although software patents and business method patents overlap and are often difficult to distinguish, they actually represent problems associated with opposite ends of the granularity spectrum. Software is the extreme case of complex technology in which one product may contain thousands of patentable functions. The functions can be designed and implemented by an act of writing that requires no special equipment or investment. Barriers to participation are low, innovation is ubiquitous, and independent invention is commonplace. Business methods, by contrast, are broad concepts that can be implemented in hundreds of different ways. As is the case for software functions, the barriers to simply thinking up methods and models for conducting business can be very low, but patents at this level can preempt a wide swath of competitive alternatives.
Business method patents, along with many system or application-level software patents, are frequently criticized as overbroad. Indeed, there is lingering uncertainty about whether the first computer or Internet implementation of a known function or service, such as Priceline's patent for conducting a reverse auction over the Internet, is obvious since combinations of known elements are considered non-obvious unless there is something in the prior art that "suggests" combining them [ 123].

The figure above shows how the "software" problem and "business method" problem diverge from the classical case of patents on discrete technologies such as chemicals and pharmaceuticals where there is rough equivalence between patents and products. In these discrete technologies, the patent system seems to work reasonably well: Patents are valued; the system is accepted by industry consensus; and patent disclosures are at least moderately useful as a source of information [ 124].

The functional complexity of computer programs has a number of problematic aspects that could be documented — at least in terms of perceptions of developers, R&D managers, lawyers, and other participants in the innovation process. At one level, it presents the anti-commons problem — the high costs and uncertainty of managing and accounting for diverse property interests in a single marketable unit. This raises the prospect of royalty stacking, especially if each patent claimant is entitled to a figure of one to five percent of sales that is reckoned as a reasonable royalty in other contexts. (Historically, the development of complex technologies have been subject to worse, the use of patents to block rivals and stymie rapid development and deployment — as in the early radio and aircraft industries, where government intervention was needed [ 125].)

Ironically, the principal reason that royalty stacking is less of a problem than it might appear to be is that software is not in fact the "new technology" it is often represented to be, and huge volumes of patent-defeating "prior art" were created during the decades when computer programming was not patentable (or created by people who discounted the value of patenting software). As Bill Gates put it in a 1991 internal memo: "If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today" [ 126].

Much innovation in software is cumulative or sequential — i.e. it builds on earlier innovation, thereby giving early innovators greater leverage over later innovators than in discrete technologies [ 127]. While it may be possible for innovators to design around individual patents, patent thickets can create substantial barriers against new entrants, especially small ones. Software is highly interdependent, and incumbents can use patents to strengthen legitimate their control of interfaces. Article 6 of the proposed European directive responds to this problem by ensuring that patents, like copyright, cannot be used to block interoperation of complementary programs.
Arguments have frequently been made that the rapid pace of innovation in software is unsuited to the slow cycles of the patent system. On the one hand, the very short product cycles in software make it possible that the technology may be obsolete by the time the patent is granted. On the other hand, the eighteen months during which a patent application is secret is a long time from the perspective of independent innovators who may be blindsided by patents in process [ 128]. Economists have suggested that standards of patentability should be higher for rapidly innovating industries such as software [ 129], or even that patents may be less desirable to spur investment in new fields where there is an abundance of opportunity and where imagination and diversity may be more important than centrally controlled development [130].

The fact that innovation in software is voluminous and incremental raises profound practical problems in administering the patent system. The ease of creating functionality in software means that there is a huge amount of prior art at all levels of granularity, much of it dating from the period before patents were routinely granted and much of it undocumented. The documentation in source code disappears when the program is compiled. Software is commonly designed to be intuitive and user friendly, so that it can used without reference to documentation. Knowledge about software is disproportionately either tacit or embedded — and so perhaps insufficiently explicit for the patent system to work well [ 131]. There is too much software, not enough information about it, and what there is is hard to find. Since software innovations can be used in many different fields, the literature from which prior art must be sought will be widely dispersed. At higher levels of abstraction, synonyms and close substitutes abound, and functionality can be expressed in many different ways. In other words, the more abstract the subject, the more blurred are the metes and bounds, the higher the transaction costs, and the more the system favors those with enough resources to penetrate or bear the uncertainty.
The problems associated with fine granularity, volume of innovation, and identification of prior art make it difficult to delimit and evaluate software patents with confidence. This is compounded by broader institutional problems, in particular, lowered standards of non-obviousness (inventive step), together with the high cost, risks, and indeterminacy of litigation. The transparency, certainty, and well-defined boundaries needed for a property rights regime to work well are missing [ 132].

An argument can be made that such legal murkiness can be good, especially in unsettled areas [ 133], in that it encourages marketplace accommodations for difficult problems. For example, it leads to cross-licensing and patent pools. But in a heterogeneous industry, asymmetry of information and resources creates many opportunities for strategic behavior, and the high presumption of validity in the U.S. gives patent holders considerable leverage to exploit assymmetries. Although patent portfolios discourage full market entry by new players, individual patents may advantage small companies with lesser ambitions. Incumbent patent portfolios may inhibit organic growth, but pwned patents may facilitate sale of small companies. Patents enable non-producing firms to hold up companies with products in the market.
Scholars have been interested in the potential of patents for developing markets in technology [ 134]. However, in software the gulf between patents and products makes this impractical. There is virtually no market for components, and certainly not for components at the level of patented functions [ 135]. The licensing market, such as it is, seems to be defined characterized by patentees looking for infringers, rather than productive companies looking for technology.
In principle, patents resolve the paradox of transactions in information: The fact that the value of the information cannot be determined unless the seller reveals the information to the buyer, but then the buyer no longer needs it. Patents resolve the quandary by allowing the potential buyer to have the information but precluded from making use of it. But in the case of software, the boundaries, scope, and enforceability of patents may be so indeterminate that firms are reluctant to take on knowledge of patents that could be used against them [ 136]. The risks of knowing too much about patents may be one of the less obvious lessons of the Stac v. Microsoft case. Microsoft had negotiated with Stac, then broke off negotiations and developed its own technology. This sequence not only raises the potential of treble damages for willful infringement but tells a story that may lead a jury to conclude that a large company tried to take advantage of a smaller one.
This schizophrenic posture toward knowledge is also seen in the provisional rights now afforded by the publication of applications 18 months after filing in the U.S. [ 137]. These rights are effective only when and if an alleged infringer has actual knowledge of the application and its provisional claims. But if firms in fact no longer attempt to read the emerging patents in the ICT sector, they have as much, if not more, reason to ignore the published applications. This is a matter of concern in that early publication is intended to elicit prior art that can obviate bad patents and ensure that issued patents are of proper scope [138].

One characteristic of the software environment that clearly distinguishes it from that of other technologies is the availability of copyright as additional form of protection, which may well reduce the net benefit of patent protection for software [ 139]. Indeed, prior to the availability of software patents, the software industry developed no less rapidly, protected as it was by copyright as well as trade secret and other common means of appropriating value from innovation [ 140]. On the other hand, the argument has been made that court decisions limiting the scope of copyright have increased demand and need for copyright protection [141].

In comparison to the controversy and hostility surrounding software patents, developers generally feel comfortable with code-level copyright [ 142]. Copyright is automatic and virtually costless to establish. Unlike patent, it does not purport to draw bright lines around ideas but proscribes what is, by consensus, objectionable behavior. Independent creation is allowed. Inadvertent infringement is rare and there are accepted practices for avoiding it [ 143]. In Europe, small developers are concerned that patent will in effect trump copyright — that the uncertainties that patents create will undermine confidence in the ownership of original works, and that the stronger business effects of patents will skew competition and diminish the value of copyrights [144].

It has been notoriously difficult for economists to speak with confidence about the overall benefits and costs of the patent system, but anecdotal evidence suggests that for software the benefits of the patent system are less and the costs are higher than for other technologies. It might be possible to adjust the patent system to compensate and to improve its functioning with respect to software, but such an undertaking would conflict with the once-size-fits-all principle that appears to be enshrined in TRIPS [ 145]. Changes would have to be made to the system as a whole to recalibrate it for the special characteristics of information innovations. Although the importance of information innovations in today's economy might argue for optimizing the system for the ICT sector, this would be unlikely — not only because of institutional inertia but because patent policy is shaped by the interests of the pharmaceutical and biotech industries, which, unlike software developers, are deeply dependent on patents.
Most of what makes software different from other technologies is a matter of degree. However, the success of open source software as a production model is unique. The special economic characteristics of software and the global Internet allow full-blown products to be developed by volunteers and distributed to users without money changing hands. Not only is the value created by open source development unmotivated by patents (or other direct means of appropriating returns from investment), it does not show up as an asset, input, or output on anyone's books or in the national accounts. The success of the Internet and the Web as non-proprietary platforms that elicited an unprecedented outpouring of creativity and investment also contradicts conventional wisdom about the need for patents. Well-defined open standards and conventions for interconnection allowed infrastructure to be constructed on a distributed basis, demonstrating how different this environment from the paradigm of blockbuster pharmaceuticals.

Finally, there is the dominant position of a single company, Microsoft, which many interpret as evidence of the unusual economic character of software — and the contention between Microsoft and open source as opposing economic models for core information infrastructure. Microsoft appears to view open source as the single greatest threat to its core business [ 146], and open source developers commonly see Microsoft as the ultimate adversary. Software patents clearly favor Microsoft. In a 2002 survey the company found that the risk of patent infringement was the only argument against Linux that resonated with users [ 147], and Senior Vice President Craig Mundie has said that Microsoft would enforce its patents against open source software [ 148]. To the author's knowledge, Microsoft has not yet filed suit to enforce any of its patents, although it has been a frequent target of patent litigation. This may change as the company emerges from antitrust litigation. IBM was staunchly opposed to software patents in the 1970s [ 149], but after the government's antitrust suit was dropped in 1981, it was quick to take of advantage of loosening standards on patentability, amassing the largest portfolio of software patents and becoming the leading proponent for software patents as a matter of public policy.

Disciplinary perspectives on patent policy

Patent policy is shaped by litigation concerning the validity and infringement of individual patents. As a legal system, it is naturally precedent-oriented and self-referential, concerned with maintaining internal consistency within a statutory framework. Each patent allows for private regulation of behavior according to scope and meaning of the claims. Yet although each patent is by definition unique, the system does not account for differences in technologies, innovation practices, or market conditions.

The large body of economic literature on the patent system has had virtually no impact on patent policy [ 150]. Much of it is abstract modeling that cannot adequately reflect or address the complexity of the system. Some authors analyze problems characteristic of software development: innovation that can be described as cumulative, incremental, sequential, complementary, networked, or particularly rapid — or that results in technological complex products. While these characteristics are not unique to software innovation, they may reach an extreme in software [151].

The empirical economics literature is also limited by the problems of understanding and accounting for the complexities of patent law and practice. However, this work, especially the Mansfield-Levin-Cohen series of survey-based studies of industry-specific views on patents, is potentially useful insofar as it illuminates differences in patent value and practice among industries [ 152]. It places patent protection within a larger context of other means to appropriate returns from innovation, such as trade secrets, time to market, and complementary products — which also vary across technologies. Unfortunately, except for the very recent European studies noted earlier, this line of research does not yet extend to the software industry — let alone the service sector where the patenting of business methods is directed. Moreover, this work tends to be patentee-centric. It does not examine systemic problems of opacity and inadvertent infringement that bedevil the ICT sector.
Unlike telecommunications regulation and competition law, there is no integration of economic and legal analysis. The extensive legal and economic literatures on patents are largely isolated from each other, and interdisciplinary collaborations remain rare [ 153]. Practicing lawyers have no use for economic analysis, except in the calculation of damages, and most economists work with a greatly oversimplified view of the patent system. There has been growing interest in research on litigation and patent office processes [ 154], but the absence of empirical data in between the granting of patents and filing of lawsuits keeps research focused on where the numbers are — at the very front end and at the very back end of the system — and reveal little about the real impact of patents on innovation and competition.
The interview-based study of the semiconductor industry by Bronwyn Hall and Rosemarie Ziedonis [ 155] takes aim at the missing center and reveals much about the way patents are used by differently situated players within the industry. The recent FTC/DOJ hearings point to the need for similar studies in other ICT industry segments, including the need to look beyond the core actors to the increasing number firms that have no business other than to license and litigate patents. Ideally these interview-based studies would help researchers design surveys that build on the main survey tradition but expand it along the new dimensions that patent practice has taken on in recent years.
There has been growing interest in patents not only as a means of capturing value but as a strategic source of information about technology and competitors [ 156]. Yet, ironically, the prospects seem poorest in the ICT sectors, especially software, because of the poor quality of information coming out of the system [157].

There is limited practical value in understanding the technology disclosed in a patent without understanding the patent's legal effect. What do the claims mean, how broad are they, and to what extent are they valid? Patent information may be available for free over the Internet, but understanding the legal scope and validity is costly and indeterminate. A little knowledge may be costly if it leads to liability for willful infringement.
How do different kinds of companies with different market positions manage patent information and the risks of infringement? E.g., legal knowledge is managed differently from technological knowledge, and differently depending on whether it is handled by in-house counsel on salary or outside counsel on contract. How do insurers manage risk, and how is it affected by whether the insurance is offensive or defensive? How do investors assess owned patents against potential patent liabilities?

Finally, research on the political economy of the patent system is virtually nonexistent. Considering the volumes that have been written on other regulatory regimes and the central role claimed for patents in today's economy, the absence of political scientists writing about the patent system is surprising. Only at the highest international level is there a body of literature, largely because the TRIPS agreement takes intellectual property out of its traditional institutional boxes and connects it to mainstream trade and development issues [ 158]. However, software patents were not discussed in the TRIPS negotiations, nor subsequently within the World Trade Organization.

Conclusion

By rejecting U.S.-style business methods, Europe is resisting an open-ended commitment to "catching up" to a U.S. system that sophisticated practitioners are expanding in complex and unforeseen ways. However, as long as Europe proceeds by political compromise rather than by aggressively coming to grips with the systemic problems, it will remain handicapped. It must reduce the burden of the system not only on those seeking patents but also on those who wish to avoid patents. The copyright system does not disadvantage Europe or SMEs, and policy makers will want to ensure that the patent system does not do so.

The divergence in patent policy between the U.S. and Europe is a healthy development in that it opens up patent policy to new perspectives and new questions. For too long, patent policy has been formulated and promulgated by a narrow community in which the interests of professional intermediaries and specific industries, especially pharmaceuticals and biotech, are disproportionately represented.

Within the software industry, policy has been pushed in the same direction by opposite ends of the spectrum. At the one end, patents work for large companies, especially hardware companies, who can manage the high transaction and information costs of the system and exploit portfolio-level effects, especially those able to extract large revenues from licensing programs. At the other end, software patents work for individual inventors, first-stage investors, and licensing companies at the front end of the value chain, where they can earn a quick return without facing the costs, risks, and liabilities of getting a product to market and competing successfully. Those in the middle, especially small companies with products on the market, are disadvantaged and vulnerable.

The FTC/DOJ hearings show that this situation is not limited to software but extends across the complex technologies of the ICT sector. Inadvertent infringement is commonplace, exacerbated by low standards of non-obviousness, search costs, and broad, difficult-to-interpret claims. Few if any developers and engineers in this sector read patents, indicating wholesale failure of the disclosure function — the bargain at the heart of the patent system. As described by Robert Barr of Cisco, this has created a cottage industry based not on innovation but on patents:

"So obtaining patents has become for many people and companies an end in itself, not to protect an investment in research and development, not to license technology to others who need it, but to generate revenue through licensing ("holding up") other companies that actually make and sell products without even being aware of their patents. They try to patent things that other people or companies will unintentionally infringe and then they wait for those companies to successfully bring products to the marketplace. They place mines in the minefield. The people and companies (I am not just talking about individuals here) who file these patents and extract license fees from successful businesses play the patent system like a lottery. They gamble that people will infringe these patents without ever learning anything from the patentee, and without interfering with any effort by the patentee to commercially exploit their invention. The long delays in the patent office work to their benefit by keeping the eventual coverage of their patents indefinite while others produce products. They benefit from the high cost of litigation by demanding license fees that are less than the cost of litigation, hoping that people will pay even if they don't infringe, or, if they do infringe, it will be too costly to change the product. This provides opportunities for contingency fee litigators, for licensing companies and consulting firms who claim to help people 'mine' their patent portfolios for patents that even they didn't know they had. It's hard to see how this contributes to the progress of science and the useful arts" [ 159].

While the divergence is healthy in that Europe is taking a harder look at policy for information process patents than it has been subject to in the U.S., the institutional framework for producing informed, articulate, and transparent policy remains severely underdeveloped. To be sure, the Commission's understanding has advanced since the cursory and superficial treatment of the 1997 Green Paper and the follow-up Communication in 1999. The memo accompanying the proposed directive at least recognizes the scope of the divergent views even though it comes down without any visible analysis on the side of "economic weight." The proposed directive acknowledges the need to monitor the situation in both the U.S. and Europe and commits to a report after three years, but it is not clear that the monitoring will be any more than another formal consultation that results in another informal, unexplained embrace of the status quo. The Commission has not made any effort to create a baseline study, either in Europe or the U.S. that could be used to assess the policy impact over time.

The independent report commissioned for the European Parliament recognizes the underlying problem: "Unless this fundamental lack of knowledge is addressed in a more structured manner, any proposal to optimise the patent system in respect of software-related inventions is based on nothing more than wild guesses or wishful thinking ..." [ 160].

Unfortunately, research on the practical operation of the patent system is still at a very early stage, especially for the vast territory affected by the kinds of patents. Judge Paul Michel of the Court of Appeals for the Federal Circuit describes the limitations of the legal process that he and fellow judges work with:

"I cannot remember the last time ... I'm sure it's happened because I've sat on over 1000 patent cases in 14 years on the Court ... so I'm sure it's happened because virtually any possible phenomenon has happened at least once, but I cannot remember the last time when any meaningful economic or empirical, quantified data was cited in a brief ... .

[W]e just get the Federal Circuit talking to itself, with the brief writer just being the echo of what we wrote in all those prior cases. And then we write some more cases, and the cycle just goes on and on and on. And it certainly lacks the benefit of being tightly wired to the evolving reality ... .

But of course my point is simply that we have, the Federal Circuit being underinformed, and the Supreme Court being underinformed — I'm not going to say "misinformed" because I don't know for sure what the true facts are — but it seems to me we have a big problem when we have courts in a case with wide scope operating on so little data and such offhand assertions by lawyers — and sometimes by judges — with so little to back it up" [ 161].

It is deeply ironic that a system intended to promote innovation ends up under a discipline bound by precedent and authority — and that a system designed to generate knowledge should end up so ignorant of real world consequences.

About the Author
Brian Kahin is a Visiting Professor in the School of Information, the Gerald R. Ford School of Public Policy, and the Department of Communication Studies at the University of Michigan.
E-mail: kahin@umich.edu

Acknowledgments

An earlier version of the paper was presented at "Frontiers of Ownership in the Digital Economy" jointly sponsored by the Center for Information Policy at the University of Maryland and the Institut Français des Relations Internationales, at IFRI in June 2002. As the then Director of the Center for Information Policy the author gratefully acknowledges the support of the German Marshall Fund of the United States.

Notes

1. 21st Century Strategic Plan (2002), http://www.uspto.gov/web/offices/com/strat2001/index.htm.
2. Report, 7th Session, WIPO Standing Committee on Patent Law, Geneva, 6-10 May 2002, adopted 25 November 2002 as document SCP/7/8; see paragraphs 159-173, especially the exchange between the European and U.S. delegations at 170-171; http://www.wipo.org/scp/en/documents/session_7/index.htm.
3. Section 8: "Congress shall have the Power ... To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." This common utilitarian grounding for both patents and copyright contrasts with European understanding of copyright as a natural right of authors and patents as "industrial property" (a term seldom used in the U.S.).
4. See, Thomas A. Stewart, Intellectual Capital, Currency/Doubleday, 1997. The term is sometimes confused with intellectual property, which is only a subset of what is intended. For example, the Patent Public Advisory Committee confuses the two in claiming: "Conservative economic estimates place the value of patents and other forms of intellectual property as accounting for two-thirds of the market value of corporate America." Annual Report, 30 November 2001, p. 4, http://www.uspto.gov/web/offices/com/advisory/acrobat/ppacannual11-30-01.pdf.
5. Baruch Lev, Intangibles — Measurement, Management, and Reporting, Brookings Institution Press 2001; Margaret M. Blair and Steven M.H. Wallman, Unseen Wealth, Brookings Institution Press 2001; Clark Eustace, The Intangible Economy — Impact and Policy Issues, Report of the European High-Level Expert Group on the Intangible Economy, 2000, http://europa.eu.int/comm/enterprise/services/business_services/documents/studies/intangible_economy_hleg_report.pdf.
6. http://www.ftc.gov/opp/intellect/index.htm. For example, see testimony of Robert Barr, Cisco Systems, http://www.ftc.gov/opp/intellect/barrrobert.doc, and testimony of R. Jordan Greenhall, Chief Executive Officer, Divx Networks, 27 February 2002, http://www.ftc.gov/opp/intellect/020227trans.pdf.

7. The problem is reminiscent of the bilateral bartering of advertising on the Web. The practice of using bartered advertising to gross up revenues was prohibited by Financial Accounting Standards Board in February 2000.
8. See U.S. Department of Commerce, Digital Economy 2000, http://www.esa.doc.gov/de2000.pdf.

9. Shapiro and Varian's Information Rules (Harvard Business School Press, 1998) is the classic work bridging economic analysis with a practical business understanding of these characteristics. See also Kevin Kelly, New Rules for the New Economy (Penguin USA, 1999), at http://www.kk.org/newrules/.

10. However, see Rochelle Dreyfuss, Testimony before the Subcommittee on Courts and Intellectual Property of the House of Representatives Committee on the Judiciary Oversight Hearing on the United States Patent and Trademark Office, 9 March 2000, http://www.house.gov/judiciary/drey0309.htm.

11. Computer Science and Telecommunications Board, The Digital Dilemma: Intellectual Property in the Information Age, National Academy Press, 1999 p. 228, http://books.nap.edu/html/digital_dilemma/ch6.html.

12. In reality, of course, there may be few if any novel and non-obvious innovations in a particular program. In part, this is so much prior art accumulated in the many years before patents became available.
13. At this level of abstraction, it might be considered a business method patent.

14. This is more true of copyright, which is automatic and costless. Patents must be applied for in every country where they are needed, and the total cost of securing a patent in every country with a patent system is reputed to be in excess of one million dollars.
15. Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), 1994, http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm.
16. TRIPS Article 27.1. TRIPS notwithstanding, there are a few technology-specific provisions in U.S. patent law. See 35 USC 103(b), providing special non-obviousness standard for biotechnology processes, and 35 USC 287(c), limiting remedies on medical and surgical procedures.
17. See William Clinton and Albert Gore, Framework for Global Electronic Commerce (1997), archived at http://cip.umd.edu/Framework.htm.

18. As expressed in the Framework for Global Electronic Commerce:

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.

19. Intellectual Property and the National Information Infrastructure, report of the NII Task Force, Working Group on Intellectual Property (chaired by Bruce Lehman, Commissioner of Patents and Trademarks), 1995, p. 117, http://www.uspto.gov/web/offices/com/doc/ipnii/.

20. http://www.wipo.int/treaties/ip/copyright/index.html.

21. Pub. L. No. 105-304, 112 Stat. 2860 (28 October 1998). See Copyright Office Summary, December 1998: http://www.loc.gov/copyright/legislation/dmca.pdf.

22. Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society, available at http://europa.eu.int/comm/internal_market/en/intprop/docs/ along with the original (1997) and amended (1999) directive proposals of the European Commission.
23. But see Dan Burk, "Patents in Cyberspace: Territoriality and Infringement on Global Computer Networks," Tulane Law Review, vol. 68, no. 1 (1993) reprinted in 1995 Intellectual Property Law Review, p. 137.
24. Brian Kahin, "The Expansion of the Patent System: Politics and Political Economy," First Monday, January 2001, vol. 6, no. 1, http://www.firstmonday.org/issues/issue6_1/kahin/. Until 2002, the USPTO's performance goal was stated in the annual corporate plan as: "Help protect, promote and expand intellectual property rights systems throughout the United States and abroad." The 2002 plan drops "expand" and adds a balancing formula: "The Under Secretary and Director champions intellectual property rights and forges a balance between the public's interest in intellectual property and each customer's interest in his/her patent and trademark."
25. The AIPLA white paper on business method leads with the following circular argument in the listing the arguments in favor software patents: "A key argument in favor of patents on software-related inventions is that programming is a technology no different that any others for purposes of patent protection. This argument therefore concludes that the term for such patents should be the same, that the rights protected should be the same, and that the application and examination processes should be the same." AIPLA, Patenting Business Methods, 27 November 2000, p. 7, http://www.aipla.org/html/whatsnew/patentingbusiness2.pdf.
26. E.g., Lester C. Thurow, "Needed: A New System of Intellectual Property Rights," Harvard Business Review, Sept/Oct 1997; Steven W. Popper and Caroline S. Wagner, New Foundations for Growth: The U.S. Innovation System Today and Tomorrow, Science and Technology Policy Institute (RAND), MR-1338.0-OSTP, 2002 http://www.rand.org/publications/MR/MR1338.0/: "[T]here would be considerable benefit to the nation in coming to an understanding of what demands are being placed on the intellectual property protection system, how those demands have and are likely to shift, and how well the system is and is likely to be able to meet those demands."
27. See UMIST Intellectual Property Initiative: http://info.sm.umist.ac.uk/esrcip/. Small firms should be distinguished from start-ups, which benefit from patents without suffering the liabilities.
28. See compendium of licenses, including the GNU General Public License, at http://www.opensource.org/licenses/index.html.

29. An attempt to eliminate the exception for "computers programs as such" was defeated at the November 2000 revision conference, not for substantive reasons but because member countries felt that the policy issue should be addressed within European Union rather the specialized treaty-based European Patent Organisation.
30. A few of the decisions were made by the CAFC's predecessor, the Court of Customs and Patent Appeals, before the CAFC was formed in 1983.
31. For a time in the early 1990s, the Software Division of ADAPSO (now the "Information Technology Association of America") under the leadership of John Landry opposed patents for software, but the position was never pressed by ADAPSO itself. Ironically, ADAPSO was one of the few voices in favor of software patents in the late 1970s when IBM and CBEMA (now the "Information Technology Industry Council") were staunchly opposed.
32. Anthony Arundel, Patents in the knowledge-based economy. Beleidstudies Technology Economie, 37: 67-88, 2001, citing Arundel, A. Enterprise strategies and barriers to innovation. in: Arundel A., Garrelfs R. (Eds) Innovation Measurement and Policies, pp. 101-108, European Commission, Office for Official Publications of the European Communities, EUR 17019, Luxembourg, 1997. Arundel notes a reasonably high propensity to patent in the computer industry, reportedly for tactical reasons, but a relatively low number (13 percent) of computer industry respondents stating that patents are "very important" or "critical" to product innovation.
33. Paul Festa, "Patent Holders on the Ropes," CNET News.com, 2 December 2002, http://news.com.com/2100-1023-975587.html.

34. Bruce A. Lehman, "The Leadership of the USA in the field of Intellectual Property," presented to a conference on "Patenting and Innovation in the Knowledge-based Economy" held by the Netherlands Ministry of Economic Affairs at The Hague, 26 May 2001, published in Business Perspectives, Summer/Fall 2001, http://bber.memphis.edu/PDF/Summer2001.pdf.

35. See http://www.uspto.gov/web/offices/dcom/olia/harmonization/. Only some 33 comments were received, most of which came from lawyers or small inventors. The original notice is at 66 Fed. Reg. 15409, 19 March 2001.
36. Copyright law, by contrast, is open to generalists without certification, deals in ubiquitous and familiar subject matter, has a strong moral and ethical dimension, and is automatic and lightweight in application. While copyright must contend with some difficult concepts, such as the idea/expression dichotomy and the requirement of "substantial similarity," it does not require the painstaking delineation of boundaries in unique conceptual space (interpretation of claims, determination of non-obviousness and infringement) that patent law demands.
37. Statement of Ronald E. Myrick, President, Intellectual Property Owners Association, before the House Judiciary Subcommittee On Courts, The Internet, and Intellectual Property, 4 April 2001, http://www.house.gov/judiciary/myrick_040401.htm; see also consensus statement at http://www.ipo.org/consensus62800.html.

38. http://europa.eu.int/comm/internal_market/en/indprop/comp/coppenholle.pdf.
39. See answer to Question 2, in IBM comments on global harmonization at http://www.uspto.gov/web/offices/dcom/olia/harmonization/TAB42.pdf.
40. USPTO Corporate Plan 2002.

41. USPTO Corporate Plan 2001; see Brian Kahin, note 24 above.

42. See comments of F. M. Scherer, Harvard University, at FTC/DOJ hearings on 10 July 2002, http://www.ftc.gov/opp/intellect/020710trans.pdf, pp. 32ff. Scherer quotes Marver Bernstein, Regulating Business by Independent Commission, 1955, pages 116 to 117: "While technology is often needed for the adjudication of disputes, there are grave objections to giving judicial power into the hands of specialists, whose outlook is confined to a single field. The worst defect of our domestic tribunals is the opportunity they provide for narrow, professional instincts and group habits, to insert themselves without let or hindrance, and the main disadvantage of such tribunals is the domination of the judicial process by petty loyalties and outworn traditions, which predetermine the conclusion and render an impartial investigation impossible."
43. Speech at American Enterprise Institute, 20 November 2002. See Declan McCullagh, "Left Gets Nod from Right on Copyright Law," CNET News, 20 November 2002, http://news.com.com/2100-1023-966595.html.

44. OMB has supported the diversions in both the Clinton and Bush Administrations. The President's FY03 budget proposed increased for funding for the PTO but with a surcharge on fees to be used to address national security concerns.
45. "I am a realist, and realistically speaking, I do not believe that the appropriators will cede their authority to control PTO funding in the near future. We can no longer afford to chant the same mantra of more money. To my mind, the agency will be better positioned to acquire greater appropriations if it can do a better job of demonstrating how it is using available resources to meet clearly defined objectives, which ultimately means improving quality and reducing existing pendency rates and backlogs." Cong. Howard Coble, 11 April 2002, http://www.house.gov/judiciary/coble041102.htm.

46. USPTO, Business Method Patents Initiative: An Action Plan, March 2000, http://www.uspto.gov/web/offices/com/sol/actionplan.html. A surge in applications for patents on electronic commerce followed the 1998 State Street Bank decision, and controversy ensued as a number of broad patents made headlines. The USPTO responded by instituting more rigorous examinations for applications handled by Group 705, including a second review by senior examiners. Recently, Under Secretary Rogan spoke of a shift from 75 percent acceptance to 25 percent acceptance. David Streitfeld, "Note: This Headline is Patented," Los Angeles Times, 7 February 2003, available at http://www.chicagotribune.com/technology/local/chi-0302,0,7319176.story.
47. Some scholars have argued that there are rational limits to what should be invested in patent examination since few patents prove economically valuable and litigation is needed for a full test of validity. Mark Lemley, "Rational Ignorance at the Patent Office," 95 Northwestern University Law Review 1495 (2001), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=261400; F. Scott Kieff, Summary of Proposed Testimony filed with Federal Trade Commission in "Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy," http://www.ftc.gov/os/comments/intelpropertycomments/harvardlaw.pdf.
48. http://www.uspto.gov/web/offices/com/strat2001/index.htm.
49. State Street Bank & Trust Co. v. Signature Financial Group, Inc., United States Court of Appeals for the Federal Circuit, 96-1327, http://www.law.emory.edu/fedcircuit/july98/96-1327.wpd.html.
50. Rich was at that time the oldest sitting judge in the federal judiciary and he died the following year. See "Remembrances and Memorial: Judge Giles S. Rich, 1904-1999," http://www.law.berkeley.edu/journals/btlj/articles/vol14/Smith/html/reader.html.
51. Diamond v. Chakrabarty, 447 U.S. 303 (1980).

52. S. Rep. No. 1979, 82d Cong., 2d Sess., 5 (1952); H. R. Rep. No. 1923, 82d Cong., 2d Sess., 6 (1952).
53. Giles S. Rich, "Principles of Patentability," George Washington Law Review, vol. 28, p. 393 (1960), pp. 393-394, cited in John R. Thomas, "The Patenting of the Liberal Professions," Boston College Law Review, vol. 40 (1999), p. 1,139.
54. E.g., Leo J. Raskind, "The State Street Bank Decision: The Bad Business of Unlimited Patent Protection for Methods of Doing Business, " Fordham Intellectual Property Media & Entertainment Law Journal, vol. 10, p. 61 (1999); Rochelle Cooper Dreyfuss, "Are Business Method Patents Bad for Business?," Santa Clara Computer & High Tech. Law Journal, vol. 16, p. 263 (2000).
55. Judge Rich briefly alludes to what might have been a rationale for the rule against business method patents:
Since its inception, the "business method" exception has merely represented the application of some general, but no longer applicable legal principle, perhaps arising out of the "requirement for invention" — which was eliminated by § 103.

But he says nothing further about what this general legal principle might be.

56. 35 USC 273. As Rep. Manzullo explained 3 August 1999, on the floor of House:

"Before the State Street Bank and Trust case ... it was universally thought that methods of doing or conducting business were not among the statutory items that could be patented ... . In recognition of this pioneer clarification of the law, we felt that those who kept their business practices secret had an equitable cause not to be stopped by someone who subsequently reinvented the method of doing or conducting ... business and obtained a patent. We, therefore, limited the first inventor defense solely to that class of rights ... ."

57. http://www.european-patent-office.org/tws/front_page.pdf.
58. See, for example, the Frequently Asked Questions accompany the proposed patent directive: "In the U.S. on the other hand, a patentable invention must simply be within the technological arts." Notwithstanding the trilateral consensus statement, there is no such requirement in U.S. law, as the U.S. position in the WIPO harmonization negotiations makes clear.
59. See discussion in Michal Likhovski, Michael Spence, and Michael Molineaux, The First Mover Monopoly, WP 05/00, OIPRC Oxford Intellectual Property Research Centre — Electronic Journal of Intellectual Property Rights, 2000, http://www.oiprc.ox.ac.uk/EJWP0500.html.

60. Although technically the abolition of the rule was dicta not necessary to the decision in State Street, speculation that the rule might still apply at least when computers were not involved was put to rest by the CAFC's decision in AT&T v. Excell Communications shortly after State Street. See http://www.law.emory.edu/fedcircuit/apr99/98-1338.wp.html.
61. "To Promote the Progress of ... Useful Arts" in an Age of Exploding Technology, Report of the President's Commission on the Patent System, Washington, D.C. (1966).
62. 409 U.S. 63 (1972). The 1978 decision in Parker v. Flook, 437 U.S. 584, held, 6-3, that post-solution physical activity did overcome the rule in Gottschalk v. Benson.
63. 450 U.S. 175 (1981).

64. Although the CAFC was not created until 1983, the first decisions on subject matter after Diamond v. Diehr were made by the CAFC's predecessor, the Court of Customs and Patent Appeals (CCPA).
65. The author was then general counsel for the Interactive Multimedia Association, a leading industry voice against the Compton's multimedia patent. Reflecting the views of its many small content-oriented members, the IMA presented testimony that was strongly critical of software patents despite the misgivings of a couple of its largest members.
66. The U.S. Supreme Court declined to hear appeals from the State Street decision and a follow-on case, AT&T v. Excel Communications, CAFC, 98-1338 (1998). In the denial of certiorari for the latter, Justice Stevens made the unusual point of noting what is normally taken for granted — that the denial of review is not a decision on the merits.
67. See, e.g., Innovation Policy in a Knowledge-Based Economy, Merit/University of Maastricht, commissioned by DG Enterprise, http://www.cordis.lu/innovation-policy/studies/gen_study4.htm.
68. Since the USPTO does not count software patents, the estimates regularly provided by patent searcher and commentator Greg Aharonian are commonly cited.
69. Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programmes; amended by Council Directive 93/98/EEC of 29 October 1993.
70. European Commission, "Promoting innovation through patents — Green Paper on the Community patent and the patent system in Europe," http://www.europa.eu.int/comm/internal_market/en/indprop/patent/paten.pdf.
71. Supra.

72. "The possibility of obtaining licences" is an odd inducement since most companies create software from ground up and the market for software functionality is so poorly developed. In principle, patents create a requirement to obtain licenses, which SMEs are likely to view as a burden rather than a benefit.
73. The 1996 guidelines were based on In re Beauregard, 35 U.S.P.Q.2d 1383 (1995).

74. Counterfeit refers to deliberate copying, which is common in copyright infringement. Patent infringement is often inadvertent because independent invention is not a defense. The use of the phrase "counterfeit programs" is especially inappropriate since it is clear from EPC Article 52 that programs as such are not patentable, although they may be protected by copyright.
75. Yet in a March 1998 event, Software Patents in Europe, hosted by the U.K. Patent Office and supported by the Commission, the past-president of the British Computer Society Ron McQuaker expressed strong reservations about the practical workability and effects of software patents. See http://www.patent.gov.uk/about/ippd/softpat/index.htm.

76. Hart, Robert, Peter Holmes, and John Reid. 2000. Study Contract ETD/99/B5-3000 /E/106: The Economic Impact of Patentability of Computer Programs. Report to the European Commission on behalf of Intellectual Property Institute, http://europa.eu.int/comm/internal_market/en/indprop/comp/studyintro.htm.
77. Ibid., p. 4, 5.

78. Proposal for a Directive of the European Parliament and of the Council on the patentability of computer-implemented inventions, Commission of the European Communities, Brussels, 20.02.2002, COM(2002) 92 final, http://europa.eu.int/comm/internal_market/en/indprop/comp/02-277.htm.
79. All footnotes are references to the IPI study:

13 See study, at 5.
14 Ibid., at 3.
15 Ibid., at 5 et seq.
16 Ibid., at 3.
17 Ibid., at 8.
18 Ibid., at 36.

80. Obviously, there is evidence that smaller developers are affected, but it all depends on what "unduly" means. See Puay Tang, John Adams & Daniel Paré, Patent Protection for Computer Programmes, 2001, http://www.aerosme.com/download/softstudy.pdf (commissioned by DG Enterprise) and Knut Blind et al., Micro- and Macroeconomic Implications of the Patentability of Software Innovations, Fraunhofer Institute and Max-Planck-Institute, 2001, http://www.bmwi.de/textonly/Homepage/download/technologie/Softwarepatentstudie.pdf; see testimony of Pierre Haren, CEO of ILOG, at Green/EFA conference, "Is Software Patentability Necessary?" 26 November 2002, European Parliament, Brussels, http://greens-efa.org/pdf/documents/SoftwarePatenting/TextHaren.pdf.
81. Tang, Adams and Paré, above.

82. See results of the UMIST intellectual property initiative, http://info.sm.umist.ac.uk/esrcip/.

83. Knut Blind et al., note 80.

84. Suzanne Scotchmer, "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives, volume 5, number 1, Winter 1991, http://socrates.berkeley.edu/%7Escotch/giants.pdf; Suzanne Scotchmer, "Cumulative Innovation in Theory and Practice," February 1999, GSPP Working Paper 240, U.C., Berkeley, http://socrates.berkeley.edu/%7Escotch/cum-r&d.pdf.

85. Joseph Farrell, "Arguments for Weaker Intellectual Property Protection in Network Industries," in: Brian Kahin and Janet Abbate, eds., Standards Policy for Information Infrastructure, MIT Press, 1995.
86. "[W]e have a kind of business that's easy to enter, but where you enter with sometimes an overwhelming sense of dread because you don't know how many pieces of IP you will need in order to operate. It is opaque, you can't get there, and in fact the system discourages you from looking very hard because your lawyers may advise you that simply by virtue of poking around to find out what patents exist you expose yourself to willfulness claims which can triple the amount of damages and exposure to attorney's fees," James Pooley, Partner, Milbank, Tweed, Hadley & McCoy, testifying at FTC/DOJ hearing, 27 February 2002.
87. Reinier Bakels and P. Bernt Hugenholtz, The patentability of computer programs: Discussion of European-level legislation in the fields of patents for software, April 2002, http://www.ivir.nl/publications/other/softwarepatent.html.
88. The Framework for Global Electronic Commerce is no longer available on the U.S. Department of Commerce Web sites. See note 17.
89. As noted, product claims were officially allowed the previous year. The USPTO does not have the power to expand the scope of patentable subject matter on its own, but it has been content to allow the CAFC to expand the scope of patent protection and the agency explicitly embraced expansionism in its 1999 Corporate Plan.
90. See, for example, Comments on the Framework for Global Electronic Commerce by the Silicon Valley Software Industry Coalition, http://www.webcom.com/software/coalition/frcmnts.html: "Our patent system is not functioning effectively and the industry, especially the high tech industry, continues to be plagued by patents which are shockingly broad in their claims."
91. As OSTP's liaison to the Administration's Global Electronic Commerce Working Group, the author was personally involved in the negotiation of this language.
92. In addition to the 1966 Report of President's Commission cited earlier, which opposed patents for computer programs, an Advisory Commission on Patent Law Reform was established in the first Bush Administration to address harmonization. Composed almost entirely of patent attorneys and initially reluctant to address software, the Commission was deluged by comments, many critical of software patents, but the final report (1992) argues for software patents. The Office of Technology Assessment, a Congressional Office eliminated in 1995, issued a study, Finding a Balance: Computer Software, Intellectual Property and the Challenge of Technological Change (1992), that outlined many of the issues, see http://www.wws.princeton.edu/~ota/disk1/1992/9215_n.html.
93. The author was at OSTP at the time and worked with RAND on the design of the study.

94. Personal communication, Tim Hackman, IBM, 30 June 1998.

95. S. 1798, introduced 27 October 1999 (106th Congress), by Senator Orrin G. Hatch, Section 303.

96. Note 11 above, p. 228, http://books.nap.edu/html/digital_dilemma/ch6.html. The Science, Technology and Education Policy Board of the National Research has been conducting a broad study on "Intellectual Property in a Knowledge-Based Economy," which is due to appear in March 2003; see http://www7.nationalacademies.org/step/STEP_Projects_Intellectual_Property_Rights.html.
97. "Jordan shall take all steps necessary to clarify that the exclusion from patent protection of "mathematical methods" in Article 4(B) of Jordan's Patent Law does not include such "methods" as business methods or computer-related inventions." Memorandum Of Understanding On Issues Related To The Protection Of Intellectual Property Rights Under The Agreement Between The United States And Jordan On The Establishment Of A Free Trade Area, 24 October 2000, http://www.ustr.gov/regions/eu-med/middleeast/memopro.pdf.
98. Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy, http://www.ftc.gov/opp/intellect/index.htm.

99. Timothy J. Muris, Chairman, Federal Trade Commission, "Competition and Intellectual Property Policy: The Way Ahead," presentation to the American Bar Association, 15 November 2001, http://www.ftc.gov/speeches/muris/intellectual.htm.

100. http://www.ftc.gov/opp/intellect/detailsandparticipants.htm#February%2027; see especially the morning session on 27 February and the afternoon session on 28 February.
101. See testimony of Bradford Friedman, note 161 below.

102. Despite the legal requirement of enablement, it appears that even the largest companies in the ICT sector no longer reads as a source of technological knowledge — but only for the purpose of prosecuting or litigating patents. Comments by Robert Barr at the 30 October 2002 FTC roundtable: Competition, Economic, and Business Perspectives on Substantive Patent Law Issues: Non-Obviousness and Other Patentability Criteria; http://www.ftc.gov/opp/intellect/detailsandparticipants.htm#October%2030.
103. "Proposal for a Directive on the patentability of computer-implemented inventions — frequently asked questions," http://europa.eu.int/comm/internal_market/en/indprop/comp/02-32.htm:
"Isn't software different to other technologies in that patents can be used to block legitimate independent innovation?

The Commission has seen little evidence that this has been a problem in practice in the present environment."

104. See, e.g., comments by Peter Detkin, Vice President, Legal and Government Affairs and Assistant General Counsel, Intel Corporation: "[P]eople are tripping over each other's patents right and left ... . Moore's Law, as with everything else in our industry, is even more important. What that really means is that if you think you're tripping over people's patents today, just wait."
105. Sylvain Perchaud, "Are Software Patents Prejudicial to Copyright? " ( http://sylvain.perchaud.free.fr/documents/021126_copyright_and_patents.en.pdf), Presentation at Conference, Is Software Patentability Necessary?, European Parliament, 26 November 2002, http://www.greens-efa.org/en/issues/?id=14.Sylvain Perchaud.
106. "TI has something like 8,000 patents in the United States that are active patents, and for us to know what's in that portfolio, we think, is just a mind-boggling, budget-busting exercise to try to figure that out with any degree of accuracy at all." Frederick J. Telecky, Jr., Senior Vice President and General Patent Counsel, Texas Instruments, FTC/DOJ hearings, UC Berkeley, 28 February 2002, http://www.ftc.gov/opp/intellect/detailsandparticipants.htm#February 28.
107. "[W]e have a kind of business that's easy to enter, but where you enter with sometimes an overwhelming sense of dread because you don't know how many pieces of IP you will need in order to operate. It is opaque, you can't get there, and in fact the system discourages you from looking very hard because your lawyers may advise you that simply by virtue of poking around to find out what patents exist you expose yourself to willfulness claims which can triple the amount of damages and exposure to attorney's fees." James Pooley, Partner, Milbank, Tweed, Hadley & McCoy, FTC/DOJ hearings, UC Berkeley, 27 February 2002, http://www.ftc.gov/opp/intellect/detailsandparticipants.htm#February27.
108. "As I'm sure this committee is aware, there is a general animosity to pure software patents within and outside of the industry ... ." Testimony of Bradford L. Friedman, Director of Intellectual Property, Cadence Design Systems, Inc., FTC/DOJ hearings, Berkeley.
109. Rochelle Cooper Dreyfuss, Testimony before the Subcommittee on Courts and Intellectual Property of the House of Representatives Committee on the Judiciary, 9 March 2000, http://www.house.gov/judiciary/drey0309.htm; R. Jordan Greenhall, Chief Executive Officer, Divx Networks, at the FTC/DOJ hearings in Berkeley: "... I've found in the past year that I really can't understand the patent landscape and that I'm sitting with a nuclear bomb on top of my products that could go off at any point and cause me to simply not have a business anymore."
110. The author saw several instances of such tactics when he was General Counsel for the Interactive Multimedia Association. Often, the patentee gets a few big-name companies to license its patent for an undisclosed amount (perhaps only the nominal $10 needed to show consideration for a binding release) and uses this to convince the small company that the patent is valid and should be taken seriously. Many large companies, operating on a purely rational economic basis, are happy to pay US$25,000 to make a problem go away. Japanese companies used to be early targets because they were notoriously eager to avoid litigation.
111. Sam Costello, "Company claims patent on 'millions' of e-commerce sites," Infoworld, 15 May 2002, http://www.infoworld.com/articles/hn/xml/02/05/15/020515hnpangea.xml. Some of the defendant companies have created their Web site at http://youmaybenext.com. The assertion of the Rozmanith patent is another example; see Ian Mount, "Would You Buy a Patent License From This Man?," Business 2.0, April 2001, http://www.business2.com/articles/mag/print/0,1643,9575,FF.html.
112. 2000 Annual Report, IBM, p. 7.

113. Clair Horne, "Patently Unfair," Raleigh News and Observer, 9 February 2001, available at http://www.nasvf.org/web/allpress.nsf/pages/1911; Ira Sager, "Big Blue is Out to Collar Software Scofflaws," Business Week, 17 March 1997, p. 34; Ira Sager and Diane Brady, "Big Blue's Blunt Bohemian: Larry Ricciardi's real job at IBM: Talking turkey to the boss," Business Week, 14 June 1999; Hartmut Pilch, "Patent Movement Activities in the name of IBM," http://swpat.ffii.org/players/ibm/index.en.html.

114. Microsoft was the only pure-play software company to support software patents in testimony before the USPTO hearings on software patents in 1994. It noted it had not filed an infringement action although it had been sued many times (and would lose the Stac case the next month), and this still appears to be true nearly nine years later. Microsoft has even sought to create a patent-free zone around Windows through contractual provisions that restrained Windows licensees from asserting patents against each other. See "Microsoft Defends Settlement Deal," ITWorld.com, 25 February 2002, http://www.itworld.com/Man/2699/020225msdoj/.

115. Both IBM and Microsoft supported a move to legitimize use of royalty-bearing proprietary technology in World Wide Web Consrtium (W3C) standards. As noted above, this initiative was opposed by the open source community, and it was defeated with help from Sun, HP, and Apple. See http://www.w3.org/2001/ppwg/.

116. Peter Galli, "Microsoft Patents May Threaten Open Source," ZDNet UK News, 29 August 2001, http://news.zdnet.co.uk/story/0,,t269-s2093960,00.html; David Berlind, "The Hidden Toll of Patents on Standards," ZDNet Tech Update, 18 April 2002, http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2861785,00.html.
117. Martin Libicki, James Schneider, Dave R. Frelinger, and Anna Slomovic, Scaffolding the New Web: and Standards Policy for the Digital Economy, RAND 2000, http://www.rand.org/publications/MR/MR1215/.

118. Dell Computer Corp., Dkt. C-3658,121 F.T.C. 616 (1996); FTC release, "FTC Issues Complaint Against Rambus, Inc.," 19 June 2002, http://www.ftc.gov/opa/2002/06/rambus.htm.

119. The recent FTC/DOJ initiative devoted a full day to the relationship between patents and standards with an emphasis on strategic behavior; see http://www.ftc.gov/opp/intellect/detailsandparticipants.htm#April182002.
120. I take the term "information innovation" from Digital Dilemma, p. 192 (note 11 above). The term transcends debate over definitions of software and business methods and encompasses emerging subject areas, such as the use of diagnostic information, that have not been fully assimilated into policy discourse.
121. See Amazon's one-click patent, U.S. Patent No. 5960411; retrievable at http://patft.uspto.gov/netahtml/srchnum.htm; appellate decision on preliminary injunction against Barnes and Noble at http://www.law.emory.edu/fedcircuit/feb2001/00-1109.wp.html.
122. U.S. Patent No. 5,794,207; owned by Priceline and the subject of litigation between Priceline and Expedia; see Clare Haney, "Microsoft, Expedia, and Priceline Settle Lawsuits," Infoworld, 9 January 2001, http://archive.infoworld.com/articles/hn/xml/01/01/09/010109hnpriceline.xml.
123. This requirement is often cited by critics charging the CAFC with lowering the standards for patentability. Glynn S. Lunney, Jr., "E-Obviousness," Michigan Telecommunications and Technology Law Review, vol. 7, p. 363 (2001), http://www.mttlr.org/volseven/LunneytypeRE-PDF.pdf. The most recent CAFC articulation of the standard is In re Lee, 277 F.3d 1338, 61 USPQ2d 1430 (Fed. Cir. 2002).
124. Thus the fact that the pharmaceutical industry appears to be consistently the most engaged in patent policy fits with what the empirical literature says about the perception of patents in different fields. See Arundel, note 33.
125. Robert P. Merges and Richard R. Nelson. "On The Complex Economics of Patent Scope," Columbia Law Review, vol. 90, p. 839 (1990). Available at http://cyber.law.harvard.edu/ipcoop/90merg2.html.

126. Archived at http://ftp.std.com/obi/Bill.Gates/Challenges.and.Strategy.
127. Suzanne Scotchmer, "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Economic Perspectives, vol. 5, no. 1 (1991), pp. 29-43.
128. Farrell, note 88, above. Of course, patents can also be used to slow or inhibit network effects. Some small companies may want patents to protect against the ability of a resource-rich competitor like Microsoft to move quickly, especially if the competitor is leveraging complementary innovation off a successful proprietary platform like Windows.
129. Of course, this may be of little consequence if developers choose not to read patents, as appears to be the case. At the same time, the long (relative to product cycles) 18-month delay in publication and the inevitability of blindsiding may be one of the reasons developers choose not to read patents.
130. Joseph Farrell, comments at FTC/DOJ hearings, Berkeley, California, 28 February 2002, Transcript pp. 599-600, http://www.ftc.gov/opp/intellect/020228ftc.pdf.

131. It is often argued that the prior art problem is a temporary legacy of the newness of the field — at least its newness to the patent office. Yet "quality" of patent examinations for software is still a major issue 15 years after the problem first drew attention. Some progress has been made in some of the institutional problems, such as securing more qualified examiners, but the problem of managing knowledge about software prior art has never been tackled systematically. There continues to be talk in the U.S. and Europe of the need to develop databases of prior art; however, the development of a comprehensive database was attempted during the 1990s by the Software Patent Institute (www.spi.org).

132. See discussion of property characteristics in J. Bradford DeLong and A. Michael Froomkin, "Speculative Microeconomics for Tomorrow's Economy," in Brian Kahin and Hal R. Varian, eds., Internet Publishing and Beyond, MIT Press 2000; First Monday, vol. 5, no. 2 (February 2000), http://www.firstmonday.org/issues/issue5_2/delong/.

133. Dan L. Burk, "Muddy Rules for Cyberspace," Cardozo Law Review, vol. 21, p. 119 (1999), http://www.cardozo.yu.edu/cardlrev/v21n1/burk.pdf.

134. Robert P. Merges, "Intellectual Property Rights, Input Markets, and the Value of Intangible Assets," working paper, Berkeley Center for Law and Technology Digital Library, http://www.law.berkeley.edu/institutes/bclt/pubs/merges/iprights.pdf; Mark A. Lemley and David W. O'Brien, "Encouraging Software Reuse," Stanford Law Review, vol. 49, no. 2, p. 255 (1997).
135. Digital Dilemma, note 11 above, p. 197. For broad patents, such as patents on business methods, the incentive is different. If the patent is broad enough so that competitors cannot design around it, the patentee is more likely to want to exclude others rather than license it. The broader the patent, the more likely it is to be notorious rather than obscure, but valuation may still difficult and costly since that must take into account the scope and the strength of the various claims.
136. The American Intellectual Property Law Association is considering a proposal to do away with willful infringement penalties, but independent inventors and universities are likely to oppose any public effort in this direction. From their perspective, the threat of treble damages is a powerful negotiating tool that allows them to market their inventions with less concern that inventions will be copied.
137. 35 USC 154 (d). Early publication only came in the U.S. with American Inventors Protection Act of 1999, and it is not required if the applicant does not seek patent protection outside the U.S.
138. Early publication presents an obvious research opportunity since submissions of prior art become public information. How do submissions of prior art in response to early publication vary from field to field? Is prior art submitted primarily by large companies that have the resources to assess and manage prior art and patent information?
139. The contractual environment surrounding software also enables appropriability in a way not available to other technologies. While it is theoretically possible to subject any transaction to contractual limitations, it is impractical to do so in a distribution chain for physical products. By contrast, it is easy to establish a direct contractual relationship when software is made available for downloading on the Web. Software publishers have been pursuing state adoption of the Uniform Computer Information Transactions Act (UCITA) in the U.S., but has been opposed by software users, and after enactment in Virginia and Maryland, adoption has stalled.
140. The argument can be made that software would have developed even more rapidly with software protection at an early stage. However, Bessen and Maskin offer evidence that R&D intensity dropped with the advent of patent protection. See note 155 below.
141. Computer Associates International, Inc. v. Altai, Inc., 982 F.2d 693 (2nd Cir. 1992); Lotus v. Borland, 49 F.3d 807 (1st Cir. 1995), affirmed by an equally divided Supreme Court.
142. At least this is true for copyright in code which basically operates to reinforce common behavioral expectations and to protect vendors against piracy. Higher level protection, which includes non-literal elements such as "look and feel" and "structure, sequence, and organization," receded significantly as a result of decisions in the 1990s by district courts and non-specialized circuit courts (as opposed to the Court of Appeals for the Federal Circuit).
143. The classic situation is when a publisher such as a newspaper or movie studio accidentally includes material that has not been properly cleared, a situation commonly covered by errors and omissions insurance. In an Internet publication, which is not integrated into a final fixed form, inadvertent infringement is less of a problem because the infringing material can be quickly and easily removed.
Infringement can be unconscious as was in the case in the suit against George Harrison for copying the melody of "He's So Fine" when he wrote "My Sweet Lord." (Bright Tunes Music Corp. v. Harrisongs Music, Ltd., 420 F.Supp. 177 (1976) Unconscious copying is rarely an issue in software development, but firms use "clean-room" techniques to insure that programmers do not copy, inadvertently or otherwise, in the course of writing code.

144. Sylvain Perchaud, note 108 above.

145. TRIPS, Article 27.1 reads: " ... patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced." While TRIPS provides rigorous baseline standards for all patents, this phrase, closely read, may not preclude higher-level tailoring that is not inconsistent with the specific language in TRIPS. In the frequently quoted sentence, the term "without discrimination" has to refer to the nouns that follow, but not to the enjoyability of patent rights.
146. See the "Halloween Documents," edited by Eric Raymond, http://www.opensource.org/halloween/.

147. From an internal document presented at an internal "Linux Strategy Review" held by the company in Berlin in September 2002:
""Linux patent violations/risk of being sued" struck a chord with US and Swedish respondents.
Seventy-four percent of Americans and 82 percent of Swedes stated that the risk of being sued over Linux patent violations made them feel less favorable towards Linux. This was the only message that had a strong impact with any audience."

148. 26 July 2001, transcription published by O'Reilly Development Network, 9 August 2001; see http://linux.oreillynet.com/pub/a/linux/2001/08/09/oscon_panel.html?page=5.
149. IBM filed a brief arguing against patentability in Gottschalk v. Benson, 409 US 63 (1972) and supported the CBEMA brief against patentability in Parker v. Flook, 437 US 584 (1978).
150. George Priest, "What Economists Can Tell Lawyers About Intellectual Property," Research on Law and Economics, vol. 8, p. 19 (1986).
151. Only James Bessen's work is specifically ground in the software sector. See James Bessen and Eric Maskin, "Sequential Innovation, Patents and Imitation," Working Paper, (July 2002), http://researchoninnovation.org/patent.pdf. Bessen and Maskin examine software development as innovation that is characteristically sequential and complementary and therefore ill-suited to patent protection. They find supporting empirical evidence in reduced R&D intensity.
152. See summary of this work by Arundel, note 33 above.

153. There are a few notable exceptions: Stanley M. Besen and Leo J. Raskind. "An Introduction to the Law and Economics of Intellectual Property," Journal of Economic Perspectives, vol. 5, no. 1 (Winter 1991), pp. 3-27; Robert P. Merges and Richard R. Nelson, "On limiting or encouraging rivalry in technical progress: The effect of patent scope decisions," Journal of Economic Behavior and Organization, vol. 25, pp. 1-24
154. Scholars working on the economics of litigation include Jean Lanjouw, Josh Lerner, Mark Lemley and John Allison.
155. Bronwyn Hall and Rosemarie Ham Ziedonis, "The Effects of Strengthening Patent Rights on Firms Engaged in Cumulative Innovation: Insights from the Semiconductor Industry," Gary Libecap (ed.), Entrepreneurship, Innovation, and Economic Growth, forthcoming, http://emlab.berkeley.edu/users/bhhall/hz_libecap.pdf.

156. The National Knowledge and Intellectual Property Management Task Force, http://www.km-iptask.org; Kevin G. Rivette and David Kline, Rembrandts in the Attic, Harvard Business School Press, 1999.
157. "In the software industry ... the number of overbroad patent claims allowed by the USPTO, the uncertainty in the current patent process going through, and particularly the uncertainty in the judicial process post-grant, all combine to increase the difficulties and inaccuracies of the endeavor of trying to use that information in a competitive manner, because there's too much information and it is no longer meaningful in the same way as it might be in other industries ... ." Bradford L. Friedman, Director of Intellectual Property, Cadence Design Systems, Inc., FTC/DOJ Hearings, 27 February 2002.
158. E.g., Keith E. Maskus, Intellectual Property Rights in the Global Economy, Institute for International Economics, 2000; Carlos M. Correa, Intellectual Property Rights, the WTO and Developing Countries, Zed Books/Third World Network, 2000; Michael P. Ryan, Knowledge Diplomacy, Brookings Institution Press, 1998. A particularly important recent contribution is the report of the Commission on Intellectual Property Rights (established by U.K. Secretary of State for International Development), Integrating Intellectual Property Rights and Development Policy, 2002, http://www.iprcommission.org.

159. Robert Barr, note 6.

160. Bakel and Hugenholtz, note 90, p. 43.

161. Keynote presentation at "Patent System Reform" conference hosted by the Berkeley Center for Law and Technology, 1 March 2002; transcription published in Patnews, 31 July 2002.

Editorial history

Paper received 20 January 2003; accepted 26 February 2003.

Copyright ©2003, First Monday

Copyright ©2003, Brian Kahin

Information process patents in the U.S. and Europe: Policy avoidance and policy divergence by Brian Kahin
First Monday, volume 8, number 3 (March 2003),
URL: http://firstmonday.org/issues/issue8_3/kahin/index.html