Software and Law:
Is Regulation Fostering or Inhibiting Innovation?
Brian Kahin
Computer & Communications Industry Association
and
University of Michigan
Brookings Institution
December 7, 2005
patents:
a hybrid form of regulation
• property rights granted by the government
– ex parte
– database of private regulations
•
•
•
•
privately enforced through costly litigation
subject to capture at multiple levels
“one-size-fits-all”
independent creation is not permitted
a database of private regulations
200000
180000
160000
140000
120000
100000
80000
60000
40000
20000
U.S. software patents:
1976-2002
cumulative software
patents
annual issued
software patents
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
0
source: Bessen 2003
privately enforced through costly litigation
average legal costs/fees for single-patent litigation
amount in
controversy
costs per
side
X2=
total costs
total for both as % of
amount in
sides
controversy
less than
$1M
$1M to
$25M
more than
$25M
$0.5M
$1M
>100%
$2M
$4M
…
$4M
$8M
<32%
Report of Economic Survey 2003
American Intellectual Property Law Association
amount in
controversy
costs per side X 2 =
total for both
sides
total costs plus
as % of
amount in
controversy
< $1M
$0.5M
$1M
>100%
($0.3M)
($0.6M)
$2M
$4M
($1M)
($2M)
$4M
$8M
($2.5M)
($5M)
$1M to
$25M
>$25 M
…
<32%
staff time,
opportunity
costs,
distraction
“Rule of 25”
60,000 (?) notice letters received each year
25 X
2500 cases filed each year
25 X
100 patent cases fully litigated each year
Chip Lutton, Apple Computer, testimony before the House Subcommittee
on Courts, the Internet, and Intellectual Property, April 20, 2005
capture at multiple levels
•
•
•
•
•
professional services (patent bar)
regulatory capture (PTO)
specialized court (CAFC)
industry (pharmaceuticals, biotech)
global politics
= inertia/inability to reform
Under CAFC, patents have become
• easier to get
– lowered standard of inventiveness (suggestion
test; KSR v. Teleflex)
• more potent
– automatic injunctive relief (eBay v. MercExchange)
• easier to assert
– (unjustifiably) heightened presumption of validity
all matters on which FTC has recommended reform
but nothing in the current reform package!
a legal fiction
inventive / nonobvious
uninventive / obvious
“inventiveness”
volume of inventions
“inventiveness”
“flash of genius” standard (pre-1952)
current low
standard
mere novelty
volume
“inventiveness”
“flash of genius” standard (pre-1952)
current low
standard
mere novelty
institutional pressures
specialized court
patent office
patent bar
volume
“inventiveness”
“flash of
genius”
pre-1952
current low
standard
patentable
unpatentable
institutional pressures
specialized court
patent office
patent bar
novelty
volume
valid patents
questionable patents
}
zone of
ambiguity
“one-size-fits-all” model
• focused on adjudication process, not results
• confronts an increasingly diversified innovation
environment
• does not distinguish discrete and complex
technologies
– patents more potent, easier to get
• does not acknowledge alternative means of
appropriating returns from innovation
– copyright, complements, first-mover advantages, secrecy
– implicitly devalues other forms of economic value: design,
integration, testing/debugging, interoperability, networks
basic science
expansion of
patent system
biotech
traditional
subject matter
complex
technologies
software
logic,
mathematics
services
social sciences/
liberal professions
diverging characteristics
business method problem
– not “technology”
one patent covers many
products/implementations
pharmaceuticals, chemicals
– discrete technology
one patent, one product
software problem
– extreme complexity
one product, many patents
business method problem
“…[W]ith the advent of business method
patenting it is possible to obtain exclusive
rights over a general business model, which
can include ALL solutions to a business
problem, simply by articulating the problem.”
– IBM, Comments on the International Effort to
Harmonize the Substantive Requirements of
Patent Laws [USPTO consultation, May 2001]
software problem
• extreme functional complexity
– fine granularity
– multilevel complexity: algorithms to business
methods
– strong network effects
• block interoperability
• importance of complements
• danger of networking of tipping
• ease of producing patentable functions
• opportunities for extreme economies of
scope/scale, global distribution, accelerated
take-up
– enables open source
millions of producers
widespread independent invention
complex information products with 10,000s of functions
100s of millions of users
massive potential for liability
the specter of massive downstream liability
http://webshop.ffii.org
who should search?
cost of searching = $2-15K per function
x 1000s of functions
x uncertainty of unpublished patents
+ exposure to willful infringement
Information failure in the ICT sector
[T]here are too many patents to be able to
even locate which ones are problematic. I
used to say only IBM does clearance … but
IBM tells me even they don't do clearance
searches anymore.
Robert Barr, Vice President, Worldwide Patent
Counsel, Cisco Systems, Inc., FTC Roundtable,
October 2002
TI has something like 8000 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, budgetbusting 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 Feb 2002
Reliable searches not feasible or economic
because of the “tremendous volume of prior
art being generated.”
“The Commission believes strongly that all
inventions should meet the statutory provisions
for novelty, utility and unobviousness and that that
[data processing programs] cannot readily be
examined for adherence to these criteria.”
The President’s Commission on the Patent
System “To promote the progress of useful arts in
an age of exploding technology” (1966)
the consequences….
• Systemic failure of the disclosure function
• Prohibitive costs of litigation drive real costs
underground
• Bias toward capital-intensive development
models
• Massive embedded liability in user base
• Highest and best use = extortion
• Inter-industry cross subsidy