Software patents need shelter from the storm

COMMENTARY--Software patents are a controversial issue, all the more so as the European Parliament considers changes that would bring European patent law closer to the more permissive regime found in the United States.

This has resulted in a flurry of criticism, so much so that the European Parliament has deferred its decisions until Nov. 4 in order to consider objections raised by economists as well as spokespersons for the open source community.

This is a somewhat unusual debate, as patent-related issues have less to do with technical matters normally the subject of computer-oriented discussions so much as economic questions of efficiency, levels of R&D and incentives. Many would argue that since patents are useful in other technical disciplines, they will be useful in software development. I argue that the nature of software development makes it sufficiently different from other technical disciplines as to make unnecessary the economic expedient of patents.

The case for patents, in a nutshell
As a report commissioned by the European Parliament noted, A patent is not a "natural' right, but an instrument of economic policy. As such, it must be judged on its economic merits.

Patents are an economic tool designed to remedy structural aspects of certain markets which hinder technical research. Certain markets, such as pharmaceuticals, require large R&D expenditures to discover a new medicinal compound. Medicinal compounds, however, are hard (and expensive) to discover but easy to copy, which can deprive a research company of any return on the billions it spends on research.

Patents grant their owner a limited monopoly on the “idea” identified by the patent. This ownership is limited to 20 years, a length which is enshrined in the TRIPs agreement to which all members of the World Trade Organization (WTO) are signatories. Such monopoly power gives the owner the right to license at prices he or she sees fit, or conversely, the right not to license at all.

Such monopoly rights restrict competition for the length of the patent, which is an obvious societal cost. On the other hand, it also ensures the owner a return on research expenditures which went into the discovery of the patented idea. This makes large expenditures for easily copied product, such as pharmaceuticals, easier to justify, thus boosting research and development throughout an industry.

Such an assured source of revenue can have benefits for Small to Medium-sized Enterprises (SMEs). Patents are valuable assets, and they can be used to secure loans and/or venture funding, as well as serve as a source of stable revenue. Nicholas P. Godici, Director of the U.S. Patent Office, mentioned Herman Hollerith’s 1889 patent on a method for tabulating and compiling statistical information in testimony before an American congressional subcommittee. This patent provided a stable source of revenue for Mr. Hollerith’s fledgling business, which enabled it to grow into a certain company better known under its later name, International Business Machines (IBM).

Patents must be fully described as part of the patent application process. This facilitates the dissemination of the patented idea into the public domain, which becomes most useful once the patent expires. The monopoly aspect of patents also provides incentives to properly market the idea, as a patent-owning company will generate all revenue from the results of that marketing. This serves to popularize the technology so that it is universally understood by the time the patent lapses.

A final justification is what I’ll call the “exemplar” theory. The United States has the most vibrant IT industry in the world, an industry that has grown to dominate IT markets around the world. America also has a liberal patent regime, and this is causally linked, according to the theory, to America’s IT success. Therefore, Europe needs software patents in order to make an IT environment wherein European companies can thrive as American companies presumably do under America’s patent system.

Regarding the R&D effect
Most ideas are built, in some fashion, on older ones. This is particularly true of software. The kernels of most operating systems are reported to be very similar, which doesn't apply to the higher-level technology that has grown around this core like coral around a sunken ship. In addition, simple Remote Procedure Calls (RPC) are an old concept, but SOAP and XML-RPC calls are ehancements of that model, building on basic principles laid out in the "ideas" associated with RPC.

In addition, the market for software creation is huge. It is estimated that there are 10 million active programmers in the world. This is a truly massive number, dwarfing the number of innovators in other technical disciplines. This large number is driven both by the demand for software product as well as barriers to entry which are unusually low. Anyone with a cheap computer can acquire the tools required to build software. This means that R&D in the software industry is noticeably cheaper than R&D in other industries, and this, combined with large numbers of programmers, leads to a lot more contributors to global software R&D.

This leads to a fast-paced software market composed of large numbers of competing products. These products compete by creating new “features” to include in new releases. In other words, software is uniquely dependent on the creation of new ideas, and as such, will be naturally inclined to high levels of R&D. The question, therefore, is if there is any R&D gain to be derived from the economic expedient of software patents.

Evidence suggests that there isn’t. James Bessen and Robert Hunt, in a "Research on Innovation" study titled "An Empirical Look at Software Patents," found that R&D was actually REDUCED in the presence of a vibrant software patent system. From their introduction…

…software patents substitute for firm R&D; they are associated with substantially lower R&D intensity. Overall, the predominant use of software patents appears related to strategic “patent thicket” behavior.

This makes logical sense if you keep in mind that software is extremely reliant on the creation of new ideas. In the absence of patents, old research which slowly worked its way into the public domain (even proprietary software gets reverse engineered) would force companies who wished to remain competitive to maintain high-levels of R&D. In contrast, a strong patent system allows companies to generate longer-term revenue benefits from patentable IP, giving them less incentive to conduct the same levels of research.

In addition, remember that new ideas are reliant upon the presence of older ones. If those older ideas are patented, then someone has a 20 year lock on that core idea. This can be dangerous for innovation in the software market, a market characterized by rapid changes and a proliferation of new ideas. Licensing tollbooths on the foundations of new ideas can greatly hinder the appearance of new ones.

Regarding SME revenue from patents
If Small to Medium-sized businesses were creating patents in large numbers, then such businesses might benefit from the value inherent in the grant of a patent. Unfortunately, the primary actors on the patent stage are large companies. A number of the studies I read for this article recommended doing more to educate small to medium-sized businesses of the benefits of patents, in hopes that this would spur them to patent more.

This won’t have much effect, in my opinion, as there are a number of reasons why smaller companies will still choose to avoid the patent process.

…, SMEs relative lack of interest in the patent system might have a more rational explanation. Possibly, SMEs’ make conscious decisions to stay away from patents, for a variety of reasons – costs and effort being important factors. Typically, patenting (or defensive action against patent claims) will take time from the same few people that are the creative brains behind the inventions. In practice, many SMEs tend to rely on copyright protection for software, which is readily available and may provide all the protection SMEs really need. (The patentability of computer programs)

Likewise, consider that SMEs will never acquire patents in numbers comparable to large companies. This gives large companies a stronger hand in negotiations, and reduces the revenue-generating power of the handful of patents SMEs have in their possession. More often than not, SMEs will be forced to effect patent trades with large companies rather than manage licensing arrangements which would serve to bolster their bottom line.

Another reason small companies avoid the patent race is cost. The application process is expensive enough, but it is the legal costs associated with defending a claim in court which is the real burden. Of course, defending against an external patent claim can be just as expensive, but in future, there may be no way to avoid such patent suits, even with large, defensive patent libraries.

I base this on the growth of American companies composed of nothing more than a handful of patents and a team of lawyers to defend them. Such “litigation enterprises,” such as Eolas, owner of a patent on generic plug-in technology with which they have extracted large fees from Microsoft, and PanIP, a group that is suing small e-commerce sites over its claim to own the “technology” of online sales, are free of the need to trade for patents, as they have no product to speak of which would require access to technology patented by large companies.

They are free, therefore, to pursue the full revenue potential that patent-derived monopoly power grants them. These companies produce no new ideas, and serve as a tax on software companies oriented around creation of tangible product and the new ideas that go along with them.

Regarding information dissemination through patents
Few in the software industry cull the patent library to find algorithms or business methods. For the most part, patents are a legal instrument to be used in software competition, not a source of information.

It is, however, doubtful whether the information function actually plays an important role in the software industry. German research shows that patent archives are primarly valued as a source of information for legal purposes, and only to a lesser extent as a source of technical information. (The patentability of computer programs)

This is not to say that patents can’t serve as a decent source of information. Unfortunately, patents are barely readable unless a programmer happens to be versed in the verbal acrobatics of legal documents. Patents are written to enhance the appearance of innovation in order to enhance the application’s chances of being approved. Simple concepts that can be described in a sentence somehow get expanded into three or four paragraphs. This makes them poor sources of information, and partly explains why developers don’t tend to explore patent libraries.

On the other hand, if you replace the “pull” model wherein developers go hunting for technology found in patent databases for the “push” model, wherein companies go out and educate developers about their patented technology, the claim appears more credible. For instance, RSA Security had a vested interest in educating as many developers as possible about their patented technology (now lapsed), as more users implied more licensing revenue.

If software patents offer any benefits, it would be through the incentives created to market properly an idea. If the net effect of software patents is, as I’ve claimed, to reduce R&D and new idea creation in general, then this incentive is of dubious benefit.

A realistic appraisal of the American patent experiment
It is often suggested that America’s success in Information Technology is causally linked to a liberal patent regime. A consideration of the history of American software patents would suggest otherwise.

The foundation of America’s current patent framework was laid by court cases in the 1980s and 1990s. Patents on algorithms were granted in the 1970s, though these were usually tied to a hardware process wherein the software was intimately associated with the operation of that hardware. Even so, these patents were legally dubious until 1981, when the Supreme Court ruled in Diamond v. Diehr that algorithms were patentable under certain limited circumstances.

This did not result in an explosion of algorithm patents, as the ruling was sufficiently vague as to require subsequent rulings to clarify matters further. The most important clarification came in 1994 with the In re Alappat case, where the court of appeal for the federal circuit ruled that the standard by which algorithm patents would be judged was that the result must be “useful, concrete and tangible.”

The doors to business method patents were opened in 1998, in the case State Street Bank and Trust Co. v. Signature Financial Group Inc.. As Nicholas Godici explained, (t)he Federal Circuit in State Street explicitly rejected the notion that a “business method” exception exists in United States patent law, thereby ending any notion that inventions deemed to be business methods, by whatever criteria, would be excluded from patentability on that basis alone. Thus, the State Street decision clarifies that an invention deemed to be a “business method” will be treated in the same manner as any other method or processs invention ( Nicholas P. Godici, Acting Undersecretary of Commerce for Intellectual Property).

There are a number of reasons I might suggest for America’s success in Information Technology, such as an entrepreneurial culture, a relatively hands-off approach to business, a flexible labor market, a personal responsibility approach to business organization (something I should write about in a future article) and low-cost computer products (relative to other places in the world) which leads to more consumers who can use software products. Software patents, however, simply played no role in the success of American IT companies. They became popular too late to have much of an effect.

Some Parting Thoughts
America is the largest software market in the world. America also has the most permissive patent regime in the world. Since most European companies will want to sell to that large market, they will be obliged to chase down patents in order to navigate America’s patent minefield.

One might argue, therefore, that Europe’s software changes make little difference, given that European software companies will still have to contend with software patents. I disagree. It is worthwhile for Europe to chart a different course while America conducts its experiment in software patents. Though various parties disagree as to whether software patents are good for the industry, the consensus seems to be that there isn’t conclusive evidence as of yet whether software patents are a help or a hindrance.

I believe that once a final accounting is made, America’s liberal software patent regime will prove more a hindrance. When that becomes clear, it would be worthwhile to have a working example in Europe to serve as a guide when America decides to alter its own laws.

As a final point, one of the motivations for the proposal before the European Parliament was the need to standardize patent rules across Europe. Enforcement is currently left to national governments, and the rules governing the patentability of software are sufficiently vague as to allow differences of opinion. A patent that was ruled invalid in the UK might pass muster in Germany.

Standardization is a noble goal, and such a clarification is necessary if Europe is to create a unified market for software production which is competitive with America. I would suggest, however, that that standardization should move away from a confirmation of software patents. Allow the parallel experiment in patent regimes to continue a bit longer. We already have one large market with liberal software patent laws (two if you include Japan). We don’t need another until the evidence points to the clear benefits to be derived from software patents.

biography
John Carroll is a software engineer now living in Geneva, Switzerland. He specializes in the design and development of distributed systems using Java and .Net. He is also the founder of Turtleneck Software.