Software and Law:

Is Regulation Fostering or Inhibiting Innovation?

Brian KahinComputer & 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

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

cumulative softwarepatents

annual issuedsoftware patents

U.S. software patents: 1976-2002

source: Bessen 2003

a database of private regulations

privately enforced through costly litigation

average legal costs/fees for single-patent litigation amount in controversy

costs per side

X 2 =

total for both sides

total costs as % of amount in controversy

less than $1M

$0.5M $1M >100%

…

<32%

$1M to $25M

$2M $4M

more than $25M

$4M $8M

Report of Economic Survey 2003American Intellectual Property Law Association

amount in controversy

costs per side

X 2 =

total for both sides

total costs as % of amount in controversy

plus

< $1M $0.5M($0.3M)

$1M($0.6M)

>100%

…

<32%

staff time, oppor-tunity costs, distraction

$1M to $25M

$2M($1M)

$4M($2M)

>$25 M $4M($2.5M)

$8M($5M)

100 patent cases fully litigated each year

2500 cases filed each year

60,000 (?) notice letters received each year

25 X

25 X

“Rule of 25”

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

“in

ven

tive

nes

s”

volume of inventions

“in

ven

tive

nes

s”

volume

“flash of genius” standard (pre-1952)

mere novelty

current low standard

“in

ven

tive

nes

s”

volume

“flash of genius” standard (pre-1952)

mere novelty

current low standard

institutional pressuresspecialized court

patent officepatent bar

“in

ven

tive

nes

s”

volume

institutional pressuresspecialized court

patent officepatent bar

“flash of genius”

pre-1952

novelty

patentable

unpatentable}

zone of ambiguity

questionable patents

current low standard

valid patents

“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

biotech

software services

social sciences/ liberal professions

complex technologies

traditional subject matter

expansion of patent system

logic, mathematics

pharmaceuticals, chemicals– discrete technology

one patent, one product

business method problem– not “technology”

one patent covers many products/implementations

software problem– extreme complexity

one product, many patents

diverging characteristics

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

100s of millions of users

massive potential for liability

complex information products with 10,000s of functions

http://webshop.ffii.org

the specter of massive downstream liability

who should search?

cost of searching = $2-15K per functionx 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, 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 Feb 2002

The President’s Commission on the Patent System “To promote the progress of useful arts in an age of exploding technology” (1966)

“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.”

Reliable searches not feasible or economic because of the “tremendous volume of prior art being generated.”

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