Chapter 4 on Patents has some useful material for sharpening one's teeth before talking to policy makers. As well as setting out a general pro-patents case, it goes on to discuss why it is good public policy for universities to be forced to patent their research (Bayh-Dole act), why technology transfer agencies should be privatised, and then goes on to consider software patentability:
Computer Technology in its Infancy Needed Patent Protection (page 107 of the book, page 16 of the chapter pdf)
The focus of research efforts by the computer industry shifted towards software-related technology in the late 1980s as the performance of processors increased. Initially, software was construed as a creation outside patent protection. After worldwide discussions on the implication of patent rights on functional and indivisible designs, this view began to change. The economic momentum and significance of the software business, as a driver for the computer industry, and therefore for many related industries, became evident. Today, with the advent of the Internet, another test for the patent system is the rise of business method inventions. The race between the development of computer technology, and policy-makers concerned with patent law and policy will be discussed in detail below.
Computer Software Blossomed under IP Protection
In the 1980s, there were extensive discussions on whether the patent system or the copyright system, or both, should provide protection for computer software. It had become clear that computer software, in order to develop and thrive, needed strong intellectual property protection. These discussions resulted in the generally accepted principle that computer software should be protected by copyright, whereas apparatuses using computer software or software-related inventions should be protected by patents. This legal development culminated in international agreements (the TRIPs Agreement and the WCT) obligating signatories to legally protect software. The law relating to the patentability of software is still not harmonized internationally, as some countries embraced the patentability of computer software and others adopted approaches that recognize inventions assisted by computer software. Today, in many countries computer software and hardware may be protected by both copyright and patent law, depending on the nature of the IP at issue.
There was also a growing need at that time for the protection of the physical layout design of an integrated circuit, which is why a diplomatic conference on that subject was organized by WIPO in 1989. Given that patent protection is stronger than the protection afforded by other types of IP, including copyright protection, how different IP laws were used to protect various types of computer technology was an important policy decision. Along with the desire to protect new computer technologies, there was also the widely-shared concern that if the protection was too strong, it could discourage further developments of intellectual creation.
During the debate on patent and copyright protection, the competitiveness of the computer industry created a political climate more favorable to protecting certain software-related inventions by patents, rather than by copyright alone. Policy-makers were well aware that it was strategically advantageous to have patent protection for computer-related inventions in order to encourage the transfer of this emerging technology from countries advanced in this area. It was also important to protect computer-related inventions in order to stimulate investment within their own national industry.
The number of companies developing software continues to grow. Smaller software companies are filing for patents more often, particularly as venture capitalists frequently require patents as a condition for providing funding. Companies that have previously filed patent applications for software-related innovations have also stepped up their efforts to patent these innovations, including, in particular, companies with strong software portfolios.33 Also, software increasingly underlies other technologies, such as the software that today is used to design, manufacture, and render operable the hardware in a microprocessor (e.g. "verilog"; a hardware description language). This software also is protected by both copyright and patent law in many cases.
Today, the extent to which software-related inventions are patentable varies considerably from one country to another. There appears to be an acute need for international harmonization, particularly as international trade in software products continues to increase and companies competing on a global basis are interested in protecting their IP assets uniformly around the world. Also, the consequences of one country offering patent protection while others do not are that some nations will have a more sheltered environment for growth in that particular industry, and enterprises there will accumulate more patents ("patent assets"), while other nations and their enterprises will not build up patent assets in these areas. The practical significance of patent assets will be addressed later in this Chapter when we explore licensing as an important element in the strategic use of patents to stimulate development.
Business Methods and IP Protection Correspond to Internet Business Growth
Another area where business growth has stimulated the expansion of IP protection, and where IP protection has in turn stimulated business growth, is the fast-growing field of electronic commerce on the Internet. Patents have recently been granted for so-called business-method inventions in this area. As most modern business models involve the application of computer software, the patentability of business methods in the United States is closely linked to recent developments in the law on the patentability of software and software-related inventions. The decision of the Court of Appeals of the Federal Circuit in 1998 in State Street Bank & Trust v. Signature Financial Group holding that business methods could be the subject matter of patents, triggered a sharp increase in such applications.34 This seminal decision challenged traditional views of the "technical nature" of patents common in certain countries.
Since State Street Bank, patents have been issued on methods for online decision analysis, on-line financial systems, on-line customer rewards systems, and even systems for categorizing and valuing patents. Suddenly, the potential of patent protection seemed much broader and more accessible to a wider range of new ideas than had previously been contemplated. In fact, the growing quantity and complexity of business method applications reflect the increasing importance of business technologies in today's economy.
Business-method inventions which are applicable to e-commerce consist mainly of software-based systems and methods which are used to effect or simplify electronic transactions taking place over the Internet. These inventions enable the transaction to be effected by the computer system without requiring the relevant parties to be present in close proximity during the transaction. The majority of these patents have been issued in the United States of America. Patents for software-related business methods, such as those mentioned above, soared from 700 in 1996 to 2,600 in 1999. Some attracted significant public attention.35 There is a raging debate on the long-term social and economic effects of Internetrelated patents and the related issues of patentability, prior art, and broad patents.36 Recently, several high-profile patent infringement suits involving Internet patents have added to the growing discussion.
For example, Amazon.com sued Barnesandnoble.com, claiming that the latter's ordering method infringed Amazon's "one-click" patent. Amazon won a preliminary injunction prohibiting its competitor from using one-click shopping methods. A lawsuit brought by Priceline.com against Microsoft claimed that the latter's Expedia.com travel site infringed Priceline's patent on "reverse-auction." Under a settlement Expedia will pay royalties to Priceline. Much appears to be at stake as litigation involving patent infringement suits continue to be filed in relation to Internet business methods.
In the evolving knowledge-based economy, innovative ideas are often a company's most valuable source of competitive advantage. This is especially so for companies engaged in online business, with limited tangible assets and whose success is mainly dependent on innovative ideas and other intangibles which can include business models. These patents are expected to increase in tandem with the continued expansion of the Internet and electronic commerce.37 According to the USPTO, prior to 1990, business-method patents were heavily focused on computerized postage metering and cash register systems. However, by 1994 these were overshadowed by financial transaction systems, and by 1999, electronic shopping and financial transaction systems became the two dominant categories. Newly filed applications indicate that advertising management systems will join the ranks of the most popular categories in this patent class. In 2000, 899 business-method patents were granted by the USPTO.
Some countries have moved to protect business-method inventions. For example, business-method inventions are now patentable in the Republic of Korea, following the introduction of Examination Guidelines for Business Methods on August 1, 2000. According to the Korean Intellectual Property Office (KIPO), it has already received 4,000 local applications for such patents, most of which are related to the Internet by clarifying or modifying their examination standards. Other countries are still holding discussions centered on the patentability of business methods which are applicable to the Internet and e-commerce. For example, the European Commission held a series of consultations in 2000 on whether and how business-method inventions should be protected by patent within the European Community and recently proposed the new policy for adoption by the European Union member states.38 As discussed above, in the 1980s, the demarcation line was made between copyright protection of computer software, and patent protection of software-related inventions. The Internet has virtually erased that borderline, as many business methods are deemed more than mere computer software programs.
As in all other areas of technology, business-method patents are important to create incentives and encourage investment in new technologies (see Box - 4.9). However, some are concerned that the granting of overly broad patents, particularly those involving fundamental online business models, could stifle innovation and have a detrimental effect on the growth of ecommerce, particularly if these patents are abused.39 Some have also expressed doubts as to whether some of these online business models fulfill the basic requirements for the granting of a patent; they contend that existing business models are being reinvented for use on the Internet.
Still others point out the intersection of business method patents and the digital divide: with parts of the world patenting business methods, while other parts are still catching up with the most basic computer hardware technology. The consequences of this aspect of the digital divide are that ownership of business methods in the global marketplace will be secured by businesses in the nations that have aggressively supported such patents, whereas businesses from countries that are not so enamoured of business methods, or that have not yet addressed the issue, will be left behind. This gap is not as significant when markets are merely national, but in the international e-commerce marketplace of the Internet, businesses not holding IP assets in this area will be at risk of infringement. If policy-makers are not concerned about the lack of skilled human resources to develop the e-commerce industry, software programmers may wish to seek more attractive job opportunities in foreign countries where technological developments in this area are more dynamic than others for various reasons, including stronger protection of intellectual creation. This may lead to a "brain drain" which in turn exacerbates the digital divide. As the coverage and impact of businessmethod patents are global, the need for international cooperation to find the best solution is acute.
Box-4.9 The Idea Factory
The Walker Digital Corporation was founded in 1994 by Internet entrepreneur Jay Walker. The company develops and patents innovative information-based solutions for businesses and is modeled after Thomas Edison's famed Menlo Park invention factory. Walker Digital has at least 12 patents on business methods. Mr. Walker, chairman of Walker Digital and founder and vice chairman of Priceline, said that "[w]ith recent US Patent and Trademark Office and court affirmations regarding the patentability of business methods, a company now has the ability to protect not only its business products but the actual methods employed in bringing them to market and satisfying customers. This important new recognition of patent protection creates the incentive for exciting and significant innovation in US businesses, and will play a central role in enabling a new generation of businesses to emerge and flourish, both on the Internet and off." Priceline.com is based, in part, on a patent issued to Walker Digital for an innovative software-enabled business process that allows interested buyers to communicate a binding offer to potential sellers, the so-called "nameyour-price reverse auction" business model. Walker Digital received 7.5 million Priceline shares in exchange for the assignment of patent rights and a US$500,000 investment. "Patents are a critical element of priceline.com's business strategy as they strengthen and expand our competitive position," said Rick Braddock, Priceline's chairman and CEO. According to Mr. Braddock, "protected intellectual property enables us to establish and maintain our distinctive position in the ecommerce marketplace and gives the company the ability to focus on building its business and brand, and not be as concerned with the competitive copying going on in the e-commerce space. These patents also present priceline.com with the potential opportunity to open up new revenue streams through licensing."
Source: Forbes Magazine, Walker Digital Corporation, and Priceline.com.
- For example, nearly one-third of the patents which are issued to IBM in the United States of America are said to be for software-related inventions.
- In the United States of America, there was a surge in business method filings in 1998 and 1999. Although these applications represent only 1 percent of total patent applications filed at the USPTO in 1999, they have increased significantly, from 700 in 1996 to 2,100 in 1999.
- These include Priceline.com's "name your own price for..." system of purchasing goods through reverse auctions (US Patent Number 5897620); Amazon.com's "Method and System for Placing a Purchase Order Via a Communications Network" (US Patent Number 5960411), often referred to as the one-click ordering method, which allows users to make fast track orders; and Doubleclick's patent on a "System and Method for Delivering Customized Advertisements Within Interactive Communications Systems" (US Patent Number 5933811), which covers the manner in which the company delivers advertisements over the Internet.
- See, for example, USPTO, "Automated Financial or Management Data Processing Methods," http://www.hellopatent.com/us_bm/us_bm.html
- See http://europa.eu.int/comm/internal_market
- Some have argued that the current one-size-fits-all patent system should be revamped to create a more differentiated system, whereby distinctions are drawn between different types of knowledge and alternative types of patents awarded, in order to arrive at an optimal balance to encourage the production as well as the diffusion of new technologies. Other critics, especially in the legal profession, argue on the other side: that it is a bad idea to differentiate based on subject matter, and that the problems with business method patents stem from problems in the application of the current standards.