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FTC 2003 Report on Patents and Competition
Commemorate Banana Union Day

The Federal Trade Commission FTC.gov, and independent agency within the US government, published this final report in 2003 after conducting extensive hearings on the effects of patents and other exclusivity rights on competition. FTC conducted the hearings due to what some hearing participants described as the "widespread animosity against patents in the software industry" and the impression that competition law in its current state is incapable of preventing anti-competitive effects in particular of patents in the software fields, but also of exclusion rights in general on various industries. The final report comes to the conclusion that the patent system stimulates competition and productivity in some fields (pharma is cited as an example), whereas it tends to harm both in others, especially where software and business methods are concerned. The report expresses doubts as to the wisdom of past court decisions to admit patentability in these areas and proposes a series of measures for repairing some of the damage.
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Many panelists and participants expressed the view that software and Internet patents are impeding innovation (p. 165)

The U.S. Federal Trade Commission was asked to research the interface between patent policy and competition policy. After extensive hearings, its report "To Promote InnovationThe Proper Balance of Competition and Patent Law and Policy" was published in October 2003.

The FTC looked especially closely at the different effects of patents on the competitive environment in four key high-tech industries: pharmaceuticals, biotech, computer hardware/semiconductors, and computer software/internet. In its quietly-stated, deeply-researched governmental way, its conclusions are fascinating and devastating: positive effects of software patents are questionable at best; but software patents have serious negative effects on competition -- and competition, not patentability, is what drives innovation in this sector.

Recommendation: Consider Possible Harm to Competition Along with Other Possible Benefits and Costs Before Extending the Scope of Patentable Subject Matter.

... Decisionmakers should ask whether granting patents on certain subject matter in fact will promote such progress or instead will hinder competition that can effectively spur innovation. Such consideration is consistent with the historical interpretation of patentable subject matter, which implicitly recognizes that granting patent protection to certain things, such as phenomena of nature and abstract intellectual concepts, would not advance the progress of science and the useful arts. For future issues, it will be highly desirable to consider possible harms to competition that spurs innovation as well as other possible benefits and costs before extending the scope of patentable subject matter.

By contrast, computer hardware and software industry representatives generally emphasized competition to develop more advanced technologies as a driver of innovation in these rapidly changing industries. These representatives, particularly those from the software industry, described an innovation process that is generally significantly less costly than in the pharmaceutical and biotech industries, and they spoke of a product life cycle that is generally much shorter. Some software representatives observed that copyrights or open source code policies facilitate the incremental and dynamic nature of software innovation. They discounted the value of patent disclosures, because they do not require the disclosure of a software product's underlying source code...

Representatives from both the computer hardware and software industries observed that firms in their industries are obtaining patents for defensive purposes at rapidly increasing rates. They explained that the increased likelihood of firms holding overlapping intellectual property rights creates a "patent thicket" that they must clear away to commercialize new technology. They discussed how patent thickets divert funds away from R&D, make it difficult to commercialize new products, and raise uncertainty and investment risks. Some computer hardware and software representatives highlighted their growing concern that companies operating in a patent thicket are increasingly vulnerable to threats to enjoin their production from non-practicing entities (NPEs) that hold patents necessary to make the manufacturer's product.

In the software and Internet industries, innovation generally occurs on an incremental basis, with participation possible at the design level by individual programmers and small firms. Panelists consistently emphasized that competition is an important driver of innovation in these industries. Although some panelists stated that software and business method patents foster innovation, many disagreed, asserting that such patents are often questionable and are actually stifling innovation by increasing entry barriers and creating pervasive uncertainty. Some panelists questioned whether it was necessary to have patent protection on software, given the availability of copyrights. Others reported that defensive patenting has accelerated the development of a patent thicket, which, in turn, has increased the likelihood of patentees holding up their rivals. Panelists generally agreed that too many questionable patents are issued; they attributed this to the difficulty patent examiners can have in considering all the relevant prior art in the field and staying informed about the rapid advance of computer science.
[ FTC 2002: Hearings on Anti-Competitive Effects of Patents | FTC 2003 Report on Patents and Competition | OECD 2004/01 Report on Patents and Economic Performance ]
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english version 2004/08/16 by Hartmut PILCH