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

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 2003 American Intellectual Property Law Association

amount in controversy costs per sideX 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 “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

“inventiveness” volume of inventions

“inventiveness” volume “flash of genius” standard (pre-1952) mere novelty current low standard

“inventiveness” volume “flash of genius” standard (pre-1952) mere novelty current low standard institutional pressures specialized court patent office patent bar

“inventiveness” volume institutional pressures specialized court patent office patent 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

the specter of massive downstream liability

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, 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