May 6, 2005 Competition Bureau, Industry Canada Russell McOrmond, FLORA Community Consulting Interactions between patent and competition policy

Outline ● What is a patent? ● Different subject matter - why are they different? ● Competition influences on software marketplace ● Full spectrum of software licensing ● Open discussion (most of our time is here)...

What is a patent? ● Defined by Patent Act ( R.S. 1985, c. P-4 ) – "invention" means any new and useful art, process, machine, manufacture or composition of matter, or any new and useful improvement in any art, process, machine, manufacture or composition of matter; ● Only one exception to granting patents on anything that can fit this broad definition: – 27(8) No patent shall be granted for any mere scientific principle or abstract theorem. Canadian Patent Act:

How to obtain patent ● Invention is described in multiple "claims" which if granted describe the invention ● file, inspection, examination, granted, defend ● Fees exist at different stages, as well as maintenance fees. Process is not trivial, and CIPO recommends hiring a patent agent ● Monopoly lasts for 20 years after filing date (Canada - first to file) CIPO patent FAQ

What does a patent offer? ● A patent is a temporary government granted monopoly to carry out what is claimed in the patent. ● A patent does not grant you the right to do something, it only grants you the right to stop someone else ● Patents can be bought and sold (why they are thought of as a type of "property")

Why offer patents? ● Patent policy is industrial property, and is a government granted monopoly that has a very specific purpose: incentive for innovation, not kept secret ● Monopolies act as a dis-incentive to innovation by competitors, so patent policy must be balanced with competition policy ● Assumptions must be tested with sound economic analysis to determine if patents in a specific area provide incentive or dis-incentive for innovation

Different subject matter ● Patents are offered in many subject matter, each of which exist in very different marketplaces – Manufacturing of tangible goods requires expensive up-front investment to create facilities – Pharmaceuticals involves expensive research, testing and approvals – The software "build" process is automated and able to quickly take a design idea to running software on inexpensive equipment available to everyone

Limits to patentability ● While most patent lawyers and patent offices support unlimited patentability ("anything under the sun made by man"), practitioners in the art tend to support limits ● There are both practical and ethical reasons to limit the use of patents in areas such as software, art, life forms, methods of business, finance or teaching CPTech views on US Patent Reform Legislation (US Senate)

Patent quality ● Quality is a measure of whether patents granted would stand up to adequate testing of "useful, novel, unobvious" in court. Largest beneficiaries/promoters of software patents such as Microsoft, Oracle and IBM support reform to address patent quality issue ● Informal studies suggest from 60% to 95% of software patents granted by USPTO are of poor quality ● Most software innovators unable to afford court costs to defend against poor quality patents Public Patent Foundation

Software marketplace ● Largest competitive/innovative force not from competing software vendor, but competing methodologies for creation, distribution and funding of software ● "Software manufacturing" vs. Peer Production (Free/Libre and Open Source Software) ● Competition policy must protect competition in models, not price of resulting products/services

Full Spectrum for software? Software License Categories Free/Libre and Open Source Software "Proprietary " Non- Reciprocal No NDA Non- Disclosure Agreement GPL BSD Common Proprietary Shared Source (some) Reciprocal

New business models ● Marginal cost is zero for intangibles like software – counting copies not necessary, and creates overhead – Financing fixed cost of development – leverage zero marginal cost by re-partitioning revenue streams – resource development other than from counting copies used by "customers" – demand-side supplying itself, rather than supply-side vendor – leveraging lower costs of intangible inputs

Example vendor 1: "software manufacturing" ● Inputs: existing licensed software (non-copyleft FLOSS, software manufacturing) ● Value-add software - speculative ● Bundled, packaged (CD, box), distribution to retail ● Marginal costs: software=0, packaging>0, distribution>0, retail>0 ● Cost of software spread over many sales Note: Sometimes confusingly called "proprietary software", even though most FLOSS has more owners, not less.

Example vendor 2: Peer production/distribution ● Inputs: public pool of existing software (FLOSS: copyleft and non-copyleft) ● Value add software – paid by customer/self ● Possible to make marginal price=0, focus on funding fixed development costs – software=0, packaging=0, peer distribution=0, retail=0 – "demand side supplying itself" – Doc Searls ● Resource multiplication

No business value to FLOSS of patents ● FLOSS licenses and methodologies do not allow the requirement to pay additional per-unit fee to use granted rights ● Patents provide no business value to pure FLOSS businesses other than as defense against other patents ● Patents seen as protectionist policy that favors "software manufacturing" models against competitors

Peer production, Peer distribution ● "Commons-based peer production" – "Coase's Penguin, or Linux and the Nature of the Firm", by Yochai Benkler – Includes Free/Libre and Open Source Software (FLOSS), Creative Commons,... ● Peer Distribution – "And they tell two friends, and so on, and so on" – Peer-to-peer file distribution

FLOSS / CC ● Free/Libre and Open Source Software – "users' freedom to run, copy, distribute, study, change and improve the software", without additional permission or payment. Facilitates PP/PD ● Creative Commons – Applied ideas from FLOSS to non-software – Peer Production and/or Peer Distribution