patents for software in the eu.pdf

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Patents for Software in the EU:

An analysis of the criterion of Technicality and its implications

for innovation in the software industry

A thesis submitted to the Bucerius/WHU Master of Law and Business Program inpartial fulfillment of the requirements for the award of the Master of Law and Business(MLB) Degree

Rajorshi De

July 22, 2011

14.476 words (excluding footnotes)

Supervisor 1: Christian Stoll

Supervisor 2: Prof. Dr. Holger Ernst


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Acknowledgement

I would like to thank Aimee for her patience and support during the writing ofthis thesis. I would also like to express my gratitude to my supervisors for their

guidance. Above all, I am thankful to my mother whose love and contribution inmy life will remain immeasurable, and to my father whose silent approval hasalways meant so much for me.


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Table of Contents

1. Introduction ............................................................................................................... 1

2. Patent Protection for Software in the EU .................................................................. 3

2.1 The European Patent Convention ......................................................................... 3

2.2 Interpretation and development of the technical requirement in case law ............ 5

2.3 European Patent Office Guidelines on computer programs ................................ 11

2.4 The proposed EU Directive on software patentability ....................................... 12

2.5 Current position of the EPO regarding software patents .................................... 15

3. Legal Environment for Software Patents in Leading Industrialised Nations .......... 16

3.1 The United States ................................................................................................ 16

3.2 Japan .................................................................................................................... 18

4. Patents and Innovation.............................................................................................. 20

4.1 The importance of patents: Traditional perspectives ......................................... 20

4.2 Patents and appropriability: The value of patents for firms ................................ 21

4.3 The other reasons why firms patent .................................................................... 22

4.4 Patent reform and innovation .............................................................................. 23

5. Software Patents and Innovation ............................................................................. 26

5.1 General issues ..................................................................................................... 26

5.2 Patenting behaviour, use and distribution of patents in the software industry ... 28

5.3 Software industry structure, patent reform and innovation ................................. 33

5.4 Research and development trends for software in the EU .................................. 37

6. Conclusion ............................................................................................................... 43

7. Bibliography ............................................................................................................ 45


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1. Introduction

The EPO does not grant Software Patents the term itself is a misleading concept. Under

the EPC a computer program claimed as such is not a patentable invention. (EuropeanPatent Office, 2009, pp. 12-13). This statement out of a publication from the EPO in 2009

expresses the current status of patentability for software in the European Union. Over the

years, the European Patent Office (EPO) has clarified that according to the European Patent

Convention (EPC) computer software programs that lack a technical contribution are

ineligible for patents. The absence of a precise definition of these terms; however, creates a

considerably hazy standard for the patentability of computer software. There also is concern

that the restriction placed on the patentability of computer programs is inconsistent with

Article 27(1) of the TRIPS Agreement under which it is asserted that the Member States of

the World Trade Organisation should not place any constraints on patent protection for

computer programs (President of the European Patent Office, 1999). Efforts such as the EU

Directive on the patentability of computer implemented inventions (CII Directive) have tried

to solve this uncertainty by attempting to harmonize more precise definitions of the

conditions for patentability of software, but these have been effectively sunk by the divided

interests of national governments, multinational corporations and others, such as protest

groups, advocating patent free environments for software.

Questions arise as to what all of this means for the software industry in Europe? Is innovation

in the software sector at risk of being stagnated or dis-incentivised through reduced and

inconsistent patent protection? Several studies have investigated various aspects of these

issues, some with suggestions on the next move for Europe with regard to software patents.

This paper seeks to further the discussion in a new direction by exploring the nexus between

patent protection and innovation and patent law/policy changes and incentives for innovation.Therefore, in addition to answering whether there should be patents for software in the EU,

this paper also seeks to explore whether it would make any substantial difference if there

were such protection.

This paper is divided into two parts; the first is mainly an analysis of the patentability of

software under the EPC in the context of the requirement for technical contribution. I discuss

how a reading of the EPC, along with its regulations, prima facie suggests such a requirement

of technicality. I also investigate the origins of the technical requirement from some of the


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legislative history of the EPC and its subsequent evolution into technical character and

technical contribution requirements in the context of the case laws of the EPO. A section in

this part of the paper is also devoted to a discussion on the CII Directive in light of the

technical contribution requirement, as is a section on the current status of patents for software

vis--vis the guidelines of the EPO. The concluding section compares the legal situation in

the EU with other patent regimes where patents for software have been liberalised

considerably.

The second part of the paper investigates the outcome(s) that restricting protection for

computer programs may have for the software industry in Europe. I discuss the traditional

importance and conventional ideology of patents to industry and analyze findings from

empirical studies in this regard. The paper then turns to the effects of patent reform on

innovation, where the issue as to whether patent reforms which extend and strengthen patent

protection achieve their intended results for innovation is explored. In the background of

these discussions, the paper focuses specifically on software patents. Here, I initially review

some popular notions and general issues concerning the patenting of software, following

which the patenting behavior of firms and the distribution of patents in the software industry

are discussed. This paper also examines some phenomenon, such as strategic patenting and

patent thickets which tend to be particularly prominent to industries like software, in the

context of innovation. Finally, the possible effects of more protection for software in Europe

are discussed in light of all these issues. The concluding part of the paper presents recent data

from the European Software industry, including the period surrounding the CII Directive, that

reflect how the changes in the patent environment may have been received by this sector.

Subsequently, the observations made are reviewed in detail.

Note: In the interest of writing style this paper uses the terms software and computer

program interchangeably.


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2. Patent Protection for Software in the EU

2.1 The European Patent Convention

Patents for inventions in the European Union are granted by the European Patent Office

(EPO), an organ of the European Patent Organisation established by the European Patent

Convention (EPC). The EPC is a regionally limited international treaty signed in Munich in

1973. In force for presently 38 European States, the EPC does not form part of the EU legal

system. The Convention together with the local laws of the contracting states give effect to

the patents issued by the European Patent Office (Luginbuehl, 2011, p.1; Raysman and

Brown, 2004). Patent practice is governed by the European Patent Convention and the rules

of the EPO.

Article 52 (1) of the EPC 1973 states that

European patents shall be granted for any inventions which are susceptible of industrial

application, which are new and which involve an inventive step.

The invention (the EPC does not provide a definition of the term) is regarded as being new or

novel if it does not form a part of the state of the art (Article 54). The requirement of

involving an inventive step is further clarified in Article 56 as having the element of non-

obviousness i.e it is not obvious to a person skilled in the art and Article 57 provides a

definition of industrial application as having the capability of being made or used in any kind

of industry. Computer programs are expressly excluded under Article 52(2)(c) from being

regarded as inventions within the meaning of Article 52(1). Thus from a literal reading of the

Articles mentioned above, computer programs are not eligible for patents.

Article 52(3) of the EPC, however, provides that the subject matter mentioned in Article

52(2) is only excluded from being regarded as patentable as such. In fact as will be

elaborated on later, it is under this wording that most of the patents for computer programs

have been granted.

The EPC 1973 does not explicitly require that inventions be technical in nature. This

additional criteria is derived from Rules 27 and 29 of the Implementing Regulations to the

EPC, which are regarded as part of the Convention according to Article 164(1) EPC (Bakels


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and Hugenholtz, 2002; Hart, Holmes and Reid, 2001). Rule 27 states that the invention must

not only specify the technical field to which it relates but also

disclose the invention, as claimed, in such terms that the technical problem (even if notexpressly stated as such) and its solution can be understood, and state any advantageous

effects of the invention with reference to the background art (Rule 27 (1)(c).

Rule 29 requires that the technical features of the invention be defined in the form and

content of the claims. There is no clear consensus that the words be susceptible of industrial

application(Art 57 EPC) imply that the invention must have a technical character. This

confusion is the result of the varied connotations of the word industry in different European

languages (Bakels and Hugenholtz, 2002).

The legislative history behind the EPC sheds some light on the reasons behind the exclusion

of computer programs from patentability. The fact that a computer program was not

traditionally regarded to be an invention appears to be among the main considerations for

this exclusion. A 1999 proposal for the reform of articles 52(1)-(3) by the President of the

EPO outlines some of this history:

3. All attempts to establish a suitable definition of the term "invention" which would

meet with approval at European or even international level have so far failed. It

has, however, been part of the European legal tradition since the early days of the

patent system that patent protection should be reserved for creations in the

technical field. The subject-matter of a patentable invention must therefore have a

"technical character" or - to be more precise - involve a "technical teaching", ie an

instruction addressed to a person skilled in the art as to how to solve a particular

technical problem using particular technical means.

It is on this understanding of the term "invention" that the patent granting practice

of the EPO and its boards of appeal is based. The non-inventions listed by way of

example in Article 52(2) EPC confirm that only a technical invention understood in

this way can and should be patentable. The subject-matter and activities in Article

52(2) either contain no technical teaching at all, such as discoveries and scientific


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theories, or cannot be deemed part of the realm of technology, such as rules and

methods for performing mental acts or doing business, even though all these things

may well be susceptible of industrial application. Rules 27 and 29 EPC also give a

clear indication that patentable inventions must have a technical character.

(President of the European Patent Office, 1999, p.3).

On 13 December 2007, the EPC 2000 entered into force. Under the updated convention the

revised wording of Article 52(1) reads

European Patents patents shall be granted for any inventions, in all fields of technology,

provided that they are new, involve an inventive step and are susceptible of industrial

application.

The insertion of the in all technological fields implies that the EPC now expressly requires

inventions to have a technical teaching. It also appears to brings the EPC more in line with

Article 27(1) of the TRIPS agreement which states that

..patents shall be available for any inventions, whether products or processes, in all fields of

technology, provided that they are new, involve an inventive step and are capable of

industrial application.

2.2 Interpretation and development of the technical requirement in case law

This section analyzes how the European Patent Office has interpreted and applied the EPC in

the context of the technical requirement. The case laws presented here are the decisions of the

Boards of Appeal of the European Patent Office (EPO). Although the Boards of Appeal are

part of the EPO, they retain the power to independently decide appeals filed from original

patent applications and may be approached by applicants against the refusal of claims by the

Examining Divisions of the EPO in the grant phase. The decisions of the Boards are

applicable to all contracting states of the EPC.

The initial case laws presented here are intended to reflect the broad treatment of the

requirement of technical character of patent claims by the Boards of Appeal. Thereafter


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specific landmark cases for computer programs are discussed with respect to the Boards of

Appealsprogressive interpretation of technical character.

In PBS Partnership (T 0931/95), where a patent application had been filed for a method ofcontrolling a pension benefits program, it was argued by the appellant that the technical

character requirement was not an explicit preconditionto patentability according to the EPC.

The Board of Appeal observed that having technical character is an implicit requirement of

the EPC to be met by an invention in order to be an invention within the meaning of Article

52(1) EPC (Reason 6).In Quest International (T 0619/02), concerning a patent for a method

of odour selection, the Board of Appeal observed The technical character of an invention is

an inherent attribute independent of the actual contribution of the invention to the state of the

art (T 931/95, supra, point 6 of the reasons, and T 258/03, supra, points 3 and 4) and

consequently the potential of the claimed method to solve a problem of a technical nature

should be discernible(Reason 2.6.1).

In Hitachi (T 258/03), the Board of Appeal came to the conclusion that a claim for a method

of automatic auction run in a computer which involved technical means was not excluded

from patentability by Article 52(2) EPC (Reason 4). This line of reasoning is further

elucidated in Duns Licensing Associates (T 0154/04) where a claim was filed for a method of

estimating the sales of products. The Board noted that

Article 52(2) EPC does not exclude from patentability any subject matter or activity having

technical character, even if it is related to the items listed in this provision since these items

are only excluded "as such" (Article 52(3) EPC)(Reason 5(C)). The Board further observed

that For examining patentability of an invention in respect of a claim, the claim must be

construed to determine the technical features of the invention, i.e. the features which

contribute to the technical character of the invention (Reason 5(E)).

The aforementioned case laws illustrate that the Boards of Appeal interpreted Article 52(1)

EPC, along with Article 52(2) and (3), to mean that the term invention had a built in

requirement of technicality. It was accepted that Article 52(2) EPC enumerated those subject

matters whose common feature was a lack of technical character and was to be regarded as a

negative definition of the concept of invention (Legal Research Service for the Boards of

Appeal, 2010).


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VICOM (T 208/84) represents one of the earliest patents in the area of computer technology.

A claim was made for a method which filtered a two-dimensional data array representing a

stored image. The Board held that a claim which was directed to a technical process carried

out under the control of a program could not be regarded as being related to a computer

program as such (Article 52(3) EPC) and would not warrant exclusion from patentability

(Reason 12). Thus image processing was considered to sufficiently technical to qualify for

patentability even if it was based on a mathematical method (Bakels and Hugenholtz, 2002).

This decision marks an important point in the evolution of the technical requirement in

developing what would be known as the contribution approach. Reason 16 of the decision

mentions

Generally speaking, an invention which would be patentable in accordance with

conventional patentability criteria should not be excluded from protection by the mere fact

that for its implementation modern technical means in the form of a computer program are

used. Decisive is what technical contribution the invention as defined in the claim when

considered as a whole makes to the known art. Finally, it would seem illogical to grant

protection for a technical process controlled by a suitably programmed computer but not for

the computer itself when set up to execute the control.

The contribution approach was expanded and further interpreted in several subsequent

decisions. In T 0052/85 which concerned IBMs patent claim for a method of generating

language expressions related to an input expression, the Board held that in order to be

considered an invention under Article 52(1) there had to be a contribution in a field outside

the range of matters excluded from patentability under Article 52(2) and (3) EPC. (Reason

5.1). Similarly, while rejecting IBMs patent claim for an automatic spelling and check

correction procedure used in text processing (T 0121/85), it was held that

The present case is, for the above reasons, to be distinguished from cases where a program-

controlled computer is used for processing data or signals which represent physical entities

in a technical process, because in such cases a contribution is made in a field outside the

range of matters excluded from patentability, in particular outside computer programming.

For instance, in one case already decided (T 208/84, OJ EPO 1987, 14), this contribution

consisted in enhancing or restoring the technical quality of digitally processed images

(Reason 5.5).


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In Koch and Sterzel (T 0026/86), a computer program used to control X-Ray equipment was

held to produce a sufficient technical effect to be regarded as patentable. The Board of

Appeal clarified that

if the program controls the operation of a conventional general-purpose computer so as

technically to alter its functioning, the unit consisting of program and computer combined

may be a patentable invention (Reason 3.3).

The invention in this case is also referenced in T 0121/85 (discussed earlier) which mentions

that it made a contribution to a field not excluded from patentability.

In contrast, however, The Board of Appeal decided in Siemens (T 0158/88) that softwarewhich facilitated the display of special characters was not sufficiently technical so as to be

patentable.

In T 833/91, concerning a patent claim for designing digital interfaces for application

programs, the Board further elaborated on the contribution approach:

In accordance with the consistent case law, it can be said that the technical contribution to

the art rendering a claimed invention an invention in the sense of Article 52(1) and thuspatentable, may lie either in the problem underlying, and solved by, the claimed invention, or

in the means constituting the solution of the underlying problem, or in the effects achieved in

the solution of the underlying problem (Reason 3.1). The Board further stated that since

programs for computers, mental acts and the display of data were excluded from patentability

no feature making a contribution in a field not excluded from patentability can be

identified.(Reason 3.2).

In Sohei (T 0769/92), patent claims were filed for a computer system utilized for varied types

of management and a method for operating a general management computer system. The

Board of Appeal decided that

An invention comprising functional features implemented by software (computer programs)

is not excluded from patentability under Article 52(2)(c), (3) EPC, if technical considerations

concerning particulars of the solution of the problem the invention solves are required in

order to carry out that same invention (Headnote 1).


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AT&T (T 0204/93) represents a noteworthy departure from the somewhat linear progression

of the technical requirement in the body of case laws concerning computer programs. A

patent application for a system using a compiler to generate concrete programs from

generic specifications was refused by the Examining Decision. The applicant submitted that

the invention was of a technical nature since it improved the efficiency of computers and

provided a system which made useful items of commerce. The Board of Appeal confirmed

the refusal stating that

computer programs may be useful, or applicable to practical ends, is also not disputed. For

instance, a computer may control, under control of a program, a technical process and, in

accordance with the Board's case law, such a technical process may be patentable. However,computer programs as such, independent of such an application, are not patentable

irrespective of their content, i.e. even if that content happened to be such as to make it useful,

when run, for controlling a technical process (reason 3.13).

This seems to suggest that a computer program by itself would be non-patentable irrespective

of whether it had a technical character. This decision was later clarified and distinguished

in the case discussed next.

The two IBM cases, T 935/97 and T 1173/97, are considered to be seminal in the evolution of

the technical character requirement, wherein the concept of further technical effect was

introduced by the Technical Boards of Appeal. In both cases the Examining Division had

accepted the system and method claims but rejected the claims pertaining to computer

program product capable of being loaded and stored on a computer. T 935/97 involved a

patent application for a data processing system for displaying information partly obscured by

an overlying window, in another part of the partly obscured window. The Board stated that

the technical character requirement would not be satisfied merely by the fact that a program

was run on computer hardware since this feature was common to all programs and could not

be used to differentiate computer programs as such from those having technical character

(Reasons 6.1 - 6.3). The decision goes on to state:

It is thus necessary to look elsewhere for technical character in the above sense: It could be

found in the further effects deriving from the execution (by the hardware) of the instructions

given by the computer program. Where said further effects have a technical character or


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where they cause the software to solve a technical problem, an invention which brings about

such an effect may be considered an invention, which can, in principle, be the subject-matter

of a patent(Reason 6.4).

T 1173/97 involved a computer program product for resource recovery which could

implement and resynchronise a commit procedure. Granting the appeal against the Examining

Division, the Board concluded that

a computer program claimed by itself is not excluded from patentability if the program,

when running on a computer or loaded into a computer, brings about, or is capable of

bringing about, a technical effect which goes beyond the "normal" physical interactions

between the program (software) and the computer (hardware) on which it is run (Reason

13).

The IBM case also decided that patents could be granted for data carriers on which computer

programs were stored. The Board of Appeal also made important observations on the

contribution approach of previous case laws by observing that

The Board takes this opportunity to point out that, for the purpose of determining the extent

of the exclusion under Article 52(2) and (3) EPC, the said "further" technical effect may, in

its opinion, be known in the prior art. Determining the technical contribution an invention

achieves with respect to the prior art is therefore more appropriate for the purpose of

examining novelty and inventive step than for deciding on possible exclusion under Article

52(2) and (3) (Reason 8).

In the context of technical contribution, observations made in Hitachi (T 258/03 discussed

earlier) summarizes the position after the IBM cases

"There is no basis in the EPC for distinguishing between 'new features' of an invention and

features of that invention which are known from the prior art when examining whether the

invention concerned may be considered to be an invention within the meaning of Article

52(1) EPC. Thus there is no basis in the EPC for applying this so-called contribution

approach for this purpose(Reason 3.3).


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Hitachi, along with the IBM cases, signals the abandonment of technical contribution to the

prior art as being instrumental in the patentability of software programs. The concept of

further technical effectintroduced by the IBM cases was regarded as the new standard for

granting computer program patents.

In Microsoft (T 424/03), the Board of Appeal extended the reasoning applied in Hitachi and

came to the conclusion that a claim to a program on a computer-readable medium avoids the

exclusion from patentability under Article 52(2) EPC. Similar to the IBM decisions, the

Board also noted that the particular program involved could achieve afurther technical effect

when run and thus contributed to the technical character of the subject-matter in the claim

(Reason 5.3). The Board observed that following the reasoning in Hitachi any technicalmeans claimed was sufficient to overcome the exclusion under Article 52(2) EPC and that the

requirement of further technical effect was only important for determination of the

inventive step.

In October 2008, some questions of fundamental importance relating to the patentability of

computer programs (especially the divergence between the IBM and Microsoft decisions)

were referred to the Enlarged Board of Appeal by the president of the EPO. The Enlarged

Board of Appeal could find no reasonable cause for the referral but noted that in spite of

considerable convergence in recent rulings, a uniform distinction could still not be drawn

between patent applications for computer programs as such, which were excluded from

patentability and patentable technical solutions in the form of computer Implemented

Inventions (G 0003/08, 2010).

In sum, the case laws of the Boards of Appeal of the EPO show ample divergences among

themselves as to what may be sufficient to satisfy the EPCs requirement of technicality.Theinadequately defined, sometimes arcane concepts like technical contribution or further

technical effects developed in the case law defined offer limited guidance in delineating

patentable computer programs from those which are not.

2.3 European Patent Office Guidelines on computer programs

In order to align the existing guidelines and practices of the EPO to the Board of Appeal

decisions (mainly T 931/95 PBS Partnership and T 1173/97 IBM) concerning computerprogram patents, a set of amended guidelines was issued in 2001 (Notice from EPO, 2001).


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The revised guidelines stated that the EPO would grant a computer software patent provided

that the invention was of a technical character in as much as it was related to a technical

field, concerned a technical problem and had technical features. It was further reiterated in

the amended guidelines that although patents would not be granted for computer programs

per se, a computer program capable of further technical effect would not be excluded from

patentability, irrespective of whether the program was claimed by itself or on a carrier

(Raysman and Brown, 2004). Currently, another revised set of guidelines are followed by the

EPO which are discussed after the next section.

2.4 The proposed EU Directive on software patentability

By the turn of the millennium, the uncertain environment surrounding software patents had

become the subject of widespread debate and disconcertion in the EU. The fact that the EPO

had granted literally thousands of what was called computer implemented inventions in

spite of the exclusion of computer programs from patentability under the EPC, had led to

concerns about what was in fact patentable for computer software (Shaw, 2005). Another

issue was the practical enforcement of computer software patents issued by the EPO. Under

the existing legal framework, the jurisdiction for the infringements of patents lies with the

national courts of the contracting states which, under the respective national laws, may differ

significantly in their interpretation of patents and the available remedies. The problem is

compounded by the fact that the decisions of the EPO Boards of Appeals are not binding on

the national courts (European Commission, 2002; Raysman and Brown, 2004).

The 1997 Green Paper on the Community Patent (European Commission, 1997) represents an

initial effort to harmonize the laws relating to patents for computer programs in the EU. The

European Commissions Green Paper of June 1997 raised the revision of Article 52 for

discussion. There were several interested parties in favour of deleting Article 52(2), or

removing computer programs from the list of exclusions therein. In 1998, the European

Parliament held that computer programs, as in Japan and the US, should be made patentable

subject to conditions of novelty and operability of technical inventions. In its follow-up to the

Green Paper, the European Commission in 1999 urged for the amendment of Article 52(2) as

well as stated its intention to submit a proposal for a Directive on patents for computer

programs (President of the EPO, 1999). The Green Paper also triggered several rounds of

consultations by the European Commission, as well as studies investigating the economic


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aspects, management and effects on innovation of patent protection in the software industry.

A 1999 report from one such study, submitted to the European Commission on the economic

effects of software patents states that the exclusions to patentability of computer programs

as such apparent from the combination of Articles 52(2)(c) and 53 of the EPC was meant to

be only of negligible practical significance. This wording of the EPC created the

impression among independent software developers and Small and Medium sized Enterprises

that computer program related inventions were not patentable. Subsequently, the report

advises a programme to be initiated which would ensure that European SMEs and

independent software developers were aware of the opportunities and risks from patenting in

this area (Hartet al, 1999, p.1).

In February 2002 the European Commission announced the Proposal for a Directive on the

Patentability of Computer Implemented Inventions. The explanatory Memorandum to the

Proposal outlines The fundamental requirement of technical character and states that in

view of the Board of Appealsdecisions in T 0931/97 PBS Partnership and T 1173/97 IBM it

is to be concluded that

all programs when run in a computer are by definition technical (because a computer is a

machine), and so are able pass this basic hurdle of being an invention and that if a

program on a carrier has the potential to produce a technical effect when loaded and run on

a computer, such a program claimed by itself should not be excluded from patentability. This

has been interpreted as meaning that it should be allowable to claim such a program by itself

or as a record on a carrier or in the form of a signal (e.g. stored as a file on a disk or

transmitted across the internet)( (European Commission, 2002, pp. 6-7).

The proposal however did not offer any definitions or interpretations of the word technical

(Bakels and Hugenholtz, 2002).

Article 4(2) of the Proposal states that the requirement of an inventive step for computer

programs means that the invention must make a technical contribution(this is reminiscent of

the observation by the Board of Appeal in T 1173/97 IBM).

Article 2(b) provides a definition of Technical Contribution as being a contribution to the

state of the art in a technical field which is not obvious to a person skilled in the art. The

Proposal thus confirmed the requirement of technical contribution for patentability. Bray


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(2005) mentions in this regard that the proposal sought to enshrine in legislation, the

practice of the EPOs Boards of Appeal (para 18).

Article 5 provides that a computer implemented invention may be claimed either as aprogrammed computer or similar apparatus (i.e. a product) or as a process carried out by such

an apparatus. Bakels and Hugenholtz (2002) mention that this detracted from the practice of

the EPO in permitting claims to computer program products either on their own or on a

carrier and pointed to the exclusion of Computer Program Products from patentability.

The Legal Affairs Committee took a more restrictive view on the Proposal and proposed

amendments to the effect that if an invention lacked a technical character it would in turn lack

an inventive step and be unpatentable. The report also proposes amendments which attempt

to curb the practice of wording claims giving the appearance of a technical aspect. The

amendments also sought to reinforce the technical contribution and further technical

effect requirements (Bray, 2005).

The Proposal received strong support from organizations representing the corporate world,

such as EICTA which is comprised of multinational firms including IBM, Microsoft, Intel

and Philips. It also includes national associations from 24 European countries. The fiercestopposition against the proposal came from the open-source movements who claimed that

software patents would impinge upon the freedom to exchange ideas so essential for

innovation in software (this is discussed in more detail in the second part). The proposal also

faced considerable resistance from some EU countries, mainly led by Poland which engaged

in extensive lobbying against the proposal, stating that it would establish a far too liberal

regime for software patents (Shaw, 2005; Sheriff 2005).

At the time of the second reading before the European Parliament, the Proposal sought to

allow patents for computer programs which made a technical contribution and were truly

novel (McCreevy, 2005). It was stated that computer programs as such would continue to

remain unpatentable. On 6 July 2005, by a large majority (648 votes to 14 with 18

abstentions), the European Parliament rejected the Proposal and the legislative process came

to a close.


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3. Legal Environments for Software Patents in Leading Industrialised Nations

3.1 The United States

In the past three decades, the United States has developed an extremely favourable legal

regime for patents in general and for software in particular. In 2006, the USPTO granted

41,144 software patents, the total number reaching some 336,643 (IP and Software, 2008).

The United States has effectively overcome its initial reservations against patent protection

for software. A Presidential Commission on the Patent System reporting to President Johnson

in 1966 made recommendations against allowing patents for software citing reasons such as

the inadequate examination procedures at the USPTO, the rapid rate at which new technology

was generated and the availability of copyright protection. In the end however, the

recommendations were rejected (Stobbs, 2000). In the 1970s software was generally

regarded as being equivalent to mathematical algorithms or laws of nature and considered un-

patentable (Evans and Layne-Farrar, 2004). In spite of these circumstances, in April 1968, the

U.S. Patent and Trademark Office (USPTO) issued perhaps the first known patent for

software, granted for a method for sorting data utilizing a digital computer (Koller and

Moshman (1968); USPTO, 1968). Since 1980 the Federal courts and the USPTO have

radically altered the standards for patents relating to software related inventions (Bessen,

2003). Patent reforms such as the extension of patentability to software (and other subject

matter such as Biotechnology) have resulted in a surge of new patent applications and a

doubling of computer software patents between 1990 and 2000 (Gallini 2002). The most clear

signal of this pro-patent shift in the United Stateswas perhaps sent by the creation of the

Court of Appeals of the Federal Circuit (CAFC) in 1982 (Kortum and Lerner, 1998; Ziedonis

and Hall, 2001). This new centralized court which retained the jurisdiction over all patent

infringement appeals was more inclined to interpret the scope of patents to uphold the broadrights of exclusion granted to patent owners, grant early injunctions to halt infringing actions

and endorse larger damage awards (Ziedonis and Hall, 2001). Under United States Patent

Law, which is codified in Title 35 of the United States Code, patentable inventions are

defined in section 101(35 U.S.C. 101) as Whoever invents or discovers any new and useful

process, machine, manufacture, or composition of matter, or any new and useful

improvement thereof, may obtain a patent therefor, subject to the conditions and requirements

of this title.The United States Code also requires that inventions be novel and non-obvious

(35 U.S.C. 102 and 103). There are no express exclusions to patentabilitymentioned by the


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code, most pertinent to this discussion is the absence of any requirement that the subject

matter of patents have a technical character. The mere use of a computer or software by an

invention designates it as belonging to the technological arts (Hart et al, 2001). This can be

discerned from the examination guidelines for computer related inventions issued by the U.S.

Patent Office (USPTO, 1996). The Guidelines require that the utility of an invention be

within the technological artsand go on to state that A computer-related invention is within

the technological arts. A practical application of a computer-related invention is statutory

subject matter(Section II(A)).

The US courts have played an indispensible role in fashioning the landscape of patent law

considerably in favour of patents for software. A series of landmark decisions of the CAFCand other courts have crafted the current wide scope granted to applications for patenting

software. In 1981, the U.S. Supreme Court in Diamond v Diehr, drastically changed the

existing approach to patenting and set a precedent for the extension of patents to software.

The case centered around a patent for a program which was used for measuring and

monitoring the process of transforming rubber into precision products. Holding the patent to

be valid the Court reasoned that a claim drawn to subject matter otherwise statutory does

not become non-statutory because a computer is involved (page 450 U.S. 181). The decision

did not as such establish patentability for software but the new standard enabled the inclusion

of software innovations within patents for broader processes (Evans and Layne-Farrar, 2004).

A later decision extended the position developed inDiamond v Diehr. The CAFC, in the case

In re Alappat,held that software on a general-purpose computer was patentable. The Appeals

Court noted that

a general computer becomes a special purpose computer once it is programmed to performparticular functions pursuant to instructions from program software.. a computer

operating pursuant to software may represent patentable subject matter (E, 3).

The decisions of the courts were instrumental in the process of extension of patentability to

new subject matter. The USPTO took fairly narrow decisions regarding new subject matter

and interpreted them broadly resulting in the expansion of the realm of patentable matter to

historically un-patentable areas such as software and financial service products (Jaffe, 2000).

In 1995,In re Beauregardmarked a turning point for software patentability where before the


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CAFC the USPTO conceded that its rejection of IBMs patent application for software was

erroneous. During the time of the filing of the application the Commissioner of Patents issued

new examination guidelines for computer software which granted such wide latitude to

software patents that in effect any computer software could be patented provided that it was

embodied in a physical medium (Sterne and Bugaisky, 2003).

Another milestone was reached in 1998 in State Street v Signature Financial. The CAFC

examined the issue of a patent claim for a data processing system which was to be used in

the management of mutual funds. Relying on the decisions in Diamond v Diehr and In re

Alappat the court observed

However, after Diehr and Alappat, the mere fact that a claimed invention involves inputting

numbers, calculating numbers, outputting numbers, and storing numbers, in and of itself,

would not render it nonstatutory subject matter, unless, of course, its operation does not

produce a useful, concrete and tangible result."(paragraph 31).

The Court held that financial services software which incorporated algorithms was patentable

and struck down the business method exception to patentability. The State Street Bank Case

established the production of a useful, concrete and tangible result as the standard for the

patentability of computer programs (Hart et al, 2001). Yet another major change brought

about by a series of Federal Circuit decisions (as inNorthern Telecom, Inc. v. Datapoint Corp

and S3 Incorporated. v. Nvidia Corporation) was the elimination of the enablement

requirement for software patents which required filers to provide detailed explanations

(source codes, flowcharts etc) of the working of the program (Burk and Lemley, 2002).

3.2 Japan

Since 1976 Japan has also witnessed considerable patent reform. Japans trading partners,

mainly the United States, pressured the need for harmonization of the Japanese Patent System

with that of other countries and in the process catalysed the reforms (Sakakibara and

Brenstetter, 1999). In 1988, single inventions were allowed to be covered by multiple claims,

the range of single claims were also extended to cover related inventions. In 2003, the

Japanese Government introduced the Strategic Framework for Intellectual Property along

with the Basic Law for Intellectual Property. Pro-patent policies of the Strategic Frameworksuch as the acceleration of patent examination, revision of the tort system and the extension


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of protection to new fields such as biotechnology and information technology aimed to

stimulate innovation through the effective use of intellectual property (Motohashi, 2009).

Under Japanese Patent Law, inventions are defined as the highly advanced creation of

technical ideasutilizing the laws of nature (Article 2(1), Japanese Patent Act). This creates a

requirement similar to the further technical effect or technical contribution as has been

held for the EPC (Bakels and Hugenholtz, 2002; European Commission, 2002). There are

also comparable requirements as to industrial application and non-obviousness (Article

29, Japanese Patent Act).

Prior to 1990, patents could not be obtained for inventions which were purely software. It

was however possible to obtain patents for inventions which combined software with

hardware (Motohashi, 2009). In 1997, the Japanese Patent Office (JPO) issued a set of

Implementing Guidelines for Computer Software Related Inventions which clarified that

computer readable media may constitute statutory subject matter. Later in December 2000,

lengthy revised Examination Guidelines for Patent and Utility Model were issued by the JPO

with the aims of achieving consistent decisions among patent office examiners as well as

enhance efficient application and implementation of the patent laws (Raysman and Brown,

2004). The Guidelines, which ushered in the patent protection of software by itself, mention

the conditions of patentability of computer software as where information processing by

software is concretely realized by using hardware resources, the said software is deemed to

be a creation of technical ideas utilizing a law of nature (2.2.1(1), PartVII:

Examination Guidelines for Inventions in Specific Fields). Finally in 2002, existing patent

law was amended and software (including software circulated on computer networks) was

explicitly mentioned as a patentable subject (Motohashi, 2009). Bakels and Hugenholtz

(2002) comment that the essential difference with the practice of the EPO now lies in the

absence of any further technical effect requirement.

In their report to the European Commission, Hart et al, 2001 suggest that the difference in

protection between the United States and Europe could be addressed by an amendment of

rules 27 and 29 of the Implementing Regulations or to grant more latitude to the

interpretation of technical contribution as suggested by the United Nations where technology

is defined as "a combination of equipment and knowledge".


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The requirement of technicality still remains highly imprecise and subjective, creating an

environment of high uncertainty for the patentability of software. Whether Europe should

modify or altogether remove the technical requirement and embrace a more liberal patent

regime for software such as the United States or Japan remains a subject for more

deliberation. An equally important issue is as to whether any change in these patent laws or

policies would achieve substantial beneficial effects for the software industry. As Bakels and

Hugenholtz (2002) appropriately mention in their report to the European Parliament: There

is a considerable degree of consensus that the rules that currently exist in Europe provide

insufficient legal security and need to be amended for clarification. On the other hand it is

highly controversial whether there is any reason for a substantial change of the law(pg. 5).

The next part of this paper investigates these issues.

4. Patents and Innovation

4.1 The importance of patents: Traditional perspectives

The impact of intellectual property rights on innovation is one of the most p ersistent

empirical questions in the economics of technological change (Lerner, 2002, p. 1). These

enduring words characterize the contentious nature of the issues which this part of this paperintends to explore. An appropriate starting point for this discussion is a passage from the

Explanatory Memorandum to the proposed EU Directive which states:

Patents play an important role in ensuring the protection of technical inventions in general.

The basic principle underlying the patent system has proven its efficiency with respect to all

kinds of inventions for which patent protection has thus far been afforded in the Member

States of the European Community. Patents act as an incentive to invest the necessary time

and capital and it stimulates employment. Society at large also reaps benefits from the

disclosure of the invention which brings about technological progress upon which other

inventors can build.(Commission of the European Communities, 2002, p. 2)

Indeed, the traditional view and theory of patents proposes that patent protection provides

several sources of dynamic gains. Patents allow inventors to reap a larger consumer surplus

from innovations, thus granting patents may increase welfare by providing incentive for

additional R&D investment. Since patentees are required, by rules on disclosure requirementscommon to all patent laws, to reveal their innovations as part of patent filings, information is


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made available to others to be used as R&D input (Lanjouw, 1998). Patents also score over

the other types of exclusive rights over intellectual assets, such as copyright, trademark and

protection of design in their span of protection which stretches further than just the

expression of an idea to protect the idea itself. The power over technology that patent offers,

allows the patented product to command prices higher than the competitive price, which

facilitates recovery of the cost of innovation. The traditional view advocates the net effects of

patents as being the results of the trade-off between their positive effects on innovation and

the adverse outcomes that they have for competition and the dissemination of technology.

Increasingly, however it is emerging that these views of patents often do not hold for all

industries in terms of advances in science, evolution of new technology markets and changes

in patent policy (OECD, 2004). In the next section this paper explores whether the value that

firms assign to patents uniformly support the traditional view and thereafter some related

reasons underlying the patenting of inventions by firms are examined.

4.2 Patents and appropriability of returns: The value of patents to firms

Over the years, various studies have explored how firms regard patents in terms of the return

they can earn on their investments. The patent literature consistently reports findings which

show that, among the common mechanisms for appropriating returns from their inventions,

patents occupy a lower ranking for firms. Levin, Klevorick, Nelson and Winter (1987)

enquired into the conditions of appropriability in more than a hundred manufacturing

industries and found that for new processes patents were rated as being the least effective

with lead time and learning curve advantages receiving superior ratings as mechanisms for

appropriating returns. Although patents were considered to offer better protection for

products than processes, they still ranked substantially behind lead time, learning curves and

service efforts. Firms reported the effectiveness of patents being limited by the fact that

competitors could legally invent around them.

In 1998, Shankermans study of the private value of patents in industries in France across

different technology fields and ownership nationalities, utilized patent renewal data to derive

estimations of patent value in the pharmaceuticals, chemicals, mechanical and electronics

industry. Using a measure in terms of the estimated cash subsidy that would have to be paid

to yield the same level of R&D in the absence of patent protection, his analysis showed that

the private value of patent rights, averaged over the four technology fields, was equivalent to


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an R&D subsidy rate of 15-25%. It emerged from the study that although patent protection

provided a substantial incentive to R&D, it was not the major source of returns for

inventions. Lanjouw (1998) also arrived at a similar conclusion, in his empirical estimates of

the private value of patent protection using new patent data. Results from four technological

areas (computers, textiles, combustion engines and pharmaceuticals) in West Germany

indicated the aggregate value of patent protection on a yearly basis to be 10% of related R&D

expenditure.

Post patent reform in the United States, studies in 2000, by Cohen, Nelson and Walsh found

that secrecy along with lead time had emerged as being the leading mechanism for the

protection of innovations across a wide range of industries. Although patents were still notthe dominant mechanism for appropriating returns from innovations, findings showed that

their role had become more central in large firms endeavors to protect their intellectual

assets. As discussed in the next section of this paper, their survey indicated that only a

minority of firms expected to realize the value of their protected knowledge in disembodie d

form(Cohen, et al, 2000, 18). Although patents were adjudged to be relatively ineffective in

appropriating returns on investment, part of the explanation as why patents were applied for

as frequently as they were came from the fact that patents tended to be used with other

mechanisms to realize such returns.

4.3 The other reasons why firms patent

If patents are less than optimal for securing returns on investment for most industries, why

does the overall trend for patenting show marked increase over time? The number of patent

applications filed in Europe, Japan and the United States increased by over 40% in the years

from 1992 to 2002 (OECD, 2004). The World Intellectual Property Organization reportedthat the world total of patent filings (from 110 patent offices) reached 1,907,915 in 2008 up

by 106% since 1985 (WIPO, 2010). This section investigates some of the main reasons for

patenting by firms apart from those promoted by the traditional view.

Cohen et al (2000) observed that realization of direct commercial value from patents

themselves does not form the main consideration for patenting decisions. Motives for

patenting amongst firms were cited most frequently as being for the prevention of copying

and for blocking competitors from developing related innovations. Also cited were reasons


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such as the prevention of suits, using patents as leverage in negotiations and less importantly,

for reputational enhancement. Overall, patents as a source of licensing revenue was found to

beamong the least important reasonsfor applying for patents. However, in some complex

product industries where products are separable into numerous patentable parts, the

importance of patents for licensing revenues was found to be relatively higher (which may be

attributable to cross-licensing). The fairly consistent finding that patents are mainly used for

blocking purposes gathers strength from the industry phenomenon called patent fences

where firms develop products related to their core products and obtain patents for them.

There is little intention on part of firms who develop such related products to commercially

exploit them. It is seen instead as part of a firms competitive strategy to block the

development of rival related products from other firms (such as the over 200 substitutes that

Du Pont patented for Nylon). Such a strategy may be invoked in order to either realize

licensing revenues or to compel inclusion of the firm in negotiations for cross-licensing.

Patents were effective in conferring sufficient protection for the commercialization of the

invention itself or by licensing only in select industries such as pharmaceuticals . Other than

that patents were mostly employed for hindering competing alternatives through patent

fencing as well as for cross-licensing negotiations. Firms also tended to use patents for

defending against or initiating litigation regardless of the strength of their patents.

Consequently, firms, which patented the most, did so for the purposes of negotiation as well

as for the prevention of suits. In their study of patenting behaviour in the semiconductors

industry, Hall and Ziedonis (2001) investigated why, despite their reported ineffectiveness,

there was a paradoxical increase in the use of patents by firms. Similar to Cohen et al (2000),

strategic patenting was found to be the primary reason for intensified patenting among capital

intensive firms. In industries like semiconductors where innovation is cumulative

(discussed in more detail later) the building of patent portfolios as bargaining chips to beused to negotiate access to technologies, emerged as the leading driver for patenting.

4.4 Patent reform and innovation

In the backdrop of the discussion regarding the value and utilization of patents as contrasted

with some of the traditional views on patents, this section looks at the effects of patent

reform, including the strengthening and broadening of patent protection, on innovation. The

assumption that stronger patent protection is linked to greater incentive to innovate is

challengeable. Technology being a cumulative and interactive process, high degree of


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protection granted to individual achievements may slow the general advancement (Levin et

al, 1987). Various studies indicate that changes made in patent law with the aim of

stimulating innovation achieve little in terms of their intended objective.

The United States is generally regarded to represent the model for favorable patent reform.

The aim of the pro-patent changes, especially the creation of the CAFC, was to stimulate

innovation (Meador, 1992). However, empirical studies comparing innovation in the United

States prior to the patent reforms with that of the post-reform period, present findings which

call into question the effectiveness of stronger patent protection in encouraging innovation for

most industries.

In 1986, Mansfields study of the effects of the absence of patent protection on the

development, introduction and commercialization of inventions showed that, except for the

pharmaceuticals industry, very few additional inventions were introduced due to patent

protection. In fact, in many of the broad spectrum of industries included in the study, patent

protection was found to be non-essential for the introduction of inventions. Levin et al (1987)

caution that when examining a proposed amendment of the patent system, the incremental

effect of the change of policy depends on how much protection the other mechanisms of

appropriability provide. The provision of stronger appropriability does not correlate to

increased innovation in all contexts and may on the other hand come at excessive costs. The

authors present findings in the case of the semiconductor industry and how the limited patent

protection it received did not necessarily make it any worse off.

Kortum and Lerner (1998) investigated the causes of the surge in patenting in the United

States following the patents reforms. Their study used international and domestic data to

examine whether changes in patent institutions, mainly the establishment of the CAFC, mayhave spurred patenting. They conclude that the unprecedented rise in patenting was unrelated

to the contemporaneous changes in the patent system. Their results point instead to

improvements in the way research or innovation was managed as a more likely driver for the

leap in patenting.

Cohen et al (2000) found that in the period from 1983 to 1994 (where patent reforms such as

the establishment of the CAFC in 1982 came about) patents may have become a more central

appropriation mechanism for a more sizeable minority of industries and especially in the case


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of larger firms. The authors note however that even in spite of the pro-patent changes

instituted in the United States, the overall relative effectiveness and standing of patents

among firms had not improved substantially. There was instead, a rise in the importance of

secrecy as a means of protecting innovations. The patent reforms, in particular the court

reforms, may in fact have led to an increase in the use of patents for defensive and offensive

uses. The authors observe that enduring features of technology and industries may constrain

any increase in patent effectiveness that is achievable through changes in policy and judicial

practice (page 25).

In another study from the reform period, Ziedonis and Hall (2001) examined the patenting

behavior of semiconductor firms and found that the pro-patent reforms may have alteredincentives to patent, inducing patent portfolio races amongst large firms, where instead of

aiming to secure strong patents for core technologies, firms engaged in amassing patents in

order to reduce the potential threat of external patent owners and gain a favorable position in

negotiating access to external technology. Using patent citations as a metric showed that there

was a decline in the quality of patents filed by semiconductor firms since 1984. These

findings were consistent with the general view that firms were filing larger numbers of lower

quality patents during the period of patent reform.

Results from studies on the patent reforms in the United States find echoes in studies from

various parts of world. Arundel, Cobbenhagen and Schall (2000) report on the major policy

shift during the 1990s in most EU member states. Broad scale efforts were made by

governments to encourage firms to increase patenting and to employ disclosures in patents as

an information source. Surveys showed, however, that firms reacted (between 1993 and

1997) in an opposite manner by downgrading the value of patent databases as information

sources. In a study from Japan, where patents reforms were instituted from the mid-70s,

Sakakibara and Brenstetter (1999) examined the impact of the expansion of patent scope

brought about by the Japanese patent reforms of 1988 (above) on innovation. Analysis of data

from 307 publicly traded manufacturing firms across multiple industries, for a period

spanning the time of reforms, showed that there was an increase in R&D spending by

Japanese firms before the reforms. This increased R&D spending halted in the year of the

patent reforms and showed a relative decline in the post reform years. The authors mention

that the data from R&D spending seemed to show no evidence of an increase which could be

credited to the effect of patent reforms. Their study concludes that although the patent


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reforms resulted in Japanese firms adjusting the nature of their patenting by an increased

number of filed claims per patent, the reforms did not produce a significant increase in

innovation.

In 2002, Lerners in-depth study of the effects of the patent system on innovation examined

the impact of shifts in protection regimes across sixty countries over a period of 150 years.

The paper examined 177 policy changes (except for changes in patent scope) including the

extension of patent protection to new and controversial areas (such as chemicals and

medicines) spanning the years from 1852 to 1998. The study found that domestic patenting

remains mostly unresponsive to improvements in patent protection.

5. Software Patents and Innovation

5.1 General issues

The patent literature often recites the early concerns of Microsoft Founder Bill Gates on

software patents from a 1991 memorandum where he stated that if people had understood

how patents are granted when most of todays ideas were invented, andhad taken out patents,

the industry would be at a complete standstill (Gates, 91; Webbink, 2005; Cockburn and

Macgarvie, 2007). Microsoft would go on to become one of the leading software patenting

companies. Debates about patents for software have long been the subject of both popular

and academic debates. This section examines some often raised general issues concerning

software patents.

Jaffe (2000) discusses the desirability of software patents in the light of the following issues:

(i) The nature of software being systems constructed from different fragments, patenting of

software creates an unjustifiable need to secure a high number of licenses to market a single

product (ii) the need to issue high number of licenses favours large firms which may build

patent portfolios. This in turn may have negative effects for small software firms who

represent the main sources of innovation in the industry. (iii) Patents on standards which

allow interoperability of software may grant very broad monopoly power. (iv) The rate of

change of software technology regularly outpaces the time taken for patent grants. Software

thus runs the risk of becoming obsolete by the time a patent is issued for it. There is also the

difficulty of applying unvarying standards for patentability in fields which are new andchange rapidly. Motohashi (2009) mentions additional issues such as the difficulties in


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evaluating the novelty and inventive steps of a software invention as well as the issue of

patent thickets(discussed in the next section) which may impede innovation and are made

stronger by increasing the number of software patents.

On the other hand, a case for software patents also emerges from the patent literature. Two

authors from Microsoft argue that patent protection facilitates the sharing of technologies

without the threat of copying by imitators, of those core elements which are truly innovative,

in this way patent protection is better suited than other IP protection for advancing

interoperability while ensuring that inventors are able to protect their assets. Patent granting

processes are also designed to filter only the truly novel and useful inventions which in turn

increases the likelihood that software developers will introduce innovative technologicaladvances. In addition, the shorter period of protection offered by patents than copyright make

it more likely that inventions emerge more rapidly in society (Smith and Mann, 2004). Other

studies also present findings which favour software patents. Lerner and Zhu (2005) examine

the impact of increased reliance on patents by software firms in the aftermath of the Lotus v

Borlanddecision which reduced the protection granted by copyright to computer programs.

They find that that the shift towards more patenting by firms which were more affected by the

reduced protection from copyrights correlated with growth in the level of sales and other

measures of performance such as number of employees. In their study of patents and the

survival prospects of internet-related firms in the background of the dot-com boom and stock

market bubble in the United States, Cockburn and Wagner (2007) show that firms which took

advantage of the changing legal environment to obtain software patents, acquired competitive

advantages which led to higher probabilities for survival during the collapse of the dot com

bubble. The marginal contribution to Tobins Q for software patents are also found to be

more than other patent types (Hall and MacGarvie, 2009).

Definite conclusions on the desirability of software patents are extremely difficult. Opinions

in the EU range from a pro-patent approach from lawyers, government agencies and players

with a foothold in the industry to restriction for software patents advocated by academics,

start-up firms and engineers. Consultations in Germany and France found widely divergent

opinions between developers of software and the manufacturing industry and between

universities, software houses, suppliers of integrated software and suppliers of software

components. Similar consultations in the United Kingdom in 2001 also failed to provide


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consensus among respondents on the extent to which protection for software should be

allowed (Bakels and Hugenholtz, 2002).

The debate as to whether patents for software are generally beneficial involves complicated

issues involving trade-offs between protecting the value of inventions and the resulting costs

involved for innovation in the software industry. The following section provides further

insight into these issues from the perspectives of the distribution and utilization of patents in

the software sector.

5.2 Patenting behaviour, use and distribution of patents in the software industry

Studies have consistently shown that for software firms the holding patents of patents is not a

priority. In their analysis of the 2008 Berkeley Patent Survey which covered early technology

companies founded from 1998 onwards, Graham, Merges, Samuelson and Sichelman (2009)

report that only 24% of firms at the time of the survey held patents. Most firms reported that

software patents provided marginal incentives to innovate. The graph below summarizes the

response received from software firms by the authors from a questionnaire administered to

three industries (Biotechnology, Medical Devices and Software) requiring companies to rate

their strategies for recouping returns. Patents ranked lowest as an appropriability strategy for

software firms.

above graph adapted from Graham et al (2009)


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United States has grown from around 11.8% in 1996 to 17.2% in 2006 (2.8% to 9.8% for

prepackaged software), they still continue to be the minority holders.

Above graph constructed from data in Bessen and Hunt (2007)

above graphs constructed from data in Bessen (2011)


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The majority of software patents are held by industries (such as computers, instruments and

electrical equipment) known to pursue strategic patenting by accumulating large patent

portfolios (Bessen and Hunt, 2007; Bessen, 2011). High numbers of software patents held by

industries such as electrical equipment may also indicate the increasing importance of

embedded software in electronic devices (OECD, 2004). However, more evidence of the

strategic use of software patents is provided by other studies. In 2003, a survey conducted by

the OECD regarding the patenting and licensing practices of businesses mainly in the

machinery, chemicals, pharmaceuticals and Information and Communication Technology

(ICT) industry from Europe, America and Japan, found that firms in ICT (which includes

software) placed much more importance on the use of patents for gaining bargaining power

and licensing revenues than other factors such as competition in the product market (Sheehan,

Martinez and Guellac, 2003).

Relative importance of factors influencing firm patenting strategies

above figure adapted from Sheehan et al (2003)

Software firms typically acquire only a quarter of the patents for the same R&D as compared

to other firms (Bessen and Hunt, 2007). An atmosphere of mutual non-aggression normally

prevails in the software industry where firms do not usually assert patents against non-


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aggressive competitors nor license all patents that they may infringe. In spite of this apparent

peace, a problem arises with the way in which software products are protected by patents.

The software industry tends to engender phenomenon known as patent thickets which

develop when single products involve numerous patents, distorting the dynamics of patent

races which assume one-to-one correspondence between products and patents (Bessen,

2003, p.1). These dense set of patent rights which overlie each other pose a formidable threat

to the commercialization of new technology by requiring that licenses be obtained from

multiple patentees. There is also the risk of holdup or the inadvertent infringement of patents

by new products after they are designed (Shapiro, 2001). At the hearings of the Federal Trade

Commission in 2003, panellists from the software industry reported as to how the presence of

the software patent thicket makes avoiding patent infringement extremely difficult during

new product development where there could sometimes exist hundreds of patents covering

individual components of a product (Federal Trade Commission, 2003, p. 161-162). The

formation of such aggregations of patents also increases the threat of unjustified or frivolous

lawsuits for patent infringements in the software industry. In this context, Bessen (2011)

mentions that currently the litigation risk from software patents has markedly escalated with

more than triple the number of lawsuits involving patents since 1999. Even if such lawsuits

are ultimately unsuccessful, the cost and time delay imposed on the defendant is damaging

and may even be ruinous in the case of small firms who often do not have the means to afford

a protracted legal battle (Hart et al, 2001). Studies report more findings on the negative

effects of patent thickets. Bessen (2003) shows how even without holdup and transaction

costs, thickets can discourage innovation. Complex technology markets where the ownership

and the revenue from innovations are shared, patents not only fail to provide sufficient

incentives but also destroy the advantages of lead time. Patent thickets are also shown to

force the rapid development of portfolios by new entrants, which may in turn pose entrybarriers. Studies by Noel and Shankerman (2006) on the impact of strategic patenting and

technology spillovers in the software industry find that patent aggregations tend to impede

firms freedom in research and development processes and raise the costs of innovation.

The strategic deployment of patents by firms can attain disconcerting proportions in the

software industry. There are abundant examples where instead of being used to exploit

inventions, patents are employed to obstruct competitors, force negotiations and set up

inescapable licensing whirlpools. A prime example is the comparison between the strategies


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This section examines the inherent nature of innovation in the software sector and the

possible implications of policy changes which broaden protection and increase patent grants

for software.

Software and computers represent some of the most innovative industries. However, these

sectors have historically been the recipients of weak protection. Proponents of patents argue

that strengthening patent protection would have dynamic effects for innovation within these

industries (Bessen and Maskin, 2009). On the other hand, academics reason that the low fixed

costs of development and the existence of other intellectual property mechanisms for

software protection imply that innovation in the software industry does not critically depend

on patents (Burk and Lemley, 2002). They also point out that policy changes which ease theacquisition of patents in industries where strategic patenting occurs may lead to decreased

incentives to engage in R&D (Bessen and Hunt, 2002). The software industry is characterized

by both sequential and complementary innovation, which mean that inventions progress

by successively building upon prior ones and different, contemporaneous research paths

increase the likelihood of common goals being reached in time. This form of contiguous

innovation is helped along by the imitation of discoveries where the imitator may contribute

an idea that was unavailable to the original inventor and thereby hasten the overall pace of

development. This inherent nature of the software industry implies that strong patents may

retard innovation and imitation may promote it, innovation would thus be better served in

such industries through limited protection. Although imitation may reduce the inventors

immediate profit from his invention it raises the likelihood of his future profit by increasing

the probability of follow-on innovations. Comparisons of a non-sequential model proposed to

confirm the traditional justification of patents that innovative activity is greater with patents,

and a sequential model based on the possibility of sequences of inventions, each built upon

the preceding ones, provide support to these observations.In dynamic settings such as that of

sequential models which mimic the software industry, patents are relatively unimportant in

stimulating innovation and may on the other hand suppress complementary innovative

pathways essential for overall progress (Bessen and Maskin, 2009).

Further evidence presented by studies from industrial trends in patent regimes where software

patents were introduced, fail to confirm that more protection produces the intended result of

invigorating innovation. In fact they augment some general observations about patent reforms


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that reveal how the software industry is a prime example of not only the relative

ineffectiveness but also the sometimes impeding effects of such reforms.

In recent years, the wide latitude granted to software patents by the USPTO has been metwith increasing criticism that such practices may give rise to questionable patents which may

have negative implications for innovation and harm competition within the software industry.

Highly publicized cases have drawn attention to this issue, such as the patent granted to

Amazons one click ordering system which led Amazon to file infringement suits against

its competitor, barnesandnoble.com (Shapiro, 2004).

In their study of patent scope and innovation in the United States, Cohen and Lemley (2001),

examine the decreasingly restrictive policies of the USPTO in regard to software patents and

analyse whether they are favourable for the software industry. They argue that reverse

engineering of software is an important tool for progress in the software industry where

innovation tends to be sequential (discussed later in this section). Network effects

characterize software markets where the value derived from a product depends on the number

of other users of the product. In such markets reverse engineering serves an important

function of facilitating interoperability between products. Intellectual property regimes which

historically protected software such as trade secret and copyright, legally offered the benefit

of reverse engineering, software patents on the other hand do not. This is illustrated by the

example of Sony, whose playstation was reverse engineered by Connectrix to develop an

emulator capable of supporting Sony video games on Macintosh computers. In 1999, Sony

filed suit for patent infringement against Connectrix after the courts had rejected its claims

for copyright violation. The software industry fosters low-level innovations through rapid,

incremental improvements to inventions. There is the need for narrow software patents to

protect these low-level innovations. The study mentions that in the United States, the

approach of the CAFC in increasingly relaxing the disclosure requirement for software

patents (see elimination of enablement above) has led to broadly defined software patents

which are capable of being applied across product categories and generations. This side effect

of the pro-patent approach adopted by the courts lead to low-level software innovations being

held as un-patentable due to obviousness. The authors point out that the extent to which the

CAFC is willing to permit the enablement requirement (see elimination of enablement

requirements in US Patent reform above) to be relaxed for software patents results in almostno guidance as to how the software should be written. This virtual non-disclosure of


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information for software inventions disrupts the bargain of disclosure between the patentees

and the public which is so central to patent policy. The resulting opacity regarding the

functioning of the software brought about by this limited disclosure requirement necessitates

reverse engineering. Given that patent law fails to provide this option, patent reforms which

result in broadened protection and actually ease the ability to obtain patents, may have

negative implications for software innovation.

Bessen and Hunt (2004) studied the effects of the growth of software patents through two

decades in the United States. They document that even before software patents became

popular there was a high rate of growth and innovation in software which makes it unclear as

to how patent protection was necessary for stimulating innovation in the industry. The growthin software patents did not originate from software publishing firms but rather from industries

such as electronics, instruments and computers. Exploring the reformatory changes which led

to stronger and cheaper patents for software, they evaluate as to whether the incentive

hypothesis holds in case of the software industry (the incentive hypothesis theorises that

increasing cost effectiveness of patents should correspondingly increase appropriability and

in turn the incentive for R&D spending). Their findings show that firms which relatively

increased their software patenting, in contrast tended to decrease their spending on R&D.

This contradicts the traditional theory that extending more patent protection tends to

incentivise R&D investments. The study also mentions that the decrease in the cost of

appropriability brought by the patent reforms may have encouraged firms to pursue software

patents for strategic reasons which in turn caused other firms to engage in defensive

patenting.

Hall and MacGarvie (2009) investigated the private value of software patents for firms in the

background of the expansion in software patentability in the United States. They focused on

the major events in the period of patent reform in the United States and examine the resultant

effects on the value of software patents. Their event studies which take into account the

landmark decisions

patents for software in the eu.pdf

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