\input texinfo
@headings on
@unnumberedsec SOFTWARE PATENTS: AN ECONOMIC PERSPECTIVE
@sp 1
@centerline{First Supplementary Submission}
@centerline{By The League for Programming Freedom}
@centerline{To The Patent and Trademark Office}
@centerline{On Patent Protection for Software-Related Inventions}
@sp 1
@centerline{(by Gordon Irlam and Paul Rubin)}
@sp 1
@centerline{Version 1.0}

This document is the League for Programming Freedom's response to
issues raised by the San Jose hearings of @w{January 26-27, 1994}.
The League's submission on software patents is contained in a separate
document.

Speakers at the San Jose hearings presented many conflicting arguments
for and against software patents.  To evaluate these arguments, we
must organize them within a systematic framework and answer the
questions that they raise.  Since the patent system is an economic
system, economics is the best framework.  We therefore use an economic
perspective to evaluate the arguments we heard.  We first
describe our approach to the overall question of software patents,
and then move on to further questions.

@unnumberedsubsec What is the Main Question That Needs to be Answered?


The goal of the patent system is to promote progress.  Whether
software should be patentable is therefore a question of whether
software patents promote progress.  The economic interpretation of
this question is whether granting software benefits the economy by
making the software industry more efficient.  More explicitly, this
question asks:

@quotation
Does the transfer of economic resources which software patents
represent constitute a transfer whereby the resources are going to
be employed more productively?
@end quotation

Most broad economic transfers produce both winners and losers, so we
need to look beyond the fact that a transfer occurs, and instead look
at the larger picture.  Sometimes this can be difficult: few
economists believe agricultural subsidies are a good idea, yet the
agricultural industry is nearly universally in favor of them.  A
government hearing on agricultural subsidies would be likely to
receive almost overwhelming testimony as to their beneficial effect.

We can't simply classify public testimony on the effect of software
patents and measure its volume to determine its validity.  We need to
carefully evaluate and investigate the issues.

We need to seek advice not only from those directly affected, but also
those best equipped to answer the question: economists, especially
economists familiar with the software industry.  At stake is the
future efficiency of a $50 billion a year industry that prospered and
progressed quickly without patents.  There is a basic conflict between
patent monopolies and a free-enterprise economy based on competition,
so free-enterprise principles demand that people who want to impose
bureaucratic restrictions on a productive industry must show a clear
need for them.

@unnumberedsubsec Is it Possible to Legislatively Define Software?


This issue was raised frequently at the San Jose hearings.  We were
very surprised that such an argument would be made to justify risking
the future efficiency of a $50 billion a year industry.

Since this argument is apparently one of the key arguments in favor of
the continued granting of software patents, we would like to subject
it to intense scrutiny.

It is true that many things in this world form part of a continuum.
Nonetheless we are able to legislatively differentiate between them.
The Post Office is able to distinguish between a letter and a letter
packet.  The FDA is able to distinguish between a cheese spread and a
cheese flavored spread.  There is no way to draw a perfect line
between ``drunk'' and ``sober'', but the law does draw a line, and it
works.

On a larger scale, the IRS classifies capital goods into many
different categories to determine depreciation rates, while the
Customs Service is able to classify things to apply duties.
Considerable financial incentives exist to try to circumvent these
classification systems, yet they work.  There is little problem with
them being circumvented, or with their complexities imposing great
financial burdens.  The legal system effectively handles disputes over
occasional borderline cases.

A legislative definition of software need not embody absolute truth.
It need only work effectively and efficiently.  Searching for absolute
truth makes no more sense than determining the exact definition the
IRS should use for wood pulping machinery.

Here's the definition we propose:

@quotation
Software is composed of ideal infallible mathematical components
whose outputs are unaffected by the components they feed into.
@end quotation

We are confident the PTO and courts could readily distinguish between
software and hardware using this definition.  The PTO is already
skilled at administering a classification system that deals with far
more subtle distinctions.

Appendix A clearly shows that it is possible to classify patents based
on their software characteristics.  We examined 2,000 patents issued
during a one week period and analyzed the details of every software
related patent.  We were able to readily identify such patents using
any of a number of different techniques.

@unnumberedsubsec Do New Companies Need Software Patents to Attract Startup Capital?


At the San Jose hearings Tom Cronan of Taligent forcefully suggested
startup companies require software patents to attract venture capital.
He described Taligent as a recent startup that had succeeded in
attracting a large amount of venture capital, and for whom software
patents were considered as vital.  He failed to mention Taligent is an
IBM - Apple joint venture, staffed by transferring surplus personnel
from these two companies.  Taligent is quite different from most other
startups.

The numerous ``two kids and a garage'' stories demonstrate that
successful software ventures require relatively little capital.  It
isn't necessary to attract large amounts of capital to produce
software.  Or at least it was not necessary --- defending against
patent threats may increase the expense.

All the software companies spawned by the microcomputer revolution
gathered sufficient starting capital without any software patents.
Microsoft, Borland, Novell, Adobe, Symantec, Oracle, and WordPerfect
are just a few examples.

Other speakers besides Tom Cronan also claimed startups need software
patents to attract capital nowadays.  It doesn't however follow that
the existence of software patents helps startups.  An explanation can
be found via simple economic reasoning: if software patents exist,
then having software patents cannot harm a startup; they can only help
or do nothing.  The outcome depends on whether your competitors also
have them.  The payoff matrix is:

@example
                           YOUR COMPETITORS HAVE S/W PATENTS

                               YES                    NO

        YOU    YES       you lose somewhat       you win somewhat
       HAVE
        S/W     NO       you lose big            neutral
    PATENTS
@end example

Economists will recognize this matrix as a textbook example of the
Prisoner's Dilemma from game theory.  In either case, having software
patents are to your advantage, if such patents are available.  A
rational investor therefore must insist on them when they are available, even
though this strategy is bad for the software industry and the public
as a whole.  Government policy should aim to alter Prisoner's Dilemma
situations so that the parties involved will prefer choices that give
a high total benefit.

@unnumberedsubsec Will an Improved Prior Art Database Solve the Problem?

At the San Jose hearings, several companies called for the Patent
Office to improve its prior art collection.  Many of these companies
had been on the receiving end of software patent litigation.
Reinvention is commonplace in the software industry, and in many cases
the patent office had erroneously granted software patents because it
was unaware of prior art.

If the patent office was better aware of prior art, would the problem
of software patents go away?  No.  What these companies are
experiencing is merely a side effect of the transition from a software
industry where software patents are uncommon to a software industry
where they are widespread.

When a company finds itself accused of infringing a software patent
today, it is frequently able to look back 5 or 10 years --- to a time
before software patents were widespread --- and find prior art that
invalidates the patent.  What will happen in the future?  The company
will look back to today --- to a time when software patents are being
granted in great numbers --- and may again find the technique it is
accused of infringing was invented earlier.  This time, though, the
company will not get off the hook.  It will just find instead that it
is infringing a different software patent than the one in question.

Companies now being harmed by erroneous software patents issued in
ignorance of prior art, will be harmed in the future by an
ever-growing number of valid patents.

@unnumberedsubsec Will the U.S. Benefit Internationally From Software Patents?

Some speakers claimed software patents may benefit very large American
companies on the international stage.  Such arguments tended to be
wrapped up in patriotism.

@quotation
Of course, nothing is easier than to excite people on the argument
that everything should be made in this country and not imported:
though what would happen if anybody really tried to carry that out
is the same as would happen if everybody expelled his breath from
his body and never drew any breath in.

@iftex
@hfill{}
@end iftex
---Viscount Simon, Parliamentary Debates, House of Lords, 1949.
@end quotation

What is good for General Motors, or other very large companies such as
IBM and AT&T, may not be good for America, or for the American
software industry.  Patents are permitted by the Constitution to
promote progress, not to promote the financial interests of IBM and
AT&T.

In evaluating the international aspects of software patents it is
important to remember that economics is not a zero-sum game.  It is
also important to remember that trade between two nations, when it
occurs, is beneficial to both nations.

There are a number of international issues that were not raised.  The
economic powerhouse of the American economy is the small business.
The Japanese economy, by contrast, is driven by extremely large
conglomerates.  Software patents appear to favor large corporations
with their extensive research facilities at the expense of the small
entrepreneur.  This might be acceptable if large corporations were
equally adept at bringing innovative products to market, but they have
often proven ineffective at doing so.

Between 1989 and 1992, Hitachi acquired 30 times more software patents
than even that giant of the American software industry, Microsoft.
Yet the value of the software Hitachi contributes to the U.S. economy
is negligible.  Similarly, despite having developed the graphical user
interface, Xerox failed in its attempts to bring this important
technological software advance to market.

@unnumberedsubsec Does Software Progress Quickly or Slowly?

One of the reasons patents are harmful to software is that progress is
very fast.  Successful software products normally make all their
profits in a year or two; then they are replaced by newer versions.
Programs a few years old are considered obsolescent.

Yet one supporter of software patents claimed this was false --- he
claimed software progresses slowly.  He illustrated this by mentioning
techniques that were known two or three decades ago and are still very
useful today.

How can we reconcile these contradictory claims?

There's not really a contradiction.  When we say that software
progresses rapidly, we mean that new techniques and features appear at
a rapid pace; this makes software a few years old very obsolete.  At
the same time, some software techniques and features do remain useful
for decades.  We expect natural order recalculation, Quicksort, and
public key encryption, to be used for as long as people develop
software.

So software moves fast in one respect, and sometimes slowly in
another.  Which one is the real measure of progress in software?
Both, or neither --- it depends on your purpose.  The purpose at hand
is to determine how much harm software patents do and how much good
they do.

Because techniques remain useful for decades, programmers five, ten
and fifteen years from now will need to infringe today's software
patents.  This is why software patents can impede development so much.
An up-to-date software product will use many new techniques as well as
many old ones.  The only software you can write without infringing
patents is software two decades obsolete; because so many new
techniques have appeared since then, few users want such software.

We may also ask how much good software patents do.  The answer to this
question depends on many factors --- such as, whether most of the
techniques would be developed and published without patents.
Experience until the early 80s, when the software field operated
largely without patents, suggests that they would be; that software
patents do little good, and we do not need them to encourage progress
in software.

@unnumberedsubsec If Hardware is Patentable, Shouldn't Software be Patentable too?

The argument has been made that it would be contradictory if an
invention was patentable when implemented in hardware, but not
patentable when implemented in software.

The purpose of the patent system is to promote progress.  If software
patents do not promote progress, then permitting them in the name of
some sort of legislative uniformity is contrary to the Constitution.
Declaring software non-patentable actually provides clarity to
intellectual property law.  It helps neatly divide between creations
having a physical embodiment, secured using patents, and creations
purely of the mind, secured using copyright.  A division similar to
this is apparent in the wording of the Constitution.  We therefore do
not detect any contradiction in making software non-patentable.

@unnumberedsubsec Anything Under the Sun Made by Man

Arguments in favor of the continued granting of software patents made
reference to the following quote on patentable subject matter used by
the Supreme Court.

@quotation
@dots{} anything under the Sun that is made by man @dots{}

@iftex
@hfill{}
@end iftex
--- Diamond v. Chakrabarty, 447 U.S. 303.
@end quotation

The Supreme Court used this quote with regard to how to interpret the
current patent law.  Notwithstanding these words, some subject areas
remain unpatentable under current law: mathematical algorithms,
methods of doing business, and so forth.  But when we ask what the law
should be --- whether the granting of software patents constitutes
sound economic policy --- reference to the law as it currently stands
doesn't help answer the question.

@unnumberedsubsec Copyright is Effective and Efficient


Patents are used in other industries to prevent companies from using,
but not paying for, the results of their rivals' research and
development.  Permitting this would be a serious disincentive against
R&D investment.

Unlike every other industry subject to patents, the software industry
is unique in that its products are also subject to copyright.
Copyrights ensures that to be commercially successful, a company
choosing to follow another must spend as much to develop a program as
the original firm.  Indeed, the history of spreadsheets, word
processors, and virtually every other software product suggests that
it is actually more expensive to follow than to lead.  A product that
seeks to displace the market leader can only do so by incorporating
new features, thereby making it more expensive to develop than the
original product.

Copyright is effective because it protects precisely the product that
has been developed.  It prevents other companies from benefiting by
copying your product, while at the same time permitting them to reap
the full benefits of anything they develop.

Copyright is efficient because it enables firms to compete on the
basis of rival implementations.  This competition is vital for the
efficient allocation of economic resources.  The traditional literal
aspects copyright doctrine is also efficient because it has negligible
administrative overhead and presents no uncertainties.  A small
startup has certainty in the knowledge that they control what they
create.

Given that copyright law effectively and efficiently achieves the
economic aims of the patent system, there is simply no need for
software patents.

@unnumberedsubsec A Summary of the League's Position: Why Software Should Not be Patented


Appendix B provides an example of why the economic effects of patents
vary from one industry to another as a result of industry specific
economic factors.  A consideration of the economic factors associated
with the software industry suggests that the the granting of software
patents will harm both the most economically productive sector of the
software industry, and the American economy as a whole.  This is
because the software industry is highly competitive and software
patents stifle this competition.  Software patents will take profits
from firms developing software that solves real customer problems,
firms adding significant value to the American economy.  Software
patents will transfer wealth to firms that add little value to the
software industry.

Unlike every other industry subject to the patent system, the software
industry is unique in also being subject to copyright.  Copyright in
its traditional literal aspects form provides an effective and
efficient form of intellectual property.  There is simply no benefit
to be gained from granting patents.  Moreover, software patents, by
sending the industry the wrong economic signals, are likely to
significantly reduce the industry's efficiency.

The League for Programming Freedom believes that the government must
take action to prevent software patents seriously reducing the
economic efficiency of the software industry.

@unnumberedsubsec What Needs to be Done

Software patents appear economically damaging.  A number of possible
solutions exist.  It might be desirable to declare software
non-patentable.  Or it might be preferable to the limit the scope of
the patent monopoly in such a way as to permit the production and use
of software intended for a general purpose computer.

It is not worth arguing over which of the many possibilities is most
desirable at this stage.  A final conclusion regarding the effects of
software patents on the software industry should first be reached.
Then, if it turns out the effects of software patents are indeed
negative, attention can be focused on how to best solve the problem.

@appendix Example of How Software Related Patents can be Classified.

By examining all the patents granted during the week of March 19,
1991, we seek to show how it is possible to identify and classify
software related patents using any of a number of different
characteristics.  Verification this was possible was important in
determining that there are unlikely to be any problems in formulating
legislation to prevent software patents.

The importance of the table below has less to do with the definitions
employed, than the fact it shows it is possible to identify and
classify software related patents in a number of important and useful
ways.  The definitions we employed were:

@itemize @bullet
@item
``Infringed using software'': Does the most likely method of
infringing the patent involve the use of computer software?
Software is defined as being composed of ideal infallible
mathematical components.

@item
``Applicable to general purpose computers'': Is it likely that the
patent may be infringed by running software on a general purpose
computer?

@item
``Applicable to embedded systems'': Is it likely that the patent may
be infringed when running software in an embedded system?  An
embedded system is a computer residing in a special purpose
hardware environment, such as an automobile engine control system.

@item
``Mental process'': A mental process patent that can be infringed by
mere thought --- if you think hard enough, are given suitable
input values, and ignore any post solution activity.

@item
``Standard technique; special domain'': A patent granted for the
application of a well known technique to solve a problem in a
particular software related domain.

@item
``Claim on generic functionality'': A patent that includes a claim
worded to cover all possible solutions to the problem being faced.
One speaker at the San Jose hearings described such patents as
representing the difference between patenting a particular mouse
trap and patenting the concept of catching mice.
@end itemize

In compiling this table, we examined only what we felt was the most
significant claim of each patent.

@page
@smallexample
patent     infringed  applicable  applicable  mental   standard    claim on
number         using  to general      to     process  technique;    generic
            software     purpose   embedded            special   functionality
                       computers    systems             domain

5,000,030       yes       yes       yes       yes       yes       no
5,000,039       yes       no        yes       yes       yes       no
5,000,041       no        no        no        yes       yes       no
5,000,042       yes       no        yes       yes       yes       no
5,000,147       no        no        no        yes       yes       no
5,000,148       yes       no        yes       yes       no        yes
5,000,149       yes       no        yes       yes       no        yes
5,000,150       yes       no        yes       yes       no        yes
5,000,188       yes       yes       yes       yes       no        yes
5,000,189       yes       no        yes       yes       no        no
5,000,276       no        no        yes       no        yes       no
5,000,281       yes       no        yes       yes       yes       no
5,000,381       no        no        no        yes       yes       no
5,000,382       no        no        no        yes       yes       no
5,000,592       yes       no        yes       yes       yes       no
5,000,711       yes       yes       no        yes       yes       no
5,000,924       yes       no        yes       yes       no        yes
5,001,067       yes       yes       yes       yes       no        yes
5,001,344       yes       yes       no        yes       no        yes
5,001,418       yes       yes       yes       yes       yes       no
5,001,429       yes       yes       yes       yes       no        yes
5,001,447       yes       yes       no        yes       no        yes
5,001,471       yes       no        yes       yes       yes       no
5,001,472       no        no        no        yes       no        no
5,001,476       yes       no        yes       yes       yes       no
5,001,477       yes       yes       no        yes       yes       no
5,001,478       yes       yes       no        yes       no        yes
5,001,479       no        no        no        yes       no        yes
5,001,489       no        no        no        yes       yes       no
5,001,490       yes       yes       yes       yes       no        no
5,001,549       no        no        no        yes       no        yes
5,001,559       yes       yes       yes       yes       no        yes
5,001,560       no        no        no        yes       no        yes
5,001,561       no        no        no        yes       no        yes
5,001,568       no        no        yes       yes       no        no
5,001,569       yes       yes       no        yes       no        no
5,001,573       yes       yes       yes       yes       no        no
5,001,575       yes       yes       yes       yes       no        no
5,001,628       yes       yes       no        yes       no        yes
5,001,630       yes       yes       no        yes       no        yes
5,001,631       yes       yes       no        yes       no        yes
5,001,632       no        no        yes       no        yes       no
5,001,633       yes       yes       yes       yes       yes       no
5,001,634       yes       yes       no        yes       no        yes
5,001,635       yes       no        yes       yes       no        yes
5,001,636       yes       no        yes       yes       no        yes
5,001,637       yes       no        yes       yes       no        yes
5,001,638       no        no        yes       yes       yes       no
5,001,639       yes       no        yes       yes       no        yes
5,001,640       yes       no        yes       yes       no        yes
5,001,642       no        no        yes       yes       no        yes
5,001,648       yes       no        yes       yes       yes       no
5,001,650       yes       no        yes       yes       no        yes
5,001,651       no        no        no        yes       yes       no
5,001,653       yes       no        yes       yes       no        yes
5,001,654       yes       yes       no        yes       no        yes
5,001,660       yes       no        yes       yes       no        yes
5,001,662       no        no        no        yes       no        no
5,001,666       yes       yes       no        yes       no        yes
5,001,677       yes       yes       no        yes       no        yes
5,001,689       yes       no        yes       yes       no        yes
5,001,696       no        yes       no        no        no        yes
5,001,697       yes       no        yes       yes       no        yes
5,001,702       yes       no        yes       yes       no        yes
5,001,706       no        no        yes       yes       no        yes
5,001,707       yes       no        yes       yes       yes       no
5,001,710       yes       yes       yes       yes       no        yes
5,001,714       yes       yes       no        yes       no        yes
5,001,715       yes       yes       yes       yes       yes       no
5,001,724       yes       no        yes       yes       no        no
5,001,727       yes       no        yes       yes       yes       no
5,001,729       yes       no        yes       yes       yes       no
5,001,730       yes       yes       no        yes       yes       no
5,001,736       no        no        no        yes       yes       no
5,001,740       yes       no        yes       yes       yes       no
5,001,742       yes       no        yes       yes       no        yes
5,001,744       yes       no        yes       yes       yes       no
5,001,745       yes       yes       no        yes       no        yes
5,001,747       yes       no        yes       yes       yes       no
5,001,750       yes       no        yes       yes       no        no
5,001,752       yes       no        yes       yes       yes       no
5,001,753       yes       no        yes       yes       no        no
5,001,754       yes       yes       no        yes       yes       no
5,001,755       yes       yes       yes       yes       yes       no
5,001,758       yes       yes       yes       yes       yes       no
5,001,759       yes       yes       yes       yes       no        no
5,001,760       yes       yes       yes       yes       no        no
5,001,761       yes       yes       yes       yes       no        no
5,001,764       yes       yes       yes       yes       no        yes
5,001,765       no        no        no        yes       no        no
5,001,766       yes       yes       yes       yes       no        no
5,001,767       no        no        no        yes       yes       no
5,001,768       no        no        no        yes       yes       no
5,001,769       yes       yes       no        yes       no        yes
all others      no        no        no        no        varies    varies
@end smallexample

Patents that apply to software intended for use on general purpose
computers are likely to have greater ill-effect than software intended
for use on embedded systems.  Granting software patents for the
application of a well known techniques to particular software fields
is also particularly hard to justify on economic grounds.  Combining
suitable legal definitions for terms used in the above table shows how
it should be possible to formulate a definition of statutory subject
matter under-pinned by economic rationalism.

@appendix Example Showing Varying Economic Effects of the Patent System

As an example of how the patent system is dependent on economic
factors that vary from industry to industry, we consider just one
factor, the overall size of an industry.

Let's imagine that there are 5,000 people employed by the
candle-making industry in the U.S. and that it has been determined
based on sound economic principles that the optimal life for a patent
in the candle-making industry is 20 years.

Suppose the demand for candles were twice what it actually is.  The
candle-making industry would be almost twice its earlier size,
employing close to 10,000 people.  Under a set of economic assumptions
reasonable for the candle-making (or software) industry, economics
would then dictate a cut in the length of patents for the
candle-making industry.  Cutting the length of patents by one half
would yield roughly the same financial incentive to invent, and thus
the same rate of progress as existed earlier.  Alternatively we might
consider cutting the length of patents by only one quarter.  In so
doing we are sending a signal to the candle-making industry regarding
the increased net economic value of improvements in the candle-making
process.  This signal however has to be traded off against the
negative effect on industrial efficiency caused by the increased lack
of competition.  When the size of the industry increases the optimal
lifetime for patents needs to be shortened.  Without knowledge of
various factors relating to the inventive process in the candle-making
industry the new length for patents is a matter for debate.

It isn't fair to directly compare the software industry to the
candle-making industry; the software industry is far larger, but it is
also far broader.  From the candle-making example it should be
possible to understand how the traditional 17 year patent grant may in
some industries conceivably hurt progress by stifling competition more
than it helps progress by encouraging innovation.  The software
industry employs some 6 million people.  A significant fraction of
them develop software.  More people are probably engaged in software
development than in all other branches of engineering combined.  As a
result in the software industry reinvention has become common place,
and software patents seriously harm competition.
@bye
