1. Intellectual Property Protection in the US Software Industry Stuart J.H. Graham & David C. Mowery Haas School of Business U.C. Berkeley

2. Outline The development of the the US software industry and the changing role of formal IPRs. Trends in patenting by US software and computer firms in the “strong patent regime” of the 1980s and 1990s. –Patent propensities among leading packaged SW firms. –Copyright vs. patent protection of packaged software. –Continuations. Conclusions.

3. Development of the US software industry 1945-68: Software largely produced by systems manufacturers. 1969-75: “Unbundling” of software and hardware pricing and sales begins; ISVs enter. 1978-93: Adoption of the desktop personal computer creates a mass market for “packaged” software. 1994-present: The Internet becomes an important market and an important channel for distribution and application of software. Importance, role of formal IP protection has changed through these four stages of development.

4. The “new economics” of PC and Internet software “Packaged” software industry’s economics resemble those of recorded music or publishing; “hits” are important. IP protection is of great economic importance in packaged software, less so in custom software. Internet has at least 3 effects on IP environment & incentives: –New low-cost distribution, marketing channels for packaged software. –Expanded areas for application of “business methods” software as complements to a service or product. –New possibilities for “open-source” software.

5. Evolution of the US legal regime for software IP Copyright protection for software explicitly endorsed in 1979 by CONTU. “Look & feel” cases began to strengthen copyright protection, but later cases (e.g., Borland) limited its reach. Software patents (esp. since creation of the CAFC) have been given more favorable treatment. 1994: Stac Electronics decision underscored the importance of patents. 1998: State Street upheld a financial “business methods” patent.

6. The response to the “pro-patent” US regime in software, 1984-99 Defining software patents. –Patents issuing to leading software-only firms. –Use IPC classes that exist throughout the 1984-99 period. –Resulting sample “overweights” packaged SW patents. Our data suggest that software patenting has more than doubled its share of all patents (1.8% to 5%) during 1984-99.

7. Figure 1: Software IPC Patents as Share of All Patents, 1984-1999 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 19841986198819901992199419961998

8. The response to the “pro-patent” US regime in software: 2 Leading packaged software firms increased their patent “propensity” (patents/R&D) >8x during 1988- 97. “Incumbent” (founded before 1985) large packaged SW firms’ patent/R&D ratios are higher than those of “entrants” (founded after 1985) by late 1990s. Patenting in these fields by systems/device producers (IBM, Intel, Motorola, HP, et al.) increased as % of corporate patenting and as % of overall SW patenting, 1984-97. Patents/R&D spending up; registered copyrights/R&D spending down among packaged SW firms, 1985-97.

12. Copyright Propensities, 15 top SL100 '97 Firms, 1985-98 0 0.5 1 1.5 2 1985198719891991199319951997

13. Software patent “quality” Copyright criticized in 1989 by Menell for lack of a sufficiently high “quality” threshold; patents viewed as preferable. Software patents, esp. business-methods patents, have been difficult for USPTO to review, because of limited patent-based prior art. Our citation-based measure of “quality” of large packaged-software firms’ patents (next slide) shows no decline in quality of these firms’ patents, relative to other software patents, during the “pro- patent” era. US university software patents also display no consistent trend in “quality.”

14. 1997 Softletter 100 Patent “Quality” 0 0.5 1 1.5 2 848586878889909192939495 Measured by citations to all firm IPC patents in a two-year forward window, 1984-95 FIGURE 19 Normalized Citations

15. University Software Patent “Quality” 0.5 1.0 1.5 2.0 2.5 3.0 848586878889909192939495 FIGURE 31 Normalized Citations Measured by citations to all firm IPC patents in a two-year forward window, 1984-95

16. Continuations in software patents Continuations: “Refiling” of patent on same invention, restarting examination, while preserving filing date of original application. –Unique to USPTO; other industrial-nation patent systems have no equivalent procedure. Motives: –Prior to 1995 legislation that established patent term sa beginning at filing date, “submarine” patents could be pursued. –Revision or response to rejection of claims, reflecting asymmetric information or expectations? –“Wearing down” the USPTO through steady stream of refilings on a given invention (Quillen & Webster and Elliott present conflicting views on this).

17. Data on software patent continuations “Continuation shares:” % of patents in a given issue year that are based on continuations. 2+ year lag from applications explains the 1997 peak of issued patents with continuations (next slide). Like all US patents, share of SW patents using continuations has declined; but the share for SW patents, which initially (1975) was lower, remains higher. Why? –Not unique to SW; pharmaceuticals, biotech also exhibit higher-than-average continuation shares. –Complexity, novelty of the technological field? Considerable differences among large packaged SW firms in share of patents issuing from continuations.

19. Software IPC Continuation Issues as Share of Software IPC Patents, 1975-2000 0.00% 10.00% 20.00% 30.00% 40.00% 197519781981198419871990199319961999

20. Conclusions Patenting in packaged SW has intensified in response to changes in market structure, legal environment. Patents appear to have supplanted copyright among large packaged SW firms. Citation-based indicators do not reveal declines in the “quality” of large packaged-SW firms’ patents during 1990s. Continuations account for a higher-than-average share of SW patents than is true of overall patents. These trends yield mixed evidence on any increase in “defensive” or “strategic” patenting by SW firms. More work with firm-level data and patents is needed.

22. Adobe Patent Propensity, 1986-99 0 5 10 15 8687888990919293949596979899 Patenting per $100 R&D Figure 3:

23. Novell Patent Propensity, 1986-99 0 5 10 15 20 25 8687888990919293949596979899 Patenting per $100 R&D Figure 4:

24. Borland (Inprise) Patent Propensity, 1986-99 0 20 40 60 80 8687888990919293949596979899 Patenting per $100 R&D Figure 8:

25. Microsoft Copyright Propensity, 1985-98 0 0.2 0.4 0.6 0.8 1985198719891991199319951997 Figure 34

26. Novell Copyright Propensity, 1985-98 0 0.1 0.2 0.3 0.4 0.5 0.6 1985198719891991199319951997 Figure 33

27. Adobe Copyright Propensity, 1985-98 0 5 10 15 20 25 30 1985198719891991199319951997 Figure 32

29. Microsoft Continuation Issues as Share of Patents, 1992-99 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 9293949596979899

30. Adobe Continuation Issues as Share of Patenting, 1992-99 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 9293949596979899

31. Borland (Inprise) Continuation Issues as Share of Patenting, 1992-99 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 92939495969798

33. University Software Patenting and Overall Patenting, 1984-97 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 1984198619881990199219941996 Overall university patenting as share of all utility patents University software patenting as share of all software patents