Business Week Commentary

["Jim Bessen" <jbessen@researchoninnovation.org>]

FYI appearing this week:

DECEMBER 22, 2003

INDUSTRIAL MANAGEMENT

      Commentary: Inventing A Better Patent Law
      Can Europe spur software innovation while safeguarding intellectual
property?


Patent law is one of the pillars of capitalism, a way to encourage
innovation and reward creativity by granting inventors temporary monopolies
on their work. The idea worked fine when the inventions in question were
physical objects such as Edison's lightbulb or industrial chemicals. But
tailoring patent law to the Digital Age has turned out to be fiendishly
difficult. As the number of patents on software programs soars in the U.S.,
policymakers are revisiting current rules that some worry may be harming
innovation. Meanwhile, in Europe, the question of whether even to allow
software patents has unleashed one of the fiercest intellectual-property
debates the Continent has ever seen.

The problem: Until two decades ago, the only way to protect software against
trade theft was through copyright. As is the case with a novel or song
lyrics, a copyright guards the actual lines of code in a program. But a
copyright cannot prevent someone from reusing the groundbreaking ideas
brought to life through software. That's why U.S. courts have gradually
widened patent law to allow software claims and even business processes,
such as Amazon.com's "one-click shopping" technique. Trouble is, software is
somewhere between technology and art. If patents were allowed on lyrics, for
instance, the Beatles might have had a 25-year monopoly on every song
written about yellow submarines.

The battle in Europe concerns where to draw the line. On one side are
Brussels technocrats and technology giants such as Microsoft (MSFT ), SAP,
and Nokia (NOK ), all of which insist that Europe must do more to protect
intellectual property or risk compromising its global competitiveness. "If
you want to compete with the U.S. and China, you have to have patents to
protect your software," says Jean-Philippe Courtois, the chief executive of
Microsoft Europe. Adds SAP CEO Henning Kagermann: "What we'd obviously like
to see is a global standard."

The opposing camp is every bit as adamant. An army of economists,
left-leaning politicians, and programmers such as Linux creator Linus
Torvalds argue that software patents are a creativity-crushing weapon
wielded by multinationals to bash upstarts. "U.S. experience shows that,
unlike traditional patents, software patents do not encourage innovation and
R&D," Torvalds wrote in an impassioned Sept. 21 letter to Pat Cox, president
of the European Parliament. "They hurt small and medium-sized enterprises
and generally newcomers in the market." Torvalds and allies would like to
see Europe boldly forswear software patents entirely. Many see the fledgling
"open-source" software movement -- which has particularly strong momentum in
Europe -- as the Old World's best shot at challenging the dominance of U.S.
software giants such as Microsoft. Allowing any sort of software patents,
they say, could ruin open source by putting programs under lock and key.

LEGAL MINEFIELD. Europe's patent battle is boiling over just as Americans
themselves are reexamining software patents. The Federal Trade Commission
and Justice Dept. held joint hearings last year to air complaints from tech
leaders that the U.S. system has run amok. Corporations, many testified, are
increasingly locked in an intellectual-property arms race, stockpiling
patents and spending millions of dollars every year prosecuting or fending
off patent lawsuits. "We are filing hundreds of patents each year for
reasons unrelated to promoting or protecting innovation," said Cisco Systems
Inc. (CSCO ) counsel Robert Barr during the hearings. "The system is in
danger of destroying itself." The result could hurt America's tech sector.
The legal minefield created by software patents makes it nearly impossible
to write a program without tripping over somebody else's protected string of
code. Even Intel Corp. (INTC ) Chairman Andrew S. Grove is worried about the
impact: He told attendees at an October tech conference that the
overburdened U.S. patent system might be creating a drag on innovation.

Can Europe devise a better solution? The whole world is watching. For the
past two years, the European Union has been working to tighten its existing
patent laws, while harmonizing the overlapping and contradictory provisions
in its 15 member states. One goal was to preclude the worst excesses of the
U.S. system -- for instance, by setting tougher standards for proving
novelty and disallowing patents on business processes. But the whole process
was upended in late September, when the European Parliament -- under heavy
last-minute lobbying by open-source advocates -- unexpectedly approved a
draft law that effectively banned all software patents. Anti-patent
advocates were jubilant. "More innovation will come to market if companies
don't have to waste so much money on lawyers," says Laura Creighton,
co-founder of collaboration software maker AB Strakt, based in Göteborg,
Sweden.

Trade groups, however, were apoplectic. The European Information,
Communications & Consumer Electronics Technology Industry Assn. labeled the
draft law a "disaster" that would "rob innovators" of protection and fair
compensation for their work. Luckily for them, the European Council of
Ministers has refused to sign off on the legislation, arguing that it is
rife with inconsistencies. Internal markets commissioner Frits Bolkestein
has even threatened to abort the whole legislative process and resort
instead to multilateral negotiations among Europe's national patent
offices -- a clear step backward for European standardization. One way or
another, it's now likely to be another year before a new draft emerges.

RAISING THE BAR. The sad fact is that because of such polarization, Europe
may be blowing an opportunity to devise a more nuanced approach to
protecting intellectual property. Software-patent opponents are justified in
fighting to set the bar higher than in the U.S. But an outright ban is no
solution. Such a move would put Europe at odds with the U.S. and Japan, as
well as violating rules set out by the World Trade Organization. It could
also invalidate thousands of software patents already issued by the European
Patent Office, erasing billions' worth of intellectual property and
jeopardizing patent licenses negotiated by companies across Europe.

A ban also would fly in the face of history. For more than a century, notes
Harvard Business School professor Josh Lerner, experts with different axes
to grind have argued that existing patent code isn't suitable to emerging
technologies, ranging from railroads and pharmaceuticals to genetically
modified organisms. But time and again, the law has evolved to encompass the
nuances of new technologies. Lerner believes it's far better to let the
rules work themselves out than to make industry-specific or
technology-specific exemptions, such as Europeans are proposing for
software. Such exemptions, he says, invariably become the subject of fierce
lobbying motivated by self-interest and profit motives, not by notions of
justice or social benefit.

To find a middle ground in Europe, both sides must start by turning down the
rhetorical volume. Opponents of patents should accept that an
across-the-board ban could hobble a host of vital European and global
industries, from automotive to telecom to medical systems. After all, most
products from these businesses today contain substantial amounts of
software; a ban on software patents could deny protection to, say, a new
computer-controlled intravenous drip or a programmable switch, where the
innovation itself is defined by the software. That would erode protection on
innovation.

Both camps also should work to preserve elements of Europe's existing patent
laws that help limit some American-style problems. For instance, the Paris
Convention of 1883 requires that for patents to remain exclusive, an
invention must be exploited in actual products. That helps prevent companies
from hoarding unused software patents merely for horse trading, as is
increasingly common across the Atlantic.

Lastly, Europeans should work to craft a new patent process that is smart
and fast. That would include rapid publication of applications, speedy
approvals, and ample opportunity for challenges after the initial grant -- a
step the FTC also recommended for the U.S. in an October, 2003, report. By
offering protection, not suffocation, Europe could set an example for the
world in the best way to foster digital innovation.

By Andy Reinhardt