Software Feature Slugging it out over software Software patent controversies have put intellectual property onto the front pages of newspapers across the world. A supporter of such patents tries to convince an opponent of their worth made. Patents have never been intended to By Craig Opperman and Jason Schultz be an alternative to first to-market-incentives and many innovation-incentives exist: first-to- There is probably no more vehement IP debate market, patents and others. than whether software should be patentable. Even so, there is plenty of evidence that While proponents argue that protection is vital software patents induce innovation. Many to incentivise innovation and protect those that software start-ups would not have been invest in R&D, opponents believe that it harms financed without patent filings. Without funding, competition and prevents smaller players from they would not have brought products to market, competing with established operators. and would instead have languished with nothing In order to get a closer understanding of more than ideas. Thus, patents are linked to what is involved, we invited two prominent capital, which in turn funds innovation. figures – one from each side of the argument – A classic example is Priceline.com, which to discuss some of the major issues. Jason was founded around patents from a highly Schultz currently leads the San Francisco-based innovative think-tank called Walker Digital. Electronic Frontier Foundation’s (EFF) Patent Priceline was apparently copied by Microsoft’s Busting Project; while Craig Opperman is in Expedia leading to litigation that ultimately private practice in Silicon Valley and has more settled in Priceline’s favour and a license to than 15 years experience as a lawyer and Expedia. But, without its software patents, corporate C-level executive. Priceline may have been put out of business. Under the debate format agreed, Schultz Instead, patents helped increase competition. and then Opperman asks a series of questions, Additional examples are companies that and comments on each of the answers he innovate to develop software products receives. Schultz’s contributions are in red complementary to those of a larger company. throughout the article, Opperman’s are in black. These innovations are then patented, making the company an attractive acquisition target or giving its products an edge in the market. SCHULTZ TO OPPERMAN When faced with a build-or-buy decision, the larger company buys the innovative, patent- protected company or its products rather than Jason Schultz: In theory, patents should be just copying the innovative company. granted only as needed to induce inventions Which brings me to the final comment on that would otherwise not be made. What this question. It is precisely because software concrete evidence do we have that any of is so easily reproducible that software the advances in the software field are due to innovations should be patented. If they were patents as opposed to normal first-to-market not, the software giants would relentlessly incentives? copy young, innovative companies and, because of their substantial resources, would Craig Opperman: I am not sure that underlying squelch them. Survival of the fittest would patent philosophy is to grant patents only to become survival of the fattest and, without induce inventions that would otherwise not be software patents, few would compete in 32 Intellectual Asset Management April/May 2005 www.iam-magazine.com Software markets dominated by the behemoths and otherwise have, then the regulation does not innovation would be reduced substantially serve any public interest. Which brings me to your VC investment JS: Let me start with your last point first. point. There is no doubt that many VCs Protection is a funny thing. When you are the require patent portfolios as escrow before one with it, it seems perfectly reasonable. But investing. But this may be because they want when you are the one it is being used against, to maximise their return, not because they it can seem quite different. For example, one want to maximise overall innovation or public could say that the monopoly that US railroad good. Sure, if one looks at progress from the barons had on cross-country freight transit perspective of a single software company that was the only protection they had against wants patents, there may appear to be a net competition from others who also wanted to gain in profit for that one company. But one Jason Schultz: carry freight. Some of these companies were company’s success might also lead to a It is generally agreed that quite small when they first started but, as dozen companies going out of business or patents are granted as incentives they grew bigger, they were able to exploit being prohibited from offering cheaper and to increase the rate of innovation their monopolies to gouge competitors and higher quality alternatives to the public. For and artistic progress, not simply customers alike. Thus, protection against example, how do we know that, because of as protection schemes to prevent competition is not necessarily a universal Priceline.com’s patents, 10 other innovative larger competitors from entering good. It often depends on the purpose to companies weren’t driven out of business or marketplaces of smaller which the protection is put. under funded? How do we know that companies That said, I can certainly see why a small Priceline.com is offering consumers the best company would want such protection against quality service at the lowest competitive large competitors in a crowded market. But price? We hope these things are true, but protection is not the only option. Innovation is because Priceline.com has a monopoly on its another. Branding is another. Look at a method, we have no assurance that the public company like Google. It has patents, sure. But is not losing out in some way. have they asserted any of them against their Consider a somewhat exaggerated wealthy competitors? No. They compete with example. I want to buy one of two baseball Yahoo! and Microsoft although they are much teams. One team uses steroids; the other smaller (even after their IPO). They do not rest does not. I know the one using steroids will on their patents and other IP. They innovate. probably win more games. Which should I They build customer loyalty and enhanced the invest in? Obviously, from a winning customer experience. perspective, I should invest in the steroid- And how about open source projects? Why taking team. But is this beneficial to the public has Linux become successful when it has no interest? Am I really investing in the best team patent IP? How is Apache the fastest growing in terms of natural talent? Won’t my actions web server product on the market without any drive other owners to invest in steroid-taking patents to its name? What about the Mozilla teams and, ultimately, in all players taking Firefox browser? These are examples of steroids? From the perspective of the owner of alternatives to patents. These projects a non-steroid-using team, it might well seem innovate because they know that innovation that the only way to protect oneself in the will help them more in the long term than marketplace is to also use steroids. My point relying on lawyers, litigation and licensing. here is that while there may be certain small In the United States, the power to grant benefits to individual software companies in patents comes from the US Constitution, specific situations, the drive to patent every which states that Congress shall grant patents single software feature known to man may and copyrights to: “Promote the Progress of have grander consequences that are overall Science and the Useful Arts”. Thus, it is bad for the innovation environment – for generally agreed that patents are granted as example, what many in the patent world have incentives to increase the rate of innovation called patent thickets. and artistic progress, not simply as protection Sure, Priceline filed for and received schemes to prevent larger competitors from patents on its auction system. Sure it was entering marketplaces of smaller companies. able to go IPO. Sure it made its investors and Thus, the central question for any patent executives incredibly wealthy. But the policy discussion, at least in the US, is this: fundamental question to ask is not whether does the particular patent regulation in Priceline.com benefited, but rather, did we as question give us additional innovation and a society benefit? If even a single company social benefit that the public would not (say Microsoft) were to have offered the same otherwise enjoy without the regulation? If the service to the public without needing the amount of innovation is the same as we would incentives of a patent, then the public would www.iam-magazine.com Intellectual Asset Management April/May 2005 33 Software have received the same benefit that Priceline and the public interest. Thus, even some offers without any of the associated social marginal increase in burden on small costs to competition. It is this question that I companies would still benefit society more than think remains to be answered with empirical no burden on any company to search. evidence before we know whether software patents are truly serving their purpose. JS: Under a property rights theory, it makes sense to think of patents as fungible assets, JS: Why don’t we impose an affirmative but how does it promote innovation to allow search duty on patent applicants? Aren’t them to be bought and sold by companies they in the best position to know where prior that do not actually innovate themselves? art might be? CO: It absolutely does promote innovation to CO: I am a strong supporter of an affirmative allow patents to be bought and sold.