Intellectual Property Rights in Frontier Industries Intellectual Property Rights in Frontier Industries Software and Biotechnology Edited by Robert W. Hahn AEI-Brookings Joint Center for Regulatory Studies WASHINGTON, D.C. 1 Contents LIST OF ILLUSTRATIONS viii PREFACE, Robert W. Hahn and Robert E. Litan ix 1INTRODUCTION, Robert W. Hahn 1 Pivotal Cases for Software IP Protection 1 Turning Points for Biotech IP Policy 4 The Policy Debate 5 Notes 8 2AN OVERVIEW OF THE ECONOMICS OF INTELLECTUAL PROPERTY PROTECTION, Robert W. Hahn 11 A Review of IPR Theory 13 Some Classical Theory: Information Property Rights Increase Innovation 13 Some Recent Theory: Strong Patents Can Erect Barriers 17 The Empirical IPR Literature 20 Do Strong Patents Spur Innovation? 20 Do Patents Increase Information Disclosure? 24 Do Patents Increase Technology Transfer? 26 Do Patents Increase Commercial Development? 29 Do Patents Increase Economic Development? 31 The Crucial Role of Data and Measurement 35 Conclusions 37 Notes 39 3SOFTWARE PATENTS: GOOD NEWS OR BAD NEWS? Stuart J. H. Graham and David C. Mowery 45 Patents and Innovation 46 v vi INTELLECTUAL PROPERTY RIGHTS IN FRONTIER INDUSTRIES The Historical Development of the Computer Software Industry 49 The Evolution of Intellectual Property Rights Policy and Practice in the U.S. Software Industry 52 Copyright 52 Patent 53 Patenting Trends in the U.S. Software Industry, 1987–2003 56 Software-Related Patenting by Packaged Software and Electronic Systems Firms, 1987–2003 62 Changes in the “Patent Propensity” of Packaged-Software Firms, 1987–2003 65 Patent Quality Issues 69 Conclusion 73 Notes 76 4DESIGNING OPTIMAL SOFTWARE PATENTS, Dan L. Burk and Mark A. Lemley 81 Software Patents 82 Disclosure 82 Obviousness 84 Patent Scope 86 Software Innovation 89 Optimal Patent Design 91 Institutional Competence 95 Legislative Competence 96 Judicial Competence 98 Agency Competence 99 Conclusion 100 Notes 101 5 STATE STREET MEETS THE HUMAN GENOME PROJECT: INTELLECTUAL PROPERTY AND BIOINFORMATICS, Iain M. Cockburn 109 Patenting Activity in Bioinformatics 111 Gene Patent Issues Revisited? 112 Implications of State Street 114 Challenges Posed by a Frontier Technology 115 CONTENTS vii Assessing the Impact 117 Economic Context 119 Open Source Biology 121 Conclusion 124 Notes 126 6“OPEN AND COLLABORATIVE” RESEARCH: A NEW MODEL FOR BIOMEDICINE, Arti K. Rai 131 The Open and Collaborative Model in Context 134 Innovation in Biopharmaceuticals 134 Vertical “Dis-Integration” and Calls for Access 135 Beyond Access: Open and Collaborative Research 136 The Open Source Model 137 Open and Collaborative Biomedical Research 140 Open and Collaborative Biomedical Research: A Critical Evaluation 145 Open Source Bioinformatics Software 145 Open and Collaborative Databases 147 Wet-Lab Biology 148 Conclusion 151 Notes 153 7DOES OPEN SOURCE HAVE LEGS? Wesley M. Cohen 159 Background 159 Open Source and the Tradeoffs Associated with R & D Information Flows 162 Why Else in Software? 164 Can Open Source Methods Be Applied to Biomedical Research? 166 Should Open Source Methods Be Applied to Biomedicine? 168 Alternatives 170 Discussion 171 Notes 173 INDEX 177 ABOUT THE AUTHORS 185 Illustrations TABLES 3-1 Patenting by the Softletter 100, by USPTO Patent Class, 1987–2003 59 3-2 Patenting by the Softletter 100, by International Patent Class, 1995–2003 60 FIGURES 3-1 Software Patents’ Share of All Issued U.S. Patents, 1987–2003 62 3-2 Large Packaged-Software Firms’ Patents, as a Share of All U.S.-Issued Software Patents, 1987–2003 63 3-3 Large Systems Firms’ Software Patents, as a Share of All Software Patents, 1987–2003 64 3-4 Large Systems Firms’ Software Patents, as a Share of Firm Patents, 1987–2003 65 3-5 Top Fifteen Packaged-Software Firms’ Software Patent Propensity, Firms’ Patents per R & D Expenditure, 1987–2002 66 3-6 Largest Packaged-Software Firms’ Software Patent Propensity, Firms’ Patents per R & D Expenditure, 1987–2002 67 3-7 Comparison of IBM and Microsoft’s Software Patent Propensity, Firms’ Software Patents per Software R & D Expenditures, 1992–2003 68 5-1 Issued U.S. Bioinformatics Patents 112 5-2 Published U.S. Bioinformatics Patent Applications 113 viii Preface The appropriate dimensions of protection for intellectual property rights in general and patents in particular have been matters of controversy since the sixteenth century. As growth in advanced economies has seemingly become more dependent on technological change, the stakes in intellectual property rights have grown. Software and biotechnology, both relatively new areas to come under the patent umbrella, have brought the debate to a fevered pitch in recent years. The focus on high-tech industries has been especially bright over the last couple of decades. The 1980s saw a flurry of legislative changes, includ- ing two that made it easier to obtain patents for publicly funded research. Today, we still wrestle with the aftermath of several legislative changes and legal precedents. Those who believe that patents indeed provide sig- nificant incentives for innovation are generally pleased with recent changes in patent protection, although most still acknowledge the need for more systematic reform of the system. But skeptics worry about several problems, including the strategic use of patents to inhibit innovation. This collection of essays provides a state-of-the-art analysis of intellec- tual property rights issues in two frontier industries, software and biotech- nology. It is the result of an AEI-Brookings Joint Center conference held on April 30, 2004. The authors examine a number of fundamental intellectual property issues. These include the general impact of patents on innovation, the measured effects of software patents, the design of optimal software patents, the old patent problems that new technologies have raised afresh, the use of an open source model in biomedical research, and the research conditions that often dictate how intellectual property is dealt with in an industry. After evaluating a number of features of the current system of ix x INTELLECTUAL PROPERTY RIGHTS IN FRONTIER INDUSTRIES intellectual property, the authors make some recommendations for reform and suggest areas for future research. Like all Joint Center publications, this volume can be freely down- loaded at www.aei-brookings.org. We encourage educators to distribute these materials to their students. ROBERT W. H AHN, Executive Director ROBERT E. LITAN, Director AEI-Brookings Joint Center for Regulatory Studies 1 Introduction Robert W. Hahn Despite decades of research and debate, key questions about the insti- tutional framework protecting intellectual property (IP) have yet to be answered satisfactorily. And the appearance of exciting new technologies in recent years has made the questions all the more urgent. Accordingly, in the spring of 2004 the Joint Center brought together leading scholars to address the protection of intellectual property rights in two frontier indus- tries, software and biotechnology. Specifically, the center asked the special- ists to focus on the issue of how intellectual property protection can best be designed to spur innovation without inhibiting follow-on research or deny- ing the public access to the fruits of technological change. This volume contains their responses. Before reviewing their conclusions, I offer some perspective on the path that intellectual property rights have taken with respect to high-technology innovation. The 1980s and 1990s saw a series of precedent-setting court decisions that dramatically altered the way the law protects property rights in both software and biotechnology. Pivotal Cases for Software IP Protection In the 1970s, when software emerged as a product distinct from hardware, the law categorized computer programs as mathematical algorithms. As such, software could not be patented.1 The Supreme Court confirmed this I would like to thank Iain Cockburn, Wes Cohen, and Arti Rai for helpful suggestions and comments in drafting this chapter. 1 2 INTELLECTUAL PROPERTY RIGHTS IN FRONTIER INDUSTRIES interpretation in 1972, when it struck down a patent granted on a new and faster process for converting decimal numbers to binary numbers.2 A hand- ful of patents awarded later in the 1970s could be classified as software patents today. But, by and large, the 1972 ruling remained unchallenged for the next decade.3 The common view was that software was best protected by copyright. Accordingly, copyright law formally expanded in 1980 to include software.4 In 1981, another Supreme Court ruling dramatically changed IP pro- tection for software.5 While it did not fully establish the software patenting standards in place today, the Diamond v. Diehr decision set the stage for later precedent-setting decisions that extended protection to software. Diehr had developed software for “molding raw, uncured synthetic rubber into cured precision products.”6 The court found this patent valid, reasoning “a claim drawn to subject matter otherwise statutory does not become non- statutory because a computer is involved.”7 Justice Rehnquist, who wrote for the majority, noted that “the claims must be considered as a whole.”8 The Diamond v. Diehr ruling established that algorithms in a patentee’s software were not protected as abstract ideas but in their application in a physical process, such as rubber curing.9 Software in isolation remained nonpatentable, but creative patent attorneys were now able to wrap soft- ware innovations into patents for tangible processes