Archive for May 15th, 2009
The Federal Trade Commission (FTC) with their nine no-nos with respect to patents in the 1970’s[1], signaled a major shift in policy towards patents. These anti-patent policies reached absurd levels in the FTC consent decree against Xerox in 1975 that required Xerox to dedicate its patent portfolio to its competitors.[2] By the late 1970’s there was widespread concern that the US had lost its economic and technological edge. Our auto industry and our semiconductor industry were about to be overtaken and made obsolete by the Japanese and others.
In reaction to these concerns, our patent laws were strengthened in the 1980s. For instance, all patent appeals were consolidated into the Court of Appeals for the Federal Circuit (CAFC) created in 1982.[3] A number of the initial Judges on the CAFC were former patent attorneys and the court brought consistency to patent appeals. The court also took seriously the idea that issued patents are presumed to be valid. These changes signaled a more favorable atmosphere for patents in the 1980’s. Before the CAFC patents were treated differently in each of the federal court circuits. Some circuits had not upheld the validity of a patent in decades. The new court brought a sense of stability to patent law. The 1980’s saw a restoration of America’s economic and technological dominance in the world.
The Supreme Court also displayed a more favorable attitude towards patents. In, Diamond v. Chakrabarty, 447 U.S. 303 (1980), the Supreme Court decided that genetically modified microorganisms could be patented. In Diamond v. Diehr, 450 U.S. 175 (1981) the Supreme Court stated that while mathematical algorithms per se were not patentable, inventions incorporating mathematical algorithms that were otherwise directed to statutory matter were patentable. These cases set the stage for two of the most significant start-up industries in the 1980’s and 1990’s, specifically the software and biotechnology industry.
The legislative environment was also favorable to patents in the 1980’s. Extending the life of a patent to compensate for the delay in securing marketing authority from the FDA, became possible in 1984. 35 USC 156. The definition of infringement was amended to include export of kits of parts to make a product, which if made in the US would be an infringement of a US patent. 35 USC 271(f). In 1988 the definition of infringement was again expanded to include importation of products made by a process that violates a US patent, 35 USC 271 (g) and a request for marketing approval for a patented drug to be effective before the expiration of a US patent 35 USC 271 (e). In a reaction to FTC’s nine no-nos, the Patent Misuse Reform Act was passed in 1988, that made it clear that a patent was not unenforceable if the patentee refused to license their patent or used a patent tying arrangement.
The 1990’s continued the pro-patent trend. The definition of infringement was extended to acts in outer space controlled by the US in 1990, 35 USC 105, and state governments were made liable for acts of patent infringement in 1992. In 1995 the law on obviousness for a biotechnology process was changed, so that a showing the process resulted in a new and nonobvious product is sufficient to support a conclusion of nonobviousness, 35 USC 103(b). In 1995, the United State Patent Office officially started allowing claims to software stored on a computer readable medium. This allowed patent claims directed to a computer disk. As a result, a patent ower could sue a someone for owning a disk with infringing software. This seemed to be the end of the Patent Office’s sad history of denying patent protection to software enabled inventions.
The culmination of this pro-patent trend was State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). In this case, Signature Financial had obtained a patent on a “Hub and Spoke” method of running mutual funds. In this method, several mutual funds (or “spokes”) pool their investment assets into a single investment portfolio (the “hub”). Software then determines the value of each fund based upon a percentage ownership of each of the assets in the hub portfolio. This information was tracked on a daily basis, and is used to track fund share pricing and tax accountability. State Street Bank asked the court to declare this invention unpatentable as a mere mathematical algorithm or as a business method. They pointed out that the patent claim comprised steps that are the requirements specified in an Internal Revenue Service regulation for avoiding taxes on a partnership. The Federal Circuit rejected the arguments of State Street Bank, and instead upheld the patent by explicitly stating that business methods can form patentable subject matter. The court emphasized that software or other processes that yield a useful, concrete, and tangible result should be considered patentable.
A backlash against this pro-patent trend was already forming by the late 1990s. The main focus of the backlash was the “Amazon one click patent,” that allowed a user to order online using a single click. Amazon.com applied for the patent in 1997 and it issued in 1999 as patent number 5,960,411. A number of competitors had copied Amazon’s one click ordering system and shortly after the patent issued, Amazon.com sued Barnes and Noble for infringement.[4] Industry studies showed that between sixty and sixty-five percent of online shopping baskets abandon before they checked out. The primary reason for abandoned shopping carts seems to be buyer confusion and annoyance with the online purchasing process. Presumably, many of those abandoned shopping carts represent lost sales. The goal of the one click method for online shopping made the process simpler, easier and faster, thereby capturing some of that lost business. Barnes and Noble’s Express Lane (one click shopping system) was evidently successful, since a large percentage of their customers had chosen to utilize the Express Lane rather than the shopping basket.
Anti-patent activists started a boycott against Amazon.com because of the one click patent issue.[5] The one click patent was the subject of many critical articles that suggested the invention was trivial, that the one click patent was obvious, that the one click process was trivial to program and that software should not be patentable. The sad and ironic component to this controversy is that it is easy to design around the claims of the one click patent. Design around means to invent an alternative to a patented invention that does not infringe the patent’s claims. In this case, all Barnes and Noble or any other online retailer had to do to design around the claims of the one click patent was have a two click ordering system. However, few of the critics of Amazon.com and the one click patent mentioned this simple solution. Nor was there any complaint that Barnes and Noble was essentially too lazy to spend the time and effort to come up with this simple design around solution. One of the functions the patent system promotes is alternative designs to problems[6] by creating an economic incentive to create alternative designs.
Most of the critics of the Amazon one click patent, either do not understand patents and the role of claims in patents or they are just openly hostile to software patents. For example, the Free Software Foundation has a movement to end the patenting of software, believing that software patents inhibit development of software. The Free Software Foundation never criticized Barnes and Noble for being too lazy to design around the claims of Amazon.com’s patent because they are fundamentally opposed to software patents.
The arguments against software patents have a fundamental flaw. As any electrical engineer knows, solutions to problems implemented in software can also be realized in hardware, i.e., electronic circuits. The main reason for choosing a software solution is the ease in implementing changes, the main reason for choosing a hardware solution is speed of processing. Therefore, a time critical solution is more likely to be implemented in hardware. While a solution that requires the ability to add features easily will be implemented in software. As a result, to be intellectually consistent those people against software patents also have to be against patents for electronic circuits. Of course, some of them are opposed to patents more generally; however, the historical record has shown that patents have been effective in encouraging technological development. [7]
[1] Pate, R. Hewitt, “Antitrust and Intellectual Property”, American Intellectual Property Institute, 2003.
[2] Pitofsky, Robert, “Challenges of the New Economy: Issues at the Intersection of Antitrust and Intellectual Property”, American Antitrust Institute, 2000.
[3] Warshofsky, Fred, “The Patent Wars: The Battle to Own the World’s Technology”, John Wiley & Sons Inc., 1994, p. 65.
[4] Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp.2d 1228 (W.D. Wash. 1999).
[5] “Richard Stallman – Boycott Amazon!”. Linux Today. 1999-12-22. http://linuxtoday.com/news_story.php3?ltsn=1999-12-22-001-05-NW-LF. Retrieved on 2006-09-22.
[6] Westvaco Corp. v. Int’l Paper Co., 991 F.2d 735, 745 (Fed. Cir. 1993)
[7] Khan, Sorina B., The Democratization of Invention: Patents and copyrights in American Economic Development, 1790-1920, Cambrdge University Press, 2005, pp. 50.
“A country without a patent office and good patent laws was just a crab and couldn’t travel anyway but sideways and backwards“, Mark Twain- Connecticut Yankee in King Arthur’s Court
Starting in the late 1990’s patents came under attack from a number of companies, economists and intellectuals. A rallying point for these anti-patent crusaders was the Amazon “one click” patent covering the use of a one-step system for ordering items online. A number of competitors quickly copied Amazon’s one click ordering system. Complaints against the Amazon “one click” patent included: it was not novel, it was obvious, it was a trivial invention, and it was easy to program such a system. The anti-patent movement forced a number of changes to patent laws in the decade from 1999 to 2009. These changes tend to reduce the benefits to the inventor and allow society to use other peoples’ inventions with less cost and risk. In other words, these rules socialized the benefits of inventions but kept the cost private.[1]
Patent Theory and History
Patents have always been an instrument of industrial policy by countries. The first patents countries awarded were either for new inventions or as a reward for bringing new technologies to a country.[2] The purpose of these early patents was to strengthen local industry and patents were awarded as special privileges from the Monarchy or legislature. Countries tried other incentive systems such as annuities, cash prizes, and titles as methods to encourage technological innovation and industry.[3] The US still uses cash prizes in the form of grants for scientific and industrial research and in the form of contests with prizes as an instrument of industrial policy. The first modern patent system was created in the US in 1790. A modern patent system is characterized by an examination system administered by an independent examination core that is readily accessible to all inventors – as opposed to only wealthy or politically connected inventors. Also, such a system provides for the diffusion of knowledge. Recent research has shown that the US patent system in 19th century met these goals. Inventors obtaining patents in the US were from all occupations, varying economic circumstances, included men, women, and even slaves, and were dispersed geographically throughout the US.[4]
Patents are often considered a social contract, a reward system, or a property right.[5] The US constitution emphasizes both the industrial policy and social contract nature of patents as:
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries – Article 1, Section 8 US Constitution.
The social contract theory of patents is a trade between the inventor and society. The inventor is given a limited term property right in exchange for disclosing how to practice their invention. The reward system emphasizes that the inventor receives an award, such as a limited term to exclude others from using his invention. While the property theory of patents emphasizes that, like tangible property, an inventor owns the product of his labor (physical and mental).[6]
The US patent system was established by statute in 1790.[7] The statute allowed an inventor to apply for a patent from the Secretary of State, Secretary of War or the Attorney General.[8] The inventor had to provide a description of the invention, a drawing, and a model. This information had to be sufficient for one skilled in the art to build the invention.[9] If upon examination of the patent application the Secretary of State, Secretary of War or the Attorney General found the invention sufficiently useful and important they could issue a patent.[10] This system was too time consuming for Secretary of State, Secretary of War and the Attorney General, so it was replaced with a registration system in 1793.[11] However, the registration system for patents resulted in many frivolous patents, some fraud, and ultimately expensive litigation.[12] The Patent Act of 1836 established the patent office with independent examiners.[13] These examiners were hired based upon their skill in the technology of the inventions they examined.
The perceived success of the US patent system in encouraging technological development caused a number of countries to emulate the US patent system.[14] However, in the latter half of the 19th century in Europe an abolitionist movement against patents grew.[15] This movement argued that patents impeded competition and free trade.[16] Holland went so far as to repeal its patent laws in 1869, however they reinstated patent rights in 1912.[17] This anti-patent sentiment did not seem to infect the US. However, by the 1930s antitrust concerns about patents in the US began to surface. This backlash against patents reached its zenith with a Supreme Court judge writing “the only patent that is valid is one which this (the Supreme) Court has not yet been able to get its hands on.”[18] The 1952 Patent Act reaffirmed the rights of inventors to obtain patents if their invention was novel and nonobvious. The nonobvious requirement was new and appears to have been in reaction to a Supreme Court case that required “a flash of genius” in order to obtain a patent.[19] The “flash of genius” standard was arbitrary and inventions that were the result of years of research did not fit the “flash” part of the standard. For example, Edison’s high impedance light bulb resulted from intensive research and did not exhibit a “flash of genius”. The general economic and technological fortunes of the US followed the attitudes towards patents.[20] Favorable treatment of patents in the 19th century coincided with the US advance from a minor economic player into the world’s greatest industrial economy. While, anti-patent attitudes that prevailed in 1930’s corresponded with the great depression. The anti-patent rulings of the Supreme Court in the 1940’s gave way to a more favorable legislation towards patents encompassed in the 1952 patent legislation. This more favorable atmosphere for patents seemed to hold through the 1950s and most of the 1960s and corresponded to strong economic and technological growth.
[1] Note that the US has tried the opposite of socializing the costs, but keeping the returns private. For instance, the US K-12 educational system is tax funded but the student keeps the returns on their education. Another example is the recent (2008) banking scandals where any profits were kept by private investors and any losses were born by the taxpayer.
[2] Khan, Sorina B., “An Economic History of Patent Institutions”, eh.net/encyclopedia/article/khan.patents, p. 1.
[3] Ibid, p. 4.
[4] Khan, Sorina B., The Democratization of Invention: Patents and copyrights in American Economic Development, 1790-1920, Cambrdge University Press, 2005, pp. 9-10.
[5] Denicolo`, Vincenzo and Franzoni, Luigi Alberto, “The Contract Theory of Patents”, Societa Italiana di Economia Pubblica, 2003, p. 1.
[6] Mossoff, Adam, “Rethinking the Development of Patents: An Intellectual History, 1550-1800”, Hastings Law Journal, Vol. 52, p. 1313.
[7] Warshofsky, Fred, “The Patent Wars: The Battle to Own the World’s Technology”, John Wiley & Sons Inc., 1994, p. 38.
[8] Ibid pp. 38-39.
[9] Ibid p. 39.
[10] Ibid p. 39.
[11] Ibid p. 47.
[12] Ibid p. 48.
[13] Ibid p. 48.
[14] Khan, Sorina B., “An Economic History of Patent Institutions”, eh.net/encyclopedia/article/khan.patents, pp. 2, 9 & 15.
[15] Ibid p. 8.
[16] Ibid p. 8.
[17] Ibid p. 8.
[18] Dissent by Jackson J. in Jungerson v. Ostby and Barton Co. 335 US 560, 80 USPQ 32 (1948).
[19] Cuno Engineering v. Automatic Devices Corp, 314 U.S. 84, 51 USPQ 272.
[20] No attempt is being made for a rigorous correlation between patent attitudes and economic performance. This is because policies often lag attitudes and the effect of policies is not immediately reflected in the economy. In addition, a number of other variables confuse any analysis, such as the US was the only industrial country whose production facilities were essentially left intact after WWII and this contributed significantly to the US economy in the 1940s. Despite this, there is clearly a general correlation between general patent attitudes in the country and its economic and technological performance.
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