State of Innovation

Patents and Innovation Economics

Intellectual Property Socialism: Part II U.S. Patent Law from 1960-2000.

            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.

Advertisements

May 15, 2009 - Posted by | -Law, -Legal, Innovation, Patents

1 Comment »

  1. […] According to many people, one of the best known business method patents is the Amazon one click patent.  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.  Industry studies showed that between sixty and sixty-five percent of online shopping baskets abandon before they checked out.  The primary reason for abandoned internet 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 was to make the process simpler, faster, and more secure, 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.  Amazon’s one click patent clearly involved software and therefore hardware, in order to have any meaning.  The hardware included the internet, the customer’s computer, and Amazon’s servers.  Amazon.com used real technology to solve a real problem.  This is exactly the sort of invention our patent system is designed to protect.  (For more on the Amazon one click patent click here) […]

    Pingback by Bilski, Software Patents and Business Method Patents « State of Innovation | June 8, 2009 | Reply


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: