Debates over software patents touch on the industrial structure of the industry. While successful incumbents such as Microsoft and IBM often fall target to criticisms of software patents, smaller firms hold the majority of these patents and leverage them in licensing partnerships with firms holding complementary technologies. The software industry benefits from small specialized firms able to obtain patents for innovations that they develop, commercialize, and share with society. Arguably, software patents enable a decentralized, non-concentrated and flexible industrial structure.

Adding to the discourse on patents and industrial structure, Professor Petra Moser, from the Stanford Dept. of Economics and the National Bureau of Economic Research, released a study on patent policy and the direction of innovation. How do Patent Laws Influence Innovation? American Econ Review, Vol. 95, No. 4, September 2005. This is impressive research that suggests economies can drive innovation and progress by fostering patents in some industries.

Moser argues that historically, inventors in countries without patents avoided industries dependent on patent protection; those with early leads in industries who failed to implement patent protection lost to those who did. On these findings, Moser argues that patents play a role in the structure of industries and economies.

... innovation in countries without patent laws concentrates in a small set of industries where patents are less important, while innovation in countries with patent laws appears to be much more diversified. These findings suggest that patents serve to expand the set of industries where innovation is attractive to inventors. But they also indicate that patents may help to determine the direction of innovation and that the adoption of patent laws in countries without such laws may alter existing patterns of comparative advantage across countries.

An important implication of the paper concerns today's controversies over software patents. While Moser cautions against strengthening patent laws in some developing countries, her work can be generalized to address the issue of patents for software. If the software industry survived until the 1990s by relying on copyright and trade secret protection, then why does society need software patents today? Do software patents help the industrial structure and innovation of the technology industries?

Lets look at the alternatives to patents to show how they may help drive the direction of software innovation, as Moser, Chesbrough and DeLong suggest.

Trade secrets are obviously an inferior kind of protection compared to patents, as they do not encourage the kind of disclosure required under patent law, that facilitates diffusion of innovation. Trade secrets do not encourage inventors to commercialize their innovations, or to contribute them in other ways to the technological community.

There are important drawbacks of copyright which patents address for software innovation. Copyright provides some protection for software, but does not guard against independent invention. It is also far easier to obtain a copyright rather than a patents, as a patent must pass standards such as novelty and non-obviousness, whereas copyrights have no such thresholds. Further, copyright only covers expression rather than implementation and functionality, key characteristics of technology.

Finally, the patent doctrine of infringement is preferable to that in copyright. With patents, infringement hinges on whether an invention falls within the scope of a patent, whereas with copyright, there is ambiguity over the very activities that may constitute infringement or piracy. FOSS advocates who only want to see copyright protection for software do a disservice to their cause when they advocate tolerance for or try to curb-back activities constituting copyright violations.

While there exists controversies surrounding software patent infringement that relate to claim construction and scope of protection, patents do provide the kind of robust protection needed for technological innovation if administered and enforced correctly. Scholars such as Professor Robert Merges have suggested that legal claims on a patent can be limited by Its technical disclosure.

Software patent critics claim that these patents are not vital for recoupment of R&D and commercialization costs. However, their arguments tend to side-step the issue of patents when they claim that innovation does not require R&D, capital, or even profits.

With the issue of profit incentives, Moser makes an important point that a necessary precondition for patent laws to influence innovating activity is that innovation must be responsive to profit incentives. Confident in the academic research supporting this notion, Moser's work casts incentives for monetary profit as the decision making concern for firms as patent laws shape the direction of their innovating activity.

While Moser's work does not argue for universally extending patent protection, the patentability of software, nor posit that patents have no ill-effects on innovation, the paper does provide critical insight on some benefits of patents that may be applicable to our modern technology industries.

posted by Noel Le @ 8:17 AM | Academia, International, Markets: Business, Investment & Innovation, Patents

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