Thursday, February 2, 2012

Software Patents vs Competitiveness: Less is More

Less is More   (Madrid-based EU Study)  (Boston Law + Federal Reserve Study)

A pair of studies on the effect of software patents on innovation and competition in the marketplace. Both studies take a negative view on the effect of software patents. 

Fundamentally, this should come as no surprise to economists. While the pro-intellectual property rights side of the argument sees intellectual property rights as being equivalent to all other property rights (tangibility and duplicability characteristics notwithstanding) and consists mostly of legal professionals and law scholars, economists see it differently. What economists see in this debate are market-distorting monopolies. Everyone who ever took a first-year economics course is trained to think that monopolies cause inefficiency and should be avoided, or at least limited as much as possible. In the case of the IPR debate, a rat by any other name, still smells as strong. 

Lately however, legal scholars in the EU have begun to see the IP issue in the same skeptical light that most economists see it in. This is due largely to the role that patents have in emerging anti-competitive behavior in the I.T. industry. The list of emerging anti-competitive crimes includes frivolous patents, patent trolling, use of patents as competitive-entry barriers, and patent-based M&A. While many of these actions are not yet illegal in most first-world countries, the growing chorus of voices on this issue in both the EU and Switzerland may soon change that. 

Madrid-Based EU Study
This study finds that software patents have the effect of reducing competition, encouraging obvious and frivolous patents, fostering the emergence of artificial entry barriers, and the replacement of both education and R&D-based competition with litigation-based competition and patent-portfolio-based competition  (patent trolling). The study also finds that software patents favor a smaller number of large, rigid companies (oligopolistic firms), who channel resources into claiming patents rather than R&D. In short, the growth of software patents has been harmful to the software industry in general and to the European software industry in particular. 

Boston Law and Federal Reserve Study
On the other side of the Atlantic, an empirical look at the effects of software patents in the US in the wake of recent legal changes. Whereas during the 1970s, federal court decisions typically described computer programs as mathematical algorithms, which are unpatentable subject matter under U.S. law, court decisions in the 1980s and 1990s lowered the standards, allowing software to be patentable. 

The study finds a disconnect between software patent propensity of software patents and R&D investments or productivity growth.  Furthermore, the study finds that software patent acquisition acts as a substitute for firm-level R&D. In short, legal changes in the US software patent system has failed to incentivize R&D in the software sector, as classical theory has established. Rather, legal changes encouraged more strategic patenting and less innovation.

What Do We Need?
Essentially, IPR and patent law needs to be reformed in order to curtail anti-competitive activity. In the future, it is likely that competition law will evolve to the point that patent trolling will be as illegal as collusion, price fixing, and other monopolistic behavior.

While there are many directions in which reform can go, the moderate course is one of simply watering-down existing IPR law in order to limit anti-competititive behavior. In the future, it is likely that there will be limits on what  can be patented. The list should include obvious technology, traditional technology/medicine, life forms, genomes, and algorithms (all of which can currently be patented in the US). Furthermore, in order to increase competition, the protections granted by patents should be continually reduced, thereby stopping patent-holders from resting on their laurels. Lastly, IPR infringement lawsuits should be subjected to stricter burdens of proof. This measure could discourage patent-trolling in a big way.    (Madrid-based EU Study)  (Boston Law + Federal Reserve Study)


  1. I agree. Moreover, this kind of patents is often abused for something that it’s not aimed for. A few days ago, there was a news item saying that Google is being sued by a company that has as its only occupation making money out of software patents that it has bought from other firms. That’s not what patents are meant for. Patents should expire if they’re passed from one owner to another.

    And, by extension, all economic activity that is not productive and that only hinders those who play the game with good intentions should be banned

  2. Yes, I agree. This is ostensibly the reason that we have competition law, which I think needs to be updated concerning the IPR issue. If patents become devices which HINDER competition, then competition law should be amended.

    I have read a few different points of view on solutions this issue. The which seems most reasonable to me is to simply water-down the IPR laws by making a patent grant a shorter protection time, making obvious technology which has no R&D behind it unpatentable, and by making the transfer of patents more difficult.