LEFIC WORKING PAPER 2002-02 PATENTS AND THE INTERNET Lee Davis www.cbs.dk/LEFIC Copenhagen Business School Solbjerg Plads 3 DK-2000 Frederiksberg1 PATENTS AND THE INTERNET1 By Lee Davis Department of Industrial Economics and Strategy Copenhagen Business School 8 March 2002 to be published in Gunnar Eliasson and Clas Wihlborg, eds., The Law, Economics and Technology of the Internet. (forthcoming) “Intellectual property is the Web’s war zone.” - Business Week, 5 June 2000 1. Introduction In recent years, the Internet has become both a major front in the “battle” between proponents of open access to new technologies versus proponents of the protection of proprietary rights, and a key source of patent-related information. Developments in Internet technology have been accompanied by an increasingly strategic view of patents by firms seeking to maximize the overall value of their intellectual property (Knight, 1996, Grindley and Teece, 1997, Davis, 1998, Ransley and Gaffney, 1997, Rivette and Kline, 2000a,b). While it has long been recognized that the costs of patenting go hand in hand with the benefits (cf. Penrose, 1951, Machlup, 1968), the explosive growth of the Internet has extended the ways in which firms can use patents strategically, and amplified the broader policy debate as to what inventions should be patentable, and how strong patent protection should be. This chapter explores some of the implications of these changes by focusing on two questions. First, to what degree can Internet business methods be patented, and what are the implications of these patents for firms and society? For example, Amazon.com, Inc. has U.S. patent on its one-click technology, offering Internet shoppers an easy-to-use online tool. British Telecom has a U.S. patent on hyperlink technology. As of this writing, such “software-implemented business methods” are not patentable outside the United States. Many U.S. patents on Internet business methods may well be found invalid in coming years. The2extension of patent protection to Internet business methods in the United States has led some observers to fear a “crisis” in the patent system. Writes Seth Shulman (2000: 75): It was never the object of patent laws to grant a monopoly for every trifling device, every shadow of a shade of an idea…Such an indiscriminate creation of exclusive privileges tends rather to obstruct than to stimulate invention. It creates a class of speculative schemers who make it their business to watch the advancing wave of improvement, and gather its foam in the form of patented monopolies, which enable them to lay a heavy tax on the industry of the country, without contributing anything to the real advancement of the arts. It embarrasses the honest pursuit of business with fears and apprehensions of unknown liability lawsuits and vexations accounting for profits made in good faith. Some fear that if patents on Internet business methods are generally found to be valid, extended into other national jurisdictions and strongly enforced, they could threaten the traditionally open access of the Internet. Countries outside the U.S. also need to decide whether or not to permit patents of this type. Second, how does the Internet, as a rapid, highly efficient, global communications and distribution medium, affect firm patenting practices? The proliferation of information on the Internet clearly helps firms to analyze who has taken out what patents in their area and when, and how central these patents are to their own R&D efforts. Patent-holders deemed “in the way” can become targets for take-over, or perhaps be invited to form a joint venture (another means of extracting the rents). New business tools, like web-enabled exchanges for patents and licenses, have been created, linking potential buyers and sellers of intellectual property, but often also providing a range of other services. These include evaluating the patents on offer and insurance policies to mitigate the risk of buying a patent that later is found to be invalid. In sum, the Internet considerably enhances the innovating firm’s ability to access patent-related information posted on the World Wide Web, to signal its activities and intentions to other market participants, and to exchange patent-related information. Our arguments in this paper are based on sources from the literature, conference presentations, and interviews. Since the development of the Internet is so recent, and the focus of investigation has not yet, to my knowledge, been subject to rigorous analysis in the business and economics literature, the paper should mainly be seen as a preliminary effort to reflect on the answers to these two questions, given the nature of the Internet and the economics of the patent system. Our tentative conclusions are as follows. As regards the first question, it is important to differentiate between the U.S. situation, and the situation of countries that have not yet3permitted patents on software-implemented business methods (for reasons of space, we will mainly confine our discussion of the latter to the European Patent Convention). In the United States, given the recent, almost “chaotic” developments as regards what can and cannot be patented in this area, it is urgent to define more clearly which kinds of Internet business methods fulfill the criteria of patentability, and which do not. We will argue that the definition of what is patentable in the U.S. should be raised, to avoid the issuance of so many trivial patents, and reduce the costs of these patents to innovating firms and society. Outside the U.S., permitting the patentability of Internet business methods raises fundamental issues, not only for this particular group of inventions, but also for to the criteria of patentability more generally. In Europe, an invention must have some sort of “technical effect” to be patented; in the U.S., the requirement is only that the invention is industrially useful. Thus if Europe adopts the U.S. approach to business method patents, it would have significant implications not only for the patentability of software-implemented business methods, but also with regard to the definition of what constitutes a patentable invention according to the European Patent Convention more generally. Ideally, these issues should be resolved through a new international agreement. Turning to the second question, the advent of the
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