Mann (2004) - The Myth Of The Software Patent Thicket

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Reference

• Mann, R.J. (2004), "The myth of the software patent thicket", bepress Legal Series, pp.183

@article{mann2004myth,
  title={The myth of the software patent thicket},
  author={Mann, R.J.},
  journal={bepress Legal Series},
  pages={183},
  year={2004},
  abstract={This paper is the first part of a wide-ranging study of the role of intellectual property in the software industry. The project focuses on the software industry because of the importance of that industry to the modern economy, because of the importance of innovation to that industry, and because of the well-known difficulties of accommodating traditional intellectual-property regimes (patent, copyright, and trade secret) to innovation in the industry. This paper focuses on innovation in the hundreds of small venture-backed firms that form the bulk of the population of the industry. After a brief description of the history of the industry in Part II, Part III discusses the evidence on which the paper relies: a set of about 50 interviews of industry executives – diversified geographically, by size of company, and by role in the industry (software developers, venture capitalists, lenders, etc.). Relying on those interviews, the paper provides a detailed explication of the role that intellectual property plays in the industry. Parts IV through VI of the paper organize the information from the interviews and situate it in the extensive literatures on venture capital investing, the economics of innovation, and patents. The first substantive topic of the paper (Part IV) is the features of startup firms that attract investment by venture capitalists – generally something about the startup that suggests a “sustainable differentiation” of the firm from its competitors. The differentiation could come from any number of advantages the firm has – a first-mover advantage, special skill of its employees, a unique approach to solving a difficult problem, or, in some cases, intellectualproperty protection.The second substantive part of the paper (Part V) discusses the role of copyright. The major point of this part is that copyright protection is of little value to startup firms. Copyright protection is designed to protect expression, and not functionality. Thus, it provides little of the protection for which venture investors are looking. The basic problem is that it does not offend copyright law if a competitor observes a software product and designs a new product that includes precisely the same functionality, so long as the competitor uses none of the “expression” from the first product. Because the competitor’s customers are for the most part interested in the functionality, not the expression, this is not an important constraint. On the other hand, copyright protection does provide important protections in other areas, most obviously in protecting the later-stage firm’s products from piracy. Generally, this part of the paper tells a story of unsuccessful efforts to stretch the copyright regime to do something it never was intended to do. The final substantive part of the paper (Part VI) discusses the role of patents. Because patents do protect functionality, they have at least the theoretical potential to provide the sustainable differentiation for which investors are looking. The problem, however, is that in many sectors of the software industry innovation is not of a character that a typical patent can protect a firm from competitors: often competitors would be able to design a competing product that works around a firm’s patent. Thus, despite significant increases in patenting in the industry, about 80% of venture-backed software firms do not obtain patents during the early years of their existence. The question, then, is what benefits patents do provide to those firms. This part explores several benefits, including the classic benefit of excluding competitors. In this industry at least, that benefit accrues primarily to small firms, protecting them from the competitive depredations of incumbents. Incumbents, by contrast, rarely use patents to exclude smaller firms from the industry. The part also discusses a series of less conventional benefits small firms gain from software patents: as barter in cross-licensing arrangements, in signaling their technical competence to third parties, in converting tacit knowledge into a verifiable and transferable form, and in making the firm attractive to potential acquirers. The paper closes by discussing the implications of the patent analysis for recent debates about the value of patents in the software industry. The paper starts with a discussion of theoretical literature suggesting that free availability of patented technology is important because of the software industry’s reliance on cumulative patterns of innovation. It then presents evidence about existing practices in the industry suggests that technology in fact is readily available, rebutting the prominent claims of a patent “thicket” that is supposedly stifling innovation in the industry. On the contrary, I argue, to the extent patents have an important effect in the industry, it is an effect that inures primarily to the benefit of the smaller firms trying to find a foothold from which they can compete.},
  discipline={Mgmt, Law},
  research_type={Discussion},
  industry={Software},
  thicket_stance={},
  thicket_stance_extract={},
  thicket_def={},
  thicket_def_extract={},  
  tags={},
  filename={Mann (2004) - The Myth Of The Software Patent Thicket.pdf}
}

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Abstract

This paper is the first part of a wide-ranging study of the role of intellectual property in the software industry. The project focuses on the software industry because of the importance of that industry to the modern economy, because of the importance of innovation to that industry, and because of the well-known difficulties of accommodating traditional intellectual-property regimes (patent, copyright, and trade secret) to innovation in the industry. This paper focuses on innovation in the hundreds of small venture-backed firms that form the bulk of the population of the industry. After a brief description of the history of the industry in Part II, Part III discusses the evidence on which the paper relies: a set of about 50 interviews of industry executives – diversified geographically, by size of company, and by role in the industry (software developers, venture capitalists, lenders, etc.). Relying on those interviews, the paper provides a detailed explication of the role that intellectual property plays in the industry. Parts IV through VI of the paper organize the information from the interviews and situate it in the extensive literatures on venture capital investing, the economics of innovation, and patents. The first substantive topic of the paper (Part IV) is the features of startup firms that attract investment by venture capitalists – generally something about the startup that suggests a “sustainable differentiation” of the firm from its competitors. The differentiation could come from any number of advantages the firm has – a first-mover advantage, special skill of its employees, a unique approach to solving a difficult problem, or, in some cases, intellectualproperty protection.The second substantive part of the paper (Part V) discusses the role of copyright. The major point of this part is that copyright protection is of little value to startup firms. Copyright protection is designed to protect expression, and not functionality. Thus, it provides little of the protection for which venture investors are looking. The basic problem is that it does not offend copyright law if a competitor observes a software product and designs a new product that includes precisely the same functionality, so long as the competitor uses none of the “expression” from the first product. Because the competitor’s customers are for the most part interested in the functionality, not the expression, this is not an important constraint. On the other hand, copyright protection does provide important protections in other areas, most obviously in protecting the later-stage firm’s products from piracy. Generally, this part of the paper tells a story of unsuccessful efforts to stretch the copyright regime to do something it never was intended to do. The final substantive part of the paper (Part VI) discusses the role of patents. Because patents do protect functionality, they have at least the theoretical potential to provide the sustainable differentiation for which investors are looking. The problem, however, is that in many sectors of the software industry innovation is not of a character that a typical patent can protect a firm from competitors: often competitors would be able to design a competing product that works around a firm’s patent. Thus, despite significant increases in patenting in the industry, about 80% of venture-backed software firms do not obtain patents during the early years of their existence. The question, then, is what benefits patents do provide to those firms. This part explores several benefits, including the classic benefit of excluding competitors. In this industry at least, that benefit accrues primarily to small firms, protecting them from the competitive depredations of incumbents. Incumbents, by contrast, rarely use patents to exclude smaller firms from the industry. The part also discusses a series of less conventional benefits small firms gain from software patents: as barter in cross-licensing arrangements, in signaling their technical competence to third parties, in converting tacit knowledge into a verifiable and transferable form, and in making the firm attractive to potential acquirers. The paper closes by discussing the implications of the patent analysis for recent debates about the value of patents in the software industry. The paper starts with a discussion of theoretical literature suggesting that free availability of patented technology is important because of the software industry’s reliance on cumulative patterns of innovation. It then presents evidence about existing practices in the industry suggests that technology in fact is readily available, rebutting the prominent claims of a patent “thicket” that is supposedly stifling innovation in the industry. On the contrary, I argue, to the extent patents have an important effect in the industry, it is an effect that inures primarily to the benefit of the smaller firms trying to find a foothold from which they can compete.

Review

Definition of Patent Thicket

"Specifically, the idea is that there are so many overlapping patents in the industry that potential innovators cannot readily obtain the approvals necessary to conduct their research."

• The paper terms "Fractionation", which appears to be similar to concepts of "fragmentation" of ownership rights in other papers.

"If – as I argue – the principal direct benefits of patents protect small firms and help them obtain financing, then software patents may play a role in the high levels of fractionation we observe in the industry as it currently exists."

Sample

• 50 interviews of U.S. software industry executives from various locations, company sizes, and industry roles.
  • Industry Roles of those interviewed: software developers, venture capitalists, angels, banks, small software company people involved in obtaining funding, and large software company people that review potential firms for acquisition.
  • Interview locations: California, Massachusetts, Texas, Washington, and Michigan.
• Interviews were 30-45 minutes long and subjects were the author’s contacts in the industry, institutional affiliations and personal contacts

Results

"The idea of a 'thicket' or 'anticommons' in the software industry is difficult to credit. When raised in my interviews, that thesis universally was rejected."

• The startup firms did not claim to do a prior-art search before developing a new product, and the investors did not express concerns that a firm’s portfolio may be infringing the IP of others.
• Patent Thickets only exist when firms are unable to agree on licensing terms, but this would be an incorrect description of the software industry today.

Social Welfare Consequences

• It cannot be said whether the hundreds of small software firms receiving institutional funding would exist without patent protection or whether there would in fact be even more small firms.

"Taken together, the volume of multiple-round financing of patentless startup firms, as well as the cross licensing at low transaction costs that pervades the industry, suggest that the existing body of patents are not stifling innovation in startup firms in any substantial way."

Policy Advocated

"...In those industries, IP can play a crucial role in innovation...[I]t serves as a device to foster high degrees of fractionation. By increasing the number of approaches to resolving important problems, fractionation can provide for an ever more rapid pace of innovation and consequent Schumpeterian destruction. From that perspective, IP can be an engine of competitive discipline, and not a tool to block competition."