Wednesday, May 04, 2005

SOFTWARE PATENTS STRIKE BACK (PART I): In the March 2005 publication of the Texas Law Review, professor Ronald Mann, publishes a well-written and long-needed study of the effects of patenting on the software industry, entitled "Do Patents Facilitate Financing in the Software Industry?" The Article is the first part of a wide study of the role of intellectual property in the software industry. Unlike previous papers that focus primarily on software patents—which generally are held by firms that are not software firms—the Article provides a thorough and contextually grounded description of the role that patents play in the software industry itself.

The article reaches some significant conclusions that have been advocated before by this blog, the most significant being that software patents are more beneficial to smaller companies than to larger companies.

The Article emphasizes the difficulties that prerevenue startups face in obtaining any value from patents, since litigation to enforce patents is impractical for those companies. Efforts to obtain patents often divert the company’s focus from the central task of designing and deploying a product, and the benefits of excluding competitors are limited for businesses that cannot themselves exploit the relevant technology. However, once the company starts becoming larger, a number of potential benefits appear. First, despite concerns that patents are not effective to appropriate profits from innovation in the software industry, a substantial number of software startups do have patents of sufficient strength to exclude competitors. That important finding, taken with the fact that the principal targets of those patents are much larger comapnies, suggests patents are more beneficial to small companies than to large companies.

Another important finding in the article is that the concept of patent "thickets" is bunk. It has been advocated by scholars and businesspeople that the enforcement of software patents has hindered innovation in the software industry through creation of a patent “thicket.” These laims were rejected for two broad reasons. First, direct evidence of high R&D spending in the software industry undermines claims that software patents cause firms to reduce R&D spending. Second, the actual structure and practices of the industry belie any claim of a patent thicket. The article shows that the development of young firms in the software industry is not significantly constrained by large patent portfolios in the hands of incumbent firms.

It is a groundbreaking article that I strongly recommend for anyone interested in software patents. The article also provides reasons why copyright protection is an extremely poor substitute for patent protection, and even suggests that patent "trolls" are (gasp!) good for the patent system.

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