Intellectual Property Rights in Frontier Industries: Software and Biotech
Washington, D.C. - April 30, 2004

Introduction
On April 30, 2004, the AEI-Brookings Joint Center hosted two panel discussions about intellectual property rights: one panel focused on biotech while the other focused on software. 

The panelists discussed the following key questions: How do property rights’ regimes affect incentives? How are the new fields of biotech and software bringing policymakers to the old, unresolved controversy of patenting algorithmic inventions and variations on life forms?  Can biotech learn from patenting models in the software industry?  Is that model desirable?  What do the trends in software patenting and R&D suggest for technological innovation?  Do frontier industries, such as software and biotechnology, merit special intellectual property rules?  The first panel focused on biotech and consisted of Ian Cockburn, Professor of Finance and Economics at Boston University, Arti Rai, Professor of Law at Duke University Law School, and Wesley Cohen, Professor of Economics and Management at Duke University.  Robert Hahn, Executive Director of the AEI-Brookings Joint Center, moderated this discussion.  The second panel focused on software and consisted of David Mowery, Professor of Business at the University of California, Berkeley, Dan Burk, Professor of Law at the University of Minnesota, and Starling Hunter, Assistant Professor at the MIT Sloan School of Management.  Scott Wallsten, Fellow at the Joint Center, moderated the second panel. 

Panel 1: Biotechnology and Intellectual Property Rights

Ian Cockburn, Boston University School of Management     
Mr. Cockburn made several arguments regarding intellectual property policy at the intersection of biotech and software, the bioinformatics industry. 

He described bioinformatics, or computational biology, as the next wave in biological resources. He suggested that the boundary-spanning nature of this research means that increasing numbers of patents issued for bioinformatics inventions are likely to bring policymakers back to some old, painful, and unresolved controversies. Patenting of algorithmic inventions in software and business methods, on the one hand, and genes and DNA sequences on the other, strained Patent Office resources and weakened public support for the patent system. Bioinformatics, by combining the two, is likely to bring a number of questions back into sharp focus.  What standards of obviousness or utility should be used to determine patentability? How broad are the claims, in practice? What types of incentives are provided to different actors, and where do they steer the locus of innovative effort? What are the implications for the productivity of research in this area?

Arti Rai, Duke University Law School   
Ms. Rai analyzed the promise, and limitations, of biomedical research that rejects conventional property rights.  She focused on “open and collaborative” production that does not involve the usual sorts of exclusionary proprietary rights, that differs from firm-based or contractual, market based production, and that also differs from “traditional” academic research in biology.

She described that in recent years, the trend towards increased proprietary rights in biomedical research has met with some resistance in the form of research projects that disavow conventional forms of intellectual property rights. Open biomedical research programs have explicitly adopted the licensing schemes of the open source software movement. Basic biomedical research differs from software development in many important respects, however, not the least of which is that such research is based in publicly-funded universities.  Ms. Rai argued that the location of basic biomedical research in universities may impede rather than foster openness.

Wesley Cohen, Duke University, Fuqua School of Business
Mr. Cohen commented on Arti Rai’s paper, “Open Source Biomedical Research: Promise and Perils,” and Ian Cockburn’s paper, “State Street Meets the HGP: Intellectual Property and Bioinformatics,” and offered his own insights.  Mr. Cohen suggests that given the balance in any market between the appropriability and complementarity effects of information flows, acting on either alone will likely affect the other, altering incentives to innovate.  He argues that intellectual property rights are more central to competitive advantage in some industries.  For example, in a “complex product” technology where commercializable products are comprised of numerous protectable elements, spawning mutual dependence and extensive cross-licensing, returns to innovation are less a function of intellectual property and more due to first mover advantages and complementary capabilities.  Under such circumstances, “open source” sharing may complement these other strategies.  On the other hand, in the “discrete product” model, evidenced in “pharma,” intellectual property rights are more central to competitive advantage.

Panel 2: Software and Intellectual Property Rights

Dan Burk, University of Minnesota Law School

Mr. Burk emphasized the need for optimal patent policy to maximize the patent incentive effect, while minimizing burdens placed on future innovation by tailoring the scope of the patent to the characteristics of each technological sector affected.

In the case of software, he suggested the need for relatively narrow patents that are relatively easy to obtain, and subject to the exceptions necessary to ensure interoperation and follow-on development. However, current software patent doctrine bears little relationship to this industrial profile. The United States Court of Appeals for the Federal Circuit set a lax standard of disclosure software patents, resulting in patents scope unconstrained by doctrines of enablement and written description. At the same time, Federal Circuit case-law suggests that a stringent standard for patent non-obviousness will be applied to such patents, resulting in relatively few valid software patents.  Mr. Burk argued that optimal software patent doctrine would constrain scope to deal with patent thicket while lowering the non-obviousness standard to validate more issued software patents.

David Mowery, University of California, Berkeley, Haas School of Business

Mr. Mowery revealed that software patenting has grown significantly in the United States since 1987 as a share of overall patent activity. He suggested that this trend has sparked a modest debate over the potential “chilling effects” of software patenting on technical progress in this important technical field.  He examined the causes of increased software patenting, examined the available data on trends in such patenting during the 1987-2003 period, and discussed some of the policy issues raised by software patents. He also analyzed the available data on trends in the “quality” of software patents during this period.

Mr. Mowery concluded that current data do not suggest strong links among increased patenting, R&D spending, vertical specialization, or (alternatively measured) innovative performance in the United States software industry, and that citation-based indicators do not reveal declines in the “quality” of large packaged-software firms’ patents during 1990s.

Starling David Hunter, MIT, Sloan School of Business
Mr. Hunter commented on Graham and Mowery’s paper, “Software Patents: Good News or Bad News?” as well as Burk and Lemley’s paper, “Designing Optimal Software Patents.”  He summarized several points of agreement: first, the need for appropriate incentives for economic activity; second, the need for a change in rules, policies, and laws; third, the necessity to place software patents in a “strategic” context; and fourth, proposals for the United States patent system to eschew sui generis solutions in favor of grounded, textual, and pragmatic ones. 

Question and Answer Session

The questions following the panel discussions reflected concerns about applying patents to the software and biotech industries.  One audience member wondered whether patenting often had nothing to do with innovation but was used as a signaling tool and or for a reduction in transaction costs.  Mr. Cockburn responded by noting that patents are often used as signaling devices to potential venture capitalists of whether a company will yield future returns, even though the patents may have no relation to future returns.  Mr. Cohen asserted that while this may be true, the signaling function varies across industries and technologies.  Another audience member was concerned about banning the protection of databases.  Ms. Rai argued that there is no need for additional protection of databases in the biological sciences.  Mr. Cockburn maintained that had the human genome project been patented at its outset, “it would have been a disaster.”