OR/MS Today - August 2003


INFORMS Online


Patently Labyrinthine

By Matthew Saltzman

Patents and copyrights are intended to be tools to foster innovation by granting limited monopolies to inventors and authors. The promotion of innovation through patents relies on a delicate balance between the monopoly rights of the innovators and the ability of competitors to improve on the innovation. The view that recent developments in intellectual property law have tipped the balance too far to the side of the innovator is gaining currency. A number of developments in patent law have contributed to this perception — among those of particular interest to INFORMS members are software and business practice patents.

As I described in my last column, a patent grants an inventor the right to exclude others from making, using, offering for sale, selling or importing his invention. From the summary page at www.law.cornell.edu/topics/patent.html:

"In order to be patented, an invention must be novel, useful and not of an obvious nature.... Such 'utility' patents are issued for four general types of inventions/discoveries: machines, human-made products, compositions of matter, and processing methods.... Changing technology has led to an ever-expanding understanding of what constitutes a human-made product. Specific additions to the Patent Act provide, in addition, for design and plant patents."

Patents cannot be obtained for laws of nature, natural phenomena or abstract ideas. Traditionally, mathematical formulas and algorithms have been excluded as abstract ideas. The usefulness of an innovation is rarely contested. The standards for novelty and non-obviousness require that the innovation not exist in the prior art, nor be obvious to someone of ordinary skill in the relevant art.

Before 1981, software and business processes were not considered patentable. In that year, the U.S. Supreme Court case Diamond v. Diehr upheld the patent of a software-controlled rubber curing process. Through the mid-1990s, the notion of software patentability was refined, but it remained the case that software as such was not patentable. Patents could be had on a software-intensive process, for example, software control of a mechanical process (Diamond v. Diehr), software manipulation of numbers representing concrete values (such as EKG or seismic data), or software embedded as an integral part of a machine.

In 1998, the U.S. Court of Appeals for the Federal Circuit Court heard State Street Bank & Trust Co. v. Signature Financial Group, Inc., in which a patent was granted for a certain method of managing a portfolio of mutual funds. The court held that a mathematical algorithm could be patented as long as it produces a "useful, concrete and tangible result," and did away with the exception for business methods. The finding that business processes were patentable was confirmed by the same court in 1999 in AT&T Corporation v. Excel Communications, Inc., although AT&T's patent on a method for producing a message record for a long-distance telephone call was eventually overturned on other grounds. Business process and software patents are closely linked, because patentable business processes generally are implemented as computer programs.

Recently, a number of patents have been filed or issued that have had or could have a significant effect on the conduct of the software business, e-commerce and business in general. Among the more controversial, high-profile items:

  • The RSA public-key cryptography patent (expired in September 2000).
  • Unisys's patent on the LWZ compression algorithm, which is part of the GIF format for image files (expired in June 2003).
  • Amazon.com's patent for "one-click" purchasing online.
  • Amazon.com's patent for "conducting a discussion relating to an item" for sale.
  • Netflix.com's patent on its method for renting DVDs online.
  • Priceline.com's patent on online "reverse auctions," in which the purchaser names a price and the first vendor willing to accept the price wins the sale.
  • SBC's patent on "having elements on a web page that don't change, yet apply directly to other parts of the page that do change."
  • Thompson Multimedia and Fraunhofer Institute's patent on features of the MP3 audio file format.
  • British Telecom's patent on a form of hyperlink (recently found by a U.S. court not to cover Web hyperlinks).
These are all U.S. cases. In September of this year, the European Parliament is scheduled to vote on changes to patent rules to bring them in line with U.S. rules.

Arguments in support of software patents follow the traditional arguments in favor of patents for anything: patents allow companies to protect their original work, and so encourage innovation and investment.

Critics of software/business practice patents raise a number of issues that they claim negatively affect innovation by stifling competition. For example, the economics of the patent process and patent litigation make it impossible for small developers to obtain patents or avoid infringing. In addition, the software development process is inherently incremental, so patents prevent innovation rather than encouraging it. Furthermore, software and business practice patents are frequently awarded despite failing the traditional tests of originality and non-obviousness.



Matthew Saltzman (mjs@ces.clemson.edu) is an associate professor of Mathematical Sciences at Clemson University and the editor of INFORMS Online.





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