BUSINESS AND FINANCIAL METHOD PATENTS, INNOVATION, AND POLICY
| Author | Bronwyn H. Hall |
| DOI | http://doi.org/10.1111/j.1467-9485.2009.00493.x |
| Published date | 01 September 2009 |
| Date | 01 September 2009 |
BUSINESS AND FINANCIAL METHOD
PATENTS, INNOVATION, AND POLICY
Bronwyn H. Hall
n
Abstract
Court decisions in the 1990s are widely viewed as having opened the door to a flood
of business method and financial patents at the US Patent and Trademark Office,
and to have also impacted other patent offices around the world. A number of
scholars, both legal and economic, have critiqued both the quality of these patents
and the decisions themselves. This paper reviews the history of business method and
financial patents briefly and then explores what economists know about the
relationship between the patent system and innovation, in order to draw some
tentative conclusions about their likely impact. It concludes by finding some
consensus in the literature about the problems associated with this particular
expansion of patentable subject matter, highlighting the remaining areas of
disagreement, and reviewing the various policy recommendations.
I Intro ductio n
The explosion in business method patent applications and grants that occurred
in 1999–2001 has abated somewhat, and the legal landscape has changed as a
result of several court decisions. However, the many policy questions raised by
the response of the financial, e-commerce, and software industries to the well-
known State Street Bank decision on the patentability of business methods
remain. Many scholars, bothlegal and economic, wrote on this topic shortly after
the decision and the accompanying increase in patents in this technological area.
1
Although much of this literature provides a fairlythorough analysis of individual
cases and what they signify, there was relatively little literature on the impact of
business method patents based on a more broad-based or empirical approach.
Notable exceptions to this are a series of studies of financial method patents by
Lerner (2001, 2006a,b) and some studies of business method or financial patents
by Allison and Tiller (2003), Hunt (2008), Wagner (2008), and Hall et al. (2009).
The current paper examines the evolution of patenting in this area and
reviews some of the literature on patents more broadly in an attempt to infer the
n
University of California at Berkeley, University of Maastricht, and NBER.
1
See, e.g., Bakels and Hugenholtz (2002), Bessen and Maskin (2006), Blind et al. (2001),
Cockburn (2001), Cohen and Lemley (2001), Davis (2002a,b), Dreyfuss (2000), Hart et al.
(1999), Hunt (2001b), Kasdan (1999), and Lerner (2001).
Scottish Journal of Political Economy, Vol. 56, No. 4, September 2009
r2009 The Author
Journal compilation r2009 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
443
implications of this literature for business method patents. The focus is on two
issues: the role of patents in encouraging innovation and the consequences of
low patent quality for the performance of the system. I begin by reviewing the
facts about business method patents briefly, and then survey what economists
know about the general relationship between patent systems and innovation, in
order to draw some implications for the likely impact of business method
patents on innovation in industry. A discussion of the patent quality issue is
followed by a summary of the policy recommendations made by those who have
followed the evolution of legal standards as both software and business methods
have become acceptable subject matter.
Most economists view the patent system as a necessary evil: with a patent
grant we trade off short-term exclusive (monopoly) rights to the use of an
invention in return for two things: (1) an incentive to create the innovation; and
(2) early publication of information about the innovation and its enablement.
The argument is that without the patent system, fewer innovations would be
produced, and those that were produced would be kept secret as much as
possible to protect the returns from misappropriation. Mazzoleni and Nelson
(1998) expand on this analysis and provide two further related arguments for the
existence of a patent system: it serves as an inducement for the needed
investments to develop and commercialize inventions, and it enables the ‘orderly
exploration of the broad prospects’ opened up by particularly novel inventions.
In considering the economic impacts of the implicit subject matter extension
implied by the increased use of patents to protect business methods, the tradeoff
between these benefits and the welfare cost of the grant of a monopoly right are
at least as important as they are in any other technological arena.
As our understanding of the uses and abuses of the patent system has grown,
other benefits (to competition) and costs (to innovation) have emerged as
important. Table 1 summarizes the basic dilemna: the patent system can
generate both benefits and costs, for both innovation and competition.
Economic analysis says first that competition may suffer when we grant a
monopoly right to the inventor of a business method but it will benefit if this
right facilitates entry into the industry by new and innovative firms, and allows
Table 1
Costs and benefits of the patent system
Effects on Benefits Costs
Innovation Creates an incentive for R&D Impedes the combination of new ideas and
inventions
Promotes the diffusion of ideas Raises transaction costs
Competition Facilitates entry of new small
firms with limited assets;
Creates short-term monopolies, which
may become long-term in network
industries
Allows trading of inventive
knowledge – markets for
technology
BRONWYN H. HALL444
r2009 The Author
Journal compilation r2009 Scottish Economic Society
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