Negligent to ignore software patents?

Intellectual Property Rights, including patents and trademarks, promote innovation and creativity. They also form a valuable business asset when running a business successfully. A patent for a new business idea or new software could become a ticket to extraordinary wealth and success but on the other hand the costs of not patenting can lead to huge financial and strategic losses.

We report here the conclusion of a two week study by a German economics student working with some of our patent attorneys who practice in the software sector in our Midlands office.

When it comes to software patents there are differences to other technical areas: in the 1950s, 60s, and 70s, the United States Patent and Trademark Office (USPTO) did not grant a patent if the invention was purely a calculation by a computer, so patents could only be granted to processes, machines, articles of manufacture, and compositions of matter themselves. During this time, confidentiality and trade secrets were used as the primary method of protection of such computer based inventions.

The Diamond v. Diehr decision in the U.S. Supreme Court in 1981 opened the gates for software patents: in this case the USPTO was ordered to grant a patent on an invention, even though computer software was used. After this point, more patents on software began to be granted. But by this time it was too late for companies like Xerox or VisiCalc for some of their pioneering software developments.

VisiCalc was disclosed to the public in 1979. It was the first spreadsheet program available for personal computers and conceived by Dan Bricklin. Later more powerful clones of VisiCalc like Quattro Pro, Lotus 1-2-3, and Microsoft Excel were used. Despite being such a revolutionary idea, Bricklin failed to profit significantly from his invention, because he was advised that he would be unlikely to be granted a patent for it! Spreadsheet programs such a Microsoft Excel and Lotus 1-2-3 are used by tens of millions of people today and earn their manufacturers hundreds of millions of dollars.

However, even though Bricklin's spreadsheet was the original from which all others were copied, he did not receive any elements of those riches. A lack of patent protection for VisiCalc plus other business mistakes deprived Bricklin of greater glory - not to mention fortune.

"Companies that are good at managing IP will win, and ones that are not will lose".

The evidence behind this statement can be also shown by the example of Xerox and its invention of graphical user interface (GUI). A GUI provides a visual environment to present information with graphical icons, menus, dialogue boxes and other graphical entities that can be selected and manipulated by a user with a mouse or a keyboard.

Failure to patent the results of innovative research can lead to unbelievable losses, as is evidenced by Xerox's decision in 1979 not to patent its invention of GUI that later formed the basis of Apple Macintosh operating system and Microsoft's Windows personal computer operation systems. Xerox did not have a real chance to make money out of GUI invention, since the invention was so far ahead of its time. Xerox could have been more dominant than other companies are today if their management had had the vision to realise the value of what they'd created.

Had Xerox patented the GUI, then even at a very conservative royalty rate of 1% of sales, the license fees that Xerox might have earned between 1984 and 1998 from sales of Macintosh and Windows operating system software are estimated to have topped half a billion dollars.

But if you have the vision to realise the value of what you had created, and you focus on intellectual property, it could lead to huge success and wealth as in the case of Dell or Jay Walker's Priceline.

Dell secured 4 patents on its build-to-order direct sales model and has 28 other patents still pending on this system, which may also soon be granted. For example US patent number 5,894,571 is entitled "Process for configuring software in build-to-order computer system". This model enables buyers to order a custom-configured PC via the Internet or a 0800 number. These orders are processed through continuous-flow manufacturing, configuration, and customer service operations for delivery to home or office within 72 hours. Dell's patents cover not only the on-line customer-configurable ordering system, but also the way it is integrated into the company's manufacturing, inventory, distribution, and customer service operations. In short, Dell has patented its pioneering method of doing business.

In 1988 Dell conducted initial public offering (IPO) of company stock; 3.5 million Shares at $ 8.50 each. In 1995 shares of Dell stock were worth $ 100 on a presplit basis. In 2000 the company sales via Internet reached $ 50 million per day. In 2001 for the first time, Dell ranked No.1 in the global market share.

For Dell, its build-to-order system has resulted in the highest margins and the lowest manufacturing and inventory costs in the industry and the fervent loyalty of millions of satisfied customers; so Dell's success does not just make the shareholders celebrate. In 2002 U.S. consumers choose Dell as their No.1 computer systems provider. So at least Dell's highly strategic approach to patenting seems to work brilliantly.

A patent for a new business idea could become a ticket to extraordinary wealth and success, especially in the e-commerce sector of the Internet.

In the case of Jay Walker's Priceline it began with a simple idea: let customers bid on the 500,000 airplane seats that go unsold each day. Jay Walker put his idea online in April 1998, he gambled that with the power of the Internet, his concept could usher in a new era in airline pricing by allowing people to name their own prices on seats that would otherwise remain empty. In the first year of operation Priceline.com built the second most-recognized e-commerce brand on the Internet with an overall awareness for travel products six times greater than Expedia. By mid-1999, Walker's company started expanding its product offerings, with a similar "name your price" deal an hotel rooms in over 1000 US cities.

Priceline.com's fortunes are tied to a new model of e-commerce, but it's not just a new model of e-commerce - it's a patented new model. Priceline.com holds three U.S. patents covering its buyer-driven commerce system and related elements.

During the second quarter of 1999 Priceline.com's business began to scale rapidly: The first $ 100 million-plus revenue quarter, passing the 2 000 000 customer mark, and leisure airline ticket sales that grew more than 1000% over the same quarter in 1998.

Priceline continues to enjoy tremendous popularity among its users, and in two years the company gained 4 million customers and is still going strong, selling 40,000 airline tickets every week in 2004. Priceline has been doing so well that it now licenses out its business model to companies like Budget Rent-A-Car and Alliance Mortgage. Another mark of its success is the company's expansion into Asia and the Pacific.

However you try to manage in business competition, a fact is that patents will be key in establishing the winners and losers.

Xenia Neumann, Economic student, University of Hanover, Germany
Dr. Karl Barnfather, Withers & Rogers LLP, Leamington Spa, UK