JANUARY 26, 1994 AFTERNOON SESSION __o0o__ COMMISSIONER LEHMAN: Looks like we have a somewhat_dwindled group, but still an impressive audience for this afternoon. Thanks for sticking with us. Our next witness, to start us off this afternoon, is going to be Jerry Baker, Senior Vice_President of the Oracle Corporation, and please accept our apologies, Mr. Baker, for our starting a couple minutes late. Do you want to come forward? __o0o__ JERRY BAKER ORACLE CORPORATION MR. BAKER: Good afternoon, distinguished representatives of the United States Patent and Trademark Office, and members of the public. I am Jerry Baker, Senior Vice_President of Oracle Corpora- tion and head of the company's product line development organiza- tion. Oracle is now a one and one half billion dollar company employing over eleven thousand people worldwide. At Oracle we believe that patents are inappropriate means for protecting software and are concerned that the patent system is on the brink of having a de- vastating impact on the software industry. In our opinion, copy- right and trade secret law is satisfactory to protect the developer's rights in software and to promote innovation in our industry. I commend you, Commissioner LEHMAN, for the foresightedness to recognize this imminent threat, and to hold these hearings. This Administration has shown tremendous strength of character by raising such fundamental questions about its mission and objec- tives, and I applaud you for doing so. As we proceed through these hearings let us always keep sight of the U.S. Constitution- al mandate for the patent system, to promote the progressLscience and useful arts. I cannot find any evidence that patents for software will tend to achieve this purpose. indeed, every indica- tion is to the contrary. I will attempt to explain Oracle's thesis within the framework of the questions the PTO has propounded for this hearing. First, you ask, "What aspects of software_related invention should or should not be protectable through the patent system?" The examples specified in the question illustrate part of the problem. Software is fundamentally different from what the PTO is used to seeing. In many other industries the policy rationale for patent protection is understandable. In exchange for making their in- ventions available to the public, patent holders are rewarded with a seventeen_year monopoly, giving them exclusive right to this new technology. In cases where an inventor has committed substantial capital resources to the invention, this opportunity to monopolize the commercial application of the invention is jus- tified not simply as a reward Pas an incentive to motivate the developer to dedicate time and money necessary for innovation, design, production, marketing and distribution. This policy, however, does not fit well with the software indus- try. Unlike many manufacturing_intensive industries, innovation and development of software products is very rapid. Although there may be substantial development expenditure, there is an ab- sence of tooling and production is accomplished almost instan- taneously. As a result, software improvements are quickly incor- porated into new versions, making product cycles very short. Be- cause a patent takes two or more years from application to is- suance, well into a product's projected life cycle, patents do not motivate companies to invest in the development, design, pro- duction and distribution of their products. In this environment a seventeen_year monopoly is completely out of context with in- dustry reality. Software varies from manufacturing in another key aspect. The en- gineering and mechanical inventionTr which patent protection was devised are often characterized by large building_block inven- tions that can revolutionize a given mechanical process. Software seldom includes substantial leaps in technology, but rather consists of adept combinations of several ideas. A com- plex program may contain numerous established concepts and algo- rithms as well as a multitude of innovative ideas. Whether a software program is a good one does not generally depend as much on the newness of each specific technique, but instead depends on how well these are incorporated into the unique combination of known algorithms and methods. Patents simply should not protect such a technology. The scope of what is protectable is a core issue with tremendous impact to anyone in the software industry. Oracle's answer to your question is that none of the cited examples should be pro- tectable with the possible exception of Example F, which is not truly a software innovation, but rather an otherwise_patentable invention that just happeXo be implemented on a computer. Next, although Oracle has not yet been a defendant in a patent infringement suit, it is probably just a matter of time before we are. Our engineers and patent counsel have advised me that it may be virtually impossible to develop a complicated software product today without infringing numerous broad existing patents. Since the validity of many issued software patents is highly question- able and because Oracle is a company with sizeable resources with which to defend a lawsuit, many patent holders must be reticent to litigate an infringement action against us. Further, as a de- fensive strategy, Oracle has expended substantial money and ef- fort to protect itself by selectively applying for patents which will present the best opportunities for cross_licensing between Oracle and other companies who may allege patent infringement. If such a claimant is also a software developer and marketer, we would hope to be able to use our pending patent applications to cross_license and c0e our business unchanged. But not all infringement plaintiffs are in the software business, and we would be forced to either pay royalties or risk an expen- sive lawsuit. Thus, to answer your next question, only if patent eligibility standards were dramatically limited could we expect to see a positive implication in the industry. And most positive would be for no software to be patentable at all. Your next question takes us back to the Constitutional issue. Do software patents promote innovation in the field of software? The U.S. software industry has evolved to a multibillion dollar industry that leads the world in productivity and accounts for a substantial portion of the U.S. GDP. The software industry has advanced the efficiency of other industries through the proli- feration of computing and computer_controlled processes. All of these gains have come prior to the application of the patent pro- cess to software, and consequently without patent protection for software. Software companies succe`nly because they continue to be innovative in bringing new and better products to the market, and these very market forces will continue to drive the software industry without patenting of software. Finally, you asked whether a new form of protection for computer programs is needed. We do not believe one is necessary. Existing copyright law and available trade secret protections have proved very well suited to protecting computer software and they have done so in a manner that is not disruptive to software develop- ment. Copyright protects software as soon as it is written, without the expenditure of time and money on prior art searches and registration. Since computer software is considered a work of authorship under copyright law, the entire software program including each portion of code as well as the derivatives thereof are protected from copying. Developers may write software code without fear of infringing the rights of others, so long as they do not copy other developer's works. Copyright lawdourages inno- vation since it allows everyone to take advantage of improvements in technology while protecting developers from having their specific works copied or appropriated. At the same time, trade secret law protects developments that have not been disclosed beyond the development team. Many com- panies are successful in using trade secrets to establish market prominence, while the competition hurries to catch up. Oracle has recommended that patent protection be eliminated for computer software and computer software algorithms because software patents are failing to achieve the Constitutional man- date of promoting innovation and indeed are having a chilling ef- fect on innovative activity in our industry and because software is fundamentally different from manufactured products and these differences justify different treatment under the law. Nevertheless, if patent law continues to apply to software, we believe that fundamental changes must be made in patent policy and procedure. Our recommendations ho way endorse the use of pa- tents for protecting software, but the recommended changes could serve to assuage the existing problems if patents must ultimately affect software development. However, we believe that making the necessary changes to the pa- tent system will prove to be highly difficult to achieve. Patent law must be consistent throughout the world, and if it is to be applicable to software, it should encompass much shorter periods of protection than exist now, unified prior art searching capa- bilities, equal standards of novelty, the elimination of patent rules that allow patent flooding, and identical standards for prior_use restriction. Because the evolution of software moves very quickly, the term of software protection should be cut back accordingly from the current seventeen years from grant date to three years from the application date, that is, the application period must be dramat- ically reduced. A balance of fifty years protection for direct copying of code would continue to be provilby copyright law. Also key to the success of the patent system for the software in- dustry are the following changes. First, the prior art capabili- ties of PTO workers must be vastly improved to conform effective- ly the novelty and nonobviousness of the software patent that is the subject of applications. New classifications as well as an effort to record the current state of prior art would be neces- sary. This is conceptually a daunting task. Most software inno- vation is not recorded for public availability. Instead it is held as trade secrets. The Software Patent Institute has been formed to build a database to assist the PTO with finding prior art, and while the SPI's in- tentions are admirable, it is inconceivable that developers, small and large, will be willing to give up their trade secrets or even to devote the substantial time needed to evaluate, draft and submit evidence of existing art to the SPI database. Second, because the unusual speed with which software innovations are incorporated inpducts, the PTO's patent review process must be made more efficient. It should take no more than six months from application to registration. In the software industry where a patent application typically takes two or more years to pro- cess, the patented invention is frequently either widely used or obsolete by the time the registration is issued and the public discovers it is protected by a patent. Third, examiners skilled in computer science and software pro- gramming must be trained on the nature of software inventions and the state of existing art. Many more qualified examiners must be employed at the PTO. Compensation rates equal to those provided by the industry are essential to recruit qualified personnel and to retain them at the PTO. Fourth, the PTO in conjunction with industry must establish addi- tional committees to clearly delineate the standards of novelty and nonobviousness that will be required for software inventions to receive patents. Thank you for affording me the opportunity to speaktay. I again commend the PTO for its willingness to face this very difficult but extremely important issue. COMMISSIONER LEHMAN: Thank you very much, Mr. Baker, I really appreciate your coming to us. I would love to ask a bunch of questions, but I think since we got a little bit of a late start we move on, so, thank you. Next I'd like to call Carl Silverman, Chief Counsel at Intel Cor- poration.