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The case for stronger software and intellectual property protection.

As the information age progresses, the types of products we make and buy are evolving. The "information component" of goods is rising. The price of hardware continues to fall, while the price of software has risen or has remained constant. This trend will continue because manufacturing costs, a large portion of hardware costs, will continue to fall, while human intelligence costs, and therefore software costs, will keep rising.

Regulation of software is, like the industry itself, in its infancy. Governments all over the world are scrambling to update their copyright and patent laws to compete in the global information arena. As the world leader in software production, the United States has a large stake in making sure its laws do not sap the creative juices that have driven this growth engine.

One of the main inhibitors to growth in the software industry is piracy. The software piracy problem can be broken down into two categories. First, there is the theft of ideas from one company by another. A prime example of this is the suit between Apple and Microsoft. Apple claims that Microsoft stole the idea for its Windows software from the Apple Macintosh. In this case the plaintiff is charging not the copying of code, but the copying of the "look and feel" of the user interface in question.

In the world of integrated circuits, the fuzzy line between hardware and software has made for some lengthy lawsuits. The long-running battle between Intel and Cyrix over Cyrix's microprocessors and coprocessors continues. Intel has sued Cyrix, claiming that the upstart company copied the design for its enormously successful 80387 math coprocessor. Cyrix has sued Intel for trying to drive them out of business.

Corporate battle in the software and integrated circuit arena is expensive and experts see no quick solution to the controversy. A concern is the amount of money companies are spending on litigation that could be put into research and development. Legal fees, even for small software companies, can run into six figures.

The second category of software piracy is the seemingly harmless copying of programs by users. While sharing programs like this seems innocuous, the repercussions nationwide are surprising. The Software Publisher Association estimates that $2.4 billion in revenue was lost by American software companies in 1990 through illegal copying.

To make matters worse, copyright and patent laws can be woefully inadequate in dealing with technological issues such as these. Judges with little background in technology frequently issue precedent-setting rulings. Judge Vaughn Walker, who is presiding over the Apple/Microsoft case, had to get a day of instruction on the Macintosh before he could continue with the case.

The list of companies involved in intellectual property lawsuits reads like a who's who of the high-tech world: Lotus, Ashton-Tate, IBM, Fujitsu, Computer Associates, and the Santa Cruz Operation, to name a few. Yet computer software is only one element of the broader world of intellectual property. Examples of intellectual property being stolen include: Art Buchwald's claim that the story for the movie "Coming to America" had been stolen from him, imitation Cartier and Rolex watches on the streets of New York, and illegally photocopied chapters of textbooks given out in many universities. The impact of pirated intellectual property is enormous--$80 billion in lost sales and 250,000 in lost jobs annually. Piracy of movies, books, and recordings costs the entertainment industry over $4 billion each year.

Intellectual property now accounts for more than 25% annually of United States exports. The current number of lawsuits has risen to almost 6,000, from only 3,800 in 1980. In 1990, over 170,000 patents were filed in the United States, a 39% increase over 1985.

Companies have recognized that intellectual property rights can mean large gains or losses on the balance sheet. Texas Instruments, one of the most aggressive defenders of its patent portfolio, earned $256 million in licensing fees in 1991. It is estimated they will earn up to $350 million in 1992. Rodime, a Scottish company collected over $16 million for patent violations on its 3.5-inch disc drive design. Lawsuits amounting to $50 million were pending against companies such as Sony, Hitachi, and Fujitsu when Rodime declared bankruptcy.


What are the weapons available to American companies for protecting intellectual property? The legal means can be divided into three main categories: patents, copyrights, and trade secrets. Software is usually protected by copyrights, which protect expressions of ideas, while patents normally cover inventions. Copyrights are designed to protect the software code itself and the screens the user sees. Patents protect the underlying functionality.

Patents are the strongest form of protection, providing 17 years of monopoly on an idea. Some companies have been successful using trade secrets to protect their ideas. While trade secrets provide less legal protection than patents and copyrights, the secrets are never published. Patents are published at the end of the protection period. Coca-Cola has for years successfully used trade secrets to protect its formula.

In the international arena, things can get complicated. Companies that compete globally have become adept at defending their intellectual property rights. In Japan, the battles have become heated over patents and cross-licensing. There is a fundamental difference in the philosophy of Japanese intellectual property laws and those of the U.S. In Japan, laws are designed to help spread technology, a reflection of the teamwork on which their society thrives. In the U.S., laws are designed to prevent the theft of ideas and protect the individual inventor.

Fusion Systems of Rockville, Maryland, has been in a bitter struggle with Mitsubishi over the rights to a microwave lamp design it was selling in Japan. Mitsubishi purchased one of the lamps, then reverse-engineered it and brought a very similar product to market. In the meantime Mitsubishi had filed 300 patents on various features of the lamp including such mundane features as a simple clamp on the end. Mitsubishi claimed that it had the rights to this product and fought for a cross-licensing agreement from Fusion Systems.

While Europe is moving to unify its patent laws, they are anything but uniform right now. The Munich-based European Patent Office (EPO) issues a single European patent that is registered in 15 countries. The problem is that different countries interpret cases from the EPO differently. British and German courts have disagreed recently on electronics patents. The Patent Cooperation Treaty has been signed by 49 nations. This treaty requires filing at the EPO or other countries' offices. The treaty is seen as a first step in simplifying patents across national borders.

Europe, like Japan, grants priority to the first to file an application. In the U.S., the priority goes to the first to invent regardless of filing date. Europe generally does not recognize a U.S. patent unless one is filed in Europe within one year of a U.S. filing.

In Latin America and countries of the Far East, intellectual property laws are changing rapidly. These nations have recognized that to be part of the information society they will have to offer protection of ideas. Thailand has been one of the worst violators.

Pirated copies of software and American movies are available in Bangkok for a fraction of list price. Mexico and Brazil have recently upgraded their laws to provide more protection. In Mexico, the protection period for trademark licensing was extended to ten years. Brazil, long a stronghold of software piracy, has upgraded its laws to be compatible with those of other countries. Software vendors have taken notice of the large untapped market for software in Brazil and other Latin nations. For years, countries of the Third World viewed intellectual property as a vestige of U.S. imperialism and saw no harm in copying. Fortunately, this attitude is changing.


The world of intellectual property rights, and software in particular, offers a stiff challenge to governments around the world. The U.S. government has implemented changes to modernize its system. One of the most important changes was the complete overhaul of the patent and trademark court system in 1982. Before this new system was set up, 70% of all challenges were successful (meaning the original patent holder lost). Since then, patents have been upheld in over 60% of the cases.

The government must be careful, however, not to interpret the law too tightly and stifle innovation. This is particularly important in the software market. Programmers tend to be mavericks who need to be able to use the latest techniques for their work. There is also the problem of high turnover in technology-rich areas such as Silicon Valley and the Northeast. If programmers have to look over their shoulders or consult a lawyer every time they release a new product, the U.S.'s lead in software could be jeopardized.

Mr. Dunaway is with Silicon Graphics in Dallas, Texas.
COPYRIGHT 1992 University of Memphis
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Dunaway, David
Publication:Business Perspectives
Date:Mar 22, 1992
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