I appreciate having the opportunity to be here to present the current best thinking of our company on the subject of this hearing. If I'm making points that are not clear or deserve some comment or questions, please don't hesitate to interrupt. I think I'm scheduled to go most of my allotted time with my prepared remarks, but I want to communicate while I'm here this morning as best I can.
Microsoft is a developer and marketer and supporter of a very wide range of systems and applications software products for personal computers. By having helped to make it easier for users to work with their personal computers for an increasing number of purposes, the company's products have been able to contribute to what's sometimes referred to as the "PC revolution," which has occurred in the past 12 to 15 years. The growth of the company has paralleled an even more important statistic, which is the increase in the number of people who use personal computers in this country. About a million people were using personal computers in 1980; by today we estimate that probably 90 million or more people are using personal computers.
The software industry is a major contributor to the economy of this country. In the last five years, virtually every study of the key technologies of America's present and future have identified the vital role of computer software industry. Software is characterized by both its very rapid technological innovation and by the widespread use of that technology in downstream markets. Computer software improves the competitiveness of other industries in this country and around the world because it helps to make __ our products help to make those enterprises more efficient and more innovative, and it's the continuous evolution and enhancement and improvement of software products that permeates much of the economy of this country.
The US software industry has experienced quite remarkable growth. Measured over the past ten years, it is the fastest growing industry in this country by any rational measurement; it is now larger than all but four or five industries in this country's economy. The growth has been fueled by strong export performance by US companies; 75% of the world's sales of pre_packaged software come from US software companies; and the 100 largest American software companies earn more than 50% of their revenues from offshore sales.
The key to much of this is strong intellectual property protection, which we and our colleagues and competitors in the industry view as essential for US software industry to continue to compete globally and continue to play a leadership role in this nation's economy.
On this morning's subject of patent protection for computer software, we believe that the existing laws in the form of the statute and the regulations and the case law provide both an adequate and an appropriate framework in which to assess the patentability of software_related inventions. This is not to say however that the existing system cannot be improved, and we commend the patent office for its willingness to take a constructive view of that challenge.
We appreciate the Patent Office's commitment to the improvement of the examination process by increasing the number of examiners and the expertise of the examiners in software technology and providing better technical training for the examining corps.
We also agree that or support the Patent Office's decision to pursue some reform of the re_examination process. I read in the Commissioner's opening remarks from yesterday that there is some legislation forthcoming and we look forward to reviewing that and supporting it in a constructive manner, assuming it does things which we think are beneficial to the process. The advantage of reforms to the re_examination process are measured both in terms of a more efficient determination of patentability, but have the very handsome byproduct of reducing the threat of expensive and protracted litigation.
We believe the software industry would benefit from greater availability of prior art; this is not a novel subject to you experts or to the audience, but patent applicants need to know more about prior art, the office needs to know more about it, and parties to infringement actions or threatened infringement actions could benefit from better, earlier information about prior art. We are a participant in the Software Patent Institute's efforts to gather that prior art, and we are trying to exhort our colleagues and competitors to step up and make more technical information available, so that it can become part of a richer and more relevant database of prior art.
And finally, we think that the industry would benefit from a reduction in the average pendency of applications before the Patent Office. We don't presume to think that that's an easy matter to accomplish, but we think it's important; the more prompt issuance of patents will provide industry participants with a better return on their substantial investments in technology and in the patent process itself. That is particularly material for an industry like ours, which is so fast_moving and where today's invention is next year's afterthought.
With a commitment from both the industry and from the Patent Office to implement these kinds of changes and perhaps others that have been suggested or will be thought of, we believe that the existing system can mature in a fashion that effectively achieves the constitutional goals of stimulating and protecting innovation in a competitive context.
Let me try to respond to each of the questions that have been published for these hearings. Question one asks, What aspects or specific examples of software_related inventions should be protectable via the patent system?
Without addressing each example individually, Microsoft notes that this inquiry appears to subsume two basic issues. First of all, should patent protection be available in some form for inventions embodied in software; and secondly, if so, how should protection be characterized? As to the first issue, we do not believe that patent protection should be withheld from an invention that otherwise meets the statutory requirements for patentability, simply on the basis that the invention is or may be embodied in software. I think that point is reasonably well resolved by the courts and by the Patent Office at this stage.
With regard to the second question: The characterization of the protection, we favor claims structures that clearly recite those aspects of computer software_related inventions that are novel and unobvious, and allow an accused infringer to readily identify the activity or activities that may be proscribed under the claim. The success of a particular claim in meeting these objectives may depend, however, less on the form and more on the substance of the claim and the supporting specification.
As to question number two, the impact of software_related patents on the industry, Microsoft has never initiated an action for patent infringement. We have, however, unfortunately been the defendant in several lawsuits involving software_related patents. The defense of those suits has consumed considerable of our resources, resources we'd prefer to use in positive and constructive research and development efforts. Even so, we are committed to the existing patent system as a reasonable and responsible vehicle for protecting software innovation, particularly when that process is viewed in light of the ongoing effort being made by the Patent Office and the courts and more and more, I'm pleased to say, by the industry to improve the systems application to our technology.
The dichotomy illustrated by our position reflects the equity that we think can be achieved by the existing system in balancing the competing interests of protecting innovation on the one hand and preserving competitive freedom on the other hand.
One potential way of lessening the negative impact of software_related patents on the industry would be to consider again this subject of reform of the re_examination process. The threat of litigation involving a patent of questionable validity can be particularly damaging to a smaller company, which may not have the financial or the human resources to effectively challenge the patent's validity in the federal court process. Although the existing re_examination process affords a potential defendant an alternative venue in which to contest a patent's validity, the utility of the current re_examination process is limited by its ex parte nature and the limited scope of prior art that can be considered.
The Patent Office, the Patent Bar and industry participants should carefully consider whether these and other limitations on the existing re_examination process should be overcome.
Question number three addresses the implications of maintaining or altering the standards for patentability of software_related inventions. Microsoft believes there are several advantages to the maintenance of the existing standards. We're not suggesting they should be frozen, but we believe that they are fundamentally sound and there are reasons to continue to rely on them in the main.
Workability. Although the expression and application of the existing standards may not yet have fully matured, the standards have evolved slowly over a number of years and do provide a stable framework in which to assess the patentability of computer software_related inventions. Improvements have already been made. The Patent Office has already taken steps to improve the quality of examinations, as we've noted, and the software industry is working to enhance the effectiveness of the Patent Office's application of existing standards through, among other means, the work of the Software Patent Institute.
Thirdly, this is a way to avoid greater near_term uncertainty. Both the industry and government have made considerable strides in understanding and applying the existing system, particularly in the last few years. The introduction of some new statutory or regulatory standards would almost certainly present a new set of uncertainties or ambiguities, making a major revision perhaps more unsettling to the industry, at least in the short and perhaps the midterm.
And finally, there are investments that have been made under the current standards by industry members, and significant changes to the patent standards might compromise the value of those substantial investments.
Question four asks whether the existing framework of patent copyright, trade secret protection effectively protects and promotes innovation in the software field. Microsoft response to that would be, yes, it does. The importance in the growth of the software industry described earlier in my remarks has not occurred in a legal vacuum, as I'm sure you are all aware. As noted in the Patent Office's discussion of Topic A, the Supreme Court held in 1981 that the mere presence of a software_implemented mathematical algorithm in an invention does not automatically preclude the invention from being eligible to receive patent protection. Similarly, the copyright statute has expressly addressed the subject of computer programs since 1980. The maturation of the industry under the existing legal framework suggests that the framework is appropriate and that it is reasonably effective.
While copyright has been and is an important and effective tool for the software industry, that does not mean that there is no role for patent protection. Indeed, there is a large and growingly important role for patent protection.
Microsoft believes that the software patent law will continue to mature and we would trust rapidly enough to effectively support growing industry awareness and use of software patents.
The final question asks whether a new form of protection is required for computer programs. Microsoft does not believe that a new form of protection is required; the existing patent system has a long history which reflects an appropriate balance in protecting inventive technology. The system has served American industry well. We are aware of no compelling reasons at this time why it should not be continued to be applied and approved as it is applied to the field of computer software.
Thank you for this opportunity to share Microsoft's current thinking on this very important subject.