July 3, 2003

Terry Fisher on Proprietary Legal Strategies in Computer Software [8:05 pm]

(entry last updated: 2003-07-03 20:34:07)

(Hoo boy; on rereading, it’s clear I was getting pretty tired here. I have done a little editing, but more probably ought to be done)

This presentation is going to be awkward, in that the schedule change means that you already got to hear the debate, and you only heard from Yochai on open source; and you didn’t have this part. Sorry

Because of the depth of the earlier discussion, I can probably go faster than I expected. Here we go

Four regimes that can be used to protect software: trade secret law, copyright, patent and contracts

Roughly speaking trade secret and copyright are becoming less important, and the other two are becoming more important. I think I will be laying the foundation for the proposition that, between these various systems, my view is not a clear cut as Larry’s that patent protection is necessarily bad. In particular, if construed properly, patents might be better. And, in fact, the real danger is the in the domain of contracts

Trade secret law is potentially a basis for protection because of the difference between source code and object code. In order to shield, one only reveals the object code; and the legal system steps into protect the secret of the source code via trade secrets. Note that trade secret law is state law; in some states it’s common law, in some states it’s statutory. Specifics differ by jurisdiction, but only in small ways.

Trade secrets are (a) Information pertainting to manufacture; (b) processes for treating or preserving materials; (c) information relating to business operations; (d) consumer lists; computer programs; (e) single or ephemeral events and (f) negative information (note a socially pernicious effect - the waste of monies chasing something that is already known by others to be a failure).

So this is an opportunity. How to achieve this protection. First, the information must have been secret initially (and possibly novel). A reasonable effort must have made to keep the secret (efforts to signal the intent to protect, rather than something stringent, like retinal scans). And the information must be commercially valuable

How to show liability - two circumstances (1) the defendant got the information via a breach of confidence (usually migration of employees previously or still under contract); (2) or “improper means” - mostly actions that are independently illegal (B&E, etc). It does include actions otherwise legal; the duPont decision - a competitor hires a plane before the roof on a plant is finished to take pictures and is found to have infringed.

The key doctrine that weakens this protection is that which makes reverse engineering permissible. So, buying a copy of a piece of software, and debug/decompiling, you are perfectly in the clear.


Software is added to copyright as a consequence of Congressional action following the 1977 CONTU (1978 Act). So, software is like a novel, musical composition, etc. The author enjoys the standard entitlements. Exceptions are fair use, merger (part of the idea/expression distinction - when there are only a few possible ways to express an idea, the principle that ideas are not protected dominates, so copyright does not obtain if there are only a few ways to implement the idea in software), and “essential” or “archival” copying.

Apple v. Franklin (CA3 1983) - Franklin copied the Apple OS so that user applications could run on its hardware. Franklin is sued; stipulates copying, but asserts that the only way to run Apple applications requires the Apple OS - a claim that the merger doctrine applies. Court says - NO; Franklin goes out of business.

Under TRIPS (146 countries), the principle is extended to the rest of the world. Article 10 says that source and object codes are protected by copyright. Articles 11, 12 and 13 limit the ability of countries to modify the standard copyright provisions for computer programs.

Yet, there is a diminishing of copyright protection as an exploited strategy. Certain judicial interpretations have been unfavorable to the copyright owner. Nonliteral copying of programs (how close a similar function is too close?) - after offering relatively broad protection, the Altai case leads to a sharper look at the nature of the similarity, requiring a consideration of an analysis of the program at the abstract functional level - leading to less protection to the copyright holder.

Reverse engineering to achieve interoperability is also not an infringement. Development of code to work around lockout is a fair use.

Menu hierarchies are not copyrightable (the Lotus look and feel cases) - on the grounds that a menu hierarchy is a method of operation and thus un-copyrightable

(Jonathan described working on MS Excel 3. There, he was workinf on finding menu text that would be (a) synonymous with the Lotus structure and (b) containing the same key letter so that the same keystroke sequence would generate the same program action in 123 and Excel. After a dispiriting run through the thesaurus, Z’s team hit upon a different approach - the 123 user help system/tutor. Initiated by the forward slash, the same function initiator as 123, the tutor would process the subsequent keystrokes and inform the user that the Excel keystrokes to achieve the same task were as follows, and then would execute as a demonstration. The consequence was that the parser would use the 123 menu hierarchy, even though the formal Excel hierarchy was something else, and Lotus was perfectly happy to accept this approash as non-infringing.)

Ineffective enforcement: the Business Software Alliance’s statistics assuming that loss = copies in use. The world piracy rate is rising overall, especially in Asia. As the piracy rate rises, the presumption that you should be protected falls (you aren’t trying hard enough to protect) - so trouble here too

Patent Protection:

The US is the pioneer in this treatment - in Gottschalk v Benson, the patent is disallowed because software is just an algorithm; Diamond v. Diehr (US 1981) software in hardware patentable. And finally, the Federal Circuit relaxes the impediments. For a while, it has to be combined with a machine; then running on a microprocessor, etc.

Approximately 300,000 applications per year; about half granted - and the trend is up.

How do the doctrines of patent law get applied in this setting; utility, novelty, obviousness and disclosure - in software, the obviousness hurdle is made more difficult to surmount, while the enablement hurdle is lowered - so source code does not have to be disclosed.

Q: How big a deal would it be to remove patent protection for software? Terry: not sure; Another practitioner: I don’t know how to answer. Software will continue to get written, but new activities are likely to be undertaken at a lower rate. More than likely a turn to contract.

We’ll come back to patents, and let’s turn to contract. No given the questioning, we better go with it now. Patent protection has the merit of being harder to get, so the number of programs shielded is substantially lower. Another way in which patent protection is narrower: copyright requires substantial similarity, while the patent law requires that the plaintiff’s patent infringement claim requires a showing that ALL the patent’s claims are infringed (that seems wrong to me - I’m not sure I got it).

We could change the rules so that disclosure is required, and we allow reverse engineering for interoperability as we do is copyright. With this and other adjustments, it’s possible to argue that patent law might be a less onerous property domain.

Politically, however, we have the situation that patents are easier to take away from software writers as a mechanism for protection than copyright ever will be.


Contract law is much more protective. Shrinkwrap licenses and click-on licenses include a host of restraints, removing many of the protections in fair use, first sale, etc. substantially more generous than copyright.

It’s not clear if these things are enforceable. The UCITA effort tried to accomplish this - and luckily a host of law professors managed to head this off. A mixed bag on whether copyright preempts state contract law. Some have been found to be preempted and some not. Bowers most recently says no preemption, in this case on reverse engineering.

So, contract law is the most noxious-looking one of these domains.


Q: Are there any new UCITA efforts out there? Terry: So far, no, but there’s still the case that individual judges could elect follow it anyway

Q: Jim Flower - UCITA was too onerous to try to rearrange the Georgia Code; states viewed it with suspicion, particularly given that they at least understood the law. Inertia as a social benefit in this case.

Q: Does not the difficulty of getting patents lead to distribution effects - low income participation in patenting is unavailable. Terry: You are right that there is a clear disproportionate effect in the favor of those with the resources to pursue patents.

Q: Where does Lexmark fit into this reverse engineering for interop? Terry: The DMCA provisions are distinguishable and able to override the reverse engineering doctrine. The viability of the escape hatch might have been decided in the presence of the DMCA

Q: the SCO case does not include a copyright claim - why not?

Z: The family tree through with the ownership of the unix code to SCO is so convoluted that it’s not clear that SCO know what copyrights they own. So SCO is working to keep it in state courts, and possibly leaving them the option to bring up copyright later.

IMHO, this probably was poor performance on my part here - be sure to check out the other weblogs that Donna cites here

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Larry Lessig and Jason Matusow: Open Source and Proprietary Software [6:47 pm]

(entry last updated: 2003-07-03 18:55:46)

Charlie: I’m here to moderate this discussion: Larry as the pessimist that free software will be swamped; and Jason believes in coexistence. And it’s going to be up to the audience to get the discussion going. 15 minutes each for Jason and Larry on their respective sides. This is their third meeting.

Larry: The last time we met it was Brazil. Here’s the story I want to tell; laying out some distinctions and then speaking on the importance of free software. Larry’s skepticism is whether there will be coexistence

The words we will be fighting about will be free, open, shared and proprietary. I’m going to focus on the copyleft software, contrasting it with proprietary software. Free software gives you the machine plus the plans, while proprietary software gives you a machine. A number of humorous distinctions between the degree to which the user is empowered.

Jason will put shared source between these two extremes - Jason will explain that.

I want to talk about the advantages that come along. There’s zero price; good code; does the code teach others; does the code enable strategic behavior; is there a mode that destroys intellectual property?

open free shared proprietary
“free” y y m n
good y y y y
teach all all some none
strategy unlikely never y, hard y
destroy n ? ? n

There are a series of characteristics that each of the four classes of software within this heirarchy

Businesses that engage in the business of using and building copylefted software, that kind of software will make it very hard for a business to be made around software - threatens to undermine the ability of a business to protect any of its software - the fuzziness of derivative work gets the firm into terrible problems - viral. It’s a question that free software and shared source software both come with some kinds of encumbrances; so it may be that both are viral.

The key thing is to recognize that both introduce conditions upon the user. Copyleft dictates the nature of release; proprietary software says you have no right, even with $$, to distribute or modify.

Which should we prefer? Who’s the we? Microsoft has acknowledged that free software is a threat. From Microsoft’s perspective this is a threat to their business model. Governments have expressed an increased interest in using free software. Oregon initiative. Peru has also pushed this, articulating a set of values that have to do with freedom of access, permanence of data and security, free software is appropriate. Germany; UK Commission (Barton - see earlier) on developing company; the US DoD.

So the notion of transparency, efficiency, security, and a rich ecology all support free software initiatives.

Microsoft has resisted narrowly; the US government should avoid GPL because (1) IP protection is fundamental to software business; (2) GPL undermines this by prohibiting certain kinds of licensing - commercial but not proprietary; (3) Code developed under the GPL by the government is now not available to proprietary software businesses - a loss to these taxpaying firms. So what is the principle - government should not promote models of development that foreclose some business models. If so, this rule cuts both ways - government could only support public domain software under this principle.

Jason Matusow: [Jason gets his punches back] And Larry gets a Darth Vader cape, and a light sabre - and Larry looks quite fetching!!

I’m going to start with giving the Microsoft perspective, rather than directly treating Larry’s points.

Part of this discussion has been at the product level, and I’m not here to talk about the relative merits of specific applications. Rather, I’m talking at a somewhat higher level

There has been a cycle of innovation within a number of communities, including the government, academia, industry and consumers. This cycle has led to the products that have become commercial products. TCP/IP as an example. While the e2e design is a part of the success, the commercial development in hardware is at least as big a part.

Most software development is a product of private investment. The government investment is very small, in comparison with the private investment.

The discussion becomes a split around the question of whether the business of software is directly commercializable, indirectly through services, or not at all - and Microsoft believes in direct commercialization.

There are many ways to build software product; and good products emerge from these different models.

Turning to commercial and noncommercial software. Red Hat is commercializing Linux directly, just as Microsoft does. Red Hat is striving to become more commercialized. So there is commercialized open source.

The industry is moving to the middle. There are both closed and open source elements of many of the business strategies we see today. Both community and proprietary based work.

Much of what is going on has been the issue of commoditization of software. The market value in software is all about the innovative changes done on top of the commodity elements. If the commodity elements dominate, then the space for innovative distinction gets narrower.

Microsoft wants to maintain the space for competitive innovation in the software space. And to extend that as far as possible.

And why all this focus on source code? Transparency is critical, I agree. Transparency increases trust. But, it’s not clear what’s wanted. 68% want to see source, less than 5% have actually looked, and less than 1% will modify the source.

This means that the real need is trust, not access. Shared source initiative is the effort to work to build this trust around a mechanism for sharing source.

The OSI list of licenses is very lengthy; with 9 direct derivatives of the GPL. Microsoft has also tried non-commercial licenses; and other variants. There are lots of ways that we are licensing to stimulate innovation. And the Windows source is available, but it’s not open source - it’s shared source.

So we’re looking for the balance on commercialization and licensing

Charlie: What question would you most like the other to address.

Larry (likes his cape!): First, we agree on transparancy. So, is Microsoft being transparent about its motives for shared software. If there are all these models, and governments should not be banning things - on either side. Yet, these initiatives keep appearing. So, what is should be the government role?

Jason: We have been very clear - we don’t like the GPL; relative to governments, I have been asked about procurement preferences. Microsoft believes that there should not be procurement preferences based on development models, but should instead be based on value for money. Agreement with the OSS representatives there.

The Mitre Report is possibly biased; moreover, Microsoft has never said don’t use GPL, but you should make sure that you understand the license. And the technology transfer requirements of the US government mean that there will be some implications of the developemnt of GPL software.

Larry: Followup - you said two things about value. I agree that the government shouldn’t discriminate on development models. But what does value mean? It’s not just financial?

Jason: Agreed

Larry: So developing countries should go with open source

Jason: I agree up to the point that it becomes a mandate, rather than a rational choice.

Larry: The gove’t could articulate the appropriate values in legislation, right?

Jason: Could be, I guess. But I worry about the legislative element. But what happens, then, when they build the knowledge base up (c.f., India). And unique things are developed. But the GPL locks him out of direct commercialization of that unique thing. And don’t governments have an interest in making that work?

Larry: In the case that I gave, the government can choose what parts are GPL and what parts are not GPL. And governments can choose where the commodity and the innovation spaces should be.

Jason: Windows Server 2003 - with file sharing in transactional, but I’m not going to do it using SMB - and when I innovate in that space, shouldn’t I be allowed to claim commercial rights to that?

Larry: But the government shoudl be allowed to set make the choice.

Now Jason gets to ask his question (Larry brandishes his light sabre): Is direct commercialization of software always bad? Software patents are bad?

Larry: Lots of direct commercialization is good. The fundamentally different question is whether or not software patents are bad - software patents are bad because of the awfulness of the patent system as applied to software. These are separate issues - one is the action, and one is the protection methods.

Jason: You started a discussion: if transparency is good, and opening source is good, has the relative importance of patenting become more important (versus trade secret) in this space to ensure commercialization?

Larry: Brad Smith and I agreed that there might be a better patent system that would make software patents lead to more opening of ideas. But in the real world, software patents are bad because the existing systems is terribly poor at doing this, and managing it poor - especially measured against the benefit.

Jason: Software patents are good in that they are available to be defensive in nature. I am in favor of these patents

Larry: Craig Mundie went further, claiming that they would be used offensively, rather than defensively.

Jason: IBM is patenting a lot of stuff, too, in their patent portfolio.

Charlie: I’m asking the audience to formulate some questions that will sharpen the distinctions between these two perspectives.

Q: You say s/w patents will be used defensively, then it’s hard to see what’s the benefit - if they didn’t exist at tall, you also wouldn’t have to acti defensively.

Jason: But it does exist, so we have to. It might be true, but the system does exist in this form.

Larry: Microsoft is working to ensure that they can indemnify others against IP problems be working through the IP issues that our firm might face. A fallout from the SCO case. Larry explains the SCO/IBM case - Microsoft settled, reinforcing the case against the other defendants (Jason: that’s an interpretation)

Larry: The Gates memo on IP; arguing that patenting as much as possible to defend against problems and (possibly) new entrants.

Jason: This e-mail was lamenting the situation, not gloating over it.

Q: from Etienne - What about open data formats, rather than open source.

Jason: This is pushed hard, and there are open data formats that are available today. Some are simplistic, ASCII; more elaborate, like HTML, XML, RTF. This could be required, and governments could require that. But they don’t - because the higher functionality that is the competitive differentiator is demanded.

Larry: Should governments be allowed to require that all documents be in Word? Jason: Legislated? Larry: Yes; Jason: No

Q from Renata: Isn’t shared source look but don’t touch? And isn’t that a transparency issue?

Jason: Some licenses are touch - and we give significant access to sovereign governments and 3 supranational organizations, as well as documentation. And the question is that will we go after others who we believe have used our source? The answer is that, under the notion of derivative uses under copyright, we would have to pay attention - and we may decide it’s a license violation.

Larry: Here’s a distinction. When I install gcc, or Apache, I don’t engage in a licensing agreement with the owner. When I do a shared source license, are there some rules about what I can and cannot use?

Jason: there are licenses that say you can't combine with software that might limit commercialization.

Larry: what about combining without distributing?

Jason: we don’t make any such restriction.

Charlie: We’ve been talking about developing countries facing IP problems, yet wants to be legal, would you encourage them to go open source?

Jason: this is probably the most direct question that could be asked of us. We still believe that they should look to acquire the highest value for their money in software - so they should consider everything. In reality, there are a lot of questionmarks that this raises, that I won’t answer in a public forum.

Larry: China has hundreds of millions of computers, where they cannot possibly afford to install Windows. To comply with IP they could install Red Flag Linux - is that OK?

Should they break the law and pirate Windows, or should they install linux.

Jason: We want them to pay for Windows; I don’t have a good answer. SCO litigation means that Linux is not allowed; but FreeBSD - I’m not going to answer. In my personal experience, we’ve had to wrestle with some peculiar problems - for example, we didn’t ask for license proof to help people get throuth Y2K

Larry: (after much discussion) There are some things under shared source that I cannot do that I can do on the free source computer (without distribution)

Jason: At an intent level, we don’t mean to limit free software. Under certain situations, however, we don’t want you to use the software in certain ways.

Larry’s takeaway: We don’t know if there’s a devil here. If there is a devil, it’s in the details. In the details, there’s a question of a covert tilt against the software ecosystem. And, in the evolution of the next state, the .NET space, is the consequence that developers will not be able to participate in that arena. Jason wants all kinds of development to happen; but the IP game may lead to problems, particularly in developing world - c.f., the question Jason couldn’t answer in this forum

Jason’s takeaway: I think that ultimately the intent of shared source will appear over time; and the ways that we intend to remain a direct commercializer of software. We believe direct commercialization is a good thing. How are developing nations going to work in this IP regime? That’s going to be a key issue going forward; they are going to want to use development from other nations; and open source is not going to solve all their problems. Fundamentally, Microsoft believe that in the end of the day all this discussion should be superseded by the quality of the product, and that product quality should be the determinants of consumer choice.

(This seems like a lot of inside baseball, but let me give a simple example. Suppose I am a shared source developer and I want to develop a modular application, say within the .NET environment. As I look at the MS source, I see how to do this, and I design my code to be plug compatible with this (set of) software elements.

Now, if I understood Jason right, the construction of that tool, and testing it on my machine, would be a violation of (at least some of) the shared source license, even if I don’t ever distribute my code. Under free software, I can certainly do this, but it seems that I can’t do it with shared source.

More importantly, there were three key pieces to Jason’s talk and the subsequent discussion that I want to reiterate here:

  1. A key question that Jason was not prepared to answer was centered on the question of the preferred strategy for the hotbeds of piracy in Asia. Would Microsoft prefer that these regions persisted in their illegal copying of Microsoft products, or would Microsoft prefer that these areas move to an open source product, given that the list price of Microsoft products is beyond the means of the country to supply to all its users. All Jason was prepared to say was that Microsoft would prefer that users in these regions employed legal copies of Microsoft software.

  2. As a perfectly legitimate product strategy, Microsoft is actively working to track all the IP content of their products, worldwide, so that they can be able to indemnify their users against the kind of IP challenges that Linux is currently facing from SCO.

  3. (This is the one that requires the most reading between the lines) Microsoft’s shared source licenses, or at least some variants thereof, require that licensees never combine elements of Microsoft code with any code that limits the commercial use of the result (read: GPL code). Note that this is a limit that is more stringent than that of the GPL, which only makes requirements of such combinations UPON DISTRIBUTION of the result. Arguably, this could mean that any open source product that appears to interoperate at the code level (think .NET) with Microsoft object code that is produced by a coder who had a shared source license might very well be subject to action under the shared source license. Granted, a certain amount of proof would be required, but it would be hard to argue that this interoperability was achieved without the combination of code (through testing) that the license specifically prohibits.

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Yochai on Peer Based Software Production: July 3 2003 [2:12 pm]

(entry last updated: 2003-07-03 15:40:36)

and we’re off…

Free Software and Common-Based Peer Production

Today we’re talking about controls on the logical layer, and in particular the relation to the content layer. This lecture is going to be about a new model of production, of content and software, that seems to be emerging throughout the digital environment - this development requires explanation, because it does not match our current working models to explain production of valuable goods. So, some observations

  1. Free Software - chacteristics and institutional framework

    It’s getting harder and harder to ignore the success of free software - it just works. A graph of webserver adoption - with Apache as an illustration. Linux, also beginning to capture a larger portion of platforms today.

    Proprietary software depends upon exclusion. Use is permitted only in exchange for payment. Learning is generally prevented altogether because of the need to prevent copying in the business model. Customization if allowed only within the space that the software vendor allows - again the risk of letting the user into the guts of the software challenges the economic value of the instrument in the face of potential redistribution, which is not allowed.

    Free software inverts these circumstances by limiting the owners control (not the owner’s copyright). A self-limitation of the owner’s control via the license. Use for any purpose, study the source, adapt for your own use, redistribute exact copies, and allows making and redistribution of modifications. The so-called copyleft - GPL

    Identifying characteristic is a cluster of uses permitted, not absence of a price (the free v free beer distinction)

    Eric Raymond (Cathedral and the Bazaar), Moody and others have written about it. The basic approach is a crude but workable tool is created and released to a community that interates in the refining of the tool. The net becomes a communication and an organizing basis for this effort; a volunteer effort, self organized.

    A little on free software vs open source software - a schism on the distinctions between the economic and the philosophical arguments - Yochai cares, so he uses free, but he sees little practical distinction

    The institutional frameworks: proprietary, open access, and copyleft - property is a set of legal conventions about what can and cannot be done with something (?). Permissions in this space, provided they can be bought and sold, lead to a market in the property. So, it’s permissions.

    At the other end, we have public domain/open access. Many of the advantages we ascribe to free software would come along with the allocation of their software to the public domain. But, the public domain has a weakness - the public domain can be reappropriated by downstream actors, under the law, taking it out of the realm of usability. The weakness is that your work will be taken and used to enrich someone else - the suckers reward.

    So, we have copyleft - a widely used instrument of open source. A study of SourceForge shows that something over 90% of projects were under a copyleft license - irrespective of the political schism. Copyleft is a cluster of legal provisions designed to make reappropriation of free software by proprietary interests.

    Elements of copyleft - redistribution for profit or not is allowed, but distribution must include source code; others may also redistribute the product as received; freedom to modify and distribute, but the distribution terms are unchanged - a central provision. You can change however you like; but once you distribute your changed version, you must include the source, which includes your additions and improvements - plus notification of changes and attribution of sources. Covenants ensure that all the provisions of the copyleft are associated with the descendents of the first generation licensed object. It is not contractual; you are permitted to employ the program for so long as you behave in accordance with the covenants; once you violate the covenant, the license is revoked - IOW, permissions to do things within the copyleft can be revoked for non-compliance.

    These arrangements do not discriminate between commercial and noncommercial free software.

    Current questions: what counts as a “modification” as opposed to just running an application using functionalities from a GPL program (and then there’s SCO which doesn’t really bring the GPL into question)

    So, copyleft (v. public domain) reduces incentives to adopt proprietary strategies in software; reduces opportunities for defection

  2. Commons Based Peer Production - why has this phenomenon emerged, and is it really the case that software is the only domain within which this approach can work?

    In fact, there are similar phenomena on the net out there. There are clusters out there that, collectively are effectively able to coordinate their behavior without price signals or managerial commands and produce value. Potentially human parallels to the distributed computing activities (SETI@home, etc.).

    Consider other domains where something like this happens:

    • Academic research - self selection of projects, built on what others have done, distribute results as widely a possible, make money elsewhere by teaching or getting grants- an old model

    • The WWW itself - volunteers out there, for their own reasons, put content out there that collectively builds a context that supplies information, glued together via the WWW and a search engine - a diffuse model

    • Mars Clickworkers at NASA.Gov - large scale scientific effort; chop the problem up into small tasks and get people to buy in; kuro5hin - a peer generated op-ed space; the wikipedia project.

    • A question of relevance and accredidation - let’s look at Slashdot. A story gets posted, and lots of comments, many of which are irrelevant. The commenter system gives us some way of evaluating the story and understanding the topics.

    • Google - the ranking system is based on how many other WWW pages refer to a page. The links are essentially votes on relevance. Another peer produced set of information (contrast with Overture, ranking by price; Yahoo! ranking by librarians) More interestingly, consider the open directory project, which does better than Yahoo!, at least in the case of the list that Yochai picked.

    (distributed proofreading)

  3. Economic Analysis

    So, why would anyone do this?!? There are diverse ones. The OSS economics literature maps several motivations - intrinsic (things that make me better off) and extrinsic (things making the rest of the world better/change the world). Intrinsic ones include hedonic ones (it’s fun), ethics; extrinsic - reputation, or demand for service contracts. So that’s what the economists say

    More abstract is an argument that rewards derive from diverse sources, not just money. Money, pleasure and social/psychological interactions - and, moreover, these are not independent from one another. In particular, social unpleasantness (leaving cash at a friend’s home in exchange for an evening ruins the experience) can derive from the injection of money into an activity - it can undermine motives as well as create them.

    So, an argument - when contributions are too fine grained/small to design transactions around, peer production seems to dominate - it’s too small to do for money, but worth doing for the greater good. If, on the other hand, if money is not seen as a disincentive, it can lead to greater participation. When the role of money leads to a loss of psychological benefits, things are very hard to get started.

    Bottom line, it appears that organization of information production is the thing that is needed to make things happen, rather than trying to find the right money incentives; in fact, money may be a disincentive. The organization will depend upon the modularity and granularity of the problem, and the difficulty of reintegrating.

    What’s the value - human capital is hard to define and value, so contracts and pricing are hard to set up. It appears that peer production systems seem to do a better job at getting value out of certain kinds of human capital - the ability to manage this human capital to make contributions is left to the group, rather than the manager. This also means that peer review is needed, since contribution could be defective - but the individual gets to decide to act, rather than being managed into acting.

    Moreover, firms erect an artificial barrier to getting the right person to work on the right asset. When the assets and the people are not in the same firm, a suboptimal allocation of human capital might emerge - while the peer process of development removes this barrier. Increasing ways to work, in collaboration, goes up.

    The Commons problem - commons problems are dependent upon the kind of common. Property does help in some cases; and therefore there are problems in this space. Primary concerns: defection by appropriation of assets will demotivate the other participants; poor judgment of participants; and putting the pieces together.

    Solutions include formal rules (GPL, etc), technology (the organizing code), social norms - these govern behavior. Redundancy and averaging out help to deal with poor judgment. The integration solutions are either iterative assessment/efforts - or you get a market actor who stays within the peer rules yet exploits the assets in ways that garner economic rewards within the peer context (Red Hat)

  4. Business Models

    Surfers - businesses built around the existence of the phenomenon, getting benefits from the product’s existence (IBM selling more servers through Linux) - or pushing pieces back into the market - Red Hat.

    Toolmakers - a platform for developing peer developemnt tools and selling these tools. Massive Multiplayer Online Gaming.

  5. Thematic Analysis - so, we see diverse motivations, with complex monetary relations. Peer production that it not just open source software. Anti difection mechanisms to keep the system working. And a business hook to keep things working at the intersection


Q: So, this seems to work for non-rivalrous goods. What happens with rivalrous goods? The MIT cheap eyeglasses technology example. Yochai: this is not really a non-rivalrous good - the design is still IP. There is going to be this tension of ownership in these sorts of contexts; getting at the economic value without undermining the system that created the valuable assett/IP.

The question of whether this really works for physical goods (barn-raising, for example) is much more problematic. So far, there is little seen. But since there is so much economic activity in the intellectual level, it may not matter - there are plenty of reasons to consider the importance of this issue just because of that.

Q: Given that OSS programmers are largely employed by software firms that sell proprietary goods. If the proprietary software goods market goes away, what happens to these developers?

Y: Point one, there is a certain amount of slack in the economy, where people have come to combine play with production (clickworkers, slashdot, etc.). The more specific question for software is that roughly 2/3 of the dollars that go to people who write software get their income from services, with the rest from selling software. That means that there is a certain amount of income to programmers that is already services driven - and it’s of the scale of the entertainment industry (I missed the rationales for this leap to entertainment)

Q: Are these two ways of producing exclusive - i.e., one will dominate? Or will they coexist, and, if so, are there legal structures that need to change to ensure that?

Yochai: They are not mutually exclusive. Economies will probably be based on both. The primary threat to peer production is that policies that make the world more congenial for proprietary systems make the world less good for the peer systems. Raising the IP barriers makes access harder for everyone, and may be particularly onerous for the peer development model.

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2003 July 3; ILaw; Terry Fisher on (Business Method) Patents [12:06 pm]

(entry last updated: 2003-07-03 13:34:33)

And Terry’s getting ready to start……

Revised plan for the day; first Terry on business method patents, then Yochai on free software and peer production. in the afternoon, Terry on the legal meaning of proprietary software, and then closing with Larry and Jason Matusow debating on the open, closed software spectrum. And of course, the banquet tonight at 6:00

Business method patents - the central point is that this sort of patent is increasingly important on the net, and they are almost always bad/pernicious. Yet, they are well established here in the US. The secret is that they are not established yet overseas - and we can hope that they will learn from the US’ mistakes.

Most patents are enforced in the US, Japan and the Europeans Patent Consortium (?) - over 80% of them are in these jurisdictions.

The US has three kinds of patents, utility, plant and design; most of which are utility patents. Founded on section 101 of title 35. New or useful products or processes become the two main bifurcations in this space.

Traditionally outside of the domain of patents include abstract ideas, laws of nature, printed matter, animals, plants, naturally occurring substances, surgical procedures and business methods. However, the domain of patent protection has slowly begun to expand into these domains.


  • purified natural substances exhibiting new qualities can be patented (the rosy periwinkle story - leukemia drug of Eli Lilly)

  • The plant protection act (1930) extends patent protection to new asexually produced varieties

  • 1970 - following an international agreement - extends patent protection to sexually reproducing plant varieties, so long as they are stable

  • In 1980, Chakrabarty - non-naturally orcurring organisms are patentable - Supreme Court decision

  • Supreme Court extends plant protection into the general patent law;

  • Cannot patent devices associated with nuclear weapons

  • Software becomes patentable over the course of the 1980s and 1990s

  • Surgical procedures become patentable, like a medical device or a drug. Traditionally, this was NOT patentable. the USTPO - the Palin opthamologist patent for cataract surgery. The shape of the incision makes a difference patent #5,080,111. He then informed other opthamologists of this technique, but he wanted a fee for use. Huge outcry. In the end, Congress overrode the extension of patent to surgical procedure - not by removing the patent, but leaving doctors legally allowed to infringe. However, there remains liability for the device producer that enable the doctor to use the procedure.

  • Bringing us to business method patents

For most of the 20th century, you can’t patent a method of doing business - usually discussed in dicta, because it’s rarely at issue. Quietly, the patent office starts offering these patents, and in 1996 the USPTO formalizes this and in 1998 we get the State Street Bank case - how to account the value of a share in a portfolio of diversified assets. So,a program is written to automate this process and a patent is obtained on this technique.

A complainant filed for declaratory judgement; the court declares that the algorithm/software is patentable in the State Street Bank case; the court also repudiates the business method exception to patents. Leading to a surge in applications for patents.

The surge leads to a surge in grants around 1999-2000 - the internet boom - it then drops.

Some examples: priceline.com’s dutch auction; amazon’s single click e-commerce checkout system; others

The single click method, developed by amazon, is patented - barnes and noble mimics and is sued.

Behavioral profiling 5,848,396 - gather information on what you are doing, profile you, and then pick ads to sell to you

held by Freedom of Information, Cambridge MA

A backlash starts up - three forms.

  1. (a) Bounties which offers bounties to those who ferret out prior art that would invalidate (generally on the grounds of novelty)

  2. (b) Litigation - to get a patent you have to show that the invention is novel, non-obvious, it’s useful and you have to show how some competent person could implement - the attacks are generally on the basis of non-obviousness (established Hotchkiss - 1850; bar raised in 1941/Cumo case; turned over the Court of Appeals for the Federal Circuit gets exclusive jurisdiction) - other jurisdictions (UK starts low bar and rises slowly, Germany gets very stringent during the 1930s, then lets the bar lower - overall the standards are converging under TRIPS)

    The so-called Graham conditions to establish non-obviousness are established and these form the doctrine. Brought to bear on business methods.

    Amazon single click - the district court finds that there is sufficient novelty. By the time it gets to the appellate court, the controversy arises. At appeal, it was declared insufficiently novel for injunctive relief.

  3. (c) Agitation to get the USPTO to change its processes. Several groups offer up change suggestions, some of which are implemented. Legislative proposal floated, but don’t go anywhere. Nevertheless, the backlash slows the rate of patents in this area

In the EU, we see other activity. Although business patents as such are prevented, a technically derived method is patentable. A complication. Revision of this doctrine is not undertaken as a consequence of the “EuroLinux Alliance.” A kind of stalemete, although some methods have been patented.

In Japan, we see about the same position. Japanese patent law says inventions must be industrially applicable. But it still can be done

Lets turn to theory in this area. There are two economic theories: reward theory and rent dissipation

Reward theory: as discussed yesterday, IP creations are public goods - microeconomics argument - marginal cost curves and demand curves and the argument of perfect price discrimination - capture of all consumer surplus which Terry calls monopoly profits (not exactly accurate, but ok because he puts it in quotes <G>) So Terry then shows standard monopoly pricing analysis - Price - Marginal Revenue, rather than the competitive result where price = marginal cost. Leading to deadweight losses

Thus, we have disadvantages of IP - we need administrators, patents are impediments to cumulative innovation, and we get deadweight loss of consumer surplus. Thus, patents are costly, so their benefits better be worth it.

Lookin at the other theory - rent-dissipation. Inventions give rise to improvements that build upon the invention. Subsequent innovations build upon this primary invention. The race to get to the first breakthrough (and the associated monopoly profits) means that we get overinvestment of innovation effort in specific areas, leaving other innovation needs “underinvested”

Two suggestions to rectify this - the Kitch proposal is to give broad protection for pioneering inventions, giving them control over subsequent development, managing the innovation or leading others to drop out. The Merge criticism says this just makes things worse, so narrow patents are better - of course, this just makes the problem reemerge for the secondary development.

Why BMPatents are unneeded? A) Patent protection is an additional reward that is not needed for those who innovate in this space - first mover advantage already motivates the inventor in this space. B) At the same time, we get all the nasty costs of patents, administration, deadweight loss, impediments to further innovation, and unavoidable rent dissipation.


A set of additional ways of framing the limits are cited. Terry seizes on a key point, which is that there are alternatives to patents, particularly trade secrets, which form a backdrop against which the merits of patents are frequently considered. In the case of business methods, the ease of reverse engineering shows that trade secret protection is not available. (this leads me into something of a muddle, in that I feel like there’s some sort of circular discussion here)

What about software? Most BM patents have a software component, but not many - and we’ll talk about software patent issue later today.

Terry goes on to show that the courts continue to dive down the rat hole - a patent on how to hold a golf club (a putter) #5,616,089 - a push of the notion of patent beyond it’s logical extreme - the Fosbury Flop, for example, could be patented and he would either have made a bunch of money, or won the Olympics for 20 years

A discussion of the eBay litigation and the NetFlix BM patents.

If we are going to repudiate BM patents, how do we define them? Terry: good question. This is tricky, mostly that you have to go back to the pre-state street bank work, and then have the courts establish whether this issue at patent is a business method (in which case it’s not patentable) or it’s not.

Q: I don’t see how to define a bright line. Terry: you’re right; it is difficult to do, but it should be done, blurry as the line might be.

Q: Why is the AMA opposed to patentability of procedures, while drugs and devices are OK? Good point. It shows that it can’t be the case that we don’t want patents on things that effect people’s lives. So it’s hard to locate the priciple that differentiates the cases. It is possible that the AMA saw that the idea that one doctor is making another doctor unable to perform his hippocratic duty - but it’s demonstrably odd.

Q: Why the atomic weapons exception? Not to keep people from learning how to make bombs, but because a new reward system was instituted in its stead,

Going back to the surgical methods, most doctors seem to see this exception as rooted in the ethics of the profession


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Late night/early morning 2003 July 3 [2:55 am]

(entry last updated: 2003-07-03 11:59:47)

After a raucus and enjoyable evening at the Gordon Biersch with Cindy, Yuko, Etienne, Ryan, Kevin, Don and Govind, I have a couple of things to post before hitting the hay (and I’ll probably just add to this list tomorrow before ILaw starts in)

  • Slashdot has an article on the Japanese push to stop people from using their cell phone cameras to "shop lift" images from stores: Digital Shoplifting From Bookstores?

  • Slashdot has a small article on the continuing Lexmark case, pointing to the EFF’s most recent materials and a BBC article: Lexmark DMCA Case Winds On

  • Billboard’s take on the EFF Let the Music Play initiative: ‘Let The Music Play’ Ads Target RIAA

  • Donna channels J.Grimmelmann from Lawmeme on yesterday’s ILaw session: Grimmelmann in the House

  • Dan Gillmor on Intel v. Hamidi: Ruling a defeat for Intel, a victory for free speech

  • Missed this: BMG tinkers with CD copy controls [via a blog doesn't need a clever name]

  • For those of us who aren’t quite as up on the implications of Jonathan’s suggested constituency for testing out Terry’s proposal, we get a little more detail from John Palfrey: Nesson on Fisher’s Alternative Compensation Scheme for Digital Music

  • Is it possible that Larry just likes going after Declan? Or is he just too attractive a target? what declan doesn’t get (finally, we’re back) takes on Declan’s writeup of the Microsoft lobbying push on cable companies: Microsoft’s new push in Washington

  • Derek says it better than I ever could: What’s New? aka I Can’t Shut Up About Madster - more on AIMster. We also get to hear from Aimee, who focuses on Ed’s comments; and here’s the EFF position

  • To promote the Microsoft eBook, Microsoft offers free e-book downloads

    In a move aimed at bolstering the use of its Microsoft Reader program, the software giant announced on Wednesday that it would offer free downloads of e-book bestsellers over a 20-week period.

    Although Microsoft has launched similar promotions in the past to boost users’ familiarity with Reader and attempt to snag market share from Adobe’s omnipresent Acrobat software, the new promotion is the largest in scope and duration that the company has offered, Microsoft eReading group product manager Cliff Guren said.

  • Bowing to the inevitable, Billboard tracks Net music downloads

    Nielsen SoundScan, which tracks retail music sales and is the source of Billboard’s top music charts, will make data available Wednesday on music downloads sold at several digital-tunes services. These include Apple Computer’s iTunes, Roxio’s Pressplay, MusicNet, Liquid Audio and Listen.com. It also plans to track sales from the upcoming Napster service.

    Nielsen SoundScan’s announcement that it will begin recording download sales lends credence to Web music-retail efforts and could help raise the general profile of online services among consumers and the recording industry. The entertainment industry also will finally have a window into digital music sales after years of fearing that illegal file swapping in peer-to-peer communities is cannibalizing offline album sales.

    Here’s Billboard’s article: Nielsen SoundScan To Track Download Sales

  • From the NYTimes, two pieces:

    • Libraries Planning a Meeting on Filters [pdf]

      Officials of the American Library Assocation will call a meeting with the makers of Internet filtering software next month to voice concern over a federal law that requires libraries and schools to use Internet filters or risk losing federal money.


      Judith Krug, director of the Office of Intellectual Freedom at the American Library Association, said that in the meeting, tentatively scheduled for Aug. 14, librarians will ask the companies to ensure that their software can easily be turned off and on again by librarians.

      The group will also demand that the companies reveal their database of blocked sites to libraries so they can determine which programs best suit the libraries’ needs, or they may work with third parties to develop new filtering software.

      I’m sure that Ben Edelman will be happy to help them work through the list, since the filtering companies should be happy to give it out <G>

    • The Laptop as Recorder, Remote Control Included [pdf]

      A new Toshiba laptop, the Satellite 5205-S705, comes with an unusual accessory: a television remote control.

      The computer is supplied with that channel hopper’s best friend because television programs can be recorded directly to its hard drive. The unit is also supplied with software to schedule recording sessions, turning the laptop into a stripped down variation of the TiVo.

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