Do Patents Facilitate Financing in the Software Industry?

Ronald J. Mann, Columbia Law School


The role of intellectual property is examined and, specifically, patents in the software industry. Especially considered are the advantages and disadvantages of patents depending on firm size. Findings are based on interviews with about 60 professionals in the software industry.The interviews elicited information about the motivations, practices, and institutional environment of the software industry. The study begins by emphasizing the difficulties that startups have extracting value from patents. As the firm gets larger, potential benefits from patents appear. Some startups do have patents strong enough to exclude competitors, which are often larger firms. Hence, patents are more beneficial to small firms than to large ones. Next is considered the indirect effects due to the use of patents in cross-licensing transactions for signaling information about a firm. The claims that enforcement of software patents has created a patent"thicket" that limits innovation is rejected. Young firm development is not significantly hindered by large patent portfolios of established firms. The relatively weak protections that copyright and trade secrets afford are considered. Neither usefully allows small firms to obtain value from their inventions. Conclusions of the study provide skeptical evaluations of several proposals that would limit patent rights but not completely abolish them.(TNM)