JANUARY 26, 1994

AFTERNOON SESSION

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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?

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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.

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