I. Excerpts from Remarks by Fed Chairman Alan Greenspan
Market Economies and the Rule of Law
2003 Financial Markets Conference of the
Federal Reserve Bank of Atlanta
Sea Island, Georgia
April 4, 2003

"In recent decades, the fraction of the total output of our economy that is
essentially conceptual rather than physical has been rising. This trend has,
of necessity, shifted the emphasis in asset valuation from physical property
to intellectual property and to the legal rights that inhere in the latter. Though
the shift may appear glacial, its impact on legal and economic risk is only
beginning to be felt."

"Over the past half century, the increase in the value of raw materials has
accounted for only a fraction of the overall growth of U.S. gross domestic
product. The rest of that growth reflects the embodiment of ideas in
products and services that consumers value. This shift of emphasis from
physical materials to ideas as the core of value creation appears to have
accelerated in recent decades."

"Technological advance is continually altering the shape and nature of our
economic processes and, in particular, is promoting the trend toward
increasing conceptualization of U.S. GDP. The movement over the decades
toward production of services requiring little physical input has also been a
major contributor to the dramatic rise in the ratio of constant dollars of
GDP per ton of input."

"In the physical world, the usual situation is that each additional unit of output
is more costly to produce than the previous one; that is, production, at least
eventually, is characterized by increasing marginal cost. By contrast, in the
conceptual world, much of production is characterized by constant, and
perhaps even zero, marginal cost."

"For example, though the cost of creating an on-line encyclopedia may be
enormous, the cost of reproduction and distribution may be near zero if the
means of distribution is the Internet. The emergence of an electronic platform
for the transmission of ideas at negligible marginal cost may therefore be an
important factor explaining the recent increased conceptualization of the GDP.
The demand for conceptual products is clearly impeded to a much smaller
degree by rising marginal cost than is the demand for physical products."

"But regardless of its causes, conceptualization is irreversibly increasing the
emphasis on the protection of intellectual, relative to physical, property rights.
Before World War I, markets in this country were essentially uninhibited by
government regulations, but they were supported by rights to property, which
in those years meant largely physical property. Intellectual property--patents,
copyrights, and trademarks--represented a far less important component of the
economy, which was mainly agricultural."

"Only in recent decades, as the economic product of the United States has
become so predominantly conceptual, have issues related to the protection of
intellectual property rights come to be seen as significant sources of legal and
business uncertainty. Intellectual property is clearly more difficult to define, and
hence, to protect. Ownership of physical property is capable of being defended
by police, the militia, or private mercenaries.Ownership of ideas is far less
easily protected."

"The nature of intellectual property is importantly different from physical property.
In particular, one individual's use of an idea does not make that idea unavailable
to others for their own, simultaneous use. Furthermore, new ideas almost invariably
build on old ideas in ways that are difficult or impossible to delineate."

"In the case of physical property, we take it for granted that the ownership right
should have the potential of persisting as long as the physical object itself. In the
case of an idea, however, we have chosen to strike a different balance in recognition
of the chaos that could follow from having to trace back all the thoughts implicit in
one's current undertaking and pay a royalty to the originator of each one. So rather
than adopting that obviously principled but unworkable approach, we have chosen
instead to follow the lead of British common law and place time limits on
intellectual rights."

II. Excerpts from Remarks by Fed Vice-Chairman Roger W. Ferguson, Jr.
At the 2003 Financial Markets Conference
of the Federal Reserve Bank of Atlanta
Sea Island, Georgia
April 5, 2003

"Earlier in the conference, we heard about the domestic and international
frameworks surrounding business method patenting. This final session will
focus on the public policy issues related to business method patents. To
introduce this session, I would like to step back and place the public policy
debate in a broader context."

"In particular, I want to briefly discuss the importance of information
technology and intellectual property in the "new" economy. Throughout
history, economic growth and an increasing standard of living have been
driven by an economy's capacity for invention and innovation. The
economies of the United States and other countries have seen huge
productivity gains from the development and rapid adoption of new
information and communication technologies. The mechanisms for
protecting intellectual property, and the degree to which they are used,
vary from industry to industry and over time, but the incentives created by
intellectual property have likely been important in fostering economic growth."

"Over the past several years, and particularly since the State Street decision,
those protections have been extended and now encompass the processes
and methods of doing business that use these technologies. In many regards,
such business method patents may be no different from traditional product
and process patents; however, the fact that we are all here to discuss this
topic suggests that business method patents may be distinctive in some
important ways. Are the risks of a too-lenient, or too-stringent, patent
system the same for these innovations? Are the current institutions capable
of assessing the novelty and non-obviousness of such inventions? Is a second
level of review really necessary for these patents? Our goal here is to consider
these and related questions. How should we structure our intellectual property
institutions? What roles should each of these institutions play to ensure an overall
public policy geared toward the continued innovation and adoption that is central
to strong economic growth?"

"The State Street case was decided during a period of intense innovation and
creativity in the U.S. economy that led to gains in productivity. As we are
coming to understand, the sources of these productivity gains go way beyond
the increased technological ability to gather, store, process, and disseminate
information. Rather, much of the increase in productivity we have seen stems
from the simultaneous invention of new forms of economic organization and
of innovations in business practices, both within and across economic entities."

"Economists have argued that information technology is best thought of as
general purpose technology (GPT). A key characteristic of GPT is that
technical progress depends not only on invention but also on so-called
co-invention, that is, innovation in complementary technologies that
increases the productivity of the GPT: new processes and new
procedures that best use the technology."

"These processes and procedures are precisely the focal point of business
method patenting. Following State Street, inventors can now gain protection
for their innovations in this area: not only the hardware and software but
also the embedded business method is patentable. Inventors of new ways
of using these technologies can now gain protection for their work. For
example, a patent was issued for "reverse auctions," in which the buyer
names a price and the first willing seller gets the sale. Netcentives was
granted the patent for online incentive and reward programs. In the
financial arena, the original State Street patent was granted on the
software, hardware, and algorithms that computed share prices for a hub
and spoke system of mutual funds. Various computer methods that allow
the securitization of financial instruments have now been patented. In all
these cases, the transformation of electronic data to create a new product
or new method of transacting has won patent protection."

"However, innovations in the new economy are in some sense broader
than these examples suggest. Economic gains are likely to be found not
just in the invention of new products but also in reorganizing the firms and
markets themselves. Here, too, business method patents are likely to be
important. In recent years, huge improvements have occurred in
supply-chain management, linking manufacturers directly with their
distributors. Several dot.com companies were founded on the notion of
bringing industry participants together in new ways, using new technologies
and business practices. Although some of these firms are no longer with us,
the electronic sharing and processing of information that they introduced
is unlikely to stop."

"The widespread adoption of technologies in these latter cases rests
fundamentally on the adoption of standards, on the idea that all industry
participants use compatible technologies. In the parlance of economics,
such technologies exhibit network effects: The value of the innovation to
a given user increases with the number of other users. In this case, the
efficiency gains arise when a large number of users sign on to the
standard. The key issue, therfore, is who owns this standard, that is,
whether any market participant may have open access to a public
standard or whether the property rights to that technology are owned
by a given firm. Further, with business method patents, these property
rights may attach not to a specific technological standard but more
generally to a method of transacting or some other business process.
In such cases, how should the market determine the outcome, and what
effect could the patenting system have?"

"The task for public policy in the post-State Street world is to strike
the right balance--to encourage innovation and rapid adoption of new
products and processes while limiting damage from granting monopoly
power. The United States has been in the forefront of the financial
services industry, a position we want to maintain. But how do we
structure the institutions of public policy to attain these goals? To make
matters more complex, how do we achieve this balance when not only
is the technology rapidly advancing but the realm of patentable material
is expanding as well? State Street opened the door to a new world, a
world that innovators have only just begun to explore. To date, most
patent filings are still modeled on traditional "machine-plus-method"
patents, emphasizing the technology as much as the process. However,
the model may change. As the Patent and Trademark Office remarked
in its recent white paper, the subject of patents is slowly moving away
from the "implementing or enabling engineering" toward "the end result
the inventor is trying to achieve with that technology." When inventors
start approaching the patent office with patents for true business methods,
how should they be handled? What should be the role of the courts?
What processes need to be in place?"

"To discuss just these issues, we have a great panel, with some
interesting ideas and some very strong opinions. To begin, I would like to
ask Bronwyn Hall, Professor of Economics at the University of California
at Berkeley, to present her paper."

Click on the link below to view Ms. Hall's paper (pdf format):

"Business Method Patents, Innovation, and Policy"


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