Dynamic Inefficiencies of Intellectual Property Rights from an Evolutionary/Problem-Solving

Perspective: Some Insights on Computer Software and Reverse Engineering

Luigi Marengoa and Simonetta Vezzosob

a St. Anna School of Advanced Studies, Pisa, Italy, e-mail: l.marengo@sssup.it

b Law Department, University of Trento, Trento, Italy, e-mail: svezzoso@economia.unitn.it

Nature and scope of the paper

• interdisciplinary: law & economics

• in line with an economic and legal more „cautious“ stance towards IP

• sketch an evolutionary/problem solving approach- to IP

- to reverse engineering of computer programs

• tentative application: assessment of the legalrules on reverse engineering in the EU

IP and market failure arguments

• under certain conditions, markets fulfil their role as allocative mechanisms

• one of the conditions: lack of externalities

• if externality: under-production and under-investment

• knowledge one of the loci of externalities because of non-rivarly and non-excludability

result: underproduction and insufficient investments

Core of the current IP policy

create an artificial scarsity to allow an appropriate degree of appropriability

of returns from R&D investments

More cautious approach towards IP

economic perspective: positive impact of IP policyon innovation and creativity questioned

legal (policy) perspective: some questioningof strong IP regimes

•rejection an the EU Directive on computerimplemented inventions•„interoperability clause debate“ in the French Parliament•U.S. Supreme Court: more pro-competition stance towards patent law?•European Microsoft case: refusal to provide interoperability information not justified by theneed to „protect“ incentives to innovate

Traditional perspective on IP as a Coasian perspective

knowledge generation process exposed to externalities

solution: define property rights and create markets for the externality

Problem: “granularity” of (I)PRs

• property should be granted and enforced separately on every – however „small“ - right with economic value

• IP theory and policy: domain of technological knowledge divided by property claims on essentially complementary pieces of infomation

consequence: high costs of reassambling constituent rights in order to engage in further research as a heavy burdenon technological advance

e.g. overlapping patent claims

“Neutrality” assumption of the Coasian approach

• technology is given

• technological separable interfaces are pre-defined by the state of the technological knowledge

• PR only determine the efficiency of different coordination modes

“Neutrality” assumption questioned

• institutional arrangements and technologies co-evolve

• (I)PR and coordination modes influence the pace and direction of technological change

more finely defined IPRs cause sub-optimaltechnological trajectories

Evolutionary/problem solving approach to IPRs/1

• production of new software as problem-solving activity

design of viable solutions in a huge combinatorial space,with diffused interdependencies

• Herbert Simon: boundedly rational agents must decompose anylarge, complex and intractable problem into smaller sub-problems,to be solved independently

division of problem-solving labour

Evolutionary/problem solving approach to IPRs/2

• extent of the division of problem-solving labour limited by the existence of interdependencies

decomposition may separate interdependent elements

• solving each problem independently does not allowoverall optimization

• decompositions as necessary conjectures to tackle complex problems but limit the kind of solution that can be developed within the givendecomposition

Evolutionary/problem solving approach to IPRs/3

optimal decomposition: separation into separable sub-problems all and only those elements separable from each other designed by someone with perfect knowledge

instead: boundedly rational agents forced to designnear-decomposition

in the same sub-problems only interdependencies which are believed to be more important for theoverall system performance

Evolutionary/problem solving approach to IPRs/4

FUNDAMENTAL TRADE-OFF

finer decomposition:

• advantages of decentralized local adaptation

• disadvantages in so far as there is a higher probability that interdependent components are separated into different sub-problems and cannot be adjusted together

Evolutionary/problem solving approach to IPRs/5

• Coasian perspective on IPRs: definition of as many marketsas rights with economic value

• e/p-s: the higher the degree of decentralization, the smaller the portion of the search space: e.g. speed of adaptation

but: technological trajectories that are not optimal

lower the probability that the optimal solutions are included in such a small portion of search space

Evolutionary/problem solving approach to IPRs/6

• because of characteristics of production processes andlearning processes

market-like decentralized mechanisms de not provide appropriate signals in the earlyproblem solving/innovation phase

• as search proceeds and a set of standards in the techno-organizational design problem is achieved

increase in the degree of decentralization can allow for fast-climbing of this „peak“

TC factors responsible in this phase for differentdegrees of integration?

Evolutionary/problem solving approach to IPRs/6

(tentative) policy conclusion:

more flexible coordination of interdependent elements („pieces of knowledge“) than the

Coasion solution would allow for

example in the following: rules on reverse engineering of computer programs

The legal protection of computer software in a nutshell/1

covered by patents and copyrights (also trade secrets)

PATENT LAW:- covers the inventive idea as such- specifications must be disclosed---but, in case of software, no obligation to disclose the implementing source code- no fair use-- no possibility to invoke reverse engineering as fair use

COPYRIGHT LAW: - covers the „original expression“ of the idea--protection of source and object code against literal copying- no disclosure obligation- fair use

The legal protection of computer software in a nutshell/2

U.S.: software covered by-patent law (since 1981)-- no need to affect the physical world in a tangible way-copyright law

E.U.: software covered by- patents as long as it is not „pure“ software but there is a„technical contribution“-- e.g. technical process carried out under control of aprogram- copyright law

in the following: rules od reverse engineering in EU copyright legislation

Reverse engineering from an evolutionary/problem solving perspective/1

• activity aimed at acquiring information, not to make a perfect copy

for that, RE is not needed (just copy of the object code)

• copyright: applied to artefacts whose inner structure waslargely transparent and easely grasped by any experienced (and possiblycultivated) „customer“

• knowledge accumulation: based on reverse engineering of creationsof other people‘s minds

• compiled computer code: exception !

codified piece of knowledge not understandableby even an expert mind reader

Reverse engineering from an evolutionary/problem solving perspective/2

MAIN ISSUE should be:

• not if reverse engineering is legal, but whether it should be allowed to copyright something which is not readable

• in any case: RE is not a threat to a firm‘s incentive to produce innovative software

the threat comes from the so called (almost) limitedexpansibility, that is the possibility to copy digital goodsin form of computer files very cheaply

• RE: „threat“ because competitors would enter the marketwith compatible alternative programs

but an „open system“ can be also a choice

Reverse engineering from an evolutionary/problem solving perspective/3

from an e/p-s perpective

• closed source codes hinder the accumulation process

• the inefficiencies determined by conjecturally decomposingsystems that present strong and widespread interdependenciesshould be compensated by introducing competitive markets for each quasi-separated components

if the architecture is kept under a strictmonopoly: no room for adaptationdriven by competition

Reverse engineering from an evolutionary/problem solving perspective/4

• interdependencies among „chunks of knowledge“ such asdistinctive pieces of software are not known in advance

RE not a „threat“

• trial-and-error activities by agents in order todiscover them

• because of the complexity of the problem, collective search strategy more efficient than the Coasian market partitioningfrom a technological point of view

clear social value,not free-riding

Assessment of the EU rules on reverse engineering from an e/p-s perspective/1

Article 6 Decompilation of EC Directive 91/2501. The authorization of the rightholder shall not be required where reproduction of the code and translation of its form within the meaning of Article 4 (a) and (b) are indispensable to obtain the information necessary to achieve the interoperability of an independently created computer program with other programs, provided that the following conditions are met:(a) these acts are performed by the licensee or by another person having a right to use a copy of a program, or on their behalf by a person authorized to to so;(b) the information necessary to achieve interoperability has not previously been readily available to the persons referred to in subparagraph (a); and (c) these acts are confined to the parts of the original program which are necessary to achieve interoperability.2. The provisions of paragraph 1 shall not permit the information obtained through its application:(a) to be used for goals other than to achieve the interoperability of the independently created computer program;(b) to be given to others, except when necessary for the interoperability of the independently created computer program; or (c) to be used for the development, production or marketing of a computer program substantially similar in its expression, or for any other act which infringes copyright.

(…)

Assessment of the EU rules on reverse engineering from an e/p-s perspective/2

3. In accordance with the provisions of the Berne Convention for the protection of Literary and Artistic Works, the provisions of this Article may not be interpreted in such a way as to allow its application to be used in a manner which unreasonably prejudices the right holder's legitimate interests or conflicts with a normal exploitation of the computer program.

Assessment of the EU rules on reverse engineering from an e/p-s perspective/3

"the [Software]Directive and in particular the decompilation provisions werethe result of intensive debate among all interested circles and the balance found then appears to be still valid today" (EC Commission, 2004).

Assessment of the EU rules on reverse engineering from an e/p-s perspective/5

rules too restrictive?

from an e/p-s perpective

heavy burden of „compatibility“ provision

no research exception, also of a commercialnature

no error correction exception

not possible to diffuse the information (e.g., licenceit for a fee)

…

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