Patent Protection and Software Innovation: Evidence from Alice

Abstract

Although software innovations are the cornerstone in the modern economy, their patent-ability, as well as the social and private value of software patenting, have continued to be at the center of policy debates pertaining to the U.S. patent system. The landmark 2014 U.S. Supreme Court ruling in Alice v. CLS Bank had profound impact on software patenting as it drastically limited the scope of patent protection on software innovations. Using Alice as a natural experiment, we found that limiting software patents had no detectable downsides to the value of software firms. Instead, it was associated with improved sales, greater engagements in open source development, and tighter scope of individual patents. Our findings offer implications for the extent to which software firms pursue patenting as a strategy to protect innovation versus pursuing alternative appropriability mechanisms. They also have compelling implications for patent policies on software and software-related inventions, such as artificial intelligence, business methods, and other emerging digital innovations.

Keywords: Innovations, Software Patents, Alice, Natural Experiment