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News and Trends

July 1, 1998
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SOFTWARE PATENTS

What’s Intellectual Property Worth?

RECENTLY, SOFTWARE HAS GAINED NEW RESPECTas a patentable product. But with the rapid changes in technology, small developers need to weigh benefits against barriers when going down patent road.

Until the mid-1990s, most software had to be part of a larger system to be considered patentable, says Peter Michaelson of Michaelson & Wallace, a Red Bank, N.J. law firm that specializes in technology patent issues. The U.S. Patent and Trademark Office has been issuing patents for gizmos, designs and mechanical processes for centuries, but no one was quite sure what to do about software, especially as a stand-alone product.

For years software represented the almighty no-no, the attempt to patent an algorithm. "Within the past two years, the courts have taken a different view," Michaelson says.

The U.S. Court of Appeals for the Federal Circuit (CAFC) in Washington, D.C. has been home to patent disputes since 1982, but it took a landmark appeals case to change the precedent regarding software patents, says Ray Galasso, intellectual property attorney in the Austin, Texas office of law firm Thompson & Knight.

In 1995, IBM convinced CAFC that software itself was patentable subject matter. "IBM won [the dispute], and all of a sudden the floodgates opened," Galasso says. Since CAFC’s ruling, the patent office has been swamped with software applications, and many companies reported at least a two-year wait for an answer.

Despite the backlog, companies seem more eager than ever to patent the software applications they believe to be critical corners of the industry. "In the software area, processes are powerful things," says Alfredo Garcia, president of AudioCARE Systems, a division of MUMPS AudioFax Inc., Wayne, Pa. "If you’re the first person who thought of doing something this way, and you get the patent on it, it’s golden." AudioCARE’s RxInfo, a telephone-based patient education system for prescription drugs, was patented last fall.

The true market potential of a patent rests in pinpointing what the industry will require most in the near future. In 1995, the FDA asked Congress for a law requiring all pharmacies to provide patient drug information--a month after AudioCARE applied for the RxInfo patent. Call it astute foresight. Garcia calls it pure luck.

However, there’s a hitch to investing in the patent game: Most companies keep their developments secret until a patent application is filed. In the United States, a patent is issued to the company that can prove it conceived the idea first, not necessarily the one that filed first.

Being second can mean a lot of R&D funds just went out the window. "You have to consider the cost benefit of going through the exercise, since technology changes so quickly," says Peter Skinner, CFO of Oceania, Inc., Palo Alto, Calif., "and whether it makes sense to take this step to protect your intellectual property."

The R&D investment is risky, but so is being shut out of a market. Skinner says most companies spend more time thinking about how to create an essential product than in racing to out-patent the competition. "As a business person, you have bigger fish to fry," he says. "You’re trying to build commitments and products. You’re focusing on how to turn your ideas into reality."

Patents must be maintained through fees to the U.S. patent office, based on the size of the company--perhaps several thousand dollars every two or three years. But for larger corporations, Galasso says, the revenue generated by royalties and licensing fees far outweighs the maintenance costs.

A patent loses its leverage if it isn’t protected from infringers, but the process of patent litigation can create additional headaches. Depending on the federal district court, a patent lawsuit may take anywhere from one to seven years, Galasso says.

Michaelson says patent litigation is expensive and risky, and most companies would rather be doing business than suing each other. He sees arbitration and mediation as smarter alternatives to court battles. "Two companies may not be as far apart as they think, and can often end up with a business deal between them."

Pamela Tabar is a freelance writer in Cleveland, Ohio.


FDA REGULATION

Cerner’s Blood Bank System Targeted

THE FDA HAS ORDERED KANSAS CITY, MO.-BASEDCerner Corporation to hire an outside consultant to conduct an audit of the company’s blood bank donor and transfusion software--an FDA-regulated medical device--after a patient was given an incompatible blood transfusion due to a software malfunction. According to the FDA, the software failed to generate a screen warning regarding the incompatible blood unit, and dispensed two units of the incorrect blood to the patient in an emergency transfusion. Cerner spokesperson Allison Stein-Best would not reveal details concerning the well-being of the patient, but said that the company, which recalled the software in February, had fixed the problem and delivered the modifications to its clients on May 1.

The FDA, which is allowing Cerner to continue selling its blood bank and transfusion software, issued a letter outlining several areas of concern with the product, based on the agency’s visit to Cerner in March and user complaints, including: noncompliance with good manufacturing practices (GMP), failure to complete a 1997 code inspection project on time and other code review inconsistencies, and several isolated incidents where the software reportedly mislabeled blood units, lost patient data and incorrectly calculated expiration dates. "We are committed to fixing all of the problems outlined in the letter," Stein-Best said.

In the letter, the FDA also referred to an earlier warning letter issued to Cerner in May of 1993 concerning other violations at the company, and noted that combined, the two warnings "may be symptomatic of serious underlying problems in your firm’s manufacturing and quality assurance systems." According to Stein-Best, the 1993 letter addressed a "separate problem," and said that the company was looking for a consultant to complete the audit, which is due in November. "We are committed to being in compliance with the quality software regulations," Stein-Best affirmed.

--Polly Schneider


HEALTH MANAGEMENT

Managed care at work

THE NEXT GENERATION OF MANAGED CARE WILL integrate personal medical care and work-related healthcare with new incentives toward productivity, according to the results from a recent Towers Perrin survey, "Pathways to the Next Generation of Managed Care."

Studies based on the workers’ compensation model that factor in work productivity losses suggest that using information technology to improve health and outcomes can eliminate up to 30 percent of healthcare costs. "Managed care is heading in a new and very positive direction," says Howard Veit, managing principal of Towers Perrin Integrated Health Consulting Practice in Atlanta. Given the competitive environment, he is convinced that plans to develop efficiency products will increase within the next few years. This will open a new market for information systems that can measure and report on employee productivity.

Following the successes that managed care companies have demonstrated in curbing costs, employers are now looking for their leadership in managing the total cost of healthcare by merging health benefits, workers’ compensation and disability management, through new delivery models. This comprehensive market view, termed "total health management," addresses work productivity and wage losses--now considered a significant portion of healthcare costs.

"Most of the initiatives to date have come from the workers’ compensation and disability management industries, says Jenny Emery, leader of Tower Perrin’s Total Health Management efforts in Hartford, Conn. "Healthcare has been the last one to the party," she says. But that is changing. The Towers Perrin survey indicates that the healthcare industry is redefining its core business as total health management. Total health management, she adds, is an opportunity for healthcare organizations to expand market share. By directly linking medical costs to work productivity losses, in addition to direct care costs for the provider, caregivers and employers can collaborate more proactively to manage total health costs across the continuum.

However, there will be substantial challenges to meet and achieve these goals. In order to change the focus from cost containment to employee productivity, healthcare administrators will need to redesign healthcare delivery systems. "When the incentive is on return to work and productivity, health plans will be developing pathways to get patients through the system and back to work much more efficiently," says Veit.

"Health plans today see total health management as the potential next generation of managed care and view it as a way to gain increased credibility in the healthcare marketplace," she says.

--Charlene Marietti



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