Software Patents

Robert Osfield Testimonial

The "Directive on the Patentability of Computer Implemented Inventions" has drawn big business and small business at opposing sides of the debate. The following article explains why some IT related business favour software patents, which most SME's are so opposed to, and how even big businesses not in the IT sector stand to loose from software patents.

Why are the multi-national IT business so pro software patents?

Multi-national IT business like IBM, Microsoft, Sun, Siemens, Nokia, Erikson are heavily funding lobby groups like ECITA and Campaign for Creativity to promote the Council Common Position version of "Directive on the Patentability of Computer Implemented Inventions" which legalise the patenting of software algorithms and business methods. But why?

The explanation is simple, creating a patent minefield inhibits competition, and in markets where competition is suppressed prices rise or can be kept artificially high. Suppression of competition also has a second key effect, it reduces the need to develop new and innovative products, which in turn means that R&D expenditure can be cut. Higher prices and lower costs result in greater profits.

To further qualify the analysis one can look to the US market as whole - increase in patenting of software also tracks a lower rate of innovation and new products entering the market, and lower R&D investments. One can also look at Microsoft on its own. Over the last two years it has culled one third of its R&D workforce, yet number of patents the company has acquired has doubled. Microsoft has also slowed its release schedule of products - Internet Explorer development is at a standstill, and Windows Longhorn, Microsoft next generation operating system is now several years late. Despite products development grinding to a halt profit margins remain way above market average.

There is a negative side to patents for even large IT business like Microsoft - they become the target for patent litigation specialist who seek rents for infringement. Settlements can run into hundreds of million pounds and a can add several percentage of revenue on top of usual costs.

However, if the negative aspect of patent litigation can be used in large IT businesses favour, as such cases cause a great deal of fear, uncertainty and doubt amongst competing IT companies and customers [This sentence makes no sense to me. W]. Competitors will think twice about releasing products into a market place where they know they will be hit by software patent litigation. Products are already being withdrawn from the market for this reason alone.

Customers also see the headlines about litigation, and then look for indemnification from litigation, this is something only the biggest IT players can afford, as one can no longer get software patent litigation insurance in Europe or the USA as the all the original providers of such protection have withdrawn from the market as it was to expensive and risky. The leaves smaller IT players unable to indemnify customers, and in turn means they loose customers to the bigger players purely on the basis of threat of software patent litigation.

Microsoft itself has engaged in promoting fear in the market place over software patent litigation, and has even lectured heads of state in Asia on the threat of patent litigation due to the use of the Linux operating system. Promotion of fear in the market place moves the focus away from the technical strengths of products and onto legal might. Microsoft, like other IT businesses, are backing this up by supporting legislation that legalises software across the globe. Frighten the Hurd [herd? I don't think most readers will get obscure refences to the Hurd kernel W] whilst at the same time digging pits to trap them in.

Why are SME's so against software patents?

Software development is very different to the traditional engineering or electronics industries. Industry leading software can be developed by small teams of programmers with very modest budgets. Whole operating systems have even been developed simply through collaboration of individual programmers working together over the Internet, with both source code and executable distributed entirely freely (as Open Source / Free Software). Copyright and trade secret protection has been the traditional route for software businesses to protect their products. It has proven to be highly flexible and effective: the worlds richest corporation was founded on copyright protection alone (it's only since gaining its monopoly has it has promoted the use of software patents), and the same copyright protection is exactly what protects individuals and teams that write Open Source/Free Software software. Copyright and trade secret protection is the most efficient form of protection for real products for both big and small IT players.

However, in recent years software patents have been introduced first in the US, then increasingly in Europe. This changes the market dynamic for SME's irreparably. Any successful new products become targets of litigation from competitors and from patent companies seeking rents. The threat of this eventuality has made SME's increasingly cautious of developing new products for the market place, or even just adding new modules to existing products, as doing so further increases the chances of accidental infringement. The cost of patent litigation is so high that SME's will increasingly have to avoid potential infringement by giving any patented areas are very wide berth. The effect is that new innovative products will not make it to market and existing products will be withdrawn.

Ensuring that a product is free from patent infringement is a double edged sword. In the USA if you know about the existence of a patent and go ahead regardless and then are later found infringing, triple damages can be awarded. It doesn't matter if the original time the patent was deemed to not cover the software [erm - I don;t follow this bit about 'original time'. W] or the patent was assumed to be invalid, it's only once a patent case is taken to court that actual infringement can be resolved or a patent invalidated. The advice from lawyers in the USA is not to check against filed patents. Since many software patents exist both in the USA and Europe, looking at patents here will automatically place one in the triple damages category in any US litigation, so the advice here in Europe has to be the same, one should not look at filed software patents. The situation in Europe has been made even more precarious by the inclusion of patents in the IP enforcement directive, taring patent infringers with the same brush as counterfeiters and drug traficers. Company directors can now be liable for infringements, company premises can be searched and materials taken and bank accounts frozen without warning and without going to court. The expression "you are dammed if you do, dammed if you don't" fits this situation perfectly.

The impact on both big and small customers of IT

The threat of patent litigation also impacts on the customers of SME's, as they don't want to shoulder burden of protecting themselves against litigation for using a piece of software. Increasingly, work contracts now include software patent ligation indemnification clauses. Since the cost of original software will never cover the cost of litigation, and its no longer possible to get insurance for this risk, SME's will increasingly have to withdraw from tendering for contracts. This means less revenue to sustain and grow SME, and less choice for end customers - at best they will now be stuck with just handful of expensive large IT corporations as suppliers or perhaps no suppliers at all. These end customers could be small business, from local shops through supermarkets, to big manufacturing business like Boeing; the whole range of end-customers of IT suffer.

Consumers are also affected: less products to market, what products that there are will be less functional, and crucially they will not be able to exchange files as easily as they could otherwise. With less competition in the market place the drive to reduce prices will be diminished. Prices can end up rising and the drive to improve products will also be not be present.

The impact on the EU as a whole

With the slowing of innovation in the EU due to software patents, IT companies and their customers will increasingly trail their counterparts in countries where software patents do not exist. The emerging market in China is one very clear example, whilst software patents in Europe will stop Chinese companies from marketing products in Europe, the Chinese market is big enough to sustain itself and will simply advance quicker, overtake Europe as a technology centre and then leave us behind. Not only will our IT businesses no longer be able to compete in China, but they won't be able to compete internally. Only by removing the brake of software patents will Europe be able allow the free market forces of competition allow it drive forward, only by advancing as quickly as we possibly can we expect to keep ahead in the technology race

Markets and society can work in a positive feedback loop or a negative feedback loop: technologically advanced societies will benefit from seeding greater progress, while societies that begin to fall behind no longer have the mindset to innovate and will be relegated to be mere consumers of technology. The freedom to build on and share ideas can stimulate a positive feedback loop with far east high tech industry being one such example, the phenomenon of OpenSource software is another example at a different scale. Conversely, software patents are alreading surpressing the freedom to build and share ideas - this instigates a negative feedback loop and a downward spiral ensues.

Europe also loses purely from the cost of licensing software patents, as the money goes predominantly to foreign business: over three quarters of all software patents granted in Europe are owned by non-EU business. If the EU wants to sustain growth in Europe then its must plug the sieve that is leaking money from Europe.

Furthermore without a healthy IT industry Europe will increasingly have to source IT products and services outside the Europe. The trade defecit in IT is already significant, shackling our IT industry with software patents will only make the situation much worse.

Background of Author

This article is drawn from my experiences of working in the IT business for the past thirteen years, with the last four running my own business.

Over the last four years I have had 4 direct experiences with software patents severely inhibiting product development, one case of a large customer requiring software patent litigation indenfication, and one case of potential infrigment with a benign defensive patent turning into a potentially offensive patent through a company buyout.

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