Patenting of Software and Business Methods

This article, based on a paper delivered on 31 July 2003 to the Legal Service Technology Law Core Group at the Subordinate Courts, discusses the different approaches to the patentability of computer software and business methods.

During the dot-com frenzy not too long ago, the protection of software and business methods provoked a degree of debate and anxiety that was positively neurotic, if not nationalistic. The Americans had been rather liberal in granting such protection, and this aroused fears and concerns within the European Commission that its member states were not operating in a level playing field. Understandably, the Europeans have their corner to fight, for the world at the dawn of the 21st century is as divided as it was at the beginning of the 20th century (when the Europeans reigned supreme) as regards how far it is legitimate to extend civil rights which inevitably restrict the right and freedom of other traders and other countries to compete. So the European Commission embarked upon an extensive as well as intensive five-year study and consultations which culminated in the publication in February 2002 of a report entitled ‘Proposal for a Directive on the Patentability of Computer-Implemented Inventions’ (‘EC report’). To be sure, the report did not entirely mollify many of the fears and concerns, but it does contain information and findings that are both interesting and salutary to Singapore. This article will discuss some of these findings.

Patents is one of the quartet of monopolies which form the core of what is now known as intellectual property law. The others are copyright, registered designs and trade marks. Each of these monopolies, in its own way, constitutes a fetter on the right and freedom of others to compete in the market place. Each, to some extent, restricts free trade and works against the public interest. These arguments of course represent one side of the grand debate. They ignore the benefits and enjoyment which the public at large can derive from the increased creativity and investment resulting from protection. It must also be borne in mind that a monopoly legislation is, at root, a response to the philosophical riddle that has vexed every legal, ethical, governmental and social discourse. The philosophical riddle is this: is the monopoly justified by the benefits which it gives to the society at large? This article proposes to unravel this riddle in relation to software and business methods.

The Computer

The computer now lies at the heart of the modern economy. It touches almost every aspect of life. Without it, there is a serious risk that life would literally grind to a halt. The computer and its progeny, computer software, control everything — from operating complex telecommunications equipment, to lifting the space shuttle from earth, to running your car engine and to controlling the air-conditioning system in the office.

There are two halves to the ubiquitous computer — hardware and software. Both need legal protection. The major hardware manufacturers, like IBM, Dell and HP, spend thousands of hours and millions of dollars designing and making each upgrade and each product better than the last. They depend for their success on effective protection of the creative efforts involved in designing and developing new products. That is why IBM has consistently been the largest patent holders in the world. Today, nearly one-third of its patents are embedded in products which are marketed world-wide.

Software and software companies arose as a result of the unbundling of software and hardware in the late 1960s by the hardware manufacturers. The unbundling spawned many software companies which started literally in someone’s home office or garage. As the personal computer increased in popularity and eventually appeared everywhere, the number of software companies increased sharply. Large sums of money were also invested in research and development by these companies. Microsoft, Computer Associates and Oracle, three of the most well known software-only companies, invested US$3.5bn combined in 1996. 60% of Siemens’ research and development annual budget of about 8bn Euros was spent on software development and it has some 10,000 employees solely engaged in software development all over the world.

Today, the software industry is critically important to many national economies and to the health of the world economy. According to the EC report, the industry has had a major impact on the whole of the European industry and provides substantial contribution to the GDP and employment of the member states. It reported that each software creates on average two to four jobs in the downstream economy (such as marketing and sales) and one job in the upstream economy (such as research). These figures appear to be rather low. At any rate, between 1999 and 2002, the number of such jobs created in the member states has been growing at around 47%. In Singapore, according to the Business Software Alliance (‘BSA’) in its report last month, the strong software growth has helped Singapore’s IT sector to grow to around S$3.5bn a year. It predicted that a 10-point drop in Singapore’s software piracy rate could help Singapore’s IT industry to grow to S$6.2bn by 2006, creating more jobs for the workforce. This is indeed an industry that any government must take seriously, if it wants to encourage companies to invest in the country.

Software piracy has been a pernicious problem in Southeast Asia which refuses to go away. Notwithstanding the best efforts of the BSA, the problem will probably not be resolved as long as there is money to be made.

This is not to say that there is something terribly wrong with the law, or with Singapore law. Of course, critics of the law have had a field day. Nicholas Negroponte, the internet guru, boldly declared at page 58 of his 1995 book entitled Bit Protection? In Being Digital that

Copyright law is totally out of date. It is a Gutenberg artifact. Since it is a reactive process, it will probably have to break down completely before it is corrected.

John Perry Barlow in his insightful article entitled ‘Selling Wine Without Bottles: The Economy of Mind on the Global Net’ wrote:

This vessel, the accumulated canon of copyright and patent law, was developed to convey forms and methods of expression entirely different from the vaporous cargo (namely, digital information and property) it is now being asked to carry. It is leaking as much from within as without ...

Intellectual property law cannot be patched, retrofitted, or expanded to contain the gasses of digitised expression any more than real estate law might be revised to cover the allocation of broadcasting spectrum. We will need to develop an entirely new set of methods as befits this entirely new set of circumstances.

Justice Laddie, that eminent custodian of the development of IP law in the UK, said that the law has gone too far. In a lecture sometime ago which he provocatively entitled ‘Copyright: Over-strength, Over-regulated, Over-rated?’, he asked a number of probing questions which have been on the lips of many. One of these relates to the period of copyright protection. There is a world-wide movement to increase the period to life of the author plus 70 years after his death, instead of 50 years. In the recent US-Singapore FTA, there is an obligation on both countries to provide copyright protection to each other’s work on the basis of the life of the author plus 70 years. This obligation is also found, or is being considered, in many other countries. Justice Laddie asked:

What justification is there for a period of monopoly of such proportions? It surely cannot be based on the principle of encouraging artistic creativity by increasing the size of the carrot. No one is going to be more inclined to write a computer program or speeches, compose music or design buildings because 50, 60 or 70 years after his death a distant relative whom he has never met might still be getting royalties. It is noticeable that this expansion of term is not something which has only occurred in the last decade. On the contrary, it has been a trend which has been in evidence for the whole of this century. Before the 1911 Act, the term of copyright in artistic works extended to seven years after the author’s death. In 1911, this was extended to 50 years after death. The growth of term is in fact greater than these figures suggest. Life expectancy in 1910 was far shorter than it is now. The result is that a monopoly which was expected to last about four decades in 1910 should now be expected to last on average more than three times as long.

These remarks are of course especially pertinent in relation to products such as computer software which is notorious for its short shelf life. The judge concluded by saying that:

In relation to a statutory monopoly like copyright (and one can include patents in that category), it is not open to a judge to pass through them undeterred. He must apply the law. But it is possible to see that in the case of copyright, not only do the mediaeval chains remain, but they have been reinforced with late 20th century steel. Perhaps the time has come when we should look again at the underlying assumptions on which this monopoly is based.

What are these underlying assumptions?

The principal underlying assumption is that copyright and patent protection promotes innovation and creativity, which are vital for the viability and success of a modern economy and which benefit everyone eventually. The assumption is grounded on the principle of reward, in that the protection in the form of a monopoly for a limited period is the reward for the investment in time and money in research and development. The conventional wisdom is that the reward in turn incentivises more artistic and inventive creations. In the case of patents, the protection is effected by a basic exchange in which the patentee gets the right for a limited period to exclude others from using the invention in return for a full disclosure of the invention to the public so that others may use his knowledge. The prospect of a temporary monopoly restores the incentive to make investment and take risk in inventing and developing new technical products and solutions, for the benefit of consumers. In the US, the right of an inventor to a patent is enshrined in the US Constitution itself and its whole patent system has a utilitarian nature.

This principle of reward has been the backbone of the patent system since the Statute of Monopolies in 1624 and has supported many technologies that have come and gone since then. The principle is as applicable today as it was nearly 400 years ago and applies to software as to any other technology, as expressly recognised by the WTO/TRIPS provisions which prohibit discrimination of patent eligibility based on technology. The provisions provide that standards for determining patentability of software inventions should not be any more rigorous than the standard used for other technologies.

Software

In relation to software in particular, the debate concerning the most appropriate IP regime for protection continues unabated. Copyright has of course been often deployed to protect software. It is easy to obtain and does not require any formalities. It protects the source codes, object codes and graphic user interfaces to the extent that they have their own individual character. But not everything in a software can be protected by copyright. This is because copyright only protects expression, rather than ideas. Inventions, on the other hand, are about ideas and applying those ideas to solve problems. Ideas by their nature may be expressed in any number of ways. Copyright does not, for instance, protect the functional interrelation between technical components of a system, for example, the architecture of a processor or the particular way of processing data in such a processor. It merely prevents copying and is inadequate to protect the functionality. The same functionality can be created in various ways of programming. Hence, even if a competitor is not allowed to copy a program, he can create a different program (and thus circumvent copyright) and still offer the same functionality. A patent would prevent the competitor from replicating the same functionality.

Further, there is a perception that writing software is fundamentally different from writing books. The complexity of information processing systems, the successive generations and principles of programming languages (procedural, functional, object oriented, etc) and the various basic paradigms of programming (deductive, inductive) suggest that the resulting programs are a product of engineering rather than literary activity. Therefore, it is only natural that patent law, rather than copyright law, should apply to protect such software.

Business Methods

Unlike software, business methods are as old as business itself. The arguments against patenting them are that innovations in ways of doing business are not like new drugs which require costly research and development. The advantages of stealing a march on competitors, albeit temporarily, are their own reward. Further, there is the practical problem for a patent office regarding searching for ‘prior art’ in business methods. The global scale of e-commerce and the internet makes it especially difficult for an applicant to show that his method of doing business is in fact new and for a potential objector to show that a patent has been ‘anticipated’. Also, even when a patent is granted, it may still be challenged at a later date, thus placing an onus on the patentee to ensure that his ‘claim’ is worded appropriately. The time and costs these involve are likely to prohibit SMEs and individual entrepreneurs from seeking business method patents, which means only big corporations can have such patents.

On the other side of the equation, it might legitimately be asked: if a commercially successful but seemingly simple invention, such as a bolt threaded in a specific manner, can be patented, why should a commercially successful but seemingly simple business method not also be patentable? To borrow an adage from the copyright law,¹ if it is worth developing, is it not worth protecting?

US Approach

This question is answered in the affirmative in the US where the law is that, in order to be patentable, an invention need simply be within a technological field and no technological contribution is required. The mere fact that the invention uses a computer or software makes it become part of the technological field if it also provides a ‘useful, concrete and tangible result’. This was confirmed in the 1979 case of Diamond v Chakrabarty [1980] 447 US 303 where the US Supreme Court went so far as to state that Congress, in defining patentable subject matter in s 101 of the US Patents Act, intended to include ‘anything under the sun made by man’. This paved the way for the protection of computer generated business methods such as:

1. a data processing system consisting of software for managing mutual funds using the ‘hub and spoke’ system (State Street Bank & Trust Co v Signature Financial Group [1998] 47 USPQ 2d 1956 (Fed Cir));
2. Amazon.com’s ‘one-click’ system which allows a customer to make a purchase with a single mouse click and the single click triggers an automatic retrieval of personal details such as name, address and credit card number (Amazon.com v Barnesandnoble.com 73 F Supp 2d 1228 (WD Wash 1999);
3. British Telecoms’ (‘BT’) ‘hyperlinks’ system which allows users of the web to move between pages by clicking on pictures and text; and even
4. a technique for swinging a golf club (US Patent No 5,616,089, 1 April, 1997).

European Approach

In contrast, in Europe, software can only be patented if it gives rise to a ‘technical effect’, and business methods ‘as such’ cannot be patented at all. This is due to Art 52 of the European Patent Convention (‘EPC’) which states as follows:

(1) European patents shall be granted for any inventions which are susceptible of industrial application, which are new and which involve an inventive step.

(2) The following in particular shall not be regarded as inventions within paragraph (1):

(a) discoveries, scientific theories and mathematical methods;

(b) aesthetic creations;

(c) schemes, rules and methods for performing mental acts, playing games or doing business, and programs for computers;

(d) presentations of information.

(3) The provisions of paragraph (2) shall exclude patentability of the subject matter or activities referred to in that provision only to the extent to which a European patent application or European patent relates to such subject matter or activities as such [emphasis added].²

(Interestingly, similar provisions were originally found in the Singapore Patents Act (Cap 221) but were deleted by an amendment in 1996. Therefore, it will never be known whether their retention would have impeded software innovation in Singapore, hence the focus of this article on the European experience.)

Not unexpectedly, the difficulty relates to the words ‘as such’ and according to a study incorporated in the EC report, this has given support to the widespread belief, particularly amongst SMEs and independent software developers, that software related inventions are currently not patentable in Europe. The study also noted the considerable concern amongst the SMEs and independent software developers about the potential adverse effects of extending patent protection to software related inventions. The case was made that the extension would mean that they would have to divert time and effort to making sure that they are not infringing patents as well as to enforcing patents in expensive litigation, which is a major burden for many of them. Supporters of the open source movement, in particular, consider patents to be a threat to the development and propagation of open source or public domain software.³ Their arguments include:

1. there is no conclusive evidence to suggest that the principle of reward in relation to software patents would promote innovation;
2. there have been widespread filings of trivial inventions in the hope that one will ‘strike gold’, such as BT’s US patent concerning the hyperlink and Amazon.com’s claim to ‘one-click shopping’;
3. software development is largely incremental and based on existing elements rather than a single inventive step. It usually embodies another process in the form of procedure, algorithm or method and, as such, copyright has proven to be adequate to protect software;
4. software patents would inhibit the inter-operability between hardware and software as well as cross-network inter-operability of software which are key to the success of the internet. In particular, software patents were seen as inhibiting the necessary openness and sharing of information.
   

However, the study also found the following countervailing evidence:

1. There was abundant evidence that the profitability and growth of SMEs and independent software developers in the US have often been to a significant extent dependent on possession of patent rights. This is because the patent rights help them to:
   
   1. raise finance to develop and market their inventions;
   2. license the competitors;
   3. sell or license their inventions to a large company;
   4. block the products of their competitors from going into the market; and
   5. use the rights as bargaining chips in cross-licensing negotiations and in infringement proceedings.
      
2. There was also ample anecdotal evidence indicating that lack of patent rights has made it easier for the large companies to take the ideas of SMEs and independent software developers and market them without compensation. Further, there was no evidence that in Japan, SMEs and independent software developers have been unduly hampered by the possession of patent rights by large companies or of others. They perceive the patent as an important tool to market their inventions world-wide.
3. On the filing of trivial inventions, there are existing safeguards. In practice, clearly invalid patents will be recognised as such, especially by the open source community. They will be exposed on the internet. The courts will back this up if the patents are indeed invalid. Further, knowledge or suspicion that a patent is weak or invalid makes for a weak bargaining position and does not help the patentee at all. Overall, the existence of invalid or weak patents, whilst inevitable (just like weak copyright works), has not constituted a significant barrier to software developers.
4. As regards the incremental and inter-operability issues, the evidence was that the market has the habit of eventually moving towards de facto standardisation according to the dominant player’s product or process. Possession of patent rights can help a player achieve dominance.
   

All this evidence led the study to conclude that, although there were considerable concerns by the SMEs and independent developers in Europe concerning the impact of patents on software, they have in fact not been unduly affected by the patents held by the big companies.

In light of this conclusion, the EC report has recommended that there is currently no need to change the patents law in Europe. The requirement of ‘technical effects’ should remain. This means that a business method is patentable only if there is a novel and inventive technical contribution or technical feature in it. Patents for ‘pure’ business methods will not be granted. The report found comfort in the fact that there has been considerable debate in the US itself as to whether granting business method patents may in fact stifle e-commerce.

In June 2000, the US Congress commissioned a report in which the various arguments for and against business method patents were laid out. Proponents of the patents argued that business methods are as subject to costly research and development as the traditional inventions relating to products, and there is no reason why the principle of reward should only apply in one area of costly research and not in another. Another argument put forth was that new business methods can also be valuable sources of information, just as traditional manufacturing techniques. They should be allowed to be patented, otherwise business method innovators will conceal them as trade secrets — therefore a loss to society at large.

Detractors of business methods patents questioned if there are indeed economic gains from such patents. They say that such patents may harm rather than foster economic progress as well as stifle competition. The attorneys amongst them argued that effort alone is insufficient to justify the reward of patent protection for an innovative business method. They point to the US Supreme Court case of Feist Publications v Rural Telephone Service 499 US 340 (1991) where the court rejected the ‘sweat of the brow’ theory as a basis for copyright protection by reasoning that effort alone was not enough to make a subject matter copyrightable. The court there concluded that an ordinary ‘white pages’ telephone directory was not copyrightable because it lacked even a minimal degree of creative expression.

Significantly, the US report could not conclude whether business method patents were good or bad for SMEs and entrepreneurs. It, however, noted that the availability of patent protection did enable these people to obtain venture capital and prevent free riding of their innovative business methods. On the other hand, the availability of the protection is a ‘double-edged’ sword for them in that it is very expensive for them to obtain and enforce patents in the US.

Conclusion

As mentioned before, Singapore has done away with the prohibition on patenting of computer software and business methods. The impact of this seems to be minimal. IPOS has been accepting patent applications for software and business methods, and there has been no concern expressed from any quarter that Singapore law has gone too far. In particular, the open source software industry has been silent in this regard. In this author’s view, this is understandable as, despite the presence of patent protection for software, the industry has continued to flourish, especially on the internet. It is suggested that if software innovation is to be encouraged and the software industry in Singapore developed, Singapore must offer the people involved a safety net. That net is patent protection, complementing or supplementing copyright protection. As regards business method patents, the European and UK approach is to be preferred.

Tan Tee Jim, SC
Allen & Gledhill
E-mail: tan.teejim@allenandgledhill.com

Endnotes