Analysis: Software industry split as Foss drops Patents Bill bombshell

A single-sentence change to the long-stalled Patents Bill has caused a furore in the software industry.

LATEST: Tindall, Morgan-backed software company resigns from NZICT amid Patents Bill spat

It seems dry stuff to outsiders, but emotions are running very high among those who work in tech. On the geek scale, this a bigger deal than gay marriage or whether to keep the drinking age at 18.

When the bill was first introduced, in 2010, some cheered that former Commerce Minister Simon Power had specifically excluded software from the legislation.

The change announced yesterday by present Commerce Minister Craig Foss is excruciatingly worded, but boils down to the fact that software programmes *will* be patentable (software is still excluded as an invention, but can meet other patentable criteria such as novelty “as such”).

On the face of it, you would think anyone in the software industry would want their work to be patentable. It’s a sector founded on intellectual property.

But it’s not that simple. Especially for a small New Zealand company, it’s expensive to apply for a patent across multiple countries (see some price examples in this piece I wrote for NZTE a couple of years back).

It also costs a lot to renew patents each year in each country you want to sell your software; more so given software is such a fast-moving industry,

Worse, if you think a big US player has violated your patent, it will cost you millions to take them on – millions you don’t have if you’re an NZ start-up (see a couple of examples in another article I did for NZTE: Keeping your big ideas safe).

It’s no wonder that successful Auckland-based mobile banking software company M-Com (bought by US giant Fiserv last year) chose to eschew patents – far beyond its financial reach - in favour of rapid innovation.

In a recent guest editorial for NBR, in which he raised fear about the US using the Trans Pacific Partnership agreement, to force NZ to rewrite its intellectual property laws, Institute of IT Professionals NZ chief executive Paul Matthews wrote:

Software patents and other IP mechanisms are designed to enforce a “status quo” approach where those countries in a “development” phase (such as New Zealand) are in a far less advantageous position as those in a “mature” market phase, such as the US, and it’s great to see that recognised by our government early in negotiations.

Last night, Mr Matthews railed against the Patents Bill change.

“This has been billed by the Government as a compromise. In reality, it is the worst of both worlds: allowing software patents through the back door (assuming New Zealand follows other "as such" jurisdictions) while reducing certainty for everyone,” Mr Matthews said.

“We're extremely disappointed that the government has decided to go against the unanimous position of the Commerce Select Committee and backtrack on the position they have held over the last two years.

“Software patents make software development and innovation significantly risky and at a time when many other jurisdictions are considering making changes to limit software patents, our Government has just opened the back door.

“The ‘as such’ provision being added has caused a disaster of litigation in Europe and other jurisdictions and is a dream result for IP lawyers in New Zealand; with software patents now likely to move to the courtroom for many years to come. As has happened everywhere else that has implemented "as such", innovative companies will have to spend a far larger portion of their meager funds on lawyers rather than getting on and innovating.”

Open Source Society president David Lane said the local software industry had been “thrown under the bus” by the software bill change.

Sticking with his bus metaphor, Mr Lane blogged on the "as such" addition: "those six letters represent a legal loophole the size of a bus."

A cynic would say that companies that operate in Mr Lane’s space, which typically make money from services sold around open source (collaboratively coded and often free) software – are less inclined to support software being patentable.

Mr Lane points out New Zealand’s largest commercial software developer, the export-orientated Orion Health, submitted against software being patented.

The OSS president sees Mr Foss caving to pressure from NZICT, the lobby group whose membership includes a number of the large US-based multi-nationals, including Microsoft and IBM.

NZICT CEO Candace Kinser rejects the argument that the switch to making software patentable will  

“New Zealand is already positioned as a leader in developing and commercialising technology and innovations, and we have had for a long while.  We are no longer in a ‘development phase’ in creating technologies or innovations. 

“New Zealand has a number of companies and technologies that are best in class, particularly in niche areas - these companies need to be able to protect their intellectual property and have the ability to patent their innovations here, and around the world.  No one is forcing a company to patent anything if they don’t want to, but taking away the ability to protect innovations if you do want to – that is oppressive.

“Most small companies need to raise capital so that they can get their invention off the ground. Trying to raise capital puts them in fierce competition with many great ideas. A lot of investors filter out anyone that doesn’t have a good strategy on IP, so patents can be essential just to get noticed.  Another issue is that many investors will not sign NDAs, so without patents there is no protection of the invention.”

In line with Australia
Ms Kinser also points out that including software in the Patents Bill brings NZ into line with Australia, which should help reduce costs for those seeking IP protection.

"It’s not easy for small companies if large companies copy their inventions, but at least they have some options and protection or recourse. Without patents there is virtually nothing they can do about it. The reality is if they are exporting, they will often need to work with patents anyway. It is simpler for them if the rules in New Zealand are the same as the countries they are exporting to. Otherwise there can be quite a few extra costs for them on working with patent attorneys."

NZICT's argument for patents
As I mentioned above, having recourse is all very well, but meaningless if you don't have the millions to take action against those you think have violated your IP (and of course, as Samsung has discovered in its fight against Apple, even near-limitless financial resources may not be enough).

Ms Kinser says those that don't wish to pay for patent protection (like M-Com) don't have to. 

"It’s a risk they chose to bear but at least with they have the choice to do so, or not," she told NBR.

Those that want to should have the choice.

"I’d hate to see more kiwi innovators going offshore to Australia and the USA because there is another hurdle put in their way to protect their product which will ultimately affect their ability to raise funds and ultimately commercialise their innovations on the world stage."

She adds, "Most small companies need to raise capital so that they can get their invention off the ground. Trying to raise capital puts them in fierce competition with many great ideas. A lot of investors filter out anyone that doesn’t have a good strategy on IP, so patents can be essential just to get noticed.  Another issue is that many investors will not sign NDAs, so without patents there is no protection of the invention.

"Small companies often look for opportunities to partner with larger companies to get momentum. Very few big companies will sign an NDA just to discuss an idea, so again, without patents there can be little protection of the invention, particularly if it has yet to be marketed or commercialised."

Last refuge of those that can't compete
Mr Foss has sought to move debate away from desktop and internet software. He says the change will help companies like F&P, which embeds software in the chips inside its whiteware.

Mr Lane is not impressed by that argument.

“From our point of view, embedded software is a very minor category relative to most software being created. The NZOSS would prefer a blanket exclusion for software patents whether embedded or not, but chose not to contest the embedded condition.

“Personally, I think that - like patriotism for a scoundrel - software patents (and related litigation/extortion) are the last refuge for companies who can no longer compete through innovation. If we can hasten their demise by removing software patents, the world will be better for it.”

Worked so far
NZICT's Ms Kinser notes that while the Patents Bill floated the idea of excluding software, it has been patentable "for many years in New Zealand, and during this time we have seen exponential growth in the sector."

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