Law and technology

The Government has cleared up the recent uncertainty about software patent reform by confirming that the proposed exclusion of software patents will proceed. A press release from Commerce Minister Simon Power said:

“My decision follows a meeting with the chair of the Commerce Committee where it was agreed that a further amendment to the bill is neither necessary nor desirable.”

During its consideration of the bill, the committee received many submissions opposing the granting of patents for computer programs on the grounds it would stifle innovation and restrict competition… The committee and the Minister accept this position.

Barring any last-minute flip-flop – which is most unlikely given the Minister’s unequivocal statement – s15 of the new Patents Act, once passed, will read:

15(3A) A computer program is not a patentable invention.

Lobbying

It is clear that the lobbying by pro-software patent industry group NZICT was unsuccessful, although Computerworld reports that its CEO apparently still holds out hope that “[IPONZ] will clarify the situation and bring this country’s law into line with the position in Europe and the UK, where software patents have been granted”. Hope does indeed spring eternal: the exclusion is clear and leaves no room for IPONZ to “clarify” it to permit software patents (embedded software is quite different- see below).

As I wrote earlier, it remains a mystery as to why NZICT, a professional and funded body, failed to make a single submission on the Patents Act reform process – they only had 8 years to do so – but instead engaged in private lobbying after the unanimous Select Committee decision had been made. It also did not (and still does not) have a policy paper on the subject, nor did it mention software patents once in its 17 November 2009 submission on “New Zealand’s research, science and technology priorities”. It is not as though the software patent issue had not been signalled – it was raised in the very first document in 2002. Despite this silence, it claims that software patents are actually critical to the IT industry it says it represents.

The New Zealand Computer Society, on the other hand, did put in a submission and has articulated a clear and balanced view representing the broader ICT community. It said today that “we believe this is great news for software innovation in New Zealand”.

Left vs right?

Is there a political angle to this? While some debate has presumed an open-vs-proprietary angle (a false premise) some I have chatted with have seen it as a left-vs-right issue, something Stephen Bell also alluded to (in a different context) in this interesting article.

Thankfully, it appears not. The revised Patents Bill was unanimously supported by the Commerce Committee, comprising members National, Labour, Act, the Greens, and Maori parties. It reported to Commerce Minister Simon Power (National) and Associate Minister Rodney Hide (Act). Unlike the previous Government’s Copyright Act reform, post-committee industry lobbying has not turned the Government.

What about business? NZICT apart, the exclusion of software patents has received the wide support of the New Zealand ICT industry, including (publicly) leading software exporters Orion Health and Jade, which as Paul Matthews notes represent around 50% of New Zealand’s software exports. The overwhelming majority of NZCS members support the change. Internationally, many venture capitalists and other non-bleeding-heart-liberal types have spoken out against software patents, on business grounds.

Some pro-software patent business owners might be miffed at a perceived lack of support from National or Act, perhaps assuming that software patents are a “right” and are valuable for their businesses. The reality is that only a handful of New Zealand companies have New Zealand software patents (I did see a figure quoted somewhere – will try to find it). Yes, they can be valuable if you have them but that is a separate issue (and remember, under the new Act no one loses existing patents). A capitalist, free market economy (and the less restrictive the better) abhors monopolies, and this decision benefits the majority of businesses in New Zealand. Strong IP protection is essential in modern society – including patents – (see my article “Protecting IP in a post-software patent environment“) but the extent of statutory protection when being reviewed will always come down to a perceived balance, not just for the minority holders of a patent (a private monopoly) but for the much larger majority artificially prevented from competing and innovating by that monopoly.

I have always taken pains to note, like NZCS, that there are pros and cons to software patents. And I am a fan of patents generally. Patents are good! But for software patents, the cons outweigh the pros. There are sound business reasons to exclude them. This specific part of the reform targets one specific area, has unanimous political party support (how rare is that?), and wide local business support. The last thing it can be seen as is an anti-business, left-wing policy (if it was, I’d have to oppose it!)

Embedded software

Inventions containing embedded software will remain, rightly, not excluded under the Patents Bill. Minister Power confirmed that IPONZ will develop guidelines for embedded software, which hopefully will set some clear parameters for applicants.

Software is essential to many inventions, and while that software itself will not be patentable, the invention it is a component of still may be. Some difficult conceptual issues can arise, but in most cases I don’t expect difficulties would arise. This “exception” (if it can be described as such) will not undermine the general exclusion for software patents.

My latest Computerworld article is now online:

• AdWords and trade marks: taking care of business, Computerworld, 15 July 2010

I know at least one New Zealand company is currently attempting to “peacefully” resolve a trade mark-AdWord situation. It could be some years, though, before a New Zealand court case emerges. The EU and Australian decisions (and a further ruling last week) are fairly orthodox (helpfully so), and there’s no reason that the same wouldn’t apply in New Zealand. In short, trading off other’s trade marks is a risky business. It can also be expensive – not just because of the possibility of being sued (which is usually a last resort and, in the scheme of things, relatively uncommon) but also due to being forced to change or abandon advertising efforts.

On a related note, for new businesses starting up, key steps before settling on a business / product / service name are:

1. Search the Companies Office for similar company names.
2. Check domain names (not just for availability but for similar names).
3. Check trade marks (again, not just for identical matches but similar ones too).
4. Check Google.

It’s a lot easier to get a “clean” name / brand at the outset than have to change it down the track.

The US Supreme Court has released its long-awaited Bilski decision involving business method patents. Many commentators had hoped that the case would provide a definitive statement on the patentability of business methods, and possibly other subject matter such as software patents, compression techniques and biotechnology. Instead, it seems the court has kicked for touch – or “taken a knee” in the American equivalent, I am informed.

The court ruled that the “machine or transformation” test was not the only criteria for determining patentability, but that there should not be “broad patentability” of business methods. Lower courts could continue developing limiting criteria. It upheld the lower court’s decision to reject Mr Bilski’s attempt to patent a method of financial hedging. But it left many questions, and some confusion, by not giving clear guidance on what’s patentable and what’s not.

Some comments:

Forbes.com:

The practical effect of the Bilski ruling will be limited, lawyers said, but it will definitely mean more lucrative patent litigation.

New York Times:

There were high hopes that the Supreme Court would clear things up in the mushy, litigation-filled realm of patents on methods of doing business.  [Bilski] was anything but a landmark decision. Still, there was a clear message for patent trolls, patent brokers and licensing companies, patent lawyers and lobbyists: Play on!

“The court is certainly not shutting the door on business method patents, as some thought it might,” said Josh Lerner, a patent expert at the Harvard Business School. “This preserves a fair amount of ambiguity.”

Patently-O:

Although not rejected by the majority opinion, it is clear that the broad “useful, concrete, and tangible result” test is dead. That test is conclusively rejected by what I term the Anti-State-Street Majority — a majority created by the combining the two concurring opinions in Bilski and their five-justice majority. The result is that the scope of patentable subject matter is certainly narrowed from its 1998 high-water-mark.

Glyn Moody:

So, the long-awaited US Supreme Court ruling on Bilski vs. Kappos has appeared – and it’s a mess. Where many hoped fervently for some clarity to be brought to the ill-defined rules for patenting business methods and software in the US, the court instead was timid in the extreme. It confirmed the lower court’s decision that the original Bilski business method was not patentable, but did little to limit business patents in general.

AP:

Scott Bain, lawyer for The Software & Information Industry Association, said the decision “preserves a delicate but important balance.” “It keeps the door closed to patenting mere abstract ideas, which many ‘business method’ patent applications have been,” he said. “But just as importantly, it affirms the continued viability of patenting useful software applications, which will allow software companies to continue in their role as a driver of economic growth.”

Nature:

For those who were looking to the Supreme Court to provide clarity on a contentious issue, however, the court’s limited ruling was a bitter disappointment. “The decision is incredibly unhelpful,” says Steven Bauer, head of litigation at the law firm Proskauer Rose in Boston, Massachusetts. “Nothing in their decision can be used to decide what’s patentable or not.”

The decision had potential ramifications for New Zealand companies who have (or hope to get) business method patents. If such patents were unavailable in the US, the value of having them in NZ and other countries could be somewhat undermined. Unfortunately, though, the recent New Zealand patent law review also didn’t address business method patents in much detail, and it will probably be many years, if ever, before the NZ Appeal Court or Supreme Court hears a similar case. The net result for all is the status quo, and business method patents will remain murky for some time.

It also will not affect the ongoing software patent debate in this country, which is also somewhat up in the air.

Reports are emerging that the proposed ban on software patents may be dropped. There are certainly a small number of organisations and lawyers who were most upset by the proposal – including NZICT, who apparently instigated the lobbying effort to reverse the change – although it appears to have received broad industry support.

It is too early to tell whether the reported comments of Ministry of Economic Development officials represent Government policy. If they do, it would represent a significant change from the Government’s earlier position as stated publicly by senior Ministers and MPs following the Select Committee report.

It would not be a major surprise, though, for the final bill to be substantially “tweaked”. The proposed exclusion came as a surprise to many, including some who had submitted in favour of it. The fact is there is not a large “anti-software patent vote”, and the Government is not going to upset too many people (relatively) over such an arcane technical issue. For those reasons, the proposal was always susceptible to lobbying.

The suggestion is that the ban might be scaled back to the lesser, “somewhat restricted” position of the European Union – the MED’s view being that if something is patentable in the EU it should be patentable here. There is merit in that suggestion, although in the US and the EU software patents are contentious and somewhat in flux themselves.

Whatever the final outcome is – banned, allowed, or restricted – it is hoped it will at least provide clarity for the market (and not just opporunities for lawyers!). Many of the alleged problems with the current system arise from uncertainty and loopholes. The new law is an opportunity to establish a clear framework for the future. It is also hoped that an explanation for any departure from the Select Committee’s unanimous report (if indeed that occurs) is provided.

My recent Computerworld article is now online:

• Protecting IP in a post-software patent environment, Computerworld 10 May 2010

The article briefly summarises some of the ways developers can protect valuable intellectual property if, as expected, New Zealand bans software from patentability. I avoided the pros-vs-cons debate, because the decision has been made (after an 8 year long review). For developers operating in New Zealand, software patents will not be an option. Software patents in other countries still are, though.

Meanwhile in a new development, a German appeals court has reversed a lower court and upheld a software patent:

… the highest German appeals court in matters of civil and criminal law overruled the country’s highest patent-specialized court and decided that a client-server software for the automatic generation of structured documents (such as XML or HTML) is an example of a patentable software invention… This decision has the effect that in Germany, a country in which software patents were previously only considered valid under relatively strict criteria, all software ideas are now potentially patentable as long as they are innovative from a purely formal point of view, meaning they’re at least marginally different from how a technical problem was solved before.

If this is a change in position (change being the only constant), does it represent a change in European policy? No – Courts do not (or should not) make policy. They interpret and apply law.  But if Europe does change its position (politically or judicially) on software patents, will New Zealand need to follow suit and reverse its expected software patent ban? Pressure to conform with international norms (if one emerges) and trading partner requirements may force a change down the track, but the New Zealand decision was born of widely supported policy, not judicial opinion (or judicial fiat for that matter).

Another judicial development still pending is the US Supreme Court’s ruling in Bilski, expected to be released in the near future. That decision could impact on the ability to patent business methods, which underlie many software patents (and vice versa).

P2P operator personally liable for copyright infringement

A US court has ruled that LimeWire, one of the early popular file-sharing sites, induced copyright infringement (Eric Goldman has an excellent summary here of the “intention” issue). While this outcome was really inevitable, what is more relevant is that the Judge also ruled that the founder and sole director, Mark Gorton, is personally liable. This is a clear warning that peer-to-peer operators potentially face personal liability – which some say could have a chilling effect of P2P services.

In New Zealand, section 92B of the Copyright Act provides a limited safe harbour from copyright infringement (see my Computerworld article here) [Note: this part of the Copyright Act is due to be amended] . Whether this would protect a LimeWire-like operation in New Zealand is debatable – s92B does not protect intended infringement.

The US decision also involved liability under trade practices laws. In New Zealand, personal liability can attach to directors of companies under the Fair Trading Act 1986.

50,000 Hurt Locker downloaders to be sued

It is being reported that upwards of 50,000 people are in the process of being sued for pirating the Hurt Locker movie. The movie was leaked to the internet several months before its release, which potentially cost it dearly in ticket revenue. The lawsuits are aimed at generating settlements. Since the first lawsuits were filed in January 2010, about 40% have already settled.

There are no reports of proceedings outside of the US. Class actions in New Zealand are not facilitated by the legal system, and are very difficult to bring (a failing of our legal system) and it is therefore unlikely that proceedings will be brought against New Zealand users due to the high cost of doing so.

iiNet appeal set down

The legal appeal of iiNet’s total victory over anti-piracy group AFACT ’s claims of copyright infringement liability in Australia has been set down for August this year. As with the first ruling, this appeal will be closely watched – enormous resources are being put into heavyweight IP litigation around the world to determine just where the line should lie for ISP / third-party liability for copyright infringement. Several decisions have recently gone against rights-holders, while others (such as the Newzbins case in the UK and the LimeWire case above) went the other way. The iiNet appeal will be heard in the Federal Court. If iiNet wins again, it is likely that AFACT will seek a further appeal to the High Court of Australia.

The New Zealand Computer Society has written to the Minister of Commerce, Simon Power, in support of the planned removal of software from patentability. From the letter:

We are of the view that there are significant advantages and disadvantages to removing patentability of software, and there are a number of significant considerations and issues that need to be addressed. However on balance, the Commerce Select Committee’s recommendation is one we support.

The letter goes on to give good reasons for the position. It concludes:

NZCS represents a broad church of ICT professionals and no doubt some of our members have different views on software patents (as with all things). However … the evidence certainly appears clear that software patents are simply too potentially harmful to our sector, and in fact innovation in New Zealand, to support. … People should have the option of commercial exploitation of their creations, however we believe this protection is inherent and appropriate in Copyright.

The word “potentially” is important here. While it is easy to point to the odd success story that might be linked to a software patent, it is much harder to justify the potential harm. The NZCS can be commended for taking a balanced position on this subject. As it takes pains to point out, there certainly are some benefits in software patents, and few people would argue otherwise. However, there are greater disadvantages.

NZCS has also conducted a survey of its members, showing “around 97% support for NZCS taking a stand, and approximately 80% in favour of us supporting the Commerce Select Committee’s recommendation that software patents be removed.”

Meanwhile, another industry group NZICT has issued a press release expressing concern about the proposal. Unfortunately, the press release does not set out any evidence in support of its position. It also makes the extraordinary claim that “the software industry has not been consulted sufficiently on this change”, despite an extensive consultation process running for over eight years, including the first round of industry submissions on software patents reported in November 2002.

The Government’s decision to ban software patents has been harshly criticised as likely to damage investment and “suck the lifeblood” out of the New Zealand software development industry (Computerworld print edition, 12 April 2010). What evidence is there to support these contentions? Certainly none have been put forward. Here are comments from a trio of industry-leading organisations who know a thing or two about the industry:

• The CEO of the New Zealand Computer Society, Paul Matthews, says “on balance the evidence is clear that software patents are simply too harmful to our sector, and in fact all of New Zealand, to support. We were very happy to see Software Patents removed from the Bill and will be making it very clear to Government that we would be very disappointed to see them make an unwelcome return.”
• IP lawyer and former president of the New Zealand Software Association, Wayne Hudson, says that most of NZSA’s members can’t afford to “play the patent game”, and most members are “probably apathetic” to the issue.
• The CEO of Orion Health, New Zealand’s leading software exporter, Ian McCrae, supports the ban on software patents, saying the negatives outweigh the positives (Computerworld print edition, 12 April 2010).

Add to that the New Zealand Open Source Society (which has been the leading voice against software patents), other leading firms such as Catalyst IT, and numerous others, and it is clear that a very large part of the industry is either happy or apathetic about the ban on software patents.

The cross-party Commerce Committee (chaired by former lawyer, and opposition MP, Lianne Dalziel, and deputy-chaired by National MP Peseta Sam Lotu-Iiga, also a lawyer) unanimously recommended the ban, accepting the submissions in favour. The Commerce Minister, Simon Power (another former lawyer) says “the Government believes the committee has dealt with the issue in a sensible manner and has found a reasonable solution”.

So who is actually unhappy about this decision?

• Microsoft New Zealand, which says it is “concerned”, although it acknowledges it doesn’t actually do software development in this country;
• Microsoft partner Intergen (a leading NZ firm), which says it damages the industry [see comments section], although it was (by its own account) not interested in putting in a submission to the Select Committee (Computerworld print edition, 12 April 2010), and according to IPONZ does not hold any patents in its name or its parent company’s name.
• NZICT (whose Tier 1 members include major patent-holders Microsoft, IBM, and HP), though it appears not to have a policy position on this apparently critical issue, did not make a submission to the Select Committee, and did not mention software patents in its 17 November 2009 submission on “New Zealand’s research, science and technology priorities”.
• Patent attorneys AJ Park and Baldwins, both of which have filed software patents on behalf of international patent holders.

So, in the main, it appears that those unhappy about the decision are limited to the local subsidiaries of major international patent holders, their association (NZICT), and their local business partners. Their opposition is understandable. There are certainly some advantages to software patents to existing holders – but there are more disadvantages and other reasons not to allow them.

Banning software patents will align New Zealand with the European Union and remove a significant threat to the local industry. The general unavailability of software patents in the EU does not seem to have held back the IT sector in that region (or indeed the development of the internet itself). No compelling arguments have been put forward to indicate that New Zealand will somehow have a different experience after the new law takes effect. Instead, as the Select Committee unanimously found and the Government has agreed, the removal of software from patentability is a positive move, and one that has support across New Zealand’s IT industry.

The Select Committee examining the proposed Patents Bill has recommended that software patents be excluded from patentabilty (full report, 1.6MB PDF):

We recommend amending clause 15 to include computer programs among inventions that may not be patented. We received many submissions concerning the patentability of computer programs. Under the Patents Act 1953 computer programs can be patented in New Zealand provided they produce a commercially useful effect. Open source, or free, software has grown in popularity since the 1980s. Protecting software by patenting it is inconsistent with the open source model, and its proponents oppose it. A number of submitters argued that there is no “inventive step” in software development, as “new” software invariably builds on existing software. They felt that computer software should be excluded from patent protection as software patents can stifle innovation and competition, and can be granted for trivial or existing techniques. In general we accept this position.

It is great to see the committee has accepted the core arguments put forward by a range of submitters (including myself) and rejected the opposing views put forward against those arguments. The mention of open source is significant and quite likely the first time it has directly influenced policy.

The actual proposed amendment implementing the ban is straightforward:

15(3A) A computer program is not a patentable invention.

The committee has not attempted to define “computer program”, which is sensible and consistent with the use of that term in the Copyright Act 1994. The amendment is not wide enough that it will necessarily prevent someone attempting to dress up what would otherwise be a software patent application as a business method patent. But it will be highly effective in most cases, and should prevent the worst examples of software patents granted (or threatened) overseas from being replicated in New Zealand (e.g. 1-click).

The House will need to vote on the proposed changes to the Bill.

The committee also discussed embedded software:

While the bill would provide adequate incentives for innovation, however, we are aware of New Zealand companies who have invested in a significant number of software-related inventions, involving embedded software.* We sought advice on the approach
taken in other jurisdictions such as the United Kingdom and the United States, and whether legislation that would enable “embedded software” to be patentable might be practicable. After careful consideration we concluded that developing a clear and definitive distinction between embedded and other types of software is not a simple matter; and that, for the sake of clarity, a simple approach would be best. We received advice that our recommendation to include computer programs among the inventions that may not be patented would be unlikely to prevent the granting of patents for inventions involving embedded software.

Software in any form would likely be caught by the proposed section 15(3A), but the final sentence of the above quote reflects the fact that it will not be possible, or practical, in many cases to separate the embedded software from an invention. It is important to note that the proposed Bill does not expressly endorse embedded software patents, but as with business method patents each application will need to be assessed on its merits.

Pink Floyd has won a case, in the UK, preventing its record label EMI from distributing its songs individually, instead of as an entire album. The band objected to this practice, which it said undermined the integrity of their “seamless” albums. The judge said EMI was “not entitled to exploit recording by online distribution or by any other means other than the original album, without the consent of Pink Floyd”.

While this case turned on a contractual clause expressly prohibiting EMI from selling Pink Floyd’s songs “out of context”, New Zealand’s copyright law can give musicians (and other copyright holders) limited protection against “derogatory treatment” of their musical works outside of a contract (part of the “moral rights” of authors long recognised in civil law jurisdictions, but only since 1994 in New Zealand).

Under section 98 of the Copyright Act 1994, an author of music has the right (with various complex requirements and exceptions)  “not to have his or her work subjected to a derogatory treatment”. It is important to note that, where this section applies, it gives the right to the author, not the copyright owner who usually has all the rights under copyright law.

Derogatory treatment includes doing something “prejudicial to the honour or reputation of the author”.  What this actually means in practice is not always clear. In the case of a band, whose reputation might include concept albums portraying a high level of “interconnectedness” of songs, an argument could be made that breaking up the album, or rearranging it, or reducing a song to ring tone without permission, is a derogatory treatment. Similarly, using a musical work to accompany or promote a highly offensive movie could be derogatory treatment (one quirk is that moral rights extend to the “musical work” but not necessarily to an actual recording of it). In either case, the person using the work may be licensed to use it, but the author may still have a remedy for derogatory treatment. It would very much depend on the facts, taking into account the complex and incomplete coverage of moral rights.

One of the few New Zealand cases involving derogatory treatment is Radford v Hallensteins ([2009] DCR 907 and others). It involves a clothing chain that printed t-shirts showing an image of sculptor John Radford’s Western Park installation in Auckland. Radford has brought a claim against the clothing chain for copyright infringement, including derogatory treatment of his work. The case is yet to be heard, but the District Court refused to strike out the claim last year.