Law and technology

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.

Google has won a major legal victory, with the European Court of Justice (the EU’s highest court) ruling that Google can continue to sell other companies’ trade marks as AdWords keywords (it was the use of the Loius Vuitton trade mark by a competitor that sparked the suit). This is seen as a major setback to the ability of companies to protect their brands. But the ruling does not green-light all manner of trade mark infringement. Advertisers must still not engage in misleading, deceptive or other infringing conduct in relation to a trade mark. The Court said (via press release):

Google has not infringed trade mark law by allowing advertisers to purchase keywords corresponding to their competitors’ trade marks. Advertisers themselves, however, cannot, by using such keywords, arrange for Google to display ads which do not allow internet users easily to establish from which undertaking the goods or services covered by the ad in question originate.

The Court said it will still be up to EU member courts to assess, on a case by case basis, whether the particular way in which an advertiser has used its AdWords is confusing or deceptive – if so, standard trade mark infringement remedies will apply. Whether the service provider (i.e. Google in this case) could be found liable would depend on:

“whether the role played by that service provider is neutral, … is merely technical, automatic and passive, pointing to a lack of knowledge of, or control over, the data which it stores. If it proves to be the case that it has not played an active role, that service provider cannot be held liable for the data which it has stored at the request of an advertiser, unless, having obtained knowledge of the unlawful nature of those data or of that advertiser’s activities, it failed to act expeditiously to remove or to disable access to the data concerned”.

Service provider role recognised

The ruling draws a clear distinction between the service provider – which would avoid liability if it played merely a “neutral”, “passive” role – and the user of the service (i.e. the advertiser). There seems to be a growing acceptance of the need to make this distinction with online services. Other recent examples include an earlier UK ruling on defamation (again involving Google) and the iiNet case in Australia (currently under appeal).

This ruling applies only to Europe. Other trade mark claims have been brought and settled elsewhere, and further challenges will no doubt arise. But this ruling by the EU’s highest court is a strong endorsement of Google’s position. Due to the conforming nature of the internet, and the relatively consistency of trade mark law globally, the decision is likely to influence any challenge against Google in New Zealand.

An Australian version of the Peer-to-Patent initiative was recently launched in conjunction with IP Australia (official site). From the official announcement:

Peer-to-Patent Australia opens part of the patent examination process and invites the public to review patent applications volunteered for the trial… The process is designed to tap into the expertise of the public to help assess whether a particular application is eligible for a patent.

The system is currently being run as a 12 month pilot programme, limited to business method patent applications.

The original Peer-to-Patent initiative completed a 2 year US pilot in June 2009. While the US Patent Office has yet to report on its results, the first year report from the New York Law School was positive (some criticisms are listed at Wikipedia). The US pilot was not limited to business method patents, although interestingly the patent application which received the most user interaction was such a patent – “Method, apparatus and computer program product for providing status of a process” (hmm, maybe they could also give it a unique name like ps or top?).

It is a good idea for the Australian pilot to be limited to business method patents, which covers most manifestations of software patents. It appears that IP Australia is giving good support to it. Let’s hope that IPONZ watches this closely – IPONZ (like the MED) has good IT systems and has been quite progressive with IT. If the pilot works, it will be a major improvement to a currently in-need-of-improvement system.

Of course, as with any community-driven system, its quality will only be as good as the community supports it. For open source, could it be a case of “many eyes make bad software patent applications unsuccessful”?

In this week’s Computerworld, I have written an article on how intellectual property can be protected from trading risks. Software developers and tech companies in particular should consider implementing this sort of model. It is common for businesses in other industries to do so, but technology firms for some reason often do not.

An important thing to remember: it is often a lot easier to implement this model at the start of a business / project than once it is in place. It is usually not difficult per se to achieve after the business / IP is up & running, but there can be tax & accounting issues to deal with.

• Article: Firewalling your intellectual property from creditors (Computerworld 18/11/09)