Issue No. 05 - September/October (2004 vol. 21)
European Union Struggles With New Rules for Software Patents
A proposed law designed to further standardize the patent process in European Union countries has sparked controversy with amendments relating to software and business methods. Passed last September by the European Parliament, the directive won approval by the EU Council of Ministers in May, but only after significant revisions that make it easier for large companies to win and enforce software patents.
Dubbed the European Union Directive on the Patentability of Computer-Implemented Inventions, the directive and its series of revisions underscore the great differences between Parliament's and Council's approach to the future of EU software patent law.
Open source software groups in Europe had cheered Parliament's earlier version of the proposed law, whereas some industry analysts and patent lawyers said it was problematic. One of the directive's goals is to encourage progress, innovation, and competition in the software market. But the lawyers questioned the strength of the patent protections in Parliament's version, saying that without solid protections, firms could seek to protect technical information as trade secrets.
Meanwhile, in the US, complaints continue to mount about the cost and complexity of the patent process for technology companies. Technology groups including the Electronic Frontier Foundation (EFF) say the process needs a tune-up, so they're taking action.
The directive's status
As software developers and technology companies in the EU and US keep a close watch, the directive's fate is uncertain. The next big step will come this fall, when Parliament will give it a second reading. If Parliament doesn't approve the directive as passed by the Council, it will go to a codecision process in an attempt to iron out the differences.
As it stands, the Council has amended the directive to consider for patent protection software that provides a technical contribution, and it will generally exclude from consideration business methods, such as Amazon.com's One-Click shopping service. The directive version that Parliament passed placed more substantial limitations on the patentability of computer-implemented inventions.
"The current version of the directive seems to confirm that the EU Council of Ministers and the European Parliament remain at opposite ends of the spectrum when it comes [to] the patentability of software," says Guy Gosnell, a computer science patent attorney.
"[This version] seems to be much more in line with the approach to the patentability of computer-implemented inventions taken by other countries including the US and Japan, while continuing to draw a harder line than at least the US in conjunction with the patentability of business methods," Gosnell says. "In this regard, the directive … appears to recognize the investment that is generally required for software development and to provide a mechanism for securing patent protection on the resulting software, such that the developer can recoup and perhaps make a return on its investment."
That said, Gosnell predicts Parliament won't pass the Council's version of the directive. The codecision process might not prove effective, either, he says. In this case, software patent law in Europe could remain much the same, he says, continuing somewhat inconsistent treatment of software patents, particularly in conjunction with enforcement efforts.
Open source supporters hold out hope
Parliament's view of patent law seems to leave large companies with the most to lose. The open source community and some of the smaller software companies cheered Parliament's tough stance. And groups such as the Foundation for a Free Information Infrastructure (a European group based in Munich) and the EuroLinux Alliance lobbied extensively to limit software patentability.
The groups also received high-profile support from the likes of Linux guru Linus Torvalds, who sent a letter encouraging Parliament members to act with caution regarding the directive's software patent rules.
"The experiences from the USA demonstrate that software patents don't benefit anyone but perhaps the patent lawyers," Torvalds wrote. "They will just weaken the market and increase spending on patents and litigation, at the expense of technological innovation and research."
Open source groups were pleased when the Parliament's version of the directive passed with the amendments limiting software patents, but some of these provisions continue to be the most contested. Open source groups opposed the Council's current version.
Copyright: The better choice
More patents won't help EU software companies become more innovative, argue some longtime software industry members, such as Robert Cochran, managing director of Catalyst Software.
Of the two main approaches to protecting software—copyright and patents—copyright is best, he says. Copyright law protects the original software author's rights, while still allowing liberal innovation and development in the marketplace, he says.
"Copyright has been around in some form for many hundreds of years and has been shown capable of adaptation to deal with new technological developments—thus, we have standard copyright licenses, Freeware, GPL (General Public License), Creative Commons, and many other forms all derived from the same underlying base of law and not requiring any significant change to that law," Cochran says, adding that copyright law is also almost free to implement. "When we turn to patents however, we see a very different picture."
The problem with patents
One important feature of patent law is that the patent rights start from the date of the initial patent claim, not the date of invention, Cochran notes. This is different from other intellectual property rights protections, which are based on first use, not first registration, he adds.
"This problem doesn't really arise to any serious extent in other fields, but is a major concern in relation to software," Cochran says. "It is one reason why I and many others believe that patenting of software is inherently anticompetitive and stifling of innovation."
Other problems: The costs of patenting prove out of reach for many small companies. It's also difficult for patent examiners to properly judge software-related applications. For all these reasons, Cochran backs Parliament's approach.
"I believe the directive is good insofar as it seeks to harmonize the rules regarding patenting of software-related items across Europe," Cochran says. "The more we have international, or at least regional, harmonization, the better. So the concept behind the proposed directive is sound and to be welcomed."
"The problem relates to the details of the proposed directive. There has been a creeping opening up of patents to software in Europe, following the practice in recent years in the USA. Perhaps [this is] because the European patent offices are under pressure from major international technology firms, who traditionally have protected their 'hardware' inventions by patents, but are now seeing major intellectual assets being based on software," he says.
"If this directive is passed in the format proposed by the Council, then it will leave a major risk that the door will be opened to preemptive patent-based attacks" on software, where success seems likely in fields considered important to the major international players, Cochran says.
A consensus on business methods
One thing Parliament and the Council agree on is preventing patents for business methods. Current European patent laws stress technical contributions to software technology; thus, e-commerce business methods don't apply. The directive in either version would continue that tradition.
US patent rules allow business method patents. This raises sticky questions for global e-commerce companies, Gartner Research warned its clients in an advisory regarding the Parliament-backed version of the directive.
"If the amended directive becomes law, the significant differences between the US and European approaches to software patenting raise the prospect of a patent war," the advisory said. "Potentially, this could have big implications for Web site operators as disputes arise" regarding enforcement jurisdictions.
In the US, the business methods patents issue continues to generate debate and court battles.
"Many people, like Amazon, have embraced business method patents because it's in their best interests," says Greg Kirsch, a software patent attorney and adjunct professor of patent law at Emory University School of Law. "The jury is still out on whether these patent laws are fulfilling their mission."
But if innovation is occurring that wouldn't without the patent protection, the patents are doing their job, Kirsch says. Although people often seek to make broad statements on patent law, software technology in particular requires a case-by-case examination to answer that innovation question, he says.
Differing patent rules in Europe and the US will be a hot topic as the European directive continues to move through the legislative process, he predicts. "There are some serious consequences if there's protection in one place and not in the other," Kirsch says.
US patent protests grow
Without question, patents are being sought, fought, and spent on at a fast pace in the US technology industry. For software companies, documenting previously invented technology, or prior art, has become a complex, ongoing battle, and one that can prove problematic for reasons developers are familiar with.
The US Federal Trade Commission spoke out on the US patents situation when it issued a report in October 2003 with recommendations for change. (The report followed a 24-day hearing that the FTC and the Department of Justice began in February 2002 to hear testimony regarding patent law issues and problems, including testimony from hardware and software companies.)
The FTC says it seeks to balance competition and patent law to encourage innovation.
In the report ( www.ftc.gov/os/2003/10/innovationrpt.pdf), it also proposes legislative and regulatory changes to improve patent quality. For starters, the FTC recommends making it simpler for firms to challenge a patent's validity at the US Patent and Trademark Office, as opposed to federal court proceedings. The FTC further advises changing evidence rules to improve courts' power to single out dubious patents.
But Congressional action would be required to enact some of the FTC's proposed changes, so the timetable for change is far from firm.
The National Academy of Sciences has also released a report this year urging reform to the US patent system, saying federal action is needed to improve the system's "flexibility, openness, and reliability."
The NAS suggests that Congress enact legislation to create an "open review procedure." This would let third parties "challenge recently issued patents before the US Patent and Trademark Office's administrative patent judges, who would resolve questions about a given patent's validity." The move would let federal district courts concentrate on patent infringement. Although this type of review system would require additional funding, it could lower court spending, boost quality of granted patents, and solve disputes more quickly, the NAS explains.
The NAS study also concluded that the USPTO must increase staffing and improve procedures to deal with the large volume of applications, which has now topped 300,000 per year.
Some groups, including the EFF, say technology patents aren't getting enough review. The EFF has begun the Patent Busting Project to take aim at patents that the group deems to be limiting innovation or threatening online communications technologies, such as blogging and video and audio streaming.
As part of the project, the EFF has crafted a "Ten Most Wanted" list of patents and plans to gather "prior art that shows their invalidity, and show negative impacts on online publishers and innovators," as outlined on the project Web site ( www.eff.org/patent/wanted).
The targeted patents are "overly broad," "being used to intimidate smaller players like individuals and small businesses," or affecting "pools of free expression," says Jason Schultz, EFF staff attorney.
"Not only do we want to eliminate these patents as a threat, we want to point out the cracks in the [patent application] process as well," Schultz says.
The EFF plans to challenge the patents' validity by filing reexamination requests to the USPTO. Look for the first of these requests to be filed by the end of this year, Schultz says. Such requests are usually accepted or declined for reexamination by the USPTO within three months; however, if accepted, the cases can take years to complete, he says.
Although the EU directive's implications are far from cemented, US companies and technology professionals are watching with interest, especially on issues such as business methods.
What are the long-term ramifications for US developers and companies that do business in Europe if certain software technologies or business methods are patentable in the US but not in Europe?
"If European laws are such that they don't provide much protection for software, people are just going to keep that information secret," Kirsch says. "Why go through the hassle of making it public" by even applying for European patents, he says.
If the Parliament-backed version of the directive prevails, "US companies would certainly be lacking one arrow from their quiver in Europe that they enjoy in the US, and would need to rely upon other forms of protection including copyright law and trade secret law to the extent applicable," Gosnell says.
EBAY SOFTWARE DEVELOPERS' HARD SELL
eBay is intent on making it easier for users to transact business over its online auction marketplace. And it's doing so with the help of hundreds of software solution providers.
eBay's Developers ProgramBenjamin Alfonsi
The eBay Developers Program, which was officially launched in summer 2003, is part mentoring program, part business partnership. It seeks out software solutions that make using the site easier and then helps developers go live with their offerings. According to Jeffrey McManus, senior manager of platform evangelism for the program, it provides opportunities for companies that deal in tangible goods as well as for solution providers.
And who benefits? Everyone, according to McManus. And the easier it is to do business on eBay, the more business eBay does.
"They win, we win, everybody wins," McManus says. "The program benefits the huge community of buyers and sellers on eBay, as well as the software developers who help make their transactions easier. There isn't always a divide between these two groups. A lot of developers are also high-volume sellers."
One example is Z Trading Post ( www.ztradingpost.com), formerly SuperPawn, an online pawn superstore. "We were one of the earliest developers to work with eBay," says CIO Marco Herrera. "We saw early on the potential for leveraging the eBay API to post volume."
But they needed a more efficient way of integrating Z Trading Post's sales offerings with the eBay sales channel. So, with eBay's help, Z Trading Post came up with a software solution that lets it automate and manage auctions in a more seamless fashion. As a result of plugging into eBay's API, Herrera estimates that the cost of an individual auction has dropped from US$22 per auction to less than $1.
The technology has proven so successful that Z Trading Post plans to market it later this year, and according to Herrera, several companies have already expressed interest.
"We had hoped to eventually sell the software, but we could not have predicted to what extent there would be a demand for it," Herrera says. "Our company began as a fourth-generation pawn shop, dating back to the late 1800s, and we're becoming a systems integration company. That was unforeseen."
Spreading the word
Aside from the obvious attraction of business gain for would-be developers, the program's other attraction is ease of use. According to Herrera, "They [eBay] have improved their API dramatically. Initially, you had to deal with things like XML yourself. But eBay has really expanded the platforms it supports."
"You can now develop eBay applications using any modern language or platform available today," McManus says. In attracting developers to the program, we gravitate towards where there's the opportunity for critical mass but we 'show the love' to others as well."
Indeed, one primary challenge—perhaps the only one at this stage—for evangelists such as McManus is spreading the word. But if the success of June's eBay Developers Conference is any indication, the program will continue to grow.
Five hundred participating developers attended the conference in New Orleans to get advice, give feedback, and, perhaps most importantly, generate new business relationships.
"Even in this technological age, there's something about doing business face to face," says David Steel, CEO of e-commerce platform Zoovy ( www.zoovy.com), who says he found the conference helpful. "It gives you the chance to meet other developers and find out what they're doing."
As for competition among program participants, Steel believes there's little. "There are so many people looking for all kinds of different solutions that there's plenty to go around.
"We doubled our customer base in the last 13 months," he says. "Before hooking up with the Developers Program, we had about 500 customers; now we have well over 1,000. And our customers have only gotten bigger and better, so our sales have actually quadrupled."
The Developers Program itself has witnessed this same kind of exponential growth. "When we started the program, we had about 200 developers working with us," McManus says. "Now we have about 8,000."
"eBay integration is already its own line of business, and the Developers Program will only expand it more. Ultimately, it's about acceleration through automation—but that's the core of any good software solution."