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Today the Wall Street Journal reported that the US leads the world in R&D spending – at $450 billion – by a wide margin, outpacing Japan by a 3 to 1 margin, and most of the rest of the industrialized world by a factor of 4-10 to one.  (“How China Chases Innovation”, U.S. News – The Outlook, by Bob Davis, WSJ)  About 2/3 of all R&D spending in the US is privately funded.  China was the closest in R&D spending, at about 1/2 the level of the US.  Only Japan, Germany and South Korea spent more as a percentage of GDP.   Interestingly, all the top R&D spending countries ,as a percentage of GDP, had strong patent systems.  The lowest spending countries, Brazil and India, have notoriously weak patent systems.  Interestingly, despite its large R&D spend, China lags the world in “new ideas”, still focusing on imitating Western technologies and producing them more cheaply.

With the US leading in R&D spend, and China and other developing nations leading in low cost production, common sense tells us the patent system plays a vital role in protecting the US’s R&D spend against free-riding, low wage, imitator nations.

If you want a look at what competition in the US would be like without a strong patent system, just take a look at China, where copying is rampant, and a large percentage of innovators are rewarded with having their products cloned and their business destroyed.

While a lot of time is spent focusing on the perceived unfairness of paying a so-called “troll” (more fairly called non-practicing entities or NPE’s) for the right to make or sell a product, the reality is that the intellectual property rights asserted by NPE’s typically do not come cheap.  For example, companies like Microsoft and IBM Corporation spend heavily on advanced R&D, and without the patent system to help protect their investment and obtain a reasonable return, they would no doubt greatly reduce their spend.

The reality is that the US now exists in an entirely different world than it did even 30 years ago – a world in which power and wealth are tied more closely to ownership of intellectual property than to manufacturing production.   Is this a world in which the US wants to lead the effort to reduce the value of intellectual property protection?  I don’t think we need a Ph.D. in economics to answer that question for us.  What we need to do is take a step back and look at the patent system as a whole, and realize that all in all, the patent system heavily favors innovator nations like the US, not imitators in low wage countries.  While you can always find examples of where the patent system didn’t work as hoped for, there are many more examples for each of these where it did.

One of my favorite old adages is “be careful what you wish for.”   I think it serves well as a cautionary note for those that are calling for the abolition of software patents.  Why?  Because while the opponents of software patents constantly point out the downside to software patents, they NEVER talk about the downside of not having any software patents.  I can easily see some clear and present negative consequences to American software companies if we abolish software patents.

For one, all software will all be freely clone-able.   Because there will be no consequence to copying functionality (copyright does not protect functional aspects of software), the decision to buy or clone, and the decision to create something new or clone an established product, will strictly be one of which is cheaper.  Innovating, which is risky and costs money, will not be a wise use of money, when your reward will be handing your innovation to unimaginative, risk-averse, low cost producers, to clone.

Let’s say an established company wants to switch vendors for specialty software components it may be buying from one of the multitude of small software companies that support the business-to-business market.  No problem in a world without software patents.  Just give the new vendors the functional specs and have them clone away.  In this “clone at will” world, an innovative incumbent vendor, employing American-based innovators, will readily lose out to the vendors mindlessly cloning established products from a lower cost jurisdiction.   Actually, you don’t even need a lower cost jurisdiction for this type of competition to be unfair, where the incumbent has risked capital and expended substantial sums to establish a market for their product.

Or, let’s say you are an entrepreneurial software publishing entity in a low cost jurisdiction like India, China, South America or even Eastern Europe.  Right now, if you want to clone software covered by patents and sell it in the US, or even software not yet covered by patents but possibly covered in the future (once the US company starts getting cloned), you have a serious barrier to entry – the last thing you need is to blindly clone a product and walk straight into a patent infringement case, which can happen even if the patents in questions are relatively narrow.  But in the Shangri-La the anti-patent opponents envision, blind cloning by developers in low cost jurisdictions will be a fantastic business.  All they will have to do is wait for a US company to spend a few years risking their capital to establish a new market for a particular software product, and then come in to compete with a cheap knock-off.

Do innovative software developers really want a world where blind cloning is as easy as falling off a log?  I don’t think so.  If you ask me, If the anti-software-patent contingency got what they wished for, they would be wishing for software patents.

Yesterday, 100+ innovative American businesses sent a letter to Congress expressing strong support for the patent system and opposing expansion of the “Covered Business Method” (CBM) program.  Signatories to the letter include some of America’s most innovative companies including a number of leading software companies.  Software publishing companies and industry organizations signing the letter included Microsoft, Adobe Systems, IBM, and the BSA- The Software Alliance.   According to the letter, “The US patent system for more than 200 years has succeeded spectacularly in promoting ‘the progress of science and useful arts,’ as the Founders intended, in part because it has always provided the same incentives for all types of inventions. To expand and make permanent the CBM program would be to turn ill-advisedly and irrevocably in a new direction — discriminating against an entire class of technology innovation.”   The letter goes on to say expanding the CBM program “would have far-reaching implications, because data processing is integralto everything from cutting-edge cancer therapies to safety systems that allow cars to respondto road conditions in real time to prevent crashes. Subjecting data processing patents to theCBM program would thus create uncertainty and risk that discourage investment in anynumber of fields where we should be trying to spur continued innovation.”

A full copy of the letter can be found here:  http://www.scribd.com/doc/170311368/Letter-100-Innovative-Businesses-and-Organizations-Send-Letter-to-Congress-Objecting-to-Covered-Business-Method-Patent-Legislative-Proposals

This month, Colleen V. Chien, Associate Professor, Santa Clara University School of Law, published the above titled article that reported the results of a survey of a number of venture capitalists and start-ups.  The surveys were very instructive in a number of respects, and Professor Chien’s recommendations are thoughtful and constructive, and I support most of them wholeheartedly, including better funding for the USPTO, limiting the scope of patent cases so they do not automatically become wars of attrition, and requiring more specific infringement reads in demand letters.  I also think it would be interesting to know more about the “real party in interest” in NPE cases, in those relatively few circumstances it is truly hidden or obscured, but I’m not sure it really serves any purpose other than satisfying our curiosity.  I also agree with making start-ups less attractive as targets, but as I point out below, I think 99+% of all start-ups are already unattractive targets for the simple reason they almost never have money to pay damages.

While I like Professor Chien’s ideas as enumerated above, some of the statistical information in the article did not square with my personal experience representing start-ups over the last 30 plus years.  In particular, the article implies that there is a high likelihood that a start-up will face a patent law suit or patent demand crisis while still in the formative stages, and therefore be materially impeded from moving forward with their business.  For example, the article shows that 75-88% of VC’s have had an NPE make a patent demand on its portfolio, implying that 75-88% of all start-ups are going to face a serious patent issue.  To be fair, the article also notes that a much smaller 20% of start-ups responding to the survey reported getting a demand letter regarding a patent.

But these numbers, both for the VC’s and the start-ups, struck me as being much higher than my experience with what I believed was a “start-up.”  So, what accounts for the differences in my perception and the survey?  First, the definition of “start-up” used in Professor Chien’s article is pretty generous in terms of how long “start-up” mode lasts:  “Building upon the steps carried out by the Berkeley Patent Survey, we included in our sample companies less than 10 years old with at least one email address”, page 39.  Well, I have to admit there is no legal definition of how young a company has to be in order to be called a start-up, but I think calling a five year old business a start-up, much less a nine year old business, is a bit like calling a five to nine year old child an infant.  This is what Wikipedia says a start-up is:  “a business enterprise that has been launched recently.”  Generally speaking, I would say most people consider a start-up to be less than five years old, if not less than a few years old, if not less than two years old, but at the very least, not more than five years old.  Why is this important?  First, it helps account for why my experience has been so different than the typical experience of a VC funded start-up as represented in the article, in terms of patent threats.  If a VC funded start-up makes it past five years, it is likely one of the minority of start-ups that is making money, and is far from still operating in start-up mode.  Instead, it is at that point an emerging growth company, and indeed probably one in a very high technology industry that is thick with innovation and intellectual property.  In such circumstances, would it not be nearly expected for the company to be encountering some “friction” from companies it is competing with, or established holders of foundational IP?

Another interesting survey that was just released also flies in the face of the suggestion that the US patent system is weighing down start-ups, at least compared to other countries with patent systems less generous toward software patent protection.  This Business Week article: http://www.businessweek.com/articles/2013-08-27/why-the-u-dot-s-dot-should-get-more-credit-from-entrepreneurs, just released last month, cites to an Ernst & Young study published last month that concludes that the U.S. has the best environment for entrepreneurship among 20 of the world’s largest economies.  Why don’t any of these articles ever get any press in the anti-software patent lobby?

I am also amazed at how much time is spent focused on trashing software patents as though they were the “leading cause” of business failure, when in fact they are so far down the list of reasons businesses fail they barely register in surveys that aren’t on a witch hunt.  For example, in a statisticbrain.com survey (http://www.statisticbrain.com/startup-failure-by-industry/), patent suits or demands did not even make the list of top reasons for the failure of start-ups.  The top four reasons given were:  1) Incompetence; 2) Unbalanced Experience or Lack of Managerial Experience; 3) Lack of Experiences in line of goods or services; and 4) Neglect, fraud, disaster.  These four reasons alone account for 88% of failures, according to this survey.

Moreover, the odds of a start-up getting sued for patent infringement are negligible.  According to gust.com, a web site for start-up funding, there are several million “startups” formed each year, and of these, “in very general terms, roughly 1,500 start-ups get funded by venture capitalists in the US, and 50,000 by angel investors.” (http://gust.com/angel-investing/startup-blogs/2012/11/22/how-many-start-ups-in-the-us-get-seedvc-funding-per-year/) So then, what are the odds one of these three million or so start-ups is going to get sued?  Well, if you figure even 50% of the 5,000 or so patent suits are directed at start-ups, the odds of getting sued as a start-up are .083%, or about one in one thousand.  Hardly a crisis for start-ups in America, in my opinion.  Granted, if a “start-up” makes it to the point of profitability the odds go up, but even still, unless the start-up is infringing on a competitors patent, it runs little risk of being enjoined or put out of business, for while an NPE may be a parasite, its simply bad business for parasites to kill their hosts.

In summary, I like Professor Chien’s ideas for improving the patent system.  They are sensible and thoughtful.  As far as the survey data in the article goes, I think it greatly overestimates the problems poised by patents for the typical start-up.  In fact,  to the extent patents are a problem for a start-up, I think I can make a good argument that these problems are largely due to the success of other predecessor start-ups who toiled and pioneered technology years before and were granted valuable, broad, pioneering patent rights.

Finally, I always like to ask the question as to why, despite all the draconian predictions for years on end that patents are ruining innovation, start-ups continue to reliably deliver the bulk of true innovation and disruptive new technologies?  The answer is simple:  patents are the least of a start-ups problems.

“Coming down on the wrong side of the New Zealand patent debate is patently the worst advice for start-up entrepreneurs in the history of capitalism,” wrote Fisher, the CEO of CrowdOptic, the San Francisco-based startup behind the patent, in an email to Upstart Business Journal.  For the full story, visit the article here:  Upstart article

My thanks to Tim Bianchi, Schwegman, Lundberg & Woessner, PA, for this guest post:

On September 5, 2013, the Federal Circuit affirmed a District court holding that a computer system claim was not patent-eligible under 35 U.S.C. § 101.  In Accenture Global Servs., GmbH v. Guidewire Software, Inc., a divided panel affirmed a District of Delaware decision finding system claims 1-7 of U.S. Patent 7,013,284 not patent-eligible on summary judgment.  (Accenture Global Servs., GmbH v. Guidewire Software, Inc., 800 F. Supp. 2d 613, 621-22 (D.Del. 2011).)  Judge Lourie authored the majority opinion of the panel (Judges Lourie, Reyna, and Rader), and Judge Rader filed a dissenting opinion.

District Court Action Results in Summary Judgment of Invalidity Based on 35 U.S.C. § 101

Accenture sued Guidewire for infringement of the ’284 patent in late 2007.  In 2011, the District court found claims 1-22 of the ’284 patent invalid under 35 U.S.C. § 101 on summary judgment.  The District court decided the summary judgment motion after the Federal Circuit and Supreme Court decisions in In re Bilski, 545 F.3d 943 (Fed. Cir. 2008)(en banc) aff’d on other grounds sub nom. Bilski v. Kappos, 560 U.S. ____, 130 S. Ct. 3218 (2010).

Federal Circuit Appeal

Accenture appealed the District court determination only as to claims 1–7, directed to a system for generating tasks to be performed in an insurance organization, but did not appeal similar method claims 8–22.  The Federal Circuit affirmed the District court in a 2:1 split panel decision by leveraging the finding of patent ineligibility of method claims 8-22 that were not appealed:

We conclude that the district court’s decision on patent-ineligibility of the system claims must also be affirmed, both because the system claims offer no meaningful limitations beyond the method claims that have been held patent-ineligible and because, when considered on their own, under Mayo and our plurality opinion in CLS Bank, they fail to pass muster. Although the issue of the patent eligibility of the method claims is not before us, as it has not been appealed, it is plain to us that, as the district court held, those claims are ineligible for patent.

Because the ’284 patent’s method claims have been found to be patent ineligible, we first compare the substantive limitations of the method claim and the system claim to see if the system claim offers a “meaningful limitation” to the abstract method claim, which has already been adjudicated to be patent-ineligible. CLS Bank, 717 F.3d at 1291. Under this analysis, we compare the two claims to determine what limitations overlap, then identify the system claim’s additional limitations. Essentially, we must determine whether the system claim offers meaningful limitations “beyond generally linking ‘the use of the [method] to a particular technological environment.’” Id. (quoting Bilski, 130 S. Ct. at 3230).

According to the majority, one must consider if the method claims are similar enough to the apparatus claims to warrant a conclusion that the apparatus claims are equally not patent-eligible.

More about the ’284 Patent

The ’284 patent claims describe a computer system and method for handling insurance-related tasks.  The Federal Circuit decision summarized the claims as follows:

Claim 1 is a claim to a system for generating tasks to be performed in an insurance organization. The system stores information on insurance transactions in a database. Upon the occurrence of an event, the system determines what tasks need to be accomplished for that transaction and assigns those tasks to various authorized individuals to complete them. In order to accomplish this, the claimed system includes an insurance transaction database, a task library database, a client component for accessing the insurance transaction database, and a server component that interacts with the software components and controls an event processor, which watches for events and sends alerts to a task engine that determines the next tasks to be completed.

Claim 8 claims a method for generating tasks to be performed in an insurance organization. The method takes an insurance transaction and applies rules to that transaction to determine tasks to be completed. These tasks are made accessible to authorized individuals who then complete the task.

The text of claim 1 and claim 8 are provided for comparison:

1.  A system for generating tasks to be performed in an insurance organization, the system comprising:

an insurance transaction database for storing information related to an insurance transaction, the insurance transaction database comprising a claim folder containing the information related to the insurance transaction decomposed into a plurality of levels from the group comprising a policy level, a claim level, a participant level and a line level, wherein the plurality of levels reflects a policy, the information related to the insurance transaction, claimants and an insured person in a structured format;

a task library database for storing rules for determining tasks to be completed upon an occurrence of an event;

a client component in communication with the insurance transaction database configured for providing information relating to the insurance transaction, said client component enabling access by an assigned claim handler to a plurality of tasks that achieve an insurance related goal upon completion; and

a server component in communication with the client component, the transaction database and the task library database, the server component including an event processor, a task engine and a task assistant;

wherein the event processor is triggered by application events associated with a change in the information, and sends an event trigger to the task engine; wherein in response to the event trigger, the task engine identifies rules in the task library database associated with the event and applies the information to the identified rules to determine the tasks to be completed, and populates on a task assistant the determined tasks to be completed, wherein the task assistant transmits the determined tasks to the client component.

Claim 8 reads as follows:

8.  An automated method for generating tasks to be performed in an insurance organization, the method comprising:

transmitting information related to an insurance transaction;

determining characteristics of the information related to the insurance transaction;

applying the characteristics of the information related to the insurance transaction to rules to determine a task to be completed, wherein an event processor interacts with an insurance transaction database containing information related to an insurance transaction decomposed into a plurality of levels from the group comprising a policy level, a claim level, a participant level and a line level, wherein the plurality of levels reflects a policy, the information related to the insurance transaction, claimants and an insured person in a structured format;

transmitting the determined task to a task assistant accessible by an assigned claim handler, wherein said client component displays the determined task;

allowing an authorized user to edit and perform the determined task and to update the information related to the insurance transaction in accordance with the determined task;

storing the updated information related to the insurance transaction; and

generating a historical record of the completed task.

Federal Circuit Majority Compares Apparatus Claims to Method Claims

The majority compared the method and system claims of the ’284 patent:

It is not disputed by the parties that the ’284 patent’s system claim 1 includes virtually the same limitations and many of the same software components as the patentineligible method claims. Both claims are for “generating tasks to be performed in an insurance organization.” . . .  Both the claimed system and the claimed method contain an insurance transaction database containing information relating to an insurance transaction “decomposed into a plurality of levels from the group comprising a policy level, a claim level, a participant level and a line level, wherein the plurality of levels reflects a policy, the information related to the insurance transaction, claimants and an insured person in a structured format.” . . . Additionally, claim 1 and claim 8 both contain: a client component, . . . a task assistant, . . . and an event processor, . . . . The system claims are simply the method claims implemented on a system for performing the method.

Accenture only points to system claim 1’s inclusion of an insurance claim folder, a task library database, a server component, and a task engine in attempting to show that the system claim is meaningfully different from the ’284 patent’s method claims. However, these software components are all present in the method claims, albeit without a specific reference to those components by name. (underlining added)

The majority decision further determined that the ’284 patent does not distinguish the system and method claims:

Indeed, even the specification of the ’284 patent makes little distinction between the system and method claims. The patent describes the invention as “[a] computer program . . . for developing component based software capable of handling insurance-related tasks.” Id. col. 3 ll. 23–25. The patent then discloses detailed software descriptions of the various software components without differentiating between the system or method claims. Further, although the patent’s Figure 1 shows a schematic diagram of the invention, one that includes computer hardware, the schematic’s hardware is merely composed of generic computer components that would be present in any general purpose computer. . . .  The patent thus discloses that the representative hardware for the ’284 patent is a generic computer. In fact, other than the preamble to claim 1 stating that it is a system claim, the limitations of system claim 1 recite no specific hardware that differentiates it from method claim 8. Indeed, in this case “[t]he system claims are [akin] to stating the abstract idea [of the method claim] . . . and adding the words: ‘apply it’ on a computer.” CLS Bank, 717 F.3d at 1291 (plurality opinion) (citing Mayo, 132 S. Ct. at 1294).

Because the system claim and method claim contain only “minor differences in terminology [but] require performance of the same basic process,” id. at 1291, they should rise or fall together. Accenture only cited four additional limitations in system claim 1, and we have already indicated why those limitations do not meaningfully distinguish the abstract idea over the patent ineligible method claim. While it is not always true that related system claims are patent-ineligible because similar method claims are, when they exist in the same patent and are shown to contain insignificant meaningful limitations, the conclusion of ineligibility is inescapable. Thus, like the unappealed method claims, the system claims of the ’284 patent are invalid under 35 U.S.C. § 101.

Federal Circuit Majority Reviews the System Claims “On Their Own”

The majority decision included a separate section to analyze the claims on their own, stating that the system claims are ineligible for patenting because they fail to include limitations that set them apart from the abstract idea of handling insurance-related information.  The majoried identified this “abstract idea” of the claim:

The abstract idea at the heart of system claim 1 of the ’284 patent is “generating tasks [based on] rules . . . to be completed upon the occurrence of an event.” ’284 patent col. 107 ll. 25, 38–39. Although not as broad as the district court’s abstract idea of organizing data, it is nonetheless an abstract concept. Having identified the abstract idea of the claim, we proceed with a preemption analysis to determine whether “additional substantive limitations . . . narrow, confine, or otherwise tie down the claim so that, in practical terms, it does not cover the full abstract idea itself.” CLS Bank, 717 F.3d at 1282 (citing Mayo, 132 S. Ct. at 1300; Bilski, 130 S. Ct. at 3231; Diamond v. Diehr, 450 U.S. at 187); see also Ultramercial, 2013 WL 3111303, at *8 (“[T]he relevant inquiry is whether a claim, as a whole, includes meaningful limitations restricting it to an application, rather than merely an abstract idea.” (citing Prometheus, 132 S. Ct. at 1297)).

The majority decided that Accenture’s position (that the claim is limited by being applied in a computer environment and within the insurance industry) was not sufficient to adequately “narrow, confine, or otherwise tie down the claim,” citing Bilski, Diamond v. Diehr, and Parker v. Flook. The decision noted that the specification was complex, but deemed the claims to recite only “generalized software components arranged to implement an abstract concept on a computer.”

Federal Circuit Majority Compares the ’284 Patent Claims to the Ultramercial Claims

The majority differentiated claim 1 of the ’284 patent from the claims in the Ultramercial patent (which were found to be patent-eligible by the Federal Circuit panel only recently) by finding that claim 1 is more abstract than the claims upheld in Ultramercial.  Furthermore, the majority found that the instant case raise different procedural issues than the Ultramercial case, because in Ultramercial the claims had not been interpreted and were the subject of dismissal on a 12(b)(6) preanswer motion to dismiss.

Judge Rader Dissents

Judge Rader’s dissent made the following points:

• Judge Rader cited his decision in Ultramercial, Inc. v. Hulu, LLC, 2010-1544, 2013 WL 3111303 at *8 (Fed. Cir. June 21, 2013) for the proposition that (1) any claim can be simplified to an abstract idea if stripped of its concrete and tangible limitations, and (2) it is not proper for a court to go hunting for abstractions by ignoring claimed concrete and tangible limitations.
• He disagreed with the majority’s characterization and use of CLS Bank, stating: “[N]o part of CLS Bank, including the plurality opinion, carries the weight of precedent. The court’s focus should be on Supreme Court precedent and precedent from this court.”
• He disagreed with the majority’s position that Accenture’s failure to appeal the finding of invalidity of the method claims estopped it from arguing that the elements therein are directed to patent-eligible subject matter.
• He countered the logic set forth by the majority that the invalidity of the method claims urged similar invalidity of system claims by citing an excerpt from the CLS Bank decision.  That excerpt stated that just because one or more method claims was invalid under § 101, that does not dictate that all associated system claims must be likewise invalid.
• Judge Rader would have held that the specific combination of computer components rendered the claim patent-eligible under § 101.

The dissent recalled an earlier quote by the Court prior to grant of en banc review of CLS Bank:  ”[N]o one understands what makes an idea abstract.”  Judge Rader finished by reiterating his view that the statute should be consulted, which offers broad categories of patent-eligible subject matter.

Observations

It seems that the Federal Circuit could not be more divided on the subject of patent eligibility than it is today.  As long as the basics of patent-eligibility remain uncertain parties will have less knowledge about the strength of their patents and will expend a lot of resources posturing and briefing on these issues.  That will impact the resources of the courts.  Regardless of your position on patents and patent-eligibility, I think we all agree that what is needed is a patent system that is as uniform, fair, and predictable as possible.  It will be interesting to see if the Supreme Court is going to take this opportunity to again weigh in on patent-eligibility.

In reading this article about recently deceased Ronald Coase, Nobel Prize-winning economist, it struck me that the following proposition from Mr. Coase explains why the practice of bidding out legal projects has been largely a failure:  “The free market can be a huge hassle, and letting the market set prices for everything is not always the most efficient approach.”  This market inefficiency means that many types of volume legal projects (like patent applications or simple contracts) are priced using a fixed fee approach, even though the actual cost of any one of these fixed fee projects (measured on the basis of time and materials) can vary considerably from the fixed fee.  While this pricing mechanism is typically the most efficient for both client and attorney, it also has the natural tendency to attenuate the effort expended on projects that are the most difficult, and therefore cost considerably more than the fixed fee.  Unfortunately, in certain cases, these difficult projects may also hold the most potential value for the client, so appreciable attenuation of effort to fully exploit the value opportunity may cost far more in lost advantage than is saved through the pricing efficiency.  In other words, it is possible that projects with potential values differing by an order of magnitude end up getting roughly the same allocation of resources.  This is clearly not a wise use of resources.  Perhaps Mr. Coase would have recommended a more nuanced approach to fixed fee pricing that took into account the economic potential of a project.

(This post from Matt Adams, Partner, AJ Park Law & AJ Park Patent Attorneys, Wellington, New Zealand.)

The New Zealand Government recently put in place a new Patents Act. One of the hotly debated topics was the extent to which patent protection should be available for computer-implemented inventions.

Common sense has prevailed. New Zealand will continue to grant patents for inventions that make use of or involve a computer program.

The current law

Until the new law comes into force, inventions will be assessed under the Patents Act 1953 (the old act).  The old act defines an invention as any “manner of new manufacture”. What is patentable subject matter and what is not patentable subject matter is defined by case law and decisions of the Commissioner of Patents.

The Hughes Aircraft Company decision established the appropriate test for patentable subject matter in 1995 as:

… whether each of the claims define a method which, either directly or by clear implication, embodies a commercially useful effect.

The Haddad decision held that the term “manner of new manufacture” implies a situation which involves some sort of interaction with a real entity or which achieves a tangible product or result.

A blanket exclusion

A draft Patents Bill was released for public consultation nearly 10 years ago in December 2004. It did not restrict or exclude patents for computer-implemented inventions. A new government introduced the Patents Bill to Parliament in July 2008.

The Patents Bill was referred to the parliamentary Commerce Select Committee which then called for submissions. Many of the submitters were from the New Zealand Open Source Society (NZOSS) or their supporters who wanted an exclusion for computer programs. Many submissions urged a consistency of approach with other markets. The NZOSS for example suggested that “New Zealand could follow the European lead in patent law”.

The committee published a revised Patents Bill in March 2010. The revised bill included new clause 15 (3A) simply reading “a computer program is not a patentable invention”.

The view of government officials was that the committee intended this to be interpreted similarly to the interpretation of similar exclusions in the legislation of other countries, in particular the United Kingdom and other European members. This would allow computer programs to be patented if they produce a “technical effect”.

There was understandable concern that the wording proposed by the committee did not clearly express the committee’s intention. There was also concern that the courts would not interpret the restriction in the manner intended by the committee.

The ‘as such’ restriction

The government introduced supplementary order paper SOP 120 to better align the proposed wording of the exclusion with:

• the intention of the committee
• New Zealand’s international obligations
• overseas precedents.

The new clause had a European look about it as it excluded computer programs “as such”.

The new clause upset many of those submitters who had asked the Commerce Select Committee for an exclusion for computer programs. In order to address these concerns the government introduced supplementary order paper SOP 237. New clause 10A introduced by SOP 237 reads as follows.

10A     Computer programs

Interpretation of the new restriction

Clause 10A contains several additional new clauses intended to provide additional guidance on the proper interpretation of the phrase “computer program as such”. The phrase is intended to be interpreted in a manner that is consistent with New Zealand’s international obligations under the agreement on Trade-Related aspects of Intellectual Property Rights (TRIPS). The intent of parliament is to codify in legislation the first three steps of a test set out in an English Court of Appeal decision known as the Aerotel test.

There is a clear direction to the Commissioner of Patents and the New Zealand courts to apply the Aerotel test and subsequent English jurisprudence that applies the test when considering patent applications involving computer programs. The UK courts for example have allowed patents for a computer programmed to work better (Symbian), a better way of designing drill bits (Halliburton), and organisation of touch screen devices (HTC Europe v Apple). There are very few New Zealand cases in this field of patent law. The ability to refer to United Kingdom case law will certainly be of assistance.

Under the new law it will not be possible to obtain a patent for an invention that involves or makes use of a computer program if the alleged inventive feature lies solely in it being a computer program. However, a patent may still be granted for an invention that makes use of or involves a computer program if the actual contribution made by the invention lies outside of the computer or affects the computer itself but is not dependent on the type of data being processed or the particular application being used.

The way forward

As set out above, New Zealand will continue to grant patents for inventions that make use of or involve computer programs. There is clearly expressed parliamentary intention to apply the Aerotel test and subsequent English jurisprudence that applies this test.

Matt Adams