To Do or Not to Do?: Revisiting Business Method Patents in the Software Industry
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To Do or Not to Do?: Revisiting Business Method Patents in the Software Industry
By Anushka Aggarwal
In India, the debate over the patentability of business method inventions has taken on new dimensions with the rise of emerging information and communications technologies. Traditionally, India has excluded business methods from patentability but has granted copyright protection to computer software. For software, copyright protects the code (Copyright Act, 1957, s. 2(o)), while patents protect the technical process or functional aspects (Patents Act, 1970, s.3 (k)).
In the notable case of Open TV v. Controller of Patents & Designs, the Delhi High Court upheld the absolute exclusion of business methods from patentability. The Court’s suggestion for reassessment, though contentious as it impinges on legislative jurisdiction, demonstrates a willingness to reconsider the stance on business method patents. This shift moves the focus from whether business methods should be patentable to how broad the scope of patentable subject matter should be for business methods.
Spotlight on the Software Industry
This analysis focuses on the software industry, as addressed in the Open TV case. The correlation between the availability of patents and the incentive to innovate is not universal but industry-specific. I conclude that the patent system should maintain the absolute exclusion for business methods, regardless of emerging inventions. To support this, I explore whether patents are necessary to promote innovation in business methods, delving into the competitive and cumulative innovation theories relevant to the software industry.
Competitive Innovation Theory: The Importance of Executing the Move
The exclusion of business methods from patent protection is based on the understanding that the value of a business method lies in its execution, not in exclusive rights to the methods themselves. This means that the profitability of a business method comes from how well it is put into practice, rather than simply owning the method and preventing others from using it. For instance, algorithmic trading, which uses complex models to analyze market data and execute trades, falls under the exclusion of business methods. While innovative, its value to society is in execution and application, not in monopolizing the method.
Proponents of excluding business method patents argue that patents are unnecessary for encouraging innovation in such inventions. This competitive innovation theory posits that business methods in the software industry have sufficient market-based incentives like competition, consumer demand, and first-mover advantage. The first-mover advantage, driven by network effects, makes an invention more valuable as more users adopt it. Thus, ownership is not a prerequisite for innovation.
In Yahoo v Controller of Patents and Rediff.com, the Intellectual Property Appellate Board (IPAB) upheld the exclusion, emphasizing that patents are not needed as incentives in this domain. The counter-argument suggests that patent protection can make technology transfer more lucrative, reducing the cost of cooperation between firms and creating more opportunities for entrepreneurs. However, in the software industry, consumer preferences are often ‘sticky,’ meaning users are unlikely to switch platforms frequently. For example, users familiar with Facebook’s social media algorithm are unlikely to switch to a new platform, thus diminishing the value of patent protection in this context.
Evidence to support exclusion based on competitive innovation theory shows that rapid innovation in the software industry has occurred without strong patent protection. The absence of patents does not necessarily mean they are not facilitative, but patents for business methods in the software industry are not seen as sufficiently beneficial. Business method patents surely help companies gain competitive advantages, encouraging investment in innovative technologies. For example, Facebook and Google have filed and received patents (in the US) for business methods like social media algorithms and ad personalization respectively. (To see a counter view point, that such filings benefit only lawyers and a small number of inventors, see). However, patents impose social costs on consumers by creating temporary monopolies and restricting access to technology.
By creating temporary monopolies, patents impose a social cost on the consumers while excluding the access to technology to the other companies in the market. While a ‘pro-business methods attitude’ like in Bilski v. Kappos(here, the US Court rejected a categorical exclusion of business method patents from eligibility) might be favorable for developed countries like the US which have a robust market to take the weight of business method monopolies, in developing countries like India, the monopolies would be rather disadvantageous. Developing countries often rely on fostering market competition and encouraging the growth of diverse industries, especially in emerging industries like the software sector. Further, issues related to access to essential services and technology, say a healthcare startup innovating a telemedicine business method, become more crucial. Therefore, given the social costs that the patentability of business methods imposes, the exclusion remains justified for emerging technologies based on the competitive innovation theory. The patent law attempts to balance the social cost by requiring the satisfaction of criteria like novelty. However, the way the business methods are usually developed inherently challenges this criterion, suggesting that patent law is not necessary to strike this balance in the software industry.
Cumulative Innovation Theory: Rapid, Iterative Development of Methods
Innovation in the software industry is rapid but cumulative and iterative, building on pre-existing ideas and codes. This cumulative innovation theory suggests that the trend of rapid, incremental developments negates the need for patent protection. Granting patents for each incremental improvement could lead to a ‘patent arms’ race.
The high standard for non-obviousness, even to the extent of absolute exclusion, encourages innovation that enhances overall welfare. While some argue that patent protection for incremental improvements can stimulate innovation, the nature of emerging technologies like blockchain, metaverse, Internet of Things, and Artificial Intelligence (AI) makes distinguishing these improvements difficult. For example, AI algorithms, which consist of vast networks of artificial neurons, cannot be easily reduced to a set of instructions.
Conclusion: Upholding the Exclusion
The Delhi High Court decision sparks important debates about the scope of business methods eligible for patent protection, especially in the context of emerging technologies. However, applying traditional theories of competitive and cumulative innovation to the context of emerging software technologies reveals that the foundations for exclusion remain valid. Therefore, the absolute exclusion of business method patents in the software industry should continue, supporting a balanced approach to fostering innovation without the social costs of monopolies.