The United States Chamber of Commerce (USCC) has yet again awarded a dismal rank to the Indian IP Regime, and made sharp criticism of the IP policies of the Modi Government. The 4th Global IP Index, prepared by the Global IP Chamber of the USCC, ranks India’s IP environment second. In this report, the US Chamber of Commerce recommends that ‘the guidelines published in August 2015 (Guidelines for Examination of Computer Related Inventions) provide for the broad patentability of CIIs including in operation through not only novel hardware but also “known hardware.” The publication of these guidelines and the potential expansion of the patenting of CIIs with the use of these new guidelines by the Controller General would have been a major step forward for India’s national IP environment and a boon to the software industry in India and beyond.”
However, contrary to the suggestions by the US Chamber of Commerce, the Indian patent office has recently decided to roll back its August guidelines and restrict software patenting for computer-related inventions. This might seem to be a retrograde step, and it certainly warrants a critical analysis.
Landscape & Patentability
India is a party to the TRIPS agreement, which requires patents to be “available for any inventions, whether products or processes, in all fields of technology”. Because of this clause, some have argued that the TRIPS agreement requires India to grant patents for software, although it is subject to interpretation. Nonetheless, several measures have been taken by different patent systems to ensure that the software industry does not get converted into a landmine of numerous patents such that no one can innovate without infringing another patent.
India is not the only one to have restricted software patentability. There are several other countries and patent offices that have treaded this path:
1) The European Patent Office does not process software patent applications if they are limited to mere automation provided by a computer and the self-evident physical processes happening within the computer when the software is executed.
2) New Zealand passed a patents bill in 2013 to restrict software patentability in an attempt to protect its fledgling software industry. It restricts pure software innovations from being patented. However, software can still be patented when it is a part of a novel piece of hardware.
While these nations have restricted the level of patentability for software innovation, some countries such as Russia, Philippines and the GCC have banned software patents altogether.
The current stance of the Indian Patent Office is quite similar to that of New Zealand. Software patents are to be granted only when they are claimed in conjunction with a novel hardware. Pure software patents will be denied a grant.
Unlike pharmaceutical or chemical patents, software patents are not indexable, leading to prohibitively high discovery costs. This results in inadvertent infringement, despite hours of legal research. There are IP spaces that cannot be efficiently indexed or searched, and in such shadows inadvertent patent suits and counter-suits crop up. Popular legal experts Christina Mulligan outlines this problem in her research paper ‘Scaling the Patent System’. A well-functioning patent system requires the discovery costs to be low enough so that it is economically feasible for firms to obtain information they need to comply with the law. As the number of software firms begins to increase, as well as the average number of non-indexable patents owned by a firm begins to increase, the discovery cost starts increasing by order of their product, and soon the game gets skewed in favour of the bigger firms who can afford the fees. The cash strapped start-ups of India would not have sufficient space to grow against IP threats from bigger multinational firms with stronger portfolios.
Although patents are termed as intellectual property, various scholars have noted that software patents do not function well enough as a property. In a well-functioning property system, property boundaries are clear, and infringement can be avoided inexpensively, whereas in a badly functioning property system, unanticipated disputes lead to unforeseen costs.
In case of software patents, the boundaries of a patent are vague, sometimes further obfuscated by abstruse claim language. Legalities such as doctrine of equivalents are often used to broaden the interpretation of a patent and enforce it in unforeseen domains. The absence of strong IP enforcement mechanisms in India, as pointed out by the Global IP Index, might have escalated litigation costs necessary for deciding the patent boundaries.
– Negative impact on foreign investment & foreign technologies
It has been found that there is a drop in foreign investments if a country’s intellectual property rights’ system is weak. Over 30% of the studied US firms felt that intellectual property protection in India was too weak to invest in joint ventures, or to transfer their newest technology to any of their Indian subsidiaries, or to license their newest or most effective technology in India. India’s IPR system is still considered to be one of the weakest, as is evident from the latest Global IP Index Report.
– Positive impact on software start-ups
Will the patent system be effective in protecting the burgeoning number of start-ups and smaller firms and larger firms? Lanjouw and Schankerman have observed that the probability of litigation sharply increases for firms with smaller portfolio sizes, and consequently, protecting patents is costlier for them. IP confrontation between firms of unequal asset strength typically end up with the larger firm being able to extract better terms, since they pose a more credible litigation threat to the smaller entity.
It has also been observed that legal mechanisms such as discovery or preliminary injunction benefits stronger firms, while it is particularly damaging to capital-constrained rivals. The settlement terms are influenced by the effective threat of litigation, which consequently reduces the R&D incentives of the smaller firm. Thus such legal mechanisms may be especially harmful in innovative industries “driven by smaller, more vulnerable, venture-capital based firms.”
– Positive impact on domestic R&D
A study on the economic impact of software patenting in the US during the 1990s suggests that reducing the necessity of strategic patenting will increase capital for research and development. The investment diverted for building patent portfolios to prevent litigation, to aid settlement negotiations or to cross-license can be cycled back for funding in-house research.
The impact of software patenting in past decades has been rigorously studied by James Bessen in his book ‘Patent Failure’. With an increase in the number of software patents, related litigations rose at an even faster pace. And soon, the litigation costs significantly exceeded the profits derived from the patents. Losing out on a fraction of the R&D cost in order to maintain market monopoly might work for big firms in developed economies, but it will certainly have been an unsustainable model for smaller start-ups in India. In the absence of litigation cost overhead, their R&D activities are speculated to get a considerable boost.
– Negative impact due to domestic competition
The lack of IP protection of software will enable competitors to directly adopt software features from each other. Even if one company invests time and effort to develop a proprietary software, it can no longer be protected after a rival company reverse engineers it. This may enable capital-backed rivals to compete and kick out the original innovator from market.
– Negative impact due to non-disclosure of technical advancements
The patent system allows free flow of information from the industry to the research community. In absence of patent protection, industries will not be at liberty to disclose proprietary technical advancements in the public domain. This will restrict subsequent advancements, which could have been possible if a researcher tried to work on the existing problems in a patented technology and released an advanced version of the technology with his own modifications and sophistications.
What does this imply?
On one hand, the decision will shield domestic players from legal battles against bigger, better resourced and lawyered-up multinationals. The tech industry may view India as a safe haven from litigation, and bolster the already exploding software industry. On the other hand, it will considerably restrict the global presence of Indian software companies. For Indian software start-ups to grow, they will need to reach out to the global marketplace. However, lack of IP protection in their home ground will prevent their foreign applications from benefiting from the Indian priority, leaving their inventions vulnerable to being copied by competitors.
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