Legal protection of software and business methods

(Part one: Software)

Although patent law is not new, it has taken on new significance in recent years because of the rise of the high-tech economy. Software and business methods — two mainstays of many Internet companies — are each protectable in the international arena, though the scope of protection is still emerging and often controversial.

Negligence is a factor business enterprises always endeavor to avoid in their operations, and the perils of the electronic and digital age have magnified these pitfalls. As early as 1981, New York’s Irving Trust computer operators forgot to put the right code in their computer, and billions of dollars didn’t get forwarded electronically to the Federal Reserve. The loss of interest was between US$10 million and $15 million, a huge amount during that time, close to three decades ago.

Even earlier in 1973 was the aggravation suffered by a company in the US called Hyman-Michaels, which ordered its US bank to transfer $27,000 to a supplier. Because operators in a Swiss bank forgot to load paper into an automatic Telex machine, the transfer never took place and Hyman suffered an over $2 million loss of potential profit; again, at that time — close to four decades ago — a pretty big amount. In 1981, eight years after the blunder, Hyman won a court judgment against the Swiss bank.

There are other horror stories, even in our country, caused by the negligence of so-called computer whizzes and Internet magicians.

Negligence in the failure to patent high-tech inventions and innovations can lead to losses of no mean dimension. Any company that creates software or invents new methods of doing business on the Internet can ill afford to be negligent. It is necessary to consider the tremendous benefits of patenting for protection in this age of the World Wide Web.

Computer programs, either in their original “source code” format (readable by human beings) or in their “object code” format (readable only by computers), are generally deemed to fall within the definition of a “writing” for copyright purposes. In fact, as early as 1980, the international community amended their copyright laws to provide that computer programs, to the extent they embody an author’s original creation, are a proper subject matter of copyright. However, even today there has not been that much clarity, so that the scope of copyright protection still hangs, perhaps because of varying interpretations by courts in different jurisdictions of the world.

As a result, patent protection for software has taken on greater importance as it has already become recognized by the courts worldwide.

During the past several years, many high-tech and Internet companies increasingly began to use patents for legally protecting their computer software and other innovative techniques from misappropriation by others. At the same time, many software companies preferred to rely less on copyright protection to protect their innovations. This divergent but possibly related trend caused a dramatic shift in thinking in the high-tech and Internet industries, a change destined to have a major impact on the continued advancement of these technologies.

As many lawyers are aware of, copyright law requires that the protected subject matter be original, while patent law requires that it be novel (new) and non-obvious. To be novel and non-obvious, the inventions must not have been a part of what is called “prior art” and must not have been an obvious variation of the prior art, regardless of whether the invention was created independently of the prior art.

This is markedly different from copyright law where an independent creation of even an identical work results in copyright protection in the second created work. An issued patent allows the patent owner to exclude others from making, using, selling or offering to sell the patented invention. Such a right operates regardless of whether another copied the invention from the inventor of the patented subject matter. In this manner, patent protection can be significantly stronger than copyright protection.

Like copyright protection, the allowable scope of patent protection for software-related inventions has changed considerably. However, unlike copyright protection, the allowable scope for software-related patents enlarged in recent years.

Protecting software legally can therefore be accomplished by either copyright or patent laws or both. Deciding which course to pursue requires an understanding of the reasons for obtaining protection in the first place. When developing computer software, the creator of the software usually wishes to ensure that the time and effort expended are somehow protected against misappropriation by, for example, a competitor. By the same token, the software developer wants to prevent others not only from making verbatim copies of the software, but also from copying as much of the innovation that went into the software as possible.

Given the choice, most software developers want to be able to a) prevent others from making, using, or selling verbatim copies of the software, and b) prevent others from utilizing the functionality by which the software operates. From the developer’s point of view, the broader the protection, the better.

But just as the software developer wants to prevent its software from being copied, either exactly or functionally, society (you, me and everybody other than the developer), wants to have broad and inexpensive access to software that performs useful functions in new and innovative ways. It would benefit society the greatest if it could a) have access to a wide variety of innovative and useful software products, and b) pay little for such software.

Because software lends itself well to being easily copied and distributed, it would be possible for the laws applicable to the World Wide Web to allow for society to pay little for software — by simply allowing for any and all copying and distribution of software by third parties. Of course, such a law would provide little incentive for software development as few companies or individuals would be willing to go to the trouble of developing software knowing that it could be easily copied without recourse, although the current prevalence of open-source “freeware” (software written by programmers who seek fame over fortune), means that this is not always the case.

Thus, assuming that society wants to have wide access to innovative software, it is safe to say that society is willing to pay for this access, such as by allowing software developers to have proprietary rights to their creations. However, unlike the software developer who wishes to have broad rights that allow him or her to reap a maximum return on investment, society likely is only willing to grant the software developer enough of an incentive so as to create a maximum threshold of innovation or usefulness in the developed software.

In the end, society wishes to reward the software developer, but not to the extent that the developer would optimally desire.

Obviously, a gap exists between the level of legal protection afforded software that the developer ideally wants and that which world society is willing to grant.

However, as with any other difficult legal determination, a line, albeit not always a bright line, can be created that is equally fair to both the creator of software and society.

When creating the ideal level of protection for software, a number of factors can be taken into account: a) At what minimum level of protection will a software developer be willing to develop a particular piece of software? b) What is the maximum price society is willing to pay for such a piece of software? c) How can the level of protection be created so that the maximum amount of innovation in software is generated at a price suitable for the maximum number of members of society?

Regardless of these policy issues, though, what practical advice should an Internet or high-tech company follow to obtain the highest level of protection for its software? Because software can be protected by both copyright and patent law, the ideal approach is to pursue both.

Ultimately, therefore, whether to seek patent and/or copyright protection for your software is a complicated decision that involves an evaluation of the makeup of the software itself, the importance of the software to your company, your goals in obtaining legal protection, and your resources for seeking it. Ideally, all of these factors and more should be discussed with a patent attorney with experience in software issues.

(To be continued)

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