Table of Contents
The fundamental role of the patent system from an economist’s perspective is to address market failure and restore the incentives to invest in production of knowledge. In the absence of a patent system, competitive markets will fail to provide sufficient incentives to innovators to undertake costly and risky investments in innovation because of market failure. Innovators are provided with exclusive rights to prevent others from exploiting their invention and enabling the innovators to recoup the benefit of their innovation. The exclusive right, however allows innovators to establish a monopoly position, which may lead to market distortions. A monopoly typically results in overall loss of efficiency in a market because of higher prices and under-provision of the final goods. This results in a trade off between higher prices (presumably a social harm) for the benefit of greater investment by private parties in innovative programs.
Both developed and developing countries are investing heavily in knowledge production activities. For example, the latest available data shows research & development (R&D) expenditure of the countries which are members of the Organisation for Economic Co-operation and Development (OECD) amounted to around 772 billion US dollars. China’s R&D expenditure amounted to 115 billion US dollars, making it the third largest country in terms of R&D expenditure. An important function of the patent system is to encourage technology transfer by creating tradable property rights. In the absence of a patent system, firms will be reluctant to share technology know-how when there is a high risk of imitation by the prospective buyer or a third party. By encouraging technology transfer and foreign direct investment, integration into the global economic furthers the goals of economic development through innovation.
As the reader will find discussed in the next section, membership in the World Trade Organization (WTO) can bring developing countries opportunities to grow their economies through trade with more developed countries on a more even playing field (limited trade barriers). The treaties that must be accepted by developing countries when they join the WTO, particularly the Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement, can limit the benefits of membership. By nuancing domestic laws, the joining country can realize the full benefits of membership in the WTO.
With the move towards a knowledge-based economy, intangible assets (such as trade secrets, patents, trademarks, etc.) have become more important resources of businesses. In the OECD, spending on these intangible assets has increased at a faster rate than investment in tangible (physical) assets. Investment in intangible assets in the developing world is increasing at a faster rate than in the developed economies of the developed, OECD, countries. Additionally, In response to international pressure, governments in developing economies typically commit to improving protection measures by promising to amend intellectual property (IP) regulations. One example of evolving governmental attitudes toward IP in developing countries is a recent amendment to India's Patent Act, which requires generic drug manufacturers to pay license fees. The amendment was first exercised against the Bayer drug Nexavar in 2012, requiring the grant of a compulsory license to a local generic manufacturer. The amendment permits a compulsory license if an invention is not available to the public at "a reasonably affordable price," which the Controller General interpreted as meaning at a reasonably affordable price exclusive of the development cost of the invention.
Economic growth is a good stimulus for the development of a strong property rights in intellectual property, defined by both cultural and institutional acceptance of those rights. Intellectual property is easily distributed (unlike real property; i.e. land) and imitated. Controlling imitation, distribution and reproduction is essential to realizing the value of the intellectual property. An effective deterrence on imitation will reduce the costs of enforcing contracts and at the same time increase the expected returns on investment and licensing. This development of strong legal institutions will enable IP rights to be securely traded. In particular, licensing of services and technologies could capture substantial rewards for developing countries that have invested in innovation. A system of licensing can only be efficiently administered if there is the institutional capacity to enable an enforcement system to enforce those contracts. In 2001 the size of the global technology market was found to be around US$ 35 billion in the mid-1990s and by 2005 alone, a separate estimate found the technology licensing market alone to be worth US$ 100 billion. This tremendous growth in technology licensing alone, represents an opportunity for developing countries to realize future growth through innovation.
The growth of the economy in many developing countries is often led by either commodities or low-level service industries. China and India are the prototypical examples of quickly growing economies with a reliance on services and manufacturing. In particular, India, almost one-third of India's exports are related to services and most of these are in the business process and software industries. As of 2007, the growth in the software industry has led to tremendous growth in Foreign Direct Investment (FDI), nearly half of the foreign direct investment in India is concentrated in the computer software, electronics, telecommunications, and services sectors. WTO accession, in China, led to a surge in exports and greater economic growth, because of better, more stable access to foreign markets and renewed FDI. The tremendous growth represents the dividend of membership in the WTO as well as the steps taken by developing countries to join satisfy the obligations implied by membership in the WTO.
Purposeful technological efforts, such as private sector R&D, and conducive government policies may play a central role in basic development and the subsequent upgrading of technological activity. An increase in FDI helps to motivate the development of patents and licensing in the pre-existing fields of innovation. FDI may play a role in technological development efforts in its later stages. These observations suggest that developing country government should promote domestic, private R&D and innovation conductive policies before inviting FDI which will focus on existing strategic sectors.
The Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement came into effect on 1 January 1996 at the conclusion of the Uruguay Round of negotiations. The agreement generally required harmonization of copyright terms (i.e. length of protection, reduction of formalities, protection of computer programs, etc.) as well as patent protection for "inventions" in all fields of technology. The requirement for the patent protection of invention in all fields of technology has provided an avenue for nuance as countries develop their laws to comply with the agreement.
Article 7 of the TRIPS agreement lays out the primary goals of the treaty: "The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology." The TRIPS agreement did establish a previously unknown system for international copyright protection, a dispute resolution mechanism. Prior agreements, currently managed through the World Intellectual Property Organization (WIPO), did not have a dispute resolution mechanism. This mechanism provides a way for national parties to the agreement to retaliate against one another if the WTO dispute resolution body determines that there is cause.
The TRIPS agreement has an article dedicated to the protection of intellectual property embodied in computer software. TRIPS Article 10 (1) reads, "Computer programs, whether in source or object code, shall be protected as literary works under the Berne Convention (1971)." TRIPS Article 9 (2) specifies that copyright protection is reserved for the specific expression of ideas, processes or other procedures. Articles 9 (2) and 10 (1) of the TRIPS agreement, if read in conjunction, indicate that computer programs are, as a matter of law, expressions and not ideas; this ultimately limits their protection under patents, relegating them to protection under copyright. This reading of Article 10 (1) requires the implied limitation that computer programs may only "exclusively" be protected under copyright. To the contrary, computer programs may, and are, protected under both patent and copyright regimes. The TRIPS agreement is typically read such that computer programs are protected under patent regimes. Many countries however, place limitations on the patentability of computer programs through exclusions to patentability. This is discussed in Part II of this paper.
The TRIPS agreement lays out several important concepts including the Principle of National Treatment (Article 3), Most-favoured Nation Status (Article 4), and the basic requirements for patentable subject matter (Article 27). These first two articles relate to the treatment of individuals, companies and states within the World Trade Organization. These two articles, combined, provide members of the WTO with an economic argument for participating in the WTO.
Article 3 of the TRIPS agreement provides “each member shall accord to the nationals of other Members treatment no less favourable than that it accords to its own nationals with regard to the protection of intellectual property." This article provides all members of the TRIPS agreement with a status at least equal to that of one's own nationals. The intent of the article is to ensure that WTO members do not provide their own nationals with preferential treatment over the nationals of any other member country. Article 3, balanced by Article 4 ensures an equal playing field for each member country and its nationals.
To balance the effects of Article 3, Article 4 of the TRIPS agreement requires all member nations to carry "most-favored nation" (MFN) status. In particular "With regard to the protection of intellectual property, any advantage, favour, privilege or immunity granted by a Member to the nationals of any other country shall be accorded immediately and unconditionally to the nationals of all other Members." Under MFN, if a country gives preferential treatment to on country, it must accord the same benefits to all countries within the trading group. Unlike Article 3, the primary consideration here is not whether or not the nationals of another member country are being treated as well as the nationals of the subject country, but rather whether or not they are being treated at least as well as the members of any third country. There relatively few exceptions to MFN in the TRIPS agreement. Exceptions are provided only for items not subject to national treatment in the Berne (primarily a copyright treaty) and Rome (an additional copyright treaty focused on broadcasters and performers) Conventions, as well as for IP treaties entered into before the creation of the WTO (1 January 1995). Few international agreements were concluded prior to 1995 regarding the patenting of software, and as a result, these exceptions are generally inapplicable. The European Patent Convention was established on 7 October 1977 and would fall under this exception, although the member nations did not notify the Council for Trade Related Aspects of Intellectual Property. As a result this agreement is not excepted from the TRIPS agreement.
The TRIPS agreement does leave some flexibility for the Members to design their patent system since certain issues are not defined in the Agreement (for example, the definition of “invention”). A critical term in the law regarding patents is “invention.” The scope of the term “invention”, as well as how it is defined in the national legislation, are not uniform, although certain common underlying features can be found. In some countries, the term “invention” is defined in the law, while in others, the scope of the term “invention” needs to be extracted from a non-exhaustive list of subject matter. Manipulating the definition of the word “invention” provides legislators and administrators throughout the world a device to tune the patent system while staying in compliance with their international obligations vis-a-vis TRIPS.
Justifications for excluding software from patentable subject matter are numerous, however an early reasoning suggested that because computer programs were a form of writing they should be protected exclusively under the copyright law. This argument was commonly countered on the basis that copyright only protects the expression and not the ideas surrounding the expression. One of the main problems with recognising abstract ideas as patentable subject matter is that they do not provide practical useful outcomes directly, they must be further reduced to practical effect. It is when the proffered invention is reduced to practical effect that it can be deemed patentable subject matter.
The European Patent Convention (EPC) forms the foundation of the European Patent. The European Patent is a bundle of national patents resulting from the designation of member countries in the application for patent. Although TRIPS does not have any direct relationship or effect on the EPC, it has been used for guidance in relation to the patentability of computer programs. The language used in the EPC regarding the patentability of computer programs is similar to the language used in India and New Zealand, and can be used to understand their legislation as well.
The patentability of software and related inventions is currently determined principally by Article 52 paragraphs (2)(c) and (3) of the EPC. Article 52 (2) (c) of the EPC reads as, “the following in particular shall not be regarded as inventions within the meaning of paragraph 1: ... schemes, rules and methods for performing mental acts, playing games or doing business, and programs for computers.” (emphasis not in the original) However, since 1978, the European Patent Office has granted over 30,000 software related patents. Article 52 (3) of the EPC narrows the bar on patenting computer programs by limiting Article 52 (2) to, “exclude the patentability of the subject-matter or activities referred to therein only to the extent to which a European patent application or European patent relates to such subject-matter or activities as such.”
EPC Article 52 (3)’s “as such” language provides a route for the patentability of computer programs. According to the EPO, computer-implemented inventions - whether claimed to a physical product or apparatus or to a process or method are patentable, so long as they involve an inventive technical contribution to the prior art. This means that a claim to a computer program is not allowed, but "claims to physical entities or processes relating to such items may be allowable." Therefore as long as the program relates to the solution of a technical problem, the fact that the program is a key element in the invention does not preclude patentability as long as the invention is new, involves an inventive step and has industrial applicability because such an invention is not claiming the program "as such". Crucially, the “as such” language does not bar the classification of computer programs as beyond the range of patentable subject matter, but rather strictly limits it to technical achievement.
Consistent with the TRIPS Article 27 (1), the United States does have the same three requirements to patentability as all other WTO nations: 1) novelty, 2) utility (TRIPS - industrial application), and 3) non-obviousness (TRIPS - inventive step). Similarly, consistent with TRIPS Article 27, the United States does not have specific, statutory exclusions on patentable subject matter. The United States has created exclusions using the judicial process, in particular for abstract ideas. The exclusions are not statutory and may be overruled by either the Supreme Court of the United States (the judiciary) or ultimately by the legislature (the Congress).
The statutory language that forms the basis for patentability in the United States is found in Section 101 of Title 35 of the US Code, “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” Patentability of inventions in the United States has evolved since the Supreme Court’s decision in Diamond v. Diehr which established the first approval by the Supreme Court for a software invention. Three categories of subject matter are excluded from patentability: “laws of nature, natural phenomena, and abstract ideas.”
Diamond v. Diehr established that computer programs are patentable when the underlying invention (in Diehr, a software controlled timing process) is considered as a whole and the physical machine or process claimed is involved in transforming an article to another state or thing, despite the use of an abstract idea. Computer program patents must also claim only those computer features that go beyond human capabilities (e.g. speed, automaticity, improved reliability of calculations, rapid and simple access to enhanced volumes of information, etc). However, subsequent cases have nuanced this position by finding that specifying a particular method or means of employing an abstract idea with detailed limitations in claims is sufficient without further algorithmic support.
Claims to computer and computer hardware are still eligible for patent protection, however in current times, we are not examining the patent eligibility of computers or computer hardware as such, but computers that have routinely been adapted by software consisting of abstract ideas claimed as such, to do all sorts of tasks that formerly were performed by humans. The key takeaway of patentable subject matter analysis for software in the United States is that the Courts have evidenced a trend of looking to the underlying inventions for making patentability determinations for claims employing abstract ideas. In other words the meaningfulness of the limitations is the key to determining if a software invention is patentable.
New Zealand's Patents Act was first passed in 1953, however it was amended in September 2013. The 2013 amendment added Section 11 which reads:
1. A computer program is not an invention and not a manner of manufacture for the purposes of this Act.
2. Subsection (1) prevents anything from being an invention or a manner of manufacture for the purposes of this Act only to the extent that a claim in a patent or an application relates to a computer program as such.
3. A claim in a patent or an application relates to a computer program as such if the actual contribution made by the alleged invention lies solely in it being a computer program.
Similar to the language in the EPC above, the amended New Zealand Patents Act limits the broad application of the ban on computer programs as patentable subject matter (as an invention) by limiting the bar to “computer programs as such.” This limitation is further described in Subsection 3 as a limitation on inventions where the “invention lies solely in it being a computer program.”
The explanatory note that accompanies Supplementary Order (No 237), which proposed amendments to the Patent Act of 2013, clarified the relationship between the amendments and New Zealand's international obligations under the TRIPS agreement. The new clause clarifies that a computer program is not excluded from being a patentable invention but instead defines it as not being an invention. This approach is more consistent with New Zealand's obligations under the TRIPS agreement as it restricts the ability to exclude inventions from patentability. The explanatory note further explains that the effect of this approach is that it will not be possible to obtain a patent for an invention that involves or makes use of the computer program if the sole inventive feature is that it is a computer program. “It will still be possible for a patent to be granted for an invention that makes use of a computer program if the actual contribution lies outside the computer or if it affects the computer itself, is not dependent on the type of data being processed or the particular application being used.” It is important to note that the legislation does not bar patents on inventions that enable a computer to run software more quickly as the actual contribution of the invention lies in its effect on the computer. In effect the limitation affects alleged inventions which take an existing procedure and execute it as a computer program.
The language used is very similar to that used in the EPC and was also affected by the decisions of courts in the UK. In particular, the Aerotel and Symbian cases which discussed the identification of an invention in the context of software patents. The Symbian decision found that a claim directed to a technical process which process is carried out under the control of a program cannot be regarded as relating to a computer program as such. Similarly, in the Aerotel decision "A computer program having the potential of achieve the further technical effect of enhancing the internal operation of the computer, which goes beyond the elementary interaction of any hardware and software is not considered to be a computer program as such, and thus also contributes to the technical character of the claimed subject-matter." It is clear that the narrowing of the New Zealand law in its explanation of what a “computer program as such” means, has drawn liberally from the European and UK context. As such it is likely that the result of revision to their existing Patent Act will have similar results.
The Indian Patent law draws a substantial amount of inspiration from the UK legal system.  The Indian Patent law has dithered as a result of lawmakers. In 2002 the Patents Act was revised to adopt the language of TRIPS Article 27, "redefining an 'invention' as a new product or process involving an inventive step and capable of industrial application.'" At the same time however, the Indian Parliament adopted Section 3 (k) which provided that computer programs per se and algorithms were not considered patentable inventions. This limitation is consistent with the limitations in the EPC and the recently adopted New Zealand Patent Act if "per se" is read as "as such."
The interpretation of the "per se" phrase in Section 3 (k) has been contentious and has left ambiguous the legislators intent. "The wording undoubtedly implies that the legislature’s intention was that mere computer programs should not be patentable, but that software inventions – in other words, inventions implemented by software which are more than mere computer programs – could be patented." Often Indian Patent Office applies the test as used at the European Patent Office and equate the expression ‘per se’ with ‘as such’ as used in the European Patent Convention. The result is that the patentability of software in India is similar to software patentability in EPC jurisdictions.
As India’s IT industry has expanded and become a crucial plank of the national economy, it is noteworthy that the Indian legislature has dithered over whether or not to allow the patenting of software. The debate in the legislature and society at large continues, however the legislature has yet to determine the most effective way to tune the Indian Patent Act to promote development of this important field while remaining in compliance with their international obligations.
The following recommendation, in spite of being oriented towards the legislatures and policymakers of developing countries, can be similarly argued for those of developed countries as well. It is important to note that all public policy has a non-goal oriented limitation in cost. Especially in developing countries, concerns have been raised as to how to implement, in the national laws, the public policy flexibilities that best fit the needs of each country. At a minimum these costs must be incorporated into the patent system to ensure that the innovation sector does not cannibalize other important policy goals in a developing countries national budget. This cannot be done by tuning the patentability of subject matter, but is rather, more likely done through application fees, particularly by foreign filers.
There is an innovation capacity gap between the developed and developing economy. In particular the countries that are party to the TRIPS agreement range from the most developed countries (i.e. the United States, Germany, etc.) to middle income countries (i.e. India, China, etc.) and low income countries (i.e. Mali, the Democratic Republic of Congo, etc.) In view of this innovation capacity gap, the question has been raised as to whether, and to what extent, the international patent system is supportive of the national efforts of development irrespective of the level of the country’s economic development. Given the large innovation capability gap, countries with a lower level of technological development rely extensively on technology transfer from countries with more technological capacities. Since the R&D capabilities of local industry have not yet reached that critical level where it can engage in discovery or development the local industry directs most of the R&D activities towards minor modifications patent protection for incremental innovation can be of immense value to the industry as it caters to the local requirements. The technology transfer to the developing countries from either other developing countries or developed countries, will be subject to licensing agreements.
Licensing agreements, in particular covering either the development of computer software that will either be patented, cross-licensed or otherwise will fall under the TRIPS agreement given the members are members of the WTO. As discussed above, membership in the WTO provides substantial benefits as it provides Most Favoured Nation (TRIPS Article 4) status to each member country and provides nationals of each member country with the minimum benefits of National Treatment (TRIPS Article 3). To stay compliant with the TRIPS agreement, there are few tools that can be “tuned” to the discretion of national legislatures. A tool that has been used successfully to tune a national patent regime is the word “invention” (as described above in Part II: New Zealand & its Requirements).
By defining "a computer program, as such, not an invention," the New Zealand legislature provided itself the ability to limit the applicability of the TRIPS agreement in relation to the patentability of software, and then to liberalize the limitation. By using this construction, legislatures can similarly limit the patentability of computer programs and as the conditions in their country change, widen the definition to include a broader array of computer programs. By slowly amending the definition over time the legislature will still permit innovation relevant to its experience while preparing their domestic industries to compete on the global (WTO) stage.
This construction is sufficiently broad that it will also provide the adopting country’s legislature to provide either a rule making institution (typically an administrative agency such as a Patent Office) or the judiciary (as is done in the United States), with the ability to modify the definition of the “computer program as such.” If the primary public policy objective of the legislature is to promote economic growth, it is likely that such a legislature will retain the rule making power to allow multi-sector monitoring, as an administrative agency or the judiciary will not have the necessary expertise to continuously monitor progress towards the set objectives.
Although many developing countries are not currently equipped with the capacity to participate in the innovation market as many other members of the WTO, the requirements of the TRIPS agreement require members to have a minimum threshold of protection for patents. The enforcement of these patent rights in a developing country provides social goods and harms that may not be overall positive for that country. To remain compliant with the TRIPS agreement, while benefiting from WTO membership, a country could carefully nuance the terms outlined in the agreement. In particular, the definition of the word “invention” has been successfully nuanced by New Zealand in relation to computer programs.
By using similar language, a developing country can provide its own innovators with the same economic market while limiting the intellectual property market to its benefit. This can be carefully adjusted by a responsible legislature to ensure both compliance with current international obligations and to ensure continuous incentives to domestic innovators to continue innovation.
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