Why New Zealand's Decision to Ban Software Patents is Important for Start-Ups

September 5, 2013

This week, New Zealand voted to ban software patents, and the impetus for New Zealand's decision seems to be the practice of patent trolling; the Chief Executive of New Zealand's Institute of IT Professionals commented that the country would no longer tolerate "the vexatious practice of ';patent trolls.'" Why does this decision matter to California start-ups and should the United States follow New Zealand's lead? Answers to these questions will be discussed in the following article.

Coincidentally, New Zealand's decision to ban software patents comes on the heels of a report issued by the Government Accountability Office (GAO) ("Assessing Factors that Affect Patent Infringement Litigation Could Help Improve Patent Quality"), which was discussed in an earlier blog article ("Patent Trolls Targeting Software Companies and Start-ups") and which essentially concluded that patents on software do not work. Why don't patents on software work? There are several reasons, including the sheer number of patents and poorly issued patents. In the past 20 years, the number of software patents has grown tremendously. In 1991, software patents made up less than a quarter of all patents issued by the U.S. Patent and Trademark Office (PTO); however, in 2011, the PTO issued more software patents than any other category of patents. Software patents also produce more litigation than any other category of patents because software is used so widely and because the patents issued by the PTO are often overly broad, unclear, and vague. The GAO points out in its report that another problem with software patents is that their complexity and rapid development cycle make researching patents impractical. This problem is particularly relevant to start-ups; because granted patents are often poorly crafted, it is impossible for entrepreneurs to search through them in order to determine whether or not they are infringing on another's patent. The GAO interviewed representatives from software start-up companies, who confirmed this problem, explaining that "searching for relevant patents before developing new products is unrealistic and diverts already scarce resources, particularly because their product development process can be as short as two months." The start-ups also advised the GAO that "they do not always apply for patents until their companies are well established because patents attorneys are expensive, and the process is time-consuming. [T]he cost of [research and development] is low relative to the cost of applying for a patent, so there is minimal incentive in the software industry to patent in order to recoup [research and development] costs."

Some experts believe that the United States should follow New Zealand's lead and ban software patents because they do not promote innovation but in fact hinder it, as explained above. The difficulty with this proposal, however, is that while the patent system does not work well for software, it works well for other industries such as the pharmaceutical industry, where chemical patents are indexed and searchable by formula. These same experts point out that the United States Supreme Court's decision this summer in Association for Molecular Pathology, et al. v. Myriad Genetics, et al., hints at the possibility that the high court may not be particularly fond of software patents. In that case, the Court ruled that human genes may not be patented because the patent included "well-understood, routine, conventional activity previously engaged in by researchers in [the] field."

Patent infringement lawsuits against start-ups are all too common and very destructive. Start-ups should keep an eye on this important issue because if the United States decides to ban software patents, the number of lawsuits against startups is certain to decrease.