Patent injustice for small software companies

The software patent system as it stands favours large enterprises, which has serious implications for future innovation and development in the IT industry

Patents have become a hot topic over the last year, due to the controversy surrounding a proposed European directive that will change the legal framework around software patents.

The proponents of the directive, which include the UK Patent Office (UKPO), claim the directive is needed to clarify the law and will not allow the patenting of software per se. But opponents of the directive, which include many software developers, small software companies and a number of MEPs, are concerned the directive will open the doors to the widespread patenting of software.

Even if the directive is amended or rejected by the European Parliament in its second reading in July, technology patents are still an issue for small to medium-sized technology companies, which may wish to file patents or may be at risk of violating the patents of other companies.

The patent office and the government in the UK are keen for small and medium enterprises to use trademarks, copyright or patents to protect their intellectual property. The UKPO claims that companies can gain various advantage through patents, including protecting their research and marketing effort in developing a product and an improved ability to obtain venture capital funding.

But the UKPO admits that the patent system can be less accessible to SMEs and is working on possible solutions to this issue. "Getting a patent is expensive. Once you've got it, you need to enforce it. We have been made aware of the difficulties that SMEs may face in defending patents," says Lawrence Smith-Higgins, the head of awareness, information and media at the UKPO.

The problems that SMEs face with both filing and enforcing patents means that large companies tend to file disproportionately more patents than small companies. For example, a study earlier this month by Colorado College in the US, found that only 20 percent of patents issued by the European Patent Office are held by SMEs, despite the fact that SMEs are responsible for half of Europe's turnover.

The costs of filing a patent
Although a "fair proportion" of people file patents without the help of patent attorneys, Smith-Higgins says that legal help is generally advisable. "It's not the type of thing you can do yourself," he says. "A patent attorney will be earning money for drafting claims. It's no good having a granted patent if someone can get around the claims."

A call to the UKPO enquiry unit revealed that it dispenses similar advice to customers regarding legal-help. "You can do it yourself. But your success rate is going to be a lot higher if you use a patent attorney — they work on patent specifications on a daily basis," said the customer services assistant.

Even the Patent Reform Group (PRG), which is campaigning to make the patent system more accessible for SMEs, says that legal help is a must.

"I would say, don't ever write a patent without using a patent attorney," says PRG chairman John Mitchell. "It's become such a technically complex process that unless you have a patent attorney your patent will be completely useless."

The cost of hiring a patent lawyer is likely to start at around £1,500 for a simple application and will increase for more complex applications, according to the UKPO. "If you're filing an application for basic mechanical technology it will cost around £1,500 to £2,000. If you're talking about an invention related to biotechnology that will arrive in the [patent] office in five boxes, that will hike it up," says the UKPO's Smith-Higgins.

But according to the PRG the extent of this "hike-up" could well be out of reach for a lot of smaller companies. The group's secretary Jon Miles says the UKPO is massively out with its estimations and that filing a patent application is likely to cost between £12,000 and £15,000 when you include factors such as responding to any queries during the patent approval process.

The reality out in the business community seems to be more in-line with the tens of thousands quoted by the RPG. Radioscape is a UK company, based in London, with around 90 employees, that fits squarely in the SME bracket. Given that its business is built around the emerging field of digital radio it has been forced to seek protection from the patent system on numerous occasions. So far, the company has filed about 30 patents at what is claims is a "considerable cost". The company not only employs a full-time patent lawyer but also uses external patent specialists to handle filing and enforcement.

"For a company of our size patents are a significant investment and for smaller companies the cost may be prohibitive. The view taken at Radioscape is that the value we get from having a granted patent is a worthwhile investment," says Richard Conway, the general counsel of Radioscape. "If you add up cost, particularly if you expand the patent beyond UK, it's quite substantial. [You have] the cost of patent searches, translating the patent into different languages, using an external patent attorney."

Although the Radioscape example highlights the significant costs of getting involved in the patent system, the company has also been used as a poster-child by pro-patent organisations. The company was cited on a recent UKPO document as an example of why patents are important for SMEs.

But in an ironic twist, although Radioscape has invested a lot of resources in patents for its various technologies, the company actually owes its very existence to the fact that some of its larger brethren chose to give it royalty-free access to some of their patents.

"We were formed in 1996 to take advantage of a digital radio standard — a group of companies such as Philips put patents in a pool to encourage small companies," says Richard Conway, Radioscape's general counsel. "If the standards body didn't exist and companies like Philips hadn't made their patents available, technologies like digital radio wouldn't be as common today."

The majority of SMEs struggle to file more than one patent, according to the Colorado College study. Of the SMEs granted patents by the European Patent Office, 81 percent had only been granted a single patent over six years. The report also showed that less than one percent of SMEs had filed 10 or more patents.

Larger companies, which have larger human and capital resources, are generally able to fully take advantage of the patent system and often file hundreds of patents over the course of a year. For example, Microsoft, SAP and IBM have had 225, 142 and 106 patents published respectively by the European Patent Office this year.

International patents
Small companies also often have to make difficult decisions about which country to file patent in — more countries equals more cost. Unisto, a Swiss-based company that produces security seals for retail and manufacturing, has only taken out its patents in a few countries, as it is too costly to file the patents worldwide.

"We thought about filing the patent in China as it's an emerging market. But then we thought, 'Will somebody copy this product and make it in China? Am I ever going to defend it in China? How much will it cost me to file it in China?' Eventually we said we'll write it off," says Unisto sales and marketing director Mark Hayward. "I would like it the patent system to be cheaper in the early days to secure patents in more countries for less money."

Again, costs are less of a factor for large multinationals that often are able to fire off as many patents in as many countries as they please. "The reason multinationals have a greater number of patents is probably due to the fact that they have full time patent departments. I worked in a patent department of a multinational pharmaceutical company when I was younger, and it was routine to file a patent in every country which had a patent system," said an anonymous former insider.

Spreading patent confusion
Larger companies clearly have an advantage when it comes to the geographic spread of patents but they also have a further advantage in the type of patents they can produce. Large companies have the financial muscle to invest in filing what are best described as trivial patents. On the whole, these kinds of patents are not protecting any current intellectual capital but may allow that company to tie up or benefit from a future competitor's innovation.

According to a software manager at a small technology company, multinationals are swamping patent offices with well-worded patent applications for currently trivial technologies in the knowledge that a certain proportion of them will be passed and may pay off in the future.

"Generally what happens there is mega-company A's patent department decides they don't have enough patents on their books and it puts them at a disadvantage over their competitors. So they offer big cash incentives to their employees to come up with anything patentable," he said.

"The employees wanting the cash simply submit as many ideas as possible, often knowing full well these ideas are trivial, frivolous or have been done before and wouldn't stand up in court. The lawyers then reword the patents in as much technical language as possible to confuse the patent examiners and bang, you have a patent."

Although this is an accusation that the UK patent office vigorously denies, claiming that the quality of the patents it grants is higher than those granted by its European counterparts, the granting of trivial patents is inevitable when large companies are able to minimise the costs of filing patents through economies of scale.

Some say the patent office should carry out more rigorous prior art searches and should be accountable for the patents it grants, but this would raise the costs of filing applications — due to the additional time and legal fees incurred by the patent office — which would further disadvantage small businesses.

The costs of defending a patent
Even if a small company has the resources to file a patent, that doesn't necessarily mean that they will have the resources to defend it. A recent report on the Web site of the Intellectual Property Advisory Committee (IPAC) claims that the patent system has failed small businesses and "personal experience, anecdotal evidence and research indicate there is widespread abuse of patent system. The issues highlighted by the IPAC report include (i) wilful infringement of clearly valid patents owned by lone inventors and SMEs, and (ii) wilful exerting of clearly invalid patents against SMEs by larger organisations or wealthier SMEs." The report states that the typical small business does not have sufficient financial means to defend their patents or access to affordable intellectual property insurance.

This is a problem that the PRG's Mitchell has faced. Mitchell, who is the chief executive of UK software company AllVoice Computing, had spent several years fighting a patent infringement suit in the US against Lernout & Hauspie (L&H), the makers of Dragon software. He won the initial case, but soon afterwards L&H went bankrupt and he is now fighting a similar case against the company that bought the rights to L&H's software. "The cost of enforcing my patents has extended to millions of dollars and several years of my time," says Mitchell.

Once a technology becomes successful, it is cheaper for a large company to prove another company's patent is invalid, than it is for the large company to pay royalties to the patent holder, says Mitchell.

Ali Guryel is the boss of another small business that has had its patents challenged by a larger organisation — in this instance, the UK government. The managing director of Frontline Technology, had a patent for school attendance registration system, challenged by the UK Department for Education and Skills (DfES).

Guryel filed the patent in 1993 but it was only once when it was successful that the DfES launched its challenge. "I invested and took so much risk. It took eight years until we had a market breakthrough and then big companies started muscling in. They lobbied the government, who then took us to the high court to revoke the patent," says Guryel.

The Secretary of State for Education at the time, Charles Clarke, admitted that challenging the patent was cheaper than paying license fees. "These proceedings were primarily brought because the patent restricted schools' access to a full range of technology. Additionally, my Department assessed the potential additional costs to schools for licence fees, based on Frontline Technology's published terms and scale of charges, to be substantial over the life of the patent to 2013…the litigation costs incurred to date are a fraction of the potential cost that schools could have incurred by way of licence fees," said Clarke in a written answer to the House of Commons.

Although the judge in this case accepted the DfES' claim that technology used by a college in Solihull in the 1990s predated the Frontline's claim, he did not totally revoke their patent, according to a Guardian report on the trial.

Unisto has had fewer problems defending its patents, but Hayward admits that if it went to court it would probably prove too costly. "If someone violates your patent and makes a product you should go after them. If you hit them hard — 'I will sue you for x, y, z and damages' they will often back off," he says. "The chances of you following that through are slim — you will probably never defend it as it's a waste of time. It's much better to spend your money marketing your product and establishing your brand."

Proposed solutions
Concerns with the difficulty that SMEs may have defending their patents, lead the UK Patent Office to investigate possible solutions. A study carried out by a UKPO working group last year stated that "the cost of patent litigation is an obstacle preventing SMEs from enjoying the benefits of the patent system".

One of the main solutions proposed by the UKPO following this study was a mutual assurance scheme, where through paying subscription fees, members have access to legal advice and services. Although the UKPO is likely to look to the government to kick things off by providing some seed money, eventually the scheme could be wholly funded by members.

The UKPO hopes to set up such a scheme in the near future, but has not set any deadlines as yet, according to Smith-Higgins. "We are in negotiation with one of the large insurance companies with a view for them to come up with a scheme to take this forward," he says.

Another solution being investigated is a service offering non-binding opinions to the two parties involved in a patent case. If one of the parties decides to ignore the advice and later loses the case, the court is likely to take this into account when deciding on what damages the losing party must pay. Smith-Higgins says he has "no doubt" that this service will eventually be offered, and is likely to cost around £200.

As for the cost of filing a patent, the UKPO says there is little it can do to reduce this. "Our official fees for a patent from start to finish is £200 — this is a small amount if you consider the time and effort put in by our organisation to get the patent into its final stages," said Smith-Higgins.

Although the UKPO's suggestion may make a difference, the costs of both filing and defending patents will continue to be more difficult for SMEs than their larger brethren. As multinationals scoop up more than their fair share of patents there is a risk that they can use these patents as a barrier preventing small companies from producing a competing technology.