Patents: an Open Letter to my MP

By Michael Kay on December 14, 2009 at 02:18p.m.

Dear Rob Wilson MP,

My accountants have drawn my attention to a little-noticed clause in the Chancellor's recent pre-budget statement that announces a measure (curiously named the "patent box") whose effect is to offer a reduced rate of corporation tax for profits deriving from patents. The stated intent is to encourage and reward innovation. As far as the software business (so important to the economy of your constituency) is concerned, the effect is likely to be exactly the opposite, and I would therefore like to encourage you to oppose it and to ensure that a Conservative government will not only reverse it, but move in the opposite direction.

First let me explain where I am coming from. After 25 years as a senior software engineer with ICL, I spent 3 years with the mid-size German company Software AG, and for the last six years I have been running my own one-man software company here in Reading. It's a successful small business, selling globally over the internet, and relying 100% on innovation: my competitors are companies like IBM and Intel. They have both produced products similar to mine this year, but 5 years behind.

Technically, UK and EU law disallows patents on software. However, the patent lawyers have found ways around that, and the current situation is that the patent offices are accepting applications that are software patents in all but name, and the courts are accepting them as valid.

The software business does not need incentives to innovate. If you don't innovate, you die. This measure does not encourage innovation, it encourages patenting of innovations. And in the software business, patenting of ideas benefits no-one: certainly, it does not benefit society or the economy at large, which is the only possible justification for governments to interfere with the market and grant one company a monopoly over an idea.

Why are patents in the software business bad?

* Firstly, they reward failure and penalise success. In software, having a good idea only takes you 1% of the way towards a successful product. Most failures occur during the long 99% of the journey that comes after the original Eureka moment. Companies who fail to complete that journey, or whose final product is a dud, go bankrupt or get taken over. The receivers are obliged by law to get the best value they can by exploiting the assets of the company, and very often the only asset left is the patent portfolio. So they look around for other companies who have had similar ideas but have turned them into successful products, and they sue them for patent infringement. Sun paid a 9-figure sum to Kodak a few years back in such a case in respect of a patent Kodak inherited when it bought Wang, which had gone to the wall; recently an otherwise unsuccessful company has been awarded a similar sum against Microsoft, for an idea which most people in the industry considered completely trivial and obvious. The Chancellor's new measure will not reward successful innovation: rather, it will reward the "patent trolls" who pursue successful innovators on behalf of the unsuccessful.

* Secondly, patents by their nature discourage competition, and competition is the biggest spur to innovation. Progress in the software business comes largely through a process of leap-frogging: you see someone come up with an idea that seems to work, and you go one better; they respond by making yet another improvement to the concept, and so on. If either party at any stage chooses to stop this process by invoking patents, both companies suffer, and society as a whole loses out. Therefore, it doesn't happen very often: the patents lie in store unused, like a nuclear weapon. The Chancellor's proposals encourage companies to take the patents out of the box and exploit them, to reduce their tax bill.

In fact the bigger companies like Fujitsu, IBM, and Microsoft tend to have cross-licensing agreements in place where in effect each company agrees not to pursue the other for patent infringement. Although such an arrangement is transparently anti-competitive (it is essentially an agreement between the established players in a market to make it harder for newcomers to enter on level terms), it appears to be entirely legal.

* Thirdly, the "ideas" that get patented in the software business are abstract and intangible. There is no objective way that patent offices or courts can decide whether two ideas expressed in different language are equivalent, or whether an idea is "obvious". Independent innovation is rife - two good programmers given the same problem will tend to come up with the same solution. Infringement is impossible to avoid: having come up with a solution to a problem, there is no effective way of searching the patent databases to see if the idea is "off limits" because someone else grabbed it first. There is therefore a lack of natural justice in the system. I have seen cases where small start-up companies like my own have become a thorn in the side of big players, and have been put out of business (or nearly so) by the threat of a patent infringement lawsuit. They have not wilfully done anything wrong; they might even have a perfectly good defence; but the mere threat of legal action is enough to kill their business stone dead, because their customers will walk away.

* Finally, patents make it more difficult to produce interoperable products (I'm active in the World-Wide-Web Consortium, which creates many of the standards that allow the internet to function, so I see this at first hand). Having products from different vendors that work together is clearly beneficial to the economy at large, and anything that makes this more difficult is a bad thing.

There has been so much talk in the industry over the last few years about the negative effects of patents that I am surprised and disappointed to see the Chancellor taking this measure. I hope that an incoming Conservative government, looking to dismantle the government regulations that inhibit competition and free trade, will look at the patent system as one of its first targets. I don't know about other industries like pharmaceuticals, but the IT industry would be much better off without it.

Best regards,

Michael Kay
Saxonica Limited