Alice in India
The software industry is still grappling with the impact of the US Supreme Court’s decision in Alice v CLS Bank. But India’s IT heavyweights, well accustomed to a high patentability bar for computer-related inventions, see more opportunities than challenges ahead
Information technology is India’s signature export industry, a central pillar not just of the country’s economy, but also of its global brand. Buoyed by compelling cost competitiveness and a large pool of talent in computer sciences and engineering, the sector is expected to be worth some $300 billion by 2020, according to the India Brand Equity Foundation. When it comes to IP strategy, the top IT companies are some way ahead of their compatriots in many respects – perhaps because for years their primary markets have been sophisticated, IP-rich jurisdictions such as the United States.
India has been in the international IP spotlight in recent years, even though local companies still file relatively few patents. This interest is largely due to an increase in high-profile patent disputes in the pharmaceutical and telecommunications spaces. But while litigation in these sectors may be grabbing most of the headlines, activity in the software industry is also hotting up. Since 2013, stakeholders have been debating the government’s guidelines for the examination of computer-related inventions. Section 3(k) of the Patents Act proscribes the patenting of computer programs per se and the interpretation of that statute determines the extent to which innovations facilitated by computers can qualify for protection. Recent court decisions have further fuelled the debate, auguring the possibility of a more permissive interpretation in the future.
At the same time, the US Supreme Court’s decision in Alice v CLS Bank has prompted a rethink among many in the global software industry about the value of their patents. The less clement judicial climate has even caused some to declare that players with sizeable portfolios in the sector should write down a significant portion of their book value. But while it may have proved controversial elsewhere, the decision has made little waves in the Indian IT community. This is because, having long navigated the requirements of Section 3(k), many companies already take a relatively conservative approach to patenting software, even in jurisdictions such as the United States. Alice could also accelerate the trend towards open source in India, which has been heavily promoted by the government.
It is not just the giants of the Indian IT industry that will be affected by future interpretations of Section 3(k), the evolution of software patents in the United States and potential shifts towards open source. Smaller enterprises, too, must calibrate their strategies to the changing landscape, with the country’s flagship companies leading the way. This could have potentially significant effects on the overall IP ecosystem. India is home to 3,000 tech start-ups and one study has suggested that this figure could reach 11,500 by 2020. As they mature, will these companies buy into the concept of IP creation?
Patent strategies in the IT sector
Information technology is the only commercial sector for which the Indian Intellectual Property Office (IPO) tracks and publishes a list of filing statistics in its annual reports (although curiously, there is no overall list of top Indian applicants – just tables for domestic IT, R&D organisation and academia). This is a sure sign of the industry’s importance to the domestic economy. Even still, the numbers themselves are not overwhelming in terms of volume. The most recent report, for 2013-2014, reveals the top five domestic IT filers. Tata Consultancy Services (TCS) is in pole position, with 126 applications. Domestic outfits Infosys, Wipro and the Indian Institute of Technology are joined by two different local subsidiaries of Samsung. One of these – Samsung India Software Operations – is the only IT-related company which appears on the list of top five domestic patent grantees, with 84.
That said, however, the most sophisticated Indian companies are unlikely to tell you that volume plays any part in their filing strategies; instead, these are characterised by a laser focus on quality. Yet numbers are nonetheless nudging upwards. “There have been substantial increases in the number of filings both in India and globally in the IT sector by Indian companies,” says Ganapathy Narayanan, who heads the corporate IP group of TCS. “TCS has filed the highest number in India consistently for about the past four years.” Nonetheless, he suggests, there is certainly room for improvement among companies in the sector: “A key issue is probably awareness and having the maturity level to identify what is patentable subject matter and what needs to be protected by appropriate means other than patents.”
Figure 1. Market size of IT industry in India ($ billion)
Source: India Brand Equity Foundation
India’s IT industry is export focused, necessitating strong IP protection in key markets such as the United States
At Infosys, says Anindya Sircar, associate vice president and head of the IP cell, the IP division has steadily gained importance in recent years: “Initially, its role was far more limited and the functions were far less. Enabling collaboration with other functions and strengthening the process of building IP led our grant numbers to go up tremendously over the last four to five years, and we have started operating in a much more structured fashion.”
The IP strategies that India’s top IT companies have been devising are tailored to their needs as primarily business-to-business (B2B) solutions vendors. They reflect both the realities of their home jurisdiction and the needs of customers, primarily in the United States and Europe.
Ganapathy sums up the approach at TCS in three concise objectives: “Our driving force is that we want to promote IP creation within the company, protect the IP that is created and profit from it in both economic and societal terms.” In creating customised solutions for other companies and moving up the value chain, TCS has created plenty of new technologies. And in the B2B space, the end user is just as concerned about the intellectual property protecting a product as the vendor. So the primary goal, continues Ganapathy, is to satisfy customers. Above all, that means making them feel protected: “It is in the customer’s business interest that the product is IP safe and has the freedom to operate.” But offering patent-protected solutions to clients has another benefit for the TCS brand: when a solution comes with patent protection, clients know that it is a new technology, it is at the cutting edge and it is suited to their specific needs.
When Sircar briefs the Infosys board on his team’s work, meanwhile, he reviews its contribution towards two overarching goals: reducing risk and adding value. “Value enhancement is primarily identifying and capturing a relevant IP right that can be commercially important to the organisation, which is a continuous process,” he explains. While previously, filings fell into three broad categories – strategic, defensive and monetisation focused – today “the process is more focused on strategic filings as compared to the others, mainly because we have decided as an organisation to place immense importance on using open source”. This means thinking carefully about which technologies should be protected by patents, which should be open source and which should be protected through other methods. Here again, the nature of the B2B model means that the client also has a role in shaping IP policy: the contractual agreement between the two determines the proprietary or open source nature of the product – as well as to whom the rights belong. But the direction of the wind is unmistakable, and it is blowing towards open source.
Section 3(k): the state of play
Section 3 of India’s Patents Act specifies what qualifies as an invention and prohibits, under subsection (k), the patenting of “a mathematical or business method or a computer program per se or algorithms”. It has read this way since computer programs were first addressed directly by the law in 2002, with the exception of a four-month period from late 2004 to early 2005, when a clause was added after “per se” reading “other than its technical application to industry or a combination with hardware”. Soon afterwards, the legislature passed a new version of the law which did not include that clause. (Intriguingly, a 2014 Stanford study found that during those four months, there was a significant positive effect on Indian software companies’ share prices, but little change in patenting activity.)
To clarify this discrepancy, as well as the ambiguous meaning of “per se”, the IPO has since issued numerous guidelines in order to ensure uniformity and consistency in how inventions including software elements are examined. The latest effort came in 2013, when the IPO updated its Guidelines for Examination of Computer-Related Inventions and solicited public comment. It concluded upfront that the legislature intended to maintain the original scope of Section 3(k) as written, not including the clause briefly added in 2004. It also made clear that simply combining a computer program with hardware is not enough to avoid rejection under Section 3(k), especially if that hardware is a “general purpose known computer”. As attorney Someshwar Banerjee pointed out in IAM at the time: “The guidelines seem to encourage novelty in hardware to overcome rejections under Section 3(k).”
In public feedback on the guidelines, TCS pointed out that those parts of the policy which emphasised novelty in hardware did not serve to clarify the standards for examination of software-led inventions, calling them “a significant departure from the very objective of addressing the CRI class of inventions”. The feedback concluded with an example of a novel software-led invention: Amazon’s infamous ‘1 Click’ patent. As TCS noted: “Though the invention claims did not involve any novel hardware, the novelty in the method and software was valued while granting the patent. The business impact of the inventions confirms this to be one of the most valuable patents in the CRI category.”
Even without outright software patents, companies say that they can protect their most inventive IT products by honing in on the novel solutions that they afford to real-world problems. “We are not attempting to protect a mathematical algorithm or software code itself,” notes Ganapathy. “What those computer programs actually do is the subject matter for the patent… We want to protect a new way of implementing a novel idea. We don’t see any ambiguity there.”
Anecdotal reports from private practitioners suggest that many patents for computer programs emphasising the involvement of hardware are sailing through the system. Indeed, in Sircar’s analysis: “If you study some of the recent grounds of patents from the IPO, there is considerable success with angles and approaches including the attachment of hardware or machine transformation.” Something that would doubtless help to clarify the situation is more jurisprudence in the field; although Sircar points out that “the number of such incidents is low right now – it will take more time to develop and have more such cases come up”.
One recent case in particular has generated significant comment over whether the jurisprudence may be shifting towards a more permissive interpretation of the statute. In issuing an injunction against Intex Technologies on behalf of Ericsson, a Delhi High Court judge stated: “[It] appears to me prima facie that any invention which has a technical contribution or has a technical effect and is not merely a computer program per se…is patentable.” As noted in an American Intellectual Property Law Association comment urging the IPO to interpret Section 3(k) in line with the decision, it sets out a standard that is not so different from that of the European Union, which bans patenting software “as such” – which is interpreted to mean software that does not have a technical character or technical effect
Figure 2. Indian IT exports by revenue
Source: India Brand Equity Foundation
Software products and engineering services account for about 19% of industry export revenue (excluding hardware)
Alice who?
This is the context in which the Alice decision was received by India’s IT industry. While the US Supreme Court ruling itself did not strike down software or business method patents, it also did not offer clear guidance on what qualifies as abstract, and therefore unpatentable, subject matter. There is still significant debate over just how severely this will affect the software patent landscape; but an analysis by Fenwick & West partner Robert Sachs a year down the line concluded that subsequent trends suggest that “we will continue to see the zone of patent eligibility curtailed in software… Indeed, the more advanced the software technology… the less patent eligible it is deemed to be by the courts and the USPTO”.
Any significant change in the US software environment is bound to affect Indian companies; according to figures from Brand Value India, about 70% of the sector’s revenues come from exported goods and services, and a significant proportion of those are to the United States. But in contrast to the handwringing seen in some corners of the US market, the largest IT players in India have welcomed the decision. A move towards convergence, should Indian rules become more permissive and US rules more restrictive, may even put them in an advantageous position.
Due to the requirements of Section 3(k), companies such as TCS have directed their patents towards decidedly non-abstract claims, so the risk posed by Alice, they feel, is low. “We solve an industry problem with a unique technology and software is just a way of implementing that technology, which is why we call it a computer-implemented invention. That has been our philosophy,” explains Ganapathy. TCS files patents according to that philosophy not just in India, but also in the United States, where the bulk of its business originates. As Naranayan puts it: “We don’t go customising the patents in every jurisdiction; the technology that we want to protect is the same. This decision has reinforced that the strategy that we use is appropriate. We may have a few cases where office actions have marginally increased, but we see it getting back to normal. Is there a direct impact, with our patents being affected? No, not really.”
One reason why TCS, for one, is not overly concerned about the ruling is that it prefers to monetise its intellectual property through its offerings to customers rather than directly licensing out its patents. “We do a valuation of patents, but it is based on the projected market for the solution that we offer using an in-house developed model,” says Ganapathy. “It would be a different conversation if we based that on the market value if we are going to license it, but we do our own model and are monitoring that.” And Alice, he concludes, has had little effect on client demand or concern about products being IP safe.
Table 1. Top 5 lndian applicants for patents in the field of information technology 2013-2014
|
Company |
Applications filed |
1 |
Tata Consultancy Services Limited |
169 |
2 |
Samsung R & D Institute India – Bangalore Private Limited |
84 |
3 |
Infosys |
83 |
4 |
Samsung India Software Operations Private Limited |
66 |
5 |
Wipro Limited |
59 |
6 |
Indian Institute Of Technology (Collective) |
59 |
Source: Office of the Controller General of Patents, Designs, Trademarks and Geographical Indications
At Infosys, the recent trend towards open source has also lessened the impact of Alice, according to Sircar: “Alice has really made us rethink the conditions of patentability, and which inventions to protect through IP and which to protect through other means. Definitely, an open source approach does mitigate quite a bit of the obstacles raised by the decision.”
Open season
This shift in philosophy started in earnest with the arrival of current CEO Vishal Sikka. Sikka’s views on the patent system, particularly as it concerns software, are no secret. In January he told the Press Trust of India: “I think the software industry and its strange fixation on patents is absolutely wrong and is actually not at all productive to innovation.” Sikka is not the only prominent figure pushing for a broader move towards open source in the country. The government has framed open source as a part of its much-vaunted Digital India initiative, mandating that responses to public sector requests for proposal utilise open source solutions where possible. Whether this attitude will take hold in the private sector is an open question – but Infosys is blazing a trail in this regard.
Table 2. Top 5 Indian patentees 2013-2014
|
Organisation |
Patents granted |
1 |
Council Of Scientific & Industrial Research |
98 |
2 |
Samsung India Software Operations Pvt ltd |
84 |
3 |
Hindustan Unilever Limited |
32 |
4 |
Bharat Heavy Electricals Limited |
22 |
5 |
Tata Motors Limited |
21 |
Source: Office of the Controller General of Patents, Designs, Trademarks and Geographical Indications
“Most of our current projects plan to make the fullest use of open source data,” says Sircar. “We feel that using open source adds on a lot of flexibility in the technology, not only for yourself but for the community at large. If it is managed well over time, it will add quite a bit of value to the company.” As to whether Infosys could take a page out of Tesla’s book and open up licences to technologies that it has already patented, Sircar says that “we are seriously thinking and contemplating along those lines. We are evaluating ourselves and some kind of meaningful resolution will soon evolve”.
At TCS, engagement with open source is likewise a feature of its strategy. “We have been following the open source community going back to the 1990s,” says Ganapathy. “But we were not very active in adopting open source until about 15 years ago, when we started an internal team to look into it. If you look at it now, the open source community has become more mature and the solutions and products have reached the level where they can be adopted in the mainstream.” The company’s aim, he says, is to offer a judicious mix of open source and proprietary software based on the client’s demands and the needs of the business: “We want to offer the customer the best possible solution. We build something which has some proprietary components and some open source components, taking into account the customer’s own policies and level of interest in open source, as well as the technological requirements.”
Of course, a strong emphasis on open source does not mean that the IP cell and technology patents will not have key roles to play within the company: “We have to keep in mind our contractual obligations to clients and accordingly we will keep some of our innovations proprietary”.
“It’s not as if we’re not going to file patents,” agrees Sircar. “We will also be conducting a lot of training and awareness programmes, making people aware and motivating them to use and contribute back to open source.” The team will also play a key role in checking that the appropriate rules of usage are being followed with regard to open source and determining appropriate contributions to be made back to the community.
Reactions to the IPO’s Section 3(k) guidance
In an effort to bring uniformity and consistency to the examination of patents involving computer software, the IPO in 2013 released draft Guidelines for Examination of Computer-Related Inventions and solicited feedback from the public. Here are some excerpts from the responses of stakeholders.
Much of the technological innovation today, especially in the information technology (IT) industry, is achieved through new and innovative software development as opposed to hardware innovation. Innovative software can achieve the same technical effect without the added cost of hardware development and at a much faster pace. This trend toward software implementation of inventions and away from hardware continues throughout the worldwide IT industry. The Guidelines’ approach of favoring older technology over new technology is against this trend and potentially will discourage software innovation in India…The India IT industry has witnessed rapid growth in the past decade, and a balanced approach to the patentability of computer-implemented inventions – in line with the practice of other major patenting jurisdictions—will help boost further growth of the India IT industry, especially in software.
Ron Somers, president, US-India Business Council
Since a substantial portion of exports from India are related to software, it is prudent that the IPO encourage patenting of software-implemented inventions — both to protect Indian industry and to draw in international investment. Indian companies actively obtain patent protection for their software inventions in jurisdictions that allow it, such as the US and EU. In a similar fashion, the patent ecosystem in India should nurture the software industry by ensuring there are legal protections available to encourage a culture of investment in innovation.
Yolynd Lobo, director, BSA India
Indian software companies operate in the International markets and are globally competitive. Patenting of computer related inventions should be objectively considered taking into account accepted practices across the world. Indian judiciary, including the Honourable Supreme Court and the Intellectual Property Appellate Board (IPAB) have always relied on the decisions given by common law courts, wherever the provisions of the law are similar. Similar provisions have been addressed by the patent offices in other countries across the world should be considered relevant.
Bishakha Bhattacharya, director, NASSCOM
The draft guidelines attempt to interpret and apply Section 3(K) in a restricted manner, particularly with regard to the interpretation of the term “Per se”. This creates a major concern for us. The revised manner of examining Section 3(k) requirements is not aligned with major or established jurisprudence in other major patent jurisdictions. It is possible to apply Section 3(k) such that the requirements of Article 27(1) WTO TRIPs Agreement are met and at the same time it does not prevent granting patents to technical inventions, even when they are implemented by means of software.
J L Anil Kumar, head of IP&S India, Philips Intellectual Property & Standards
As Ganapathy puts it: “Adoption of open source without proper governance will not ensure that it is used in an appropriate manner. There could be planned use of open source or there could be unplanned use, in which a developer picks up some open source without realising the licensing implications. We have our own internal systems for this which have reached a level of maturity.” This once again points back to the need to protect customers and give them confidence that a solution is IP safe. “A licence to the customer for a TCS IP-based solution is given only after it undergoes multiple levels of checking for the use of open source in it,” says Ganapathy. “We make it clear upfront in our agreement with the customer that there are open source components with certain licence conditions and proprietary components with other terms and conditions. And we ensure that all licences are compliant.”
As open source continues to grow in importance, deciding what to give back to the community and what to keep as proprietary will be among the most important facets of companies’ IP strategies. This also demands close working relationships between the IP function, R&D and the business units. Ganapathy explains how the centralised process works at TCS: “Giving back to the community is a business decision based on what the solution is. We have released some of our solutions – in fact, some of the implementations of our patented technology as well – to the open source community. We continue to do that on a case-by-case basis based on business imperatives. To help in taking an appropriate business decision, we have a centralised committee, which I am a part of.”
Leading the way
The upbeat mood in the Indian IT space stands in marked contrast to the gloomy predictions being made in the United States post-Alice. “Over the next 12 months we will have to adapt to new things and make improvements in all aspects,” acknowledges Sircar; but “I don’t think there is a big boulder rolling towards us as a challenge”. Ganapathy agrees: “Externally I don’t think there are any major challenges. There are internal operational issues which we will address: how to increase awareness and make sure appropriate IP is protected and aligned to our policies.”
Despite high-profile litigation over standard-essential patents in the past couple of years, there is also little concern over full-blown patent wars breaking out in the IT industry. “If you look at the current situation in the courts,” notes Sircar, “most of them are relatively hard cases. With time, litigation will definitely increase, but it will not be a dramatic rise.” “There will be litigation in any mature IP system,” points out Ganapathy. “If filings increase, naturally there will be an increase in litigation. Litigation may not have risen to such a great extent if you think of it that way. There are high-profile cases, but when you look at the numbers I don’t think it is a substantial risk.”
Once again, however, there is still room for improvement: for example, the entire industry would benefit from increased efficiency at the IPO, a key focus of its latest annual report. “We would expect increased government support in IP creation and suggest increased capacity building in the patent office,” comments Sircar. He says that Infosys welcomed the recently released draft IP rights strategy as the first attempt to take a comprehensive approach to IP creation, protection and enforcement. Furthermore, the industry is looking forward to official guidelines from the IPO on standard-essential patents and fair, reasonable and non-discriminatory licensing. “These are things which are new to the country and if proper guidelines are provided, things will function in a much more effective manner.”
There is also a focus on sharing know-how with the many start-ups and small and medium-sized enterprises in the IT space. Infosys, for example, has announced a $250 million Innovate in India Fund to help start-ups to develop technology and bring them into the company’s network of strategic partners. Ganapathy hopes that smaller enterprises can benefit from the IP savvy built up by IT giants over the decades: “We have gotten to a certain maturity level and we want to make sure that the market and society also reach that level. We have a long way to go and we want to take the entire ecosystem along with us”. Whether they succeed will likely have a major impact on how the next generation of great Indian corporates approaches IP strategy.