As the IT sector was slowly making its presence felt, in the 1980s, the U.S.P.T.O. was forced to change its position with regard to software patents by the Supreme Court. The 1981 case of Diamond v. Diehr provided the first instance in which the U.S. Supreme Court ordered the P.T.O. to grant a patent on an invention even though computer software was utilized. This became a landmark judgment in that the court held that a machine, which transforms materials physically under the control of a programmed computer, is patentable. In addition, and without overruling the earlier Gottschalk v. Benson decision holding that a mathematical procedure cannot be patented, the majority in Diehr said that the Benson decision did not render all computer programs unpatentable. The question whether computer programs standing by themselves could ever be patentable was left undecided.

This ruling saw an immediate inflow of software patent applications into the Patent Office in a steady stream. Later, the decision in In Re Alappat No. 92-1381(Fed. Cir. July 29, 1994), clarified the position further by allowing patenting of inventions that can be implemented in either hardware or software, provided the patent application establishes the invention as something more than a mere mathematical formula.

These and later decisions reveal a growing trend towards obtaining patent protection for software. Further it can also be stated that patent protection for software is fast replacing the earlier practice of copyrights. The high costs involved in the research and development of software have also been one of the reasons other than the commercial value of patents in the increasing number of patent applications for software.

Countries like U.S. have moved ahead granting patents to business method claims also. Whereas in India section 3(k) of The Patents Act, 1970 does not allow a computer program per se to be patented. But a technical application to industry or a combination with hardware is patentable.

Thus as patent law is evolving with regard to software, apart from the general concerns yet another issue that demands attention is the growth of open source software vis-à-vis patents.

Open source software is a collective name for all kinds of software for which the source code is freely available. Everyone is allowed to extend or improve the software and to distribute it. The basis of open source software model is the free sharing of source code and the right to use another's work unrestricted. The advantages of using open source software are the ability to reduce costs and development time, or to avoid being dependent on a single vendor. Like all software, open source software is also protected by copyright.

Herein it is necessary to understand how software copyright is different from software patents. Copyright protection is extended to the expression of an idea and not to the idea itself. Thus where two developers write their own codes, but come down to a common conclusion, each may enjoy copyright protection for their respective codes.

Generally, a computer program is automatically copyrighted to the author of the program. This allows the author to restrict copying, usage and modification of his computer program by third parties. Permitting others to use the software is done by means of license. Thus the permissions that are granted and the conditions under which those permissions are granted are set out in the license.

As far as Open Source Softwares are concerned, it has a different approach. As said earlier, the software including source code is freely available for anyone. The license grants everyone permission to adapt or improve the source code, even to rectify errors, to make a more efficient implementation or to add completely new functionality etc. The software may also be copied and distributed freely, even in a modified form. Further, the author does not charge for this and the software is freely available on the Internet.

Although the license does not demand any money, there are conditions laid out. Whenever a user distributes the work or incorporates it in a commercial product, he is required to reproduce the name of the author typically in the form of a copyright notice. Other licenses require a distributor to make the source code of the open source software available. This could be by putting it together with their own product or by putting it on a website. Clear identification of modifications is also a requirement. Further, these modifications may sometimes be required to be supplied in separate files and must bear a different name to avoid any confusion about what is the official version.

But issues arise when the code infringes on a patent, affecting distribution and use, which will not be allowed without permission from the patent holder. Moreover there are other risks involved including the grant of a royalty-free patent license when distributing open source software implementing one’s own-patented technology and also there is a distinct possibility that some open source software may infringe on third party patents.

Further, an open source author mostly does not have the means to take a license for all users of his software and will not own a patent portfolio to improve his bargaining position, either. And infringement becomes easy to be proved since the source code is freely available. Thus patents and open source software can be said to be fundamentally incompatible.

Looking at the positive side of open source software, it adds even more competition to the software industry and thus increases the need for innovation. Open source programs have demonstrated a level of reliability and robustness under rapidly changing conditions (The Business Case for Open Source, Apr. 1999, The Open Source Initiative, 26 Apr. 1999 http://www.opensource.org/for-suits.html.).

This area is infact a major resource as far as the software industry is concerned despite the fear that proprietary software developers have. Open source software can also cut down costs in terms of millions with regard to implementation, regular updates and security upgrades. Hence growth of open source software should also be taken into consideration while patent applications for softwares come up.