Software patents have often been in the news recently, both in end-of-year reviews of 2011 and in developments of the New Year.

For example, just last Thursday The Wall Street Journal reported that Kodak, the company that invented digital photography, is facing bankruptcy due to its failure to raise sufficient funds through a sale of its library of patents on digital photography and imaging to maintain operations.

Last summer, Google bought a division of Motorola, Motorola Mobility, for $12.5 billion. The sale included over 17,000 patents held by that division of the company. In another news story of last year, a consortium of technology companies including Microsoft and Apple paid $4.5 billion to buy the patents of Nortel, a bankrupt telecommunications company.

You may wonder why technology companies such as Google, Apple and Microsoft, each with their own research centers full of engineers and programmers, are spending billions of dollars to buy more patents. These are billions of dollars which could have been invested back into their own labs, into new products or product improvements or paid as dividends to their stockholders.

They are not doing so because of some belief that the “next big thing” is waiting to be found within those patents, unrecognized by the original patent holder.

Patents on software are often so broad and/or vague that it is virtually impossible to invent something new that is not already covered, wholly or in part, by previous patents. Patent law expects can often find thousands of patents that essentially cover the same function, such as patents for backup data storage. This means that any company releasing a new software product can be faced with either paying huge sums of money for patent licensing agreements or for patent infringement lawsuits.

The larger the library of patents that the company already owns or has access to (such as the thousands of patents formerly held by Nortel), the easier it is for the company to argue in court that the new product is based on patents the company already controls.

Patent law exists to protect the interests of inventors and to thereby encourage innovation – there is more of a financial incentive to create something new if you know that the full force of the law will be brought to bear to ensure that the idea is not stolen.

The current system, allowing for vague or overly-broad ideas to be patented, fails to encourage innovation. The large technology companies spend billions of dollars, dollars which could otherwise be spent on innovation, on buying up patent libraries to provide themselves with legal protection against patent infringement charges.

On the other hand, individuals can be discouraged from creating new start-ups if they are aware that the company could easily be wiped out by patent infringement lawsuits or settlements. In the same vein, venture capitalists are less willing to provide financial backing to a new company if the danger of seeing the investment drained away by a lawsuit is too great.