July 6 (Bloomberg) -- European technology companies including Nokia Oyj and Siemens AG lost a three-year fight for stronger patent protection when the European Parliament rejected a law on software inventions. Governments were counting on the legislation to encourage investment and counter U.S. domination of Europe's $60 billion software market.

The Strasbourg, France-based parliament today voted 648 to 14 to throw out a draft law protecting inventions that combine software and machinery, such as code that reduces battery consumption on mobile phones. The assembly opposed U.S.-style limits on free software and ruled out a compromise with European Union governments, which endorsed the legislation in March.

``We buried a bad law and did so without flowers,'' Eva Lichtenberger, an Austrian Green, told reporters. ``The legislation would have hindered the development of small companies and helped big businesses because they are the only ones that can afford patent lawyers and litigation costs.''

A lack of uniform rules in the 25-nation EU means European companies trail U.S. firms such as International Business Machines Corp. in patenting software. That puts companies like Ericsson AB, the world's biggest maker of wireless networks, and SAP AG, the No. 1 business-management software maker, at a disadvantage when negotiating technology-license agreements.

Missed Opportunity

The defeat is ``a missed opportunity,'' said Mark MacGann, director general of the European Information, Communications and Consumer Electronics Technology Industry Association, which represents companies including Nokia and Siemens. ``Harmonization would have been an optimal solution.''

Patents, unlike copyright, give holders exclusive rights to a technology for a set number of years. Patent holders can charge a license fee for their invention and restrict who uses it. Companies are increasingly seeking this protection for computer- driven inventions, which account for about a fifth of patent applications in Europe.

The European Commission, the EU's executive arm, proposed legislation on the patenting of ``computer-implemented inventions'' in 2002 to chip away at disparate national patent- enforcement rules and reduce the regulatory burden on Europe's technology industry.

The rejection emboldens a group of policymakers in Europe who are spearheading resistance to EU market-opening proposals in industries that range from services and airlines to energy and championing the rights of national regulators, workers and companies.

Common Market Woes

Earlier this year, French President Jacques Chirac and EU parliamentarians moved to scale back a plan to deregulate services businesses from architects to hairdressers because of fears the law would trigger an influx of lower-paid foreign workers in rich nations such as France and Germany. EU regulators are also struggling to enforce rules that give energy customers the right to choose suppliers and airlines more freedom to fly to destinations outside Europe.

The threat of an EU parliament veto had hung over the draft software-patents law for months. Led on the issue by Michel Rocard, a Socialist former French prime minister, the parliament proposed to limit software patents in an initial vote in September 2003 and called for a new proposal in February this year after EU governments had signaled support for an industry- friendly version.

``It would have been impossible to amend the draft law in a way to reach a good result,'' Piia-Noora Kauppi, a Finnish member of the conservative European People's Party, the parliament's biggest group, said in an interview.

Open-Source Software

Advocates of so-called open-source software, such as the Linux operating system, had lobbied the parliament to restrict software patents because of concerns the EU would follow the U.S. approach, which gives patent protection to software and ideas such as Internet pop-up advertising.

Open-source software is typically developed by a loose network of volunteers and distributed without restrictions on how the programs can be used or how often they can be copied. Patents can leave open-source developers and users open to infringement claims for inadvertently distributing patented methods.

Industry had pinned hopes on a software-patents law after broader plans to create a European patent system stalled because of disputes between nations including Germany and Spain over language. The drive for a harmonized system is part of EU plans to boost economic growth that has trailed the U.S. in 12 of the past 13 years.

`Community' Patent

A single European system would end the risk of conflicting national court rulings on the same patent and trim intellectual- property protection costs, which are higher than in the U.S. A patent covering eight EU nations for eight years, for example, costs about 30,000 euros ($36,000) compared with about half that in the U.S., according to the Munich-based European Patent Office.

``The law on computer-implemented inventions would have addressed some of the problems associated with a lack of harmonization in the area of enforcement,'' David Sant, head of the EPO's bureau in Brussels, said by telephone today. ``This problem isn't likely to go away.''

Lawmakers including Kauppi said the rejection of the software-patents legislation should give fresh impetus to the creation of a single European system, dubbed the ``Community'' patent.

``We should now concentrate on the more general issues in the area of patents,'' Kauppi said. ``The Community patent is the most important.''

Instead of killing the software-patents legislation, the parliament could have sought changes to a draft text hammered out in March by national industry ministers or accepted that text as it stood. Amendments would have led to negotiations on a compromise with the ministers.

To contact the reporter on this story: Jonathan Stearns in Strasbourg, France at jstearns2@bloomberg.net

Last Updated: July 6, 2005 06:29 EDT