Company Law - Business Method Patents

Introduction

Chapter I

It is said that “law grows with growth of a nation” and in the modern era a nation grows with growth of intellectual property. The escalation of intellectual property has become barometer of the economic growth of a nation. A nation’s system of intellectual property protection seems to have substantial effect in relatively high technology industries like chemicals, pharmaceuticals, machinery and electrical equipment on the kinds of technology transferred to that country and the amount of direct investment in that country.

Aptly, the 21st century is often labeled as ‘century of knowledge’, as the ability to create, access and use knowledge has become, even more than before, a fundamental determinant of global competitiveness of enterprises and economies. The centrality of knowledge as a source of productivity gain and competitiveness has recently placed the intellectual property system at the centre stage of the knowledge economy. Statistics on patent applications and patent grants show a significant increase in patenting over the past two decades leading to what has generally been termed a ‘pro-patent era’.

In the United States, for example, the total number of patents granted by the USPTO has been rising by 6% a year since the mid-1980s. The surge in patent applications has been particularly significant in knowledge-based industries such as biotechnology, information and communication technologies (ICT), nanotechnology or advanced chemicals.

Patent is a legal instrument, which aims at creating statutory right over an invention, which is the result of well-planned research and development. Patents operate as monetary incentive for the inventors to make commercial use of the inventions, which they own. Patent is a legal right bestowed by the national government in consideration of unveiling the scientific and technical information of the invention to the public.

In the past fifty years, the range of patentable subject matter has expanded exponentially. Today, patents are issued for software, genetic information, and even business methods.

Background of US Patent Law:

Patent Law:

The Constitution of the United States authorizes the federal government to issue patents. According to Article I, Congress may “promote the Progress of Science and useful Arts by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” To that end, Congress passed a series of Patent Acts, beginning with the Patent Act of 1790 and most recently with the Patent Act of 1952. For an invention to be patentable, the Patent Act states that the invention must

(1) Constitute ‘patentable subject matter,’

(2) Meet the technical requirements for patentability, which require that the invention be ‘new,’ ‘useful,’ and ‘non-obvious,’ and

(3) Disclose a written description of an invention including the best mode of carrying it forth.

In exchange for disclosing such an invention, the United States government grants the inventor the right to exclusive use of the invention for a period of twenty years from the patent application filing date. Thus, the United States Supreme Court stated that the patent system “embodies a carefully crafted bargain” between the inventor and society by encouraging the disclosure of patentable inventions in return for the “exclusive right to practice” for a period of years. Further, the Court has stated that Congress intended patentable subject matter to “include anything under the sun that is made by man.” However, the Court has limited patentability by excluding laws of nature, natural phenomena, abstract ideas, and mathematical formulas from patentable subject matter.

The explicit goal for patents in the Constitution is to promote the arts and sciences. 

However, legal theorists argue that in reality the goal of the patent is three-fold:

(1) An incentive for inventors to invent;

(2) An incentive for inventors to disclose their inventions; and

(3) To induce firms to invest in innovation of patentable inventions.

While the first two goals reasonably follow from the constitutional language and the statutory requirements for patenting an invention, the third goal recognizes that even after an invention has been patented, “further investment is often necessary before [the invention] is ready for commercial exploitation.” For example, many inventions will require the building of new plants or equipment before the commercial potential of the invention can be realized. Therefore in addition to the incentive to invent and disclose, the initial protection of a patent may enhance the likelihood that a patented invention can be successfully commercialized.

Business Method Patents

Chapter II

“Supposedly, in order to be patented, something has to be new, useful and unobvious. . . . Of course, when the patent office gets into the game, they start interpreting new and unobvious. New turns out to mean we don't have it in our files and unobvious tends to mean unobvious to someone with an IQ of 50.”

Richard Stallman

During most of the last century, the U.S. Patent and Trademark Office (USPTO) rarely granted business method patents, claiming that a process could not be patented if it was simply an abstract idea, something the USPTO believed described most business methods. Similarly, software patents were usually held to be unpatentable by the USPTO and the courts, based on the view that they were unprotectible algorithms.

I. History Of Business Method Patentability

Beginning most notably in 1908 and extending until 1996, the position of the PTO was that business methods were not patentable subject matter. The relevant provision of the PTO, as explained in its Manual of Patent Examining Procedure (MPEP) §706.03, provided “though seemingly within the category of process or method, a method of doing business can be rejected as not being within the statutory classes.” The PTO’s position on business method patents was based, at least in part, on Federal appellate cases, including Fowler v. City of New York (stating, “no mere abstraction, no idea, however brilliant, can be the subject of a patent irrespective of the means designed to give it effect” ) and Hotel Security v. Lorraine Co. (stating, “In the sense of the patent law, an art is not a mere abstraction. A system of transacting business disconnected from the means for carrying out the system is not, within the most liberal interpretation of the term, an art. Advice is not patentable. . Such cases reflected the view of lower courts at the time that business methods were considered abstract ideas and thus were unpatentable on the basis of the Supreme Court’s interpretation of the subject matter requirement of in Diamond’s case. For nearly a century, the PTO followed, and courts presumed valid, although without formal endorsement, the business method exception to patentable subject matter.

II. Origin of Business Method Patents

The United States Court of Appeals for the Federal Circuit rendered its decision in State Street Bank & Trust Co v Signature Financial Group in 1998. A rival financial institution charged that patentholder State Street Bank & Trust Co.’s patent was invalid because it fell into the so-called “business method exception” for which no patent protection was available. The Federal Circuit read Section 101 of the United States Patent Act literally and held that a business method could, indeed, constitute a “new and useful process, machine, manufacture, or composition of matter, or ... new and useful improvement thereof,” entitling its inventor to a patent.

State Street opened the floodgates. As of late 2004, the United States Patent and Trademark Office (USPTO) classes and subclasses that cover much of the Internet and information technology fields contained 4,394 issued United States patents and the USPTO had published another 6,596 applications.

III. What is Business Method Patent?

It is a misconception that patents can be only obtained for an invention of intangible item. The whole landscape of patent law in US has seen a historic change in the decision of the State Street Bank & Trust Co. v. Signature Financial Group, Inc. it laid that patents can be obtained for how a business function is performed, such as, explaining the steps in how a business process is carried out. If such a process meets certain criteria established by the USPTO then this process may be patentable as a business method.

The court ruled that patent laws were intended to protect any method, whether or not it required the aid of a computer, so long as it produced a “useful, concrete and tangible result.” Thus with one stroke, the court legitimized both software patents and methods of doing business, opening the way for Internet-related patents. This lead the USPTO to create a new classification for applications: “Data processing: financial, business practice, management or cost/price determination.”

Since 1998, an increasing number of patents have been issued to software and Internet companies that have devised novel ways of doing business-for example, new online ordering processes or a unique Internet advertising scheme. These patents, which usually combine software with business methodology, are commonly referred to as business method patents or Internet patents.

There are several categories of patents, with business method patents falling into the utility patent category, which are patents granted to someone “who invents or discovers any new, useful, and nonobvious process (emphasis added), machine, article of manufacture, or composition of matter, or any new and useful improvement thereof.” Finally, the most important value of a business method patent is the potential it has for providing a competitive advantage since it in effect provides a monopoly for the patent holder by legally excluding others.

IV. Legal Requirements for Getting a Business Method Patent

In order to qualify for patent protection, a business method or software must meet four requirements:

1. The method or software must fall within the classes of patentable subject matter. Anything that is created by humans falls within these classes; laws of nature, natural phenomena and abstract ideas do not.

2. The method or software must be useful. This requirement is fairly easy to satisfy because any functional purpose will suffice. A business need only demonstrate that its method or software provides some concrete tangible result. For example, the Amazon 1-Click patent provides a tangible result - an expedited purchase.

3. The method or software must be novel. This requirement means the method must have an aspect that is different in some way from all previous knowledge and inventions. This requirement is discussed in more detail below.

4. The method or software must be nonobvious, meaning that someone who has ordinary skill in the specific technology could not easily think of it.

Novelty

An Internet method will flunk the novelty test if it was put to public use - or described in a published document - more than one year before the patent application for the business method was filed. For this reason, a business that is seeking to acquire a patent must research the prior art and promptly file its patent application or it risks losing valuable patent rights.

A business method is considered novel when it is different in at least one element from all previous methods - known in patent speak as the “prior art”. Prior art consists of:

1. Any published writing (including any patent) that was made publicly available either: (1) before the date of invention of the business method or (2) more than one year before the patent application for the business method is filed

2. Any U.S. patent that has a filing date earlier than the date of invention of the business method

3. Any relevant method or process (whether described in writing or not) existing publicly before the business method was conceived, or

4. Any public or commercial use, sale, or knowledge of the business method more than one year before the patent application for the business method is filed.

For purposes of prior art, the date of invention of the business method is the date that the business can demonstrate that the method works. The USPTO will consider all prior art, whether Internet-related or not.

Nonobviousness

Meeting the nonobviousness test turns on whether or not the method provides a result that would be new or unexpected to someone with ordinary skill in the field of the business. Or put another way, if the differences between the business method and the prior art would not have been an obvious development to someone in the field, it is probably nonobvious.

V. Some of the better-known examples of business method patents include:

1. The Amazon.com 1-click patent is often cited as a classic example of a “business-method patent.” While the validity of this patent may be argued one way or another, it's classified as a business-method patent because it includes concepts for conducting a business transaction. Amazon.com’s famous “1-click” patent, is directed to a system and method for placing an order to purchase an item via the Internet. The patent is essentially directed to a methodology whereby information associated with a user is pre-stored by a web site, and the user may thereafter order items from the web site with only one click of the mouse (clicking on a link associated with the item). In December 1999, Amazon.com successfully obtained an injunction against its online competitor, Barnesandnoble.com (bn.com), forcing Barnesandnoble.com to replace its own one-click system with a slightly more complicated ordering system. While this injunction has since been lifted, the underlying litigation is still pending.

2. The Priceline.com patent regarding a “reverse auction” method for purchasing airline tickets over the Internet.

3. The State Street Bank patent, which covered a new type of financial instrument.

4. The AT&T patent, which covered a method for producing a message record for a long distance telephone call.

5. On September 26, 2001, MercExchange, L.L.C., filed a complaint against eBay, its subsidiary, Half.com, and ReturnBuy for patent infringement under 35 U.S.C. section 271. MercExchange is a one-man company formed by Tom J. Woolston. Woolston is the inventor of the patents implicated in MercExchange v. eBay. The three patents at issue were No. 6,202,051 (hereinafter “051 patent”), covering a method and apparatus for internetworked auctions; No. 6,085,176 (hereinafter "'176 patent"), covering a method and apparatus using search agents to return a list of matched goods from a plurality of markets; and No. 5,845,265 (hereinafter "'265 patent"), covering a method and apparatus for creating a computerized market for goods for sale or auction. MercExchange v. eBay was a high stakes lawsuit, given that the scope of the patents at issue allegedly covered major components of eBay’s internet-based business. These major components include the auction, fixed price sales, and the searching function linking a buyer’s interest to the merchandise databases. Subsequent proceedings limited the patent infringement issues to only the 265 and 176 patents. As well, the court limited the defendants to eBay and Half.com. On May 27, 2003, the jury found that eBay and Half.com had willfully infringed the 176 and 265 patents. This verdict assessed damages of $35 million. On August 6, 2003, the District Judge denied plaintiff's motion for a permanent injunction to enjoin eBay's infringing activities, denied defendants’ renewed motions for a new trial and for judgment as a matter of law, and reduced the jury-determined damages to$29.5 million. Following the district court's final judgment, eBay and Half.com filed an appeal with the United States Court of Appeals for the Federal Circuit. In addition, upon eBay's request, the PTO ordered a reexamination of MercExchange's patents on June 4, 2004. Both proceedings are currently pending.

6. One October 23, 2004 Dell Inc., the world’s largest online seller of computers, was sued by a small company on grounds of patent infringement. The suit alleges that Dell is violating a patent held by DE Technologies of Virginia, USA, on methods for selling product internationally using the Internet.

Critics of Business Method Patent

Chapter III

Whenever the laws change dramatically, there is typically a reaction from the public, usually negatively. In the patent context, this occurred in the early 1980s when the courts began allowing patents to issue on living organisms (bacteria, genetically engineered organisms, etc.), and the U.S. Patent Office began issuing these types of patents. Nay Sayers immediately began protesting, stating that patenting life forms would open a floodgate that may not easily be closed, and that it is immoral to take ownership in, for example, a genetically engineered organism. In the end, such patents have been deemed to be instrumental in the expansion of the biotech industry, and many useful inventions have resulted. The protests have died out, and most people now see the benefits of this expansion of patent law.

Likewise, in the early 1980s and early 1990s, when courts declared that software inventions could be patented and the Patent Office obliged, programmers and others in the software industry were alarmed. To these people, patents represented just the opposite of how the software industry needed to operate. To many programmers, sharing experiences and techniques was a hallmark of a fast and ever-changing industry, and patents impeded such progress.

More recently, with the courts and the Patent Office now allowing patents to issue on business-method inventions (after a long-held precedent forbidding such patents), many have declared that patent law has entered territory that it was neither intended to, nor should, cover. With the explosion of the Internet, business-method patents are viewed by many as unnecessary and unwanted.

Critics of business-method patents (and software patents) have a point, but only to a degree. The courts have mandated that the Patent Office grant patents on business methods that satisfy the three-pronged test for patentability - the invention must be (1) useful, (2) new and (3) non-obvious. However, in the past, the Patent Office hasn’t had the expertise or the tools to make this determination, and so patents of undue scope have issued. Such overly broad patents are commonly used as examples of bad patents and have led to the broad-brush condemnation of software and business methods as a whole.

While there’s no doubt that the Patent Office has and continues to make mistakes, it would be foolish to abolish software and business-method patents in concept merely because the procedure is flawed. If patent examiners at the Patent Office were given the tools and training to do their jobs properly, then we’d likely see patents issuing only on truly innovative concepts that deserve patent protection.

The Patent Office has taken some steps in the right direction to make this happen. It recently introduced a more thorough examination process for business-method patents (whereby patent applications are subjected to an additional level of review), and additional training and prior-art resources are becoming available to patent examiners. The problems won’t be fixed overnight, but in time the system should work much better. Once we get to that point, it should become more difficult for critics to find examples of bad patents, and the controversy will likely die away.

Some critics of business method patents object to the broad scope of such patents and assert the obviousness and non-novelty of many issued patents. One patent that is the target of such criticism covers accumulation of product registration information until a network connection is detected and then uploading the product registration information. Another involves training janitorial personnel in office cleaning using posters. In late 2002, one patent holder committed to the public domain its rights under an issued patent covering a reservation system for the use of restrooms.

A few critics even predict that inappropriate use of patent laws could ruin the patent system for everyone else by providing incentives for “pinstriped lawyers instead of white-smocked inventors” as the Constitution had intended. Thomas Woolston, a Virginia business owner, recently claimed that the online auctioneer, eBay, was infringing his business method patent for selling auctioned items at a fixed price. He sued eBay and eventually won a jury verdict of $35 million in May 2003, but the case is awaiting a decision on appeal to the U.S. Court of Appeals for the Federal Circuit. For eBay, dealing with the patent troll incidents like this is “an unfortunate cost of doing business” and has driven up its costs, while diverting time and resources from business development.

The sky is not falling. However, the system is flawed, and it needs fixing. The courts have made it clear that business methods can be worthy of patent protection, and absent intervention from Congress (a possibility, but unlikely at least in the near term), business-method patents are here to stay. It might take some more time before the Patent Office fixes itself, but it will happen. In the end, most of the controversy will go away, inventors (and their employers) will use the patent system in the way it was intended (to promote innovation and its dissemination to the public), and innovation will continue on its never-ending march forward.

Conclusion

Chapter IV

“Business-method patents” are among the most controversial forms of legal protection for some Internet companies. But they can also be among the most important assets. Business methods and software can also be protected under trade secret laws. A trade secret is any confidential business information developed by a company that gives it an advantage over competitors. As long as it’s kept secret, this protection does not expire. Patent protection, however, although more expensive and shorter in duration, is often preferable to trade secret protection because a patent owner can stop others from using the patented method even if the new user developed the method on its own, without stealing or copying directly from the patent owner.

This could be elucidated by the example of Walker Digital obtained a patent for an online reverse auction that became the business model for Priceline.com. As of June 2002, Priceline.com had a market capitalization of about $900 million. The experience of Amazon.com and Walker Digital and the growth of business method patents generally suggest that business method patents can be an integral part of a franchiser’s franchise system and a significant asset for building and protecting its brand equity.

Internet patents can be used offensively against a major competitor or they can be used defensively as a bargaining chip against an aggressive competitor who threatens to sue based on one of its patents. Innovation will continue on its never-ending march forward and inventors will continue to make profits by their inventions through the toll of patents. Business Method Patent is also a step ahead in the march of investor’s incentive to make profits.