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Bar Journal - December 1, 2000

Business Method Patents and Their Impact on e-Commerce

By:
 
I. INTRODUCTION

Thomas Jefferson, the primary author of one of the earliest versions of the United States patent laws, recognized that patents serve as necessary rewards to encourage individuals to invent. Accordingly, inventors such as Thomas Edison and Alexander Graham Bell were able to secure limited monopolies in the form of patents in exchange for their toils and eventual contributions of their technologies to the sciences. Today, however, patents are affiliated not only with light bulbs, telephones or other mechanical devices, but also with methods of doing business, particularly methods of doing business over the Internet.

Patents arguably represent the most potent weapon in the arsenal of intellectual property rights because they allow their owners to block competitors from making, using or selling a patented invention for 20 years. This is not lost on e-commerce businesses, and they are flooding the United States Patent and Trademark Office ("USPTO") with business method patent applications. On the flip side, e-commerce businesses must understand the reality that one day they may open their mailboxes to find a cease-and-desist letter from a competitor that has just received a patent covering a particular way of doing business.

Why this sudden onslaught of e-commerce business method patents? Of course, some of the recent surge may be attributed to the relative novelty of the Internet and the increasing importance of business conducted over the Internet. But the trend is more the result of the decision issued by the Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group, Inc.1  In State Street, the court held that there is no statutory or judicial roadblock to patenting the manner in which a particular business is conducted, the so-called "business method." When the United States Supreme Court denied certiorari of the State Street appeal, the race to the Patent Office began in earnest.

The business method patent, for all its excitement and potential, is not without significant controversy. The complaints came to the forefront loudly and clearly when one of the largest Internet players, Amazon.com, secured a patent for its "one-click" method of ordering items from its website. Shortly thereafter, Amazon.com wielded its patent against one of its key competitors, Barnesandnoble.com, and the Federal District Court for the Western District of Washington enjoined Barnesandnoble.com from using the technology in the midst of the 1999 Holiday season. The decision undoubtedly sent chills down the backs of many dot-com CEOs, raising the specter that they too may become a defendant in a patent infringement case.

This article explores the importance of business method patents and their impact on e-commerce. After providing a brief primer on patent law, the article addresses the recent case law concerning business method patents, as well as the fallout resulting from the court decisions. Following a brief summary of notable e-commerce patents, the article concludes with a discussion of the controversy surrounding business method patents and their effect on e-commerce.

II. A BRIEF PRIMER ON PATENT LAW

Article 1, Section 8 of the United States Constitution grants Congress the power "to 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." Pursuant to that Constitutional grant of authority, Congress has enacted laws that define the country’s current patent system.2 

The primary author of one of the earliest versions of the patent system, which is largely intact today, was Thomas Jefferson.3  In his writings, Jefferson expressed his aversion to monopolies, but he also acknowledged that "ingenuity should receive a liberal acknowledgment."4  Accordingly, Jefferson’s patent system represented a compromise by granting inventors limited monopolies over their inventions as a way to encourage further invention. The Supreme Court has explained the purposes of the patent system as follows: "First, patent law seeks to foster and reward invention; second, it promotes disclosure of inventions to stimulate further innovation and to permit the public to practice the invention once the patent expires; third, the stringent requirements for patent protection seek to assure that ideas in the public domain remain there for the free use of the public.6 

A. Patentable Subject Matter

Our patent system allows inventors to obtain patents for utility,7  design, 8  and plant9  inventions. Design patents cover original and ornamental designs for articles of manufacture, such as furniture, perfume bottles and shoes.10  Plant patents cover new and distinct asexually produced plants, such as flowering plants and trees.11 

Utility patents are by far the most common patents issued. Congress has defined patentable utility inventions as "any new and useful process, machine, manufacturer, or composition of matter, or any new and useful improvement thereof."12  Although the labels are not critical and frequently overlap, utility inventions continue to be categorized as: 1) processes; 2) machines; 3) articles of manufacture; or 4) compositions of matter. A process is, generally speaking, a method or procedure of doing or making something, such as a method of making a particular automobile part. Machines and articles of manufacture frequently overlap, but machines normally include moving parts, such as a can opener, where as an article of manufacture, such as a screwdriver, does not. Compositions of matter normally involve chemical compositions, such as the composition of a particular lubricating solvent.

The United States Supreme Court has held that Congress intended patentable subject matter to "include anything under the sun that is made by man."13  Although the Supreme Court’s language appears to suggest a broad spectrum of allowable subject matter, the court has established that not every "invention" is patentable. It has long been the rule that laws of nature, natural phenomena and abstract ideas are not patentable.14  The Supreme Court in 1874 explained that "[a]n idea is itself not patentable, but a new device by which it may be made practically useful is."15  For example, Einstein’s E=MC2 or Newton’s law of gravity cannot be patented because such discoveries are "manifestations of the laws of nature, free to all men and reserved exclusively to none."16  The Court has likewise held that mere mathematical algorithms are not patentable because like laws of nature or abstract ideas, they are the "basic tools of scientific and technological work."17 

B. Criteria For Patentability

Simply because one’s invention fits into one of the statutorily defined categories of patentable subject matter does not entitle the inventor to a patent. The invention must also overcome the three statutory hurdles of utility, novelty and nonobviousness.

The utility requirement, deriving from Congress’ mandate that a patentable invention be "useful"18  is the easiest hurdle to overcome. To be patentable, a product or process must function as claimed and be capable of performing some benefit to humanity, but it need not be more useful or superior to other existing devices.19  Rejection of patent applications for lack of utility typically involve products or processes that simply do not work, such as a perpetual motion machine.20 

To meet the novelty requirement, an invention must be new in light of all technology publicly known prior to the date of invention.21  Technology publicly known prior to the date of invention is referred to as "prior art." Prior art includes technologies publicly known prior to the date of one’s invention, as well as technologies that existed prior to the inventor’s conception, but were not publicly disclosed until after the date of conception.22  An invention can also be barred on novelty grounds if the inventor fails to file a patent application within one year after the invention is publicly used, disclosed in a printed publication, sold or offered for sale.23 

The requirement that an invention be nonobvious is often the most difficult hurdle for inventors to overcome.24  To be nonobvious, an invention must comprise differences from the prior art that are not trivial or obvious to a person "skilled in the art." Thus, no patent may issue if the difference between the claimed invention and the prior art are such that they would have been obvious at the time of the invention to a person having ordinary skill in the subject matter of the invention. For example, an invention related to a modified computer keyboard would be judged for obviousness based on the knowledge of the ordinary person skilled in the art of computers or computer keyboards. This largely is a subjective test, but an invention normally can pass this test if it has one or more substantive physical differences over the prior art, and if there are benefits arising from these differences. In analyzing nonobviousness, courts also have been willing to consider "secondary considerations" of nonobviousness, such as commercial success of the invention, long-felt need for the invention, and failures of others to invent the technology.25

 

C. Steps for Obtaining a Patent

A detailed explanation of the necessary steps to obtain a patent are beyond the scope of this article. Briefly, to obtain a patent on an invention, an inventor must file a patent application with the USPTO. The application must disclose the invention in sufficient detail so that the disclosure enables an individual of ordinary skill in the art of the invention to make and use the invention.26  In addition, the application must present "claims" which particularly point out and distinctly claim the subject matter of the invention.27  The claims in the patent application are the legal description of the invention that carve out the scope of patent protection for the invention.

Once an application is filed with the USPTO, a patent examiner assigned to the application will conduct an internal patentability search to determine whether the invention is useful, novel and nonobvious, and meets the other statutory requirements of a patent. The examiner then will issue his or her decision to the applicant in a written "Office Action." The Office Action typically includes "objections" to the form of the patent application and/or "rejections" to the invention’s subject matter as described in the application. Rejections are often based on lack of novelty or on obviousness grounds.

In response to the examiner’s Office Action, the applicant must respond to the examiner’s objections and rejections, frequently amending the application accordingly. This give and take between the USPTO and the applicant may be repeated as needed until the USPTO finally rejects the patent application or issues a patent. This process is frequently referred to as "Patent Prosecution," and normally proceeds for 18 to 36 months before a patent application is finally rejected or a patent is issued.

D. Patent Rights and Patent Infringement

In effect, a patent represents an agreement between an inventor and the United States Government whereby in exchange for a monopoly limited in time, the inventor publicly discloses how to make and use the invention. One who obtains a patent on an invention has the right "to exclude others from making, using or selling the invention throughout the United States" for a term of twenty years from the date of application for the patent.28  It is important to recognize that a patent entitles the patentee only the right to exclude others from making, using or selling the patented invention, but does not entitle the patentee himself to make, use or sell an invention.

A patent owner may be prevented from making or selling her own invention if the invention comprises a component that has been patented by another. For example, if inventor X patents a ball-point pen in combination with a cap, she may be prevented from making and selling the pen/cap invention if inventor Y has already obtained a patent on the ball-point pen. Inventor X could prevent Inventor Y from making and selling a ball-point pen with a cap, but Inventor X may be precluded from making or selling her invention without a license from Inventor Y to make and sell a ball-point pen.

Patent infringement occurs when there is unauthorized making, using or selling of a patented invention.29  Literal infringement of a patent occurs when a product or process contains all of the elements claimed in a patent.30  Even if a product does not literally infringe a patented invention, it may still infringe the patent pursuant to the judicially created doctrine of equivalents. Under that doctrine, a product or process may infringe a patent if it performs substantially the same function in essentially the same way to obtain the same result as the patented invention.31 

A patentee who has established patent infringement can seek injunctive relief, compensatory damages, and in some cases, punitive damages in the form of treble damages and attorneys’ fees.32  A patentee can seek preliminary and permanent injunctive relief to prevent continued infringement, but any injunctive relief can extend only until the underlying patent expires.33  Compensatory damages may include the patentee’s lost profits and/or damages based on an established or reasonable royalty rate that should have been paid by the infringing party.34  Treble damages and attorneys’ fees are typically awarded only in those cases in which there has been willful infringement, that is, undertaking infringing activity with knowledge that it may be in violation of a patent.35 

III. BUSINESS METHOD PATENTS AND E-COMMERCE

Business methods are exactly as their name applies – any method of conducting business. Business methods can relate to the way a business is structured, operated, organized, marketed, managed or conducted. Methods of conducting business have been around as long as business itself, but business method patents have only recently come to the forefront, due largely to the State Street Bank36  decision handed down in 1998 by the Court of Appeals for the Federal Circuit.37 

Prior to the State Street Bank decision, courts and practitioners alike referred to a business method exception to patentable subject matter. An early court decision frequently cited as authority for the exception is Hotel Security Checking Co. v. Lorraine Co.,38  which involved a method for account checking to prevent fraud and embezzlement by waiters and cashiers in hotels and restaurants.39  The court found the patent invalid for lack of novelty, but the decision included some dicta suggesting that business methods could be unpatentable subject matter.40  In Loew’s Drive-In Theaters, Inc. v. Park-In Theatres, Inc.,41  the Court of Appeals for the First Circuit stated that "a system for the transaction of business . . . however novel, useful, or commercially successful is not patentable apart from the means for making the system practically useful, or carrying it out."42  Practitioners have likewise opined that business methods were not patentable.43  In State Street Bank, the Court of Appeals for the Federal Circuit rejected the existence of a business method exception.

A. The State Street Bank Decision44 

State Street Bank involved a patent owned by Signature Financial Group, Inc. entitled "Data Processing System for Hub and Spoke Financial Services Configuration."45  The patent generally was directed to a computerized accounting system and software used to manage mutual fund investment arrangements.46  State Street Bank and Trust Company sought a declaratory judgment that the patent was invalid and unenforceable. The Federal District Court for the District of Massachusetts held that the patent was invalid because it constituted an unpatentable mathematical algorithm and also because it fit into the so-called business method exception to patentable subject matter.47  The discussion of both facets of the court’s holding is significant in the arena of e-commerce patents, which frequently include claims comprising both software applications and business methods.

The district court first considered whether the invention amounted to an unpatentable mathematical algorithm simply embodied in a computer software program. The court emphasized the difficulty of determining the patentability of computer software because software programs essentially direct computers to perform mathematical algorithms.48  The court applied the then-accepted judicial test for determining patentability of software inventions, commonly referred to as the Freeman-Walter-Abele test. Under this test, which arose from three decisions issued by the United States Court of Customs and Patent Appeals (the predecessor court to the current Court of Appeals for the Federal Circuit),49  courts were to first determine whether a patent’s claims recited directly or indirectly a mathematical algorithm. If it did, courts were to determine whether the claimed invention as a whole was no more that the algorithm itself.50  If the invention boiled down to a mathematical algorithm, it was not patentable under the Freeman-Walter-Abele test.51  To be patentable under the test, an invention must "comprise an otherwise statutory process whose mathematical procedures are applied to physical process steps."52 

The district court in State Street Bank held that the patented invention failed the physical transformation component of the Freeman-Walter-Abele test.53  The court explained:

Quite simply, the [computerized accounting system] involves no further physical transformation or reduction than inputting numbers, calculating numbers, outputting numbers, and storing numbers. The same functions could be performed, albeit less efficiently, by an accountant armed with a pencil, paper, calculator and a filing system.54 

Moreover, the district court based its finding of invalidity on its holding that the patent fell into the so-called business method exception to patentable subject matter.55  The court cited to earlier decisions that equated business methods to unpatentable abstract ideas.56  The court went on to explain:

In effect, the ‘056 Patent grants Signature a monopoly on its idea of a multi-tiered partnership portfolio investment structure; patenting an accounting system necessary to carry on a certain type of business is tantamount to a patent on the business itself. Because such abstract ideas are not patentable, either as methods of doing business or as mathematical algorithms, the ‘056 Patent must fail.57 

The Court of Appeals for the Federal Circuit reversed the lower court’s decision and found Signature Financial’s patent valid. First, the court rejected the lower court’s finding that the patent was an unpatentable mathematical algorithm.58  The appellate court limited the Freeman-Walter-Abele test to purely mathematical applications and held that the computerized accounting system was patentable because it utilized a mathematical algorithm to produce a "useful, concrete and tangible result."59  Thus, it is clear that software is patentable if it is not simply a mathematical algorithm, but rather the utilization of an algorithm to produce some practical, useful result. Rather than focusing on a requirement of physical transformation, the Court of Appeals focused on practicality and usefulness of the invention.

More notable was the court’s putting to rest any lingering notion of a business method exception to patentable subject matter. In reaching its holding, the court emphasized that the case frequently cited as establishing the business method exception, Hotel Security Checking Co. involved a patent that was invalidated for lack of novelty, not because it was a business method. The Court explained:

In Hotel Security, the patent was found invalid for lack of novelty and "invention," not because it was improper subject matter for a patent. The court stated "the fundamental principle of the system is as old as the art of bookkeeping, i.e., charging the goods of the employer to the agent who takes them. If at the time of [the patent] application, there had been no system of bookkeeping of any kind in restaurants, we would be confronted with the question whether a new and useful system of cash registering and account checking is such an art as is patentable under the statute."60 

The appellate court in State Street Bank concluded that patents for business methods should be treated like any other process patents.61  That is, a business method may be patentable if it is novel, useful and nonobvious, and if it meets the statutory filing requirements.62  The decision was appealed and the Supreme Court denied certiorari.63

 

B. The State Street Bank Decision and E-Commerce Patents

It is clear from the State Street Bank decision that whether an invention is patentable should not turn on whether it is a method of doing business rather than doing something else. As e-commerce has become firmly entrenched in mainstream commerce, businesses have developed technologies to take advantage of this new business marketplace. Whereas in the past, individual businesses sought to beat their competitors by secretly developing better and more efficient ways of doing business, today e-commerce businesses are also trying to outright stop their competitors by obtaining patents on their business methods.

Because the Internet is relatively new, ways of doing business on the Internet are in some ways novel – at least in their utilization of the Internet. And the number of e-commerce applications filed is a telling indication of businesses’ awareness of the potency of a business method patent. E-commerce related patents increased by almost 100% from 1998 to 1999 above, and likely will increase at a greater pace in 2000.64  The media’s increased interest also is a telltale indicator of the importance of the implications of business method patents.65 

The range of e-commerce patents is broad, although most include a claim for some form of a business method. One of the more high-profile patents is U.S. Patent No. 5,960,411, which was issued to Amazon.com in September 1999. The patent is entitled "Method and System for Placing a Purchase Order Via a Communications Network" and relates to the ability of Amazon.com website customers to order goods with one click of the mouse. Common to many e-commerce websites is the use of virtual shopping carts, which customers can "fill up" while shopping on a website. After a customer’s shopping is done, the customer must complete the online shopping experience by providing shipping and payment information. Jeff Bezos, Amazon.com’s founder, came to realize that many sales were not completed because customers abandoned their shopping carts rather than take the time to supply the ordering information. Thus, he designed the Amazon.com website so that a customer only has to supply his shipping and payment information once. Each time the customer returns to the website, Amazon.com will recognize the customer and allow the customer to complete an order with one mouse click on the item to be purchased. As discussed below, Amazon.com quickly used its "one click" patent as a sword against its competitors.

Other e-commerce patents relate to Internet businesses that award incentives for online purchases. For example, U.S. Patent No. 5,794,210, issued to Cybergold, Inc. in August 1999, relates to a method of awarding points to online customers who receive particular online advertisements. The incentive points can be exchanged by consumers for online credit or a deposit to the consumer’s individual bank account. Netcentives, Inc. also obtained a patent in 1998 for a method of rewarding online consumers with bonus points that can be redeemed to make online purchases.66 

Food.com received a patent for an "Internet Online Order Method and Apparatus" in November 1999.67  This patent relates to a method and system for managing online orders of food and other products to be delivered to online consumers’ homes. Other e-commerce patents include patents obtained by Open Market, Inc. that relate to securing online payments.68  Priceline.com, Inc.’s owner, Jay Walker, has received a number of patents related to the company’s "reverse auction" system that allows potential purchasers to name their price for virtually any product or service.69  Another recent patent covers an online dating service.70 

Over the years, inventors have applied for patents for different reasons. Some inventors may take great pride in displaying plaques with the cover page of their inventions. Indeed, a significant number of inventions have been patented despite the fact that the inventions have little or no market value. For example, it is unlikely that U.S. Patent No. 5,993,336, which discloses a particular method of executing a tennis stroke while wearing a knee pad, has any market value.

For the more entrepreneurially minded inventor, however, patents can represent extremely lucrative property. After all, once a patent issues, it entitles the owner to stop others from making, using or selling the invention in this country for a period of twenty years from the date of filing.71  This is not lost on e-commerce businesses.

If a patent owner determines that a competitor (or non-competitor) is making, using or selling its patented technology, in other words, infringing its patent, the owner has numerous options. The owner can demand that the infringer discontinue any infringing activities. The owner can demand payments for past infringing activity and seek royalties for future infringing activity. The owner can offer to sell the infringer the patent, or issue an exclusive or nonexclusive license to use, make or sell the patented technology. Or the owner can sue the infringer in Federal court for damages and/or injunctive relief to prevent further infringing activities. Damages may include treble damages and attorneys’ fees if willful infringement can be established.72 

C. E-Commerce Patent Litigation

Along with the recent flurry of issued e-commerce patents has come patent litigation involving e-commerce competitors. The case that has raised the most eyebrows likely is Amazon.com, Inc v. Barnesandnoble.com, Inc., which arises from Amazon.com’s "one-click" method patent discussed above. The USPTO issued Amazon.com’s patent on September 28, 1999, and Amazon.com wasted no time before filing a complaint against Barnesandnoble.com on October 21, 2000, with its newly issued patent hoisted high as a sword. In the heart of the holiday shopping season, Amazon.com sought preliminary injunctive relief to prevent one of its largest bookseller competitors from allowing its customers to order goods with one click of the mouse. The Federal District court for the District of Washington granted Amazon.com’s request and preliminarily enjoined Barnesandnoble.com from continuing infringing activity.

A quick review of the case reveals the potency of a business method patent. Barnesandnoble.com contended that the single-click patent was invalid because it was not novel or nonobvious in light of the prior art, and even if it was valid, Barnesandnoble.com’s website did not infringe the patent. In addressing the novelty of Amazon.com’s patent, the court accepted expert testimony that prior websites required more than one mouse click to order merchandise from e-commerce retailers. With regard to the nonobvious inquiry, the court noted that although Barnesandnoble.com’s expert opined that the one-click method was a trivial modification to the standard online shopping cart system, he also conceded that the idea had never occurred to him. The court also took notice that Barnesandnoble.com and other competitor websites had espoused similar one-click systems, indicating a secondary consideration of nonobviousness. The court concluded that the fact that Barnesandnoble.com had copied the one-click method "’gives the tribute of its imitation, as others have done.’"73 

With regard to the infringement analysis, the court noted that in addition to its online shopping cart option, Barnesandnoble.com offered an "Express Lane" option, which allowed shoppers to purchase items with one click of the mouse. The court held that this one-click method used by the Express Lane option clearly infringed Amazon.com’s patent and granted the injunctive relief sought by Amazon.com. Barnesandnoble.com has appealed the injunctive award and that appeal is pending.

Consequently, it appears that any e-commerce retailer that allows its shoppers to save time and purchase with one click of the mouse would be infringing Amazon.com’s patent. The court did note, however, that Barnesandnoble.com could modify its "Express Lane" option to avoid infringement by requiring users to take at least one additional action other than the single mouse click to purchase goods.74  A visit to Barnesandnoble.com’s website reveals that after ordering with a single mouse click, shoppers now must confirm their order with a second click.

Amazon.com is not the only e-commerce patent holder that has raced to the courthouse with patent in tow. In fact, Amazon.com itself is being sued for patent infringement by Intouch Group, Inc., which filed suit against Amazon and others in April 2000 contending that the defendants infringed a patent facilitating the manner in which consumers can sample music online.75  Furthermore, Priceline.com has brought suit in the Western District of Connecticut against Microsoft and its Expedia Inc. subsidiary, claiming that Expedia.com’s hotel booking service infringes Priceline.com’s patent.76  Priceline.com seeks monetary damages as well as an order closing down Expedia.com’s business.

Patent litigation also has been fierce among online coupon distributors. Chicago based Coolsavings.com, Inc., obtained a patent in 1998 for its "Interactive marketing network and process using electronic certificates."77  Shortly after, Coolsavings.com brought a number of lawsuits against competitors for patent infringement. One of those competitors sued by Coolsavings.com, E-centives Inc., owns a patent related to an electronic couponing method and has in turn filed a patent infringement suit against Coolsavings.com.78  In the realm of Internet postage, Pitney Bowes has brought suit in the Federal District Court of Delaware against Stamps.com and E-Stamp for infringement of Pitney Bowe’s patents covering buying postage over the Internet and printing it on envelopes.79  These cases suggest that the State Street Bank decision may have opened the proverbial Pandora’s Box of patent litigation amongst e-commerce competitors.

D. E-Commerce Patents: A Sword And A Shield

Whatever one may think about the propriety of business method patents, there can be no doubt that savvy businesses are paying attention to them. E-commerce businesses must seriously consider patenting innovative business methods, even if it is not their plan to try to prevent their competitors from using similar business methods. Otherwise, a business may find itself as a defendant in a patent infringement action and facing the prospect of being foreclosed from using its own business method because a competitor has obtained a patent on the method.

Patents of all types historically have served as both offensive and defensive weapons, but sophisticated e-commerce companies in particular must explore the offensive and defensive benefits of patents. An offensive strategy may involve using business method patents to hinder or prevent competitors from utilizing the same methods to conduct their businesses. Or e-commerce businesses may use a patent to force a competitor to share a piece of the market pie by licensing the patented business method to the competitor.

It is clear that e-commerce giants Amazon.com and Priceline.com are using their business method patents offensively in an effort to weaken their key competitors. Another pending patent gathering a great deal of interest is one that covers a computerized method of facilitating international trade transactions.80  The pending patent application, which was filed by Edward Pool of DE Technologies, LLC, relates to a software system that facilitates the computerization of the entire international trade process, including the creation of customs and shipping documents, currency conversions, the calculation of air and sea freights, as well as other services such as insurance. Mr. Pool has already touted his technology and claims that once a patent issues, he will seek a fee equal to 0.3% of each computerized trade across international borders, which fee could amount to billions of dollars annually. Mr. Pool has caught the attention of many because the list of users of technology potentially covered by his pending patent application is long and includes such heavy hitters as International Business Machines Corp. and DHL International.81  Although it is expected that the USPTO will issue the patent shortly,82  it very likely will face a formidable challenge to its validity.

Other companies may not be interested in making money by licensing their technologies to other businesses. Nor may they be interested in becoming involved in costly litigation to force their competitors to stop using similar technologies. But businesses may be very concerned that a competitor will try to use a patent to stop them from conducting their business in a certain manner. Businesses for that reason alone may be forced to seek a patent as a shield rather than a sword. In the past, if a company had a successful way of operating its business, the preferred strategy may have been to keep the business method a trade secret. However, with the emergence of business method patents, maintaining trade secrets may not be good enough.

Internet companies may invest hundreds of thousands of dollars to research and develop e-commerce technologies, and thousands more marketing their business and creating good will. Without patent protection on its technology, a company’s money and efforts could be wasted as a result of another company patenting a similar business method. Additionally, it may be more difficult for e-commerce companies to keep their business methods secret. Unlike some traditional bricks-and-mortar companies, significant aspects of most e-commerce business methods are readily accessible to the public and can be analyzed freely by competitors.

If a company has been sued for patent infringement, and it does not have a patent of its own to rely on in defense, one typical defense is to challenge the validity of the patent alleged to have been infringed. However, patents are presumed valid upon issuance, and challengers to a patent’s validity must prove invalidity by clear and convincing evidence.83  Not only is this burden a difficult row to hoe, but it also requires costly litigation that may not be feasible for e-commerce companies that are desperate for cash flow. Even if there is a strong case for invalidating the patent, a company may not be able to afford the litigation costs and thereby succumb to a licensing arrangement.

E. Do Business Method Patents Promote the Progress of Science?

The patent system was created to further the Constitutional mandate to "promote the Progress of Science," but many critics of business method patents question whether they indeed promote the progress of science. Unquestionably, the 20-year monopoly that a patent affords encourages many independent inventors to continue toiling away late at night in their garages in the hope that their inventions will become the next toaster or ball point pen. And most will undoubtedly agree that the seventeen-year monopoly84  that Alexander Graham Bell was granted when he invented the telephone was a good bargain in exchange for the public disclosure of the telephone technology. Larger companies, such as the major pharmaceutical companies, spend millions of dollars on research and development in anticipation that they will be able to recoup those costs for those inventions that are patent worthy. Without such patent protection, the public would lose some of these pharmaceutical inventions because there would be no incentive for companies to spend millions of dollars in research if a competitor could freely copy the end product once it hits the market.

But do the lure of patents induce companies to "invent" new and better business methods? Or is it more likely that good old capitalism provides the real incentive to improve the manner in which business is conducted? The survival-of-the-fittest reality of modern business drives businesses to continually evolve, improve and update. Otherwise, businesses will go the way of the typewriter, patent or no patent. There can be little doubt that businesses will develop and improve business methods regardless of whether these methods can be patented, as they have been doing long before the State Street Bank decision.

Even if patents may encourage some to develop better business methods, thereby aiding the progress of science, should they be the subject of patents? In Thomas Jefferson’s days, patents involved tangible nuts-and-bolts inventions, not the manner an e-commerce business allowed customers to place orders. Did Jefferson, an anti-monopolist, truly intend businesses to use the patent system to foreclose competitors from competing through similar methods of doing business? Or did the United States District Court for the District of Massachusetts have it right in the State Street Bank case when it equated business methods to unpatentable abstract ideas?85  In her decision, Judge Patti Saris compared business methods to abstract ideas and explained the rationale for not allowing abstract ideas to be patented:

The reason for this rule is simple, "phenomena of nature, though just discovered, mental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work." Granting a patent monopoly on the use of scientific principle, rather than on its particular practical application, would impede rather than promote "the Progress of Science and Useful Arts."86 

If individuals are allowed to patent basic commercial mechanisms, is the fundamental structure of our free market economy being forever altered?

Some critics contend that the patents issued to e-commerce businesses are not based on any novel inventions, but old ways of doing business modified for the Internet.87  They argue that even if methods of doing business are the proper subject matter of patents, most e-commerce methods of doing business do not meet the basic criteria of patentability – novelty and nonobviousness. In other words, incentive programs, dating services, and hotel booking services have all existed in the past, but now they are the subject of patents only because "inventors" have adapted them for the Internet.88 

This likely is a legitimate concern that needs to be addressed. Internet patents are being filed at a torrential pace since the State Street Bank decision two years ago, a pace that the USPTO is not equipped to handle. Compounding the difficulties produced by the pace of e-commerce patents is the relative inexperience of examiners at the USPTO, which during this booming economy has faced a period of high turnover. Also problematic is the fact that prior art libraries for Internet inventions are limited, making searches difficult, expensive, and often times inadequate.89  The result may be that patents are being issued for technologies that are not novel or nonobvious because the examiner simply was not able to locate evidence of the prior art. Furthermore, as discussed above, once a patent is issued it is presumed valid, and challenging the patent can become prohibitively expensive.

On the other side of the argument, supporters of e-commerce patents contend that there is no reason that business methods should be excluded from patentable subject matter. They contend that the arguments against e-commerce patents are the same arguments that historically have been made against patents in general. Some argue that, like any inventor, inventors of new and better business methods need patent protection to induce them to keep inventing.90  The supporters argue that business method patents will encourage e-commerce and other businesses to continue researching and developing better ways to conduct business, thereby benefiting the public.91 

F. What Lies Ahead For Business Method Patents?

With the Supreme Court’s denial of certiorari of the State Bank Street decision, it appears that business method patents are here to stay, unless Congress or the Supreme Court eventually decides otherwise. Yet, the cacophony of criticism and concerns voiced about business method patents has not fallen upon deaf ears. For one, the USPTO is undertaking steps to ensure that examiners scrutinize applications for business method patents with a keener eye toward novelty and nonobviousness. In March 2000, the USPTO announced its "Business Methods Patent Initiative: An Action Plan," which delineates steps the USPTO will be taking to improve prior art searches and examinations for business method patent applications.92  The USPTO will undertake efforts to better train its examiners in the area of e-commerce technology. Furthermore, the USPTO is looking to establish "Customer Partnerships" with the Internet and e-commerce sectors, thereby creating avenues of communication between the USPTO and industry to discuss issues and concerns. The USPTO has also heightened the search requirements for all business method applications in order to develop a more accurate prior art record.

Additionally, Congress has enacted legislation that provides a "first inventor" defense to those companies sued for infringement of patented business methods. Section 273 of 35 U.S.C., which was signed into law by President Clinton in November 1999, provides a defense to a party alleged to have infringed a business method patent if: 1) the party reduced to practice its own method of doing business at least one year prior to the filing date of the infringed patent; and 2) the party had been commercially using its business method before the filing date of the infringed patent.93 

It is too early to measure the impact of this legislation, but clearly it will not undercut the potency of e-commerce patents. The defense may be available to those companies that have been keeping their methods of doing business secret for years prior to a competitor patenting the specific business method. But the defense will not help those businesses attempting to implement new business methods already patented by their competitors. And in the world of e-commerce, where new technology and business methods continue to emerge daily, the defense largely may be unavailable to e-commerce companies. The rapid pace of e-commerce innovation means that the typical e-commerce business may find it difficult to establish by clear and convincing evidence that it implemented a particular business method one year prior to the date its competitor filed a patent application for that business method.94 

IV. CONCLUSION

Regardless of the controversy surrounding business method patents, one thing is certain – the USPTO is willing to issue them and the courts have been willing to uphold them. E-commerce businesses must consider whether their ways of doing business over the Internet are useful, novel and nonobvious. If they are, patent protection should be considered not only to keep their competitors from utilizing a similar business method, but also because it may protect them from being a defendant in patent infringement litigation. Like e-commerce itself, business method patents are in their infancy, and it is difficult to fully comprehend all the future ramifications. The USPTO and Congress appear to be taking steps to smooth the bumps in the road created by the State Street Bank decision, but e-commerce companies must keep their eyes on the road staying alert to the potential pitfalls and benefits arising from business method patents.

ENDNOTES

1. 149 F.3d 1368 (Fed. Cir. 1998).
2. See 35 U.S.C. § 1 et seq.
3. The Supreme Court discussed Thomas Jefferson’s role in the early Patent System in Graham v. John Deere, 383 U.S. 1, 7 (1966).
4. Id. at 8.
5. Patents are frequently referred to as a form of limited monopoly, although as described later in this article, a patent entitles the owner to exclude others from making, selling or using the patented invention, but it does not entitle the patent owner himself to make, use or sell the patented invention. Thus, the term monopoly may not be entirely appropriate in that it suggests one has cornered the market on an invention.
6. Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262 (1979).
7. 35 U.S.C. § 101.
8. 35 U.S.C. § 171.
9. 35 U.S.C. § 161.
10. 35 U.S.C. § 171.
11. 35 U.S.C. § 161.
12. 35 U.S.C. § 101.
13. Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980).
14. Diamond v. Diehr, 450 U.S. 175, 185 (1981).
15. Rubber-Tip Pencil Co. v. Howard, 87 U.S. 498, 507 (1874).
16. Funk Brothers Seed Co. v. Kalo Inoculant Co., 333 U.S. 127, 130 (1948).
17. Gottschalk v. Benson, 409 U.S. 64, 67 (1972).
18. 35 U.S.C. § 101.
19. Isenstead v. Watson, 157 F. Supp. 7, 9 (D.D.C. 1957).
20. In Re Ferens, 417 F.2d 1072, 1074-75 (C.C.P.A. 1969).
21. 35 U.S.C. § 102(a).
22. 35 U.S.C. § 102(g). Patent applications pending before the USPTO are maintained in confidence, so a subsequent applicant may be unaware of prior art which is disclosed only in a pending patent application.
23. 35 U.S.C. § 102(b).
24. 35 U.S.C. § 103.
25. Graham, 383 U.S. at 17-18.
26. 35 U.S.C. § 112.
27. Id.
28. 35 U.S.C. § 154. Patents for designs are effective only for fourteen years. 35 U.S.C. § 173.
29. 35 U.S.C. § 271.
30. See, e.g., Builders Concrete, Inc. v. Bremerton Concrete Products Co., 757 F.2d 255, 257 (Fed. Cir. 1985).
31. See Donald S. Chisum, Patents: A Treatise on the Law of Patentability, Validity and Infringement, § 18.04 (Dec. 1999).
32. 35 U.S.C. §§ 281, 284, 285. 
33. See Clark v. Wooster, 119 U.S. 322, 324-25 (1886).
34. See, e.g., Deere & Co. v. International Harvester Co., 710 F.2d 1551 (Fed. Cir. 1983).
35. See, e.g., Underwater Devices, Inc. v. Morrison-Knudsen Co., Inc., 717 F.2d 1380, 1390 (Fed. Cir. 1983).
36. 149 F.3d 1368 (Fed. Cir. 1998).
37. The Court of Appeals for the Federal Circuit handles all appeals of district court cases relating to patent matters.
38. 160 F. 467 (2d Cir. 1908).
39. Id. at 467.
40. Id. at 472.
41. 174 F.2d 547, (1st Cir. 1949).
42. Id. at 552.
43. See, e.g., 1 Peter D. Rosenberg, Patent Law Fundamentals § 6.02[3] (2d ed. 1995)("Whereas an apparatus or system capable of performing a business function may comprise patentable subject matter, the law remains that a method of doing business whether or not generated by an apparatus or system does not constitute patentable subject matter.").
44. The case originated in the Federal District Court of Massachusetts, State Street Bank and Trust Co. v. Signature Financial Group, Inc., 927 F. Supp. 502, 515 (D. Mass. 1996), and on appeal was decided by the Appeals Court for the Federal Circuit. 149 F.3d 1368 (Fed. Cir. 1998).
45. U.S. Patent No. 5,196,056 issued to Signature Financial Group, Inc. on March 9, 1993.
46. In summarizing the invention, the patent states that the invention "provides a data processing system and method for monitoring and recording the information flow and data, and making all calculations, necessary for maintaining a partnership portfolio and partner fund (Hub and Spoke) financial services configuration." Id.
47. State Street Bank, 927 F. Supp. at 515-16.
48. Id. at 508.
49. See In re Abele, 684 F.2d 902 (C.C.P.A. 1982); In re Walter, 618 F.2d 758 (C.C.P.A. 1980); In re Freeman, 573 F.2d 1237 (C.C.P.A. 1978).
50. See, e.g., In Re Schrader, 22 F.3d 290, 292 (Fed. Cir. 1994).
51. Id.
52. Arrhythmia Research Technology, Inc. v. Corazonix Corp., 958 F.2d 1053, 1058 (Fed. Cir. 1993).
53. State Street Bank, 927 F. Supp. at 515.
54. Id.
55. Id. at 515.
56. Id.
57. Id. at 516
58. State Street Bank, 149 F.3d at 1374.
59. Id. at 1373.
60. Id. at 1376, quoting Hotel Security Co., 160 F. at 469, 472 (citations omitted).
61. State Street Bank, 149 F.3d at 1375-77.
62. Id.
63. 119 S.Ct. 851 (1999).
64. N. Godici and S. Kunin, "USPTO: Operational Issues Being Faced in Regard to Converging Technologies," presented at AIPLA Institute, Jan. 26, 2000, p.1.
65. There have been numerous articles on e-commerce patents since the State Street Bank decision was handed down in 1998. See, , e.g., James Gleick, "Patently Absurd," The New York Times, March 12, 2000, p. 44; Lawrence Lessig, "Online Patents: Leave Them Pending," The Wall Street Journal, March 23, 2000, p. A22.
66. U.S. Patent No. 5,774,870.
67. U.S. Patent No. 5,991,739.
68. See, e.g., U.S. Patent Nos. 5,715,314 and 6,049,785.
69. See, e.g., U.S. Patent No. 5,794,207 for "Method and apparatus for a cryptographically assisted commercial network system designed to facilitate buyer-driven conditional purchase offers" issued on August 11, 1998; see also U.S. Patent No. 5,797,127 for "Method, apparatus, and program for pricing, selling, and exercising options to purchase airline tickets" issued on August 18, 1998.
70. U.S. Patent No. 5,963,951 for "Computerized online dating service for searching and matching people, issued on October 5, 1999.
71. 35 U.S.C. § 271(a).
72. 35 U.S.C. §§ 284, 285.
73. Id. at 1242 (quoting Diamond Rubber Co. v. Consolidated Rubber Tire Co., 220 U.S. 428, 441 (1911).
74. Id. at 1248.
75. Intouch Group, Inc. received a patent for "A Network Apparatus and Method for Preview of Music Products and Compilation of Market Data" in October 1999. See U.S. Patent No. 5,963,916. Intouch Group brought a suit against Amazon.com for patent infringement in April 2000. See Margaret Kane, "Amazon Sued For Patent Infringement," ZDNet News, April 13, 2000, http://www.zdnet.com/zdnn/stories/news/0,4586,2542378,00.html.
76. See "Expedia Seeks Dismissal of Priceline.com’s Patent Suit," WebTravel News, December 20, 1999, http://www.webtravelnews.com/455.htm.
77. U.S. Patent No. 5,761,648.
78. See Thom Weidlich, "E-centives Sues CoolSavings for Patent Infringement," Direct Newsline, May 19, 1999, http://www.directmag.com/magazines/directnewsline/archive/1999051902.htm.
79. See http://www.pb.com/whats_new/infringement2.asp, April 14, 2000, discussing Pitney Bowes' complaints against E-Stamp and Stamps.com for patent infringement.
80. See William M. Bulkeley, "A Billion-Dollar Patent?" Wall Street Journal, August 28, 2000, p. B1.
81. Id.
82. Id.
83. 35 U.S.C. § 282; Trans-World Mfg. Corp. v. Al Nyman & Sons, Inc., 750 F.2d 1552, 1560 (Fed. Cir. 1984).
84. When Bell received his patent in 1876, patents were effective for seventeen years from their date of issuance, whereas today they are effective for twenty years from the date on which the underlying patent application is filed.
85. State Street Bank, 927 F. Supp. at 516.
86. Id. at 507 (quoting Gottschalk, 409 U.S. at 67 and U.S. Const. Art. I, cl. 8)(citations omitted).
87. See, e.g., Jesse Berst, "How Patent Attorneys Are Stealing Our Future," ZDNET AnchorDesk, January 18, 2000, http://www.zdnet.com/anchordesk/story/story_4364.html; Lawrence Lessig, "The Problem With Patents," The Standard, April 23, 1999, http://www/thestandard.com/article/display/0,1151,4296,00.html.
88. See Mark Gimein, "How Many Inventors Does It Take To Patent a Light Bulb?" Salon.com, August 27, 1999, http://www.salon.com/tech/feature/1999/08/27/priceline/index.html.
89. James Gleick, "Patently Absurd," The New York Times, March 12, 2000, p. 44.
90. Fransisc Marius Keeley-Domokos, State Street Bank & Trust Co. v. Signature Financial Group, Inc., 14 Berkeley Tech. L.J. 153, 169 (1999).
91. Id.
92. See "Business Methods Patent Initiative: An Action Plan" at http://www.uspto.gov/web/offices/com/sol/actionplan.htm.
93. 35 U.S.C. § 273.
94. The party asserted the defense has the burden of establishing the defense by clear and convincing evidence. 35 U.S.C. § 273(b)(4).

The Author

Attorney Jeremy T. Walker is a registered patent attorney practicing with the Intellectual Property Group and Litigation Department at the firm of McLane, Graf, Raulerson & Middleton, P.A., Manchester, New Hampshire.

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