From the Nolo eCommerce Center

A company that develops a new way of conducting e-commerce may be able to prevent others from using it for almost two decades.

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 Internet patents or business method patents. These patents are important because any company that develops or acquires such a patent can stop others from using the patented business method for approximately 17 years. And, of course, the owner of the patent can exploit it by licensing the method – that is, charging a fee for others to use it.

Example:

Amazon.com devised a method for expediting online orders known as the “1-Click” system. The method allows a repeat customer to bypass address and credit card data entry forms, because Amazon can access that information directly from the customer’s computer. Amazon, which was granted a patent on this business method in September 1999 (U.S. Pat No. 5,960,411), promptly filed a widely reported lawsuit alleging that BarnesandNoble.com copied the 1-Click process, renaming it “Express Lane.” In December, 1999, a court ordered BarnesandNoble.com to stop using the patented process until the lawsuit is resolved.

New Protection for Business Methods: The State Street Case

Business method patents are part of a larger family of patents known as utility patents that protect inventions, chemical formulas and other discoveries. A business method is classified as process because it is not a physical object like a mechanical invention or chemical composition. Traditionally, the U.S. Patent and Trademark Office (PTO) rarely granted business method patents, claiming that a process could not be patented if it was simply an abstract idea, something the PTO believed described most business methods. Similarly, software patents were usually held to be unpatentable by the PTO and the courts, based on the view that they were unprotectible algorithms.

These rules changed in July 1998, when a federal court upheld a patent for a method of calculating the net asset value of mutual funds. State Street Bank & Trust Co. v. Signal Financial Group, Inc. 149 F.3d 1368 (Fed. Cir. 1998) cert denied 119 S. Ct. 851 (1999), http://www.kuesterlaw.com/saris.htm. 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. In the six months following the ruling, patent filings for software/Internet business methods increased by 40% and the PTO created a new classification for applications: “Data processing: financial, business practice, management or cost/price determination.”

Since the State Street case, patents have been issued for an online shopping rewards program, referred to as the “ClickReward” (U.S. Pat. No. 5,774,870); a system that provides financial incentives for citizens to view political messages on the Internet (U.S. Pat. No. 5,855,008); an online auction system by which consumers name the price they are willing to pay and the first willing seller gets the sale (also known as “name your price” or as a “reverse auction,” U.S. Pat. No. 5,794,207); and a process that supposedly blocks the auction practices described in the previous patent (U.S. Pat. No. 5,845,265).

Using Internet Patents as a Sword or Shield

Internet patents can be used offensively against a major competitor, as Amazon.com demonstrated when it stopped BarnesandNoble.com from using a one-click shopping system, or they can be used defensively as a bargaining chip against an aggressive competitor who threatens to sue based on one of its patents. Experience has shown that rivals are less likely to go to court when they know that their opponent can also wield a patent. Such competitors often prefer to reach a truce under which each company cross-licenses the other’s patents.

Example:

Company A and Company B both sell concert tickets online, including services for exchanging unwanted tickets and earning rewards for frequent purchases. Company A holds a patent on a method of exchanging concert tickets. Company B has a patent on a method of offering rewards to concert promoters for group ticket purchases. Although each company believes the other is infringing its patent, neither seeks to enforce its rights in court, fearing that the other is almost sure to file a lawsuit in response. Instead, after a few months of legal posturing Company A and B agree to share or “cross-license” their technology.

Determining Who Gets a Patent

What happens if a competing business claims that it was already using the particular method that is the subject of a patent application? If Business A files for a business method patent, but Business B can show that it was using the method publicly more than a year prior to the filing, Business B can thwart the patent application or, if necessary, invalidate the patent later. The key is that Business B’s use of the method must have been public. If Business B used the method confidentially, the patent will be issued to Business A. However, under a 1999 amendment to the patent law, Business B retains the right to continue using the method without liability for infringement.

Example:

Company A has been using a business accounting method for years but has never publicly disclosed it. Company B independently develops the method and obtains a patent on it. Company B sues Company A. Under the amendment to the patent law, Company A has not infringed the patent.

If Company A had been using the method publicly for more than year before the patent application was filed, Company B’s patent would be invalidated.

Legal Requirements for Getting a Business Method

In order to qualify for patent protection, a process – in this case a business method or software – must meet four requirements:

  • The method or software must fall within the classes of patentable subject matter. This requirement is easy to meet. Anything that is created by humans falls within these classes; laws of nature, natural phenomena, and abstract ideas do not.
  • The method or software must be useful. This requirement is also 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.
  • The method or software must be novel. That means it must have an aspect that is different in some way from all previous knowledge and inventions. This requirement is discussed in more detail below.
  • The method or software must be nonobvious, meaning that someone who has ordinary skill in the specific technology could not easily think of it. This, too, is discussed just below.

The Price of Power

The cost of obtaining a business method patent depends on several factors, including the subject matter of the patent, the complexity of the examination process and lawyer’s fees. Unless you do it yourself – in which case the costs are much reduced – you can expect to pay between $3,000 and $15,000 to acquire a business method patent. After a patent is issued, the owner must pay maintenance fees to the PTO after 3.5, 7.5 and 11.5 years. Of course, if the patent is challenged – and many are – the costs can skyrocket.

Novelty

A business method is considered novel when it is different from all previous methods – known in patentspeak as the “prior art” – in one or more of its essential elements. Prior art consists of:

  • any published writing (including any patent) that was made publicly available either (1) before the date of invention or (2) more than one year before the patent application is filed
  • any U.S. patent that has a filing date earlier than the earliest date of invention
  • any relevant method or process (whether described in writing or not) existing publicly before the method was conceived, or
  • any public or commercial use, sale, or knowledge of the business method more than one year before the patent application is filed.

For purposes of prior art, the date of invention is the date that the business can demonstrate that the method works. The PTO will consider all prior art, whether Internet-related or not. As noted, an Internet method will flunk the novelty test if it was described in a published document or put to public use more than one year before the patent application 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.

Nonobviousness

Meeting the fourth requirement, nonobviousness, turns on whether or not the differences between the business method subject to the patent application and the prior art would be obvious to someone with ordinary skill in the field of the business. Or put another way, whether or not the method provides a new or unexpected result.

Example:

An economist devised a method of avoiding taxes by using a credit card to borrow money from a 40l(k) fund. The method did not exist previously and differed substantially from previous methods of avoiding taxes. Since the method was new and was not obvious to accountants or tax experts, the economist acquired a patent (U.S. Pat. No. 5,206,803).

It usually takes two and a half to three years from the date of filing for a business method patent to be issued. It is then valid for 20 years from the date of filing. The period between filing and issuance is called the “pendency period.” Only after a patent is issued can a company stop another from using making or selling the process. A patent owner cannot stop a competitor from using the process during the pendency period, regardless of whether the competitor purposefully copied the method or stumbled upon it independently.

Alternate Protection for Business Methods and Software

Business methods and software can also be protected under trade secret law and copyright law. 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. Copyright law protects against the copying of software programs. It may also protect, in a very limited manner, the copying of a business method to the extent that the method is expressed in writings or other fixed media. For example, if a method includes written training materials, the materials can be protected under copyright and others are prohibited from copying them. However, the underlying idea or process that is the basis for a business method cannot be protected under copyright law. Copyright protection lasts for up to 70 years after the death of the author or, in the case of copyrights created by businesses, 95 to 120 years.

Both copyright and trade secret are designed to protect against high tech thieves. You can go to court to stop others from stealing your trade secret or copying your software. Although patent protection is more expensive and shorter in duration, it is often preferable to trade secret and copyright 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.

Is the PTO Qualified to Issue Business Method Patents?

Business method patents have created confusion and controversy, largely because critics claim the PTO is ill-equipped to investigate whether these processes are novel and nonobvious. One reason why patent examiners are considered dense in this area is that, when determining novelty, they have traditionally reviewed past patents and other information in the PTO library. Because the Internet revolution is new, this almost guarantees that the PTO will not detect similar Web-based methods and software processes developed recently. In other words, many critics contend that patent examiners simply do not competently investigate whether an Internet business method is novel or nonobvious.

In response to this criticism, the PTO announced in March 2000 that it is adding an additional “layer of review” to business method patent applications and is hiring technology specialists to aid examiners in the areas of finance, e-commerce, insurance and Internet infrastructure.

Challenging a Business Method Patent

There are two ways to challenge business method patents after they are granted. A disgruntled competitor can sue in federal court or can institute a procedure in the PTO known as a re-examination.

Filing a lawsuit can be expensive (often costing hundreds of thousand dollars and sometimes running into the millions) but some companies choose to fight it out in the hopes that they can invalidate the adversary’s business method patent. The challenging party normally seeks to prove the patented process was not novel or was obvious, and therefore that the PTO shouldn’t have issued the patent. This is usually done by demonstrating that the patent examiner overlooked important prior art.

Initiating a re-examination procedure with the PTO can also invalidate a patent. The PTO will reconsider the patent in light of recently uncovered prior art. A re-examination is not as costly as litigation. But if reexamination fails and the patent survives, it will be “strengthened” to the extent that others will be less likely to challenge it and the patent owner will feel more confident enforcing it.

The result of many current PTO and court challenges may be that at least some recent business method patents will be invalidated. One of the most vocal critics of business method patents, Gregory Aharonian of the Internet Patent News Service (http://www.bustpatents.com), provides an archive of questionable business method and software patents.

Avoiding Patent Violations (Infringement)

Determining whether someone has infringed an Internet patent depends on a close examination of the patent “claims,” a brief statement in the body of the patent application that defines the scope of the business method. You can read claims for any U.S. business method patent by visiting the PTO website (http://www.uspto.gov) and searching the patent database by name, subject matter or other criteria.

Think of the claims as the boundaries of the patent owner’s rights. Or put another way, if the elements or steps in your business method match all of the elements or steps elaborated in someone else’s patent claims, then you have infringed their patent. Even if the other owner’s claims don’t literally match your business method, a court may still find infringement if the methods are very similar. In doing this, courts will apply what’s known as the “doctrine of equivalents.” This means if the steps in the patent and the allegedly infringing method are sufficiently alike, a court will find that infringement has occurred.

Since your business method will not infringe someone else’s patent unless each and every step (and limitation) of their claims is found in your method, it is often possible to write around or redesign a business method so that it does not create a violation. For example in the lawsuit involving Amazon’s 1-Click patent, discussed above, the judge stated that Barnes and Noble could avoid infringement with “relative ease” by modifying its Express Lane feature. If true, this at least to some extent negates or narrows the power of the Amazon patent.

If you’re concerned about whether a valuable business method you want to use infringes someone else’s patent, it’s wise to obtain the opinion of a patent attorney. The attorney may determine that your method does not infringe, or if it does, he or she can help you determine the modifications you’ll need to implement to avoid infringement.

Defending a Claim of Patent Infringement

If you are accused of violating another company’s patent, your only real defense is to prove that the other company’s patent is invalid. This is done by challenging the patent on the basis of lack of novelty or nonobviousness. However, if the patent owner wins the lawsuit, the owner can obtain a court order preventing your infringing activity and can recover financial damages to compensate the company for lost revenue and, in exceptional cases, triple damages and attorney fees.

Willful Infringement: A Bad Idea

If you know that your business method infringes an existing patent and you continue to use it, particularly after being warned by the patent owner, you may be found liable for willful infringement. If this occurs, you might be required to pay up to three times the actual damages. In other words, the court will determine the patent owner’s lost profits and then multiply them by three. In addition, you may be responsible for paying the patent owner’s attorney fees (as well as your own lawyer’s charges).

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