Table of Contents
As its name suggests, a business method patent grants to its holder exclusive rights to a particular way of doing business. Until recently, it was widely assumed that business methods were not patentable. As a result, firms enjoyed only limited intellectual-property protection against imitation of their strategies by competitors. Some innovations could be kept secret, and innovators could prevent competitors from learning of those innovations by "improper means." However, most innovations could not practicably be concealed, and competitors were thus free to mimic them. The 1998 decision by the Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (1998) altered this situation dramatically. That decision upheld a patent on a software program that was used to make mutual fund asset allocation calculations. In the wake of that decision, companies have been seeking -- and obtaining -- business method patents at a furious pace. The U.S. Patent and Trademark Office (USPTO) reports that, in 1998, 1300 patent applications pertained to business methods, and 420 such patents were issued. In 2000, 7500 applications for business method patents were filed, and 1000 such patents were issued. Because a large percentage of those patents involve methods of doing business online, they merit our attention.
The frenzy over business method patents is by no means confined to the United States. The European Patent Office (EPO) and patent offices from South Africa to Japan are also currently addressing the problem of business method patents. Some of these countries seem likely to follow the Americans' lead; others are resisting. Meanwhile, considerable controversy continues to swirl around business methods patents in the United States, and Congress is currently considering legislation that would limit their availability. In sum, the fate of this new form of intellectual property protection remains in doubt.
Introduction | Readings | Examples | Discussion Topics | References
Note: The following materials assume an understanding of the main features of patent law. If you are unfamiliar with this field, you might find helpful the attached brief summary or the more extensive outline provided by Michael Neustel.
Defining and Enforcing Business Method Patents
Business method patents (hereinafter, BMPs), like all other patents, are defined by their claims -- the language, typically resulting from a tug of war between the patent applicant and the patent examiner, that identifies the products or processes to which the patentee can lay exclusive claim. The difficult task of interpreting those claims is assigned to a judge -- usually in the context of a so-called "Markman" hearing (named after the Supreme Court's decision in Markman v. Westview Instruments, 517 U.S. 370). In the past few years, federal courts, when engaged in Markman hearings, have often interpreted BMPs fairly broadly. Here are two examples:
- E-Data (previously called Interactive Gift Express) sued eighteen companies for patent infringement (Interactive Gift Express, Inc. v. CompuServe Inc., No. 95-CV-6871, filed August 23, 1995) in the Southern District of NewYork. E-Data's patent is for a system which produces material objects at a point-of-sale location, as opposed to being manufactured at a central facility and then distributed. The invention specified a central processor and several remote machines at point-of-sale locations which requested information from the central processor in order to create the desired good. The objective of the invention was to reduce waste from overproduction, yet maximize the availability of products to consumers. Each of the defendants employed a similar system in which information was downloaded directly onto their customers' computers. Judge Jones of the Southern District of New York interpreted E-Data's claims to exclude most forms of electronic commerce and then dismissed the case without making any findings of fact. E-Data appealed and on November 3, 2000 the U.S. Court of Appeals for the Federal Circuit (court of last resort for patent cases with the exception of the U.S. Supreme Court) determined that the district court had adopted an excessively narrow interpretation of the patentees' claims. The Federal Circuit therefore remanded the case for further proceedings. Interactive Gift Express, Inc. v. CompuServe Inc., 231 F.3d 859 (Fed. Cir. 2000).
- The dispute between amazon.com and barnesandnoble.com -- the most famous of the BMP cases -- also involved, among other things, a Markman hearing. Amazon.com was granted a patent for a "1-click" ecommerce ordering system, which enabled a repeat customer to purchase an item with a single click of his or her mouse (i.e., without having to provide his or her address, shipping preferences, credit-card number, etc.). Relying on this patent, amazon.com sought to prevent its competitor, barnesandnoble.com, from employing a similar system. The district court found that Amazon had shown "a likelihood of infringement" by barnesandnoble.com and consequently issued a preliminary injunction. The Federal Circuit approved the District Court's generous interpretation of Amazon's patent. However, (for reasons considered in the next section), the appellate court found that Barnes and Noble had raised sufficient questions concerning the validity of the patent that the issuance of the preliminary injunction was improper. For the full text of the latest court opinion, click here.
Controversy over Business Method Patents
Isn’t it Obvious?
Much of the controversy over BMPs centers around the USPTO’s procedures for prosecuting these applications. It is often alleged that the Patent Office is issuing patents on old methods of doing business that are now being done on the Internet. Critics complain that innovations like as Amazon.com's 1-click method are "obvious" -- and thus, pursuant to 35 U.S.C. §103, ought not receive patents. An “obvious” invention is one whose subject matter would have been obvious to a person having “ordinary skill in the art” at the time the invention was made. See Graham v. John Deere, 383 U.S. 1 (1966)). An examiner can infer the obviousness of a BMP from established business practices, or from the automation of known practices normally done manually. Once the examiner makes a prima facia case of obviousness, the applicant has the opportunity to rebut it in any of several established ways.
The Search for Prior Art
To make a claim of invalidity based on either lack of novelty or obviousness, the patent examiner must first identify relevant “prior art.” The patent office has had a difficult time identifying prior art in business method cases. Until recently, business methods were commonly kept secret by innovators in order to give them competitive advantages. Consequently, the PTO's traditional printed resources (such as patents, journal articles, academic dissertations, company literature, etc.) are not good sources of prior art for this type of patent application. Additional difficulties arise from the fact that, whereas the patent office examiners are highly skilled in some field of technology (e.g., electrical and/or computer engineering), they are not required to have any background in business. Therefore, the examiners may not necessarily recognize or know where to look for established practices in different business environments.
The public, including business executives, can be an important resource in locating and identifying business method prior art. In an ironic twist to the business method patent controversy, a new website BountyQuest.com has been launched. (A second ironic twist is that Amazon.com's Jeff Bezos teamed up with Tim O'Reilly to launch this site.) This site allows anyone to post a bounty (at least $10,000) for prior art that would challenge an indicated patent. The public is invited to respond to these postings and collect the bounty. Some of the earliest postings were on familiar patents such as Amazon.com’s 1-click patent, SightSound’s digital download patent, Priceline.com’s reverse auction patent, and even BountyQuest’s own business method, whose application is pending. The founders of this website hoped to encourage good patent applications, as well as to help those in the industry invalidate the "bad" ones. Already at least four individuals have received bounties for proffering prior art.
Are Business Method Patents Fundamentally Different?
There is a close connection between business method patents and software patents, since many of the business methods that are being patented are implemented with software. Are these two types of innovation really different from machines, methods of manufacture, and other things that the patent office has granted patents on for hundreds of years? In response to the uproar over Amazon.com's patents and pending litigation, Jeff Bezos (of Amazon.com) has proposed that business methods (and software) ought to be patented for a shorter period of time. Read his proposal. Bezos and Tim O'Reilly have been adamant in their opposing stances on this issue; O'Reilly's comments can be found here. Unfortunately, Bezos's suggestion most likely would violate the World Trade Organization's (WTO's) Trade-Related Aspects of Intellectual Property Rights (TRIPs) agreement, to which the United States (along with 139 other nations) is a signatory. Article 33 of the agreement requires utility patent terms to be no shorter than 20 years from the filing date. For an overview of the TRIPs agreement, click here.
What is the Role of Legislature?
Not to be left out, Congress has turned its attention to BMPs. Two days before the last Congressional session ended, Democratic representatives Howard Berman (CA) and Rick Boucher (VA) introduced the Business Method Patent Improvement Act of 2000. The act addresses a few of industry’s concerns about business method patents. One concern is that they cannot be challenged without significant risk by the challenging party. Therefore the Act creates a formal opposition process which can be initiated by anyone within 9 months after a patent issues, resulting in a bench trial. The holding from the bench trial would be appealable, and the patent holder would be given an opportunity to amend the patent claims as long as the amendments only narrowed or maintained their scope. Additionally, the Act would require publication of all business method patents 18 months after filing, and would allow the public to submit relevant prior art to any published application, file a protest, or request a proceeding to determine an invention’s patentability, to further improve the quality of issued patents.
Change at the USPTO
The USPTO has responded to the public's and industry’s concerns. On March 29, 2000, it released an action plan to revamp the examination procedures for this class of applications. Recently, it also released a white paper, which outlines its new examination procedures. The American Intellectual Property Law Association (AIPLA) has also released a white paper, recommending similar changes.
One goal of the USPTO is to obtain better information concerning relevant prior art for each application. To that end, it is hiring and retaining examiners who have significant business experience and expertise. It is also updating its electronic databases to include non-patent literature (NPL) which would be relevant to this class of patent applications. The USPTO has additionally been working to establish partnerships with industry associations and corporate entities to continually address new industry concerns. The first business methods partnership meeting was held on March 1, 2001. Approximately 90 participants attended, and identified a number of areas to focus discussion on in future meetings. Among those areas were the potential for different legal standards for different types of inventions, the cost of prosecution under the new rules, and issues surrounding the patenting of non-computer implemented business methods. To address these concerns as well as to keep the industry abreast of the USPTO changes, there is now a website exclusively for business method patents.
Other procedural safeguards, such as a mandatory second exam for all allowed applications, have been put in place to increase the quality of the issued patents in this class. The second exam is intended to ensure that the prior-art search was conducted correctly and that the scope of the claims is appropriate. To incorporate these changes, the "Examination Guidelines for Computer-Related Inventions" is being updated, and a larger percentage of business method applications are going to be reviewed by the quality control unit at the PTO (Office of Patent Quality Review).
The International Perspective
The Patent Cooperation Treaty (and before that, the Paris Convention Treaty) has enabled inventors to apply for patents in many countries at the same time. This type of application results in a preliminary prior-art search, which makes a provisional assessment of the patentability of an invention. However, countries are not bound by that provisional review. Typically, individual national patent offices conduct their own assessments -- in light of their own legal standards -- of the novelty and inventiveness of each application. In sum, substantive patent law remains national in coverage. Consequently, the patentability of BMPs must be determined on a country-by-country basis. Here are the ways in which BMPs are handled in a few important jursdictions:
The European Patent Office (EPO) has historically not granted patents for computer programs and business methods. However, an estimated 20,000 patents have been issued on computer programs due to the exclusion limitation for software programs with “a technical effect.” See EPO's recent press release here. Many observers believer that many business methods would soon be patented under the same limitation. However, at a recent conference (November 20-29, 2000), the EPO decided to maintain, at least for the time being, its ban on software and business method patents, until a more thorough consideration of the issue can be completed.
In Canada, like Europe, business methods are not officially patentable. See Lawson v. The Commissioner of Patents (1970), 62 C.P.R. 101. Lawson states that for an invention to be patentable it must “be one that offers some advantage which is material, in the sense that the process belongs to a useful art as distinct from a fine art.” The Canadian Patent Office has interpreted this principle to mean that computer methods or systems which are directed to a useful end result, and not merely directed to making calculations nor to the presentation of an algorithm and its solution, are patentable subject matter. As a result, some patents directed to computer software inventions, including computer implemented business methods, have been granted in Canada. Recent case law suggests that if a business method is innovative enough to qualify as an invention, a patent may be granted and upheld in Canada. See Progressive Games, Inc. v. Commissioner of Patents (Unreported Decision of Denault, J. dated 22 October, 1999).
Japan has also recently reexamined its procedures for examining BMPs. The Japanese Patent Office (JPO) has made its examination procedures stricter, requiring “more specific descriptions” and a clearer description of what the “inventive step” (analogous to the U.S.’s §103 requirement of non-obviousness) is. Japan, like the U.S., is committed to increasing the “prior art” databanks and utilizing industry experts so that applications with a firm foundation in the prior art, lacking novelty and/or non-obviousness will be denied. In effect, the JPO has said that business method patents per se are not patentable, unless they fall within the scope of software-related inventions generally and have the necessary inventive step required of all patentable inventions.
Trilateral Technical Meeting
The Japanese Patent Office, the European Patent Office, and the United States Patent and Trademark Office convened in a Trilateral Technical Meeting during mid-June 2000 to discuss and attempt to harmonize the patent practices between the three offices. At the meeting, the three offices agreed that a “technical aspect is necessary for a computer-implemented business method to be eligible for patenting” (either claimed expressly by the EPO and JPO or implicitly by the USPTO) and that to “merely automate a known human transaction process using well known automation techniques is not patentable.” This opinion may overstate, somewhat, the extent to which the policies and practices at the three offices are congruent. One can expect further efforts at harmonization in the near future.
Introduction | Readings | Examples | Discussion Topics | References
Home Gambling Network
Patents have always been issued and enforced on a country-by-country basis. Since the Internet is a global medium, disparity between legally protected inventions in one country can affect operations in another country. For example, when websites created in one country (which may or may not prohibit business method patents) infringe a patent from another country, what do you do? In Nevada, one judge has enforced the U.S. patent (5,800,268) where the "infringing" website was "targeted to U.S. customers" even though the infringing company was based in the Carribean. Home Gambling Network (assignee of U.S. patent) was therefore awarded a permanent injunction against First Live Casino (Carribean company). See Home Gambling Network, Inc. v First Live Casino et al., Case No. CV-S-98-1506-JBR (RLH) (D.Nev. Feb 18, 2000). For more information on the concept of "targeting" to obtain personal jurisdiction, please see the jurisdiction module (forthcoming).
Allan Konrad (from U.C. Berkeley) claims to own the rights by way of 3 U.S. patents (5,974,444, 5,544,320, and 5,696,901) to the way interactive Websites operate. He claims that his patented methods generically describe a computer user requesting information from a webpage and getting it back from a server. Therefore, he has sued 35 corporations in Texas (possibly because TX has the reputation of being sympathetic to claims "off the beaten path"). Three defendants (Motorola, Boeing, and Eastman Kodak) are paying licensing fees estimated at under $1M each because it was cheaper to settle. Microsoft, Netscape and Sun Microsystems sued Konrad in California in May to invalidate his patents on grounds that his claimed method was in use prior to his 1993 filing date.
British Telecom claims to own a U.S. patent on hyperlinking technology. The patent in controversy was filed over 20 years ago (due to a change in the patent laws, it will be enforceable for another couple of years). Late last year, BT demanded payment for patent infringement from some American Internet Service Providers (ISPs). Recently, BT filed a suit against Prodigy (an ISP) for infringing this hyperlinking patent. Read Eurolinux's response to the suit.
Introduction | Readings | Examples | Discussion Topics | References
1. Without international enforcement, what good would a patent do? It would be very easy to create a website in Canada or some other country to escape infringing a U.S. patent, with the non-U.S. website equivalent to one created in the U.S. in every way. In that case, a U.S. patent would be almost worthless. On the other hand, what right does any country have to enforce its nationally-granted and recognized patents (possibly to the detriment of citizens of another country) on what is arguably an international medium? What should be done about this problem? Suppose the patent offices "agree to disagree." Is such an enforcement scheme viable? If not, what are the options?
2. Sometimes parties choose to settle instead of litigate potentially invalid patents. Is this practice socially desirable?
3. What could/should the U.S. Supreme Court do about BMPs? Thus far they have not decided to hear any Internet-related patent cases. Why do you think they haven't?
4. Is Jeff Bezos right? Should business method and software patents have a different treatment altogether, such as a shorter patent term? Currently, there are two other types of patents besides the "catch-all" utility patent category: design patents (on the way a product looks, as opposed to the way a product works, with a patent term of 14 years after the date of issue) and plant patents (covers new varieties of asexually reproducing plants, in conjunction with the Department of Agriculture). Should there be a third type of patent application, and what should the term be? Should a secondary body (like Department of Agriculture) also have to approve it?
Introduction | Readings | Examples | Discussion Topics | References
Patent Law Primer, by NEUSTEL LAW OFFICES, Ltd. - Thorough overview of patent law. Section titles include: "Definition of Patent", "Patentable Subject Matter", "Who May File for Patent Protection?", and "Content of Patent Applications."
Frequently Asked Questions Concerning Patents - Good article covering general patent issues ranging from the nonobviousness and novelty requirements of patent law to who can apply for a patent.
Scope-of-Protection Problems With Patents and Copyrights on Methods of Doing Business, by Richard H. Stern - This in-depth article focuses on the problems in the business method context of "demarcating by workable criteria the legally protectable concrete and specific aspects of innovative contributions from the legally unprotectable abstract and general aspects of those contributions."
US Patent and Trademark Office General Information Concerning Patents - This resource, created by the American Bar Association, contains a vast amount of general information concerning the application for and granting of patents. It is written in non-technical language given that its stated audience is inventors, prospective applicants for patents, and students. In particular, the resource discusses the role of the Patent and Trademark Office, general conditions of patentability, and the parts of a patent. Moreover, it contains an excellent discussion of the patent examination process.
U.S. Patent Offices, Laws, and Databases
United States Patent and Trademark Office - Main Website
United States Patent and Trademark Office - Business Method Patent Site
Manual of Patent Examining Procedure (MPEP), - Online version of the entire manual.
National Association of Patent Practioners - Website for this non-profit organization dedicated to supporting patent practitioners and those working in the field of patent law in matters relating to patent law, its practice, and technological advances.
Delphion Patent Server - Website containing a free, fully searchable, user-friendly patent database. Used to be IBM website.
STATE STREET BANK & TRUST CO., v. SIGNATURE FINANCIAL GROUP, INC., 149 F.3d
1368 (1998) - The Federal Circuit case which is generally credited with laying the foundation for Internet patents.
AT&T CORP. v. EXCEL COMMUNICATIONS, INC., 172 F.3d 1352 (1999) - In this post-State Street decision, the Federal Circuit reaffirmed its State Street decision stating specifically that "[i]n our recent decision in State Street, this court discarded the so-called "business method" exception and reassessed the "mathematical algorithm" exception."
"NetZero accuses AT&T service of patent infringement" by Bloomberg News, January 12, 2001
More Pending Cases:InTouch Group Inc. v. Amazon.com, Liquid Audio, Discovermusic.com, and Entertaindom (part of Time Warner), filed April 2000. Patent (called “Network Apparatus and Method for Preview of Music Products and Compilation of Market Data”) covers way consumers sample music online.Trilogy Software v. CarsDirect.com over patent 5,825,651, scheduled for trial in March 2001 (WD Tex, No A99CA690JN)
Sightsound.com v. N2K over patents 5,191,573, 5,675,734, and 5,966,440 scheduled for trial in September 2001
J. Harrington v. Yahoo! Inc. over patent number 5,895,454 scheduled for trial in May 2001
Net MoneyIN v. Cybersource over patents 5,822,737 and 5,963,917 scheduled for trial in March 2001
Novadign v. Marimba over patent 5,581,764 scheduled for trial November 2000. See ND Cal, number C-97-20194.
Coolsavings.com v. Emaginet over patent 5,761,648. See ND Ill. Complaints filed in 1998 and 1999.
The Register (Software patents stay banned in Europe - for now By: Graham Lea, Posted: 22/11/2000 at 16:15 GMT)
Strategic Concerns When Pursuing Foreign Patents In The Computer Arts - Everything you've ever wanted to know about filing for a patent in a foreign country.
10 European Industry Leaders Raise Concerns About Software Patents, by EuroLinux Alliance - Although the München Convention states that, in Europe, software per se is not patentable, the European Patent Office (EPO) has been granting patents for years that can be used to protect programming techniques. This is true by virtue of the fact that the München Convention makes it possible to patent industrial inventions which are based on innovative programming techniques. Such patents are sometimes referred to as "software patents", even though they are not patents on software as such.
Basic Patent Cooperation Treaty (PCT) Principles - Section 1801 of the Manual of Patent Examining Procedure describes, in the words of the Patent and Trademark Office, the general principles behind the PCT.
Basic Facts About the Patent Cooperation Treaty (PCT) - Information on the PCT from the U.S. Patent and Trademark Office's site
Foreign Patent Filing - This small page summarizes the international and European filing processes.
Canadian Patent Office - Website
European Patent Office - Website
Japanese Patent Office - Website
UK Patent Office - Website
Introduction | Readings | Examples Discussion Topics | References
Berkman Center for Internet & Society