Business Method Patents Online

Table of Contents

Case Studies
Required Reading
Discussion Topics
Additional Resources
Special Event

Last Updated: March 10, 2000

This week we will be looking at one of the “hot button” issues in Cyberspace – the Internet patent.  In essence, Internet patents protect a particular way of doing business online.  Indeed, they are more generically referred to as “business method patents.”  The recent interest being generated by this subject is, in part, brought on by the fact that the U.S. Patent and Trademark Office is seeing a dramatic increase in the number of Internet-related applications mostly from corporations looking to protect their intellectual assets.  Although estimates differ depending on how patents are classified, some experts estimate that the number of Internet-related patents granted by the patent office rose from 165 in 1995 to 2,193 in 1998.  By way of example, one such patent was granted to, an Internet retailer who was one of the first on the scene, securing protection for its buyer-driven, “name your price” business model.  Additionally, says it holds a patent that covers the entire concept of selling music through digital downloads.  Recently, has begun demanding a 1 percent royalty from anyone, including the online music store CDNow, who is selling music in digital form online.  Coupling this monopoly potential with what is already a highly competitive online arena, and the not-so-surprising result has been an overwhelming backlash by the online community, as well as by many in the legal community.  Nevertheless, the fact remains that these Internet patents keep getting filed for and the Patent and Trademark Office keeps issuing them.

With this brief introduction you are ready to move on to the case studies below.  The first case study is designed to draw attention to the magnitude of the potential impact Internet patents can have on the Internet as we know it today.  The second case study is more intricate and is designed to tease out the complexities from both a legal perspective, as well as a business perspective.  Once you've reviewed the case studies, please proceed to the Required Readings section.  When you have finished there, consider the hypothetical problem described in this week's assignment.  As you complete the assignment and participate in the discussion, feel free to look through the suggested discussion topics or the additional resources provided near the end of the module.

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Case Study #1 - E-commerce

You have just come up with the greatest internet start-up idea since Amazon.  You are going to sell (put your favorite item here) over the Internet and make a fortune.  Site visitors will come in droves to your site, pick out the items that they want, put them in their electronic shopping cart, and then pay with their credit card right online using a secure real-time payment screen so they don't have to worry about credit card fraud.  Then, all you have to do is fulfill the orders and count the money.

So, you rush on down to your attorney’s office to file the incorporation papers so you can start hitting up the venture capitalists for money.  While you are waiting in the reception area, you read this article.  You are crushed.  Someone has already patented e-commerce, and they will probably expect a royalty for every item you sell!  What are you going to do now?  What can you do?

Case Study #2 - Patent & Licensing Exchange

Ebay aficionados learned long ago the value of offering products for sale in an online auction format.  Although the online auction may be a relatively new beast, in cyber-terms, it is not exactly a novel idea anymore.  So who does the Intangible Asset Exchange (IAX) think they're fooling?  Well, for starters the IAX claims to be the first self-sufficient, fully functional online market for intellectual property assets.  Their soon to be unveiled Web site will provide the portal through which subscribers can offer to sell or search for their intellectual property.  Such property can range anywhere from a copyrighted screenplay, for example, to a biotech patent.  Since IAX is a subscription-based market open only to “qualified” individuals and companies, it claims to offer a higher level of security than other online auction systems.  Aside from the fact that the IAX deals only in knowledge-based assets in a securer-than normal online auction forum, the IAX also claims to be distinguishable from other online auctions by virtue of the fact that it provides a self-contained online market where asset valuations are achieved using its innovative and proprietary Intangible Asset Risk-Reward (IARR) valuation model.  The IARR valuation model modifies the popular Black Scholes option pricing formula, used for decades to price stock options, to be applicable to knowledge-based assets trading in an online forum.  In essence, the IARR model finds that the greater the novelty of the intangible asset, the greater the potential value, and hence the greater the risk.  Industry leaders have already begun to recognize the significant contribution the IARR model can make to an otherwise illiquid intellectual property market.  IAX specifically credits its IARR valuation model as being a key component to its revolutionary online intellectual property market.

The next feature that IAX takes innovation credit for is the creation and application of a proprietary database designed specifically to meet the challenges of listing and searching for intangible assets.  This relational database makes it possible for a buyer to search for intangible assets based on any number of criteria ranging from the type of technology to cost.  The database also allows a would-be buyer to limit its search to a particular class of asset based on its risk-to-value ratio as determined by IAX’s IARR valuation model mentioned above.  Additionally, the database allows for two-way look ups.  Namely, buyers can search for sellers or particular products in the traditional method, while sellers can search for buyers who have previously indicated what they are looking for.

Additional features that IAX has built into its online intellectual property auction include patent validity insurance and escrow services which provide added security for transactions cleared through the IAX auction board.  The patent validity insurance is the first of its kind and, although very similar to real estate title insurance, it has been heralded by industry leaders who view it as a necessary element to any successful intangible asset market.  Similarly, the escrow service provides for added protection since funds escrowed until a buyer has had an opportunity to have the asset in question fully assessed.

IAX estimates that only 2% of the estimated $5 trillion in new intellectual property globally was licensed in 1998.  At least part of the reason for this is the inherent difficulty and expense involved in valuing intellectual assets.  By providing a fully functioning online market with a built in valuation mechanism, IAX views itself as a pioneer making possible what would never otherwise have been.

Feeling that they are true innovators, IAX has filed for four separate patents each covering a different aspect of its online intellectual property market.  Patent 1 is directed generally to a subscription-based online auction of intellectual property.  Read broadly, this patent would cover any online auction system which involved the sale of intellectual property to a restricted group of individuals.  Patent 2 is more specific in that it covers only the IARR valuation model discussed above. Read broadly this patent would likely cover any valuation model which uses the industry standard Black Scholes formula to valuate an intangible asset.  Patent 3 is directed to the database feature of the online system.  This patent, if read broadly, would cover the use of a database in an online auction for intellectual property, where the database in question allows two-way look up and searches using a risk-reward criteria.  Finally, Patent 4 is directed to the entire IAX system.  If read broadly, it would cover only an online auction of intellectual property with the following elements:

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Required Reading
Note:  Unless otherwise identified, all the links in this section represent required reading.
Please follow these links before proceeding with the rest of the module.

What is a patent anyway?  A patent is a government issued grant which confers on the inventor the right to exclude others from making, using, offering for sale, or selling the invention for what is now a period of 20 years, measured from the filing date of the patent application.  Patent protection for a U.S. patent extends only throughout the United States and its territories and possessions.  Thus, a U.S. patent, taken alone, will not give an inventor the right to exclude those in foreign countries from making or using the invention.  Rather, patent protection generally must be sought in each individual country in which protection is desired.  However, as will be discuss further in the readings below, the Patent Cooperation Treaty has greatly simplified this process.

You can also analogize a patent as being a contract between the inventor and the government.  In particular, the inventor is given a limited term monopoly on the invention, and in return, the government obtains and places the invention in the public domain.  With that said, it is also important to understand what a patent is not.  As mentioned above, a patent enables the inventor to block others from her invention, but it does not give the inventor an affirmative right to make or use the claimed invention since such acts may actually infringe a prior-issued patent that has not expired.

Why do we have a patent system in the first place?  Article I, Section 8 gives 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."  So as a starting point, you can say that our patent system is designed to "promote the progress of science."  However, there are probably an infinite number of ways of achieving this end.  The question really should be, "why have we adopted the current form of our patent laws?"  Although this question has generated a plethora of responses over the years, it is generally recognized that one of the major principles underlying the patent system is that of incentive creation.  Namely, the patent system provides a set of necessary incentives for an inventor to bring his or her idea to the marketplace.  The first and perhaps foremost incentive proffered over the years is that the patent system provides an incentive to invent.  Under this rationale, an inventor will not adequately be compensated unless she is given an “exclusive” right to her invention.  By virtue of not being adequately compensated, the inventor may choose not to spend the resources required by the inventive process.  Next, the patent system creates an incentive to disclose.  Here, the carrot of exclusivity we just mentioned is used to strike a “bargain” with the inventor under which the inventor is afforded legally enforceable rights to her invention in exchange for the public disclosure of the invention.  The public benefit to disclosure is simply the free and relatively immediate dissemination of information on which others in the scientific community can then build.  A third incentive that has been proffered by some legal commentators focuses on the creation of an incentive to commercialize the invention.  The theory underlying this third incentive is that, assuming the invention is valuable, either the inventor will commercialize the invention or license it to someone who in turn will commercialize it.  Whereas the incentive to disclose results in a benefit to the scientific community through information dissemination, the incentive to commercialize envisions the benefit being that the invention will be put to its most efficient use by those in the best position to do so.

What are the requirements of obtaining a patent?  The Patent Act imposes a number of hurdles which must first be overcome in order for one to obtain patent protection for their invention.  As we discuss the requirements for patentability, you should keep in mind that there are numerous refinements and intricacies to these general principles that are beyond the scope of this discussion.  With that caveat in mind, perhaps the most onerous requirement imposed by the Patent Act is that the invention must be novel, as defined in Section 102 of the Patent Act, which essentially requires that the invention not be known by others before the date of invention.  Although this would at first appear to be a relatively striaght forward requirement, Section 102's subsections contain a mine field of intricate requirements devoted to ensuring that patents are not granted on inventions which contribute nothing "new" to society.  Additionally, the invention must not be obvious when viewed through the eyes of one skilled in the particular field to which the invention belongs.  Next, the invention must be of proper subject matter.  In particular, abstract ideas or laws of nature are not considered patentable subject matter.  Rather, the invention must be a process, machine or composition of matter.    To better understand these fundamental requirements of patentability, please review this Patent Law Primer (only read Part III, sections A-D, F-G, and J).  You should complete these sections before moving on as it will familiarize you with basic patent law terminology and principles.  However if you are already familiar with basic patent law concepts, you may want to skip the Primer.

The United States Court of Appeals for the Federal Circuit is the court of last resort for all patent cases (except of course for the Supreme Court).  In 1998, the Federal Circuit, in State Street Bank & Trust Co., v. Signature Financial Group, Inc., 149 F.3d 1368 (1998), upheld a patent for a computer running a software program which was used to make mutual fund asset allocation calculations.  This case has been credited by many with started off the Internet patent frenzy.  Please read this excerpt from the court's opinion.  Then review this except from an article describing the Internet patent boom and giving some examples of Internet patents.

While there seems to be a majority who believe the State Street Bank decision was revolutionary and will have a dramatic effect on how courts treat Internet patents, there are some who regard the State Street Bank decision with far less fervor.  To this end, the following two articles nicely lay out the boundaries of the debate.  Please read Opening Pandora's Box by Robert M. Kunstadt.  Then read Thomas Hahn's reaction entitled Much Ado About Method Patents.

Roughly speaking, the claims in a patent define the boundary of the inventor's right to exclude.  In essence then, the claims serve to circumscribe a property right by setting forth the metes and bounds of the inventor's ability to protect her invention.  The issue of what the claims mean is a legal question decided by a judge who will read through a patent application, paying almost exclusive attention to the language in the claims (with a couple of technical exceptions, including the use of extrinsic evidence), and decide how broadly to interpret the patent.  One problem with this approach, and there are a few, is that the language used in patent claims tends to be confusing at best.  To get a better sense of what a patent looks like, click here to review some of the more talked-about Internet patents.

To better gain an appreciation for the tremendous impact Internet patents can have on the online business community review this New York Times article describing the recent preliminary injunction that scored against and the situation surrounding's reverse-auction patent.  Then take a look at this excerpt from the court's injunctive order.

An even more recent example of a patent which stands to affect the way business is being conducted online was issued just this past December to Linkshare.  In particular, LinkShare was granted patent protection on its technology for managing Internet affiliate programs. LinkShare patent (optional).  The idea is that a small piece of software placed on a merchant’s site gives LinkShare the ability to track a user's online behavior from the moment the user clicks on a banner ad on a referring Web site to the point of a completed transaction on a merchant’s site.A commission, payable to the referring site, is then generated when a user clicks on one of these “affiliate links” or banner ads, and then purchases something from the merchant’s site.Similar affiliate programs can be found throughout the Internet in the form of buttons that offer to send users to an online store where they can then buy books, software or any other number of products.  In fact, some estimate that hundreds of thousands of sites have added these “affiliate links” that generate a commission if a user clicks on them and then buys something.  The significance of the LinkShare patent is that, depending on how broadly it is interpreted, LinkShare may be given the right to block anyone from using such an arrangement of links between sites with commission payments.  However, just this past February, was granted a patent (optional) on a remarkably similar system, wherein a website that includes a direct link to the site can earn a share of any subsequent sale consummated on Amazon’s site.The Internet retailer says it will pay a commission of up to 15 percent of the sale price for books that are sold this way and another 5 percent on anything else purchased.

Finally, as mentioned briefly above, the process for insuring that your invention is being protected in other countries has been dramatically simplified with the adoption of the Patent Cooperation Treaty.  As a introduction to this process, read this summary describing the implications of the Paris Convention and the Patent Cooperation Treaty.

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Senator Schumer from New York has recently been quoted as saying, in reference to the Internet patent situation, that "[t]his is one of those issues where you can't avoid intervention."  [Article]  To this end, imagine that you have have been asked by the Senator to develop the basic structure for a bill which is designed to counter the harms he feels are being caused by Internet patents.  Thus, your assignment is to summarize, in a couple of paragraphs, the basic approach the proposed bill will take.  Imagine also that the Senator predicts some opposition to this bill, so be sure to include arguments supporting your proposed approach.  In particular, he anticipates some noise to be made about the incentives that the patent systems provides and why these are also needed in the online context.

Response Assignment:  Review the proposed approach and arguments made in the initial assignment. State whether or not you agree with the proposed approach to the Internet patent problem, and more importantly, why.  Provide a couple of paragraphs supporting your position.

If you are a member of group A, you should submit your assignment answer at the time and in the manner specified on the home page for your section.           CLE  | Section A1  |  Section A2  |  Section A3  |  Section A4  |  Section A5  |  Section A6  |  Section A7  | Section A8

If you are a member of group B, you are not required to submit an answer to the assignment but should feel free to discuss the issue in the Plenary Conference.

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Discussion Topics

1.  Case Study #1 above drives at the point that the issue of Internet patents is not only for the Amazon.coms of the world to worry about.  Rather, anyone desiring to engage in e-commerce or any number of other potentially protected activities may be forced to confront a web (no pun intended) of patent licensing issues.  With that said, however, the effect of Internet patents may be even more widespread if companies are forced to continually license the technology required for engaging in even the most basic of online activities.  In such a case, Internet patent licensing may just become another cost of doing business online.  Does this mean that it will be the consumer who ultimately pays?  If so, are the cost-saving efficiencies of the Internet in jeopardy?

2.  The above Case Study #2 poses an interesting example of the tension between giving someone protection for a legitimate contribution and giving someone a monopoly on the "Internetification" of an old way of doing business.  Should someone be able to receive patent protection for simply taking an old idea to a new forum?  Or is the IAX example a bit more than that?

3.  Consider the four patents, described above in the Case Study #2, for which the IAX has filed.  Which, if any, deserve patent protection and why?

4.  After reading the excerpt from the State Street decision and considering the injunction was awarded against, how do you think the patent, discussed in the required readings, will hold up in court?

5. Even assuming the U.S. adopts a workable approach to the Internet patent issue, other countries are not likely to follow the same path.  Many predict a widening disjuncture between the treatment of Internet patents in the U.S. and the treatment of such patents in other countries.  Given that the Internet fails to respect boundaries and jurisdictions, what will come of the situation where someone in another country sets up a Web site which in turn infringes a U.S. Internet patent?

6.  Some legal commentators have suggested that the "Internet patent crisis" is, along with everything else pertaining to the Internet, nothing more than overblown hype.  In particular, they are convinced that the other requirements of patentability, such as nonobviousness and novelty, will knock out many of the Internet patents which have been granted by the PTO.  From what you have read in the Patent Primer and related materials, do you agree that we have blown the Internet patent situation out of proportion?

7. As discussed above in the Required Readings, the patent system creates various incentives designed to further the Constitutional mandate of promoting "the progress of science and useful arts."  However, many have argued that, for whatever reasons, these incentives are simply not applicable in the online context.  They argue that the Internet's incredible rate of expansion is self-evident proof that these incentives are not needed for "the progress of science and useful arts" and granting Internet patents can only dampen the online enthusiasm which already exists.  Do you agree?

7a.  If you agreed in Question 7 that we don't need added incentives for Internet business and technology to continue to thrive, what do you suppose the reasons are for why the Internet has been able to prosper without having any real means of "idea" protection?

8.  The Federal Circuit which decided the State Street Bank case is the court of last resort, except of course for the Supreme Court, for all patent cases.  The State Street Bank case was appealed to the Supreme Court, but the Court declined to hear the case.  Although the Supreme Court does not take many patent cases, it will take cases where there is an important issue to be decided.  For example, the issue of the patentability of living organisms prompted the Supreme Court to decide the issue in Diamond v. Chakrabarty in 1980.   So why do you suppose the Supreme Court declined to decide on the important issue of business method patents?

9. Take the article about the New Zealand woman who has recently sued Yahoo!  After reading through the abstract and the first claim of her patent, do you think the court should uphold her patent?  If so, do you think Yahoo! is infringing it?

10. Thomas Woolston, the inventor of the MercExchange invention we looked at in the required readings claims his patent covers Priceline’s patent.  Do you agree?

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Special Event

William Lee, recently appointed Managing Partner of Hale & Dorr and John A. Reilly Visiting Professor at the Harvard Law School, will be participating in this week's module.  Mr. Lee, one of the country's leading intellectual property law litigators, has posted a comment in our Plenary Discussion area and will field questions on the issue.  If you have a question for Mr. Lee, please direct it to  The deadline for submitting your questions is 5:00 p.m. (EST) on Wednesday, March 15th.  To avoid inundating him with emails, we will select a limited number of questions, the responses to which will be posted in the Plenary.

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Additional Resources

General Materials:

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."

Legal Protection for Software:  Does State Street  Mean "Easy Street" for Software Patents?,  by Russel O. Primeaux - This article summarizes how the court in State Street Bank dealt with what used to be the business method exception to patentability and how it narrowed the mathematical algorithm exception to patentability.    [ Abstract ]

Protection for Software Methods May Be "Big...Really Big", by J. JOHN SHIMAZAKI  -  This article focuses on the patent and addresses questions such as how the Priceline method works and whether the patent will hold.

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 focusing on the enhanced problem created 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."  Note that this article considers both the copyright and the patent issues relating to methods of doing business. Since we have not covered the copyright issues relating to methods of doing business, this article is recommended for only those who are sufficiently comfortable with the intricacies of patent and copyright law.

Internet Business Methods: What Role Does and Should Patent Law Play?, by: Jared Earl Grusd -  This law review note, published by the Virginia Journal of Law and Technology, provides a thorough discussion of the State Street case.  The note then provides an extensive discussion of the policy considerations of patent law and how they comport with what is going on with Internet patent.  The article also draws from the biotech patent context in suggesting that the courts have discretion under the nonobviousness and enablement requirements of patent law, to restrict business method patents.

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 on the patent examination process.

General Information Concerning Patents - Information on patents from the U.S. Patent and Trademark Office's Web site

Priceline Patent Sparks Debate - A short older commentary on the situation.

The Problem With Patents  - This article, by our very own Lawrence Lessig, highlights some of the fears surrounding Internet patents.

Lawsuit Pits Patent on the Line  -  This article discusses's patent infringement lawsuit against Microsoft.

United States Patent and Trademark Office - Main Web site

Patent Cooperation Treaty (PCT) Special Programs Office home page -  Web Site

Manual of Patent Examining Procedure (MPEP), -   Online version of the entire manual.

National Association of Patent Practioners -  Web site 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.

IBM Patent Server -  Web site containing a fully searchable patent database with a user friendly interface, maintained by IBM.

Case Law:

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.

AMAZON.COM, INC., v. BARNESANDNOBLE.COM, INC., 1999 U.S. Dist. LEXIS 18660 (1999) - This court issued an injunction upholding's Internet patent.   [ Excerpt Only]

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."

International Materials:

Internet Sparks Patenting Controversy, by Richard Poynder -  This article, written by a British freelance journalist, discusses the Open Market and patents.  The article also includes commentary designed to summarize the changing European perspective on the issue.

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.  Similarly, as we've been discussing, the U.S. has begun issuing such patents under the rubric of business method patents.  This article contains opinions from mostly European software leaders on the use of the patent system to protect what would otherwise be a programming technique.

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.

Japanese Patent Office -  Web Site

European Patent Office - Web Site

UK Patent Office - Web Site

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Copyright Policy
Jonathan Lindsay (J.D. Candidate) prepared this module under the supervision of Professor William W. Fisher III.
Last Updated:  March 10, 2000

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