Internet Business Method Patents

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 business method patents or Internet 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 account. Amazon was granted a patent on this business method in September 1999 (U.S. Pat No. 5,960,411).

Protection for Business Methods: The State Street Case

Business method patents are part of a larger family of patents known as utility patents, which protect inventions, chemical formulas, processes and other discoveries. A business method is classified as a process, because it is not a physical object like a mechanical invention or chemical composition.

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

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). 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 USPTO 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).

In response to recent criticisms that patent examiners are ill-equipped to investigate whether business methods are novel and nonobvious, the USPTO added an additional "layer of review" to business method patent applications and hired technology specialists to aid examiners in the areas of finance, e-commerce, insurance and Internet infrastructure.

Using Internet Patents as a Sword or Shield

Internet patents can be used offensively against a major competitor or they can be used defensively as a bargaining chip against an aggressive competitor who threatens to sue based on one of its patents. Experience has shown that rivals are less likely to go to court when they know that their opponent can 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, if Business B used the method confidentially before Business A filed for a patent, it can continue using the method without liability for infringement.

Example:
Company A has been using a business accounting method for years, but 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 or, more likely, never would have been granted in the first place.

Legal Requirements for Getting a Business Method Patent

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

  • The method or software must fall within the classes of patentable subject matter. Anything that is created by humans falls within these classes; laws of nature, natural phenomena and abstract ideas do not.
  • The method or software must be useful. This requirement is fairly easy to satisfy because any functional purpose will suffice. A business need only demonstrate that its method or software provides some concrete tangible result. For example, the Amazon 1-Click patent provides a tangible result -- an expedited purchase.
  • The method or software must be novel. This requirement means the method must have an aspect that is different in some way from all previous knowledge and inventions. This requirement is discussed in more detail below.
  • 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.

Novelty

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

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

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

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

Nonobviousness

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

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).

Timeline for Obtaining a Patent

It usually takes two and a half to three years from the date of filing an application until a business method patent is issued. The period between filing and issuance is called the "pendency period." 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. Only after a patent is actually issued can a company stop another from using making or selling the process. The patent is then valid for 20 years from the date of filing.

Alternate Protection for Business Methods

Business methods and software can also be protected under trade secret laws. A trade secret is any confidential business information developed by a company that gives it an advantage over competitors. As long as it's kept secret, this protection does not expire.

Patent protection, however, although more expensive and shorter in duration, is often preferable to trade secret protection because a patent owner can stop others from using the patented method even if the new user developed the method on its own, without stealing or copying directly from the patent owner.

In addition, a patent owner can use the business method publicly or license it to others without losing its rights in the method.

Copyright 2004 Nolo