W. Petty

Tuesday, 27 April 2004 14:31

Preventive measures

Use of the Internet to conduct business has exploded since 1999.

Business-to-business (B2B) and business-to-consumer (B2C) revenue is estimated to reach $6.7 trillion in 2004, up more than 16-fold from just five years ago. Big and small companies alike are doing business over the Internet in an attempt to capture a share of this revenue. These companies are aggressively exploiting a recent change in U.S. patent law to seek patents covering how they do business and to obtain and maintain an advantage over their competitors.

Today, businesses have the opportunity to pursue a new kind of patent, the "business method" patent, which provides a tool for protecting the way a company does business. Business method patents represent an expansion of patent protection beyond the traditional domain of technological innovations.

In 1998, a federal appeals court ruled that software inventions embodying business models -- a mutual fund management model in that case -- should not be excluded from the scope of patentable subject matter. This court's decision shattered a prior bias against the grant of patents in this country for business-related innovations and opened a new opportunity for protecting business methods under our patent laws.

Given this expansion of patent protection for business-related innovations, companies that use computers to conduct business and to deliver services to their customers -- banks, insurance companies, investment fund companies, real estate companies and on-line retailers -- are aggressively procuring patent protection for their innovative methods for doing business. Examples include Amazon.com's method for one-click purchasing, Doubleclick's method for delivering advertising over the Internet and American International Group's method for reducing the interest rate and insurance premium associated with a mortgage loan.

What is a patent?

The U.S. Constitution empowers Congress "to promote the progress of science and useful arts, by securing for limited times to ... inventors the exclusive right to their ... discoveries." Under this power, the federal government operates the U.S. Patent & Trademark Office, which administers the country's patent system.

An inventor can obtain a U.S. patent to protect useful processes, machines, articles of manufacture and compositions of matter. This protection provides the patent owner with exclusive rights to exclude others from making, using, importing, selling and offering for sale the invention for up to 20 years.

A patent must disclose to the public how to make and use the invention, including the best mode for practicing it. This teaching enriches the public knowledge and allows others to improve upon the patented invention.

To secure a U.S. patent, an invention must be both new and nonobvious. In evaluating a patent application, the Patent Office will look at the body of "prior art" associated with the specific field of invention covered by the application. This prior art, which can be patents, publications, marketing collateral or products, reflects how the problem solved by the invention covered in the application has been addressed in the past.

An applicant is entitled to a patent only if the inventive solution is not found in the prior art.

Why seek patent protection?

Abraham Lincoln, a patent holder himself, called the introduction of patent laws one of the three most important developments in the world's history. The importance of patent protection has been intensified under the "new economy," in which a company's intellectual property, including methods for doing business, may be one of the company's most significant assets. EBay, Amazon.com and Priceline.com are just a few examples of companies whose success is directly linked to how they do business with their customers.

There are several reasons to patent a business method.

* Defensive patent shields. One reason a company seeks patent protection for its innovations is to develop a defensive patent portfolio. By patenting an inventive concept that makes up the core aspects of a company's business, that company can carve out a niche in a marketplace, with the patents defining the extent of the boundaries of that niche.

Patents can help protect a company's investment in research and development. Also, a patent portfolio can serve as a bargaining chip to resolve a dispute when the company's competitor threatens it with a patent infringement lawsuit.

* Offensive patent weapons. Alternatively, a company can build a patent portfolio to serve as a source of revenue, either to augment other revenue streams or, in the extreme case, to serve as the company's sole revenue source. Under this model, a company would license a patented innovation to other companies, either on an exclusive or nonexclusive basis.

For entities that eschew a license yet practice the invention covered by a patent, the patent owner can sue them for patent infringement to recover money damages and enjoin further infringing activities. The company can use its patents to exclude competitors from operating within a business niche, giving the company a competitive advantage over those competitors and protecting market share.

* Attract capital investments. A patent portfolio can attract investment in a company by translating an intangible business method into a tangible asset. A patent offers an assurance to venture capitalists that other companies may be reluctant to enter a business niche carved out by the patent, which otherwise could dilute the financier's return on investment.

A patent portfolio also may result in an increased valuation of a company by a financier because patents create a barrier to a competitor's entry into a market and may generate potential patent license revenue.

Answering the critics

Business method patents, especially for software and e-commerce applications, have been criticized as a barrier to innovation on the Internet.

A major theme expounded by critics is that the Patent Office's issuance of software and business method patents is out of control. If left unchecked, critics have asserted that innovation in the online marketplace will come to a screeching halt.

The Patent Office has responded to this criticism by applying a heightened level of scrutiny to patent applications claiming business process innovations. In addition, it has increased the number of examiners handling patent applications for business models and expanded the scope of prior art search activities conducted by examiners during the examination of these applications.

Also, in the event that an examiner concludes that a business method patent application is patentable over the prior art, the Patent Office initiates a second-level review of this "allowed" application to ensure compliance with patent laws.

Predictably, critics focus on the restrictive power of the patent grant but ignore the other half of the social bargain of the patent system. Through the patent process, a business discloses its innovations, including methods for doing business, to the public. Other companies can then build on these disclosed innovations.

In this way, patents for business methods are no different than patents for technical innovations. A company may own the patent for a mousetrap and monopolize its sale. However, by disclosing how to make and use the mousetrap, others can build a better mouse trap. After all, there is more than one way to catch a mouse.

Excluding competitors from a market

As an increasing number of business method patent applications work their way through the Patent Office and become patent grants, more business method-related patent lawsuits will be in the news as companies attempt to protect their niche or extract revenue from their growing portfolios.

For example, Priceline.com sued Microsoft over technology associated with travel ticket auctions. Amazon.com sued Barnesandnoble.com over Amazon.com's "one-click" technology, which enabled Amazon.com's Web site to identify a user and allow that user to order a product from a Web site with one click of a mouse.

Last spring, a jury determined that eBay and its "Buy it Now" feature infringed two patents owned by MercExchange.

Patent litigation is notoriously complex and, consequently, expensive -- and there are no guarantees of a successful outcome in the courtroom. Despite the uncertainty, the adage "the best defense is a good offense" applies to patent litigation.

Much of the expense and uncertainty of patent litigation may be avoided by an accused infringer if that organization has a strong patent portfolio itself. Cross-licensing possibilities may allow two companies to achieve synergy in exploiting their combined innovations.

On the other side of the fence, a strong patent portfolio can bring a quick end to infringing activities by another company -- which does not want to risk the costs of patent litigation and an adverse decision -- thus protecting the patent owner's competitive advantage or establishing a licensing opportunity.

Securing a competitive stake in the market

By building a patent portfolio that encompasses how you conduct business, your company can help secure a competitive advantage over other players in the market. A patent portfolio can be used to generate revenue outside of your company's normal revenue sources, through licensing and monetary awards from patent litigation.

Finally, your investment in patents can be used as a defensive shield against patent litigation targeted at your business. Scott Petty is a partner in the Atlanta office of King & Spalding LLP, where he is a member of the Intellectual Property & Technology Practice Group. Reach him at (404) 572-2888 or spetty@kslaw.com.