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Under lock and key Featured

9:36am EDT July 22, 2002

Technology, commerce and the law rarely coincide in a single case. When it does happen, the results can be dramatic.

This convergence occurred in State Street Bank & Trust Co. v. Signature Financial Group, in which the Court of Appeals for the Federal Circuit held that if the requirements of the Patent Act are otherwise met, business methods are patentable. Now, the opportunity exists for capitalizing on the business method patent wave and excluding competitors from using a business method.

Put another way, businesses can now patent the methods by which they operate, thereby creating a barrier to market entry for potential competitors.

Background of business method patents

Business method patents include virtually any method for conducting business as long as the method utilizes a computer aid. Otherwise it meets the requirements in the Patent Act of utility, novelty and nonobviousness.

Business methods can include the way a business is structured, managed, organized or executed. One particular area in which the filing and issuance of business method patents has been embraced is in e-commerce. Many e-commerce start-ups actively seek business method patents to block competitors and stake out their corner of the Internet. They correctly view patents covering their business methods as one of their only assets with potential value.

Business method patents have encountered widespread publicity, thanks in part to a few well-publicized lawsuits, particularly that involving Amazon.com's infamous one-click ordering patent. Media attention has raised public awareness that these types of patents can be another weapon in the battle to beat competitors for market share.

This publicity has also generated concern in some corners that the patent system is being abused.

Concerns about business method patents

Awareness generated by business method patents has naturally engendered concerns. Skeptics have created apocalyptic scenarios such as a single bank foreclosing all other financial institutions from offering home banking services based on a single patent.

Others argue that State Street went too far in liberalizing patent law. The federal circuit, however, has downplayed such scenarios and stated that the requirements of novelty and nonobviousness will preclude these situations.

Over the next few years, the Patent Office and the courts will likely address these concerns. Nevertheless, business method patents appear to be firmly entrenched.

Developing a business method patent strategy

No matter what the concerns and criticisms, businesses cannot ignore that for the foreseeable future, proprietary business methods are patentable and many businesses may be able to protect these methods.

Furthermore, as many financiers seek out promising new technology companies whose primary, or only, assets are their ideas, the importance of protecting these ideas may become paramount to the company's survival. Thus, the savvy business will develop a strategy for protecting its business methods.

For the start-up, a business method patent can often lead to higher valuations and make it difficult for larger, established entities to enter the start-up's market space. Analysts often see promise in a company's intellectual property, and with many start-ups, intellectual property is often one of their only assets. Also, the ability to establish a defined market presence by excluding competitors can be vital to a start-up company's survival and an existing company's growth plans.

Start-ups should look to business method patents as a way to help define their place in the market while providing some breathing room during initial growth stages. Existing companies may look to patents as a way to establish beachheads in new markets.

Looking ahead

Another factor driving companies to evaluate and establish programs for protecting proprietary business practices is the unforeseeable future. Since no company knows exactly what patent applications its competitors may have filed, the smart entity will review its practices and attempt to stake out a strong position barring competitors from using the same methods, if only to protect itself from competitors doing the same to it.

Even though the full scope of these patents will not be completely known for several years, every company should assess the extent to which its business relies on potentially patentable methods. Such an audit can aid the company in determining whether rights exist that should be protected, as well as help avoid disputes with competitors. Todd Tucker is an attorney at Arter & Hadden LLP and a member of the E-Group, a multidisciplinary group of attorneys which focus its practice on entrepreneurs, Internet, e-commerce and emerging growth companies. He can be reached at (216) 696-4661.