Why all the fuss about business method patents?

If you’ve been paying attention to business news recently, you may have noticed that there is a raging controversy over “Business Method Patents,” especially as applied to e-commerce and the internet. This article explains how these patents came to be, and takes some guesses as how it will all work out in the end.

What is patentable?

United States Patent Law has its roots in the U.S. Constitution, which provides Congress with the power to promote the progress of science and useful arts by securing for inventors the exclusive right to their discoveries. We can be pretty sure that, back in 1787, the framers of the Constitution did not contemplate one-click online shopping, or for that matter, gene splicing, relational databases, fault-tolerant computing, or cellular phones. As technology has spawned technology in dizzying circles of positive reinforcement, the question remains open of what ‘discoveries’ the Constitutional language was intended to protect. This is technically known as the issue of patentable subject matter.

Congress’s current thinking on the subject is codified at 35 U.S.C. § 101, which states “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” A more liberal restatement of this statutory language was offered in the legislative history, where Congress ventured that patent protection should extend to “anything under the sun that is made by man.” The federal courts have been called upon with increasing frequency to interpret the statute in new fields of scientific endeavor. This includes genetically altered life forms, computer software, and most recently, business models. So far, the ‘anything under the sun’ approach appears to be winning.

The “game” of patenting

The evolution of patentable subject matter may be likened to a tennis match. Congress sets the height of the net and the boundaries of the playing surface. A patent applicant serves a ball across the court to a patent examiner. The ball is batted back and forth until it finally passes one of the participants, resulting in an issued patent or an abandoned application. The patent applicant propels the ball by submitting a patent application that includes a set of claims, each claim being a concise statement of what the applicant believes to be a patentable invention. The patent examiner imparts a contrary direction by pointing out how the claims fail to satisfy patent office interpretations of the law on patentable subject matter. In close cases, the federal courts may be asked to make line calls.

Patent attorneys know how to play this game well. When machines are ‘in’ and software is ‘out’, inventions are characterized as machines. This is simply a word game. A patent claim may be directed to a “machine that receives a first number and a second number, and that adds the first number to the second number to provide a sum,” rather than “computer executable code for adding a first number to a second number to provide a sum.” Patent attorneys routinely characterize a single inventive concept in a number of different ways, such as a method for doing something, an apparatus that does that same thing, a computer program, and so on. The patent examiners who work at the Patent Office, for their part, are adept at searching the prior art to find the elements of a patent applicant’s claimed invention.

Buy low, sell high?

Every once in a while, the federal courts decide that the lines should be moved. This is what happened in 1998 when the Court of Appeals for the Federal Circuit retired the so-called “business method” exception to patentable subject matter. From this observer’s perspective, it seemed like a relatively small change to patent law. Virtually every one of the six million plus patents that have issued from the U.S. Patent office have carried with them an implied business method. That is to say, if I patent an improved mousetrap, an implied business method may be found in the additional element of selling the improved mousetrap for a profit. All that has really changed is that an applicant can now claim the business method explicitly.

In other words, an applicant can now claim a method of doing business that includes buying low and selling high, right? Well, it isn’t quite that simple. In addition to being directed to patentable subject matter, a claim must be different from everything that has come before. This concept is legally formalized as the dual requirements of ‘novelty’ and ‘nonobviousness.’ The law in this area raises numerous complex issues that can (and do) fill treatises. Suffice it to say that a patent application is measured for newness against the prior art, a benchmark established by every printed publication throughout the world, in combination with the knowledge of one having ordinary skill in the relevant art. To continue the tennis metaphor, a patent examiner may also return a ball using the force of prior art. A claim to the buy-low-sell-high business model, for example, would be compared against millennia of literature disclosing this fundamental business concept. The patent office will cite a publication that describes the buy-low-sell high business model and reject this claim.

To tell the truth, accepting business methods into the patent flock might not have made that much difference — a legal oddity of interest only to those whose sole competitive advantage resides in an ability to yield higher returns for investors, people such as analysts, fund managers, and the like — had it not been for the concurrent emergence of the Internet. The Internet provides a platform for the seamless exchange of services, content, and currency among servers and billions of individual users. It is an enabling technology for a universe of previously unimagined business models — things that really are new, in the legal sense that is. And so this junction of law and technology has led to a virtual gold rush upon the patent office, everyone clamoring for a slice of federally backed monopoly in the e-commerce pie. The age of the e-commerce patents has been born, fueled by easy money from venture capitalists and enthusiastic equities markets.

Unforced errors

By and large this works well. Investors nod approvingly at the promise of their investment being protected by a sustainable competitive advantage. The pursuit of patents provides another outlet for the boundless energy of youthful start-ups. It also gives patent attorneys something to do. But consider the problem that faces the patent office. To reject a claim, a patent examiner cannot rely on opinion or speculation. By law, the examiner must come forth with prior art related to the claim, and the examiner must point out where the claimed invention is described within those printed and published materials. Patent examiners are good at searching the prior art. But they are really good at searching through prior art patents. It makes sense. They work with patents every day. They know how to read and interpret them. And the patent office maintains a patent database. Examiners keep this database at their fingertips, and they really stay on top of it. The database is a free, Web-enabled, publicly accessible, searchable database of millions of patents. The database stores full text and images. And it is conveniently sorted into different technological classes. The quality and utility of the patent office’s database may be appreciated when one considers that it is one of the most accessed Web-based databases, on one of the most accessed Web-pages, in the world. But most importantly to examiners, the patent database is trustworthy.

So examiners typically focus on patent prior art. Comparable resources are simply not available for other types of non-patent prior art. They could not hope to find all of the marketing materials, white papers, and product specifications generated by companies. They cannot sift through the Ph.D. and M.S. theses at universities. Even where databases are available on-line for universities, these on-line databases only contain abstracts or keyword records, full-text searching is missing. Further, what the examiner is looking for may be deep within a thesis, not excerpted into the abstract. Foreign language databases present other obvious difficulties. To help with all these types of searches, the patent office provides electronic information centers with dedicated staffs of researchers, mostly trained librarians, that will perform searches of the non-patent literature for the examiners. Translators are also provided to review technical journals published in most major languages, including Chinese or Russian. Any of these printed materials legally qualify as ‘prior art’. But even with these resources, this type of prior art is difficult for examiners to search through, or anyone for that matter.

This is one of the reasons that patent litigation is so notoriously expensive. Defendants in patent infringement lawsuits will routinely spend hundreds of thousands of dollars interviewing experts and combing the prior art in hope of finding a few pieces of prior art that cast serious doubt upon the ‘newness’, or novelty and nonobviousness, of an issued patent. It is also one of the reasons that e-commerce patents have raised such an uproar. When someone files a patent application for a semiconductor manufacturing process, a patent examiner may safely rely on several decades of issued patents to establish the state of the art. But applications for business methods began in earnest only a few years ago, and it takes about that long for a patent application to mature into a patent. So when an examiner goes looking for patent prior art in business method applications, there is woefully little there. One suspects that examiners at the patent office have issued a few patents recently, as they are obliged to do in the absence of relevant prior art, that have left them feeling a bit queasy.

This means that when people complain about e-commerce patents being overly broad, they may have a point., even if you accept the basic validity of “method patents.”. In some cases, largely due to a lack of adequate searching resources, even good patent examiners issue bad patents. It is an inevitable consequence of the court’s creation of a new area of patentable subject matter. The rapidly growing volume of e-commerce patent applications has only worsened this already bad situation. Not to worry.

All of this may just be a transient phenomenon, instead of a sign that the the patent system is broken, as some critics have maintained. Over time, the patent office’s database will grow include a rich collection of various business methods, and as this database matures, new applications will be compared to the state of the art rather than a vacuum. And new methods for examining prior art, such as BountyQuest’s Broadcast Reward System, are likely to be developed to facilitate the patenting process. There are some truly innovative business models being developed, models for which the Internet genuinely is the enabling technology. And then there are business models that amount to little more than online catalogs. Ultimately, the innovative business models will succeed, both as businesses and as patents. In the meantime, the federal courts have redrawn the lines to the disadvantage of patent examiners. They could certainly use a bigger racquet to help them stay in the game.