Authored by E. Robert Yoches
Going on Offense
OurCompany/company_overview.cfm?screen_id=1.1 (visited June 27, 2000). More and more of these licensing enterprises now seek revenue from patents. Some go after an entire industry, as Mr. Dickens did with his Y2K patent, Dickens 2000 Patent, http://www.ita.org/year2000/dickens.htm (updated May 5, 2000), or as E-Data did with its Freeny patent, Richard H. Stern, Patents on Selling via the Net—Really?, 16 IEEE Micro 5 (1996). This list would be noticeably incomplete, of course, if it omitted Mr. Lemelson, the acknowledged leader of this industry, with his hundreds of patents in many diverse fields. Lemelson Patents Online, http://www.lemelsonpatents.com (visited June 27, 2000).
The strategy of generating licensing revenue, however, is not limited to individuals and other small but aggressive companies. Looking to a patent portfolio for revenue marks the strategy of the world's largest corporations. Texas Instruments, perhaps the leader in turning patents into revenue streams, generates more than $1.0 billion per year in license royalties. Wang Laboratories suffered some setbacks in its principal business of making and selling computers, but turned to its patent portfolio for licensing and litigation, sometimes being thwarted in trying to expand the scope of its patents to new technologies. Examples of the New Paradigm, http://www.s299.com/presentations/TechSearch/tsld006.htm (posted Mar. 30, 1999).
Selecting the Competition
Aside from antitrust concerns, there are few other limitations to patent owners' use of patents. For example, owners of business-method patents could seek to control competition by licensing some entities and excluding others, in effect choosing one's competition.
Becoming a Standard
By openly licensing the patent protecting a high-demand technology or method, the patent owner stands to gain market share by becoming a de facto standard, much like the Windows® operating system has become the de facto standard for most software written for personal computers. The patent owner must be careful, however, when it comes to standards promulgated by standards organization. If the patent owner hides a patent that blocks any practice of the standard, a court just might refuse to enforce the patent. One patent owner unsuccessfully tried this tact in the field of automatic teller machines but was stopped when a court found his conduct improper and refused to enforce the patent. Stambler v. Diebold, 11 U.S.P.Q.2d 1709 (E.D.N.Y 1988), aff'd, 878 F.2d 1445 (Fed. Cir. 1989) (unpublished).
When venture capitalists step up to the plate to fund a new enterprise, they expect patents, or, at least, patent applications. The patents and applications serve not only to describe the inventions, but also to distinguish the new businesses' technologies from those of competitors.
Business-method patents have little, if any, track record. As a result, it is difficult to put a value on the technology protected by the patent. But standard valuation techniques, used to put values on patents for many years, can serve as a first step in valuing an entire technology.
Many companies accumulate patents as a means of defense. A competitor will think twice about asserting one of its patents against the company if it fears a countersuit for patent infringement. This defensive strategy, however, only works against competitors practicing in an area potentially affected by the first company's patents. It has little impact on patent owners active in industries unaffected by the first company's patents, or on patent owners whose only business is to license patents.
But this strategy may become important for business-method and e commerce patents. These patents generally arise in rapidly growing industries. Lawsuits in such industries can slow down competitors, giving the patent owner an edge in acquiring market share. But two can play the same game, so that if a competitor's patent portfolio can inflict as much litigation pain on one party as that party can inflict on the competitor, then neither side will launch a patent suit. The effort is wasted, benefitting only third parties who remain outside the fray.
Deterrence and IPOs
If a company seeks to raise funds on the open market, it might hope to gain an advantage by filing lawsuits for patent infringement as a way of appearing strong to investors. But the company should weigh the risks of a countersuit, which might negate any hoped-for advantages. In the e commerce arena, many entrepreneurs risk a great deal by filing suit against a competitor that has its own patents.
If a company has patents yet is potentially infringing another company's patents, the two can get together and cross-license each other's patents. Costly infringement suits go away, and each party gains a degree of exclusivity, depending on the terms of the licenses. A company can make this option and the ultimate terms of the license more attractive by obtaining valuable patents in the competitor's areas of commerce.
Create Prior Art
This defensive tactic gets a bit complicated and requires a review of some basic doctrines in U.S. patent law. A company with a business-method invention might want to file for patent protection as a way of creating prior art that will defeat the patenting efforts of others. But simply applying for a patent might not create blocking prior art. Under 35 U.S.C. § 102(g) the earlier invention may not be abandoned, suppressed, or concealed. If the business-method inventors have kept the invention secret (i.e., concealed it), then a patent on the later invention could still issue and, theoretically, be used to stop the practice of the earlier development.
The business-method inventors can avoid this problem by publishing details about the technique. But publication has its own disadvantages, such as the immediate loss of trade secrets.
If the inventors decide to file an application as a means of ultimately creating prior art and ultimately receive a patent, then the application becomes prior art under 35 U.S.C. § 102(e) as of the date the it was filed. If the inventors plan not to file in other countries that publish patent applications, they may instruct the PTO not to publish the application. Otherwise, under recent changes to the patent law, the application will automatically be published 18 months after filing. If the application does not issue as a patent, pursuing patent protection does not amount to suppression or concealment, so the inventors can later make the invention public and still have it serve as prior art.
Costs of Business-Method Patents
The PTO fees for filing a patent application usually total around $1000, which breaks out into a $710 filing fee and other fees for additional claims, filing assignments, etc. When the patent issues, the PTO charges another fee of $1240 for a typical utility patent. Ongoing maintenance fees are $850 due at 3.5 years, $1950 at 7.5 years, and $2990 at 11.5 years.
Fees for patent attorneys and agents vary with the complexity of the invention. Ordinarily, business-method patents cost between $10,000 and $20,000 to prepare.
Often they cost at the high end of the range because of the difficulty in drafting claims to cover methods of doing business. The patent attorney has to assist the inventors in refining the invention if the concept is not fully developed. Many business-method inventions are ill defined either because they are essentially conceptual or the inventors have not finished developing them. In the first instance, the attorney must help formulate the invention. In the second, the attorney must work with the inventor to complete and refine the invention. In both instances, the attorney must also help determine which aspects of the invention to claim.
The often undeveloped nature of business-method inventions also requires additional attorney time to draft the specification. Many inventors develop a business-method invention in their heads. Its intangible nature requires the patent attorney to draft the drawings and all textual description from scratch, further increasing the cost of the application.
The above range of fees only covers the cost of preparing the application. As the prosecution process unfolds, the patent attorney will have to respond to "office actions" by the examiner at the PTO. These responses can often cost between $1500 and $3500.
Foreign Filing and Prosecution Fees
If the inventor of the business method wants patent protection in other countries, the fees for foreign patent prosecution can climb quickly. The fees paid to the United States PTO are generally much less than those required by patent offices in other countries. Therefore, patent owners can expect to pay several thousand dollars in patent-office fees for each country where they seek protection.
In addition, translation fees can often amount to several thousand dollars as can fees required by patent agents to explain the rejections and assist in responding to those rejections. Therefore, the out-of-pocket expenses for a business-method patent application from the beginning of drafting to issuance can sometimes total as much as $100,000. As a result, the filing strategy for other countries requires a great deal of thought.
Pursuing patent protection costs more than just the various fees paid. Preparing the documents requires assistance from the inventors. Those inventors might hail from marketing, sales, advertising, or other areas not accustomed to seeking patent protection. Thus, they are less familiar with the patenting process, and the patent-preparation and prosecution process can become less efficient. Similarly, many of the companies applying for business-method patents are new to the patenting field and have not developed the necessary procedures to make the patenting process more efficient and less expensive. In contrast, large technology companies often have a patent department to assist in the patenting process. Some have patent coordinators to gather information and put it into a form that minimizes the involvement of inventors in the patenting process.
Companies that file many patent applications can afford such departments and personnel by spreading their cost over many patent applications. But companies filing only a few patent applications can hardly justify the costs of a patent department or of patent coordinators. The cost of each individual application thus increases.
Business-method patents might cause resistance or resentment within the company or might raise some public-image problems. Some inventors oppose the idea of business-method patents on philosophical grounds, and there has been, at least in the e commerce area, some strong reaction against these patents. For example one individual led a boycott of the amazon.com web site out of anger that amazon.com would assert its e commerce patent against barnesandnoble.com. Inventors with that attitude may be reluctant to assist in the patenting process or may refuse outright, requiring the company to work around this problem or to exert influence that may well leave lasting resentment.
In addition, the company itself may experience some unpopularity if it is the first to enter into the realm of business-method patents. Opponents of amazon.com's patent prompted a boycott of its website, Richard M. Stallman, Boycott Amazon!, <http://www.gnu.org/philosophy/amazon.html> (updated June 15, 2000), and Jeff Bezos, the president, ended up making some conciliatory remarks An Open Letter from Jeff Bezos, <http://www.amazon.com/exec/obidos/subst/misc/patents.html/103 0062932 8281408> (posted Mar. 9, 2000). Although the boycott may have had no lasting effects, amazon.com did suffer some loss of prestige.
Another nonmonetary cost of business-method patents involves the loss of secrecy over the patented method. The United States patent laws require inventors to disclose their "best mode" of carrying out the invention, so once a patent issues, the public has access to the details about the best mode. Pursuing a patent, therefore, involves the decision to obtain one sort of intellectual property protection (patents) at the expense of another (trade secrets). Even if the bargain makes sense, e.g., because the method necessarily becomes public upon use (such as amazon.com's one-click ordering), thoughtful entrepreneurs must consider this cost when deciding whether to pursue patent protection for business methods, and in deciding which inventions to protect.
Which Business-Method Inventions to Patent
Balancing the cost and benefits is only the first step in deciding whether and when to pursue patent protection for business methods. Even if the benefits of patent protection outweigh the costs, companies and individuals should consider other factors as well.
For companies actually practicing the patented method, or some variation of it, one should consider the competition. Are others practicing the method, or likely to, and if so, how many might be doing so? Arriving at this total helps estimate the potential revenues of licensing the patent or, alternatively, the value of any defensive use of the patent. The existing competition may also provide some indication of the level of opposition the patent will likely attract when it issues.
Potential patentees should also consider the issue of standards. Standards have a complex interplay with patents. On the one hand, standards seek to increase the number of people using a particular technology. On the other, patents seek to limit that same number. Nevertheless, anyone considering whether to get a patent on a business method should consider first whether that patent would affect any existing standards and second whether the inventor believes that the invention will become a standard or wants it to become a standard.
The term "standard" does not only apply to those formal standards adopted by organizations designed for such purpose. It also refers to products or techniques that are so common as to be an unofficial standard, such as the Windows® operating system.
Inventors with new enterprises should also consider their business plans and examine how business-method patents fit in with those plans and objectives. For example, if a company intends to seek investment, as explained above, it should pursue patents and applications that will make it more appealing to investors and venture capitalists. In some instances, for example, a patent application may even be more appealing than an issued patent, because the latter is a known entity while the former may excite the curiosity of investors with the potential of strong patent protection.
Related to this issue is a question of industry trends. In a fast-moving industry, the ultimate value of a particular patent may be small because of the small likelihood that the industry will be practicing the patent technique. On the other hand, if the industry is moving toward standardization, then management should consider how the numbers of types of patents sought will fit in with evolving standards.
Finally, some practical issues arise regarding enforceability. If the field is crowded, chances of getting a patent are questionable, so companies may wish to save their money. Similarly, if the market does not appear strong enough to allow exploitation, then patents may not be an appropriate target of investment. But if a company has just entered a field dominated by "elephants," then patents may be the only weapon of survival in such a jungle. Similarly, if the company either has obtained, or will be obtaining, sufficient financing to be able to enforce its rights, then it may wish to elevate the pursuit of patent protection to a high priority in the company.
Legal considerations also help determine the propriety of pursuing business-method patents and inform the strategy of obtaining them. One significant legal consideration involves identifying the proper inventors. The United States patent laws require that each patent properly name its inventors, even if they all have a duty to assign their inventions to the same entity. 35 U.S.C. § 256. Failure to identify inventors renders a patent unenforceable until the inventorship is corrected, and failure resulting from deceptive intent may invalidate the patent completely. PerSeptive Biosystems, Inc. v. Pharmacia Biotech, Inc., 225 F.3d 1315 (Fed. Cir. 2000).
Unlike inventions in most technological areas, many business-method inventions have unclear parentage. Often they result from meetings or general discussions among marketing and business personnel and perhaps engineers. Reconstructing the precise contributions made by each inventor months or years after conception often proves a daunting task.
Furthermore, inventorship depends on the claims. Thus, the task of finalizing inventive activity must wait for the PTO to allow the claims in a patent, sometimes years after the application was filed. By that time, the claims, and the inventors, may have changed dramatically. A coinventor need only contribute to one claim in a patent, 35 U.S.C. § 116 (1994 & Supp. V 1999); see also Donald S. Chisum, Chisum on Patents §§ 2.02- (1999), so the inventors in the application as filed should include all persons who contributed to at least one claim in the original application. During prosecution of the patent application, the PTO may take several actions that cause the applicants to change the claims. For example, the PTO could issue a restriction requirement forcing the applicant to select only certain claims for prosecution. Alternatively, the PTO may reject certain claims, causing the applicant to cancel or amend them. For whatever reason, the claims that issue in a patent often differ significantly from those that were filed, and the inventorship may change as well. Failure to repeat the inventorship determination may result in an incorrect inventorship and an unenforceable patent.
These problems of inventorship compound when the inventors do not all owe an obligation to assign their inventions to the same party. In several e commerce and business-method inventions, the inventive entity may include independent contractors or others who, unlike many employees, have no common-law obligation to assign their inventions to a third party. If a contractor has no contractual obligation to assign, the contractor is a joint owner of the patent.
Under U.S. patent law, however, the joint owners are free to exploit the patent independently of other joint owners and independently of any obligation to share the proceeds with the other joint owners. 35 U.S.C. § 261 (1994); see also Donald S. Chisum, Chisum on Patents § 2.01 (1999). Thus, one owner could offer licenses to a competitor of a second owner, rendering the business-method patent essentially useless for any purposes of the second owner.
The inventorship problems become even more complex because many inventors of business-method patents owe no common-law obligation to assign inventions because they are not technical personnel and were not hired to invent. For that reason, many companies have not thought to bind their marketing or sales personnel to assign inventions. Such personnel do not traditionally make inventions. Thus, companies may not even own their inventions.
To avoid this problem, companies should ensure that all their employees sign employment agreements obligating them to assign their inventions to the company. This should be done at the time of hiring, because if done later, some courts require that the employee receive additional compensation. See Carroll Touch, Inc. v. Electro Mechanical Systems, Inc., 15 F.3d 1573, 1580-81 (Fed. Cir. 1993). Furthermore, arrangements with contractors should contain a requirement that the contractor assign any inventions arising from their work with the company to the company.
One final legal consideration involves obligations of confidentiality. Contractors may owe obligations to other parties to maintain secrecy about certain topics. But the best-mode requirement may require that a patent application cover those topics—disclosure that may conflict with the individual's obligations to maintain confidentiality to a third party. 35 U.S.C. § 112, ¶ 1. Thus, a patent attorney faces a Hobson's choice: risk invalidating the patent for violating the best-mode requirement, or risk breaching an obligation of confidentiality. The parties involved may be able to sidestep this choice by contract or by adjusting the claims to exclude the troublesome portion. If that is not possible, then the company may not be able to apply for patent protection.
In this two-part article, we have seen how business-method patents have exploded since the United States Court of Appeals for the Federal Circuit expanded patent protection from software driving computers to methods of doing business as assisted by software and computers. The State Street Bank case in 1998 has been followed by a rapidly rising tide of applications for business-method patents in the United States Patent and Trademark Office. Many businesses have felt increasing pressure to seek patent protection simply because their competitors are doing so.
Part I of the article pointed out the absence of any clear definition of business methods. Even Congress, in the American Inventors Protection Act, only managed to define a business method as "a method for doing or conducting business"—not a particularly helpful definition. Part I then tried to put various kinds of business-method patents into categories, both for the purpose of defining what they are and for the purpose of analyzing the strategies that might dictate the seeking of patent protection and the use of such patents once protection is achieved. Part I also reviewed outbursts of public criticism of business-method patents, which might figure in to a company's decision to seek patent protection.
Part II has explored the decision of to patent or not to patent. Both offensive and defensive strategies play prominent roles in reaching the ultimate decision. So too do questions of costs, both monetary and nonmonetary. Finally, Part II has reviewed the kinds of business methods that might be worthy of patent protection. Dangers lurk, however, for the entire area of business methods is populated by professionals unaccustomed to the tricky ins and outs of patent practice. As with all articles on legal matters, this one necessarily ends with the admonition that businesses should seek legal advice very early in the game. Otherwise, valuable patent rights might be lost forever.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes and is not intended to constitute legal advice. This memorandum may be considered advertising under applicable state laws.