Business Method Patents

Introduction – What is A Business Method Patent?

Business method patents represent a new and important area in patent law.  There currently is no formal definition for what a business method patent is, but it can basically be described as a patent relating to a method of doing business.  Although such patents can now be obtained for any kind of business method, the applications often relate to automated business and e-commerce methods.

Because the Federal Circuit has not defined the specific subject matter of business methods, the Patent Office considers it a generic term that applies to many classes of subject matter.  Most business method patents fall under Class 705, which the Patent Office uses to classify patents that claim an “apparatus and corresponding methods for performing data processing operations… uniquely designed for or utilized in the practice, administration, or management of an enterprise, or in the processing of financial data.”  The courts and the Patent Office have made it clear that a business method can be protected if it meets the standard requirements for patentability, and that the holder of a business method patent would be entitled to the same rights of a party that holds any other type of patent.  That is, a business method can be patented if it is original, useful, and not obvious, and accordingly it will be entitled to the full protection of patent laws.

Two of the most well-known examples of business method patents are Amazon’s “1-Click shopping” and Priceline’s “Reverse Auction.”  Amazon patented a system which allows consumers to purchase items by clicking an order button on a website.  The website has a database that stores the user’s information to facilitate the transaction.  1-Click shopping is useful because it simplifies online shopping for consumers.  Priceline patented a system which allows users to place auction bids on items that are not yet available.  Once the item becomes available for auction, the system enters the user’s interactive bid.  The Reverse Auction has been used to help consumers purchase airline tickets before they are even available.  Thus, business method patents can relate to business models that are an enormous source of revenue to companies, as well as an important part of the consumer experience.

The History and Evolution of Business Method Patents

Business methods is a rapidly evolving topic in patent law.  The state of the law has changed such that where business methods originally could not be patented at all, they are now considered on almost the same basis as any other type of invention.

Historically, one could not patent a business method because of a long-standing rule known as the “business method” exception.  This rule stated that business methods were not patentable subject matter, and has been cited by cases from more than a century ago.  In addition, the courts did not extend patent protection to computer software, a key component to many business method patents.  In Gottschalk v. Benson and Parker v. Flook , the Supreme Court ruled that software was too similar to mathematics and laws of nature to be entitled to patent protection.

The Supreme Court changed its direction in 1981 when it ruled in Diamond v. Diehr that inventions would not be precluded from patent protection simply because they utilized computer software.  Since then, courts have broadened the scope of protection available to software-related inventions.  Over the last decade, patents have become the preferred method for legal protection of computer software.  In a series of decisions including Computer Associates v. Altai and Lotus v. Borland , federal courts greatly reduced the scope of copyright protection for software to the point where little more is protected than exact copying of software code.  If vendors want broader protection for computer software functionality, they must now seek it under patent laws.  This made way for the final step before business methods became patentable subject matter.

In 1998, the Federal Circuit finally rejected the “business method” exception and extended patent protection to business methods in its decision in State Street Bank v. Signature Financial Group.  That decision upheld a patent on a “hub and spoke” automated data processing system that used a series of calculations to transfer assets among a pool of mutual funds.  The court found the exception to be ill conceived, and it stated that it would be inappropriate to prevent an otherwise patentable invention from being issued a patent simply because it is implemented using a computer.  In short, this landmark decision resulted in the court extending patent protection to business methods that used computers.  Most recently, in 2005, it was ruled in Ex Parte Lundgren that a business method is not required to apply, use, involve, or advance the “technological arts” in order to be patented.  Thus, a business method can now be patented regardless of whether or not it must be carried out on a computer.

The Importance of Business Method Patents Now and in the Future

Business method patents are extremely important to the companies that use those methods.  The patents serve as a form of legal protection for the investments companies make to develop new and original business models.  Patents prevent competitors from copying ideas without permission and compensation, and patents also allow the patent holder to sue infringers for damages and obtain injunctions to stop them.  In fact, such infringement occurs frequently.  Amazon prevailed against Barnes & Noble for infringing on its “1-Click shopping” patent, while Ebay lost a lawsuit to MercExchange, who claimed that Ebay’s “Buy It Now” system infringed on patents held by MercExchange.  These cases serve as an important lesson showing that businesses must be aware of existing business method patents before putting new innovations to use in the marketplace.  Because there is strict liability for patent infringement, the infringing party cannot use ignorance as a defense to protect itself.  Therefore, online businesses should consult with an experienced attorney before implementing new methods of conducting business.

There are several considerations involved in deciding whether patent protection is appropriate for a given business method.  First, it is important to determine whether or not a candidate for a business method patent is in fact patentable.  Next, a business decision must be made as to whether the business method will result in enough revenue over the years to justify the expense of the patent application process.  If so, a valid business method patent can be a highly valuable asset to a company.

Conclusion

Business method patents are an important new form of legal protection available to businesses.  As the area continues to expand and develop, it is clear that business method patents are here to stay.  The Patent Office continues to expand its capacity to handle the explosion in new business method patent applications, increasing both the speed and quality of examination.  Business method patents provide businesses with a valuable legal strategy to protect new business models, thereby conferring considerable competitive advantage.

Disclaimer

This publication and the information included in it are not intended to serve as a substitute for consultation with an attorney. Specific legal issues, concerns and conditions always require the advice of appropriate legal professionals.

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