February 2000

E-commerce and Patents: The Changing Face of the "Free" Internet

I guess I’m going to have to accept it: the Internet just isn’t the open, "share everything we have" erstwhile environment that it was. Business has dominated it, and dominated it with a vengeance. Like the tear gas-laden streets of WTO Seattle, the thought brings a (sniff, sniff) tear to my eye.

But change is not necessarily a bad thing. Business, specifically e-commerce, has facilitated the demand that continues to finance the phenomenal advances in technology that make the Internet the profound, multi-faceted environment that it is. I like that part. But, developing these capabilities isn’t inexpensive and like any other business investment, the creators are entitled to protection of the fruits of their labors.

To be patentable, the subject must be novel and (patently?) non-obvious. Further, the criteria used in the determination of what is "novel and non-obvious" are complex and, some argue, fairly subjective. The subject matter covered by a patent may be quite broad. Additionally, numerous aspects (claims) of the methods or processes may be made in a single patent, the infringement of any one constituting an infringement of the whole. Ironically, an interesting twist exists that allows for the patentee to obtain a patent which he may not be able to use without infringing on someone else’s patent. For example, Company ABC develops and patents a device that enhances the output efficiency of framus makers (machines patented and manufactured by Company XYZ). ABC cannot sell its own product without making an infringing clone of XYZ’s machine. More critically, you can infringe a patent even if you are not aware of the patent or the patentee’s product. Neither does a patent owner have to prove knowledge or copying to prevail in an infringement suit.

The statutory scope of patentable inventions is defined at 35 U.S.C.§101 (1994), which states that "any process, machine, manufacture or composition of matter" is patentable subject matter. The Supreme Court has defined unpatentable subject matter to include "laws of nature, natural phenomena and abstract ideas,"1 typically construing mathematical algorithms as "abstract ideas" and therefore unpatentable under §101.2 However, after some bumpy excursions by the courts into the scope and applicability of patenting mathematical algorithms, the current state of the law is that algorithms may be patented,3 on the theory that once a mathematical expression is reduced to something tangible (e.g., a computer system or program), it becomes patentable.4 

This relaxing of the strict construction of patent scope has inevitably led to challenges to other, well-established restrictions. One such restriction is the "business method exception" doctrine5 that precluded the patenting of business methods and processes such as bookkeeping. Although the precedent was frequently cited in cases before the Federal Circuit, those decisions were invariably based on something other than the business method exception. Consequently, the exception was ripe for attack.

In March 1991, R. Todd Boes filed an application for the patenting of "[a] data-processing system [to provide] for monitoring and recording the information flow and data, and making all calculations, necessary for maintaining a partnership portfolio and partner fund (Hub and Spoke) financial services configuration."6  This patent was issued in March 1993, whereupon it was assigned to Signature Financial Group, Inc. Subsequently, Signature entered into negotiations with State Street Bank & Trust Co. with the intent of licensing the Hub and Spoke technology to State Street, who is in a similar business to Signature. When negotiations between the two broke down, State Street filed a partial summary judgment motion seeking to invalidate the patent as being subject to the business method exception. The motion was granted and Signature appealed. In reversing the summary judgment, the U.S. Court of Appeals for the Federal Circuit called the business method exception "ill-conceived" and held that it "represented the application of some general, but no longer applicable legal principle" and abolished the exception in its entirety.7 In doing so, the Court made business methods subject to the same requirements for patentability as those applied to any other method or process.

Although only decided in July 1998, State Street created the "teeth" needed to enforce the multitudes of patents applied for and awarded to software companies for the past several years. Patents provide broad protections for technological developments that are frequently manifested in software. As a matter of practical necessity, e-commerce developments are typically embodied in software and its algorithms, making these systems ideal candidates for patent protection. Internet-based enterprises are finding that patent protections may provide the needed edge to prevail in ever-increasing competition for online business. Consequently, the U.S. Patent and Trademark Office (USPTO) is being besieged by patent applications at such a rate that they are seemingly making only pro forma investigations prior to the issuance of the patent sought, arguably on the theory that infringement claims will be litigated in any event.

In the rush to the USPTO to acquire a competitive edge, numerous e-commerce companies have taken the controversial step of patenting elements of their business plans in addition to their technologies. Many critics portend that patents will slow the growth of the Internet as a commercial medium by stifling innovation and putting an emphasis on patents, not business and technology, asserting that patents of business models and methods for commerce on the Internet are absurd. Nevertheless, well-heeled players are getting patents and suing for infringements. Priceline.com filed suit against Microsoft in October 1999, claiming that Microsoft’s Expedia.com hotel-matching service violates Priceline’s patented business model. In December 1999, Amazon.com sought and received an injunction against barnesandnoble.com on a claim that Barnes & Noble’s Express Lane shopping system infringed on Amazon’s 1-Click method.

While State Street widely opened the door to patenting business methods historically denied such protection under §101, the Court was clear in its holding that judging whether a claim is too broad to be patentable is to be judged under §§102, 103 and 112. Of the three, it is perhaps §112 that gives the greatest insight into the Court’s position. 35 U.S.C. 112 reads, in part:

The specification shall contain a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same, and shall set forth the best mode contemplated by the inventor of carrying out his invention.

The specification shall conclude with one or more claims particularly pointing out and distinctly claiming the subject matter which the applicant regards as his invention.

While we can expect to see ever-increasing applications for business method patents in the "Internet Universe," we will also likely see the State Street door inched closed by strict application of § 112, invalidating overly broad patent claim language. However it plays out over the next few years, State Street will figure prominently in infringement claims.

NOTES

1 Diamond v. Diehr, 450 U.S. 175, 185 (1981).

2 See Parker v. Flook, 437 U.S. 584 (1978).

3 Diamond v. Diehr at 191.

4 In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994).

5 See Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908).

6 United States Patent 5,193, 056.

7 149 F.3d 1368 (Fed. Cir. 1998), cert. denied, 119 S. Ct. 851 (1999).

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