Business System Patent: Is It Time To Quell The Stampede?

Business and consumers are right to be concerned about the recent surge in the patenting of business systems. Although I do not agree with the view expressed by some that business system patents aren’t worth the paper on which they’re written, I am of the opinion that a significant number of these patents are likely to be of doubtful validity. This questionable validity carries with it substantial adverse consequences for business.

Firstly, their validity will ultimately be determined by the courts. However, challenging a patent’s validity is costly, and not an option open to all businesses. As a result, business system patents can be a powerful strategic weapon that may be used to unfairly intimidate, threaten and, at least temporarily, shut down competition. Secondly, if too many of these patents are found to be invalid, or are obviously so, business’ confidence in the patent system will be undermined. In the meantime, the cost to business of expensive and protracted patent disputes, and the threat to the development of commerce, particularly e-commerce, will be significant.

To address these problems it is necessary to ensure that only novel and inventive business systems are receiving patent protection, and that is best achieved, in my opinion, by considering changes to the patent examination process. In the meantime, industry needs to be alert to the risk of infringing business system patents and where possible, minimise these risks. On the other hand, where innovative and truly novel commercial systems are developed, business needs to be alert to their potential patentability, take expert advice and, where justified, apply for a patent.

In 1998, the United States Patent and Trademark Office ( US PTO) approved approximately 17,500 software patents, including 700 which covered business or financial methods, and over 300 relating to internet concepts.¹ Some of these patents have already resulted in litigation in the US, perhaps the most instructive case being Amazon.com v Barnesandnoble.com, which will be discussed in greater depth below. In the last few years, the number of internet patents granted by the US PTO has increased annually by twenty percent.² During the first half of the 2000 calendar year, 328 business method patents were granted by the US PTO.³

One such patent is that granted to a financial services provider, Signature Financial.⁴ This patent relates to an on-line investment structure which comprises a computer and software system that enables an investment fund manager to calculate the percentage share of assets, income, expenses, gains and losses of individual mutual funds invested in a pooled portfolio on a daily basis.

This patent is already famous by reason of the litigation instituted by State Street Bank, a competitor financial services firm, which culminated in the US Court of Appeals decision in State Street Bank & Trust Co v Signature Financial Group Inc (‘State Street’).⁵ In finding that the financial services system claimed in the patent constituted patentable subject matter, the Court took the opportunity to lay to rest the "ill-conceived" judicially created, so called "business method" exception’ to patentable subject matter. The Court also confirmed that mathematical algorithms are patentable provided they produce a useful, concrete and tangible result. This was the case with the patent in question, even if the useful result was expressed in numbers such as price, profit, percentage, cost or loss. The Court of Appeals stated:

The State Street decision was applied and developed by the US Court of Appeals for the Federal Circuit in 1999 in AT&T Corp v Excel Communications, Inc.⁷ AT&T owned a patent covering a method for generating a message record for long distance telephone calls and adding to that record an indicator to signify whether a call involves a particular primary inter-exchange carrier (PIC). The PIC facilitates differential billing for long distance calls. The Court held that the claimed process applied a mathematical algorithm to the PIC data to arrive at a useful, concrete, tangible result, namely, differential billing of long distance calls, and was patentable subject matter.

It is not the purpose of this paper to enter the debate over whether the decision in State Street was single-handedly responsible for opening the flood-gates for the wave of internet related business system patents.⁸ Years earlier, the Federal Court of Australia in International Business Machines v Commissioner of Patents ⁹ (the "IBM case") decided that a mathematical algorithm implemented using a computer program for producing an improved curved image on a computer from a set of control points was inherently patentable subject matter. This patent was granted on 10 October 1989.

In so finding, the Court held that the invention comprised patentable subject matter because it produced a commercially useful effect.¹⁰ The High Court had earlier decided in National Research and Development Corporation v Commissioner of Patents (NRDC) that the requirement of threshold patentability was satisfied if the invention comprised the new employment of substances or methods for a previously unsuspected usefulness arrived at by scientific ingenuity and research that produced a practical (economic) result.¹¹

Many of the new age business system patents were filed before the decision in State Street was handed down. As a result, the State Street decision can hardly be the cause of this trend. For the purpose of this paper, it is sufficient to note that the coincidence of the State Street decision with the burgeoning of e-commerce and its dependence on web-based innovations, together with the desirability that internet start-ups protect their innovations to secure a competitive edge, meant that the decision served as a catalyst for the stampede to the patent offices. To some extent, the rush is likely to have been further fuelled by the publicity that has accompanied these developments.

It is useful to briefly consider some of the many business system patents that have been granted in the US. A cursory look at the abstracts of these patents shows that some very broadly drafted patents have been granted. Priceline.com has a patent for a "reverse auction" system which enables prospective purchasers to stipulate the price they will pay for products and services, and prospective suppliers to then bid to make the supply.¹² On 13 October 1999, Priceline.com instituted patent infringement proceedings against Microsoft Corporation in respect of the use by its travel service, Expedia, of a feature for purchasing hotel accommodation using a similar method. This action has been settled on confidential terms.

British Telecom has a patent on hyperlinking entitled "Information handling system and terminal apparatus thereof". On 13 December 2000, BT sued a US internet service provider, Prodigy Communications, in the US District Court for the Southern District of New York for infringing its hyperlink patent. Commentators have noted¹³ several possible instances of prior art which may invalidate the BT hyperlink patent, including the "Hypertext Editing system" developed in the 60’s and a paper entitled "A hypertext editing system for the [IBM] 360" that was presented at a University of Illinos conference in 1969. This action is yet to be determined.

Sightsound.com has a patent which may cover the sale of digitally downloaded music. In January 1999, Sightsound.com alleged MP3.com, Inc and GoodNoise Corp were infringing this and another patent US No 5,675,734 by selling audio or video recordings through downloading over the internet.

Adobe Systems Inc has a patent entitled Method of displaying multiple sets of information in the same area of a computer screen"¹⁴ granted on 13 August 1996. Adobe instituted patent infringement proceedings against its competitor Macromedia, Inc in the US District Court for the District of Delaware alleging that several Macromedia programs incorporated user interfaces similar to Adobe’s.

NetZero was granted a patent covering the use of "pop-up" advertising windows on 5 December 2000 entitled "Communication system capable of providing user with picture meeting characteristics of user and terminal equipment and information providing device used for the same". NetZero’s name for this feature is "ZeroPort": a small, pop-up window that features advertisements or messages through a window that is separate from the browser. The technology permits an internet service provider to display advertisements or messages. On 26 December 2000, NetZero sued Juno Online Services (a rival internet services provider) alleging that Juno’s "Juno Guide", a floating, "pop-up" window infringed its patent. A temporary restraining order preventing Juno from featuring third-party advertisements in its "Juno Guide" window was granted.

LinkShare Corp has been granted a patent which might prevent linking sites receiving commissions from the linked site, if its claims are interpreted widely. Trilogy has a patent covering a method by which purchasers are able to specify what features and options the car they wish to purchase on-line must possess. Trilogy has sued Cars Direct.com which operates an on-line order system with existing car dealerships to match the preferred feature of their customers’ new cars.

These are just a few examples of the vast number of business system patents and disputes proliferating in the US. In Australia, the patent office granted around 300 patents in the class used mostly for business system patents in the period 1994-December 2000¹⁵. One of these was a patent for an automated system for identifying alternate low-cost travel arrangements¹⁶. In response to a request from a customer, the system automatically retrieves the inventory and/or discount information from the travel database, and determines low cost alternate travel arrangements. Another accepted application¹⁷ relates to a method of billing for commercial transactions over the internet.

An examination of the IP Australia Website on 2 March 2001 revealed that in the years 1998, 1999 and 2000, 290, 432 and 789 applications respectively, were filed for patents in the class used for business systems in Australia. A significant proportion of these applications are for business systems patents. The Website also revealed that 1,225 of those applications were pending. Based on the likely rate of rejection of applications it is fair to assume that a large proportion of these applications will proceed to grant.

In the context of business system patents, it is important to remember that a patent does not come with any guarantee that it is valid. Indeed, in this content it is worth noting that:

• patent office examiners do not have regard to prior publication through ‘use’ (although they do consider section 27 notices from third parties that might refer to use); and
• the patent office must accept a patent application unless it is practically certain that any patent granted on the application would be invalid¹⁸. In practical terms this means the applicant for a patent is given the benefit of any doubt.

Accordingly, the granting of a patent carries with it only a presumption that the claims of the patent are valid. This presumption can be rebutted by evidence of invalidity, including lack of novelty or inventiveness. As a result, the validity of a patent can be challenged defensively in the context of patent infringement proceedings, or by taking the offensive through the institution of revocation proceedings.

The practical result of this presumed, rather than absolute validity is that patent infringement disputes rarely are confined to infringement issues. Typically, patent disputes involve the resolution of counterclaims as to the validity of the patent, requiring in depth investigation, and evidence as to the state of the relevant prior art base at the priority date, analysis of, and evidence as to, the meaning of the patent claims, comparison of the features of the anticipatory prior art with the claims of the patent and evidence to what would have been obvious to a person skilled in the relevant field for the purpose of obviousness. As a result, patent disputes are notoriously complex, time-consuming and expensive. Where the technology is critical to a business’ survival they are long and hard fought. However, not all businesses have the financial resources to endure such a dispute to the bitter end. For this very reason, the mere existence of a patent can be a very powerful tool in a combative commercial environment, even where the patent is of dubious validity.

The story of Amazon.com’s "1-click" patent is still unfolding. Nevertheless, it is likely to be illustrative of the real difficulties created for emerging businesses if patents of dubious validity are granted.

Amazon.com has a patent which covers a commercial method of enabling customers to make multiple on-line purchases of items with a single action, without having to re-enter their customer information details, in respect of each and every transaction¹⁹. Once entered, these details (including credit card and shipping address details) are identified with a particular customer to simplify the on-line ordering process. This system is underpinned by "cookie" technology which identifies the relevant billing data for repeat customers to Amazon.com’s website. The patent abstract is as follows:

In December 1999, just before the busy holiday season for on-line book purchases, the US District Court in Seattle, Washington, granted Amazon.com a preliminary injunction preventing Barnesandnoble.com Inc, an on-line competitor, from using a single action feature in its "Express Lane" ordering system in reliance on the "1-click" patent²⁰. On 14 February 2001, the US Federal Circuit Court of Appeals overturned that injunction, on the basis that Barnesandnoble.com’s evidence raised substantial questions of invalidity of Amazon.com’s patent. This evidence included similar technology used prior to Amazon.com’s priority date by CompuServe. The critical issues of the patent’s novelty and obviousness will not be determined until a final trial of the dispute, which has been set down for 10 September this year. However, in the meantime, the parties have already undergone considerable expense, loss of time, and in the case of Barnesandnoble.com, business disruption, all of which are bound to escalate if the trial and appeal processes are pursued to their conclusion.

If forensic or judicial scrutiny exposes significant numbers of these business system patents to be invalid, as appears likely, the cost to business generally, and e-commerce in particular, will be substantial. The cost will be not only the legal expenses involved in fighting litigation to challenge the validity of the patent in question, although these are significant. There is also the business disruption, especially if preliminary injunctions are granted early on in the dispute, preventing the use of patented technology until the final trial. In addition, there is the uncertainty of whether the technology can continue to be used at all, or without the payment of licence fees. If, at the end of these battles, the patent in dispute is all too often exposed as invalid, business will have good cause to lose confidence in the patent system. A robust and well-respected patent system is vital for Australian innovation and economic development.

In May 2001 the Federal Court of Australia (Heerey J) affirmed the validity of a patent for a business process in the case of Welcome Real-Time SA v Catuity Inc ²¹(the "Welcome Real-Time case").

Welcome Real-Time SA ("WRT") is the owner of Australian Patent number 712925 (the "Patent"), which discloses a process to operate smart cards in conjunction with various traders' loyalty programs. WRT claimed that Catuity Inc. ("Catuity") had infringed the Patent by operating its CiT Transcard system. Catuity cross-claimed and sought to revoke the Patent.

Loyalty programs have been offered by traders for some time. Traders promote the purchase of their goods or services by offering rewards to customers. Rewards may accrue after a certain number of purchases, or after the customer's purchases have reached a predetermined dollar value.

Smart cards potentially allow traders to more cheaply and effectively operate their loyalty programs by storing the information relating to the customer's entitlement, their accrued "points", on the card. The customer's points are then read at a point of sale ("POS") terminal and the customer immediately receives their reward.

A number of different smart cards were trialed by the inventors. The inventors realised they needed a smart card that could differentiate the points accumulated from different traders, so that each trader (or chain of traders) could operate their own loyalty program.

Prior to the invention, smart cards that could cater for multiple traders each offering their own loyalty program had to be produced with each of the loyalty programs predefined within the smart card's memory. The technology available at the time only allowed about 10 traders' programs to be loaded into the memory of the smart card. Clearly, a card with predetermined loyalty programs already loaded onto it was not going to be effective if (potentially) thousands of traders each offering their own unique loyalty programs were to use the smart card system.

The solution arrived at by the inventors, which became the subject of the Patent, was to "dynamically" store each merchant's loyalty program in a separate record of a file called the Behaviour file. The trader's loyalty program is added to the Behaviour file by the trader's POS terminal the first time the card is used at that trader's store. Behaviour information for traders that the card holder never visits are not added to the smart card and there is no pre-allocated memory for any traders.

Catuity sought to revoke the Patent, alleging among other things, that the Patent did not disclose a manner of manufacture, was inconvenient, lacked novelty and was obvious.

In considering whether the Patent was a manner of manufacture pursuant to section 18(1)(a) of the Patents Act 1990, Justice Heerey relied heavily on the NRDC decision, and the decision of the Full Court of the Federal Court in CCOM Pty Ltd v Jeijing Pty Ltd.²² Justice Heerey came to the conclusion that:

His honour continued at page 23:

Justice Heerey decided that the invention did disclose a manner of manufacture and his honour was swayed by the fact that it involved:

Justice Heerey further held that Catuity's CiT Transcard did in fact infringe the patent. Catuity have not appealed the decision.

The Welcome Real-Time case does not extend the law regarding business system patents. Instead, it follows the Australian authorities (NRDC, CCOM and the IBM case) and confirms that business systems are patentable in some circumstances. Nevertheless, while the decision does not break new ground it will undoubtedly bolster the confidence of prospective patentees and it may act as a catalyst for others with business systems to seek patent protection.

Some have suggested that business systems patent are such a threat to the development of the internet and e-commerce that they should not be allowed at all. They argue that the monopolisation of key features of communication and commerce on the internet is antithetical to the free and open development of the world wide web and its philosophical underpinnings that the internet should be a patent-free zone²⁵. Indeed, earlier on in the Amazon.com saga, Amazon.com’s CEO Jeff Bezos, acknowledged in an open letter that business system patents, if not tightly controlled, could end up hurting all of business.²⁶

One of Bezos’ suggestions, explored by other commentators²⁷ is that the solution may be to reduce the length of protection for business system patents to 3-5 years, to make them more appropriate to the e-commerce environment.

Two US Congressional Democrats have recently proposed legislation that would create a presumption that the computer assisted implementation of an analog world business method is obvious and not patentable²⁸. This proposal is designed to ensure that patents are not granted for claims that consist of nothing more than implementing a well-known business method on the internet.

In the writer’s view, these solutions are not attractive because they would create exceptional treatment for business system patents that would unduly further complicate the patent system. In addition, the proposed presumption of obviousness assumes that all digitally applied real world concepts are not inventive. This is clearly not necessarily the case. The novelty and inventiveness of e-commerce related technologies, as with any other technology, stands to be determined on a case by case basis having regard to the prior art and the creative merits of the invention adjudged at the relevant priority date. It is not possible to generalise that all e-commerce related commercial processes are deserving of lesser protection, or are undeserving of the presumption of inventiveness.

Nevertheless, it is likely that some, perhaps many of the patents granted to date will be found to be invalid. Unless and until the litigation that is underway is judicially determined, the robustness of these patents remains to be tested. The difficulty faced by business in the meantime is that it will rarely be able to afford to simply run the risk of infringement, in the hope that the patent is invalid. However, the cost of defending an infringement action and proving invalidity may be more than that business can withstand. In addition, in the fast moving world of e-commerce, where many developments are not physically recorded it may be impossible to obtain evidence as to the state of internet based technologies at all or at a particular date, sometimes years after the event, when a patent’s validity is under the forensic/judicial microscope. Without such evidence it would be very difficult to successfully challenge a patent in many cases.

For this reason, it is crucial that reforms be considered to ensure that the preponderance of business system patents granted are able to withstand scrutiny for novelty and inventiveness. The United States PTO has proposed some important measures in response to industry concerns about business system patents²⁹. These reforms are designed to strengthen the presumptive validity of patents in this field, and ensure that patent claims are confined more narrowly to those which are truly novel and inventive. They include:

• broadening the database of traditional patent and published materials searched by patent office examiners;
• improving the technical training of examiners, with the use of specialists as a resource for patent examiners on alleged common or well known industry practices and terminology;
• consultation with the software, internet and electronic commerce industries through an industry outreach program to explore issues and possible solutions and obtain industry feedback on the prior art resources used by the US PTO³⁰;
• mandatory searching all applications in class 705 to include a classified US patent document search, and a text search of foreign patent documents and non-patent literature, together with a second-level review of all allowed applications in class 705³¹.

The proposed Business Method Patent Improvement Act 2000, if enacted, in addition to the proposed presumption of obviousness mentioned above, would require:

• patent applicants to disclose the extent to which they have been diligent in searching for prior art for business method inventions;
• opposition proceedings both before and after the granting of the patent.

Although the US PTO and US congressional proposals would, if fully implemented, increase the delay in granting patents, they are likely to lead to a more comprehensive consideration of relevant prior art, and more robust, sustainable patents.

Although the volume of business method patents applied for in Australia is not as great as in the US PTO the number of applications in the relevant class has increased exponentially in Australia from 35 in 1994, to 290 in 1998 to 789 in 2000³². Furthermore, the commencement of the innovation patent system on 24 May 2001 will undoubtedly result in an even greater number of applications for business systems patents that will not be subjected to any pre-grant substantive examination whatsoever. Substantive examination will only occur when it is desired to institute an infringement action, an opposition or revocation action, or to make a justifiable threat of patent infringement proceedings. Add to this a lower level threshold test for inventiveness, namely an ‘innovative step’, and the need for a more vigorous and comprehensive examination treatment of novelty for innovation patent applications can be readily appreciated.

Accordingly, as the vast majority of these existing applications remain pending when coupled with the imminent introduction of innovation patents, and the likely flow on effect of the Welcome Real-Time case, it is important that careful consideration be given to whether any of these reform proposals are needed in Australia to ensure we don’t encourage a stampede to patent even the most obvious business methods. Although the Australian patent system offers pre-grant opposition, and third party notification to the patent office (but not for innovation patents), there is still a need in my view to carefully consider the adoption of some of the United States reform proposals. This is especially so given that patent office examiners do not presently have regard to ‘use’ of business systems (as opposed to paper or electronic publication) and that many developments in these areas of e-commerce are not physically recorded.

Until these reforms are pursued, business must grapple with the reality that business systems patents are proliferating, and simply ignoring them may be a risky, costly approach. Awareness of the issues posed by business system patents is an important first step in managing these risks. Many businesses are unaware of the patentability of business systems and the existence of these patents. As with any other innovation, it is prudent to obtain expert advice before purchasing, acquiring, or implementing any business system of significance. Unlike copyright protection which applies only to the copying of another person’s copyright material, patents protect against the use of the patented process, whether or not the alleged infringement was independently devised. For this reason, it is wise to have expert patent searches undertaken and receive advice on these search results to reduce the risk of infringing these proliferating patents.

In the case of innovative and new business systems which have been developed for or on behalf of one’s business, it is equally important to obtain advice on their potential patentability. They may prove to be a valuable as well as meritorious business asset.

1. Lewis, Christopher ‘Back-Off State Street’ http://www.lclark.edu/~ lewis/statestreet/htm
2. Lewis, C, see above.
3. See Pattison, M & Feely, G ‘The Internet starts to take patents seriously’ Paper given at the IPSANZ 14th Annual Conference - Sanctuary Cove, July 2000 (13 July 2000) at pp1-2. The authors used the international classification G06F17/60 covering patents for digital computing or data processing equipment or methods, specially adapted for specific functions - administrative, commercial, managerial, supervisory or forecasting purposes.
4. United States Patent No 5,193,056
5. 149 F.3d 1368 (1998).
6. 149 F.3d 1368, 1373
7. 172 F.3d 1352 (Fed Cir 1999)
8. See Lewis, C above; Lea, Gary ‘The Revolution that Never Was: A Cynic’s Eye View of the Software, Business and E-Commerce Method Patenting Controversy in the Wake of State Street’ Digital Technology Law Journal 2:1 (December 2000)
9. (1991) 105 ALR 388
10. above, at 395
11. 11 (1959) 102 CLR 252
12. United States Patent No 5,794,207
13. See Aharonian, Gregory ‘British Telecom Patent: Lachey, Uninfringed and Invalid’ 23 June 2000, http://www.oreillynet.com/pub/a/patents/2000/06/23/bt.html.
14. United States Patent no 5,546,528
15. Statistics taken from the IP Australia Website on 2 March 2001
16. Australian Patent No 720436
17. Australian Patent No. 726993
18. IBM v. Commissioner of Patents ip cit at 389 and Hoffmann La Roche v. New England Biolabs Inc 99 FCR 2000 56
19. United States Patent No 5,960,411
20. Amazon.com, Inc v Barnesandnoble.com, Inc 73 FSupp 2d 1228
21. [2001] FCA 445
22. (1994) 51 FCR 260 ("CCOM")
23. Welcome Real-Time SA v Caluity Inc [2001] FCA 445 at 22
24. Welcome Real-Time at 22. His honour was quoting CCOM at 295
25. Gleick, James ‘Patently Absurd’ published first at www.patent.around.com/patent.html
26. Bezos, Jeff ‘An Open Letter from Jeff Bezos on the Subject of Patents’ http://www.amazon.com/patents
27. Pattison, M & Feely, G ‘The Internet starts to take patents seriously’ Paper given at the IPSANZ 14th Annual Conference - Sanctuary Cove, July 2000 (13 July 2000)
28. Bill entitled "Business Method Improvement Act of 2000"
29. Merger, Robert 'As Many as Six Impossible Patents Before Breakfast: Proper Rights for Business Concepts & Patent System Reform' (1999) 14 Berkely Technology Law Journal 577,590
30. The first industry roundtable forum was held on 27 July 2000
31. 'Procedural reform – US Patent & Trademark Office Business Methods Patents Initiative: An Action Plan' (US PTO 29 March 2000)
32. Statistics taken from IP Australia Website on 2 March 2001

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.