Canada: The Patent Pendulum — Part 1

In the past 12 months, two significant decisions (one in Canada, the other in the United States) have the potential to dramatically recalibrate the scope of patent protection for so-called "business methods" (and possibly "software inventions" as well). These cases may herald a backward swing of the patent law pendulum towards less protection for business methods.

In Canada, the Canadian Patent Appeal Board rejected a patent application of Inc. for its novel "one-click" online product ordering system. In the US, the Court of Appeals for the Federal Circuit in the Bilski case has narrowed extensively the ambit of patent protection in a decision involving a commodities-hedging system.

The Bilski decision is under appeal to the US Supreme Court, and the Amazon decision is also being appealed to the Federal Court of Canada. This is welcome, because each decision is unsatisfactory. But the importance of their ultimate respective determinations cannot be underestimated. Therefore it is worth taking stock, even at this interim stage, of the issues presented by them — and of what exactly is at stake in what will be their final judicial resolutions.

Importance of Patents

Before going into the two decisions, just a reminder of why patents are so incredibly important: in essence, it is because they afford the strongest form of intellectual property (IP) protection. While copyrights and trade secrets are useful as far as they go, they actually do not go that far because they protect only against copying. For example, independent creation is always a full defence to a copyright or trade secret claim.

By contrast, independent creation (subject to some nitty-gritty nuances) is generally not a defence in a patent claim. That is, you can never successfully be sued under copyright/ trade secret law for ripping off someone else's software if you never had access to it; but you certainly can be sued for infringing a third party's patent even if you know nothing about it. Therefore, for the duration of the patent (roughly 20 years), the patent holder can assert an effective monopoly on the invention it covers (and presumably charge monopoly profits on its sale or licensing for such time period). Patents, in a word, are incredibly valuable IP assets.

Hurdles to Patenting

Not surprisingly, given their significant value, the government agency that issues patents — in Canada, the Canadian Patent Office (CPO) — does not hand them out willy-nilly, but only very carefully and selectively, applying the patentability criteria with rigour and discipline. By contrast, copyright arises automatically, as does trade secret protection so long as you take appropriate steps to keep secret your proprietary information.

In general terms, the invention for which you desire to be issued a patent must be new and inventive. In terms of novelty, essentially this means that no one, anywhere in the world, can have disclosed or used something similar to what you want patented. And even if you satisfy this requirement, then your invention must not be obvious — it has to embody some degree of inventive spark that an average technical person in your space would not have come up with (in short, there has to be some creative ingenuity buttressing your invention).

In addition, your invention must come within one of the categories of patentable subject matter permitted by the Patent Act; namely, it has to be a "new and useful art, process, machine, manufacture or composition of matter." It was this latter requirement that was found to be missing in the Amazon case.

Amazon's One-Click Invention

To understand the genius behind Amazon's "One-Click" online ordering invention, you have to cast back your mind to the mid-1990s, and the infancy of business-to-consumer e-commerce. Unlike today (when Amazon is a leading online retailer — or "e-tailer"), back then, Amazon was one of many struggling new online businesses, each trying to set themselves apart from the others in a new, crowded and difficult marketplace.

One particular difficulty was that more than 60 per cent of online prospective consumers who started to order products from websites never completed the purchase because they found the "shopping cart/checkout line" process cumbersome, frustrating and time-consuming. Finding something to buy online was easy, particularly given the cookie technology that most e-tailers used (by sending your computer a cookie — a bit of software code — when you first visited their site, the next time you came back to the site, the cookie would allow the e-tailer to "recognize you" so that ads tailored to your own preferences — based on what you looked at last time — would be served up to you). It seems like magic — "My, how fortuitous that all of these ads showcase books that are of interest to me! It's as though they know me!" But it's not magic, of course; it's just simple cookie technology at work.

While the new e-consumer was wowed by the personalization features of e-tailers' websites, they were underwhelmed by the check-out buying process. Each time the "shopping cart" was ready to be pushed through the online cash register process, multiple screens confronted the customer with information to complete, instructions to follow, and precious time to waste (usually typing in the same information they had given on their previous visits). As noted above, the statistics showed that well over half the people who started this check-out process never completed it.

To address this real, practical problem, the clever folks at invented, developed, perfected and deployed on their own website their so-called "One-Click" product-ordering system. Essentially, when you wanted to purchase something from their site the second and subsequent time, you could do so by merely clicking the "One-Click" button (this would populate your order with the same information you used the last time you ordered something, thereby getting you through the check-out process in a fraction of the time). In essence, if you used Amazon, you only had to endure the check-out hassle once; after that the Amazon computer remembered who you are (courtesy of the cookie they put on your computer that first visit) and, by using your previously provided check-out data, could give you a much more satisfying online purchasing experience.

Amazon's US One-Click Patent

Amazon obtained a US patent for the One-Click invention. In the fall/Christmas season of 1999, it used this patent to great effect when, on the strength of it, Amazon successfully obtained an injunction against Barnes and Noble, preventing them from using a similar one-click check-out system on the B&N website (at the time B&N was a key rival of Amazon).

In this injunction case, B&N argued that the Amazon patent should be found invalid given all the other online ordering systems that B&N brought to the court's attention (that B&N argued proved that Amazon's system was neither novel nor inventive). The court considered each of these examples of prior art, but concluded that none actually implemented a "one-click" type functionally.

This was an important patent victory for Amazon, and forced B&N to redesign its check-out system for that critical 1999 Christmas e-commerce season. (It should be noted that subsequent litigation ensued, and the parties ultimately settled their dispute in 2002).

Amazon's Canadian Patent Application

Amazon filed for a Canadian patent for the One-Click invention, but so far has been unsuccessful in having it issued. The initial review was undertaken by an Examiner at the CPO. In Amazon's case, the Examiner concluded that the One-Click idea was not inventive, and moreover that it did not constitute patentable subject matter.

Amazon appealed to the Canadian Patent Appeal Board and the Commissioner of Patents (collectively, the "Board"). Interestingly, on the issue of inventiveness, the appeal was successful. There was one particular book on the subject of online e-commerce that pre-dated the patent application, and the Examiner held that various references in this book anticipated what Amazon had developed in its One-Click invention.

The Board carefully reviewed the book, and concluded otherwise. While use of cookies to enhance the e-consumer experience was at that time obvious, the Board found that Amazon's single-action ordering system was not obvious: the Board concluded that a skilled technician would not have directly and without difficulty conceived of the One-Click system.

Canadian Subject Matter

On the other hand, in what cannot be termed anything but a surprising decision, the Board concluded that a patent should not be issued to Amazon for the One-Click invention because it did not constitute patentable subject matter. In essence, the Board stated unequivocally that in its view, a pure business method that has no "technological effect" is not patentable in Canada.

This is startling for several reasons. First, the current CPO Manual of Patent Office Practice expressly states that business methods are not automatically excluded from patentability by jurisprudence or statute. In its decision, the Board considered and rejected that statement in the Manual. Therefore, for the Board to take such a hard and unnuanced view of business methods is disappointing (more recently, a proposed amendment to the Manual would bring it in line with the Amazon decision, also denying patentability to business methods).

The second surprising aspect of the Amazon decision is that the Board found that the term "art" and "process" in the Patent Act are confined to acts performed by "some physical agent upon some physical object and producing in such object some change of character or condition." That is, the Board believes that all categories of invention in the Patent Act are physical in nature; they involve tangible object or instruments. The decision also seems to ignore the prevalence of computers and processing systems in today's environment in assessing the "technological effect" issue.

Describing this conclusion in another way, the Board stipulates that the common characteristics of the five categories of invention is that they are "technological" in nature. And the Amazon One-Click invention does not qualify because it is only a retailing concept and some rules for ordering items. (As the Board stated, "Single-action ordering without checkout ... involves streamlining the rules for practice for shopping, that is, it relates to a business decision with business implications. There is nothing technical about this aspect of the claimed invention.")

The authorities relied upon by the Board for its conclusion on patentable subject matter are strange, particularly in terms of its use of American authorities. For example, it cites the dissent in a Canadian Supreme Court decision that refers to the State Street Bank case, which did not involve a physical system! And the Board cites the Bilski decision, which as we shall see in the next TLQ, actually takes a much more nuanced view of business method patents. (After reviewing Bilski, we will also draw some conclusions about the practical — and strategic — impact of these two cases.)

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.

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