United States: Patent Clearance For E-Commerce

Patent filings for e-commerce "business methods" have been soaring in recent years and have been stirring up significant controversy. Your client, an e-commerce business development person, major shareholder or venture capitalist, has invested or will invest, much time, effort, and expense developing their new business concept for an e-commerce service or product to be introduced via the Internet. So your client is wondering if a freedom to use study (also know as a patent clearance study) should be conducted for their e-commerce or financial business method service or product. Your client may ask "how could my new or existing Internet business method service or product be subject to a competitor's patent - when I know that business concept has been practiced in business for 25 years?"

Let's consider some of the recent events in the marketplace and the courts. Electronic commerce vendors, health care service providers, credit card companies, brokerage houses and investment banks such as Amazon, Priceline, Compuserve, American Express, Merrill Lynch, First Union, are filing for and obtaining patent protection for their electronic commerce and business methods on the heals of the well known State Street Bank & Trust Co. v. Signature Financial Group, Inc., 927 F. Supp. 502, 38 USPQ2d 1530 (finding valid U.S. Patent No. 5,193,056, for Data Processing System for Hub and Spoke Financial Services Configuration). Attempting to prevent others from cashing in on their innovative business services and products, there has been an explosive growth in litigation and other activities related to business method patents in the marketplace.

• Priceline sued Microsoft (Priceline.com v. Microsoft Corp., D. Conn., filed October 13, 1999) on Priceline U.S. Patent No. 5,794,207 (issued August 11, 1998; for Method and Apparatus for a Cryptographically Assisted Commercial Network System Designed to Facilitate Buyer-driven Conditional Purchase Offers), alleging that the Microsoft's "Hotel Price Matcher" in Microsoft's Expedia travel service infringes Priceline's patented "reverse action." Before the suit, Priceline and Microsoft executives met, apparently to discuss possible investment by Microsoft in Priceline and Priceline's senior management and technical staff provided Microsoft with a variety of allegedly confidential information. Following breakdown of the discussions, Priceline sued. This suit is pending.
• Amazon sued rival bookseller Barnes and Noble (Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp. 2d 1228 (W.D. Wa. 1999)) alleging infringement of Amazon's patent, U.S. Patent No 5,960,411 (issued September 28. 1999; for Method and System for Placing a Purchase Order Via a Communications Network), covering Amazon's 1-Click technology. This patent is directed to a method for allowing users to enter billing and shipping information once, then place future orders without having to reenter the same information. An Internet user can buy items with a single click without first putting the item in a "shopping cart." The court issued a preliminary injunction during the 1999 holiday shopping season preventing Barnes and Noble from using Amazon's patented method. The injunction was appealed to the Court of Appeals for the Federal Circuit (CAFC, the highest patent court in the U.S.), which heard the case on October 3, 2000.
• Interactive Gift Express, Inc. (now E-data Corporation) sued Compuserve, Inc. and over 40 others, (Interactive Gift Express, Inc. v. CompuServe, Inc., 1998 U.S. Dist. LEXIS 7081 (1998), alleging contributory patent infringement of U.S. Patent No. 4,528,643 (issued July 9, 1985; for System for Reproducing Information in Material Objects at a Point of Sale Location), based on defendants' alleged use of an on-line transaction system said to incorporate E-data's patented technology. E-data maintains the patent is sufficiently broad in scope to cover many on-line digital transactions. The patent allows companies to sell directly to consumers at remote locations without having to stock warehouses at those locations. The lower federal court held that the patent could not be expanded to cover the Internet. The CAFC disagreed and sent the case back for a broader interpretation.
• Many companies, particularly in the e-commerce, financial, investment, health care service, and retail fields, not accustomed to receiving patent notice letters (offering licenses or threatening a lawsuit), are now receiving such letters.
• In July 2000, the U.S. Patent and Trademark Office (PTO) held a Round Table discussion inviting industry leaders to strengthen the ability of the PTO to identify prior art and examine business method patent applications.
• Many e-commerce and financial companies are building in house patent departments.

Obtaining and asserting business method patents is not happenstance. Walker Digital (run by Jay Walker), the self described "leading integrated business solution invention and development company" and the company that launched Priceline, states on its web site that it has "invented more than 150 new Internet business systems and received 67 patents on over 450 patents it has filed to date." Walker Digital employs a group of marketing and business experts who, together with patent attorneys, brainstorm better ways to do business and then procure patent protection for these business methods.

Perhaps your client brought a business concept to a web developer, and if anything, your client believes any patent might cover the developer's web site and software, but not her business concept. While your client's business concept may have been generally practiced for many years, its inclusion as part of an e-commerce service or product may very well be the subject of a competitors' patent. E-commerce business method patents are often aimed at the business methods or business concepts themselves and may be owned by someone on the prowl to find infringers or to decrease their competition. Your client may wonder whether she is indemnified for patent infringement by her web site/software developer?

If this was your client's business method and the software developer was merely implementing her concept – the developer may have no liability. Typically, the web site/software developer specifies in the web site development agreement that the developer provides no patent indemnity for patent infringement. Under such circumstances, your client likely remains liable and, in any event, likely has the deep pockets.

Before your client takes her e-commerce concept and spends resources on product development, advertising and fund raising, you should advise your client to conduct a freedom to use study.

Before undertaking such a study, you and your client should consider both the cost and benefit of a freedom to use study. Regarding cost, there is no other way to say it - it is expensive to obtain a quality freedom to use study. But, the costs can be controlled and the classic benefits (possible insulation from a finding of willful patent infringement and resulting treble damages) are supplemented in today's patent savvy marketplace by additional benefits. These additional benefits include obtaining information about the market space for your proposed business method and using this information during the formation, funding (either from within an organization or through private equity partners) and execution of your business plan for your proposed e-commerce business method.

The first task is to describe in clear and concise terms your client's proposed e-commerce service or product. Such a description allows those involved with the freedom to use study to perform a focused search for patents which potentially may block introduction of the proposed service or product. Your client's business personnel such as a marketing manager, business developer, or software guru are generally in the best position to describe the basic concepts of the service or product. This description can be "massaged" by a patent attorney so that it is in a form that will enable a searcher experienced in searching for e-commerce patents to uncover possibly relevant patents.

The next step is to determine the patent landscape related to your proposed e-commerce service or product. The landscape can be viewed through a relatively easy electronic database search for your competitors' issued U.S. and foreign patents and published patent applications. The PTO web site and commercial web sites such as Delphion.com (formerly IBM's Intellectual Property Network) offer databases for most U.S. and foreign patents and published applications back to the early 1970's.

Until recently, under U.S. patent law, patent applications filed in the U.S. Patent & Trademark Office were maintained in secrecy until granted. Under many foreign patent laws and now in the U.S. (for U.S. patent applications filed on or after November 29, 2000 if the applicant intends to file the application in foreign countries), however, patent applications are published eighteen months from the earliest filing date. Such patents and published patent applications provide important information about your competitors' services and products and their intention in obtaining patent protection.

Patent landscape searches can be also obtained through professional electronic database searchers at patent law firms and specialized patent search consulting firms. There are also a number of software systems used for identifying relevant patents.

Another source of information about the patent landscape can be obtained through your client's personnel. For example, marketing managers, software writers, information technology specialists, and web site developers, who have been working on your client's new e-commerce service or product, may have knowledge of a potentially conflicting patent written about in industry press, formerly discussed at an industry convention, or which may have been the subject of banter at networking or industry meetings. Accordingly, your client's personnel should be encouraged to be receptive to discuss patents related to your industry and the potential competitive intelligence which can be gleaned from such patents.

After you, your client and a patent attorney have reviewed the patent landscape, they should decide whether a full or possibly "scorched earth" freedom to use patent search should be conducted by an experienced e-commerce patent searcher who may identify one or more potentially conflicting U.S. patents.

After a potentially conflicting U.S. patent has been identified, there are a series of steps and options available to handle the situation. A qualified patent attorney would initiate a non-infringement study and opinion (also required if a notice of patent infringement is received) to determine if your proposed business method service or product is within the scope of the claims (numbered paragraphs at the end of a patent - analogous to the description of land in a land deed) in an identified patent.

If a potential conflict is found, the next step likely would be to determine if the proposed e-commerce product or service can be modified (typically referred to as "designing around" for traditional technologies) to avoid infringement. This is a classic approach and in keeping with public policy to provide the motivation to make new inventions. Finding that there is no potential conflict with an issued patent may lead to the added benefit of providing a basis for your client to file her own patent application to cover your concepts which your client now realizes may be new and patentable. If a potential conflict is uncovered early in the life of your proposed business e-commerce service or product, then it is usually easier to make the required changes.

If on the other hand it is not possible for your client to easily modify her proposed e-commerce service or product to avoid conflict with the claims of a patent, then the next step typically is to determine if the identified patent is invalid (read "is not new and unobvious"). Invalidity is viewed in the light of prior public information (in patent jargon, "prior art") such as prior patents, published industry articles, commercial sales or offers for sale of prior business services and products. An opinion on invalidity usually requires a separate comprehensive invalidity search to identify invalidating prior art.

It is widely recognized that identifying invalidating prior art (particularly non-patent prior art) related to e-commerce services and products is very difficult. In fact, Jeff Bezos, President and CEO of Amazon, and Tim O'Reilly, a publisher of software books, have set up a company focused on aiding people in dealing with this difficult task. The new company, called BountyQuest.com, offers monetary rewards for hard-to-find prior art that leads to invalidity of patent posted on the site. The site is said "to support an on-line community of scientists, engineers, and professional researchers who have valuable knowledge that can help their field, their industry, and the world community."

If your proposed business method service product cannot be modified to avoid potential conflict with the claims of an issued patent and invalidating prior art cannot be uncovered, it may be possible to obtain a license to an identified patent. By performing a freedom to use study, even if a license is not available, the business decision-makers can assess the strength of a business opportunity with all available information, instead of being blind-sided by a notice of patent infringement or even a patent infringement suit.

For further information regarding this article, please contact Allan Ratner or Louis W. Beardell.

©Ratner & Prestia 2000