by Michael Lytton

Question: Should an e-health company seek to patent some aspect of its activities in order to create a barrier to entry against competitors?

Answer: Yes. Since the 1998 Court of Appeals decision in the State Street Bank case that business methods are patentable, the number of patent applications relating to computer programs has exploded. Six hundred business method patents were issued last year. The patented technology in State Street involved data processing algorithms for a particular investment program; the Court's decision significantly narrowed the scope of a pre-existing patent law doctrine that mathematical concepts or other "laws of nature" could not be patented. Since the State Street decision, patents have been granted for technology relating to credit card accounts, smart cards, online financial systems, and integrated billing systems.

The impact of State Street quickly reached the Internet. A company named Cybergold recently received a patent for a method of paying consumers to look at advertisements on the Internet. Another company, Netcentives, received a patent for an online frequent buyer program, the "Click Reward Scheme," which is the Internet analog of the familiar frequent-flyer program. Sun Microsystems was recently issued a patent to a well-known business method, whereby an Internet consumer making purchases at a website selects items to be placed in a "shopping cart."

Internet companies operate in a market environment that contains far fewer barriers to entry than the biotechnology or medical device industries, since anyone can commercialize a new idea without facing the formidable barriers of millions of dollars in capital expenditures, FDA approval, and figuring out how to obtain reimbursement for an expensive new treatment. It is much easier to copy an Internet technology than a technology in the biotech field, hence the legal protection of a patent is that much more important in cyberspace. Since so many Internet health companies have been built around a single idea, entrepreneurs have been encouraged to guard that idea by filing a patent application.

The State Street case answered the question of whether software programs constitute patentable subject matter, entitling the patent owner to twenty years of exclusivity. However, in order to obtain a patent, the technology at issue must also be "novel" and "non-obvious." The legal standard is whether the claimed invention would not have been obvious to one with "a level of ordinary skill in the art." Such determinations are difficult to make in the software field: patent examiners do not have the tools that exist in health care, such as Chem Abstracts or Medline, to identify relevant journals or other writings which would constitute "prior art" and thereby deprive an invention of its claimed novelty. Software inventions were denied patent protection until recently and so few patents have been issued thus far that examiners are not able to review previously granted patents to assess whether an invention is truly novel. Written materials such as software manuals, although widely disseminated, are not referenced in most online databases of published works. In addition, most patent examiners have traditional scientific backgrounds in the biological or physical sciences; the US Patent and Trademark Office did not hire its first examiner with a degree in computer science until 1995.

The challenges of determining whether an invention is or isn't obvious were highlighted in the recent case of BarnesandNoble.com v. Amazon.com. The federal district court in Seattle upheld the validity of Amazon's patent on a single-click ordering system, which allowed online shoppers to buy items without filling out long registration and shipping forms for each purchase. Amazon sued B&N for adopting a similar system. B&N in turn challenged the validity of Amazon's patent, basing its attack on the prior use by other companies of multi-click ordering. But the court judged the addition of an extra click to be a sufficiently different business method so as to make the one-click ordering system sufficiently novel. The battle is not over: B&N has appealed the decision and a ruling on the appeal is not expected for several months.

The significance of all of the recent patent applications on business methods is that, once a patent is granted, it is presumed to be valid. Thus, the challenger of a patent bears the burden of proof to show its invalidity. Hence, holders of patents have gone on the offensive against their competitors. The number of lawsuits over business method patents has increased significantly over the past year. A good example is Priceline.com's recent action against Microsoft, seeking to enforce Priceline's patent relating to a computer-facilitated "reverse auction," in which customers make binding offers of prices they are willing to pay for commodities such as airline tickets. Priceline.com has alleged that Microsoft's Expedia online hotel booking service uses the reverse auction business model.

In view of Amazon's recent success against B&N, people are now waiting for Amazon to begin to sue competitors on a second patent which it recently received on an "internet-based customer referral system," which involves technology by which "associate" websites can market products for a single "merchant" website. In exchange for referring customers to the merchant site, the referring associate site receives a commission on purchases that the customer makes at the merchant site. The first lawsuit will likely be filed shortly.

What does all this mean for the e-health field? The simple answer is that for those e-health companies that include an e-commerce element within their business strategy, spending money on a business method patent is a sensible investment. Twenty years of exclusivity for a computer-implemented invention is an attractive prospect and the cost of obtaining a patent pales in comparison with the cost of even the smallest litigation. It also seems wise for e-health companies to budget not only for filing patents but also for bargaining with competing companies who may assert their patent portfolio offensively. Moreover, a portfolio of issued patents may reassure skeptical investors about the reality of e-health start-ups generally, most of whom have few tangible assets.

Planning ahead makes sense. Flooded with applications, the patent office may not respond to a business method filing for about two years. Thus it's best to file a patent before any public disclosure of a new e-health technology; although US patent law gives an inventor a one-year grace period after public disclosure to file a patent application, in Europe and elsewhere, owners forfeit patent rights if they disclose their inventions before filing patents. Disclosing a new technology to a venture capitalist who has signed a non-disclosure agreement does not, however, constitute public disclosure.

Before commercializing a new e-health technology, it is also worthwhile to do a thorough patent search to determine whether the technology is patentable and to consult a patent attorney who has specific expertise in software. Patent claims may now be directed to all aspects of software (i.e., not just business methods), including multimedia, communications protocols, encryption, data compression, graphics, and other features. Conducting an initial cost-benefit analysis is best, since patent filings (particularly foreign filings) can become expensive, and in the rapidly evolving software field, inventions can easily become outdated over their twenty-year patent life.

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.