Business Method Patent Policy: Preserving Innovation in the Internet Environment 

May 1, 2002

Author: Kinari Patel

Princeton University

Undergraduate

Sponsor: Professor Philip Weiser

By guaranteeing innovators a temporary monopoly over their inventions, patents encourage inventors to spend money, time, and effort towards the development of new inventions. They give inventors the assurance that they will be compensated for their work before competitors can use their ideas. However, one type of patents, Internet business method patents, currently retards rather than advances scientific progress. In the context of the Internet – a traditionally patent-free atmosphere – business method patents grant an excess amount of protection to inventors. In the Internet environment, new inventions quickly arise out of a cycle of incremental improvements on existing inventions. Business method patents currently halt this productive cycle. Rather than eliminating business method patents altogether, this paper suggests concrete reforms can prevent business method patents from further impeding scientific growth – and ultimately hurting consumer welfare.

Introduction

Every few months, a controversial lawsuit over an alleged business method patent infringement becomes a newspaper headline. Amazon.com recently sued Barnes&Noble for using "their" technology that allows users to order products from their website in just one click. British Telecom recently demanded licensing fees from several Internet service providers for using "their" hyperlink technology! The list goes on and on.

The recent legal battles hint at the fact that Internet business method patents currently detract, rather than promote, the "progress of science." However, I argue that completely eliminating Internet business method patents will not maintain a creative atmosphere. Rather, implementing concrete reforms, both to the specific provisions of business method patents and to the general workings of the patent system, can effectively revive the original ideal of patent law: to promote innovation.

This paper proceeds in three Parts. Part I describes the justifications and ideals of patents. Part II illustrates several advantages and disadvantages of current Internet business method patents. The drawbacks of these patents are quite substantial with regards to their overbroad scope, and excessive periods of protection; however, the benefits of Internet business method patents also significant enough to conclude that Internet business method patents should not be completely abolished. Part III outlines a set of specific reforms that could prevent any more harm to the growth of innovation in the Internet business setting from occurring in the future. In particular, curtailing the term of protection and rectifying problems associated with the U.S. Patent and Trademark Office would help to strike a balance between zero protection, and the current excessive form of protection for Internet business method inventions.

I. Patent Theory

Patents are legal monopolies for the use, manufacture, or sale of an invention, and possess both economic and social justifications. They help solve the problem of potential under-investment by inventors. Patent theory purports that rational inventors will not spend a large amount of time, effort, and money for new innovations if others can freeload on their investment. To combat this potential problem, the U.S. government grants inventors exclusive use for an invention to allow them a chance to earn returns on their investments in order to recoup sunk costs. In return for the legal monopoly, the government requires a disclosure from the inventor. The knowledge thus disclosed benefits society by stimulating new ideas and further developments. New products made from these innovations benefit consumer welfare by leading to increased employment and ultimately a higher standard of living. In reality patents have changed their personalities from legal monopolies to licenses to sue.

The U.S. Patent and Trademark Office (PTO) classifies Internet business method patents – patents that embody business method in software – under utility patents. A utility patent grants exclusive rights for a period of 20 years from the time an application is filed at the PTO.

In order to obtain a utility patent, the invention must meet several requirements. The invention must be patentable subject matter ("anything under the sun made by man", i.e., almost anything but mathematical formulas like E=mc²), novel (different in some way from all previous knowledge and inventions), non-obvious (to someone who understands the technical field of the invention), and useful. Unlike copyrights, patents do not come with a "fair use" legal right that allows others to use the protected material under specific circumstances such as for educational purposes.

The twenty-year monopoly granted by Internet business method patents stifles innovation by preventing competitors from using necessary technologies to make new inventions in the rapidly developing environment of the Internet. In the patent-free Internet environment, inventors entered into a cycle of making small incremental improvements on existing technologies. Now, as soon as one small invention in the cycle becomes protected, the cycle of innovation comes to a halt.

When the rewards, such as a twenty-year monopoly, from the patents are so high, inventors are likely to shift their priority from creating substantial inventions to accumulating as many patents as they can for minor innovations. Inventors are aware that analysts value companies largely based on their ability to exclude competitors from practicing their successful business models. By possessing large patent portfolios, inventors are more likely to gain the prestige and legitimacy needed to obtain venture capital. Anecdotal evidence indicates that many of the biggest patent holders do not enjoy reputations for significant innovation but simply for efficient filing of patent applications.

a. Business Method Patent Provisions

Many argue that Internet business method "inventions" are simply real-world abstract ideas being applied to the Internet environment to create World Wide Web analogues. Amazon’s patent capitalized on the idea of impulse buying. It is the Web analogue of the real-world strategy of placing items near the supermarket register by reducing the amount of time between choosing and buying. Other companies have gotten patents for keeping calendars on the World Wide Web, and for "real-time shopping." Just because a business method is applied within the context of the Internet, should it automatically qualify as patentable material? Patents for the business idea of a shelf of goods near a cash register, the idea of a calendar, or the idea of a shopping mall would be absurd when not used on the Internet, so what makes these suddenly unique?

Profiteers may argue that a business idea becomes patentable as soon as programmers simply embed the idea in software since it has a novel implementation and a functional utility. However, Stanford professor Lawrence Lessig warns, "Every method of doing business in cyberspace by definition is substantiated in the code. There is no limit to the patent." Implementation through code can make almost any concept patentable, and one can imagine a program that counts frequent flier miles in a unique way, suddenly causing airline companies around the world to become infringers of the patented business method.

The ambiguous language of patent claims causes also leads them to be overbroad. Patent lawyers deliberately spend much time and effort making their clients’ patent claims as broad as possible so as to cover not only the actual invention at hand, but also all possible future variants. Furthermore, companies’ in-house legal counsel advise against the routine reading of issued patents because of the risk of triple damages for willful infringement. Consequently they ignore relevant prior art when fashioning the scope of their claims. Sometimes the claims are so broadly written that it is virtually impossible to grasp what is actually claimed. Reading the claims is an art in itself, involving half technology and half linguistics. Exacerbating the problem, the PTO’s traditional rule requires that each claim be written in one sentence – even if the sentence runs on for many lines and contains multiple ideas and phrases.

Since business methods combine software with abstract business ideas, they become increasingly non-technical. Consequently, these types of patents become more scattered throughout the prior art databases used by patent examiners at the Patent and Trademark Office. One examiner’s complaint further confirms this notion: "Everyone is applying for Internet patents all at once, and applications are going almost randomly to different art units because there is no central home for them, and because classification is in shambles. One examiner doesn’t know what the other examiner is issuing." Because the prior art is so scattered within the PTO, patent examiners have greater difficulty in identifying the prior art when evaluating patent applications for the non-obvious requirement.

The U.S. Patent and Trademark Office faces several other problems. An overflow of applications combined with inadequate manpower causes a rise in the rate of issuances. Examiners are not able to spend enough time on each application and, again, tend to approve many obvious patents. One examiner who worked at the PTO revealed, "I have noted a very marked decrease in the quality of patents issued. When I first started here I was told, ‘When in doubt reject.’ Now I am told, ‘When in doubt allow.’" The PTO management each year has an "allowance rate" that determines the maximum number of patent issuances that an examiner can make. That number is currently a whopping 70-80%! The very existence of such a rate may cause patent examiners to take the "easy" way out. It takes much more work to reject an application because denying an application requires a searching the prior art more thoroughly, in addition to dealing with the added wrath from the patent lawyers.

The PTO’s budget is directly tied to application fees. The greater the number of patent applications the PTO can approve, the more others are encouraged to apply – and the more money circulating within the PTO. The money is translated into bonuses for examiners who favor allowances over rejects, even if the patent should be invalid. The system is misaligned. Moreover, once a patent is granted, the PTO does not engage in any form of external review or quality control.

The PTO grapples with other problems such as dealing with patent examiners who are often not adequately technically trained to deal with complex inventions. Moreover, these inadequately trained examiners are not supplied with the resources that would compensate for their lack of skill. One of their only resources includes a database of prior art. However, this database is quite thin because many Internet patents are just beginning to emerge and few precedents have been set. A vicious cycle of issuing of what would otherwise be invalid patents develops since they often cannot locate relevant prior art and do not have the skill to ascertain characteristics that would make the invention seem obvious to someone skilled in the art. Without a substantial number of highly trained patent examiners at the PTO, dealing with the complex issues that need to be taken into consideration when issuing business method patents becomes extremely difficult.

The same reason that justified software becoming patentable justifies patenting Internet business methods – copyright protection is insufficient with its low standard of novelty (in contrast with patent protection). Many substantial business methods do exist that required much time, money, and effort, yet copying these methods is much easier on the Internet compared to the original bricks-and-mortar workplace. In the old regime, much more effort was required to analyze a competitor’s new business techniques. Even once competitors did pinpoint a new technique, it took a fair amount of time and effort to investigate and derive a competing implementation. However, for Internet inventions, in a matter of a few mouse clicks and minor modifications, rivals can easily formulate a new business method based on their competitors’ hard work.

Internet patents not only help some existing companies to survive, but they also encourage new companies to enter the market. Small Internet start-up companies have more difficulty obtaining venture capital funding without some sort of protection for their new technology. Without business method patents there would be no opportunity for start-ups to make short-term investments or create brand loyalty. Business method patents create the artificial scarcity needed to preserve market power and restore the incentive to innovate.

Both critics and opponents of business method patents raise legitimate concerns. The fact remains that companies need some form of protection to safeguard themselves against the pilfering of ideas in the Internet environment, and subsequent loss of profit. The beneficial effects of Internet business method patents taken together with their detrimental effects leads to the conclusion that a modified policy for patenting Internet business methods is more favorable than simply eliminating business method patents altogether.

Furthermore, it is too late in the game to completely eliminate Internet patents. The second decade of the World Wide Web has already sufficiently demonstrated that patent law will be a factor in the ongoing development of the Web infrastructure. Patents had seldom been a factor in the personal computer software industry, where the Web originated. However, as the Web came into contact with the telecommunications, broadcast media and consumer electronic industries, the tradition of patenting technology from those industries had inevitably transferred over to the Web.

III. Policy Recommendations

1. Reduce Life-Span

The twenty-year legal monopoly granted by a traditional patent does not make sense within the context of the Internet. Business methods are developed in an arena of competition – not in a laboratory. Competitors not only concentrate on developing completely new concepts, but also analyze existing patents and attempt to tweak or improve on them. Emulation, more than innovation, drives business method changes. Instead of hindering access to new technologies in the name of private rights, the law should help sustain a collaborative effort.

The twenty-year traditional patent is like giving gold in return for pennies. Amazon.com’s patent epitomizes this idea. Their twenty-year exclusive use for single-action ordering is not the proper reward for such an insubstantial invention as their one-click business method. A curtailed term of protection, perhaps on the order of three to five years, would achieve the same desirable effect of encouraging investment and innovation without the negative effects of stifling innovation for a prolonged amount of time in the context of an environment whose growth is more exponential than linear in nature.

Smaller changes could also be made within the patent system to prevent the granting of patents with overbroad scopes. The first step towards a better system would be to eliminate the one sentence rule in order to facilitate clearer language. Enhancing the clarity of the patent applications would not only help examiners to understand the application, but it would leave less room for manipulation by the patent lawyers. The PTO could also require applicants to disclose the computer code used to implement the claimed business method. Patent examiners, trained in computer science, could then analyze the code to see which particular functionalities merit patent protection. This approach would avoid the monopolies on ideas that result from the current one-size-fits-all process.

As previously mentioned, the salaries of the patent examiners increases as they issue more patents. One possible way of breaking the connection between personal salaries and number of patent issuances within the U.S. Patent and Trademark Office is a government subsidy for salary purposes. Application fees could then be used to help the PTO improve their prior art databases rather than to pay for patent examiner bonuses. Additionally, the allowance rate itself should be eliminated and examiners should be given more incentive to reject applications rather than accept them.

The material used for prior art to determine if a business method can be patented at the PTO should include a condition that precludes existing real world business strategies from being patentable on the Internet. Ignoring the business ideas used outside of the Internet landscape does not lead to a thorough exhaustion in searching for prior art. The more material used to search for previous material, the higher the standard for non-obviousness, and it is clear from Amazon’s patent that the standard of obviousness needs a recalibration to reflect the patters of innovation in the Internet environment.

Conclusion

Although the current model of intellectual property protection for business methods does not serve the main goal of U.S. patent law, that is, to promote innovation, it has the potential to do so. Intellectual property regulation should play a role on the Internet, but its character should be tame rather than wild. Traditional business method patents, with their overbroad scopes and extensive protective terms, are simply too aggressive for the types of innovations made in the context of the Internet where business methods arise from small enhancements upon the inventions of competitors. Shortening the term of Internet business method patents and reforming the patent system can mitigate the detrimental consequences of current Internet business method patents and promote novelty on the Internet. Making these reforms – now – can prevent business method patents from stifling innovation on the Internet in the future.