17 May 2006

Business Method Patents

The stereotypical patent is "the better mousetrap", a discrete, narrowly described physical invention. The strongest proponent of strong patent laws today, the pharmacutical industry, with its chemical formulas and recipies for particular pills that heal people, aren't far removed from that model.

In EBay, Inc. v. Mercexchange, a business method patent case aimed at Internet retailer E-Bay, arguably the most important U.S. Supreme Court patent case in decades, Justice Kennedy, in a concurring opinion joined by three of the Court's liberal justices, took aim at one of this types of patents in particular.

Mercexchange's patent was "for an electronic market designed to facilitate the sale of goods between private individuals by establishing a central authority to promote trust among the participants."

Kennedy notes:

[I]njunctive relief may have different consequences for the burgeoning number of patents over business methods, which were not of much economic or legal significance in earlier times. The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test.

The hostility to business method patents comes largely from first principals of patent law itself. While business method patents are expressly permitted by patent law, they may only be awarded when, as set forth below by the U.S. Patent and Trademark office it is not obvious based on prior art.

If the invention has been described in a printed publication anywhere in the world, or if it was known or used by others in this country before the date that the applicant made his/her invention, a patent cannot be obtained. If the invention has been described in a printed publication anywhere, or has been in public use or on sale in this country more than one year before the date on which an application for patent is filed in this country, a patent cannot be obtained. . . .

Even if the subject matter sought to be patented is not exactly shown by the prior art, and involves one or more differences over the most nearly similar thing already known, a patent may still be refused if the differences would be obvious. The subject matter sought to be patented must be sufficiently different from what has been used or described before that it may be said to be nonobvious to a person having ordinary skill in the area of technology related to the invention.

The basic criticism of most business patents is that they are, in fact, obvious extensions of ideas already published by people having ordinary skill in the area of technology related to the invention.

For example, in the case of Mercexchange patent, central authorities designed to promote trust among the participants have existed for centuries in the form of village markets, auction houses, stock exchanges and commodity exchanges. Some of these central authorities have permitted some for of electronic participation for decades. For example, people have been making stock trades via telegraph since the 19th century, and the NASDAQ has been a purely electronic auction market facilitating trades between private individuals for decades. The argument that expanding these kinds of markets from physical in person settings to electronic ones, or from stocks to physical goods, is not obvious is a serious stretch.

One suspects that a failure to judge obviousness well flows from the fact that patent examiners have historically been engineers by training, rather than businessmen. They don't have the right kind of resources, for example, to look for published prior art in the area of business methods. A simple pressure to process applications is also a factor. A patent officer must find prior art in less than a week of research. This is a searching review compared to most government applications, but also far less than an interested party facing litigation would conduct.

Mechexchange should never have been granted the patent it is suing under, in my opinion, and this patent is similar to a great many business method patents on the books. The fact that such a patent survived both the Patent and Trademark Office, and the courts, is stunning, until you see some of the other patents which have been granted such as Patent 6,257,248, which involved the business method of cutting hair using a scissors in each hand, and 5,806,063 which involves solving the Y2K problem by counting from years other than 1 AD for processing purposes (a method in use for more than 15 years when obtained). Part of what is troubling about the EBay v. Mercexchange case is that the determination on the merits which gave rise to the remedy seems wrong.

There is a widespread feeling that patent granting standards have been applied too loosely, not just in business method cases, but in all cases.

The U.S. Patent Code defines two relevant standards, "novelty" and "nonobviousness," but the courts have applied these standards much more loosely than is required by the statute. For example, novelty is the standard that prohibits a patent if a description of the invention has been previously published. Prior publication, however, will not bar issuance of a patent unless all the features of the invention have been disclosed in a single prior publication. Therefore the extension of a well-known and published technique to a new situation may well be "novel," because the application of the technique to the particular situation had not been described in a single prior article. It may also be "nonobvious" for patent law purposes, even though a scientist might reasonably think of trying the technique. This is because the standard for nonobviousness in such a situation is whether the approach offered a "reasonable expectation of success".

The courts could reinterpret such doctrines more strictly, for example, by raising the standard of nonobviousness in this context to reject a patent when a scientist would seriously consider a particular approach, and to grant the patent only when the approach seemed quite unlikely to work and still proved successful. Such changes would decrease the number of patents, while remaining consistent with the statute and rewarding more significant invention.

Also of concern are that "the patenting of very fundamental concepts" which no specific useful application has been permitted, shutting off research in broad areas for the duration of the patent, and that "[c]urrent law, however, creates a statutory presumption of validity that strongly favors the holder of even an invalid patent.", which means that often interested parties are not in a position to challenge a patent's validity on a level playing field, since they can't afford to actively monitor every patent grant to determine if a potentially invalid one that could impact them will be granted. The presumption of validity is codified at 35 United States Code Section 282.

Reform proponents are on track when they state:

Those likely to be harmed in the future by a patent may not realize which of the patents being issued are likely to be significant to them, and they may not be able to afford to contest all of them. It would be wise to go further to weaken the presumption of validity and to make it easier to bring litigation to have a patent declared invalid, presumably with some device to protect a patent holder from repeated litigation.

It is also not entirely clear what issues in patent litigation are for the jury to decide and which are for the judge.

The problem a bad patent grants isn't specific to business methods, but the problem is particularly acute in the business methods context because the number of people who conduct a business which might end up using a business method is often far greater than in the case of a typical invention patent, which impacts only people in one specific part of the manufacturing industry -- for example, a tractor attachment patent impacts only the handful of companies in the United States which build tractor attachments, while an accouting method patent potentially impacts almost every U.S. patent and covers issues well outside the expertise of your typically engineer.

A Patent and Trademark Office white paper notes that until the case State Street Bank and Trust Co., Inc. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), which held that mathematical algorithms with a specific application could be patented, was decided, business method patents were far less common. According to one review of the matter: "Under a broad definition of software/business methods, the USPTO is now granting 10 to 12 thousand patents per year, as opposed to fewer than a thousand before 1985."

Patent examiners have finally started to wake up to this issue. In 2001, 45% of business method patent applications were granted. In 2004, the grant percentage had dropped to 11%. The changes have also contributed to a huge backlog of patent applications. This is both good and troubling. On one hand, in the face of criticism, the PTO is clearly being more careful in the business patent area. On the other, it suggests that perhaps three out of four business method patents currently in force shouldn't have been granted in the first place.

Once a patent is issued, it gives the holder bargaining power, even if it is weak, and forces someone accused of infringing it to gamble and spend a great deal of money to defend themselves, if they risk fighting it. This is a serious burden to impose on someone when the majority of the people with a right to bring claims have only dubious rights.

There are also real public policy reasons to be concerned about business method patents. For example, suppose that someone develops a method to reasonably accomodate blind workers in the accounting industry. And, suppose further that this is patented, because it is not an obvious solution and no one has ever thought about it before. Then, suppose that the ADA is held to require this type of accomodation. Must every accounting firm pay the patent holders simply to comply with requirements imposed upon them by non-patent law, whenever it hires, as it is required to, a qualified blind applicant?

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