One-Click or Two? The War Over Business Method Patents

When you're Time magazine's Man of the Year, you tend to attract a lot of attention. Just ask Jeff Bezos.

Bezos, CEO of, stirred up a firestorm among legal and e-commerce experts over the issue of business method patents. The controversy began in the fall of 1999, when Amazon sued arch-rival Barnes & over alleged infringement of its '1-Click' ordering system. The technique allows customers to complete an online order with a single click of the mouse, using stored delivery and payment information. Amazon alleged that Barnes & Noble's 'Express Lane,' which also employed a one-click fulfillment mechanism, infringed on its patented business method. The court agreed and issued a preliminary injunction at the outset of the critical holiday buying season that forced Barnes & Noble to add a cosmetic 'second click' to its purchase system.

Adding fuel to the fire, Amazon received a broad new business method patent in February covering its 'affiliate programs,' by which other web sites refer customers to Amazon in exchange for a commission. The development prompted one analyst to ask cynically, .Are they going to patent air next?.

In the wake of these developments, commentators began to take shots at both Amazon and the U.S. Patent and Trademark Office, arguing that such broad patents of e-commerce techniques were misguided and would throttle the very innovation that has made the web a transforming business technology. Ironically, even Jeff Bezos agreed. In an open letter, he called for a major re-structuring of patent laws to put tough new requirements on the granting and duration of business method and software patents. The USPTO has since released an action plan to work more closely with the e-commerce industry in considering business method patent applications.

State Street Opens the Door

Not so long ago, business methods weren't thought to be patentable at all. While the Supreme Court ruled that the patent law was intended to cover 'anything under the sun that is made by man,' the courts carved out two exceptions for 'business methods' and 'mathematical algorithms' that effectively made it difficult to receive or enforce patents for technology-based means of doing business. This was long before e-commerce was even a byte in Jeff Bezos' garage.

But in October 1998, the Court of Appeals for the Federal Circuit, which has exclusive jurisdiction over appeals in patent cases, threw out the old judicial exceptions in its ruling in State Street Bank v. Signature Financial Group, Inc. The court expressly eliminated the business method exception and established a liberal new test for the patentability of software that focused on whether the computer system as a whole produces a 'useful, tangible, and concrete result.'

The ruling was tailor-made for the burgeoning e-commerce market and and other pioneers have rushed to take advantage of these new business protections. The USPTO reported that in 1999 it received 2,600 business method patent applications and issued 600 patents on prior applications., for example, patented its 'reverse auction' technique allowing buyers to name a price for a requested product or service and used that patent to sue Microsoft over a hotel price matching service on its web site. (The case is still pending.)

For many businesses, the new patent landscape has complicated their competitive strategies. Before the State Street case, businesses often relied on trade secret protection of their business methods. But since secret use does not appear as 'prior art' in considering the validity of a patent application, businesses feared that competitors could successfully patent a long-standing business method and use it as a club to sue them for infringement.

Partly in response to those fears, Congress passed the First Inventor Defense Act of 1999, which offers a limited defense for companies if another company obtains a patent on a business method already in use. The defense, which has yet to be tested in court, applies when a company has put a business method into practice at least a year before the effective filing date of a patent application and also commercially used the method before the filing date.

Growing Controversy

Despite warnings of runaway litigation, however, e-commerce patents have so far generated few disputes in court. The Amazon and Priceline cases have so far been the most prominent instances of litigation, and the preliminary injunction against Barnes and Noble in the Amazon case remains the only decision of any kind from the courts. So the judicial landscape on business method patents has a long way to go.

In issuing its injunction in the Amazon case, the court found that the 1-Click system 'addressed an unsolved need' in the marketplace and appeared to be a major innovation for consumers. To allow Barnes & Noble a 'free ride' on Amazon's idea, the court concluded, would tend to discourage future innovation.

Critics of the decision took the opposite view. They argued in the press that the USPTO is poorly equipped to evaluate business method patents, that many new patents (including Amazon's 1-Click) were a natural and obvious extension of e-commerce, and that a litigious and confrontational environment on the web would tend to restrain the development of creative new applications. These critics seemed particularly outraged that Amazon, the giant of online retail, would act aggressively to thwart innovation in the media that nurtured its own existence. (Bezos must surely have appreciated the irony of going from scrappy start-up to market bully in just a few years.)

Can both sides be right? In this case, probably so.

On one hand, Amazon's 1-Click patent fits squarely into the historical role of patents as a device to spur innovation by protecting the rights of inventors. After all, a business method patent has no practical value unless it is successful. If Amazon's idea had not proven a hit with consumers, the company's leading competitor wouldn't have copied it. To the extent that any such method is new and non-obvious, then the innovator has the right to defend its idea against copycats or to profit by licensing its technology to others.

However, businesses should be rightly concerned if the patent application process is flawed and leads to overly broad patents on methods that really aren't new ideas at all. Bezos himself believes there should be .fewer patents, of higher average quality, with shorter lifetimes.. For example, the company Cybergold contends that its patent on pay-per-view ads gives it the sole right to pay consumers online incentives including cash, points, frequent-flyer miles or other forms of compensation. While its patent has been widely ignored, such sweeping, poorly-examined business method patents undermine the credibility of the patent process.

The USPTO is at the core of the business method patent debate, and much of the criticism has been directed their way. The patent examiners at the USPTO are modestly-paid public servants with little experience in the emerging business theories of e-commerce. Unlike certain areas, such as medical devices, there is also no body of patents or peer review journals that would help in establishing prior art for software innovations or e-commerce business methods. The Internet is also so vast that identifying prior art is notably difficult. Combine these challenges with the increasing volume of applications, and it's not surprising that the agency's handling of business method patents has drawn growing complaints from industry.

Stung by criticism that many recent patents have been obviously invalid, the USPTO released an 'action plan' in March related to business method patents, including industry outreach, enhanced technical training for examiners, and expanded search activities for prior art. In late July, the agency also held a roundtable to discuss the history behind computer-implemented business methods and to identify ways to improve the agency.s approach to business method patent applications.

Patent Strategies

In the midst of a judicial and public policy debate, how should companies manage their patent strategy? While there are no hard and fast rules for determining when to pursue a patent application, companies should consider the following useful rules of thumb:

  • The easier an idea is to copy, the more need there is for patent protection. With the market taking a harder look at e-commerce concepts and consolidation already hitting many Internet business sectors patent protection may be the one way to protect a company from competition.
  • Highly complex ideas may need less patent protection. If a business method is difficult to implement, patent protection may actually backfire, because it offers a public blueprint that competitors can follow.
  • The less resources needed to implement the idea, the more patent protection is needed. If competitors can get up and running quickly, patent protection can provide a barrier to new entries in the market.
  • Less established inventors need more protection. A large company, such as Yahoo!, may generate patentable ideas but may have the market power to ward off competition even without patent protection. Smaller players do not have the same advantage.

Remember, too, that business method patent applications must meet certain basic standards of patentability. The invention must be .novel. or new . that is, it must not be found in publications or prior patents, or have been publicly used or disclosed. (There is normally a one-year grace period following disclosure in which to file the application.) The invention must also not be .obvious. to a person of ordinary skill in the area being patented. Because there are no objective criteria for 'obviousness,' this area has been a subject of particular debate with regard to e-commerce patents.

In addition, the patent application must be clearly and carefully written. Although patent claim structure and language is often arcane, the core invention and why it is novel should be expressed clearly. Similarly, striking a balance between a business method that is too complex (and thus easier to infringe by modifying small elements) and too simplistic (and potentially too obvious to be patentable) is a critical part of the application process.

There are also some basic strategies for patent protection:

File early. While a company has a year in which to file for protection after an invention is disclosed, filing early speeds up the process and may be useful in arranging investor financing.

Know who owns the invention. Inventions aren't automatically assigned to a company by employees or owners. Make sure you've established the appropriate contractual language, particularly when working in partnership with other companies, to assign ownership rights.

Decide how to use your patents. Having a patent in and of itself isn't a guarantee of protection against competition. Without market power, you may find your patents ignored by larger companies that question the validity of your patent or your ability to enforce it. In considering a patent application, know how it will add value to your business and how you intend to enforce it through exclusive use or licensing.

Watch your back. A competitor may have similar patent applications of its own. Since applications are secret, your patent may ultimately have less value in the market than you anticipate.

Think twice. Many executives have an unreasonable faith in the power of patents and patent litigation to protect their business. Patents are a tool one component of a business strategy that must be managed wisely.

Inevitably, we can expect the laws and public policy surrounding business method patents to change. Even Jeff Bezos, who is arguably the greatest beneficiary of this new patent protection, now believes that 'the current rules governing business method and software patents could end up harming all of us.' In other words, as with other areas of e-commerce, companies must navigate a legal and business framework that is still being written.