Dot.com (patent pending): Patents are now central to business strategy.

Many companies are now rushing to the U.S. Patent Office to procure patents on the companies' main areas of business, especially companies that have software as their main product or that conduct business across the Internet. There are several reasons why there is a recent surge in companies filing for patents at the U.S. Patent Office. The most significant reason is that recent changes in case law have removed the prohibition against business methods being patented. Another major reason is the modern process of creating an enterprise and the corresponding demands on start-up companies to seek and obtain patents. A further reason is that many of the modern patents procured and patent-related litigation conducted receive significant publicity in nonlegal realms and the more savvy businesspersons are aware of these activities. Accordingly, because of this increasing prominence of patents in the business world, managers must be aware of the potential issues of both their company's own patent strategy and the probable strategy of the company's major competitors with regard to patent procurement, licensing, and infringement.

Reasons for the Patent Office Rush

In the calendar year 1999, the U.S. Patent and Trademark Office granted a record 169,154 patents, which was an increase of 3.6 percent over the previous record year of 1998.(1) The rate of patenting by U.S. residents and corporations relative to the nation's size and spending has been increasing for over 12 years.(2) This increase in patent applications filed and issued is due in large part to a significant increase in patent applications being filed in the electronic and computer arts, and especially for inventions concerning the Internet.

If nothing else grabs the attention of the businessperson, solely the shear weight of the number of issuing patents should alert a businessperson that it is likely that someone has obtained a patent that directly affects the business area in which the businessperson practices. And logically, the most probable affected area from the surge of patents will be in the software and Internet arena.

Many of the reasons for the surge of patents in the software and Internet area are straightforward. One major reason is that a recent change in U.S. case law has allowed the business methodology underlying the software's function to be patented.(3) Another significant reason comes from the shifting economy and the increasing dominance of e-commerce and its associated software and Internet applications.

However, other less obvious factors are also motivating the increased patent filings. The venture capital arena is quite savvy to the importance of an intellectual property portfolio. Further, the increasing publicity of recent Internet and software patents and patent-related litigation has heightened awareness of the combative patent arena and has business management clamoring to obtain their patent swords and shields.

Changes in Software Patent Law

The U.S. Patent and Trademark Office and the federal courts were traditionally hostile to software being patentable subject matter because of the long-standing principle that software was simply an algorithmic mathematical expression.(4) Thus, as software is simply a glorified mathematical formula, the prohibition against patenting a mathematical formula was used to reject patent applications on software. Moreover, the algorithm itself which the executing software follows is a series of steps in a process that often an individual can perform himself or herself without the use of a computer system.

Many of the more recent financial software patents comprise algorithms executing steps for a specific "business method" which is a simple algorithm that can be practiced without the use of a computer system. There is another traditional prohibition at the U.S. Patent Office against the patenting of business methods. When applications were previously filed claiming financial software, the Patent Office rejected the application not only for being a mathematical expression, but also for being a business method per se.(5)

Some in the software industry foresaw a sea change in the U.S. patent law that would lead to the patenting of software.(6) Even so, the main prohibitions against patenting software, especially financial software, were clearly removed by the U.S. Court of Appeals for the Federal Circuit and its 1998 decision of State Street Bank & Trust Co., v. Signature Financial Group, Inc., 149 F.3d 1368, 47 USPQ2d 1596 (Fed. Cir. 1998).

In State Street, Signature Financial Group obtained a U.S. patent on a system for managing mutual funds whereby mutual funds pool their assets in an investment portfolio that is organized as a partnership. The system represented an advantage as it could better provide an economy of scale in administering investments with the tax advantages of a partnership.(7) Signature sued State Street Bank for infringement of the patent and the federal district court held that the patent was invalid as it was directed to subject matter that was not protectable because the patent was comprised of a mathematical algorithm and a business method.(8) The federal circuit reversed the district court and held that the patent was valid, and that it contained patentable subject matter.

The federal circuit held that instead of being a mathematical algorithm, the patent was instead claiming a system (or machine) which is programmed with the software to thus produce a tangible and concrete result. In regard to the patent claiming a business method, the federal circuit noted that while business methods were generally unpatentable, they were not "inherently unpatentable" subject matter but rather are subject to other grounds of patentability such as novelty.(9) In sum, the federal circuit in State Street permitted the patenting of software as a system and the business method utilized by the system.

In the later case of AT&T Corp., v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), the federal circuit held that the solely mathematical steps which software performs can constitute patentable subject matter. The federal circuit again restated that the focus of the inquiry is upon the patentability of the outcome from the steps from the software's process, and not upon the nature of the individual steps themselves. The court put forth the rule that the proscription against the patenting of a mathematical algorithm "is narrowly limited to mathematical algorithms in the abstract."(10)

One important aspect of AT&T is that the claims in issue involved the steps of a method as opposed to the claim for a system which was present in State Street.(11) Thus, under AT&T, a claimed method is not necessarily limited to the system performing the steps of the disclosed method as the software executes, but could conceivably encompass persons performing the same or equivalent steps of the method.

In summary, when one takes the holdings of the federal circuit in State Street and AT& T together, one can conclude that software can be patented even though it: 1) may be drawn to solely a mathematical algorithm; 2) may be drawn to solely a business method; and 3) may only embrace the steps of a mathematical algorithm or a business method. These decisions have subsequently caused many companies to file patent applications not only for software products, but also for the business method of the software itself. And in the e-commerce and Internet arena, many companies are currently filing patents on their method of doing business across the Internet in an attempt to completely secure their business position on the Internet.

Validity of Patents and Interaction with Other Forms of Intellectual Property

Another legal reason supporting the increasing investment by companies in procuring patents is that district courts and the federal circuit are increasingly holding patents valid not only in the software and Internet applications but in all areas of technology, and also allowing patents to coexist with other forms of intellectual property. One major purpose of the creation of the federal circuit was to make the common law of patents more uniform than the then fragmented jurisdictional case law which existed in the various federal judicial circuits. Before the existence of the federal circuit, some jurisdictions were notorious for holding patents invalid or in conflict with other forms of intellectual property protection, but the federal circuit has since reversed that trend. The case law of the federal circuit has continually favored the validity of patents and yielded an expansive view of both patentable subject matter and avenues of intellectual property protection.

One example of the favoritism of patent validity and interaction is the federal circuit's holding in Pioneer Hi-Bred International, Inc., v. J.E.M. AG Supply, Inc., et al., 53 USPQ2d 1440 (Fed. Cir. 2000). In Pioneer Hi-Bred, the federal circuit affirmed a lower court's ruling that utility patent protection can coexist for seed-grown plants that have other avenues of intellectual property protection available. While the federal circuit could have found that the protection provided by the utility patent conflicted with the other avenues available for protecting the plant, such as a "plant patent" or protection under the Plant Variety Protection Act, the court did not do so and affirmed the validity of utility patents for seeds and seed-grown plants.(12)

Another example of the patent validity (and more so enforceability) favoritism is Midwest Industries v. Karavan Trailers, 175 F.3d 1356 (Fed. Cir. 1999) (en banc). In that case, Midwest sued Karavan for patent infringement of a curved winch and also alleged trade dress infringement of the winch. The district court held that Midwest was not entitled to trade dress protection for the patented winch because allowing trade dress protection would improperly expand the patent monopoly on the winch. The federal circuit reversed the district court and held, en banc, that "the availability of trade dress protection does not depend on whether a patent has been obtained for the product of feature in question."(13) Thus, one could obtain and enforce a patent for a product in conjunction with trade dress protection provided that the particular trade dress is not dictated by functionality. Midwest Industries and Pioneer Hi-Bred clearly evidence the trend to favor validity of a patent accompanying other forms of intellectual property even when there is a statutory or common law conflict.

The significance of the increased likelihood that a patent will be held valid in court has two major consequences that a company should be aware of: 1) it is more likely that a patent will be held valid in litigation, and this disfavors declaratory judgment actions and counterclaims of invalidity, i.e., offensive actions against a patent; and 2) it favors "trail-blazing" in the filing of patent applications at the U.S. Patent Office that may be perceived as on the current fringe of perceived patentable subject matter. Moreover, the desire to patent should not supplant the other intellectual property protection avenues for fear of conflict. Businesses considering building an intellectual property portfolio with patents can thus feel more confident that the patents are firmer assets which are worth the expense of procurement.

The Increasing Pool of Venture Capital

A very popular business model today is the software or Internet start-up company that receives several rounds of venture capital funding with the ultimate goal of launching an initial public offering (IPO) of stock. Even in the early 1990s, many start-up companies formed around a core of patented technology.(14) Consequently, with the very large pool of venture capitalists seeking start-up companies in which to invest, the start-up company is turning to patents to give them an edge in attracting the capital.

In formation, a typical start-up company formulates a business plan explaining its business model and intended operations. Venture capitalists then examine the business plan and determine if they feel the start-up company will be a viable company for capital investment. While this typical method of funding a start-up company has existed for some time, the recent trend has been for the venture capitalists to favor start-up companies that enunciate plans to secure their business position through the patenting of the start-up company's main technology.

Furthermore, the modern venture capitalist is becoming quite aware of the recent changes in patent law and the high profile patents and litigation. The venture capitalists not only examine the start-up company to determine what intellectual property assets, such as patents, that the company has or is pursuing, but also examine the business of the startup company to determine how protectable the core technologies of the company are with patents and other intellectual property protection. It has even reached the point that many venture capitalists simply do not even consider investing in start-up companies that do not have a patent application on file at the Patent Office. In response, many businesspersons forming the start-up companies now immediately pursue patent protection at the beginning of formation of the start-up company.

The importance of the start-up company's intellectual property portfolio continues beyond formation and plays a central role in the IPO process. The underwriters of the IPO often fully examine the intellectual property procurement undertaken by the company, even to the extent of sending their own attorneys into the Patent Office to examine issued and pending patent applications, in order to evaluate a reasonable price for the stock. Therefore, a significant and secure intellectual property portfolio can initially attract an IPO underwriter and bolster the ultimate price of the initial stock.

A businessperson considering a start-up company should accordingly be aware of the importance of intellectual property protection in the creation and operation of a company. Unfortunately, by the time one might realize that intellectual property protection is important for the company, it is often too late to effectively establish a secure portfolio (as is discussed below). The expansion of patentable subject matter to include software and business methods only solidifies the fact that a modern business plan necessarily must include an intellectual property protection strategy.

High Profile Patents and Litigation

There have been very high-profile patents issued to companies and infringement suits conducted that have alerted businesspersons to the increasing popularity of obtaining patents and using the patent against one's competition. An excellent example of such a high-profile company is Amazon.com which is both diligent in securing new patents concerning Internet applications and suing its competition to assure market dominance.

Amazon.com has patented its "one-click" technology, which allows on-line customers to purchase an item with just one click of the mouse's button.(15) More recently, Amazon.com has received a patent on its "affiliates" program. In the affiliate program, a first website displays a link to another seller's website, and then the first website operator receives a percentage of sales generated on the seller's website for all sales transactions that occur though referrals from the first website.(16) Because the "affiliates" patent is very broad and Amazon.com has a history of enforcing its patents, the Internet industry is closely watching Amazon's activities in regard to the "affiliates" patent.

Amazon.com has also conducted very high profile patent litigation against its competitors. Amazon.com sued BarnesandNoble.com for infringement of Amazon's "one-click" patent and was successful in enjoining BarnesandNoble.com from using the technology on its sales website.(17) Although, the lawsuit may have been instigated for revenge as Barnesandnoble.com launched its site on the very eve of the Amazon.com, Inc., initial public offering and at the same time sued Amazon.com over Amazon.com's claim that it was the world's largest bookstore.(18) Even so, with the issuance of the new "affiliates" patent to Amazon.com, BarnesandNoble.com is once again threatened as it has 280,000 affiliate members.(19) Thus, due to its active patent procurement, if Amazon.com so chooses, it could again sue BarnesandNoble.com in a new and separate suit for patent infringement and selectively pressure one of its main competitors.

The legal actions of Amazon.com have been mirrored by other well known companies. Priceline.com obtained a patent for its on-line "reverse auction" patent, and has since sued Microsoft for its reverse auction on Microsoft's Expedia site.(20) In fact, Priceline.com and its related company, the Walker Digital Corporation, are very active in seeking patents for Internet-related business methods.

There are myriad high-profile patents and patent litigation that receive press coverage in the business and trade journals. Consequently, many businesses are now in a hurry to catch up in what they believe to be a patent race. Given the proclivity of those with broad patents on software and business methods to actually sue for infringement of those patents, the fears and concerns of the general business public may well be legitimate.

No industry can afford to ignore the rise and prominence of patents and intellectual property in modern business. Even the pundits of software and other patents freely admit that businesspersons must become aware of what patents are and how they are used.(21) A PriceWaterhouseCoopers survey of prominent intellectual property legal practitioners reveals that 90 percent of those practitioners believe there will be more intellectual property related litigation in the next few years, and 58 percent believe that there will be "much more" litigation.(22) Today, even academicians are pressured to invent so that universities can file and obtain patents in order to maintain the flow of hundreds of millions of dollars in royalties.(23) Amid all this competition, a company should evaluate its intellectual property portfolio and discern if the portfolio is in accord with its current business goals.

General Considerations

While many companies have become aware of the need for exploiting patents in their own business activities, they are uncertain as to what areas of their endeavors they can patent and how they can go about making that determination. For some companies that manufacture a product or otherwise operate in an industry where patents have traditionally been obtained, the patent strategy basically concerns enhancing the mechanism by which it already procures patents. For companies that are in nontraditional patent industries or completely new areas of technology, the development of an adequate patent strategy is not as straightforward. There are, however, several beginning points for the nontraditional patent companies to evaluate and construct an effective patent strategy.

The first consideration for patenting is the main business method of the company. The company must determine in essence what method it practices in its main enterprise. Once that method is determined, the novelty of the method must be evaluated, i.e., is there anything about the method that is unique to that company. If there is not a central business method that is readily novel, the company should determine if the central business method is likely to be improved upon and if the forecasted improvements might warrant patenting. Given the state of the case law in the U.S. as discussed above, the company should not concern itself with the patentability of the subject matter of the method as that determination could best be performed by a registered patent attorney or agent.

If the main business method does not apparently produce any patentable goods or methods, another ground of inquiry for the company's patent strategy is to examine ancillary goods and services and associated methods which are conducted within the company's structure for patentability. The company may produce a lesser good which is not its main product, provide a service tangential to its main business, or utilize certain processes that improve or simplify the manufacture of goods or delivery of services. These ancillary goods and services may be patentable and could be enticing for competitor companies to license and thus generate revenue.

Furthermore, there are often ancillary products and methods that have been improved upon at the manufacturing or performance level (i.e., the floor of the shop) which may be protectable by patent, but the management is unaware of such improvements and does not have a vehicle in place to have employees inform the management of the improvements. Consequently, the employees of a company who work the closest with the ancillary goods or services would be the best source to consult for determining where any novelty in these ancillary goods or services may lie. The company may also wish to consider an incentive program to reward its employees for an idea they bring forth that leads to protectable intellectual property for the company, be it patents or other protection.

In conjunction with a patent evaluation, companies should also consider other intellectual property protection vehicles such as product and service names that can be protected through trademark, treating internal processes as trade secrets, and both the licensing and taking licenses of technology. Much of the information gathered within the company relative to patents can illustrate other protectable intellectual properties.

Employment Agreements

A company considering patents should ensure that the employees of the company and any independent contractors it uses have signed agreements under which the employee or independent contractor assigns their inventions and other produced intellectual property to the company. Without a valid written agreement, the title and rights in the intellectual property can be clouded and, even worse, can remain with an independent contractor to leave the company without any ownership interests. Thus, a central part to building and maintaining an intellectual property portfolio is implementing or improving upon employment agreements and independent contractor agreements regularly utilized by the company.

What are Your Competitors Doing?

An excellent barometer for the evaluation of the benefits of patents in a specific business industry is to search the patent records for patents issued to competitors. Such a search can be easily conducted over the Internet at the U.S. Patent Office website (www.uspto.gov) or at the IBM patent site (www.patents.ibm.com) to reveal what issued patents are owned by one's competitors and in what specific technology areas those patents are. If a more comprehensive search is required, a professional search can be conducted at the U.S. and other patent offices to locate U.S. and foreign patents owned by a competitor.

From the patent search, a company can discern what its competitors are doing in regard to the frequency of filings and technical areas of patents, and then derive its own patent strategy. Thus, if a competitor has many patents in a company's technical area, that company is well advised to either obtain patents that can be used for defensive purposes (e.g., an infringement counterthreat), change the process or products that might be infringing, or actively seek a license from the competitor. Moreover, if a company determines that there are no competitors with patents in the company's technical area and there are few patents generally in that technical area, the company should consider an active patent prosecution strategy in that area. Therefore, a search of competitors' patents is an excellent place to begin the formulation of the direction of a company's patent strategy.

Beware of Your Own Activities!

A company (and all inventors) must note that under U.S. and foreign laws, several activities in regard to the subject matter of an invention can bar the filing of a patent application for that invention. In the U.S., activities such as publicly disclosing or selling an invention more that one year prior to filing an application for patent on the invention can bar patent protection.(24) Further, if it is desired to file the patent in foreign countries, some countries have very strict laws that hold any pre-patent filing sale or public disclosure of the invention can bar a patent.

An advisable first step in beginning to actively manage an intellectual property portfolio, much less beginning an invention evaluation process, is, therefore, to make sure that appropriate confidentiality about the products and services is maintained and sales of the potentially inventive goods and services are monitored. Further, as many types of activities of the company have adverse effects on the various forms of intellectual property protection, the company should therefore have the individuals in charge of the intellectual property strategy become familiar with the harmful activities that have adverse consequences to the company's intellectual property.

Conclusion

The great intellectual property land rush is on. Patents for what was considered traditionally nonpatentable subject matter are being filed and allowed at the U.S. Patent Office. The increasing patents in diverse technical arts are actively changing the way businesses begin and conduct business. Businesspersons must now be aware of the increasing importance of patents in what were previously considered non-patent business areas and possess the knowledge to formulate appropriate intellectual property policies. While the patent rush is particularly acute for software and Internet companies, virtually any company producing a good or performing a service has the capability to foster and enjoy the benefits of having a comprehensive intellectual property portfolio.

(1) Patenting Trends: Calendar Year 1999, U.S. Patent and Trademark Office, Technology Assessment and Forecast Database, 2-22-00.

(2) R. Buderi, Companies Squeeze the Patent Pipeline, MIT TECHNOLOGY REVIEW (March/April 2000).

(3) V. Slind-Flor, The Biz-Method Patent Rush, NAT'L L.J. (Feb. 28, 2000). The article also states that the issuance of e-commerce patents is significantly impacting the business strategies of Internet-related industries.

(4) See, e.g., Parker v. Flook, 437 U.S. 584 (1978); Gottschalk v. Benson, 409 U.S. 63 (1972) (mathematical algorithms are not patentable subject matter to the extent that they are merely abstract ideas).

(5) See In re Howard, 394 F.2d 869, 872, 157 USPQ 615, 617 (CCPA 1968) (a method of doing business is "inherently unpatentable").

(6) P. Heckel, Debunking the Software Patent Myths, 35 COMMUNICATIONS OF THE ACM 121-140 (June 1992). The author advocates that, circa 1992, "legally, software is patentable and it will remain so." p. 128.

(7) State Street, 149 F.3d at 1371.

(8) Id. at 1372.

(9) Id. at 1375-1376. This apparently contradicts that holding in In re Howard, although the federal circuit states that In re Howard did not address this ultimate issue.

(10) AT&T, 172 F.3d at 1356.

(11) Id. at 1358.

(12) See Pioneer Hi-Bred, 53 USPQ2d at 1443.

(13) Midwest Industries, 175 F.3d at 1358.

(14) See, e.g., Heckel, supra note 6, at 122-124.

(15) Amazon Patents Affiliate Programs Technology, Associated Press, February 25, 2000. http://news.cnet.com/news/0-1007-200-1558650.html.

(16) Id.

(17) Amazon.com, Inc. v. BarnesandNoble.com, Inc., 53 USPQ2d 1115 (W.D. Wash. 1999). The district court further held that the prior art produced by Barnesandnoble.com was insufficient to anticipate or render obvious (invalidate) Amazon.com's "one-click" patent.

(18) S. Junnarkar, Amazon sues BarnesandNoble.com over Patent, CNET News.com, October 22, 1999. http:// news.cnet.com/news/0-1007-202-922281.html.

(19) Amazon Patents, supra note 15. Many other on-line stores such as Pets.com and Petopia which also have on-line "affiliates" are concerned about Amazon.com's intent on enforcing the "affiliates" patent. Id.

(20) Junnarkar, supra note 18, at 22.

(21) See, e.g., K. Nichols, The Age of Software Patents, IEEE Computer, April 1999, pp. 25-31. Even though Nichols believes that "patents don't work," he admits that "[b]ecause it is highly unlikely that inventors will conduct expensive R&D without a method of recovering their investment, the attempt to bring software under the aegis of patent law is logical." p. 27.

(22) PriceWaterhouseCoopers, Is there a Future for IP and If So, At What Price?, Financial Advisory Services, Analysis of I.P.L.F. Survey Responses, February, 2000. See also Buderi, supra note 2, which gives an excellent overview on prolific-patenting companies such as AT&T and 3M and their patent procurement strategies.

(23) See, e.g., A. Pollack, Battling Searle, University Gets Broad Patent for New Patent for New Painkiller, NEW YORK TIMES, Business, April 12, 2000. Many of the nation's universities now have offices of technology transfer or offices of sponsored projects that obtain patents of the university or some university-affiliated entity and then license them. An excellent resource related to university technology transfer offices is the home page of the Association of University Technology Managers, www.autm.net.

(24) 35 U.S.C. [sections] 102; see generally M. Cicero and L. Reich, Time's Up: Inaction Causes Loss of Patent Rights, 10 SOUTH CAROLINA LAWYER 32-37 (Jan./Feb. 1999).

Lance D. Reich is a registered patent attorney and a partner in the intellectual property law firm of Bockhop & Reich, LLP, in Atlanta, Georgia. Mr. Reich concentrates in patent procurement and protection for inventions in the computer and electronic arts. His practice also focuses on computer-related transactions and the law of the Internet.

This column is submitted on behalf of the Business Law Section, Hal K. Litchford, chair, and Steven Fender, editor.