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BUILDING FENCES IN CYBERSPACE:

BUSINESS METHOD PATENTS AND THE INTERNET

Analysis of Recent Internet/E-Commerce Business Method Patents

by Jerry A. Riedinger

Perkins Coie LLP

1201 Third Ave.

48th FloorSeattle, WA 98052

206-583-8664

Prepared for the

Practicing Law Institute Program on

Patenting the New Business Model,Building Fences in Cyberspace

at the

Hyatt Regency Hotel

San Francisco, CA

June 26, 2000

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CONTENTS

I. The State of the Internet IP World:

Patenting Business Models in Cyberspace. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

A. The Business Method Battle Lines. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

B. Biting the Hand that Feeds Them. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

C. The Road to State Street. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

D. High Tech vs. Low Tech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

II. WHAT IS A BUSINESS METHOD PATENT? . . . . . . . . . . . . . . . . . . . . . . . . 12

III. ISSUES REGARDING INTERNET BUSINESS METHOD PATENTS. . . . . . 17

A. Litigating Internet Business Method Patents. . . . . . . . . . . . . . . . . . . . . . 17

B. Drafting Internet Business Method Patents. . . . . . . . . . . . . . . . . . . . . . . 19

IV. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

APPENDIX A Patent Claims From Selected Internet

Business Method Patents. . . . . . . . . . . . . . . . . . . . . . . A

APPENDIX B Selected Non-Internet Patent Claims Argued to

Include Business Methods. . . . . . . . . . . . . . . . . . . . . . B

APPENDIX C USPTO Business Method Patent Initiative. . . . . . . . . . . . . .

. . . C

APPENDIX D Selected Excerpts from the PTO Manual for

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Patent Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . D

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Patenting The New Business Model:

Building Fences In Cyberspace*

Litigation over Internet business method patents has begun, and its presence is

spreading throughout the web. Although the growth in Internet and e-commerce patentlitigation has not matched the explosive expansion of e-commerce and the web itself,

Internet patent litigation is now an established part of the e-commerce environment.1

Yahoo! has been sued over its system for retail purchases.2 Priceline.com sued Microsoft

over its reverse auction patent.3 Wang sued AOL, among others, for infringement of

Wangs Videotext Frame Processing patent.4 Microsoft was again sued over an

electronic directory patented by Civix-DDI, LLC.5 eBay has been sued by Network

Engineering Software, Inc. over an online information service patent.6 CompuServe

was sued over a 1985, pre-web patent relating to sending music over a network.7 Of

course, Amazon.coms successful pursuit of a preliminary injunction has repeatedly

captured headlines.8

Indicative of the omnipresent nature of e-commerce patent suits is their spread

beyond the major e-commerce players. As in other technologies, patent suits now

pepper the activities of smaller e-commerce players.9 Yet this flowering of litigation

masks a host of uncertainties that stalk e-commerce patents, raising issues that will only

be eroded by time and a raft of judicial pontification. In the interim, the Internet and the

web will continue to evolve, while locked in a perpetual embrace with the patent Medusa.

*

Earlier versions of this paper accompanied the authors remarks at the Washington State Bar Association5

thAnnual Intellectual Property Institute, March 24, 2000 in Seattle, WA and at the San Francisco

Intellectual Property Law Association Annual Seminar, May 25, 2000 in Victoria, B.C.1

Only a few months ago, in December of 1999, the advent of internet patent lawsuits evoked startled, andeven bitter, reaction. See, e.g., R. Korman, Behold the Technology Patents! Behold the String of

Lawsuits!, The New York Times (Dec. 27, 1998), available at www.nytimes.com.2 Harrington v. Yahoo! Inc., No. 4:99 CV-1751 (E.D. Mo.), now transferred to the Northern District of

California.3

U.S. Patent No. 5,794,207 directed to a Method and Apparatus for a Crytographically AssistedCommercial Network System Designed to Facilitate Buyer-Driven Conditional Purchase Offers. SeeAppendix A-2.4

U.S. Patent No. 4,751,669. See B. Wright, Internet and E-Commerce Patents, available atwww.bannerwitcoff.com/articles.htm.5See CIVIX-DDI, LLC v. Microsoft Corp. et al., 2000 U.S. Dist. LEXIS 717 (Jan. 24, 2000).

6U.S. Patent No. 5,778,367, titled Automated On-Line Information Service and Directory, Particularly

for The World Wide Web. Representative 367 patent claims are at Appendix A-13. See also, B. Wright,

Internet and E-Commerce Patents, available at www.bannerwitcoff.com/articles.htm.7See Interactive Gift Express, Inc. v. CompuServe, Inc., 47 U.S.P.Q.2d 1797 (S.D.N.Y. 1998).

8 See Amazon.com, Inc. v. Barnesandnoble.com, Inc., 51 U.S.P.Q.2d 1115 (W.D. Wa. 1999). A

discussion of the headlines and controversy resulting from the Amazon.com suit is contained in section IA,infra, regarding The Business Method Battle Lines.9 See, e.g., Trilogy Software, Inc. v. CarsDirect.com, Inc., No. A 99CA-69 (W.D. Tex.); Parsec

Sight/Sound, Inc. v. N2K, Inc., No. 98-CV-118 (W.D. Pa.); Coolsavings.com, Inc. v. I. Commerce Corp.,51 U.S.P.Q.2d 1136 (N.D. Ill. 1999). Doubleclick has also sued L90 in the Eastern District of Virginiaon its advertising tracking software, U.S. Patent 5,948,061 titled Method of Deliver, Targeting, andMeasuring Advertising Over Networks. The 061 patent claims are at Appendix A-10.

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I. THE STATE OF THE INTERNET IP WORLD:

PATENTING BUSINESS MODELS IN CYBERSPACE

The rise of e-commerce patent litigation has produced a maelstrom of protest andcommentary, causing even the titans of e-commerce to take note. On March 9, 2000, Jeff

Bezos, Time Magazines 1999 Person of the Year10 and the founder of Amazon.com,

proposed significant changes to the patent system, including a 3 to 5 year term for

business method and software patents. 11 Occurring three months after the start of a

boycott of Amazon.com by strident open source advocates on the Web,12 Bezos

action injected further electricity into the already charged subject of software patents,

especially patents on business methods and e-commerce. The action guarantees

continued debate on a subject the patent community had believed resolved: the legitimacy

of e-commerce and business method patents in a world operating at internet speed.

The opportunities for unfettered business method patents ballooned with the

decision by Court of Appeals for the Federal Circuit in State Street Bank,13 in which the

Federal Circuit adopted the view that business methods were not statutorily excluded

from patentable subject matter.14 While the patent community responded with mild

surprise at State Street(the decision, after all, reflected the common view among patent

10

Jeff Bezos: Person of the Year, Time Magazine, Dec. 27, 1999, vol. 154, no. 26.11

SeeAn Open Letter From Jeff Bezos on the Subject of Patents, posted March 9, 2000 on theAmazon.com web site (at www.amazon.com/exec/obidos/subst/misc/patents.html/103-4069011-1038207).The open letter was widely reported. See, e.g., Amazon.com Chief Executive Urges Shorter Duration for

Internet Patents, The Wall Street Journal, March 10, 2000 p. B3; Bezos Urges Changes in Patent Law,reported March 10, 2000 by the Associated Press and published in the Washington Post online edition, atwww.washingtonpost.com/wp-srv-aponline/20000309/aponline17354_000.htm; V. Slind-Flor,Bezos

Patent Ideas are Roiling the IP Waters, Cal Law, www.callaw.com/opinions/stories/edit0321c.html.12

At the center of the open source movement is the Free Software Foundation, founded by softwareactivist Richard Stallman. The philosophy of Mr. Stallman and the Free Software Foundation may befound in the GNU Manifesto at www.gnu.ai.mit.edu/gnu/manifesto.html. The Open Source positionon software patents is described in Mutual Defense Against Software Patents, Jan. 28, 1994, available atlpf.ai.mit.edu/Patents.mutual-def.html andAgainst Software Patents, Feb. 28, 1991, available atlpf.ai.mit.edu/Patents/against-software-patents.html. An example of Stallmans activity is his call for aboycott against Amazon.com for its recent suit against Barnesandnoble.com on the 1-Click patent,Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp. 2d 1228 (W.D. Wa. 1999). The boycott isdescribed in, for example, Stallman, Updated: Richard Stallman Boycott Amazon! Linux Today,www.linuxtoday.com.story/13652.html and in L. Grossman,Boycott Amazon?, Time Digital, Dec. 22,1999, www.time.com/time/digital/daily/0,2822,36373,00.html. Although prominent in the softwarecommunity, Stallmans approach has had, at best, only moderate success. See, e.g., S. Garfinkel,IsStallman Stalled? Wired Mar./Arp. 1993 (available atwww.wired.com/wired/archive//1.10/stallman_pr.html).13

State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 47 U.S.P.Q. 2d1596 (Fed. Cir. 1998), cert. denied119 S.Ct. 851 (1999).14

State Street, 149 F.3d at 1377. See also 35 U.S.C. 101. Section 101 defines patentable subject matteras any new and useful process, machine, manufacture, or composition of matter, or any new and usefulimprovement thereof.

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attorneys that business method patents are a natural extension of traditional patent

law),15 the software, e-commerce and open source communities reacted with dismay at

what they perceived as an unjustifiable restriction on internet freedom.16 The financial

community, especially banks and large financial service institutions, reacted with less

fervor, but nevertheless mobilized to minimize what it saw as an expanding threat to the

industry. The general public, with no immediately obvious stake in the outcome, barelynoticed what may seem a mere tempest in a teapot.17 Each of these reactions has

15

A post State Street discussion in the Federal Circuit Bar Journal referred to State Street as theculmination of decades of evolution of the statutory patentability of mathematical algorithms...an almost predictable result. S. Swanson , The Patentability of Business Methods, Mathematical Algorithms andComputer-Related Inventions After the Decision by the Court of Appeals for the Federal Circuit in StateStreet, 8 Fed. Cir. B. J. 153, 154 (1999). According to Swanson, State Streetsuggests the court systemmight catch up to industry. Id. at 152. Both the Federal Circuit and earlier commentators emphasizedthat the business method exception had never been adopted by the federal courts, including the FederalCircuit and its predecessor, the Court of Customs and Patent Appeals. State Street, 149 F.3d at 1375; Inre Schrader, 22 F.3d 290, 298 (Fed Cir. 1994) (Newman, J., dissenting); R. Del Gallo, Are Methods of

Doing Business Finally Out of Business as a Statutory Rejection? 38 IDEA 403 (1998); M. Fuelling,Manufacturing, Selling, and Accounting: Patenting Business Methods, 76 J. Pat. & Trademark Ofc. Socy471 (1994); A. Hansmann, Method of Doing Business, 50 J. Pat. Ofc. Socy 503 (1968); G. Tew, Methodof Doing Business, 16 J. Pat. Ofc. Socy 607 (1934). In the words of Jay Walker, founder of WalkerDigital (creator of Priceline.com), Our patents are no different than the patents granted after the inventionof electricity caused a revolution in how industrial processes worked. S. Hansell, Surging Number of

Patents Engulfs Internet Commerce, The New York Times (Dec. 11, 1999), available on the archives ofwww.nytimes.com.16

See the discussion accompanying notes 19-23 infra. A similar, though more muted reaction has beenexpressed in Canada. See, e.g., M. Geist, A patently obvious threat to e-commerce, globetechnology.com(Jan. 27, 2000) available at www.globetechnology.com/archive/gam/E-Business/20000127/TWGEIS.html.17

The recent article in the New York Times Magazine is the first feature-length discussion of the topic inthe general press. Among other things, the article sharply criticized the patent office:

In ways that could not have been predicted even a few years ago, the patent system is incrisis. A series of unplanned mutations have transformed patents into a positive threat tothe digital economy. The patent office has grown entangled in philosophical confusionof its own making; it has become a ferocious generator of litigation; and manytechnologists believe that it has begun to choke the very innovation it was meant tonourish.

J. Gleick,Patently Absurd, New York Times Magazine (March 12, 2000) (the article may be found on theweb at www.nytimes.com/library/magazine/20000312mag-patents.html). An earlier publication with anidentical title was published in Wired, a magazine with a narrower clientele. See S. Garfinkel, Patently

Absurd, Wired (July 1994) (the Wired Patently Absurd article is available on the web atwww.wired.com/wired/archive/2.07/patents_pr.html). A third article with the identical title was publishedshortly before the NY Times Magazine article in the alternative newspaper Seattle Weekly. See A. Gunn,

Patently Absurd, Seattle Weekly (March 9, 2000). Yet a fourth article with the identical title appeared in

Forbes Magazine on May 29, 2000. See P. Ross, Patently Absurd, Forbes Magazine, (May 29, 2000),available at www.forbes.com/forbes/00/0529/6513180a.htm. Still another article with a similar titleappeared in early 1999 in the New York Times. See D. Caruso, Patent Absurdity, The New York Times(Feb. 1, 1999), available from the New York Times archives at www.nytimes.com. A short comment alsoappeared in 1999 in Fortune magazine, J. Gurley, The Trouble With Internet Patents, Fortune Jul. 19,1999 available at www.fortune.com/fortune/technology/gurley/1999/07/19/index.html. Software patentcritic Greg Aharonian published a similar 1999 criticism in IEEE Software: G. Aharonian , Does The

Patent Office Respect The Software Community? IEEE Software, Jul./Aug. 1999 available atwww.bustpatents.com/ieeeart.htm. The harsh criticism of software and e-commerce patents in the articlescould lead to greater general public opposition to business method patents.

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importance, to varying degrees, to the outcome of the debate on e-commerce and business

method patents.

A. The Business Method Battle Lines

The loudest voices in the cacophony are those raised by the software community.Since the decision in State Street, open source software advocates have cried loud and

long about the perceived ills of software patents, with particular emphasis on e-commerce

patents.18 Similar attitudes are expressed by members of the software community who

are not formally associated with the open source movement, but who nevertheless

consider software and business method patents anathema.19 Despite the stridency of

their expression, the anti-patent attitudes of the software community would have merited

little consideration were it not for the stature of some adherents. On the software side,

the opponents of business method patents include Richard Stallman, Linux advocate and

sometime open source guru,20 as well as Tim Berners-Lee, considered one of the

creators of the world-wide-web.21

On the legal side, the anti-patent advocates includeHarvard professor and sometime internet-law guru Lawrence Lessig,22 who, between

service in U.S. v. Microsoft23 and his professorial duties, has eloquently criticized patents

when applied to the internet.24 Similarly, Professor Merges of the University of

California at Berkeley, author or Intellectual Property in the New Technology Age,25 has

sharply criticized e-commerce patents.26 Bezos action has now added the influence of

18

An example is the several thousand negative comments regarding Amazon.coms 1-Click enforcementthat accompany the Open Letter from open-source advocate Tim OReilly to Amazon.com chairman JeffBezos. See www.oreilly.com/ask_tim/amazon_patent.comments.html.19

A detailed listing of the opposition to such patents is available at www.bustpatents.com, operated by

Internet Patent News Service founder Greg Aharonian.20

See the discussion of Richard Stallman in n.3, supra.21

See M. Duvall, No Patent Excuses, Inter@ctive Week (May 27, 1999) published atwww.zdnet.com/intweek/stories/column/0,4163,2266093,00.html.22

See the discussion of Professor Lessigs views accompanying notes 31-38 and 41-44 infra.23

Professor Lessig was selected by the presiding judge in the Microsoft anti-trust litigation, Judge ThomasPenfield Jackson, appointed him a special master to address issues relating to a 1995 consent decree, a rolethat was subsequently rejected by the Court of Appeals for the D.C, Circuit. Professor Lessig wasnevertheless invited by Judge Jackson to submit an amicus brief on liability issues. Professor Lessigsrole in the Microsoft antitrust litigation is outlined in D. Bank, Legal Scholar Could Influence MicrosoftTrial, The Wall Street Journal, Feb. 23, 2000, p. B1 and A. Zitner, Harvard Professor Warns Privacy,

Free Speech on Net Sacrificed for Profit, Knight-Ridder/Tribune March 22, 2000, available atipnetwork.com/newsstorypage.asp?id_number=1752&sec=news.24

See L. Lessig, The Problem with Patents, The Standard, Apr. 23, 1999 atwww.thestandard.com/article/display/0,1151,4295,00.html. See also L. Lessig, Patent Problems, TheStandard, Jan. 21, 2000 available at www.thestandard.com/article/display/0,1151,8999,00.html.25

New York, Aspen Law and Business (1977).26

R. Merges,As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Conceptsand Patent System Reform, 14 Berkeley Technology Law Journal (1999). Merges also contends that incumulative technologies such as the software industry, broad blocking patents have retarded innovation

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the largest e-commerce player on the side of the opponents of patenting business

methods, resulting in an alignment of intellectual prowess and internet prestige favoring

restrictions on State Street.27

The vociferous opposition to business method patents in the software and

internet world demonstrates an emotional commitment to unrestricted copying of theideas of others.28 According to software patent opponents, internet patents are

absurdly broad, and part of a patent policy that obviously undermines competition,

discourages innovation, and distorts market dynamics in an important, emerging

industry.29 The same commentator contends that a profound error underlies the

dysfunctional tradition of jurisprudence involving internet patents,30 and that

[i]nternet patent holders are violating the constitutionally guaranteed freedom of

software developers to engage in thought processes characteristic of their profession.31

Others suggest that internet patent suits are obviously spurious and odious, such

that the patent laws will be a tool for the slow to retard the fast and the big to stymie

the small on the web.32 Internet patents look, it is said, as if they were invented byany schmoe, by taking some everyday occurrence and adding to it the phrase with a

and industry growth. See Merges & Nelson, On the Complex Economics of Patent Scope, 90 Col. L. Rev.839, 890-94 (1990).27

Additional intellectual support for the anti-patent position was expressed in the early 1990s by the staffof the Bureaus of Competition and Economics of the Federal Trade Commission, Comment of the Staff ofthe Federal Trade Commission, Docket No. 9505 31 44-5144-01, available atwww.ftc.gov.be/v950013.htm.28

One commentator stated: I predict that tough cybersquatters law (up to five years in jail and a $100,000fine) will be expanded to include claiming patents for obvious or prior art. Such trumped-up patent claimsare the worst form of cybersquatting, and are simply unenforceable internationally, as the offshore casinobusiness indicates. A. Lightman,The Myths that Support Massive Internet Market Caps,IntellectualCapital.com (Jan. 13, 2000), available atwww.intellectualcapital.com/issues/issues337/item7886.asp.29

B. Pfaffenberger,Internet Patents: Giving away the Store, Linux Journal, Dec. 23, 1999 (published onthe web at www2.linuxjournal.com/articles/currents/014.html). The theme that internet and softwarepatents are discouraging innovation is common. See, e.g., R. Wilson , The Patent System Has Just GoneMAD, Electronic Engineering Times, Jan. 1, 1999 available at www.bustpatents.com/eetimes.htm; M.Miller, Software Patents Must Go, PC Magazine, Mar. 15, 1999 available atwww.bustpatents.com/mustgo.htm; J. Gurley, The Trouble With Internet Patents, Fortune, Jul. 19, 1999available at www.fortune.com/fortune/technology/gurley/1999/07/19/index.html; M. Richtel, Are PatentsGood or Bad for Business Online?, The New York Times (Aug. 28 1998), available on line atwww.nytimes.com.30

Id.31

Id.32

C. Shirky, No Title, Feed Daily (Dec. 23, 1999) (published on the web atwww.feedmag.com/daily/dy122399.html). Similar, thoughts have been expressed by William Purcell,Chief Executive of Planet U., a recent defendant on an internet patent suit brought by Coolingsavings,when he stated that when people get a patent, they often get patent testosterone and think their patentcovers a lot of area it doesnt. R. Korman, Behold the Technology Patents! Behold the String of

Lawsuits!, The New York Times (Dec. 27, 1998), available at www.nytimes.com.

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computer network.33 Even normally staid editorialists at the Wall Street Journal have

piled on, referring to patent office employees as turnips, who are creating dozens of

dubious new monopolies by granting exclusive rights to every random notion.34

In attacking internet patents, the critics echo the pre-State Streetattack on patents

generally in the software arena. A common view was (and is) that [p]atents cantprotect or invigorate the computer software industry; they can only cripple it.35 This is

so, at least in part, because software developers often believe that most of the [software]

patents have about as much cleverness and originality as a recipe for boiled rice.36 In

1991, the League for Programming Freedom issued its manifesto Against Software

Patents,37 that attacked Absurd Patents and took the view that software patents

threaten to devastate Americas computer industry.38 Other critics frequently contend

that the Patent Office does not have access to the most important prior art, which, they

argue, is contained in non-patent references.39 Wiredmagazine fueled the opposition first

in 1994 with an expose of what it termed the software patent crisis40 and next in

1996 when it criticized E-datas enforcement of its patent on electronic distribution.41The opposition continues today.42

Even Professor Lessig has pulled no punches in attacking business method

patents. Calling such patents the space debris of cyberspace,43 Lessig suggests grant of

33

P. Wayner,How Can They Patent That? The Torrent of Patents for E-Commerce Schemes Raises NewQuestions About an Old-Fashioned System, Salon Magazine (March 9, 1999) (published on the web atwww.salon.com/21st/feature/1999/03/09feature.html).34

See H. Jenkins Jr., Gasoline Joins the Information Age, The Wall Street Journal, p. A27 (June 21,2000).35

S. Garfinkle, R. Stallman & M. Kapor, Why Patents Are Bad For Software, Issues in Science andTechnology (Fall 1991) (on the web at lpf.ai.mit.edu/Links/prep.ai.mit.edu/issues.article).36

Id.37

The Feb. 28, 1991 publication can be found at http://lpf.ai.mit.edu/Patents/against-software-patents.html.38

Id.39

See, e.g., J. Markoff, Internet Gadfly Wants U.S. To Put More Data Online, The New York Times(May 4, 1998), available on the web at www.nytimes.com. The most vocal advocate of this position isGreg Aharonian, whos position is detailed at www.bustpatents.com.40

S. Garfinkel,Patently Absurd, Wired (July 1994)(www.wired.com/wired/archive/2.07/patents_pr.html).A laterWiredarticle describing how easy it is for a corporation with a lame-duck product to make a minton someone elses intellectual property.41

See S. Berger,Patently Offensive, Wired(Sep. 1996)(www.wired.com/wired/archive/4.09/scans.html?pg=7).42

See, e.g., B. Pfaffenberger, The Coming Software Patent Crisis: Can Linux Survive? Linux Journal,August 10, 1999 (www2.linuxjournal.com/articles/currents/003.html);D. Johnson , Fight for Software

Freedom Far From Over Interview With Richard Stallman, Linux Today, Aug. 19, 1999(linuxtoday.com/stories/8940.html): J. Berst, How Patent Attorneys Are Stealing Our Future, ZDNet,January 18, 2000 (www.zdnet.com/anchordesk/story/story_4364.html). Some voices are more restrained.See T. Riordan, PATENTS; Historians Take a Longer View Of Net Battles, The New York Times (Apr.10, 2000), available at www.nytimes.com.43

Lessig, The Problem with Patents at note 11,supra.

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such patents siphons off resources from technologists to lawyers.44 According to

Lessig, [w]hen the world was given TCP/IP and the collection of protocols it induced, a

billion ideas became obvious to anyone who took the time to think.45 Nevertheless, says

Lessig, a feeding frenzy is underway.46 Referring to business method patents as a

monster,47 and a weed that will choke innovation,48 Lessig contends such patents

will change cyberspace because [l]awyers will be regulating the coders; innovation willproceed only as quickly as the licenses can be sold.49 In a final swipe at patent lawyers,

Lessig calls for immediate action by Congress, because [t]his central issue about the

future of innovation should not be left to the innovation of lawyers, the mandarins of our

culture, pushing courts to see how this is just like that.50

Although the reaction to State Streetin the intellectual property community has

been more subdued, the decision has nevertheless produced a host of comments and

articles51 reflecting the strong interest in the subject among patent and other intellectual

property attorneys. The PTO reaction has been the most vigorous. On March 29, 2000,

the Patent Office unveiled its Business Methods Patent Initiative,52 which announced,among other things, a new second-level review of allowed business method

applications.53 Unfortunately, neither the PTOs action nor the articles assist in

44

Id.45

Id. That comment reveals the depths of Professor Lessigs ignorance of the difficulties surroundinginnovation.46

Id.47

Lessig,Patent Problems,supra.48

Id.49

Id.50

Id. Quoted in the New York Times Magazine, Lessig expressed even greater hostili ty to softwarepatents. Calling them a disaster, Lessig contended they create these little mafia monopoly holders whocan go around demanding, with a federal court behind them, that you pay up or well shut you down. J.Gleick,Patently Absurd, New York Times Magazine (March 13, 2000).51

E.g., C. Cantzler, State Street: Leading the Way to Consistency for Patentability of ComputerSoftware, 71 U. Col. L. Rev. 423 (2000);C. Feldman,Business Method Patents in the Age of ElectronicCommerce: The State Street Decision and its Aftermath, II John Marshall Law School Center forIntellectual Property Law News Source 16 (Winter 2000); G. Rinkerman & K. Sheehan, Patent Protection

for Investment and Financial Service Configurations, 116 Banking L.J. 166 (1999); S. Swanson, ThePatentability of Business Methods, Mathematical Algorithms and Computer-Related Inventions After theDecision by the Court of Appeals for the Federal Circuit in State Street, 8 Federal Circuit Bar Journal 153(1999): R. Merges, As Many as Six Impossible Patents Before Breakfast: Property Rights for BusinessConcepts and Patent System Reform, 14 Berkeley Technology Law Journal (Spring 1999); S. Alter,

Federal Circuit Broadens Scope for Software Patents, 15 The Computer Lawyer 24 (Oct. 1998).52

See www.uspto.gov/web/offices/sol/actionplan.html. A copy of the initiative is contained in AppendixC. The National Academies of Science Board on Science, Technology, and Economic Policy sought proposals on March 23, 2000 for Research on Intellectual Property in the Knowledge-Based Economy,that will include, in Topic 2, an analysis of Software-enabled business method patents andbiotechnology patents. See Federal Register, March 23, 2000.53

Id. Rumors among patent attorneys suggest that the second-level review will actually produce amoratorium on business method patents.

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interpreting the term business method or suggest ways for the patent system to cope

with the burgeoning controversy.

B. Biting the Hand that Feeds Them

Much of the software communities criticism of patents stems from a desire to beable to write code without worrying about infringing on the rights of others.54 Despite

that simple source, the intellectual underpinning of the opposition is a broadly-based

assault on the benefits intellectual property confers on the growth and vitality of the

software industry. As expressed by Professor Lessig, the opposition to business method

patents arises from a belief that intellectual property is non-rivalous, that is, intellectual

property supposedly differs from conventional property because one persons use of a

concept protected by intellectual property does not stop another from also using that

property.55 An apple, according to professor Lessig, can be eaten by only one person,

but the same intellectual property can be used repeatedly by any number of people

without interfering with a use by others.56

That view leads to Lessigs conclusion,expressed for both patents and copyrights, that increased intellectual property protection

often reduces innovation.57 In simplest form, this argument contends that the e-

commerce and software industries would continue to do well, even absent patent

protection.58

The opposition in the software and internet world to patent protection represents

a fundamental failure to understand the importance of intellectual property, especially

patents, in creating and maintaining capital funding for software and e-commerce ventures.

Ease of imitation of a product produces a powerful disincentive to funding that products

development. Strong intellectual property protection, including broadly enforced patent54

Salon Magazine states that [o]ne reason the Web has grown so fast is that good ideas get copied soquickly. S. Rosenberg,Amazon to world: We control how many times you must click! Salon Magazine(Dec. 21, 1999), www.salon.com/tech/log/1999/12/21/bezos/. See the discussion of articles regardingstifling innovation at n. 19,supra.55

See L. Lessig, Code and Other Laws of Cyberspace, New York, Basic Books, ch. 10, 1999. ProfessorLessig cites Thomas Jefferson as the fundamental source of the concept.Id. In modern economics, thesource of the concept is, as Lessig notes, K. Arrow, Economic Welfare and the Allocation of Resources for

Invention, in The Rate and Direction of Inventive Activity: Economic and Social Factors, Princeton, N.J.,Princeton University Press, 1962. Professor Lessigs discussion in Code focuses on copyright protection,but similar concepts underlay his opposition to internet patents. See L. Lessig, The Problem with Patents,The Standard, April 23, 1999, www.thestandard.com/article/display/0,1151,4295,00.html; L. Lessig,

Patent Problems, The Standard, Jan. 21, 2000. published atwww.thestandard.com/article/display/0,1151,8999,00.html.56

Id. Professor Lessig speaks in terms of ideas being non-rivalous, and thereby introduces confusioninto his argument about copyright protection by failing to distinguish between copyrightable expressionsof ideas and the ideas themselves. A careful reading ofCode leads to the conclusion that Professor Lessigconsiders both ideas and expressions of ideas as non-rivalous.57

See L. Lessig, The Problem with Patents, The Standard, April 23, 1999,www.thestandard.com/article/display/0,1151,4295,00.html.58

See, e.g., J. Gleick, Patently Absurd,at n. 8supra.

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protection, discourages imitation. The result is that greater R & D funds are available for

technologies with strong intellectual property protection, because competitors cannot

easily copy the ideas of the market pioneer and thereby obtain the benefits of the

development without expending the same funds.59 A demonstration of the investment

communities view of the value of patents occurred when biotech stocks plummeted in

March, 2000 on the mere suggestion by the President and British Prime Minister thatgenetic technology should be made freely available to scientists everywhere.60 Although

critics of e-commerce patents contend such patents allow large companies to drive small

competitors out of the market,61 in practice, the effect is the opposite: strong patent

protection allows small organizations to compete with the largest businesses.62 Using

Lessigs terminology, patented inventions are indeed rivalous, because an unauthorized

infringing use can drive the inventor out of the market; often, small entities can compete

with the vastly greater marketing and financial muscle of large corporations only by

having exclusive rights in their developments,63 a fact that is recognized by the investment

community.64 The failure of the software and e-commerce industries to recognize the

benefits of broadly enforced patent rights presents a challenge to the patent communitythat can best be met by better marketing and dissemination of the intellectual property

message.

C. The Road toState Street

59

This principle is well known to the investment community, and to many in the internet community.See A. Kessler, Creative Destruction Can Be Lucrative, Wall Street Journal (Apr. 18, 2000); T .Riordan, Patents Considered Vital to Thrive on the Internet, The New York Times (Dec. 20, 1999)available at www.nytimes.com; M. Richtel, Are Patents Good or Bad for Business Online, The NewYork Times (Aug. 28, 1998) available at www.nytimes.com. The phenomenon is also detailed further for

the legal community in two National Law Journal articles. See G. Lawrence & C. Lobsenz, Tech Start-Ups Must Assess IP Before Pursuing Cash, The National Law Journal, p. C02 (June 21, 1999), availableat test01.ljextra.com/na.archive.html/99/06/1999_0613_76.html and A. Riddles, L. Bromberg & K. Diaz,Start-Up Companies Should Devise IP Strategies, The National Law Journal, p. C07 (February 8, 1999),available at test01.ljextra.com/na.archive.html/99/01/1999_0131_64.html.60

See L. Lindsey, Washington Leads Bulls to Slaughter, The Wall Street Journal (April 21, 2000). Themarket reaction to the statements of the President and Prime Minister caused the US Patent Office to issuea press release on March 16, 2000 reaffirming that U.S. patent policy regarding patenting human genesequence data had not changed. See Patent and Trademark Office Press Release #00-17, March 16, 2000,available at www.uspto.gov/web/offices/com/speeches/00-17.htm.61

See, e.g., A. Katz, State Street May Place Start-Ups in Peril, New York L. J. Feb. 18, 2000 atwww.nylj.com/tech/011999t2.html; B. Pfaffenberger, The Coming Software Patent Crisis: Can LinuxSurvive? Linux Journal, Aug. 10, 1999 at www2.linuxjournal.com/articles/currents/003.html.; B. Perens,

Preparing for the intellectual-property offensive, Linux World, Nov. 1998

www.linuxworld.com/linuxworld/lw-1998-11/f_lw-ll-thesource.html.62

The best software example is in the case ofStac Electronics v. Microsoft Corp., No. C-93-0413-ER(C.D. Cal.). In Stac, Microsoft was found to infringe and liable for $120 million in damages when itattempted to incorporate Stacs data compression invention into Microsofts MSDOS 6.0 and 6.2 operatingsystems.63

A detailed discussion of this issue, addressed from an anti-patent perspective, is contained in R. Mergesand R. Nelson, On the Complex Economics of Patent Scope, 90 Columbia Law Review 839 (1990).64

. See A. Kessler, Creative Destruction Can Be Lucrative, Wall Street Journal (Apr. 18, 2000); L.Lindsey, Washington Leads Bulls to Slaughter, Wall Street Journal (Apr. 21, 2000).

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How did the patent world come to this crossroad? Listening to the anti-patent

hysteria, one could easily conclude that greedy lawyers with no interest in innovation

(and perhaps a latent desire to destroy the freedom of the internet) hoodwinked the

courts into mounting a radical assault on cyberspace.65 Instead, acceptance of business

method patents evolved slowly from a recognition by the courts that such patents were

never really prohibited, and that the 1952 Patent Act cannot reasonably be construed toexclude business methods from patentable subject matter.

The evolution of the decisions leading to State Street has been frequently

described.66 The genesis of the prohibition on business method patents is commonly

said to have arisen in Hotel Security Checking Co. v. Lorraine Co.,67 a 1908 case

containing dicta saying [n]o mere abstraction, no idea, however brilliant, can be the

subject of a patent irrespective of the means designed to give it effect.68 This was,

according to the Hotel Security court, because a system of transacting business

disconnected from the means of carrying out the system is not, within the most liberal

interpretation of the term, an art.69 However, as the Federal Circuit noted in StateStreet, the decision in Hotel Security did not rely on the business method exception to

render the patent invalid: [i]n that case, the patent was found invalid for lack of novelty

and invention, not because it was improper subject matter for a patent.70 Hotel

Security nevertheless became the source of judicial statements that business methods were

not patentable subject matter,71 eventually resulting in the PTOs adoption of a policy

against granting business method patents.72

The exclusion of business methods from patentable subject matter was only half

of the mid-twentieth century legal obstacles to business method patents. The

65

Displaying a fine disregard for the history of patents relating to business methods, Lessig says businessmethod patents were discovered by a federal court in 1998. Id. The research in the area neverthelessdemonstrates that so-called business method patents have long been issued and enforced. See M.Feulling , Manufacturing, Selling, and Accounting: Patenting Business Methods, 76. J. Pat. Ofc. Socy471 (1994).66

See, e.g., C. Cantzler, State Street, Leading the Way to Consistency for Patentability of ComputerSoftware, 71 U. Col. L. Rev. 423 (2000); S. Swanson, The Patentability of Business Methods,Mathematical Algorithms and Computer-Related Inventions After the Decision by the Court of Appeals forthe Federal Circuit in State Street, 8 Fed. Cir. B. J. 153 (1999); S. Alter, Federal Circuit BroadensScope for Software Patents, 15 The Computer Lawyer 24 (1998).67

160 F.2d 467 (2d Cir.1908).68

160 F.2d at 469.69

Id.70

State Street, 149 F.3d. at 1376.71

See, e.g., Loews Drive-In Theatres, Inc. v. Park-In Theatres, Inc., 174 F.2d 547 (1st Cir. 1949).72

Editions of the Manual of Patent Examining Procedures published before 1996 provided: [t]houghseemingly within the category of process or method, a method of doing business can be rejected as notbeing within the statutory classes. SeeHotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2

ndCir.

1908) and In re Wait, 73 F.2d 982, 24 U.S.P.Q. (BNA) 88, 22 C.C.P.A. 822 (1934). MPEP 706.03(a) (1994).

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Mathematical Algorithm Exception served for much of the century to place equally

difficult obstacles to patenting such inventions. Based upon the principle that patents

cannot extend to mere abstract ideas the mathematical algorithm exception operated to

preclude patents involving a sequence of definable steps, such as are typically carried out

by software. Since many, if not most, modern developments in business methods involve

use of computers, the mathematical algorithm exception gave courts additionalammunition to reject patents on commercial activity.

The restraints on algorithm patents began to loosen with Diamond v. Diehr,73 in

which the Supreme Court reiterated the prohibition against patents on mathematical

algorithms so long as the represent mere abstract ideas, but eviscerated that restriction by

agreeing algorithms are patentable when they produce a tangible result.74 The Federal

Circuit further loosened the restrictions in two cases describing the Federal Circuits

understanding of the Diehr standard, In re Alappat75, and Arrhythmia Research

Technology, Inc. v. Corazonix Corp.76 With the decision in State Street, the Federal

Circuit removed all doubt as to the patentability of software systems conducting financialactivity.77 UnderState Street, the analysis now focuses on the essential characteristics

of the subject matter, in particular, its practical utility.78 Methods and systems having

such practical utility are patentable subject mater.79

D. High Tech vs. Low Tech

Any analysis of Internet and e-commerce patents must also included a candid

appraisal of their likely enforceability. Despite the success of Amazon.com in enforcing

the 1-Click patent,80 real uncertainty exists regarding the overall reception such

patents will receive in the courts. Many e-commerce patents represent simple,

understandable developments that, while patentable, do not describe and claim pioneeringdevelopments. Traditionally, low tech, easily-understood developments, have received

less favorable treatment in the courts.81 Logically, when faced with Internet patents that

73

450 U.S. 175 (1981).74

Diehr, 450 U.S. at 193.75

33 F.3d1526 (Fed. Cir. 1994) (in banc).76

958 F.2d 1053 (Fed. Cir. 1992).77

State Street reiterated the holding that it is no ground for holding a claim is directed to nonstatutorysubject matter to say it includes or is directed to an algorithm. 149 F.3d at 1375 (quoting In re Iwahashi,888 F.2d 1370, 1374 (Fed. Cir. 1989). State Streetalso ruled that the old Freeman-Walter-Abele test ofthe Court of Customs and Patent Appeals has little, if any, applicability to determining the presence ofstatutory subject matter. Id. at 1374.78

149 F.3d at 1375.79

At least one member of the software community vigorously rejects this proposition. See B.Pfaffenberger,Internet Patents: Giving away the Store, Linux Journal, Dec. 23, 1999 (published on theweb at www2.linuxjournal.com/articles/currents/014.html)80

SeeAmazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp. 2d 1228 (W.D. Wa. 1999).81

The Supreme Court in particular has used cases on patents describing simple, easy-to-understanddevelopments to present express its most problematic decisions. See, e.g., Sakraida v. Ag Pro, Inc., 425

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represent minor adaptations of earlier practices to the web, an unbiased observer would

expect a high frequency of invalidity rulings. Indeed, the greatest criticism of e-commerce

patents has been directed toward patents that, at least to lay commentators, appear to do

nothing except take an old practice and claim the use of that practice on the web as an

invention.82 The reality is that many Internet patents involve the cyberspace equivalent

of patenting familiar household implements; the patents specification is dressed in themost formal facade the drafting attorney can prepare, but upon close inspection the

patent represents a disappointedly trivial development.

A different conclusion, however, is appropriate for patents that describe truly

innovative uses of the web, and which could not have been developed before the advent of

commercial use of the Internet. Indeed, a key part of evaluating the potential validity of

Internet and e-commerce patents is the answer to the question: Does the patent claim a

method that was not possible before the creation of the web? If the answer is yes, then

the patent is likely following in the grand tradition of improvement that represents the

bulk of patents world wide, and has a higher chance of surviving an attack on its validity.A contrary answer means the patent is potentially subject to a vigorous validity

challenge.

II. WHAT IS A BUSINESS METHOD PATENT?

A discussion of business method patents should begin with a definition of

business methods. While the phrase e-commerce patents seems to allow little

ambiguity, no accepted or even proposed definition of business method patents exists.

Instead, the phrase is used to describe a legion of method and even occasional deviceinventions, spanning the gamut of possible commercial applications. The topic was

significant before State Street because of the need to avoid drafting claims directed to

nonstatutory subject matter.83 The issue was reduced to mere academic interest after

State Street; in the view of most patent attorneys, State Streets primary effect was to

eliminate an unnecessary concern when drafting patent claims. A year and a half of

tranquility ensued, at least for patent prosecutors.

The 1999 American Inventors Protection Act84 returned the subject to the

vanguard of patent issues. The act creates a new First Inventor defense85 to a claim of

patent infringement, applicable only to patents directed to methods of doing

U.S. 273, rehg denied, 426 U.S. 955 (1976); Great Atlantic and Pacific Tea Co. v. Supermarket

Equipment Co., 340 U.S. 147 (1950), rehg denied, 340 U.S. 918 (1951).82

The Priceline.com reverse auction patent has been frequently subjected to that criticism.83

See MPEP 706.03(a) (1994) (now superseded).84

Pub. L. No. 106-113, enacted Nov. 29, 1999.85

American Inventors Protection Act of 1999,. 4302.

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business.86 Neither the act nor the its legislative history provides any hint of a useful

definition of the term business method,87 leaving it to the courts to determine which

patents are and are not subject to the defense. The cacophony raised by the open

source community, with the potential to energize legislation from Congress, adds

urgency to the need to resolve the problems created the definitional absence.

The failure to provide a definition in the Inventors Protection Act is peculiar,

given the frequent description of the ambiguity surrounding such patents. Indeed, Judge

Newman lamented the fuzzy nature of the term business methods in her dissent in In

re Schrader,88 a precursor to the Federal Circuits ruling in State Street. Judge Newmans

opposition to the business method exception mirrored statements of earlier

commentators89 and the general ambiguity contained the cases involving so-called

business method patents.

The ambiguity continued in the Federal Circuit decision in State Street. Although

frequently referred to as the definitive case establishing the legitimacy of business methodpatents, the claims at issue in State Street were not even method claims.90 Directed to a

data processingsystem for managing a financial services configuration of a portfolio,91

the primary claim in issue was drafted as a conventional collection of means-plus-function

elements, including a computer processor means, a storage means, and various means

for either initializing the storage medium, or processing data.92 Nothing within the

claim suggests that a method was claimed, leading to the inescapable conclusion that the

86

Id.87

Id. Strangely, the section-by-section analysis of the Act included the statement that a business method

can be a preliminary or intermediate manufacturing procedure, which contributes to the effectiveness of thebusiness by producing a useful end result for the internal operation of the business or external sale. Id.

(emphasis added). The reference to manufacturing makes this explanation so broad (indeed, it readily

applies to virtually every manufacturing practice0 that it has virtually no usefulness.88

Judge Newman stated that the business method exception is an unwarranted encumbrance to the

definition of statutory subject matter in section 101, that [should] be discarded as error-prone, redundant and

obsolete. It merits retirement from the glossary of section 101. 22 F.3d 290, 298 (Fed. Cir. 1994)

(Newman, J., dissenting).89

See, e.g., R. Del Gallo, Are Methods of Doing Business Finally Out of Business as a StatutoryRejection? 38 IDEA 403 (1998); M. Fuelling, Manufacturing, Selling, and Accounting: Patenting Business Methods, 76 J. Pat. & Trademark Ofc. Socy 471 (1994); A. Hansmann, Method of DoingBusiness, 50 J. Pat. Ofc. Socy 503 (1968); G. Tew, Method of Doing Business, 16 J. Pat. Ofc. Socy 607

(1934).90

Indeed, the Federal Circuit specifically concluded in State Street that the claims in issue were notdirected to a process. 149 F.3d at 1371.91

State Street, 149 F.3d at 1371 (emphasis added). Claim 1 of the patent addressed in State Street is setforth in Appendix B-1.92

Id. at 1371-72.

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phrase business method patents could come to refer to virtually any kind of patent that

relates to financial activity.93

The scope of the uncertainty is also illustrated by reference to patents advanced

by participants in the debate as directed to business methods. Wright94 suggests

business method patents might include patents directed to: a method of trackingexpenses,95 a method for conducing a survey of music listeners,96 a method for operating

a dating service,97 an interactive game show,98 a method of estimating damage to a

vehicle,99 a method of forecasting business performance based on weather trends,100 a

method of using estimates for the future earnings potential of college students to fund

their college tuition 101 and a method of walking under water.102 Three current examples

of patents frequently contended to cover business methods are the Priceline.com patent

directed to set-your-own-price auctions,103 the Amazon.com 1-Click patent,104 and

the recently issued Amazon.com associates patent.105 Although those patents have

garnered the greatest recent hysteria, examples from the past show how broadly the

phrase business methods can be construed.

A review of such sample business method patents provides some insight, but

no definitive conclusion. Patents that include financial transactions as part of one or more

claim elements are likely to be considered business method patents. Thus, the

Priceline.com name-your-own-price patent includes all of the steps for a making

purchase, i.e., an offer, an acceptance and a payment.106 The Open Market, Inc.

shopping cart patent has elements that include a computer programmed to receive a

request for purchasing, and to cause a payment message to be sent.107 U.S. Patent

No. 5,809,484, directed to funding student education by acquiring shares in students

93

As early as 1934, a commentator on business methods noted the distinction between patents claiming business methods, and patents directed to inventions useful in the conduct of business. See G. Tew,Method of Doing Business, 16 J. Pat. Ofc. Socy 607 (1934).94

B. Wright , Patents That Protect Methods of Doing Business: Are They Worth The Paper TheyrePrinted On? National L. J., Nov. 22, 1999.95

U.S. Patent No. 5,947,526. See, Appendix B-7.96

U.S. Patent No. 5,913,204. See, Appendix B-6.97

U.S. Patent No. 5,920,845. See, Appendix B-9.98

U.S. Patent No. 5,108,115..99

U.S. Patent No. 5,839,112. See, Appendix B-5.100

U.S. Patent No. 5,832,456. See, Appendix B-4.101

U.S. Patent No. 5,809,484. See, Appendix B-3.102

U.S. Patent No. 5,906,200.103

U.S. Patent No. 5,794,207. See, Appendix A-2.104

U.S. Patent No. 5,690,411. See, Appendix A-1.105

U.S. Patent No. 6,029,141.106

See Claim 1 of U.S. Patent No. 5,794,207, set forth at Appendix A-2.107

See Claim 1 of U.S. Patent No. 5,715,314, set forth at Appendix A-3.

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future earnings, includes processingcollection and receipt from investors offunds,

and generatinga documentfor purchasing an amount of student earnings.108 The

Amazon.com 1-Click patent includes elements for sending a request to order,

generating an order to purchase, and fulfilling the generated order.109 U.S. Patent No.

5,191,573, directed to transmission of digital audio signals, includes elements involving

transferring money and transmitting the desired digital audio signal from a memorycontrolled by the party receiving the money.110

Inclusion of financial transactions is not the only way a claim can come to be

considered to be part of a business method patent. Claim 1 Patent No. 5,839,112

specifies a method for estimating damage to a vehicle; no transfer of money is mentioned

in the claim.111 Similarly, Patent No. 5,913,204 claims a method for surveying the

preferences of listeners to a radio station,112 and No. 5,920,845 describes a method of

running a date matching event.113 U.S. Patent 5,851,117 describes a method for training

an individual how to conduct janitorial cleaning activities.114 Each of the activities can be

conducted entirely without any payment of money and separate from any commercial business enterprise. Whether such non-financial patents will be considered to claim

business methods as that term is used in the American Inventors Protection Act

remains to be seen.

Even trying to define business method patents by reference to payment or

transfer of money is troublesome, since many devices can receive money (i.e., the coin-

receptor mechanism in a video game) without being part of a business transaction. As one

early commentator noted, a distinction should be drawn between patents on methods of

doing business and methods used in business.115 Logically, the former would be subject

to the prior user defense, while the latter would not. Unfortunately, even such simpleclarity is lacking.

Some limited clarity help and some additional confusion is provided by

reference to the PTO initiative on business method patents.116 That initiative expressed

the PTOs decision to provide a second review to business method patent applications.

Without explanation, the Patent Office decided to apply the second review to all

108

See Claim 39, set forth at Appendix B-3.109

U.S. Patent No. 5,960,411, set forth in Appendix A-1.110

Claim 1 is set forth at Appendix B-2.111Claim 1 is set forth at Appendix B-5.

112Claim 1 is set forth at Appendix B-6.

113Claim 1 is set forth at Appendix B-9.

114Claim 1 is set forth at Appendix B-8.

115See G. Tew Method of Doing Business, 16 J. Pat. Ofc. Socy 607, 608 (1934).

116That initiative is described in the text accompanying note 52 supra, and is contained in Appendix C.

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applications in Class 705 of the Manual of U.S. Patent Classification.117 Class 705,

which existed long before the web attained any commercial use (and well before the

decision in State Street) is titled: Data Processing: Financial, Business Practice,

Management, or Cost/Price Determination, and includes such varied subjects as

cryptography in a postage metering system, point of sale terminals or electronic cash

registers, and inventory management. Although evaluation of many of the subclasses ofClass 705 is less than helpful, some insight can be obtained from review of Class 705/1.

That subclass is titled: Automatic Electrical Financial or Business Practice or

Management Arrangement,118 and has the following definition:

Subject matter wherein an electrical apparatus and its corresponding

methods perform the data processing operations, in which there is a

significant change in the data or for performing calculation operations

wherein the apparatus or method is uniquely designed for or utilized in the

practice, administration, or management of an enterprise, or in the

processing of financial data.

Thus, in the data processing arts, a patent might be considered to specify a

business practice if the method involves the practice, administration, or management

of an enterprise, or is used in the processing of financial data. Helpfully, the class

definition notes that [m]ere designation of an arrangement as a business machine or a

document as a business form or business chart without any particular business

function will not cause classification in this or its indented subclasses.119 Nevertheless,

even the definition provided by the PTO definition of Class 705/1 is too general, since it

includes virtually any machine that is used in the practice, administration or

management of an enterprise. Further confusion arises from the fact that several of thepatents commonly considered to be directed to business methods have not been classified

by the Patent Office as part of Class 705.120

117

The manual is available at www.uspto.gov/web/offices/ac/ido/oeip/taf/moc/.118

Portions of the definition of Class 705 are set forth in Appendix D.119

See Appendix C.120

The most striking example is U.S. Patent No. 5,851,117 titled Building Block Training Systems andTraining Methods, (and which is directed to a method of training a janitor) which is in Class 434. The117 patent is frequently used as an example of the supposed absurdity of business method patents. Otherexamples are Patent No. 5,947,526, titled Personal Financial Tracking System and Method, Class 283;and Patent No. 5,191,573, titled Method for Transmitting a Desired Digital Video or Audio Signal,

Class 369. Many patents that expressly deal with Internet e-commerce are not contained in Class 705.The DoubleClick patent (No. 5,948,061) is Class 709. AT&Ts patent for billing over the Internet (No.5,905,736) is Class 370. The patent asserted by Network Engineering Software against Yahoo! (No.5,778,367) is Class 707; similarly, the patent asserted by CIVIX-DDI against AOL and Microsoft (No.5,682,525) is Class 707. Microsofts patent directed to intelligent selection of a search engine (No.6,009,459) is Class 709. The patent asserted by Trilogy Development against CarsDirect.com (No.5,825,651) is Class 700. Interestingly, the patent from State Street, No. 5,193,056, was originallyclassified in Class 364, then reclassified in Class 705. The same events occurred with the Open Market,Inc. patents on the shopping cart (no. 5,715,314); it was originally classified as Class 380, but reclassifiedinto Class 705.

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No good solution appears for this problem. As Judge Newman noted, classifying

patents as business methods is fuzzy, poorly defined, redundant, and

unnecessary.121 At best, the courts will settle on a simple bright line test such as

methods including a commercial transaction involving money. Even then, many

litigation battles can and probably will be fought over whether specific patents fit thedefinition. At worst, the courts will adopt a flexible or obscure definition that leaves the

question in doubt until finally resolved by the termination of litigation.

III. ISSUES REGARDING INTERNET BUSINESS METHOD PATENTS

Beyond the question of just what is and is not a business method patent, a variety

of material questions remain regarding the best ways to draft and enforce business method

patents on e-commerce topics. Although some helpful determinations can be made, many

questions remain for future resolution.

A. Litigating Internet Business Method Patents

The topic of how to litigate business method patents presents fewer ambiguities

than the problems associated with prosecuting the patents or determining which patents

fit the definition. This is so, because such patents should, as a general rule, be litigated in

the same manner as all other patents.122 The presence of business method or e-commerce

subject matter does not change the need for traditional litigation tactics, which are

primarily governed by factors such as the amount of money at stake, the need or lack of

need for immediate injunctive relief, the financial resources of the parties, the similarities

or differences between the accused product and the claims, and the differences betweenthe invention and the prior art. Moreover, in business method suits, as in most cases,

topics such as whether the accused infringer copied the invention and whether the patent

owner committed inequitable conduct during the patents prosecution will overwhelm

many other considerations.

Some generalities regarding litigation of business method and e-commerce

patents are nevertheless appropriate. If the patent involves e-commerce, speed is likely

to be a critical factor. In an industry changing at internet speed, the typical two-to-four

year pendency before trial can reduce the litigation to mere marginal value, if it does not

make the litigation useless. The invention claimed in a patent can become obsolete longbefore the trial is commenced (or perhaps become materially reduced in value). Every e-

commerce patent litigation should therefore include evaluation of the potential for a

preliminary injunction, so that the suits tactics will thereafter flow from each sides

121

In re Schrader, 22 F.3d 290, 298 (Fed. Cir. 1994) (Newman, J., dissenting).122

See, e.g., J. Riedinger, Making Patent Trials Interesting, Presented Jan. 6, 1998 at the 1998 NationalCLE Conference session on Intellectual Property Law in Vail, CO.

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assessment of an injunctions potential. The successful assertion of the 1-Click

patent by Amazon.com is, of course, the most striking example, since an argument can be

made that Amazon.com prevailed regardless of the eventual outcome of the case;

Amazon.com obtained an injunction during an important period (Christmas 1999) when

e-commerce loyalties were being established. Similarly, the availability of provisional

rights for published applications will bring a new dynamic to litigation strategy, since anopportunity exists now for an owner of an e-commerce patent to obtain royalties for

activities occurring before the patent issues. In the fast-changing internet world, the time

before issuance might be the only period in which the invention is used significantly.

If the patent is broad and covers important e-commerce activity, litigation of a

business method patent can involve public relations considerations that are usually not

present in other patent litigation. The intense opposition to e-commerce patent

enforcement might lead to a vociferous outcry, a flood of email protests, or even a

boycott.123 In some circumstances, the open source community might join with the

defendant to locate invalidating prior art.124 No e-commerce patent litigation should becommenced without being prepared to address these options.

Obtaining jurisdiction over infringers will become an increasingly important issue,

especially in view of the likely infringers (or patent holders) outside the United States.

Absence a presence in the United States, many infringers will have to be pursued, if at all,

by foreign patents, a course made more difficult by the reluctance of other countries to

accept business method patents.125 Questions regarding personal jurisdiction within a

particular district will similarly arise, and will most likely be resolved in the manner as

copyright cases involving the web , i.e., passive web sites that are akin to a national

publication flowing into a district will not create sufficient minimum contacts to give riseto personal jurisdiction.126

The value of early and extensive prior art searches is often much greater in e-

commerce and business method litigation than in other patent cases, because the easily

available prior art is often limited. Typical prior art sources such as the Patent Office,

technical libraries and online references have yet to develop extensive business method

references (although that circumstance is changing rapidly). The bulk of the prior art,

which might include the most important art, is therefore likely to be found only by

exhaustive investigation in non-traditional sources. Defendants will need to begin their

123The boycott attempted against Amazon.com for its 1-Click enforcement is an example. See

Stallman, Updated: Richard Stallman Boycott Amazon! Linux Today,www.linuxtoday.com.story/13652.html.124

An example is described in J. Sullivan, Volunteer Army to Fight Patent, Wired News, May 3, 1999available at www.wired.com/news/politics/story/19452.html.125

A good overview of the issues is contained in B. Wright, Internet and E-Commerce Patents, availableat www.bannerwitcoff.com/articles.htm.126

See, e.g., Agar Corp. v. Multi-Fluid, Inc., 45 U.S.P.Q. 2d 1444 (S.D. Tex. 1997).

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searches earlier than usual, and conduct the searches with greater intensity. Although

expensive, the reward for those efforts is likely to justify the costs.

B. Drafting Internet Business Method Patents

In the broadest sense, e-commerce and business method patents are prepared

using the same principles applicable to other patents. The claims, drawings and

specifications are completed with the dual and somewhat inconsistent objectives of

obtaining the broadest claims the PTO is willing to allow, while simultaneously ensuring

that the patent does not cover the prior art. The patent should be prepared with

maximum variety in claims drafted and alternatives disclosed, and the claim language

include a careful balance of expressly understood (and therefore limited) terms and

deliberate ambiguity. The patent should be prepared, of course, in minimum time and

with minimum expenditure of the clients resources, financial or otherwise. Numerous

references give fine guidance on effective ways of accomplishing these traditional

objectives.127

Several aspects of e-commerce patents are, however, unique. The growing

hostility to patents within the software community and the presence of prior-user rights

suggest that some effort should be made to prevent a patent from being successfully

characterized as a business method patent, an admonition that is doubly applicable to

e-commerce patents. Techniques for doing so are the focus of the remaining discussion in

this section.

First, business method and e-commerce patents should not necessarily be

considered to be software patents. Although many business method and e-commerce patents involve inventions that are implemented in software, the invention can be and

often is broader than the software used to carry out the invention. As a result, many of

the techniques used in drafting software patents are either inappropriate or too narrow.

Beauregard128 or computer-readable medium claims will adequately protect the

particular steps of a business or e-commerce method when embodied on a single memory,

but are at best limited and at worst unable to capture the steps of a procedure that

includes manual activity. Lowry129 claims directed to software data structures will almost

never provide adequate protection. In highly limited circumstances, refined claiming

techniques such as propagated signal claims and compatible system claims might be

127

See, e.g, R. Faber, Landis on Mechanics of Patent Claim Drafting, Practicing Law Institute, 1996.See also J. Riedinger, Writing Patent Claims for Litigation, Presented Jan. 13, 1999 at the 1999 NationalCLE Conference on Intellectual Property Law, Vail, CO.128

SeeIn re Beauregard, 53 F.3d 1583 (Fed. Cir. 1995).129

SeeIn re Lowry, 32 F.3d 1579 (Fed. Cir. 1994).

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worthwhile, but will rarely provide other than the most limited protection.130 An

assumption that business method or e-commerce patent developments are merely

traditional software inventions can therefore lead to underprotection of the invention.

Some traditional software claiming techniques are appropriate. Many e-

commerce patents lend themselves well to user interface claims, directed to the steps performed when a computer interacts with the user.131 Such claims allow far easier

detection of infringement than, for example,Beauregardclaims where infringement cannot

be identified without access to information describing the internal operation of the

infringing system. Conventional method claims that simply describe the sequence of

steps performed in the invention, are not only useful in the software field but form the

foundation of most e-commerce and business method patents. Of course, the best

approach is to prepare a variety of claims using every possible approach, producing

broad, narrow and intermediate claims, as well as claims that vary in the ease with which

infringement can be detected.

Second, patents might avoid being characterized as claiming a business method if

no method is claimed. By so doing, some possibility exists that the claim will not be

subject to prior user rights. Although this principal is easy to assert, implementing that

guidance can be a more difficult proposition. Even though the Federal Circuit noted in

State Street that the claims in issue were not method claims,132 it still evaluated the

business method exception.133 Moreover, if means-plus-function claims are used, a

failure to include supporting structure for the recited means can result in the claim being

construed as a method claim.134

Third, the claim drafter should be wary of the ability of a potential infringer to

move its activity offshore, a possibility with particular relevance to e-commerce patents.

Claims should be avoided, if possible, that specify some of the necessary activity

occurring in a remote host computer. Doing so creates the possibility that the infringer

will move the host to a location outside the United States, and therefore outside the reach

of U.S. Patents (while still accessible to customers via the web). Although arguments can

be made that such a strategy would not prevent enforcement of the patent because the

effects of the host computer are experienced within the U.S., the need for that argument

should be avoided by drafting claims that do not recite a host, unless that host cannot be

easily moved abroad.

130

A discussion of various software claiming techniques is contained in W. Ferron, Business Method andSoftware Patents Legal Update, Feb. 2000.131

The Amazon.com 1-Click patent provides a good example of such claims. See Appendix A-1.132

State Street, 149 F.3d at 1371.133

Id. at 1375-77.134

See State Street, 149 F.3d at 1371. See also In re Abele, 684 F.2d 902, 909 (C.C.P.A. 1982); In rePardo, 684 F.2d 912, 916 n.6 (C.C. P.A. 1982); In re Walter, 618 F.2d 758, 768 (C.C.P.A. 1980).

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Fourth, some claims should be drafted to ease the detection of infringement. For

example, claims that are limited to the details of what occurs when a particular item of

software is processed by a computers CPU are often impossible to assert against an

infringer. Absent decompiling all possible software and examining the softwares function

(an impossible task), the patent owner might never know of an infringement. For e-

commerce patents, a good alternative is to focus the claims on those aspects of theinvention that are visible through use of a web browser, and no more.

Fifth, some business method patents, involve activity that, in hindsight, can

appear enormously simple. While the black letter law surrounding claims drawn to

simple inventions emphasizes that they deserve the same respect as complex

developments, the law and its application are rarely congruent. Some effort should still

be made to inject an aura of technical complexity into the patent, particularly when the

claimed invention can be considered to e merely adapting an old business technique to e-

commerce. Specifications should not be drafted with deceptive descriptions, but they

should also not be drafted without regard to the usually plentiful opportunities tomention the technical details that are frequently present but often overlooked by the

attorney drafting the application.

Sixth, e-commerce patents should not be drafted in a fashion that precludes

infringement. Surprisingly, some e-commerce patents are written so that neither the e-

commerce business nor the consumer using the browser can infringe by themselves; the

infringing activity requires action by both, leading to the unfortunate possibility that

neither direct nor inducement of infringement can be proved.135 Care should be exerted to

ensure that claims are drafted to focus on the activity of just the e-commerce business or

just the consumer. In a somewhat counter-intuitive result, claims that focus on directinfringement by the consumer are actually better, since the consumers activity is easier to

detect, and the e-commerce competitor is most likely to be liable for inducement of

infringement if direct infringement by a consumer can be proven.

In every claim, business method or otherwise, the patent scrivener should be

mindful of the admonition in Sage Products, Inc. v. Devon Indus., Inc.,136 where the

Federal Circuit noted:

as between the patentee who had a clear opportunity to negotiate broader

claims but did not do so, and the public at large, it is the patentee whomust bear the cost of its failure to seek protection for this foreseeable

alteration of its claims structure.137

135

An example is Claim 39 of the Shopping Cart patent, No. 5,715,314. Claim 39 of the x314 patent isset out in Appendix A-3.136

126 F.3d 1420 (Fed. Cir. 1997).137

Id. at 1425.

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Sage places the burden squarely on the shoulders of patent prosecutors to anticipate

foreseeable future developments and include them within the literal scope of a patents

claims. Given the hostile publicity against e-commerce and business method patents,

attorneys writing patents cannot expect courts to adopt expansive interpretations.

Rather, courts should be expected to embrace Sage, especially in view of the currentphilosophy of the Federal Circuit that promotes narrow claim interpretations over broad

ones.138 Redoubled efforts should thus be exerted to thoroughly claim every conceivable

variation when writing patents on e-commerce and business method inventions.

Finally, when e-commerce patents are involved, patent prosecutors should

seriously consider taking advantage of provisional rights. If the patentee maintains at

least one published (and infringed) claim unchanged during the prosecution, the patentee

will eventually be able to recover a reasonable royalty from those who use the invention

during the pendency of the patents application.139 The pace of change in the internet

world could cause provisional rights to provide the only meaningful recovery.

IV. CONCLUSION

The environment of e-commerce patents is still fluid, if not changing at Internet

speed. As more patents issue, and more patent suits are initiated, fought and resolved,

new issues will arise, and the already burgeoning world of Internet patent litigation will

become both more complex and more controversial. Due to the pace of change in the e-

commerce world, successful practitioners are well-advised to maintain a constant

awareness of new developments, and adapt as the Internet patent world changes, since

the only certainty is unceasing fluidity.138

Allen Archery, Inc. v. Browning Mfg. Co., 898 F.2d 787 (Fed. Cir. 1990). A detailed discussion ofthe Federal Circuit focus on the publics ability to review and understand the patent is contained in M.Banner, Notice The Philosophical Undercurrent of the Recent Federal Circuit Decisions, presented atthe Fifth Annual Intellectual Property Institute of the Washington State Bar Association, March 24, 2000.139

American Inventors Protection Act of 1999 4504. Provisional rights are now specified in 35 U.S.C. 154.

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A- 1

APPENDIX A

Patent Claims From Selected Internet Business Method Patents

A-1: U.S. Patent No. 5,960,411 (the Amazon.com 1-Click patent):

1. A method of placing an order for an item comprising:

under control of a client system,

displaying information identifying the item; and

in response to only a single action being performed,

sending a request to order the item along with an identifier of a

purchaser of the item to a server system;

under control of a single-action ordering component of the server system

receiving the request;

retrieving additional information previously stored for the purchaser

identified by the identifier in the received request; and

generating an order to purchase the requested item for the purchaser identified by

the identifier in the received request using the retrieved additional

information; and

fulfilling the generated order to complete purchase of the item

whereby the item is ordered without using a shopping cart ordering model.

6. A client system for ordering an item comprising:

an identifier that identifies a customer;

a display component for displaying information identifying the item;

a single-action ordering component that in response to performance of

only a single action, sends a request to a server system to order the

identified item, the request including the identifier so that the server

system can locate additional information needed to complete the order and

so that the server system can fulfill the generated order to complete

purchase of the item; and

a shopping cart ordering component that in response to performance of an

add-to-shopping-cart action, sends a request to the server system to add

the item to a shopping cart.

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9. A server system for generating an order comprising:

a shopping cart ordering component; and

a single-action ordering component including:

a data storage medium storing information for a plurality of users;

a receiving component for receiving requests to order an item, a

request including an indication of one of the plurality of users, the

request being sent in response to only a single action being

performed; and

an order placement component that retrieves from the data storage

medium information for the indicated user and that uses theretrieved information to place an order for the indicated user for the

item; and

an order fulfillment component that completes a purchase of the

item in accordance with the order placed by the single-action

ordering component.

11. A method for ordering an item using a client system, the method comprising:

displaying information identifying the item and displaying an indication of

a single action that is to be performed to order the identified item; and

in response to only the indicated single action being performed, sending to

a server system a request to order the identified item

whereby the item is ordered independently of a shopping cart model and the order

is fulfilled to complete a purchase of the item.

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A-2: U.S. Patent No. 5,794,207 (the Priceline.com patent titled Method and

Apparatus for a Crytographically Assisted Commercial Network System

Designed to Facilitate Buyer-Driven Conditional Purchase Offers):

1. A method for using a computer to facilitate a transaction between a buyer andat least one of sellers, comprising:

inputting into the computer a conditional purchase offer which includes an offer

price;

inputting into the computer a payment identifier specifying a credit card account,

the payment identifier being associated with the conditional purchase

offer;

outputting the conditional purchase offer to the plurality of sellers after receiving

the payment identifier;

inputting into the computer an acceptance from a seller, the acceptance being

responsive to the conditional purchase offer; and

providing a payment to the seller by using the payment identifier.

12. An apparatus for facilitating a transaction between a buyer and at least one of

a plurality of sellers, comprising:

a storage device; and

a processor connected to the storage device,

the storage device storing

a program for controlling the processor; and

the processor operative with the program to receive a conditional purchase

offer which includes an offer price;

receive a payment identifier specifying a credit card account, the

payment identifier being associated with the conditional

purchase offer;

make the conditional purchase offer available to the plurality of

sellers after receiving the payment identifier;receive an acceptance from a seller, the acceptance being responsive

to the conditional purchase offer; and

provide payment to the seller by using the payment identifier.

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23. A method for using a computer to facilitate a transaction between a buyer and at least

one of a plurality of sellers, comprising:

inputting into the computer a conditional purchase offer which includes an offer

price;inputting into the computer a payment identifier specifying a financial account,

the payment identifier being associated with the conditional purchase

offer;

outputting to the buyer a request for authorization to use the payment identifier

to provide a payment it an acceptance is received;

inputting into the computer authorization from the buyer in response to the

request;

outputting the conditional purchase offer to the plurality of sellers after receiving

the payment identifier;

inputting into the computer an acceptance from a seller, the acceptance beingresponsive to the conditional purchase offer; and

providing the payment to the seller by using the payment identifier.

A-3: U.S. Patent No. 5,715,314 (the Open Market, Inc. shopping cart patent):

1. A network-based sales system, comprising:

at least one buyer computer for operation by a user desiring to buy a product;

at least on merchant computer; and

at least on payment computer;

said buyer computer, said merchant computer, and said payment computer being

interconnected by a computer network;

said buyer computer being programmed to receive a user request for purchasing a

product, and to cause a payment message to be sent to said payment

computer that comprises a product identifier identifying said product;

said payment computer being programmed to receive s said payment message, to

cause an access message to be crated that comprises said product identifier

and an access message authenticator based on a cryptographic key, and tocause said access message to be sent to said merchant computer; and

said merchant computer being programmed to receive said access message, to

verify said access message authenticator to ensure that said access

message authenticator was crated using said cryptographic key, and to

cause said product to be sent to said user desiring to buy said product.

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34. A network-based sales system, comprising:

at least on buyer computer for operation by a user desiring to buy product;

at least on shopping cart computer; and

a shopping cart database connected to said shopping cart computer;said buyer computer and said shopping cart computer being

interconnected by a computer network;

said buyer computer being programmed to receive a plurality of requests from a

user to add a plurality of respective products to a shopping cart in said

shopping cart database, and, in response to said requests to add said

products, to send a plurality of respective shopping cart messages to said

shopping cart computer each of which comprises a product identifier

identifying one of said plurality of products;

said shopping cart computer being programmed to receive said plurality of

shopping cart messages, to modify said shopping cart in said shopping

cart database to reflect said plurality of requests to add said plurality of

product to said shopping cart, and to cause a payment message associated

with said shopping cart to be created; and

said buyer computer being programmed to receive a request from said user to

purchase said plurality of products added to said shopping cart and to

cause said payment message to be activated to initiate a payment

transaction for said plurality of products added to said shopping cart;

said shopping cart being a stored representation of a collection of products, said

shopping cart database being a database of stored representations ofcollections of products, and said shopping cart computer being a computer

that modifies said stored representations of collections of products in said

database.

39. A method of operating a shopping cart computer in a computer network

comprising at least one