How Business Method Patents Protect Internet and Software Companies

Since 1998, an increasing number of patents have been issued to software and Internet companies that have devised novel ways of doing business—for example, new online ordering processes or a unique Internet advertising scheme. These patents, which usually combine software with business methodology, are commonly referred to as business method patents or Internet patents.

These patents are important because any company that develops or acquires such a patent can stop others from using the patented business method for approximately 17 years. And, of course, the owner of the patent can exploit it by licensing the method—that is, charging a fee for others to use it.

For example, Amazon devised a method for expediting online orders, known as the "1-Click" system. The method allows a repeat customer to bypass address and credit card data entry forms, because Amazon can access that information directly from the customer's account. This dramatically improved the shopping experience. Amazon was granted a patent on this business method in September 1999 (U.S. Pat. No. 5,960,411).

Protection for Business Methods

Business method patents are part of a larger family of patents known as utility patents, which protect inventions, chemical formulas, processes, and other discoveries. A business method is classified as a process, because it is not a physical object like a mechanical invention or chemical composition.

While the U.S. Patent and Trademark Office (USPTO) did not used to grant business method patents, claiming that a process could not be patented if it was simply an abstract idea, in 1998, a federal court ruled that patent laws were intended to protect any method, whether or not it required the aid of a computer, so long as it produced a "useful, concrete and tangible result." State Street Bank & Trust Co. v. Signal Financial Group, Inc. 149 F.3d 1368 (Fed. Cir. 1998) cert denied 119 S. Ct. 851 (1999).

In the six months following the ruling, patent filings for software/Internet business methods increased by 40% and the USPTO created a new classification for applications: "Data processing: financial, business practice, management or cost/price determination."

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The Cost of a Business Method Patent

The cost of obtaining a business method patent depends on several factors, including the subject matter of the patent, the complexity of the examination process, and whether a lawyer's fees are involved.

You can normally expect to pay between $3,000 and $15,000 to acquire a business method patent unless you do it yourself, in which case the costs are much reduced.

After a patent is issued, the owner must pay maintenance fees to the USPTO after 3.5, 7.5, and 11.5 years. Of course, if the patent is challenged (as many are) the costs can skyrocket, as you will need to litigate against the challenger.

Timeline for Obtaining a Patent

It usually takes between two and a half and three years from the date of filing an application until a business method patent is issued. The period between filing and issuance is called the "pendency period."

A patent owner cannot stop a competitor from using the process during the pendency period, regardless of whether the competitor purposefully copied the method or stumbled upon it independently. Only after a patent is actually issued can a company stop another from using making or selling the process. The patent is then valid for 20 years from the date of filing.

Determining Who Gets a Patent

What happens if a competing business claims that it was already using the particular method that is the subject of a patent application? If Business A files for a business method patent, but Business B can show that it was using the method publicly more than a year prior to the filing, Business B can thwart the patent application or, if necessary, invalidate the patent later.

The key is that Business B's use of the method must have been public. If Business B used the method confidentially, the patent will be issued to Business A. However, under a 1999 amendment to the patent law, if Business B used the method confidentially before Business A filed for a patent, it can continue using the method without liability for infringement.

If Company A had been using the method publicly for more than year before the patent application was filed, Company B's patent would be invalidated or, more likely, never would have been granted in the first place.

Legal Requirements for Getting a Business Method Patent

In order to qualify for patent protection, a business method must meet four primary requirements:

• The method or software must fall within the classes of patentable subject matter. Anything that is created by humans falls within these classes; laws of nature, natural phenomena, and abstract ideas do not.
• The method or software must be useful. This requirement is fairly easy to satisfy because any functional purpose will suffice. A business need only demonstrate that its method or software provides some concrete tangible result. For example, the Amazon 1-Click patent provides a tangible result: an expedited purchase.
• The method or software must be novel. This requirement means the method must have an aspect that is different in some way from all previous knowledge and inventions. This requirement is discussed in more detail below.
• The method or software must be nonobvious, meaning that someone who has ordinary skill in the specific technology could not easily think of it. This, too, is discussed just below.

Novelty

An Internet method will fail the novelty test if it was put to public use, or described in a published document, before the patent application for the business method was filed. (If the method is exposed to the public in one of these ways, it loses its novelty).

The only exception is if the actual inventor-applicant created the publication and it was made up to one year before the filing date, it will not bar the application. For this reason, a business that is seeking to acquire a patent must research the "prior art" (previous inventions or methods) and promptly file its patent application or it risks losing valuable patent rights.

Nonobviousness

Meeting the nonobviousness test turns on whether the method provides a result that would be new or unexpected to someone with ordinary skill in the relevant field of the business. Put differently, if the differences between the business method and the prior art would not have been an obvious development to someone in the field, it is probably nonobvious.

For example, consider an economist who devised a method of avoiding taxes by using a credit card to borrow money from a 401(k) fund. The method did not exist previously and differed substantially from previous methods of avoiding taxes. Since the method was new and was not obvious to accountants or tax experts, the economist acquired a patent (U.S. Pat. No. 5,206,803).

To learn more about patent elements and requirements, see the Qualifying for a Patent FAQ.

Effect of the America Invents Act (AIA)

The America Invents Act (also referred to as the "Patent Reform Act of 2011") was enacted September 16, 2011. It went into effect over a period of 18 months and affected business method patent applications in three primary ways:

• Post-grant review. A new post-grant review procedure allows anyone to challenge a patent on any invalidity ground for nine months after the patent issues. However the standard is high; the challenger must initially show that it is likely that at least one claim of the patent is unpatentable or a novel and unsettled legal question is involved. If a party initiates a post-grant or inter parties (see next paragraph) review, the party cannot use the basis or grounds for the review in a later declaratory judgment or infringement civil action.
• Challenge business method patent validity. The AIA provides a transitional eight-year transition period whereby anyone can have the USPTO review the validity of any business method patent (excluding those that are for technological inventions) based on prior art.
• Goodbye to tax strategy patents. The USPTO will stop granting patents for strategies for reducing, avoiding, or deferring tax liability. Not surprisingly, this prong is based on public policy concerns about tax avoidance schemes.

For a thoroughly updated guide to patents, get Patent It Yourself by David Pressman (Nolo). This book reflects the latest changes in intellectual property law, the latest rules on patent application and prosecution, and other changes to technical patent filing rules.