Mind Your Own Business Innovators Must Help Themselves as PTO Dishes Out Dot-Com Patents

Transcription

1 Reprinted with permission from Legal Times (p.31, February 14, 2000) Mind Your Own Business Innovators Must Help Themselves as PTO Dishes Out Dot-Com Patents by Mark E. Plotkin (Mark E. Plotkin, a partner at D.C.'s Covington & Burling, advises Fortune 500 companies, banking organizations, and Internet start-ups on all aspects of electronic commerce and financial services.) One winter's day, a tech-savvy entrepreneur notifies the U.S. Patent and Trademark Office of his intent to patent a new device. This device, which permits voice communications over vast distances, could revolutionize the increasingly global markets. To his dismay, the entrepreneur learns that another inventor filed a preemptive patent application just hours earlier. A fierce patent war follows between two start-ups seeking industry dominance, with many smaller rivals joining the fray. Some 600 lawsuits later, the disputants join forces, cross-license their technology, and merge certain businesses. A 21st century struggle over the latest e-commerce application? Jeff Bezos of Amazon.com and Rob Glaser of RealNetworks duking it out? Guess again. It's the 19th century Feb. 14, 1876, to be precise and Alexander Graham Bell of Bell Telephone and Elisha Gray of Western Union have just invented the telephone. Patent conflicts are nothing new. Creative people have long pressed technology to its limits while shielding their ideas legally. Always there are dire warnings that permitting broad-ranging patents will stifle innovation and commercial progress. Then follow the inevitable lawsuits as the courts ultimately settle the nature and scope of the rights obtained. Today we are on the cusp of another patent war. This time, the battleground lies in cyberspace, and the weapons are patents for e-commerce business methods and software applications. The prize is dominance in Internet technology. These days the single most controversial topic in patent protection and one of the likeliest sources for future litigation involves the scope of recent e-commerce patents issued by the PTO. It has been argued that many of these e-commerce patents are unjustifiably wide-ranging. Some accuse the PTO of encouraging Net entrepreneurs to take time-honored business methods, add the ubiquitous "e-" to the

2 - 2 - claim, and patent their use. Many of these patents are making headlines because the PTO is only now approving applications that were filed several years ago, when the Internet and Internet technology was beginning its explosive growth. The PTO has grown increasingly liberal in granting patents for software and e- commerce business methods. Some 3,000 Internet-related patents were issued in 1999, compared with just 648 in From the PTO's view, this is a sensible response to the difficulty of distinguishing between the technology of a Web site and the way a Web site conducts business. PTO staff maintain that they carefully study the claims and specifications for e- commerce applications to see if they are novel in light of prior art. Yet e-commerce patents continue to generate controversy both over the sheer volume of the patents issued and the underlying principles of the PTO's approach. The federal courts, for their part, have only hastened the rush to the PTO's door. Early last year, the Supreme Court, by denying certiorari, implicitly put its seal of approval on the decision of the U.S. Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368 (Fed. Cir. 1998). State Street effectively abandoned longstanding doctrines that seemed to bar patents for business methods as well as patents that contained mathematical algorithms not applied to physical elements or process steps (including many types of software applications). Instead, the Federal Circuit found that an invention is patentable so long as it produces a "useful, concrete, and tangible result." While State Street was decided in the context of an apparatus claim, another Federal Circuit panel has since reaffirmed the State Street rationale in the context of a process claim. AT&T Corp. v. Excel Communications Inc., 172 F.3d 1352 (Fed. Cir. 1999). And in a controversial decision just this past December, a federal district court granted Amazon.com a preliminary injunction barring Barnesandnoble.com from utilizing a "one click" checkout method deemed too similar to Amazon's. Amazon.com Inc. v. Barnesandnoble.com Inc., No. C P (W.D. Wash. Dec. 1, 1999). 'Cart' Blanche? Notwithstanding the enthusiastic embrace of the PTO and some important courts, considerable ambiguity remains concerning the enforceability of some of the broader business method and software patents. Some patents are so wide in scope that apparently competitors are not taking seriously the licensing invitations from the patent holders. A few patent holders are testing the waters, demanding license fees and initiating suits against those whom they deem to be infringing. For example, Massachusetts-based Open Market received patents that, arguably, allow it to demand royalties from anyone engaged in e-commerce. These include a patent on a secure, real-time payment method using credit cards; another covering electronic shopping carts; and another on a technique for analyzing how users browse

3 - 3 - Web content. Open Market says anyone using electronic shopping carts without its license is vulnerable to legal action, but has yet to announce any licensing agreements. Similarly, LinkShare in December received a patent covering the method of using a link on a Web site to send users to an online store where they make purchases for which the originating site receives a commission. It's no secret that such links are everywhere on the Internet. Likewise, a patent granted to CyberGold purportedly covers the common practice of paying consumers to look at online ads. CyberGold contends that it has the "sole right to pay consumers online incentives including cash, points, frequent-flyer miles or other forms of compensation." But competitors dispute the patent's validity, contending that consumers have been compensated for their time and attention for decades. Notwithstanding their bluster, the ability of Open Market, LinkShare, CyberGold, and others to defend their broad patents remains untested. None of the companies has sued anyone for infringement. One possible reason: the large number of Internetrelated patents that their competitors have accumulated over the last few years, which could become the basis for a counter-suit. But there have been skirmishes elsewhere. Priceline.com has sued Microsoft and its travel service, Expedia, claiming that the latter site infringes Priceline's patent on Internet-based "reverse auctioning," which allows a buyer to submit a purchase offer for plane tickets, hotel rooms, or rental cars at a certain price that sellers can accept, reject, or counter. An inventor who claims a patent on an online shopping-cart feature has sued Yahoo. DoubleClick, a large Internet advertising network, has sued two smaller companies over its patent on an ad-targeting technology. And Ask Jeeves, the popular natural-language search engine, has been sued for infringement by holders of several natural-language patents. Perhaps the loudest legal saber rattling has come from Sight-sound.com, a small Pittsburgh company that asserts that its patents control "the sale of audio or video recordings in download fashion over the Internet" and has sought licensing fees from anyone offering such music downloads. To enforce its claim, Sightsound is suing online music store CDNow. It has also reportedly sent letters to other music sites, including MP3.com, GoodNoise, and Amplified.com, demanding a 1 percent royalty on every sale that involves downloading music. Suits like these will test the integrity and staying power of some of the broader e- commerce claims. In at least one instance, it already appears that little or no prior art was discussed by the PTO in examining the natural-language patent applications supposedly infringed by Ask Jeeves a potentially fatal defect.

4 - 4 - As for the Priceline case, few companies are as knowledgeable about their intellectual property rights as Microsoft, which has some 25 years of experience in identifying and defending such rights an eternity in the Internet world. Further complicating Priceline's strategy is a separate challenge to the underlying validity of its patent brought by a former Hunton & Williams associate, who asserts that he filed a patent application for a computer-driven buyers' auction more than a year before Priceline submitted its application. There is plenty of firepower on both sides of the argument concerning the patentability of e-commerce business methods and software. Supporters emphasize that the assets of many companies engaged in e-commerce consist disproportionately of intellectual property. These assets are a cornerstone of the companies' market and shareholder value, and often play a critical role in obtaining financing. They may represent one of the few ways that a company can gain a market advantage over better-established competitors. In short, the ability to patent business processes and software may be essential to the viability of these firms. Yet the notion of granting patents for e-commerce business methods remains controversial. Some in the technology community contend that such patents choke innovation and foster monopolistic practices. The PTO's detractors accuse the office of responding to the deluge of Internet applications by hiring inexperienced staff and granting ill-considered patents vulnerable to attack as "obvious" inventions or covered by prior art. So who is right? The answer: it doesn't matter. The fact is that companies are obtaining patents right now even for simple business transaction steps that we all take for granted, but that are novel and apparently patentable because the transactions are conducted over computer networks. Corporate leaders are eyeing the barely tapped markets online, with hundreds of billions of dollars in sales expected in the next few years. In these circumstances, regardless of the public policy debate, companies (and their counsel) must act to protect any new e-commerce technologies that feature a potentially patentable business method or software application. Such patents can be exploited in a number of very beneficial ways, including: Exclusivity barring others from producing, using, selling, or importing the invention. Market share attracting new customers by offering unique features and functions. Income generation licensing the invention to others and collecting royalties; or cross-licensing it to reduce the royalty rate that might otherwise be paid for someone else's technology.

5 - 5 - Shareholder value increasing a company's market capitalization based on its ability to generate future revenues on patent-protected technology. Defense to claims asserting patents of one's own against a plaintiff in a patent dispute. Alternatively, patents may be cross-licensed to settle (or avoid) a dispute, or to reduce the amount the defendant has to pay to induce a settlement. Filing a patent application with the PTO is the right start, even where it is not certain that the patent, if granted, would be sustained under challenge. It is imprudent to sit on the sidelines on the mere assumption that a business method or application is simply too obvious to be patented or that a rival's patent will be thrown out by a court. To lessen the likelihood that a patent ultimately will be invalidated (as well as satisfying a legal duty), counsel should help to identify prior art to the PTO. A patent that demonstrably has considered all the prior art will be less vulnerable to later challenge. Because patents are jurisdictional in scope, companies that conduct business abroad will want to seek protection both in the United States and in other countries. This will not be simple. While some other nations are beginning to allow patents for software and e-commerce business methods, the European Union remains resistant to the idea. Countries that don't honor such patents may become havens for corporate rivals, who will choose to move their computer servers overseas. While this won't make them immune from challenge by a U.S. patent holder, it will introduce knotty questions of international jurisdiction that make such challenges much more expensive and much less certain in outcome. If the stakes are sufficiently high, it may be desirable to lobby for changes in other nations' laws or regulations. While there has been plenty of criticism of the State Street decision overseas, there also has been considerable scholarship acknowledging the desirability of patenting e-commerce business methods. Other governments, seeing the long U.S. lead in e-commerce, may conclude that it is in their self-interest to provide comparable protections in order to foster similar growth and entrepreneurship. Due Diligence Even as a company embarks on new e-commerce initiatives and considers the patentability of its own methods, it is prudent to review the existing patents on file and obtain an opinion as to whether the proposed activities may infringe others rights. Of course, many e-commerce business methods may be covered by patents that have not yet issued. Because patent applications are held in secrecy, it can be difficult to ascertain whether a specific business method will be protected in the future.

6 - 6 - Beyond the likelihood of direct infringement, due diligence must take into consideration the possibility of contributory infringement or inducement to infringe. Consider the example of a company that employs vendor-supplied software to process customers inquiries: If the vendor is later sued for patent infringement, the end user company may be liable for contributory infringement. In fact, a company could be liable for inducement to infringe merely for helping to sell or promote the products or services of a third party infringer, even if the company doesn t use the infringer s products itself. This is a serious consideration when embarking on any venture in the vast, interdependent network of the World Wide Web. As in times past, some companies will reap great fortunes by being first to the PTO, while those who delay may be left behind, forced to pay licensing fees or be accused of infringement. In the world of e-commerce, such advantages and humiliations are likely to be relatively brief. Net entrepreneurs have shown themselves skilled at circumventing great obstacles. Because they always assume that someone else is building a better mousetrap, they innovate relentlessly. But for now, we tremble on the brink of an all-or-nothing war among fierce competitors for dominance over the Internet. No company should join the battle without first arming itself with the strongest possible e-commerce patents. (c) 2000 NLP IP Company. All rights reserved. Reprinted with permission of Legal Times, 1730 M Street, NW, Suite 802, Washington, DC