Obtaining a Business Method Patent

A company that develops a new way of conducting e-commerce may be able to prevent others from using it for almost two decades.

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.com 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. 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."

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 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 -- and many are -- the costs can skyrocket.

Timeline for Obtaining a Patent

It usually takes two and a half to 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.

Example:

Company A has been using a business accounting method for years, but never publicly disclosed it. Company B independently develops the method and obtains a patent on it. Company B sues Company A. Under the amendment to the patent law, Company A has not infringed the patent.

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 or software must meet four 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 flunk the novelty test if it was put to public use -- or described in a published document -- more than one year 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.) 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 field of the business. Or put another way, 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.

Example:

An economist devised a method of avoiding taxes by using a credit card to borrow money from a 40l(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).

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