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Software and Business Method Patents Roll On

Patents covering software and business methods have been the most controversial aspect of patent law for the last few years. However, the criticism these patents have received has not slowed an explosion of patent litigation as owners of software and business method patents seek to enforce their rights. Software and business method patents raise important questions that every company seeking maximum protection for its IP must face: are these patents enforceable? What types of activities can be protected? What decisions should a business owner make to take advantage of software and business method patents, or to avoid being accused of violating such patents? After a brief primer on patents, we will examine recent U.S. patent litigation with a view toward answering these questions.

What is a patent? In general terms, a U.S. patent is a limited-term right, granted by the U.S. government, to exclude others from making, using or selling the invention defined by the patent claims. Under U.S. patent law, a patent can be obtained on apparatus, methods and “articles of manufacture” that are “new”, “useful” and “non-obvious”.

What is a business method patent? The term “business method patent” is not defined by statute, but is commonly used to describe patents relating to e-commerce transactions. Business method patents often cover aspects of software and Internet communications. Perhaps the best-known example of a business method patent is Amazon’s “one-click” shopping patent.

Until 1998, U.S. courts had not cleared the way for explicit protection of business methods via patents. Then, in State Street Bank & Trust Co. v. Signature Financial Group Inc. , the U.S. Federal Circuit held that computer-implemented business methods are eligible for patent protection under U.S. patent laws if they satisfy the same statutory requirements as other types of inventions. Since then, the number of business method patents issued by the U.S. Patent and Trademark Office has skyrocketed. The U.S. Patent and Trademark Office reported that a pplications for software-implemented business method patents grew from 170 in 1995 to 7,800 in 2000. In 2001, the USPTO issued approximately 1000 business method patents, and that number is expected to increase dramatically.

State Street confirmed that business methods can be patented if they meet the statutory requirements of utility, novelty and non-obviousness. The utility test can be satisfied by any useful, lawful function, and is generally a non-issue. The test thus comes down to novelty and non-obviousness — just as it does in any application for a U.S. patent. An invention can be novel if it was not “known or used by others in this country, or patented or described in a printed publication in this or a foreign country, before the invention thereof by the applicant.” In turn, the question of “obviousness” is evaluated as of “the time of invention” and from the perspective of “one of ordinary skill in the art.”

Until recently, the most notable example of the enforcement of a business method patent was Amazon.com, Inc. v. BarnesAndNoble.com, Inc. in which Amazon sued Barnes & Noble in 1999 for infringement of Amazon’s patent covering “one-click” online shopping (a method that enables a complete purchase transaction with one click of a mouse). Although the patent and Amazon’s efforts to enforce it were derided by many, a U.S. District Court ruled in favor of Amazon, and enjoined Barnes & Noble from using the feature on its website. The parties settled the litigation this year.

The decision in Woolston v. eBay, Inc. provides a more recent example of how business method patents are being aggressively enforced. In May of this year, after a five-week federal trial, a jury awarded Thomas Woolston and his company MercExchange $35 million for patent infringement by eBay’s “Buy It Now” feature, which offers customers the option of buying an auction item at a fixed, preset price. The jury found that eBay willfully infringed Woolston’s patent, which was essentially a business method. This decision reconfirms that courts will enforce business method patents, and that companies that ignore them do so at their peril.

Are Software Patents Enforceable ? The patentability of software in the U.S. had been blocked by court decisions until the door was opened slightly by the Supreme Court in 1972, in Gottschalk v. Benson , and more fully in a string of cases including Parker v. Flook (1978), Diamond v. Chakrabarty(1980), and Diamond v. Diehr (1981). Although the Supreme Court had gone through years of strict scrutiny of patents (Justice Douglas said in 1949 that “the only patent that is valid is one which this Court has not been able to get its hands on”), Diehr confirmed that methods are not rendered unpatentable simply because they contain algorithmic aspects or are executed in software. In 1996, the U.S. Patent Office issued guidelines intended to comport with Diehr and clarify when a software-based invention is eligible for patent protection. Under current standards, if the claims of a software patent meet the statutory standards of utility, novelty and non-obviousness, then the patent is as enforceable as a patent on a mechanical widget.

One of the most notable recent examples of software patent enforcement is in Eolas v. Microsoft , in which a jury awarded more than $520 million in damages to the University of California and Eolas Technologies, Inc., for infringement of the company’s patent for technology that allows interactive applications such as “plug-ins” and “applets” to be embedded in Web pages. Plug-ins, applets and similar programs are central to online commerce, since they enable everything from banner ads to interactive customer service. While some have suggested that Microsoft might have no choice but to disable its plug-in architecture based on the finding of patent infringement, it’s likely that Microsoft will find other ways to alter its browser software to avoid infringement. At the time of this writing, Microsoft issued a press release indicating changes it has made to avoid infringement.

Are Software and Business Method Patents Ever Invalidated? Although business methods and software patents are enforceable, they may not be bullet proof. In March of this year, a jury in the case of Stambler v. RSA and VeriSign found against the patent holder, Leon Stambler. Stambler, an electrical engineer, sued RSA Security Inc., its former subsidiary VeriSign Inc., and others, seeking to enforce his 1990 software patent for the Secure Sockets Layer (SSL) protocol used in virtually every e-commerce transaction. Stambler, who before bringing suit had waged a campaign to obtain royalties for a license under his patents, sought as much as $20 million in damages.

Apart from the significance of this ruling for RSA and all other companies that make, use or sell technology that incorporates SSL, the case illustrates that not every software or business patent issued by the U.S. Patent Office will be enforced by the courts. Instead, courts will continue to scrutinize patents under the standards of novelty and non-obviousness, and analyze the applicability of the patent claims at issue to the accused products or services. If the patent is found wanting in any of those areas, the patent owner will not prevail.

TLB Commentary : What can software companies and other industry players expect from this area of the law in the future? Unless Congress or the courts create a significant new body of rules, the validity and enforceability of software and business method patents will continue to be governed by the traditional standards of patent litigation, as these recent cases confirm. Litigation based on business method and software patents shows no signs of abating; in fact, the volume of such activity may be increasing.

The U.S. Patent and Trademark Office issues thousands of software patents each year, and the number of business method patents is growing by leaps and bounds. And unlike copyrights, which require proof of copying to establish infringement, patents cannot be escaped by independent creation. If the invention, whether software or business method, is covered by a patent, someone who innocently and independently creates the same invention, without knowledge of the patent or previous inventors, may be barred from making, using or selling it, and may be liable for significant damages. Thus, the risk that someone owns a patent on technology or a process that is embodied in your product must be taken seriously. Just as companies search for brand names, trademarks and service marks not already taken by others, they are well advised to determine whether technologies are clear for use before committing substantial resources to either R&D or commercialization.

Back to Technology Law Bulletin Fall 2003