IP WAKE-UP CALL.(Industry Trend or Event)

IT'S HIGH TIME TO GET THE LOW DOWN ON BUSINESS METHOD PATENTS

Like most electronics companies, National Instruments Corp., Austin, TX, applies for patents to protect its intellectual property (IP). Over the years, it has amassed more than 120 patents for test, measurement and industrial automation technology. It has not sought patents for the business methods it creates for its Web site because until recently it didn't think of them as patent worthy.

That's about to change. National Instruments has come to believe in the need to protect business method IP the same way it protects technology. "Whether it's on our Web site or in our general practices, we put a lot of innovation into our business methods," says John Graff, vice president of marketing. "We haven't sought patent protection for business methods, but we have been talking with our lawyers about it."

National Instruments is one of several electronics companies facing up to the need to protect business method IP. And none too soon, given the gusher of business method patents pouring from the U.S. Patent and Trademark Office (PTO), mainly but not exclusively to dot-com companies for e-commerce innovations. Two of the most publicized of these patents are the one-click buying method of Amazon.com Inc., Seattle, and the reverse auction method of Priceline.com Inc., Norwalk, CT. Both have sued competitors for patent infringement--just two of many business method infringement suits in the courts.

Attorneys and industry executives say it's time electronics companies take business method patents seriously. They believe many big companies have reacted to the trend while smaller companies have not. For example, Dell Computer Corp., Round Rock, TX, got its first business method patent in 1996, and has several granted or pending for methods related to such things as its build-to-order model, online product configuration and online inventory management. Yet Dell is the exception. "Most electronics companies don't understand this new landscape," says Jonathan Poe, an analyst at Meta Group Inc.'s Palo Alto, CA, office. "Electronics companies understand the patent process, but now they must extend that to business methods and understand it better."

If no previous business method patent served as a wake-up call for electronics companies, another recent one should, Poe says. Mercata Inc., of Bellevue, WA, got a patent for a method that aggregates buyers on behalf of a single seller, a process crucial to business-to-business (B2B) e-commerce. "Electronics manufacturers, distributors and buyers use the Internet, so they need to be thinking about this stuff," advises Henry Beck, an IP expert in the New York office of Heller Ehrman White & McAuliffe LLP.

The business of methods

About once a week, it seems, some newspaper or magazine trumpets an article on the controversy over business method patents, which cover business process innovation not the nuts and bolts of technology. Specifically, Beck says, a business method patent covers a sequence of steps as implemented in or enabled by software. Several hundred business method patents have been granted and thousands of applications have been filed (see table, this page).

Some critics say business methods don't deserve patent protection just because someone moved them to the Web. Other critics don't dispute the concept, but find many business method patents laughable and criticize the PTO for its lack of discrimination. They argue that PTO examiners are not rigorous enough in requiring these so-called innovations to be novel and non-obvious--two criteria all patents must fulfill.

The PTO came to its own defense in a white paper published in July 2000 (see "Resources," page 85). Business method patents, it says, fall under PTO Class 705, created in 1996 for "automated business data processing technologies." In defense of the concept, the white paper argues that methods patents have a 200-year history predating electronics. It cites several examples, including a patent on a method for detecting counterfeit notes, granted in 1799--the first known business method patent.

The white paper cites three reasons for the current brouhaha. Although electronics-based business method patents can be found earlier, they didn't have the power of the courts behind them until a federal circuit court of appeals upheld one in 1998 (State Street Bank & Trust v. Signature Financial Group Inc.). State Street challenged a patent obtained by Signature Financial Group for a data processing system that managed a hub-and-spoke mutual fund system.

The ruling created the second reason behind the current controversy, the white paper says: "The State Street decision triggered an awareness of the business method claim as a viable form of patent protection. We are at the beginning of a change in the approach to how inventors choose to describe their inventions." This, it adds, caused the third reason: "This change is in turn driving a shift in the required examiner knowledge base for examination of Class 705 inventions."

The white paper says Class 705 applications were a mere 1% of the total number of patent applications in 1999. However, it says the PTO is taking steps to improve the examination of Class 705--adding examiners, improving prior art search resources, adding new training and requiring a second review of approved applications.

Steven Shumaker, a patent attorney and principal in the Minneapolis office of Fish & Richardson PC, recently wrote a thorough explanation of business method patents, including an appraisal of the white paper: "It seems that the PTO believes that the issuance of business method patents is not a radical departure from its previous practice...the smattering of business method patents issued in the 1800s along with the few hundred issued more recently did nothing to prepare us for the onslaught of the late 1990s and early 2000s."

In Shumaker's view, some business method patents are of questionable validity. He blames that on one of several factors: heavy examination work- loads, limited prior art resources, lack of technical understanding on the part of examiners and the relative newness of business methods as patent-eligible innovations. For these reasons, he believes a higher percentage of business method patents could be busted--that is, eventually found to be invalid--if challenged in court.

Shumaker a former PTO examiner, continues in his article: "At the very least, the PTO white paper represents an acknowledgement of significant problems... With proper follow-through, this acknowledgement and the stated programs may lead to the issuance of fewer business method patents of suspect validity. They had better, because business method applications will continue to pile up...fueling more issued patents and, predictably, more controversy."

In an interview, Shumaker says that, no matter what the PTO does, business method patents are here to stay. "Some companies are still wondering what they ought to do, still trying to figure it out." They continue to wonder at their own risk, he says.

Sizing up the risk

What is at risk? Electronics companies have moved aggressively into e-commerce with customers, suppliers and partners. Many, like Dell, have created innovative business methods on their Web sites. If they don't acquire patents for these methods, they leave themselves open to infringement suits and hefty license payments (some even go so far as to call these payments legal extortion). If they don't have their own patents, they have nothing to cross license if someone attacks them, and they have nothing with which to protect their own IP from being used by others.

Several infringement suits--no one knows exactly how many--have already been filed. Two of the most publicized are Amazon's suit against Barnes & Noble Inc., New York City, and Priceline.com's suit against Microsoft Corp., Redmond, WA. Some observers, however, expect the litigants to settle out of court to avoid going through long and expensive trials.

Recently Amazon licensed its one-click-buying method for the first time-to Apple Computer Inc., Cupertino, CA. Neither company would explain what led to the license or how much Apple paid. But patent attorneys say it's unlikely that Apple would have sought a license without a bit of saber rattling from Amazon.

Thomas Lebens, an attorney and partner in the San Diego office of Fitch, Even, Tabin & Flannery GP, believes there are many more infringement suits filed than the number that have been reported, and that some companies don't know they're at risk. "Many electronics companies do not think about patents on business methods until they actually face the threat of a suit," he says. "Then it is too late to build a portfolio."

Rather than file on everything, Lebens encourages companies to evaluate their Web site IP and be selective. "Think about the core processes--what is important and what is not. With some processes, you would be able to make an adjustment and avoid an infringement suit." He cites, as an example, Barnes & Noble. It replaced its one-click-buying method with a two-click-buying method after a judge told it to stop using one click until the suit with Amazon is resolved.

Shumaker cites another, not so farfetched, concern. With all the attention on business method patents, it's just a matter of time before a company or its officers gets hit with a shareholders' lawsuit for negligently wasting IP. "If corporate officers are not diligent about doing what is reasonable to protect IP, and allow it to go to waste or be exploited by a competitor, they may make themselves liable to a lawsuit," he says.

Missed opportunities

National Instruments' Graff had his epiphany when he heard of the Amazon suit. He had already discussed business method parents with in-house counsel and outside attorneys. When Amazon sued Barnes & Noble more than a year ago, Graff was convinced it was worth the trouble to seek these kinds of patents. "In hindsight, it would have been nice to have been more aggressive sooner," he says. "Going forward, we see the value of filing for business method patents. These innovations are strategic assets for us."

National Instruments was one of the pioneer users of the Web for business. It launched its site in 1994, and almost immediately began to add innovations to help customers locate and configure products. Some of the configuration methods even predated the Web, Graff says. "We have some innovations dating to 1990. As the Web came about, these tools flowed right into our Web plans."

In the United States, inventors have one year from the time their innovation is made public to file for a patent. So National Instruments missed the chance to file for patents on these earlier innovations. When Graff looks at other Web sites, he sees methods that, he believes, his company originated years ago. Now it's too late to protect them or prevent someone else from using them. That hasn't stopped National Instruments from taking a different tack with new IP.

Graff says the first step is to raise awareness among the Web staff, then adopt procedures to review business method IP for patent protection. He hopes that many of the same procedures it now uses to review technology innovation will apply. With more than 120 patents for software and hardware, the company understands the application procedure. The main challenge, says Graff, is to change their way of thinking, assess their innovations and submit business method patent applications.

No more missed opportunities

National Semiconductor Corp., Santa Clara, CA, has gone beyond the awareness stage and actively reviews Web site innovations for patent protection. It, too, pioneered business use of the Web, especially among semiconductor companies. Executives at National Semiconductor believe they missed opportunities, but not anymore. The company has applied for business method patents for Web innovation, although none have been granted yet. "There is a whole new realm of innovation that is possible," says Phil Gibson, vice president for Web business. "These are not just business methods but technology driven, too."

One innovation is National Semiconductor's "WebBench," an integrated set of tools and procedures that enable its electronics engineer customers to find and test chips and other components on the Web site. The innovation covers both technology and business methods. Gibson's staff estimates that WebBench saves an engineer 43 man-hours on each design. That's innovation the company wants to protect.

National Semiconductor's own patent experts bristle at the term business method. "I find this whole controversy quite distracting," says Chris Burn, National Semiconductor's director of IP and technology licensing. "We're just more open minded these days about what qualifies as innovation. If it is meritorious and has strategic value to our e-commerce innovation, then we'll seek an appropriate patent."

Burn heads the group responsible for ferreting out innovations worth patent protection across the company. A couple of years ago, his staff began to look at the innovations Gibson's group was creating on the Web site. "A lot of things sneak up on you," says Burn. "You think of yourself one way and that can blind you to innovation in other places. All of a sudden, it was clear there was tremendous value [on the Web site] and the light bulb went on."

Since then, reviewing new features on the site and in WebBench upgrades for possible patent protection are standard procedure, just like reviewing hardware and software technology has been. Yet National Semiconductor does not have infinite resources for patents. "The biggest problem," says Burn, "is to figure out what is strategic and what is not. We define strategic as adding significant business value."

Gibson's only regret--that National didn't start sooner. "There are a lot of things that happened first at our site for our industry," he reflects. "I have a list of 20 things we did that became standard on other sites. We missed our opportunity to file for those [patents]."

Where they really count

Web-based exchanges and marketplaces are one segment of the electronics industry that are highly vulnerable to patent problems because their business methods are their business. These companies either move physical world processes to the Web or devise entirely new business models unthinkable before the Web. Several of these companies declined to discuss patent strategies. Two that would are PartMiner Inc., New York City, and Mercata.

PartMiner, which is partially owned by ELECTRONIC BUSINESS' parent company, Cahners Business Information, provides online component procurement services. It filed an application for a patent for a business method but has not received it yet, says Michael Manley, the firm's senior vice president and general counsel. In the ever-changing dot-com landscape, he says, it's hard to keep up with where PartMiner might be infringing or be infringed upon. "We've talked to other e-commerce companies about how they handle these things and everyone struggles with it," he adds. "We will all get familiar with these legal issues sooner rather than later."

Besides the protection they offer, patents have marketing value for dotcoms, Manley says. They can be used in branding campaigns and are often viewed favorably by Wall Street. PartMiner intends to use any patents it gets defensively and has no plans to license them, he adds. "One of the struggles for an Internet company is that the patent process is so long [about three years] yet technology shifts very quickly on the Internet." He thinks it's relatively easy for a company to adapt a method so as not to infringe on someone else's patent, citing Barnes & Noble moving to a two-click buying process as an example.

Mercata is no stranger to the PTO. It has one patent, which covers an aggregated buying method, and 12 pending in the United States and elsewhere for both technology and business methods. "We don't want to have to pay someone else royalties for what we originate," says CEO Tom Van Horn. "Even if others enter our market, then we'll have something to cross license."

Mercata uses the Web to connect a seller with a pool of buyers. As the number of buyers grows for an item, the price per unit drops. Mercata conducts aggregated buying for consumers, but its bread and butter is business selling. One of its big customers is Sun Microsystems Inc., Palo Alto, CA, which uses Mercata to sell workstations and servers to small businesses, channel partners and resellers at volume discounts.

Van Horn believes that Mercata is the leader in this business, but expects others to try the model--all the more reason to protect his firm's IP. "We started the patent process right after I founded the company in September 1998," he says. "We continue to apply for patents when we feel we have significant new thinking that deserves protection."

Mercata regularly studies new ideas for patent-eligible material. This takes place at the twice-weekly meetings where all development projects are reviewed. "We're always looking at the new features proposed," Van Horn says. When the company decides to apply for a patent, it sets up a team of three people comprised of a patent attorney, an engineer and one of the business owners of the project. "We believe this helps us craft the patent in the best way," Van Horn says. "The team approach gets the patent application done faster and better."

Here to stay

Securing a patent can cost $10,000 to $20,000, so even the wealthiest companies need to determine which business methods are most deserving of protection. In his article, Shumaker encourages companies to base patent activities on business objectives. And he urges them to do rigorous prior art searches and to extrapolate the invention to the point of the "pie-in-the-sky" as an exercise to find the outer bounds of practical coverage (see box, page 86).

None of the patent attorneys, analysts, and electronics executives interviewed for this story thinks business method patents are unimportant. It would be foolish for companies not to include business methods in their patent strategies.

They're likely to be a nuisance, however. For example, Allan Konrad, a computer scientist in Berkeley, CA, has sued about 40 companies, including Dell, pertaining to patents on remote database access. He claims that three patents he received between 1996 and 1999 define e-commerce, and he's seeking big bucks from big companies. Other patent holders have dusted off patents that pre-date the Web and are trying to cash in on them. British Telecom Ltd., for example, has one for hyperlinks granted in 1989, which it's trying to license. Shumaker and others say some of these aren't even worth fighting if the license fee is cheap enough.

Despite the occasional nuisance royalty, experts don't believe business method patents will stymie the growth of e-commerce. Attorneys point to several reasons why. The ultimate strength of a patent is to win in court, but suits are expensive, so most disputants will try to settle. This will become increasingly true as more companies acquire business method patents to cross license. If they do go to court, some of these patents could be busted. "Lots of attorneys are busting patents every day and not just in e-commerce," says Shumaker.

If any single patent becomes an obstacle, markets will find ways around it. And because the speed of Internet innovation is so much faster than the pace at which patents are granted, licenses are negotiated or suits are fought, many patents quickly will become irrelevant. "Business method patents won't bring e-commerce to a screeching halt," comments Shumaker.

Bill Roberts is a contributing writer to ELECTRONIC BUSINESS.

Advice on business method patents

In "Business Method Patents: Navigating the Sea of Controversy," attorney Steven Shumaker of Fish & Richardson PC, offers the following advice to companies seeking business method patents:

* Link patent objectives with business objectives and reflect them in patent claims.

* If you invent a process that is executed by the end user, you need to understand that a lawsuit against thousands of end users may be highly impractical. It is better to write patent claims in such a way that you will be able to pursue competitors for infingement if they implement software or processes that effectively let end users use your invention.

* Think ahead about the migration opportunities of your business method. From conventional wired to wireless platforms, for example. Draft patent and claims accordingly.

* There's no requirement to practice the invention at the time of application filing. You do not need a working implementation when you file.

* Become familiar with the technology in which you are working and the pertinent prior art. Some have predicted that many early business method patents will be found to be invalid, based on inadequate searches of prior art.

* It is often useful to cut up your business method portfolio into smaller pieces and pursue separate patent applications for each piece. More concise patents are more easily digested by the courts and juries.