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“Business Method Patents,” Practical Legal Issues In e-Commerce Seminar, MICPEL Publication, February 2000.


I.  What Are “Business Method” Patents?

         A “business method” patent can be thought of as many things, including:

(1) a U.S. utility patent whose subject matter, or the nature of the invention for which a patent has been granted, is “a method of doing or conducting business,”

 (2) a patent for subject matter that only recently has been held to be patentable by the U.S. Court of Appeals for the Federal Circuit,

(3) the form of legal protection that many e-Commerce merchants and other service providers are electing to seek in order to try to give themselves a limited-duration monopoly for the practice of their recently developed, novel and nonobvious methods of doing business,

 (4) an alternative to trade secret protection, the traditional means for protecting proprietary business methods --- but a means which does not offer as much potential protection as a “business method” patent because it is possible that a second, independent inventor of the same method could obtain a patent for it and then license it to many others, thereby diminishing or destroying any economic advantage that the method might have been providing to its first inventor, 

(5) a potential threat to many e-Commerce merchants and other service providers who could soon find that many vital methods for improving and practicing various aspects of their businesses are only available to them at great costs – the price of taking one or more licenses from the owners of such “business method” improvement patents,

 (6) a great opportunity and means for creative individuals and business entities to develop and exploit potentially, very valuable forms of intellectual property,   

 (7) a grant from the United States government to the owner of such a “business method” invention of the right, which is enforceable in a federal court, to exclude all others in the U.S. from making, using or selling the invention for a limited time (i.e., the life of a utility patent extends from its issuance date until twenty years after the date on which the application seeking the patent was filed, provided that maintenance fees are paid at 3.5, 7.5 and 11.5 years from date of the patent’s issuance), and

 (8) a document, that is crafted from the information contained in the inventor’s patent application and published by the U.S. government, which reveals to one skilled in the technology of the invention how to make and practice the invention, which is itself a new and useful process whose public disclosure contributes to the U.S. knowledge base, thereby promoting the progress of science and the useful arts.       

These various characterizations of a “business method” patent are provided as both an introduction and an overview of the matters to be discussed below.


II.  Examples of “Business Method” Patents

 The fact that “a method of doing or conducting business” can now be patented comes as a surprise to many people.  This is especially so for service providers and others who “conduct business,” but have always considered the domain of patents to be inventions relating to products, machines or compositions of matter – subject matter in which inventiveness is generally considered to be aided by the potential inventor having appreciable technical, scientific or engineering knowledge, aptitude and skills.  However, this situation, if it ever existed, is no longer the case.  Today, creative, non-technical, business-oriented people can aspire to be inventors.

 In an attempt to help clarify what types of “methods of doing or conducting business” are patentable, the following examples of issued patents are outlined below.    In reviewing these patents, one would appear to be well advised to think as broadly as possible when trying to identify the limits of patentable subject matter as it relates to “business methods” – as will be seen later in this article, the Supreme Court’s earlier holdings on this matter may be especially relevant …..the Court noted that Congress intended statutory subject matter to “include anything under the sun that is made by man.” See Diamond v. Chakrabarty, 477 U.S. 303, 309 (1980), quoting S. Rep. No. 82-1798, at 5 (1952) and H.R. Rep. No. 82-1923, at 6 (1952).   :

            In the field of e-Commerce, the most prolific inventor to date appears to be Jay S. Walker and his associates at the Walker Digital Corporation, Stamford, Connecticut.  They are the creators of, among other things,, an Internet company which is currently valued at nearly ten billion dollars, with Mr. Walker’s stock holdings having a value of over four billion dollars.  A significant part of this valuation is based on the patents that have been issued to Mr. Walker and his associates, these include:

            U.S. Patent No. 5,794,207 - “Method and Apparatus For A Cryptographically Assisted Commercial Network System Designed To Facilitate Buyer-Driven Conditional Purchase Offers,” issued August 11, 1998 and assigned to the Walker Asset Management Limited Partnership. This is apparently one of the key patents that the Walker group will try to use to prevent others from establishing online reverse auctioning services for items such as airline tickets, automobiles, hotel rooms, mortgages, etc. Incorporated is apparently using this and other patents as the basis for suing Microsoft for its Microsoft Expedia Web site’s infringement of the reverse auctioning of hotel rooms. 

             U.S. Patent No. 5,884,272 - “Method and System For Establishing and Maintaining User-Controlled Anonymous Communications,” issued March 16, 1999 and assigned to the Walker Asset Management Limited Partnership. This is apparently one of the key patents that the Walker group will try to use to prevent others from establishing online dating services.

             U.S. Patent No. 5,862,223 - “Method and Apparatus For A Cryptographically-Assisted Commercial Network System Designed To Facilitate and Support Expert-Based Commerce,” issued January 19, 1999 and assigned to the Walker Asset Management Limited Partnership. This is apparently one of the key patents that the Walker group will try to use to prevent others from establishing an electronic marketplace for the sale of expert advice (e.g.., such as the services offered by

             The titles of other U.S. Patents that have been developed and/or acquired by the Walker Digital Corporation are listed below.  In order to understand the inventions for which these patents have been issued, one needs to refer to and examine the actual patents themselves.  An example of such a patent (i.e., U.S. Patent No. 5,797,127) is provided in the Appendix to this paper.  Additionally, the patents listed below can be easily researched by accessing detailed information regarding these, and other U.S. patents issued since 1971, that is freely available on the Internet at the IBM Patent Server (  At this site, one can enter a patent number and use the IBM search engine to obtain an abstract and other vital information regarding these patents.

             5,949,875   Parallel data network billing and collection system

            5,949,044   Method and apparatus for funds and credit line transfers

            5,947,747   Method and apparatus for computer-based educational testing

            5,946,388   Method and apparatus for priority queuing of telephone calls

            5,945,653   System and method for establishing and executing functions to affect credit card accounts and transactions

            5,926,796   Method and apparatus for selling subscriptions to periodicals in a retail environment

            5,923,763   Method and apparatus for secure document time stamping

            5,909,486   Method and apparatus for awarding and redeeming prepaid telephone time

            5,884,274   System and method for generating and executing insurance policies for foreign

            5,871,398   Off-line remote system for lotteries and games of skill

            5,825,863   Prepaid limited usage calling card

            5,798,508   Postpaid traveler's checks

            5,797,127   Method, apparatus, and program for pricing, selling, and exercising options to purchase airline tickets

            5,768,382   Remote-auditing of computer generated outcomes and authenticated billing and  access control system using cryptographic and other protocols

            5,737,414   900 number billing and collection system and method for on-line computer services

            As a further example of both the various types of “business method” patents being issued and the level of effort being exerted by some business entities, listed below are some of the titles of the “business method” patents that have been granted to Citibank:

             5,953,423   Electronic-monetary system

            5,940,813   Process facility management matrix and system and method for performing batch, processing in an on-line environment

            5,930,764   Sales and marketing support system using a customer information database

            5,920,848   Method and system for using intelligent agents for financial transactions, services, accounting, and advice

            5,920,629   Electronic-monetary system

            5,898,154   System and method for updating security information in a time-based electronic monetary system

            5,890,140   System for communicating with an electronic delivery system that integrates global financial services

            5,878,139   Method for electronic merchandise dispute resolution

            5,866,889   Integrated full service consumer banking system and system and method for opening an account

            5,844,971   Form creating and ordering system

            5,825,856   Interactive voice response system for banking by telephone

            5,799,087   Electronic-monetary system

            5,794,218   Automated multilingual interactive system and method to perform financial transactions

            Most of Citibank’s patents are seen to be in the area of financial services, an area where there is a great effort being made to develop and patent new “business methods.”  Some of the titles for others’ “business method” patents being granted in the financial services area include:

            5,950,176   Securities trading system with a virtual specialist function

            5,946,668   Funding a home investment trust

            5,946,667   Financial debt instruments method

            5,946,666   Financial securities monitoring system

            5,933,817   Tiered interest rate revolving credit system and method

            5,933,815   Providing guaranteed lifetime income with liquidity

            5,930,775   Optimal investing for distressed residential real estate loans

            5,930,774   Mutual fund portfolios evaluation

            5,930,760   Annuity rates derivation

            5,918,217   User interface for a financial advisory system

            5,913,198   Survivor benefit plans design and administration

            5,806,049   Global assessment of investment opportunity and cost

            5,806,048   Open end mutual fund securitization process

            5,806,047   System for combined pool portfolio

            5,799,287   Optimal portfolio replication

            5,787,404   Credit-card based retirement fund system and method

            5,787,402   Performing automated financial transactions involving foreign currencies

            5,784,696   Evaluating portfolios based on investment risk

            5,775,734   Investment administration system

            5,774,883   Selecting a seller's most profitable financing program

            5,774,880   Fixed income portfolio index processor

            Finally, it should be noted that many “business method” patents are being granted in areas other than e-Commerce and financial services; consider the following:

             U.S. Patent No. 5,851,117  “Building block training systems and training methods,” issued December 22, 1998 to The Butcher Co.   This patent covers a method for training janitors in which the janitor is given pictorial displays showing a specific set of steps to accomplish a cleaning operation in an efficient safe manner, e.g., dusting or vacuuming of a facility as well as pictorial displays as to what must not be missed and must be avoided in performing the cleaning operation.  The trainer shows the janitor a section of the displays while telling the janitor about each step pictorially depicted in the displays.

            U.S. Patent No. 6,004,230  “Methods for training golf putting skills,” issued December 21, 1999 to Intelligent Machine Concepts, LLC.  As its title suggests, this patent covers methods for improving one’s golf putting stroke.  The business aspect of such an invention would presumably be the potential for licensing golf instructors to teach such methods.   


III.  Prior Means For Protecting Proprietary “Business Methods”

A quick check of the issuance dates of the earliest of the above listed patents reveals that the first “business method” patents were granted in the early 1970’s.  However, the vast majority of these patents have only been issued in the last three years.

Until recently, most proprietary “business methods” were protected as trade secrets.  This situation was due, in part, to a perception that there was no effective, alternative protection means, especially patent coverage.   Additionally, it was probably the case that many developers of such methods unbeknowingly took actions which eventually came to be a barrier to their successful applications for such patents.  After a year of commercially exploiting such a method, which the courts have held to be a “public use” even though the method was kept a secret, such exploitation become a bar to the successful filing by its developer and user of a patent application from which a patent for the method would issue.  See Metallizing Engineering Co. v. Kenyon Bearing & Auto Parts Co., 153 F.2d 516 (2d Cir. 1945) and 35 U.S.C. § 102(b). 

            This situation existed even though it was widely recognized that trade secret protection could present certain hazards.  For example, trade secrets can always be lost by their inadvertent disclosure -- once such a secret is out, its protection is destroyed, and it is free for all to use.  The wisdom of using such trade secret protection for one’s proprietary “business methods” is now being questioned as recent changes in judicial interpretations of the U.S. patent laws have greatly increased the probability that the federal courts will find such “business method” patents to be valid and enforceable.


IV.  U.S. Patent Laws

            The founders of the United States provided in the Constitution that "Congress shall have the promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." U.S. Const. Art. 1, § 8, cl. 8.

            A patent is a grant from the United States government to the owner of an invention of the right to exclude all others from making, using or selling the invention for a limited time (i.e., assuming maintenance fees are paid to the USPTO, the life of a patent can extend for up to twenty years from the earliest effective filing date for the invention).  In exchange for these patent rights, the inventor is required to disclose the invention in enough detail to allow other people to use the invention after the monopoly expires and to learn from the invention so as possibly to enable them to build upon the ideas contained in the invention’s disclosure -- thereby promoting the progress of science and the useful arts. 

            The Patent Act is broad and general in its language describing the proper subject matter for a patent:

            “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.... 35 U.S.C. § 101

            .... unless the invention was ...... in public use .... in this country, more than one year prior to the date of the application for patent in the United States ... 35 U.S.C. § 102(b)

            .... A patent may not be obtained, ..., if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains....”, 35 U.S.C. § 103(a).


V.   Non-Statutory Subject Matter

            However, since Congress included in patentable subject matter only those things that qualify as “any  ...  process, machine, (article of) manufacture (i.e., product), or composition of matter, or any  ... improvement thereof ...”, the courts often have been faced with the task of trying to find the right words to define those things that are to be excluded as non-statutory subject matter. 

            This task has been especially challenging during the past forty years when technological advances have made possible the creation of many totally revolutionary products (e.g., computers and computer software) and services (e.g., financial service companies offering combined banking, insurance and brokerage services over the Internet).  

            Listed below are the exclusionary words that the U.S. District and Circuit Courts typically have used to define non-statutory subject matter:

            “printed matter” for inventions that relate merely to the meaning or significance of an arrangement of printed matter without a reference to the process, product or machine that is used to prepare the printed matter, See In re Miller, 164 USPQ 46 (CCPA 1969);

            “naturally occurring article” for inventions that occur in nature and are merely found; See Ex Parte Grayson, 51 USPQ 413, for the denial of a patent for a shrimp with the head and the digestive tract removed;

            “scientific principle” for inventions expressing a scientific principle or law of nature not drawn to a practical purpose for producing a new and useful result, See O’Reilly  v. Morse, 15 Howard 62;

            “aggregation” for inventions consisting of an assemblage of elements that do not cooperate to produce a cooperative result; see for denial of a patent for a pencil with a rubber eraser placed on its end;

            “mental steps” for inventions that include only steps capable of being carried out by the human mind and thus not applied to physical elements or process steps,  See In re Meyer, 688 F.2d 789 (CCPA 1982) for denial of a patent for a computer program that assists a neurologist in diagnosing a patent.

            “mathematical algorithm” for those elements of inventions which were generally expressed as mathematical equations, and where the invention was not drawn to a practical purpose for producing a new and useful result, See In re Walter, 618 F.2d 758 (CCPA 1980) for denial of a patent for  improved mathematical methods for interpreting the results of seismic prospecting, and

            “method of doing business” for inventions consisting of business schemes that are not related to a physical process or method carried out in connection with a workpiece or product, and thus not within the “useful arts,” See Hotel Security Checking v. Lorraine Co., 160 F. 467 (2nd. Cir. 1908) which involved a bookkeeping method, In re Wait, 24 USPQ 88 (CCPA 1934) for denial of a patent for a vending process for use in selling stocks and other commodities, and In re Patton, 127 F.2d 324 (CCPA 1942) for denial of a patent for an interstate and national fire-fighting system.

            Meanwhile, the Supreme Court has tended to construe statutory subject matter broadly, noting that Congress intended statutory subject matter to “include anything under the sun that is made by man.” See Diamond v. Chakrabarty, 477 U.S. 303, 309 (1980), quoting S. Rep. No. 82-1798, at 5 (1952) and H.R. Rep. No. 82-1923, at 6 (1952).   Despite this seemingly limitless expanse, the Supreme Court has specifically identified three categories of unpatentable subject matter as: “laws of nature, natural phenomena, and abstract ideas.” See Diamond v. Diehr, 450 U.S. 175 at 185 (1981).

VI.  Computer Software  Challenges To “Non-Statutory Subject Matter” Rejections

            The frequent use by the USPTO of these types of non-statutory subject matter rejections might have continued had it not been for the tremendous growth in the importance of computer software for the U.S. economy and the gradually evolving perception that traditional means, copyright law, of protecting computer software was inadequate (i.e., inadequate for two principal reasons -- its inability to prevent competitors from developing “cleans room” copies, and a recent trend in court decisions that narrowed the limits of protection afforded to computer software.  See Computer Associates v. Altai, 982 F.2d 693 (2d Cir. 1992), where the court held that other than the copying of the literal elements of a computer program, copyright offered relatively narrow protection for the other elements of software, and Lotus v. Borland, 49 U.S. 807 (1996), where the Supreme Court affirmed the holding that the command menu hierarchy of the Lotus 1-2-3 spreadsheet program is not copyrightable because it is a method of operation.  In both of these cases, the opinions suggest that what the plaintiffs were seeking was protection that falls within the arena of patents -- not copyrights).

             The USPTO initially took the position that computer software primarily involved merely abstract mathematical processes and the computerization of mental processes.  In 1968, the USPTO published guidelines essentially rejecting the notion that computer software was patentable. See 33 Fed. Reg. 15581, 15609-10 (1968).  In the early years, the major exceptions on which computer software patents issued were for inventions that contained a physical connection to an actual process for creating an article of manufacture (e.g., a computer-controlled process for curing rubber, Diamond v. Diehr, 450 U.S. 175 at 185 (1981)) or to the manipulation of data that represented a physical object or process (e.g., method of computational topography, In re Abele, 684 F.2d 902 (CCPA 1982)).

            However, beginning in 1994, the Court of Appeals for the Federal Circuit (CAFC) decided several cases that generally tend to broaden the scope of patent protection for computer software inventions, and include holdings that:

            (1) A means for creating a smooth waveform display in a digital oscilloscope is patentable subject matter -- thus, a “general purpose” computer operating pursuant to a computer program to perform specific functions is a discrete, patentable machine, In re Alappat, 33 F.3d 1526 (1994, en banc),

            (2) Software “data structures” (i.e., a physical or logical relationship among data elements, designed to support specific data manipulation functions) would be patentable as articles of manufacture if they “were well-known mathematical constructs and lend themselves to manipulation through computer technology,” In re Warmerdam, 33 F.3d 1354 (1994); see also In re Lowry, 32 F.3d 1579 (1994) and In re Trovato, 60 F.3d 805 (1995, en banc), and

            (3) “Computer programs embodied in a tangible medium, such as floppy diskettes, are patentable subject matter,” In re Beauregard, 53 F.3d 1583 (1995).

            In response to this trend in recent court holdings, the USPTO issued on March 29, 1996 new guidelines for the patentability examination of computer-related inventions.  These guidelines indicate that there are three general ways whereby software can be used in an invention to satisfy the statutory subject matter requirement of 35 U.S.C. § 101: (1) to create a “machine” when a computer is included in the claims as having its operation controlled by the software, (2) as a “process” when it is described as a series of operational steps to be performed on or with the aid of a computer, and (3) as an “article of manufacture”  embodied in a computer-readable memory (e.g., floppy disks, CD-ROM, system memory) containing the software that directs a computer to function in a particular manner.  Additionally, these new guidelines require that such software inventions claim a technological utility -- a sufficient “tangible benefit” so that it cannot be viewed as merely an abstract idea (a position closer to the dissent in In re Schrader).  


VII.  Legal Challenges To “Method of Doing Business” Rejections

            Because so many novel “business methods” are implemented with computer software, it was probably inevitable that the courts would eventually be asked to decide a computer software case that also involved a “business method” statutory subject matter issue.  

On July 23, 1998, the CAFC decided such a case.  It held in State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368 (Fed. Cir. 1998), that a financial service provider’s “business method” software that does nothing more than transform numbers to produce a useful, concrete and tangible result is eligible for patent protection, and that the “business method” and “mathematical algorithm” statutory subject-matter exception categories have little, if any applicability -- the inquiry should focus not on exclusionary categories, but on the invention’s claimed practical utility.

            This decision was quickly followed on April 14, 1999 by another CAFC holding that a telecommunication service provider’s method for modifying the message records, used by local and long-distance telephone service providers to monitor and eventually bill for long-distance calls, to allow for them to easily identify a caller’s long-distance service provider is statutory subject matter and therefore eligible for patent protection; the District Court’s contrary holding on the grounds that the invention could be categorized as reciting a “mathematical algorithm” was improper, the court’s analysis should have addressed whether the algorithm-containing invention, as a whole, produces a tangible, useful result.  See AT&T v. Excel, 172 F.3d 1352 (Fed. Cir. 1999).


VIII.  Consequences of These Court Decisions and New USPTO Patentability Guidelines

            With these recent court decisions expanding the scope of patent protection, and the issuance of new USPTO guidelines that increase the probability that software patents will more readily issue, there has been a significant increase in the rate at which software and “business method” patents are being issued. 

            Up until 1987, only approximately 2,000 computer software patents were issued -- by 1997 this number had increased to over 13,000.  By the end of this year, the total number of U.S. software patents issued is expected to exceed 80,000.   The top software companies generally have aggressively pursued patent protection for their software.  It is estimated that the top one-hundred software companies now control sixty percent of all issued software patents.

Meanwhile, it has been estimated that the number of “business method” patent applications filed with the USPTO increased by over forty percent in the year following the State Street decision.  During fiscal year 1999, the USPTO is expected to issue over 1,000 “business method” patents.  

            Furthermore, it should be noted that these results are being achieved in spite of the often heard criticism that the USPTO lacks adequate manpower and databases of prior art in order to provide for an effective, expeditious examination of software-related patent applications to ensure that their disclosed inventions meet the statutory requirement that they be novel and nonobvious with respect to the prior art, See 35 U.S.C. § 102 and § 103.  This situation has led some to the opinion that many invalid software patents have been issued.

            However, the economic impact of some of these software patents is significant in terms of the magnitude of both the patent infringement damages being awarded and the revenues being generated by various licensing agreements; for example:

 "Microsoft Corporation ordered to pay Stac Electronics $120 million in patent infringement lawsuit, Stac Electronics v. Microsoft, for disk compression software," Info Canada, July 1994,

            "Alpex Computer Corporation awarded $208 million in Alpex Computer Corporation v. Nintendo America, Inc. for infringement of Alpex video game graphics patents," Los Angeles Times, August 2, 1994,

            "Texas Instruments formed licensing agreements with 26 semiconductor companies since 1989 and reports it has more than tripled its royalties. The company's 1993 royalties on its patents reached $521 million," Electronic News, March 14, 1994, and

            "The cost of IBM's patent license agreement royalty payments for disk drive patents adds $100 to $150 to the price of a computer," PC Week, August 16, 1993.


IX.  “First Inventor Defense” To Infringement Of A ‘Business Method’ Patent

            The consequences of the State Street case have even been felt in Congress.  On November 29, 1999 the President signed the Omnibus Appropriations Bill, H.R. 3194.  One of the bills included in H.R. 3194 was the Patent Reform Bill of 1999.  Among other things, this bill creates a “First Inventor Defense” to infringement of a “business method” patent on an infringement action initiated on or after November 29, 1999.  It adds a new section, 35 U.S.C. § 273, to the patent code which reads in part:

            “...It shall be a defense to an action for infringement under section 271 of this title with respect to any subject matter that would otherwise infringe one or more claims of a method in the patent being asserted against a person, if such person had, acting in good faith, actually reduced the subject matter to practice at least one year before the effective filing date of such patent, and commercially used the subject matter before the effective filing date of such patent.” 35 U.S.C. § 273(b)(1).

            The justification generally provided for Congress’ enactment of this legislation is as follows: Before the State Street case, it was universally thought that methods of doing or conducting business were not the statutory subject matter that could be patented.  Before that case, everybody would keep their methods of doing or conducting business as secret as they could and never tried to patent them.  In recognition of this pioneer clarification in the law, Congress felt that those who kept their business practices secret had an equitable cause not to be stopped by someone who subsequently reinvented the method of doing or conducting business and obtained a patent.  Therefore, Congress limited the “first inventor” defense” solely to that class of rights dealing with “methods of doing or conducting business.” 


X.  How Does One Go About Being Granted A “Business Method” Patent?

            In order to be granted a patent, an inventor must contribute to the U.S. knowledge base by filing with the USPTO a confidential, carefully drafted patent application that: (a) reveals to one skilled in the technology of the invention how to make and practice the invention, (b) distinctly claims and defines that which is patently novel in the invention, and (c) is subsequently judged by the USPTO to have met the statutory requirements for the invention’s patentability.  If these requirements are met and the applicant has paid the required fees, the USPTO will grant a patent to the inventor and make the application’s contents available to the public.

            A.  Novelty Search

Because patent protection is only available for new, useful and nonobvious inventions, and because the legal expenses associated with applying for a patent can be significant, it is often advisable to first make a relatively low-cost assessment as to whether it is likely that a patent will issue for the invention.  This usually involves searching the U.S. patent files to investigate technology similar to the proposed invention in order to determine the state of the art in the area of the invention and what, if any, scope of patent protection may be available for the invention.

However, it should be noted that all novelty searches have limitations that should be considered in using the results of the search.  These include: (a) a standard novelty search covers only issued U.S. patents (i.e., not covered are foreign patents and other publications from around the world), (b) U.S. patents are divided into classes; only those believed to be most clearly related to the art of the invention are searched, searchers sometimes make mistakes and do not search a class that contains relevant art, and (c) the patents to be searched are an estimated 18-24 months behind the latest technology disclosed in pending patent applications, which are confidential but available to the patent examiner to use to determine the state of the art, and (d) a novelty opinion is an informed opinion regarding whether a patent examiner will find the invention to meet the requirement of 35 U.S.C. 102 (novelty) and 103 (nonobviousness) -- this is a difficult legal question, and reasonable minds can differ -- it is possible that a patent examiner, a judge and a patent attorney may reach different conclusions.

            If the results of a novelty search yield no prior patents that substantially disclose the proposed invention, this situation usually will serve to justify incurring the greater expenses associated with preparing a formal patent application.  Typical fees for a patentability search are $250 to $600, with the legal fees for the preparation of an opinion letter being $400 to $1,000 and depending upon how much time is required to draft a representative claim to the invention.

            B.  Preparation and Filing of the Patent Application

            The patent application has two primary sections: the specification and the claims. The specification is essentially a detailed description of the invention, including drawings if necessary, showing what the invention does, how it works, and disclosing its advantages over prior art. The description of the invention must meet certain legal requirements, including that it: (a) be thorough enough to allow a person skilled in the invention’s field of technology to make and use the invention, (b) identify the invention’s best mode of operation, and (c) provide a basis for and explanation of the terminology that is used in the following claims.

            The claims of the patent application are carefully worded, legally structured sentences that vary in definitiveness, with each of these sentences attempting to distinctly define more closely than the others the patentable novelty of the invention.  Thus, while one ideal claim might suffice, the patent application almost always contains claims that range from broad ones (which define the invention with the fewest details possible) to narrow ones (which set forth in more detail the specific elements of the invention).  

            For the USPTO to examine a patent application, a required filing fee must be paid at the time the application is submitted.  For a small entity (independent inventors, small businesses {<500 employees}, and non-profits) inventor, this filing fee is now typically $345, which is half of the fee paid by the larger, non-small-entity applicants.  Typical legal fees for the drafting of a patent application and its supporting paperwork are $4,000 to $10,000, depending upon the complexity of the invention.

            C.  The Examination Process At The USPTO

            After the patent application has been filed with the USPTO, a patent examiner carefully reviews the application in order to determine the invention’s patentability. The examination workload and staffing of the USPTO are such that this examination process usually extends over a period of 12 to 18 months. 

            To be patentable, an invention essentially must be: (1) useful, (2) novel, and (3) nonobvious.  The novelty requirement is often consider to be the threshold test for patentability. It generally is satisfied unless: (i) prior to the inventor’s invention date, the invention was actually reduced to practice or an application disclosing it was filed by one still diligently pursuing it, or it was patented by another or published anywhere in the world by others or publicly known or used in the U.S. by others, or (ii) prior to one year before the filing date of the inventor’s patent application, the invention was patented or published anywhere in the world or in public use or on sale in the U.S. as a result of the acts of the inventor or others (Note: This effective one-year grace period for such acts of the inventor is unique to the U.S. patent laws; in most foreign countries, such acts of the inventor would bar the inventor from obtaining a patent).

            The probably more demanding, nonobviousness requirement is harder to objectively define.  The typical way that an examiner shows obviousness is to cite a number of prior art references that, when combined as suggested by possibly another prior art reference, contain all of the elements of the applicant’s invention.  The applicant generally challenges the logic of the combination and identifies certain secondary considerations that suggest that the invention was not obvious (e.g., long duration of well recognized need for the invention, prior unsuccessful efforts of others to develop such an invention, degree of commercial success of the invention).

            When the examiner has made his/her initial patentability determination, the USPTO responds by sending the applicant what is known as an “Office Action” containing its determination and the reasons for it.  If the Office Action contains a rejection of the claims (which occurs on the first Office Action about 80% of the time) and there exist arguable grounds for contesting the examiner’s determination, one typically files a “Response,” usually in the form of an Amendment, to overcome the rejection. There are usually only two Office Actions and Responses before a final determination is made by the examiner as to the invention’s patentability.  If this determination is detrimental to the applicant’s interests, it can be appealed -- a time consuming and expensive process. (Typical legal fees for responding to Office Actions are $1,000 to $3,000, depending upon the complexity of the arguments).

D.  Fees for the Issuance and Maintenance of the Patent

            After the examiner has agreed to allow the application to issue as a patent, the small entity inventor presently must pay the USPTO a patent issuance fee of $605, which is, in part, to pay for the expenses associated with preparing the application’s contents for publication. Periodically during the life of the patent (up to 20 years from the date of filing for those applications filed on or after 6/8/95),  the inventor must pay USPTO maintenance fees in order to allow his/her patent rights to continue to be in effect .  These come due at times that are measured from the patent’s date of issuance.  Their amounts increase with time under the assumption that the inventor will realize greater profits on the invention the longer that it has been in existence. For the small entity inventor, these maintenance fees and their due dates are: @3.5 years: $415, @7.5 years: $950 and @11.5 years: $1,455.

E.  Constructive Notice To Potential Infringers

            Once a patent is granted, its number should be placed on the invention (i.e., Pat. 6,000,000) in order to give a potential infringer constructive notice of one’s patent rights.  Otherwise, the patentee will only be able to recover damages from an infringer from the day the infringer had actual notice of his/her infringement, rather than from the day the patentee began marking the invention.

            F.  Foreign Patent Coverage

To obtain foreign patent coverage, within twelve months of filing a U.S. patent application (i.e., one’s priority date), one needs to start applying for his/her foreign patent rights, this process typically includes the following steps:

            i)  Preparation and Filing of a PCT International Patent Application that is based on the U.S. application (Typical Legal Fee of $1,000 to $2,000, Filing Fee of approximately $2,300 or $3,100, depending upon whether one designates the USPTO or the European Patent Office (EPO) for one’s international novelty search),

            ii)  Assuming that the results of the international search report are favorable and that one would like to postpone, from the 20th to the 30th month, from one’s priority date, the expensive step of entering the "national stage" of this process and the filing of the required applications in the specific foreign countries where one is seeking foreign patent rights, before the end of the 19th month from one’s  priority date, one will want to exercise his/her option to have the PCT authorities perform a preliminary patentability examination; this requires the filing of the necessary papers to "Demand" the preliminary patentability examination (Typical Legal Fee of $1,000 to $2,000, assuming no Preliminary Amendment is necessary, with a Filing Fee of $900 or $2,200, depending upon whether the USPTO or the EPO performs this examination),

            iii)  Before the end of the 30th month from one’s priority date and assuming that the PCT preliminary examination report is favorable, one has to decide in which foreign jurisdictions he/she will actually file for national patent rights.  The costs involved at this step include individual, national filing fees (e.g., approximate fees: Canada - $1,150, EPO - $4,900, Japan - $3,700), possible translation costs, foreign patent agent filing fees, continuing legal fees for a U.S. patent attorney to supervise this work, and possible later fees involved with making any necessary amendments to the various foreign patent applications.  These "national stage" fees are by far the most expensive step in this process, and it usually is suggested to postpone them until the 30th month in order to give the inventor the maximum possible period of time to assess the marketability of the invention so that he/she can better determine as to whether these final expenses can be cost-justified.


XII.  What Impact Might New “Business Method” Patents Have On U.S. Business Entities?

            A.  Threats to Business Plans From New “Business Method” Patent Holders           

            How might new e-Commerce businesses with their “business method” patents impact the traditional service industries?  Is it possible that an on-line business, such as, might obtain a patent for an improved, novel means to distribute products and services over the Internet that will conflict with the means sought to be used by traditional service institutions to sell their services and products on-line?

            B.  Possibility Of Increased Threats To The Business From Outside Consultants 

            Should businesses reconsider how they use outside consultants?  Consider the fact that many traditional service industries license base computer software and then customized it in order to have it optimally deal with the service provider’s particular line of products or services.  For the smaller service providers, these customizations are often performed by outside consultants, who consequently have the opportunity to become intimately knowledgeable regarding the service provider’s business. 

            With the scope of patentable subject matter having increased, the likelihood exists that more of these software customizations can result in the creation and invention of valuable, patentable matter.  To whom will this patentable matter belong?  Is it possible that outside consultants could come to be in the position of being the owners of “business method” patents that are vital to their former clients’ survival?

            C.  Financial Services Industry’s Unique Situation

            The financial services industry is one in which the patenting of “business methods” is proceeding at a rapid pace.   This is due in part to the unprecedented change which this industry is now undergoing. These changes are being brought about by a unique combination of circumstances, including changes in consumer needs, continuing deregulation, globalization, demographic changes, technological advancements, and recent legislation that removes depression era barriers and allows banks, investment firms and insurance companies to sell each other’s products and provide one-stop shopping for financial services.  At stake is an estimated $350 billion that Americans spend annually on fees and commissions for banking, brokerage and insurance services.

            These forces could well lead to a period of explosive growth in the development of new financial products, along with equally innovative ways to deliver and service such products.  For example, insurance companies may have to develop new financial products in order to compete with banks, which traditionally have had  greater capital resources for product development efforts, greater access to the customers and more opportunities to build better customer relationships.   In this new environment, the ability to acquire and protect competitive advantages through patents for “business methods” could play a significant role in determining which companies succeed and fail.

            The traditional business practice in the financial services industry of introducing “me too” products could be all but eliminated by the effective enforcement of the monopoly rights of new patented, financial products and services.  Staff personnel in financial institutions may need to see themselves as potential “inventors” of products and services that may be eligible for patent protection.

            D.  “Business Method” Patents As Defensive Weapons

When one thinks of the advantages of patent ownership, one often thinks first of using them as offensive weapons to extract royalties from or enjoin the activities of competitors.  However, in many instances, patent ownership can serve a much more important defensive purpose.  Because of the threats presented by new “business method” patents, many companies may elect to try to develop their own “business method” patent portfolios for primarily defensive purposes.  Then, when accused of infringement, they can seek to resolve such disputes by entering into cross-licensing arrangements whereby each company is granted a license under the other’s patents.                       

            E.  Questions Regarding The Strength Of “Business Method” Patents

            Despite the threats and opportunities presented by new “business method” patents, there are also valid concerns about the degree and speed with which individuals and business entities should take action.  For example, it is understood that patents can be costly to acquire and have often been invalidated by the courts.  Thus, there is reason to wonder about how such new “business method” patents will eventually fare in the courts.  Because of this doubt, will the owners of new “business method” patents be less aggressive in their efforts to enforce their patent rights, and therefore more amenable to licensing the rights to their new products and services under less onerous terms?


XIII.  Outline Of Information That Attorneys May Want To Share With Their Clients

A.  Expect Flood of “Business Method” Patents:

(1) Threats: 

             a.  No More “Me Too” Products & Services

            b.  Traditional Trade Secret Protection for “Business Methods” Inadequate

                                    c.  Greater Risk of Being Sued For Patent Infringement

                                    d.  Licensing Fees Could Be Required

                                    e.  Potential for Diminishing Profit Margins Due To Costs To Implement Reaction Strategies

                                    f.  Competitors May Seek To Distinguish Themselves By Advertising Their Patent Portfolios

                                    g.  Potential Investors May Expect To Evaluate Your Patent Portfolios

(2)  Opportunities:

            a.  Develop New “Business Method” Inventions, Increase Corporate Value By Patenting Them

b.  Minimize Licensing Fees By Cross-Licensing Patents

c.  35 U.S.C. 273(b)(1): “Earlier Inventor Defense” To Infringement Of A “Business Method” Patent


B.  Need To Re-Evaluate IP Strategies:  Options Include:

(1) Do Nothing

(2) Prepare For Licensing

(c) Establish Invention Development & Patenting Program

                                    a.  Consider Revising:

Employee Work Agreements:

                                                            Ownership of Employee’s Inventions

                                                            Non-Disclosure Requirements

            Consultant Work-For-Hire Agreements

                                    b.  Increase Research Efforts:

                                                Track Technical & Patent Literature In Areas of Business Interests

                                                Track Competitors’ Development Efforts

                                                Track Industry Licensing Agreements

                                    c.  Attempt To Increase Employees’ Inventiveness:

                                                Establish & Document Development Efforts

                                                             Bound Notebooks – Proof of Conception Dates

                                                            Invention Submission Forms

                                                            Review & Monitor

                                    d.  Develop Patent Portfolios

                                    e.  Review Potential, New Business Strategies & Methods To Avoid Patent Infringement Situations




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