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Why Patents Are a Rising Currency in the Net Economy As several lawsuits show, the stakes are growing every day. Will the Supreme Court be forced to rule? Everyone knows inventions such as lightbulbs, telecommunications equipment, even genetically engineered fruit can be patented. But what about what happens on a Web site when you click your mouse? Amazon.com thinks the answer that, too, can be patented. On Dec. 1, it won a preliminary injunction against barnesandnoble.com to stop its online book-selling rival from using Amazon's patented "1-Click" method for buying items on its Web site. Amazon secured its patent on the "1-Click" in September as a "Method and System for Placing a Purchase Order via a Communications Network." The Amazon case is just one of several high-profile court tests for companies trying to patent business methods in cyberspace. And where the courts ultimately draw the line will have huge implications for e-commerce in coming years. Emboldened by a decision by a federal appeals court endorsing business-method patents last year, entrepreneurs and companies are rushing to secure protections for their own methods -- from new ways of selling things over the Internet to the systems underpinning esoteric financial products. "A LOT OF CONCERN." In three years, as patent applications have tripled, the U.S. Patent & Trademark Office has been busy recruiting new patent examiners to handle the complicated applications, which can take three years or more to review. "There's a lot of concern in the industry about what the patenting of business methods means," says PTO Commissioner Q. Todd Dickinson, but he adds: "The more sophisticated are rapidly adapting." Indeed, these patents have become a kind of currency in today's Internet economy. Priceline's fast-growing empire in name-your-price sales, for example, is founded on several patents that, the company asserts, make it impossible for competitors to duplicate exactly what it does. Indeed, after Microsoft Corp. launched name-your-price sales on its Expedia travel site, Priceline hauled the software giant into court last October. There's a lot at stake in how the courts rule on both Amazon and Priceline cases, says New York patent attorney Alan L. Jakimo. "In the Internet economy, the barriers to entry are incredibly low. At the same time, it costs a fortune to get your name out there. Let's say you come up with an innovative way of doing business. If you can get a patent on that, you're ability to do business is far greater." MERRILL'S PUSH. Another active player is brokerage giant Merrill Lynch, which even has its own patent attorney on staff. The firm has 25 business-method patent applications pending and has received 18 to date. In September, Merrill won a patent for the computer system behind a novel derivative product that allows homeowners to swap the value of their home's future appreciation for a current fixed-income return. (A derivative is a contract whose value is derived from an underlying asset, such as a stock or cash flow.) Merrill plans to pool the contracts and sell them as securities to institutional investors. Merrill is no newcomer in securing these sorts of patents. It got its first one in 1982, for the system that runs its pioneering cash-management account, which combines brokerage, money-market, and checking into a single account. Now, says Merrill's Patrick Romain, a patent attorney, other financial-services firms are starting to catch on to the importance of protecting their inventions. "People are just starting to realize it. You're going to see it become a routine practice" in financial services, he says. Indeed, Romain thinks that had business-method patents been accepted 30 years ago, products such as derivatives, mortgage-backed securities, and even Michael Milken's famous junk bonds could have received patent protection, giving the patent holders competitive advantages for the typical 20 years the patent protection holds. PATENT LAB. Perhaps no one has been more aggressive pursuing business-method patents than Jay Walker. Best known as the chief executive of Priceline.com, he also runs Walker Digital, a Stamford (Conn.) laboratory that dreamed up, then spun off, Priceline. Since 1995, Walker Digital has received 30 patents -- and has some 300 pending -- on everything from new point-of-sale systems for retailers to systems that would help companies sell information they hold in databases. Indeed, Walker Digital's business model is predicated on developing new business methods, protecting them with patents, and bringing them to market by starting companies or through joint ventures, and licensing the patents. "You can expect to see several more Pricelines and many more joint ventures," Walker says. But will these patents hold? Critics charge that some are overly broad and will stifle innovation. The court ruling that has aroused all the interest in business method patents was State Street Bank v. Signature Financial Group. Signature, a private Boston company, had obtained a patent in 1993 for a "hub-and-spoke system" it developed for administering mutual funds. Basically, the system allowed investors to get timely account information, lowered the cost of administering the fund, and let them share in the tax advantages of a partnership. CONFIDENCE BOOST. State Street wanted to license Signature's system, but when negotiations broke down, State Street sued, challenging Signature's patent. A federal court judge initially ruled that business methods couldn't be patented. But the U.S. Court of Appeals for the Federal Circuit reversed the decision. The appeals court said that since the 1952 Patent Act "business methods have been, and should have been, subject to the same legal requirements for patentability applied to any other process or method." That has given new patent holders confidence and plenty of encouragement. Still, without a Supreme Court ruling validating business-method patents, the Amazons, Pricelines, and others will likely face future court tests. And while the high court let the appeals court decision stand in the State Street case, Justice John Paul Stevens wrote that "the importance of the question presented...makes it appropriate to reiterate the fact that the denial of the petition does not constitute a ruling on the merits." Sounds like this issue may yet make it to the Supreme Court for the ultimate test. By Pamela L. Moore in Greenwich, Conn. EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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