Many whose comfortable status quo has been disrupted by the advance of business method patents say patents should be limited to industrial and high tech innovations. For generations, commercial enterprises have freely copied competitors’ new product offerings and marketing approaches. Purchased products or computers might be patented, but the supplier dealt with any patent infringement allegations.

But now the center of gravity of innovation in the economy is shifting as the value of intangible corporate assets has overtaken that of bricks and mortar. And the patent system has adapted, based on the 1998 State Street Bank decision of the Federal Circuit Court of Appeals in which business methods were found to be patentable. Creative business minds, not just scientists and engineers, are taking advantage of patents to protect ideas against copying for the limited life of a patent. In fact, the U.S. Patent and Trademark Office must cope with a deluge of patent applications for inventions in financial and other “non-technical” industries. The banking, securities and insurance industries have seen some companies commit quickly to a strategy of building patent portfolios ahead of their competitors to boost their competitive advantage. E-commerce, marketing and education also are areas of increased patent activity.

Business Method Patents

A business method for patent purposes is any improvement in organizing or operating a business, from corporate structure to internal procedures to marketing approaches.

Recently issued patents illustrate the type of inventions the Patent Office now will approve. Bancorp Services has obtained a patent (7,249,037) for a method for managing life insurance policies that include a stable value protected investment. Infringement of the patent appears to require specified calculations of management fees and investment values related to tracking, reconciling and administering life insurance policies in separate accounts. GE Corporate Financial Services obtained a patent (7,254,558) for a method of prioritizing debt collections. A specific equation calculates a collection priority value for each debt based on the number of days past due, the value of the debt, the customer’s total outstanding balance, the customer’s credit score, the customer’s internal payment history, the number of days since an action due date for the debt and the total number of open items for that customer.

Turning to different service industries, World Picom Corporation of Japan has obtained a U.S. patent (7,257,547) for a restaurant occupancy managing system using portable table top terminals into which customers can enter their dinner orders. Combining educational and marketing objectives, Tabula Digita, Inc., of New York, obtained a patent (7,257,367) for a method for rewarding (in the form of a monetary credit) educational accomplishment by a person who is not eligible to open a credit account, such as a child. Under this patent, a financial services company opens an account to hold the person’s reward credits and allows the person to purchase items from vendors who provide the person’s purchase history data to the financial company for marketing purposes.

Unlike many business method patents, the invention of the Tabula Digita patent can be implemented without a computer. However, a recent decision of the Federal Circuit Court of Appeals suggests that such inventions are eligible for patenting only if they involve a machine or transform a tangible material from one form to another. As a result, the new corps of business method inventors may have to seek patents on their inventions integrated into computer systems or networks.

Criticism

Advocates of the open source software approach tend to oppose business method patents, although some large software companies have a foot in both camps, participating in open source while seeking patents on important applications. Opponents of patents on tax strategies have gone so far as to introduce legislation in Congress that would ban patents on tax planning methods, except tax preparation software and other tools used solely to do mathematical calculations or prepare returns. Much of the protest against business method patents has focused on allegations that the Patent Office is issuing “bad” patents, too many of which describe long-standing business practices. The Patent Office did require time to adjust to examining business-related inventions. But in response to criticism, the Patent Office then tightened its criteria so much that the allowance rate for business method patents has dropped to 11-20 percent as compared to just under 50 percent overall. To handle the volume of applications, the Patent Office is hiring many new examiners with business backgrounds.

Obviousness

No valid patent can issue for concepts that would have been obvious to a person of ordinary skill in the field. The Supreme Court, in KSR Int’l Co. v. Teleflex, Inc., recently made the obviousness test tougher for inventors. Patent examiners, judges and juries will be taking a closer look at the common sense of skilled persons and noting when a combination of familiar elements with known methods simply yields predictable results. Inventions for technological advances that would occur in the ordinary course given market demand, without “real innovation,” will not pass the test. Also, the Federal Circuit decisions noted above may restrict the extent to which an inventor can rely on the creative business method aspects of a computer system to show it is not obvious.

Already a court has invalidated a business method patent using the court’s guidance in KSR. In Advanceme Inc. v. RapidPay, LLC, the U.S. District Court for the Eastern District of Texas, in August 2007, considered a patent for a computerized method for securing debt with future credit card receivables. After considering evidence of several earlier financial products along the same lines, the court found that the invention before it was merely a variation of prior techniques prompted by market forces.

Risks to the Unwary

However, many patents are valid. Proving a patent invalid requires clear and convincing evidence, preferably evidence of prior knowledge not considered by the Patent Office in granting the patent. Thus, the new patent environment poses risks to the unwary. In addition to Advanceme Inc., several owners of business method patents have brought suits to enforce their patents. Also, “patent trolls” have targeted financial institutions, asserting patents in areas such as automating call center and stock market trading.

Every Penny Counts, Inc., an “intellectual property company,” has sued major credit card companies alleging that “open” and “closed” prepaid-card programs infringe its patent. An earlier suit pitched TradeCard, Inc., against banks over a patent for an electronic tool that facilitates global trade letter of credit and open account transactions. PayPal, a unit of eBay, sued a bank for conducting financial transactions over the Internet in a way allegedly infringing a PayPal patent for an online bill payment system.

Dual Role of Patent Rights

Companies benefit from understanding the dual role of owning patent rights — offensive and defensive. Patents can be used offensively to protect a company’s competitive advantage or to generate significant revenue through licensing of the patented invention. Defensively, owning patent rights may help to deter a competitor from bringing a lawsuit, when it fears a counterclaim for patent infringement. Also, cross-licensing of patents can provide a basis for settling commercial disputes. As part of their corporate stewardship responsibilities, some management teams and boards of directors have taken steps to protect corporate inventions and to avoid liability for patent infringement.

Companies facing a more patent-rich competitive environment would be wise to explore the following steps:

  1. Assess where patent barriers to competition are located and who controls them.
  2. Implement online watching searches for competitor patents.
  3. Conduct freedom to operate studies for proposed products.
  4. Map industry patents to minimize risk of infringement and focus efforts to obtain patents on areas that are not already blanketed with patents.
  5. Train personnel in patent law basics.
  6. Find and protect innovations by business people in the organization.