Patent Protection Provides Long-term Net Strategy

Nov 1999National Law Journal, Volume 22, No. 8, October 1999, pages B11-B12

Patent protection provides long-term Net strategy

'State Street' allows start-ups to protect business methods and defend marketing niches.

By Gregory J. Maier,* Bradley D. Lytle and Keth Ditthavong

Electronic commerce is transforming the way modern business is being conducted and is leveraging international market forces for the benefit of consumers. The volume of e-commerce reached $301 billion last year in the U.S. market alone, according to some estimates.1 Market analysts have projected that by 2003, e-commerce will produce revenue in excess of $3 trillion.2

From the vendor/service providers' point of view, Internet-based e-commerce is a race to attract customers so as to obtain a defensible, entrenched position in cyberspace. A strategy of early market dominance and continued legal posturing is necessary to lead the race and maintain an advantage in this virtual world with real consequences.

A lower-risk, higher-reward strategy, however, would be for pioneering e-commerce companies to limit competition in the mid term and long term by making it illegal for others to adopt those companies' proprietary computer-implemented business methods. A recent clarification of U.S. patent law has created an opportunity for e-commerce companies to adopt this strategy by seeking business-method patents that, if issued, will legally exclude others from using the methods for up to 20 years.

Access to the Internet as an e-commerce mechanism will have untold implications for how business is conducted in the future. After all, the Internet is not merely a "new passage" to new markets, but also an information resource that empowers people with instant, global access to information in the public domain--i.e., mankind's "virtual database" of cumulative knowledge.

From a modern corporate perspective, how can a company stake a claim in the new world of e- commerce? After all, global access also means global competition. A key parameter is the creation and protection of a company's intellectual property, exclusive rights to which may capture the legal right-of-way to the new e-commerce world.

Conventional "brick and mortar" retailers likely will lose significant market share to upstart cyber-retailers such as, eBay, E*TRADE and the like, but brick-and-mortar shops will nonetheless maintain a "local" market for those who like to speak in person with a sales clerk or "kick the tires" before buying something. However, for those consumers driven by the lowest cost, the competitive market forces brought by the Net make the e-commerce environment the most compelling place to shop.

Pioneers are uniquely positioned to stake claims to new territory. The significance of their claims, however, can easily erode if they are not equipped to defend them. Market inroads may later be lost to 800-pound gorillas that elbow their way into proven markets. For example, while led the effort to provide an online book store, Barnes & Noble reacted by launching a competing Web site in the hope that its good name in the conventional brick-and- mortar retail sector will resonate sufficiently with consumers to give it an advantage in the e- commerce arena as well. Thus, the issue facing e-commerce companies is how to protect new territory, in the short term as well as in the mid term and long term, as the global retail market matures.

Short-term vs. long-term plans

One short-term strategy is for a new e-commerce company to "scoop" the inevitable competition by bringing the new product or service on the Web well before competing services or products are available. The objective of this gold rush approach is to secure enough of a lead on the competition to make it impractical for them to compete with similar business models. Early entrepreneurs using this approach were largely successful because they carved out a market position when the Net was not generally recognized as being a revolutionary business-enabling technology.

Now that the Internet is being taken seriously, it will be much more difficult for pioneering e- commerce companies to maintain any significant lead on the competition unless they erect some barriers to entry that impede newcomers. This is not to say that the short-term approach of a first- to-market strategy has no value for new e-commerce companies, but rather, that there remains a need for a mid-term to long-term follow-on strategy to protect and expand on a company's market share.

Patent protection is one barrier to entry, as it makes illegal the employment of patented e- commerce business methods. Fortunately, another development has emerged alongside the Internet. The U.S. Court of Appeals for the Federal Circuit explained in State Street Bank & Trust Co. v. Signature Financial Group Inc.3 that it is possible to obtain patents on methods of doing business.4 In so ruling, the Federal Circuit definitively denounced the long-held business- method exception to patentability.5

E-commerce companies that are savvy to the U.S. and foreign patent systems stand to gain the most. Before State Street, e-commerce companies had only trade secret laws to protect their business practices, but because software code related to business processes is susceptible to reverse engineering, trade-secret protections were not always effective.

It is clear that some e-commerce companies already see the advantage of protecting their business methods, as is evident from the virtual boom in patent application filings for business method patents since State Street. The U.S. Patent & Trademark Office (PTO) has borne the brunt of this surge. According to Acting Commissioner Todd Dickinson, the PTO has experienced a 700% increase in the number of filings on software and business-method patents, attributing the dramatic increase directly to the State Streetdecision.6

The groundswell of new business-method patent applications has been so significant since State Streetthat the PTO does not typically examine a business-method application for the first time until about two years after the application is filed. Because patent rights do not vest until a patent is issued, seeking patent protection is a strategy that must be started early. A prudent business plan would not typically depend on securing patent protection before the market or service is fielded unless that time-to-market period is two or more years.

Power of patent protection

Once a patent is secured, the exclusive legal rights that vest in the inventor can be powerful. It is unlawful7 for those who have not licensed the patented technology from the inventor or the proper assignee of the patent to make, use, sell, offer to sell or import into the United States any patented invention for the term of the patent.

E-commerce companies can use patent protection to defend a market niche by making it unlawful for others to compete with products, services or methods that employ a claimed invention. Of course, after a period of 20 years, the formerly patented business method would be free for all others to use, but then again, 20 years for computer-implemented inventions is approximately the equivalent of 10 generations of computer technology.

If the long-term strategy of an e-commerce company does not include obtaining a patent portfolio on its business methods, the company will be left with few or no legal options for protecting its niche. It must passively wait and respond reactively, possibly to a competitor armed with a portfolio of improvement patents, demanding royalties or even an injunction.

Some commentators have suggested that there is a high probability of successfully defending against a patent infringement suit involving business methods because of the abundance of prior art in the field.8 In view of the possibility of another company's asserting an improvement patent against a pioneering company, however, the wait-and-see approach loses its attraction quickly, given that defending oneself in a patent infringement suit may cost millions of dollars and can last for years.

Therefore, it would be prudent for a fledgling e-commerce company to develop a patent portfolio that can be leveraged during licensing negotiations or during litigation. The cost of obtaining a patent, which varies depending on the complexity of the technology, pales in comparison with the cost of even the smallest litigation. Consequently, companies need to budget not only for securing intellectual property developed by the company, but also for bargaining with competing companies, which themselves may assert their patent portfolio.

In addition to securing market share, having patent protection can inject needed stability into the market volatility of e-commerce companies, particularly if a company is an Internet start-up. Internet start-ups, even the most successful ones, are viewed by the financial industry as extremely volatile, in part because of their "virtual" nature. That is, these companies lack tangible assets. One approach to dispelling this perception is to develop a patent portfolio that reflects, at a minimum, the core products and services of the Internet start-up. A well-targeted patent portfolio assures existing and prospective stockholders that the company is not without commercially valuable assets.

Thus, although patent protection may aptly address mid-term and long-term gaps in strategic business plans, the lack of timeliness in the patenting procedure precludes patent protection from offering a near-term solution to securing market share for new methods of doing business. Nonetheless, because of the time lag in obtaining a patent, a responsible business plan will emphasize the filing of patent applications early in the research-and-development phase to minimize the time between fielding a product or service and having a patent that covers the product or service.

All indications point to an ever-increasing recognition of, and need to protect, one's business practices. A well-orchestrated strategy for new, emerging or even established companies interested in e-commerce would therefore include a combination of a short-term strategy to obtain market share, followed by a mid-term and long-term strategy of obtaining exclusive legal rights by way of patent protection.

By encouraging inventors to disclose their inventions to others in exchange for exclusive rights to the invention for a limited time, current U.S. law offers business method patents as a mid- term-to-long-term strategic solution to young, pioneering companies that wish to stake a claim in the new world of e-commerce.

Published in the National Law Journal, Volume 22, No. 8, October 1999, pages B11-B12.

*Mr. Maier is the managing partner of the electrical/mechanical department at Arlington, Va.'s Oblon, Spivak, McClelland, Maier & Neustadt P.C. He is also chair of the ABA Intellectual Property Law section. Mr. Lytle and Mr. Ditthavong are associates at Oblon Spivak, where they specialize in securing patent protection on communications, software and Internet-related technologies.


 (1)Q. Todd Dickinson, "The USPTO--Our Challenges for the New Millennium," Remarks at the 11th Annual Fall CLE Weekend Seminar, Intellectual Property Law Section of the Virginia State Bar, Sept. 10, 1999.

(2) Linda Himelstein et al., "Why They're Nuts About the Net," Bus. Wk., Nov. 23, 1998, at 51.

(3) 149 F.3d 1368, 1374-75 (Fed. Cir. 1998), cert. denied, 119 S. Ct. 851 (1999).

(4) State Street is also famous in intellectual property circles for its clarification of patent laws regarding the patentability of software-related inventions. Under State Street, software is now freely patentable as long as it provides a useful, concrete and tangible result.

(5) State Street, 49. F.3d at 1375.

(6) Q. Todd Dickinson, "The USPTO--Our Challenges for the New Millennium," Remarks at the 11th Annual Fall CLE Weekend Seminar, Intellectual Property Law Section of the Virginia State Bar, Sept. 10, 1999.

(7) Title 35 U.S.C. 271 defines what constitutes patent infringement, and 35 U.S.C. 281 provides patentees with remedy by civil action for infringement of the patent.

(8) Bill Roberts, "Trouble on the Road to Electronic Commerce: Are Business Method Patents a Mere Nuisance or a Major Roadblock?," Electronic Business, November 1998, at 30.