VideoMyles Harrington, president and co-founder of Grant Street Group, is either a brilliant businessman or an extortionist, depending upon whether you stand to benefit or suffer from the patent he holds.
Last December, Harrington's Pittsburgh-based company won a patent on a system to conduct online auctions of new issues of fixed-income instruments. Having spent nearly four years waiting for the patent from the United States Patent and Trademark Office (USPTO), Harrington intends to enforce it. Of the several companies he has approached about licensing the technology, he claims that one, financial information giant Thomson Financial, has instead copied it. Thomson's competing system, Parity, which processed more than 350 municipal bond sales last year, directly infringes on his patent, says Harrington, who has sued as a result.
"We've been in business since 1997," he says, "and Thomson employees hit our site over 1,000 times prior to launching Parity. I can tell you that's extraordinary behavior. When small companies like us innovate, and the barriers to entry are low, we don't have a chance unless we can protect our ideas."
Says a Thomson spokeswoman: "We believe this suit has no merit, and we are confident that the outcome of these proceedings will find in our favor."
The case might seem cut and dried if Harrington's patent covered the manufacturing process of a widget or some other end product. But because it applies to a method not of making something but of doing business, as well as to the computer technology behind it, Grant Street's protection falls into the nebulous world of business method patents, the fastest-growing type — and the most controversial.
The holders of these patents say they are simply defending their hard-earned intellectual property and deserve no less protection than any other inventor. But critics assert that many business method patents are granted for inventions that simply computerize obvious techniques or prior inventions (such as municipal bonds and auctions), and therefore shouldn't qualify.
Business method patents still make up less than 4 percent of the total number of patent applications the USPTO receives annually. But the number of business method patent applications received and granted by the office grew from 2,700 and 583, respectively, in 1999 to 7,900 and 899 in 2000, according to John Love, the group director overseeing business method patent examinations at the USPTO. He anticipates 12,000 such applications in 2001.
Despite this growth, the USPTO doesn't strictly define business method patents. According to Love, his division examines Class 705 applications, which have to do with the computer-based manipulation of figures and information in the management or conduct of a business or enterprise, specifically dealing with the Internet, points of sale, or exchange of goods. To be considered for any patent, he says, an application must meet three criteria: It must be nonobvious, innovative, and useful. But critics claim that an overworked, understaffed, underfunded USPTO is unable to distinguish between what is innovative and what is common knowledge. Not so, responds Love, who explains that when a business method patent is approved, the technology itself may not be new, but its effect is.
In any case, these patents are allowing more companies to collect licensing fees and file infringement lawsuits. The USPTO estimates that the number of patent lawsuits filed in U.S. courts topped 2,000 last year, up roughly 25 percent from 1997. And patent holders are being helped by a new industry devoted to the patents' purchase and enforcement. Companies like TechSearch LLC, based in Northbrook, Illinois, buy patents from holders that can't afford to enforce the patents themselves, and then go after infringers, giving inventors a cut of the proceeds.
Infringement lawsuits aren't cheap. According to a survey by the American Intellectual Property Law Association, the median cost of litigating a patent infringement case in which $1 million to $25 million is at stake is $1.5 million, with the top 25 percent of cases costing an average $2.5 million. And the stakes can be huge. Awards or settlements in business method patent infringement cases now reach into the hundreds of millions of dollars.
Bad Patents?
The Internet, not surprisingly, deserves part of the credit (or blame) for the rise of business method patents. Much of the software source code now widely used on the Web was anonymously created by developers under the "open source" ethic, in which software code was exchanged freely for the good of the Internet's advancement. This wasn't an issue until 1998, when the first business method patent was upheld in court. In a ruling in State Street Bank v. Signature Financial Group, the court found that Signature's computer program to track mutual funds had a valid patent.
"Prior to the State Street ruling," says Love, "conventional wisdom was that mathematical ideas were nonpatentable, because the laws of nature, abstract ideas, and anything that's naturally occurring aren't eligible for patent protection."
Because very few of the previous innovations in this area were ever documented, there is little proof that an idea or program existed prior to a patent application. Finding such so-called prior art is the only way to invalidate a patent. The USPTO — which must search prior-art databases, including professional journals, before granting a patent — is actively seeking public input on new prior-art database sources that deal with business methods so that it can do a more thorough job of evaluating the validity of the patents. But unless the prior art is publicly available, which excludes most information related to the genesis of the Internet, finding it is a challenge.
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