Patents: Business Methods and Software Patents

Posted on April 9, 2012

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Article Highlights:

  • A business method patent is a class of patents which disclose and claim new methods of doing business. This class of patent applies to new types of e-commerce, insurance, banking, tax compliance etc.
  • I do not think you can stake an entire business on a business method patent. Most investors are not going to get excited about a business method patent; they want to see more value than just a patent.
  • The threat of patent infringement, the threat of litigation, and the necessity of having to litigate patent claims with little merit are an issue that we as a society need to address.

Last week, I talked about patents generally. This week I am moving to an area I am even more unqualified to speak about from a legal perspective, but which I believe is more important – business method and software patents. To give you some background, a business method patent is a class of patents which disclose and claim new methods of doing business. This class of patent applies to new types of e-commerce, insurance, banking, tax compliance etc. Additionally, software patents often fall into this class of patent because software is often simply a new method of doing business.1 Business method patents are relatively new in the patent world. However, they are also the source of a great deal of controversy. The Amazon “one click” issue, whereby Amazon received a patent for this business method of making a purchase in one click, embodies the issues surrounding business method patents.

The business method patent world was, to a degree, shook up by the recent court case Bilski v. Kappos, 561 U.S. ___ (2010). Previously, the USPTO used a machine or transformation test as to decide whether a claim comes within the “process” and is consequently patentable. The Supreme Court held that the machine or transformation, rather than being an exclusive test for eligibility is “a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under § 101.”

However, the Supreme Court did not come up with a new test, and one practitioner has described it to me as effectively punting the decision. It rejected the current case on the basis of it being an “abstract idea,” and additionally sought to limit the patentability of business method patents generally. The mechanics of such limitation, however, were to be worked out by the UPSTO and the lower courts.

Two main issues exist for small businesses under the current regime. First, the entrepreneur who is doing something new and novel with respect to his business is faced with the issue about whether he or she should attempt to get a business method patent. Generally, I do not believe it is a good idea. However, I say this with some trepidation because several patent attorneys disagree with good reason. They believe that you can and should protect the invention. If you do not make the effort of protecting your invention, then you will lose the ability to protect it. This is true, and if you lose patent protection on a valuable invention then you have lost out on a substantial asset.2

However, I disagree with this stock advice, particularly for the start-up. First, it is expensive. In order to get a business method patent that is worth it, you need to spend at least $20,000 and quite possibly more. Because of the difficulties inherent in business method patents, inevitably they are called into question. Absent special circumstances capital, time and money are too valuable for a start-up to go this route. Additionally, I do not think you can stake an entire business on a business method patent. Most investors are not going to get excited about a business method patent; they want to see more value than just a patent. Ultimately, until you create that value separately, a business method patent is not going to get you to where you need to be. I would not spend the money. However, that answer is incomplete and imperfect, but until the patent law in this area is more accessible to entrepreneurs, that is the advice I give to small businesses who are in these situations.

The other main issue with business method patents (and maybe patents more generally) is the concern that you are conducting your business free from infringing on another company’s patent. If they are too broad or too easily granted, businesses run a greater risk of infringing upon someone else’s patents. This is a huge problem that has negatively affected, and in some cases, destroyed businesses. I do not have an answer. What I do know is that the threat of patent infringement, the threat of litigation, and the necessity of having to litigate patent claims with little merit are an issue that we as a society need to address.

Mike Goodrich
Goodrich Law Firm, LLC

1 The other way to protect your software is to copyright the software. This prevents another person from copying the code. However, a copyright does not prevent another person from creating the same software functionality provided the coding does not infringe on the copyright.

2 And accordingly, you will be pretty irritated at your lawyer or other professional adviser.

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