August 28, 1998 2:40 PM PDT

Floodgates open for patent cases

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The rain of recent technology patent actions has turned into a downpour.

Throughout the high-tech world, Internet firms are announcing they have been awarded patents for everything from search technology to computer-based postage metering.

Two key factors have inspired the patent rush: Legal changes that make it easier to file for ownership and a general realization that holding a patent can become a major source of revenue and potential leverage to be used with large companies.

It's no coincidence, for example, that Netcentives--so named because of its business, Internet-incentive marketing--announced yesterday that it was awarded a patent on June 30 for its online rewards programs and that it got $17.25 million in new funding.

The timing for such actions is not surprising, as patents have a two- to three-year "gestation" before they are awarded, and the Web first began to enter the mainstream around 1995, said Carl Oppedahl, a patent attorney with Oppedahl & Larson in Frisco, Colorado. The forward thinkers who first applied for Net-oriented patents in 1995 and 1996 are the ones making the announcements now.

Still, many in the industry say they have never seen anything like the onslaught of today's patent gold rush. "Growth rates on the Internet are stupefying," Oppedahl said. "So anyone that does have a patent that will stand up could make a lot of money."

"Patents help large companies protect their property, but they also help small companies protect themselves against large companies trying to steal their innovations," he added. "We will see some smaller companies for whom patents will make a big difference."

A turning point in patent law came last month with a federal appellate decision overturning a lower-court decision in Massachusetts in State Street Bank & Trust vs. Signature Financial Group. Because of that ruling, "the doors are wide open as to what will meet statutory requirements" to get a patent, according to Jeffrey Kuester, a registered patent attorney and a partner with Thomas, Kayden, Horstemeyer & Risley in Atlanta.

Kuester was alluding to the first of three main criteria patent candidates must meet. The so-called statutory subject matter requirement puts the question: "Is this the kind of thing we consider for a patent?" The other two main criteria involve whether the subject is new and whether it is obvious, Kuester said. It is relatively unusual to have a dispute over statutory requirements.

In general, Oppedahl said, "people tend to haggle over what is or is not obvious compared to what was done before."

Widespread patenting of software is itself a relatively new phenomenon. In 1996, the U.S. Patent and Trademark Office released Examination Guidelines for Computer-Related Inventions, designed to "facilitate the patenting of computer software," said Thomas Gallagher, a patent attorney based in Stamford, Connecticut. Before the guidelines were released, software was generally not considered eligible for patents because computer programs seemed to resemble mathematical algorithms, which by themselves don't qualify for such protection.

The State Street decision is significant for a few reasons. For one thing, Kuester said, it greatly expanded the standards for what can be patented.

"If the software has a practical application, then you're probably going to satisfy the statutory subject matter requirements," he noted, adding that although the decision calls for the subject to provide "a useful, concrete, and tangible result," it cites such things as "price, profit, percentage, cost, or loss" as meeting that criterion.

In other words, Gallagher said, "now you can patent almost anything."

The decision also definitively throws out the so-called Business Method Exception, which Gallagher called a "myth" and the court said was "ill-conceived."

Although "patents covering business models are nothing new," according to Oppedahl, who cited a Merrill Lynch patent from the early 1980s as an example, "what is new is a high federal court endorsing that practice and reiterating that practice."

Moreover, Kuester said, "the court has never come right out and said, 'Business methods are just as patentable as anything else.' It wasn't widely accepted in the patent community until this decision."

All this is great news for firms such as Priceline.com, which recently announced it was awarded a patent it says covers its technology and its business model.

It also could cause headaches for firms whose business models are similar but not exactly the same.

As Oppedahl pointed out, aside from protecting a company's innovations, patents also "reward ingenuity for people who find a way to get around whatever patents have already been issued."

Patents for software also took over where copyrights left off, the attorneys said.

So-called utility patents, which cover nearly all the patents having to do with software and business methods, "protect the way something works and protects an idea," Gallagher said.

Copyrights cover written, graphical, musical, or artistic works. "Copyrights do not protect an idea, but rather they protect the expression of an idea," he said.

There are advantages and disadvantages to both, but "the copyright law has always been an awkward fit for software," noted Kuester.

"A patent is much more powerful because it doesn't require any copying," Gallagher said. Whereas a copyright would cover the source code itself for a spreadsheet application, for example, a patent would cover the notion of a spreadsheet application, regardless of similarities or differences in the underlying source code.

However, the process to get a patent takes far longer and is much more expensive and involved than getting a copyright--and in the end, a copyright lasts much longer.

According to Gallagher, getting a copyright costs about $25 and involves sending a simple application to the copyright office along with the work in some tangible form. In the case of software, the author would send in a disk with the code or a certain number of pages of written code. The copyright is valid for 75 years after the author dies.

A patent, on the other hand, only lasts for 20 years after the date it is filed. Plus, it costs thousands of dollars and involves a complicated application that often requires the expertise of an attorney.

Moreover, there is a growing group within legal and technology circles who say all the changes in the patent environment are problematic.

Pamela Samuelson, a professor at the Boalt School of Law at the University of California at Berkeley, said "patents are supposed to be about promoting innovation," but she is not entirely convinced that software is far enough removed from mathematical algorithms to be eligible for patents.

Samuelson also pointed out that it is "hard for the Patent Office to make good quality decisions" where software is concerned, because its officials lack expertise in that area, and since software was not considered patentable until recently, there is no database covering the first 30 years or so of software development to help the agency make sound judgments about current applications.

"We'll find out over the next decade or so whether or not patenting software really does promote innovation," she said.

"The real problem is that [the Patent Office] really is not equipped to handle these patents," Robert R. Sachs, an associate in the Intellectual Property Group of Fenwick & West, said in an email message. "Examiners, many of whom are young engineers, simply do not have sufficient expertise to evaluate patents which cover Internet business models.

"Either they don't realize that what is being patented is simply some old idea being done on the Net (e.g., Priceline's reverse auction), or they don't have access to resources that would evidence this," he added. "Further, [Patent Office] management itself has exacerbated the problem by seriously restricting the amount of time an examiner has to review a case, and by issuing productivity directives that in effect result in lots of patents being granted without any serious review. Who is this good for? Patent litigators."

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