PetSmart acquired Pet360 for $130 million in cash and up to $30 million more in future performance-based payments.
(Page 2 of 3)
Two well-known examples of method patents are Amazon.com’s one click ordering system, which allows repeat shoppers to complete an order without rekeying shipping and credit card data, and Priceline’s way of letting consumers name their price for airline tickets, then checking with airlines for takers. Among other business-process defenders, software vendor Open Market has obtained patents for the shopping cart software used by many retail sites, as well as its method of accepting credit-card payments. And Netcentives has patented its way of awarding frequent-flier miles to online shoppers.
Mothernature.com’s Barach isn’t the first to fear that patenting business methods could stifle innovation and competition. “The problem is their scope and identifying what’s truly novel,” says Lawrence Lessig, professor at Harvard Law School’s Berkman Center for the Internet & Society. “In the physical world, an innovation must be substantive in process or technology to be patentable. But the Internet is technology-pervasive by definition. It’s all novel.”
Lessig, well-known for filing an amicus brief in the Microsoft antitrust case, questions one-click buying in particular: “Should the translation of an ordinary process be considered novel in cyberspace? High-end department stores offer the equivalent all the time.” Lessig recommends that Congress conduct a regulatory impact study on business method patents. Without that, he fears legal licensing will overtake innovation. “Any idea or technology will have to be scrutinized by lawyers, placing a large transaction cost on innovation. Are we returning to a time when only the large are permitted to innovate?”
Patent critics voiced the same sentiments over the first electricity and telephony patents more than 120 years ago. Yet the rate of innovation increased rather than decreased. “Business method patents are just an extension of the knowledge economy,” contends Rivette. “It’s no different than a software patent. They’ve got algorithms. They’ve got flow diagrams. In essence, we’ve just stripped away the computer. In the ephemeral world of the Net, it pays to protect everything.”
Rivette’s message hasn’t escaped Internet upstarts who are elevating intellectual property strategies to a new level. “Any company that has a technological center needs to understand and appreciate the role intellectual property plays in the overall business plan,” says Coolsaving’s Scavone. “They have to be aware of its strategic importance and be adequately counseled.”
Net companies are approaching this strategy in various ways. The first is defensive: protect and defend ideas from others who would copy or patent them. If other companies assert patent claims, they can cross-license the patents rather than pay royalties or engage in litigation.
A second approach is offensive. Patents can be asserted against competitors, forcing them to pay a licensing fee or settlement. Patent licensing and settlements in the U.S. have grown from $3 billion in 1980 to $110 billion last year, a 20% annual growth rate. IBM, which tops the list of U.S. patent assignees with 2,657, earned about $1 billion from its patents last year, up from just $30 million a decade ago.
“Patents are particularly valuable when you have an innovative business method or process that is easy to re-engineer or copy,” says Christopher Jones, vice president of financial research and strategy at Financial Engines, which offers online financial advice to consumers. The company, cofounded by Nobel laureate William F. Sharpe, has invested more than $15 million to develop its forecasting models, along with a user interface that gives investors the probable outcomes of their financial decisions. “In our case, we felt that a large number of companies would eventually find our outcomes-based investment approach a compelling way to offer advice,” says Jones. “Unfortunately our user interface is easy to copy. Our patent puts us in the position to protect our investment and collect royalties.”
A third strategy is market-driven: Get third-party validation of intellectual property as a way to increase the valuation of the company in the eyes of investors. “Being able to point to your patent portfolio can be very useful with investors,” says Jones. That’s also a good way to recognize employees who contribute to the state of the art, he adds: “There’s definitely an emotional appeal to having your name on a patent.”
Boon to lawyers
With even the strategies for protecting patents in plentitude, patent litigation business is booming. Yet not all patent lawyers are happy about the legal land grab. Claude Stern, a partner who chairs the software and technology litigation group at Fenwick & West in Palo Alto, Calif., is convinced the system is “out of control.” Stern cites two recent cases: Allcare’s suit against Cerner Corp. and other health care software vendors and Interactive Gift Express’ infringement suit against Compuserve and others.
Stern, who represents defendants in both cases, says Allcare claims to own the rights to a fully integrated health care system. Its suit alleges that the entire health care industry-including giants like Cerner, McKesson HBOC, Merck-Medco and Healtheon/WebMD-is infringing on its patent. The case is currently pending in the U.S. District Court for the Northern District of Texas. In the second case, Interactive Gift alleges that it owns the commercial rights for downloading software and other information over the Internet for a fee. The firm is suing 18 other companies. The case was dismissed by a lower court last summer and is now on appeal in federal court.
“I don’t take pride in saying that the only people who are reaping the benefits from cases like these are the lawyers,” says Stern. “It’s not like we need the work. There are plenty of legitimate cases where there are real innovations.” Though the federal courts have failed to put on the brakes, Stern insists the real problem is with the patent office, which he believes has abrogated its responsibility to the courts.
Holes in the screen
The patent office is supposed to act as a primary screen for novel inventions, devices and processes, including searching for “prior art” to establish that the invention is in fact a useful improvement. But the office is overworked and underfunded.