Business Model Patents

Back to Contents of Issue: September 2000

by Jacob Adelman

When the US federal circuit court in July 1998 upheld the legitimacy of Signature Financial Group's patent for its "Hub and Spoke" data processing system, setting a new precedent for the protection of "business method" inventions, NEC foresaw the changes to come. Although it was a ruling in a US court over a US patent -- claimed and contested by US companies -- Naoki Kyomoto, general manager of NEC's Intellectual Property Division, knew it would have a formidable impact on Japanese business.

"We are very sensitive to such developments in the US," explains Kyomoto.

An earlier decision had denied Signature exclusive rights to offer "Hub and Spoke"-based services, largely because it classified the system as a business method; courts had traditionally considered business methods, literally systems of transacting business, to be ineligible for patent protection. The appeal's court judges, however, reversed this decision, ruling that the "business method exception" itself was invalid.

"We reacted to the interpretation because there was no wording that specified the necessity of technology or a technological aspect," Kyomoto says. "Usually a technological background is necessary for an invention. We took the message from this court decision to be that the method itself can be patented and we organized our company accordingly."

For a company like NEC, which markets technology in the United States, where it already has thousands of technological patents registered, it's obvious that the State Street v. Signature ruling (State Street Bank was the plaintiff in the original case) would raise eyebrows.

But it's not only Japan's technical giants that have been reacting to the decision. From the country's financial sector to its tiniest high-tech startups, all sectors of Japanese business are readjusting their practices and policies to accommodate business method patents.

Japan's patent office, meanwhile, has been establishing its own system for evaluating business methods, which it announced late last year. And in June, the office's staff met with their US counterparts in Tokyo to compare their respective examination standards.

That same month, the Nihon Keizai Shinbun reported in separate stories that three major Japanese companies were initiating their own business method patent drives. Mitsubishi Corp. and Matsushita Electric Works were offering hefty cash bonuses -- up to ¥10 million -- to staff members who came up with patentable ideas that could be turned into new businesses; tire manufacturer Bridgestone invited the public to offer its ideas for automotive businesses and would award two ¥1 million prizes for the best ones.

NEC started its initiative last March by spelling out the new standards to its engineers, who already had experience preparing patent applications for their technological inventions.

"We had some difficulty persuading our engineers to participate," Kyomoto says. "Their initial reaction was, 'Why should such kinds of inventions be patentable?' But we persisted."

Then, in January, NEC began collecting potentially patentable ideas from all sectors of its staff. Members of its sales divisions and other administrative departments were invited into its patent reward scheme, which was once the sole domain of the company's engineers. According to the scheme, staff members who come up with patentable ideas are granted compensatory money when the patent application is filed, again if it is approved, and again each time the company profits from licensing the invention.

The upshot for NEC, Kyomoto says, was over 1,500 new ideas, one-third of which came from the non-technical staff, for which the company will seek Japanese patents over the next year. NEC will also apply for US patents for about a quarter of these 1,500 ideas.

(Since the Japanese Patent Office, unlike the US Patent and Trademark Office, has no specific class for business model patents, a count of how many such patents it has issued so far is unavailable. But Kenichi Kurihara, a senior manager at Derwent Information Japan, which maintains a database of previous inventions and conducts searches for would-be patent applicants, puts the number at between 5,000 and 10,000. Meanwhile, US PTO statistics show that Japanese companies between 1995 and 1999 earned 211 patents in class 705, which is dominated by business method inventions -- 12 percent of the total number granted during those years.)

Small startups, like the Web-based ProTrade, are also being forced to figure out how to deal with this new breed of patent. Takehiko Ono, ProTrade's founder and CEO, was trying to get the business-to-business service market off the ground in February, when the hubbub over business method patents was at its loudest.

"Everybody was frightened by business method patents," says Ono, who had dreamt up his business plan last July. "Everybody was discussing the patents."

Most of this discussion was being generated by a few high-profile court cases being pursued in the US. By that time US federal court had ordered Barnes & Noble to suspend its Web site's single-click ordering feature, for which held the now famous "One-Click" patent (leading one commentator to herald "the breakdown of the United States patent system" in The New York Times Magazine.)

Closer to home for Ono, Priceline .com was in the process of suing Microsoft's Expedia travel service over its use of a reverse-auction technique, for which Priceline held a patent. Ono also intended to use a reverse-auction model for ProTrade, which, being offered on the universally accessible Internet, ran a chance of intruding onto Priceline's turf.

"In order to clarify that our business is safe and that we qualify for venture capital funding, we needed to prove that our business was unique," he says. This he did with the aid of a patent-consulting firm, who helped him set his model apart from Priceline's in his patent application. Where the US company claims a "buyer-driven" model for goods and services, ProTrade is based on a business method that assigns a value to "skills and people."

"We are exchanging the value instead of the product," he says. "If just one of the points of the patent is different, it's no longer in violation. The strike zone is really small. Everybody is exaggerating. It's not so powerful."

Patent Attorney Masahiro Samejima, who joined the Matsuo & Kosugi law firm earlier this year largely to help it cope with its expanding business method patent practice, would tend to agree with Ono's assessment. Samejima sees the patents' limited reach as their greatest flaw.

"I personally feel that business method patents don't have as much benefit as technological patents," he says. "Because ways of doing business are so varied, you can easily escape from the scope of the patent by only changing some portion of the business."

But NEC's Kyomoto, himself a patent attorney, doesn't take the patents nearly as lightly. "The protection coverage is very broad, so if another company held a similar patent, they could stop us from doing business by having the courts issue an injunction or asking for royalties," he says.

"Mr. Tahara" -- broadcast journalist Soichiro Tahara -- "wanted to talk about business method patents," Tokyo University professor Yoshio Tsukio says, by way of explaining how he came to discuss the patents in May on Asahi Television's nationally broadcast news magazine, The Sunday Project. "He says they had suddenly come from the US."

But for Tsukio, there was nothing sudden at all about the appearance of business method patents. They were only the most recent manifestation of the United States' continuing efforts to stay ahead of Japan in the international business arena.

"My conclusion is that we not only look at the new business model patents, but also understand that those patents come from a long history, about a twenty-year history, of coping with Japanese progress," he says.

Tsukio says that the seeds that would grow into the US business method patent policy were planted when the US government shifted to a "pro-patent" strategy in the early 1980s to counter Japan's growing dominance in exports, at that time in steel and machinery. "So perhaps many people in the administration or other political posts looked at that Japanese movement and wanted to make some new policies toward Japan," he says.

Under the Carter administration, he says, the US Congress introduced legislation to make patent standards more lenient and to put patented technology in the hands of industry to develop and market. In this pro-patent atmosphere, several landmark decisions granted protection to inventions that had once been unpatentable: Diamond v. Chakrabarty, in 1980, extended patent protection to biotechnological inventions, while Diamond v. Diehr, in 1981, allowed for the patentability of software.

Tsukio says these two decisions (both of which are, in fact, cited as precedents in the State Street v. Signature ruling), themselves the result of US efforts to boost competitiveness in the face of a Japanese threat, effectively stretched the bounds of patentability, leading to protection for business methods.

Echoing sentiments heard even on the National Diet floor, Tsukio continues, "The US is now changing patent policy to allow many new patents to be taken by US companies." This argument may now be obsolete, since it's based on an idiosyncrasy of US patent law that was legislated away late last year. But until then, US companies could choose when they wanted their patents to be made public, while foreign patent applications were made open when they were filed.

"When Japanese companies want to file their patent with the US patent office, from the beginning it becomes open," he says. "Only American companies can keep their applications confidential."

This informs Tsukio's main critique of business method patents. He expects that US companies will soon start being granted patents that no one knew had been applied for. When this happens, the companies will be able to exercise their patent rights against competitors who had already built their businesses around the patented claims. If this hasn't happened yet, he says, it's only because business method patents are new and many that have been applied for still await approval.

"Now most people in Japanese companies are very careful about US companies' movements," Tsukio says. "On the Internet, many people do various kinds of business. Most Internet business is probably covered by some business method patent, but nobody -- only the inventor -- knows what kinds of patents exist. And they hide it."

David Kappos, from IBM Asia Pacific's intellectual property law division, is also highly critical of business method patents. But the assistant general counsel doesn't see any such ulterior motives behind their establishment and application.

Rather, Kappos sees patent protection for business methods as the US PTO's understandable (although harmful) reaction to the courts' constant reinterpretation of patent standards. With the courts deeming more and more inventions as qualifying for protection, it gets harder for examiners to judge patentability.

"They're faced again and again with a really difficult question: Where do you draw the line?" he says. "There's no clear answer."

What is clear to Kappos, however, is that inappropriately granted business method patents do not extend any benefit to society, as patents are supposed to do, and are even likely to harm it, points that he makes in a position paper scheduled for publication in regional intellectual property journal IP Asia.

Kappos says that the cautious stance toward the patents taken by IBM, on whose behalf he articulates his arguments, represents "a major shift" for the company. IBM's interests have traditionally been tied up with strict patent protection: the company is one of the world's top patent holders, with more US patents, over the last two decades at least, than any other company.

"We have to work out what is right for IBM and in the best interest of our company," he says. And while, he says, IBM has been the only company of its sort doing business in Japan to publicly criticize the patents, other large high-tech firms have voiced their support off the record.

As to why such companies would oppose business method patents, Kappos was not at liberty to discuss. But Jim Weisser, who chairs the Ecommerce Committee of the American Chamber of Commerce in Japan, can hazard a guess: "I think IBM on this is acting in enlightened self-interest." Firms like IBM with huge reserves of technical patents don't want to expend their resources on legal challenges posed by newcomers who have simply rehashed existing business practices into business method patents.

Weisser says IBM is probably thinking, We don't want to have to go challenge every patent that comes out because the examiners didn't really think about it properly. "You would end up, basically, with an IBM prior art government relations committee."

Kappos's IP Asia article, "The Rising Spectre of Business Model Patents," doesn't dwell on IBM's interests at all. Instead it synthesizes a number of relevant criticisms of the patents into a warning for Asia's patent-policymakers (Japan's in particular), whom he says are his intended audience.

"Care must be taken ... to avoid overextending patent monopolies to business methods per se, a field for which patent exclusivity is not well suited; where for good reason governments have historically denied patent protection," he writes in an advance copy of the article.

One of the primary features of business models that should disqualify them from patent protection, he writes, is that they "do not need an innovation incentive to spur their creation." The hope of earning a patent for an invention, which, in both Japan and the United States, secures 20 years of exclusive rights from the time of application to capitalize on it, drives many inventors to innovate. But Kappos writes that there are enough inherent benefits to devising new business methods -- like being the first to offer a service or offering a higher quality of service than one's competitors -- that an added incentive is not necessary. Furthermore, business method patents don't require the huge expenditures of time and money, which one hopes will be reciprocated by the possession of a patent, that technological inventions do.

Another traditional function of patents is to disseminate information throughout society, since the specifications of patented inventions are available to the public. But, writes Kappos, "the innovation present in business methods typically must inherently be disclosed to the public in order to put the business method into profitable practice," even without its articulation in a patent.

Having argued that business methods don't deserve protection, Kappos goes on to outline their harm to society, namely that of granting inventors broad, exclusive rights that amount to an overwhelming and unfair competitive advantage. "Once a business method is patented, even new inventive technology entirely different from that implementing the patented business method would not escape the reach of the patent," he writes. "The later entrant must simply find another line of business." Now unable to execute the patented business, the "later entrant" would also be in no position to improve on it, thereby denying to society as a whole the potential for innovation.

Kappos's conclusion -- and the advice he gives Asian patent-policymakers -- is that extreme caution must be exercised when evaluating applications for business method patents. While they should not be rejected out of hand, he writes, examiners need to be sure that the business methods are backed up by a technical innovation. "[T]he mere fact that it is performed using a computer ... does not provide sufficient integral involvement to meet the technical effect requirement," he writes.

In this he is in agreement with the conclusion that the Trilateral Offices -- the patent offices of Japan, the United States, and the European Union -- came to when they met in June to compare their standards and map out future cooperation.

"A technical aspect is necessary for a computer-implemented business method to be eligible for patenting," the report released following that meeting states as the first consensus reached between the three bodies. "To merely automate a known human transaction process using well-known automation techniques is not patentable" is the second.

These agreements are primarily the result of a comparative study that had been carried out by the Japanese and US patent offices. Since late last year the two offices had been examining identical hypothetical patent claims, the judgements of which they compared at the meeting. (The European Union's office, still coming to a consensus among its member states, did not participate in the exercise.)

And to those like Kappos, who hoped that Japan would not conform to the United States' standards, the raw results of the study may be a disappointment: in the two hypothetical business method claims that the offices tested their examination guidelines on, their standards proved to be nearly identical. When asked if this indicates that the US PTO and JPO are judging applications based on approximately the same standards, a patent officer at the JPO, who asked to remain anonymous, responded "That's the result."

The officer says that the study was conducted in the first place as a response to "the increased public interest based on famous cases in America, like Signature v. State Street, and the 'One-Click.' The number of patent applications is increasing, so there is more and more interest. We want to respond to the interest by showing the cooperative study results."

The results call into question the widespread belief that the US and Japanese offices exercise widely different standards. The Nihon Keizai Shinbun, for instance, reported in early June that there is "a substantial gap between the patent authorities in Japan and the US" and that the JPO "has been slow to grant patents because opposition to 'excessive protection' is strong."

The study results belie this thinking. "Recently, I also noticed that a lot of publications write about differences between the two offices," says the JPO officer. "But the report's results are almost the same."

However, even though the results do show nearly identical official standards, many people who have experience with the Japanese patent office say that in practice it is still less likely to approve business method patents than its US counterpart.

Kurihara of Derwent Information says that the US PTO is more flexible in its judgement of whether patents produce "a useful, concrete, and tangible result," a basic test for patentability.

Patent attorney Samejima, meanwhile, says that the Japanese office is perceived as being more likely to judge inventions as "obvious" alterations of current practices, which disqualifies them from protection, than the US office. "People generally say that the non-obviousness bar is higher in Japan," he says. "At this stage, I think it's easier to get business model patents in the Untied States." But, he continued, "the difference is getting smaller."

Samejima says that Japan has a historical tendency to follow the United States' lead in applying patent law. "Japan is generally highly influenced by the United States, and that's typified in the intellectual property field," he says.

Professor Tsukio says that he no longer sees any difference between US and Japanese business method patent policy, but that the JPO had no choice but to adapt its own policies to the US model.

"If only the US patent office admits many business method patents, and the Japanese patent office does not admit them," he says, it results in the "weakness of Japanese companies and also the Japanese nation. So to equalize the patent policy is very important."

NEC's Kyomoto says he also sees the Japanese patent office as having conformed to US practices. "The Japanese patent office internally understood the US movement and, based on this movement, judged that its own practices should be corrected," he says.

This "sudden" change, Kyomoto says, has resulted in "a very chaotic stage" in the development of business method patents in Japan, with companies from all sectors, unsure of the reach of the patents, clamoring to protect their intellectual property and stake out new ground.

But he says it's only a temporary phase that is bound to end once the existence of an "inventive step" becomes the fundamental test for the patentability of business methods. With this as the standard, examiners will be able to judge more strictly whether inventions are in fact unique and whether they represent a considerable advancement beyond what people are already -- or easily could already -- be doing.

"The judgement of inventive steps will be very important from now on," he says, adding that this makes a comprehensive database of business-related "prior art" -- previous inventions and innovations -- an indispensable tool for patent examiners.

This is, in fact, consistent with another conclusion of the Trilateral Offices' study: In addition to the set of patent claims that the Japanese and the US offices examined to compare their standards was another set that they used to evaluate their prior-art search strategies. The results of this segment of the study were anything but consistent. They showed that the two offices were finding completely different examples of prior art because they were searching completely different databases.

"It is well recognized that business methods are not well-documented and IP offices sometimes find it difficult to locate documents connected with business methods, in spite of the fact that business methods per se have been practiced for a long time, which is an essential problem in examining business method related inventions," the offices write in the study. They conclude that "the Trilateral Offices should focus, as a next stage, on collaboration of searching prior art in this field in the framework of Trilateral cooperation."

The US PTO had already committed to working toward a database within the framework of its own "Business Method Patent Initiative Action Plan," released in April. Kyomoto says that NEC and other companies are cooperating with the JPO to help it compile its database.

Once patent examiners have such a resource at their disposal to base informed and consistent decisions on, he says, business method patents will become a much less explosive issue.

"It's very difficult to find prior art because the database is not sufficient now," he says. "Now it's a very chaotic stage in a sense, but if we take some time, maybe two or three years, I think a stable situation will arise."

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