Intellectual Property 3: Patent | Audio Transcript

Hi. This is Professor Michael Rappa from North Carolina State University in Raleigh, North Carolina, and I’m here to speak with you today about my course, Managing the Digital Enterprise.

With respect to intellectual property, one area of confusion and consternation has to do with patents related to Internet business methods, but before discussing this issue, let me pause for a minute and talk a little bit about patents as a means for protecting intellectual property.

Unlike copyright and trademark, a patent is something, which the inventor applies for, and the government reviews and makes a decision to grant or not to grant the patent, which is, in essence, that right to produce, manufacture and sell the invention; exclusive right to do that, and so it represents a kind of government-sanctioned monopoly and privilege to that invention.

The process of applying for a patent, producing a patent application is not only expensive, but also a good deal more complicated than simply registering a copyright or registering a trademark. Cost estimates in the U.S. vary, but we’re talking about tens of thousands of dollars or more when it comes to patent applications and hopefully succeeding in that application compared to maybe a relatively paltry sum to register a copyright or a few hundred dollars to register a patent.

And it’s almost certainly something that you need to guidance of patent attorneys to navigate that process, and so the costs are substantial. The timeframes are generally much, much longer in terms of the whole process, from producing the application to then navigating that application through the patent office approval process. Of course, having a patent on a very valuable invention; the potential returns to that patent may far, far exceed a cost, so one has to obviously consider this in the balance when thinking about whether a particular invention is something which merits a patent.

If one were to look at the great portfolio patents, even of large companies that do a great deal of patenting, one would probably find that only a small percentage of those patents really yield great returns on the investment, made not only in the patent, but getting the investment on the research and development, so obviously, there’s a certain amount of risk there, but for some businesses, even small businesses, a startup organization; the patent, receiving a patent may be a very significant and important part of the willingness of people to make those initial investments with the sense that what they’ve created has at least some degree of protection from other parties coming in and mimicking or copying the idea, and thereby minimizing the potential of return that that inventor may have to their invention.

Also, it’s worth reminding that, as with copyrights and trademarks, patents are part of the legal regime that governs any particular country, so when one goes to seek a patent, they’re seeking that patent within the context of a particular country, and to the extent that they are going to operate in other countries around the world; they consequently may need to also seek patent protections in those countries as well, so when one looks at the cost, it can escalate quite significantly as one needs to go and patent selectively in any of a handful of other countries around the globe.

Of course, with respect to anything that we do on the Internet as a kind of global medium, that only, I think, greatly hastens the need when one thinks about patents to think about how that protection may be required in other parts of the world.

Now, I think it’s important to state flatly, right at the outset, that patents and the patent process is a complicated one, and there’s no minimizing that. One really does need the advice of a patent attorney to fully understand and navigate that process, and so I’m speaking as someone who’s not a patent attorney, but yet just wanting to reflect on what is important in terms of just the basics of understanding how patents may relate to the digital enterprise, and, indeed, it does have some very significant implications.

I also should state definitely at the outset that even among the community of patent attorneys and people who work day to day with a patent law, there is a certain degree of debate and sometimes confusion, and certainly a lack of clarity, at times, about how patents relate to the digital world and what may be or may not be patentable with regard to digital technologies that don’t necessarily have a physical manifestation, so whether we’re talking about computer software or some method by which we conduct business, the electronic systems and computer networks and so forth; that this is certainly something which is still a matter of very active debate, and, in the background, as that debate is occurring, there’s also a great and significant flurry of activity to patent various aspects of what is being done in the context of digital enterprises.

And so on the one hand, this debate is raging, at least in the context of the U.S. The U.S. Congress has submitted various kinds of potential changes in the patent law to try to accommodate these things, and there are various court cases, which are occurring from time to time, which may have an influence in terms of how the courts view these patents, and all along in the background, there is just this continued flourishing of applications along these lines, and also, the U.S. patent office attempts to come to grips with these applications and to try to approve things that it feels are valid and not to approve things, which appear to be a fallout side of how the law’s currently prescribed.

So a patent is a government-granted protection, and patents protect inventions and discoveries in at least the U.S. context of machines, processes, manufacturers and compositions of matter. Inventions must be found to be new, non-obvious and useful to fit within the plausible conditions of what might be patentable in the United States. The patent, if it’s granted, provides an exclusive right to prevent others from misappropriation of that, and that means that the inventor who succeeds in getting a patent has the exclusive right to manufacturer the invention, to market and sell the invention or, if the wish, to take the invention and put it away in a safe and never do anything with it.

They still have that right to exclusively decide what will be done with the invention and that anyone else who tries to use the invention and manufacture the invention, sell the invention can be taken to court by the inventor and the patent holder to get some redress.

The whole purpose of the patent system is to get inventors to disclose their inventions to the government, and in return for this, exclusive right to the invention, but only for a period of a certain number of years, and that number is something which varies a little bit, depending on the nature of the patent and is something which has kind of changed a bit over time. I believe currently, it’s something like 17 years from the time the patent is granted, and so that’s actually potentially a very long time, especially when we’re talking about patents related to digital enterprises; that’s an enormous amount of time.

But once that period has expired, unless some certain things are done following patents and other kinds of things; as I said, this can get complicated, but presuming nothing else is done and the patent lapses or expires, then it goes into the public domain, and then others are now able to use that invention and build on the invention and move it forward, so the whole justification of a patent system is really to encourage invention; to give some protection, and therefore, incentive to inventors to share their ideas with the society in large in return for this period of protection, after which society then benefits from the invention more broadly.

Now, whether patents encourage invention or make invention more complicated or maybe up the cost of invention; there’s a certain debate, which has gone on for years and years and years about how patenting fits in and affects invention, whether it inhibits invention in some instances, and especially with respect to computer software, so this has been something that’s been going on for a few decades, and whether or not software is something that maybe falls primarily under copyright because it’s a written expression of a computer programmer or computer software developer or whether it represents an invention, which can be patented.

And so the whole free software or open source software movement is, in some sense, a response to the notion that the software is something which is patentable and, as such, could be considered highly proprietary to a particular company, and so there are all sorts of debates around patents, and there is so much at stake with respect to whether one receives a patent or not or whether patents play a role in a particular area of technological development that I guess it’s no surprise that the controversy would be extended to the realm of the Internet and the digital enterprise.

In relatively recent years, a couple of court cases involving patents opened the door to the notion that a business method itself might be subject to patents, so it’s something that people may be able to apply and receive a patent for, and just like any other patent, a business method patent just happens to relate to a method of doing business as opposed to, for example, a tangible expression of an invention, a machine or a device, and under U.S. statutes, a “process” is patentable, and a method is just one form of process.

The legal test, generally speaking, is whether the process is applied in a practical manner to produce a useful result. In practice, there really is no concrete definition of what a business method patent is, and, of course, this is something which will emerge over time, but is also the point of confusion for many right now in terms of what might or might not qualify, so when it comes to digital enterprises, a method of doing business that might be new and novel and non-obvious can cover perhaps a broad range of things, but I think we’re dealing with actually a couple of issues here in the sense that so much about the digital enterprise is not necessarily new, but being applied in a new realm, and the patent office’s practical ability to adjudicate applications and to understand whether or not this is new or whether there’s not a prior usage or a prior art; it really created somewhat of a challenging situation, and, as a result, has led to some of the earliest business method patents with respect to digital enterprises to be somewhat curious and controversial and really attracting a lot of attention and getting people kind of stirred up over what might be considered patentable under this business method patents rule.

Perhaps, the most widely notable example and a kind of magnet for controversy was the patent received by Amazon.com, the so-called one-click patent, and what this was was a method whereby information associated with the user is pre-stored by a web site, and that user may thereafter order items from the web site with only one click of the mouse, so, of course, this is going to raise eyebrows among folks, and something so seemingly straightforward and relatively obvious to people would be able to be patented by Amazon, and certainly, Amazon caused a bit of the controversy itself when it sought an injunction against a competitor, Barnes and Noble, which was forced to use an ordering system with more than one click.

That case never really made it all the way through the legal system to a conclusion, so we were not sure whether or not that patent would have stood up. The parties settled later, and therefore, left open the question of whether or not ultimately, the patent would have stood, but it created a lot of controversy, and certainly, Amazon being one of the leaders with respect to digital enterprises, drew a lot of attention and really needed to respond to its critics to some degree, and they did. I think Amazon’s basic position was that if they don’t patent some of the things that they do, which could potentially receive patent grants from the government, then that leaves the door open to others, including their competitors, to do that, and so their position was this is more or less defensive on our part.

We have an obligation to Amazon.com shareholders to protect, in whatever means we can, the things that we create. Now, to their credit, Amazon and Jeff Bezos, the CEO, came out with a rather lengthy, open-letter response to the Internet community, basically saying that we believe that software patents are fundamentally different; that they should be treated differently by the patent office; that perhaps the lifespan should be much shorter than the current 17 years, maybe three or five years, given the compression of time that we feel on the Internet.

And some other very good suggestions in terms of bolstering the identification of prior arts so that bad patents, that bad applications aren’t granted patents and a really positive effort on the part of Amazon.com to push the Congress and the United States to begin to take a closer look at the patent law and to look for where there might be very positive and productive changes to that law to benefit everyone who’s working in this area, and so, to their credit, I think they used the one-click patent and the controversy that it engendered as an opportunity to offer us some very positive suggestions about what we could do to really move forward.

But clearly, this is a slow and difficult process. Patent law doesn’t get changed overnight, and so we’re going to be dealing with this issue for a number of years, and hopefully, there will be some productive movement forward, but in the meantime, the business method patent applications will continue to pile up at the U.S. Patent and Trademark Office, and some patents will continue to be granted, and so whether it’s the double-click banner ad patent or Amazon’s affiliate program patent or many of the other examples one could point to from some of the biggest names in the digital world, whether it’s Netflix or Ebay, America Online, Yahoo and others; we’re going to have to sort of make our way through this patent thicket to understand what maybe we can do or not do without infringing on other peoples’ business method patents now.

I think the situation is such today that if you are operating in the sphere and you feel that you are doing something uniquely different that you really may be forced to explore patents as a means of protection to your intellectual property, if only from a defensive point of view, that you may find yourself in a situation where someone else patents the very same idea, and so even if you receive a patent, it’s up to you as the patent holder to decide whether you want to prosecute a particular situation that you think may be an infringement, and so just by merely having the patent; there’s no obligation on your part to necessarily go and litigate other instances that may seemingly be innocuous or fair so that the patent itself is not necessarily harmful to the extent that the patent holder takes a liberal view of how other people may be iterating on the idea.

This is a little bit different, or a lot different, I should say, from trademarks, where a trademark holder really has to go out there and protect that mark and litigate what it sees as infringements or else it may lose the distinctiveness of the mark itself and not have any opportunity in the future really to protect itself.

Having said that, I think that it’s a very fair position to take that patents may be more of a hindrance than a help with respect to the digital world, and software patents in particular may be something that to the extent that they get wrapped up in these business methods, maybe something that we really need to take a look at, and in a world where we can lower the costs to innovation and enable people to be inventive and creative and recognizing that, with respect to Internet time, one really needs to implement on a much shorter timeframe.

My personal opinion would be that we might do better without the patenting system in this realm. My point is simply from a practical point of view. We need to deal with it. It’s exists; it’s there, and so we have to come to grips with it.

Now, to the extent that the open-source world continues to expand and provide opportunities, and one can play in a world of open-source software; that’s great, and certainly, we should look at those opportunities and certainly applaud them to the extent that they lead to greater innovation and widespread use, and the ability for, not just large, but also smaller players to become engaged in the digital enterprise.

Clearly, the patent system and the world of invention with respect to patents certainly makes this a more expensive game to play in, and to the extent that people may abuse the patent system, and unfortunately, to the extent that perhaps bad patents are granted; that ultimately, once those patents are granted, it may cost a lot of time and effort and money to get them overturned and for the smaller players in this and people who cannot afford, really, to defend themselves, patens could become – and, unfortunately, bad patents can become a very threatening club on which to beat up on folks who may be not doing anything harmful or infringing, but simply can’t really defend themselves, given the costs involved.

Is the patent system flawed? Yes, it’s flawed in some ways. Does it need to be fixed or can it be improved? Yes, it certainly can. The only advice one can really walk away with today though is that it still exists, and we have to deal with it to some extent, and so one has to think carefully through what they’re doing and whether or not there might be patent opportunities there, simply as a protective mechanism.

And hopefully, as we move forward, we’ll see some improvement over time, some intelligently crafted legislation that will help sort out what is truly new and useful and unobvious that might be applied to business methods incorporated into software in the applicable and digital world.

Perhaps with some movement on the international front, we may see some of the major industrial countries at least coming together under something like the World Intellectual Property Organization and coming to some agreement and incorporating into treaties, what might be defined as a business method patent that is more broadly accepted, at least in general terms, among a larger number of countries, and thereby reduce some of the confusion about whether or not a certain thing is patentable in one country will pass the bar in other countries as well.

Lastly, let me just clarify again this kind of terminological distinction between business method patents and business models. There have been some business method patents, which are sometimes described as business models, and one might maybe think of the reverse option process, and that no being a very good, perhaps, example of a business method patent, given some of the controversy around it, but I think that business models really needs to be dealt with distinctly aside from some legal definitions that might occur within the patent world and that many, many business models are ways of doing business that have been understood for a very, very long time, whether it’s decades or even centuries perhaps.

And so not everything that is a business model, I would think, would fall under the necessary conditions to be considered a business method patent, but just to alert you to keeping these things distinctly different in your mind and not getting them muddled together that I think, from the business method point of view, one can really look in much finer green detail at what you’re doing as a business online, irrespective of how it generates actual revenue for you that may be somehow unique and something that you might be able to claim as your own invention.

So think about look around your enterprise; think about the things that you’re doing; see how within the realm of creativity that is being expressed in your organization, whether or not some of those things might be something that might provide value to you if incorporated into some broader protections like a patent, and also think through all of the intellectual property mechanisms that are available to you, whether it’s copyright or patent or trademark and to be sure that you’re taking the necessary steps to use these protections where they are appropriate and relevant to help you operate your business.

And, of course, always remember that in any serious business endeavor, having good, solid legal advice is a very important part of formulating one’s strategy with respect to intellectual property.

This is Professor Michael Rappa. Until next time, wishing you all the best with your studies.

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Unedited transcript of audio podcast produced on November 21, 2005.

Audio source file: http://digitalenterprise.org/podcasts/patent.mp3

Michael Rappa is the Alan T. Dickson Distinguished University Professor of Technology Management at North Carolina State University.

For more information, please visit: digitalenterprise.org