The relative economic significance of each of these effects varies strongly from
one industry to another.
Patents can cost tens of thousands of dollars to acquire; patent litigation can
cost millions of dollars; and patent licensing could earn companies hundreds of
millions of dollars a year. Over half a billion dollars a year is spent on patent
applications, and licensing revenues are in the tens of billions of dollars. In
many cases, the economics of patenting is often a more important consideration than
the legal aspects.
Why patent your software/Internet/business method?
Lawsuits for unintentional software/Internet/business method patent (e.g., e-commerce)
infringement can destroy small companies, which is a strong reason to secure a patent
first, before your competitor does. Unfortunately, small to mid size companies cannot
afford to patent all the software/Internet/business method innovations they may
have, as such patent costs, on average, $20,000. Our unique approach enables us
to prepare high quality software/Internet/business method patent applications for
about $4-5,000, which enables even a small company to selectively build a patent
portfolio that has a far greater chance of success over betting all your limited
resources on a single aspect or idea of your many innovations. It is very hard to
predict, which idea will be the winner in the market place, and the more broad the
patent portfolio the more likely you are to secure Venture Capital (VC) funding,
own intellectual property (IP) that has a market for licensing, and/or owning IP
that can be profitably sold. With regard to VC funding or initial public offerings,
software/Internet/business method patents resulting from the production of patentable
ideas often increases the valuation of small companies.
Software/Internet/business patents are particularly well suited for creating a licensing
and litigation-only company that generates significant patent revenue without incremental
capital investment or developmental effort. Many litigation companies are generally
available to help small companies who own valuable software/Internet/business patents
by providing deep pockets in case a small company's patents are infringed. The
litigation company will fund the legal expenses of a lawsuit (typically 2 to 10
million US dollars) so that a small company can afford to bring a patent infringement
lawsuit against a big company that is infringing their patents. In exchange, the
litigation company receives a substantial fraction of the settlement. Litigation
companies also provide a means for investors in small companies to recover some
of their investment should the small company go out of business. The litigation
company will buy the patents and investors will often recover at least some of their
Copyrights and Software
A copyright is the right of an author(s) to prevent others from copying their creative
work without a license. Thus the author of a particular piece of software can sue
someone that copies that software without a license. However, copyrights cannot
protect the "idea" or functionality of the innovation, so a substantial
modification of the software code that achieve the same functionality may not be
protected. That is, for software patents, copyrights only protect the unique text
of authorship, and is completely insufficient to protect the underlying function
in a computer program and copying must be proven. Patents are therefore an essential
part of the intellectual property framework. Software patents can cover aspects
of an invention that are arguably more appropriate to cover in copyright. Strict
limits should therefore be placed on what aspects of software are sought for patenting
even though such limits are not in place (US) or are not clearly defined (Europe).
Software patents and International Patent Law
The United States has led in creating companies, creating jobs, because it has had
the best intellectual-property system. However, protection for software and business
methods by patents is limited scope in some other countries. For example, software/Internet/business
method inventions can only be patented in Europe if they provide a non-obvious "technical
contribution", which reduces the chance of patents being granted on mere algorithms
with no technical effect or the granting of "trivial" patents with no
inventive step. Other countries such as the US, Australia and Japan do not have
the same limits on software/Internet/business method patents and this has put pressure
on Europe to expand the scope of protection.
The first step in getting a patent is to file a patent application. Even at this
early stage European patent law differs from American law. In the U.S., the person
who may claim a patent for an invention must be the inventor. This is known as the
first-to-invent rule, a rule that, though seemingly fairer on its face, has proved
troublesome at times. Europe is more pragmatic; whoever files a patent application
first is presumed to be the inventor (first-to-file rule). The purpose of the first-to-file
system is to discourage inventors from withholding an invention, while at the same
time unburdening the patent office.
Regarding the Application Process, despite the recent addition of inter partes appeals,
the patenting process is still primarily an ex parte endeavor in the US, with the
Patent Office on the one side and the inventor on the other. In Europe, anyone can
oppose a pending patent. Such opposition is handled by the Patent Office's Opposition
Division, whose decisions can be appealed to the Board of Appeal. This process helps
the Patent Office discovering prior art, working against inventors who would prefer
to hide work from the examiner that could endanger the patentability of her invention
(behavior that is countered by the duty to candor in the US). Since competitors
already had their chance to invalidate, a European patent carries a higher presumption
of validity than a US patent. Applying for a patent in Europe also automatically
entails publication of the invention. This is not necessarily true in the US
The Best Mode Dilemma
The lack of a best mode requirement in Europe can lead to problematic situations
for European inventors, who want to extend their rights across the ocean. Failure
to include the non-mandatory best mode in the description of the European patent
application may lead to loss of patentability in the US
The Paris Convention provides that "[a]ny person who has duly filed an application
for a patent . . . shall enjoy, for the purpose of filing in the other countries,
a right of priority." This priority treatment is available for a period of
twelve months. The patent is barred entirely in the US twelve months after the foreign
patent application has been submitted and the patent has been granted.
The best mode requirement does not only apply to the later application in the US,
however, but also to the original, foreign application. Hence an inventor who has
filed for a patent in Europe without describing the best mode may lose his chance
to file for a patent for the same invention in the US due to intermediate disclosure
by another, which renders the invention obvious.
Term of Protection
Under the TRIPS agreement, the patent term is twenty years from the filing date
both in the United States and Europe. The United States has adjusted the term in
compliance with the TRIPS agreement from formerly seventeen years from the date
of grant. In Europe, the filing date already functioned as the priority date, with
terms differing from country to country. Germany, for example, used to have an eighteen-year
term while in the United Kingdom it was sixteen years.
Duty to License
No duty to license exists in the US The exercise of a patent monopoly is only limited
by antitrust laws. In Europe, national laws apply: A European patent is more like
a bundle of patents, one for each country, rather than a single overarching patent.
In fact, grantors are required to file applications with the patent office of every
member country where protection is sought; those offices simply cannot deny a patent
anymore after the EPO has granted it. Still, each country will subject the patent
to its own national laws.
At least some European countries such as the UK, France, and Germany have compulsory
license statutes. All of these countries - as well as the European Community - also
have antitrust statutes, which may impose additional limits on the patent monopoly.
The software patent Controversy
Although critics of software/Internet/business method patent patents contend such
patents allow large companies to drive small competitors out of the market, in practice,
the effect is the opposite: strong patent protection allows small organizations
to compete with the largest businesses. Unauthorized infringing use of a patented
invention can drive the inventor out of the market; often, small entities can compete
with the vastly greater marketing and financial muscle of large corporations only
by having exclusive rights in their developments, a fact that is recognized by the
investment community. Historically, the software and e-commerce industries have
failed to recognize the benefits of broadly enforced patent rights.
Acceptance of business method patents evolved slowly from a recognition by the courts
that such patents were never really prohibited, and that the 1952 Patent Act cannot
reasonably be construed to exclude business methods from patentable subject matter.
The opportunities for unfettered business method patents ballooned with the decision
by Court of Appeals for the Federal Circuit in State Street Bank (see State Street
Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, U.S.P.Q.
2d 1596 (Fed. Cir. 1998), cert. denied 119 S.Ct. 851 (1999)) in which the Federal
Circuit adopted the view that "business methods" were not statutorily
excluded from patentable subject matter. The genesis of the prohibition on business
method patents is commonly said to have arisen in Hotel Security Checking Co. v.
Lorraine Co., a 1908 case containing dicta saying "[n]o mere abstraction, no
idea, however brilliant, can be the subject of a patent irrespective of the means
designed to give it effect."68 This was, according to the Hotel Security court,
because a "system of transacting business disconnected from the means of carrying
out the system is not, within the most liberal interpretation of the term, an art."
However, as the Federal Circuit noted in State Street, the decision in Hotel Security
did not rely on the "business method exception" to render the patent invalid.
Hotel Security nevertheless became the source of judicial statements that business
methods were not patentable subject matter, eventually resulting in the PTO's
adoption of a policy against granting business method patents. The exclusion of
business methods from patentable subject matter was only half of the mid-twentieth
century legal obstacles to business method patents. The "Mathematical Algorithm
Exception" served for much of the century to place equally
difficult obstacles to patenting such inventions. Based upon the principle that
patents cannot extend to "mere abstract ideas" the mathematical algorithm
exception operated to preclude patents involving a sequence of definable steps,
such as are typically carried out by software. Since many, if not most, modern developments
in business methods involve use of computers, the mathematical algorithm exception
gave courts additional ammunition to reject patents on commercial activity.
The restraints on algorithm patents began to loosen with Diamond v. Diehr (450 US
175 (1981)) in which the Supreme Court reiterated the prohibition against patents
on mathematical algorithms so long as the represent mere abstract ideas, but eviscerated
that restriction by agreeing algorithms are patentable when they produce a tangible
result. With the decision in State Street, the Federal Circuit removed all doubt
as to the patentability of software systems conducting financial activity. Under
State Street, the analysis now focuses on "the essential characteristics of
the subject matter, in particular, its practical utility." Methods and systems
having such practical utility are patentable subject mater assuming exclusivity
can be practically enforced.
Drafting Software Patents
Software patents are much like business method patents in regard to drafting the
specification and claims for scope and infringement targets. Satisfying enablement
and best mode requires some additional considerations, however. For enablement and
best mode, a patent author should always include at least one or more flow diagrams
for the software claimed, and probably several more software specific diagrams (data
flow diagrams, structure charts, thread
diagrams, or object diagrams). However, in the worst case, courts have found that
flow charts and/or source code listings are not always a requirement for adequately
disclosing the functions of software. Most likely, only in exceptional circumstances
would the author include source code.
Actually, for one software patent that held up under court scrutiny(See US Patent
Number 4,871,966), it included no flow diagrams, source code listings, data flow
diagrams, structure charts, or thread diagrams. The terms “software,” “computer
program,” “routine,” “module,” “procedure,” and “function” are not found in the
entire patent. The specification does include a mathematical description of how
to obtain, in the course of a single scan, image data for several differently oriented
planes in an object, but the discussion is entirely mathematical and theoretical.
The specification gives several equations for certain signals. Of course, anyone
skilled in the art could write a computer program to calculate an output for these
equations given the inputs. However, the specification discloses only limited practical
aspects of implementing the invention (without flow diagrams, source code listings,
data flow diagrams, structure charts, or thread diagrams). The patent provided a
textual description of its functions. Because adequate disclosure of the functions
of the ‘chip’ was in the specification, failure to specifically identify a particular
manufacturer’s ‘chip’ was not fatal to satisfaction of the best mode requirement.
It should be noted that software, Internet, and business method patents are uniquely
vulnerable to import exclusion loop holes like no other type of subject matter.
For example, courts have recently concluded (see NTP Inc. v. Research in Motion,
Ltd., 418 E3d 1282 (Fed. Cir. 2005)) that data and information in the emails - the
end result of the process -are not "products." Therefore, product import
exclusion law (§ 217(g)) was not applicable, because the process accused of infringement
did not produce any physical product. The main lessons to be learned from NTP are
(1) use apparatus claims, (2) method claims are not subject to §§ 271(a) or (f),
unless all steps occur in the United States, and (3) method claims are not subject
to § 271(g), unless they produce a product that is something other than data or
information. Thus, the patent author should draft Claim apparatuses as well as methods
such that all components or acts are in the US. NTP interpreted 35 U.S.C. § 271
in a way that deprives the inventor of a method of any remedy so long as one single
step occurs outside the United States - even if the benefit of the method is in
the United States, and even if the control of the method is exerted largely from
the United States. This is the first and biggest lesson to be learned from NTP.
Unless the outcome of NTP is changed, poorly written method claims are in jeopardy
because it is so easy to place a server outside the United States to perform one
or more steps of the invention. In those instances, the infringer is beyond the
reach of your patent. Clearly, software, Internet, and business method patents require
a significantly higher level of patent practitioner skill now, more than ever.
Examination of Software Patents
In terms of pendency, software/Internet/business method patents for many years have
taken about five to six more months to prosecute than electronics patents in general.
Pendency has risen about two months per year for the last six years, meaning that
in recent years PTO management has failed to manage to have sufficient numbers of
examiners available. Also for at least the last six years, while examiners have
about ten percent more claims to process for software/Internet/business method patents
as compared to electrical patents, it is taking examiners about twenty percent more
time to process the software/Internet/business method patents.
Patent examiners rarely have a comprehensive knowledge of the specific technologies
disclosed in the patent applications they examine. This is in large part due to
the enormous number of micro-niches in the software field and the relatively limited
number of examiners. Another reason is that patent examiners simply do not have
enough time and library resources to do their jobs. As a consequence, patents are
often allowed on inventions that appear to be trivial extensions of existing technologies.
If any member of the public disagrees with a patent office's granting of a patent,
they can challenge the validity of the patent once it issues. This is done by an
reexamination in the US and an opposition proceeding in Europe. Other countries
have similar proceedings. Currently about 5% of all issued patents in Europe are
opposed. Of those, 1/3 are fully upheld, 1/3 are partially overturned, and 1/3 are
To help improve the chances of your software/Internet/business method patent being
strong and defensable, it is very encouraged that a thoughout patent and non-patent
novelty search be performed, and that the patent specification be drafted to clearly
distinguish the invention from all pertinent prior art found.
Once your patent is pending in the patent examination process the software/Internet/business
method is often shared with or sold to the public. It can take some time for the
patent office to finally issue your patent. In that time, you run the risk of the
public coming to believe that your product or service has become part of the public
domain. To avoid this, it is often desirable to allow your patent application to
be published 18 months after filing, so third parties are usually made aware of
prospective patent rights well before any patent is granted. Granted patents may
be very different from the published applications, so the published application
may only serve as a guide to the final scope of protection.
Once examination begins, the claims will be evaluated for patentability. The claims
define the property rights provided by a patent, and thus require careful scrutiny.
The goal of claim analysis is to identify the boundaries of the protection sought
by the applicant and to understand how the claims relate to and define what the
applicant has indicated is the invention. USPTO personnel must first determine the
scope of a claim by thoroughly analyzing the language of the claim before determining
if the claim complies with each statutory requirement for patentability.
USPTO personnel will begin claim analysis by identifying and evaluating each claim
limitation. For processes, the claim limitations will define steps or acts to be
performed. For products, the claim limitations will define discrete physical structures
or materials. Product claims are claims that are directed to either machines, manufactures
or compositions of matter.
USPTO will then correlate each claim limitation to all portions of the disclosure
that describe the claim limitation. This is to be done in all cases whether or not
the claimed invention is defined using means or step plus function language. The
correlation step will ensure that USPTO personnel correctly interpret each claim
The subject matter of a properly construed claim is defined by the terms that limit
its scope. It is this subject matter that must be examined. As a general matter,
the grammar and intended meaning of terms used in a claim will dictate whether the
language limits the claim scope. Language that suggests or makes optional but does
not require steps to be performed or does not limit a claim to a particular structure
does not limit the scope of a claim.
Patentability and Validity of Software Inventions
In the beginning, United States courts treated software suspiciously: In the 1970s,
the Supreme Court held that software was essentially mathematical formulae, not
patentable under US law. However, in 1981, the Supreme Court decided in Diamond
v. Diehr that an invention could not be denied a patent solely because its claims
contained mathematical formulae.
Instead, the court required a look at the invention as a whole. Two exceptions remained
in place: the mathematical algorithm exception and, arguably, the business method
In State Street Bank & Trust Company v. Signature Financial Group the court
found that the mathematical algorithm test misleading and determined that software
and business methods should be examined like any other traditionally patentable
subject matter. In 1999, the court concluded that algorithms are patentable because
they limit a general-purpose computer to a specific purpose, performing functions
pursuant to the software. This statement is narrower than State Street's broad
holding that mathematical algorithms were patentable as long as their application
produced a useful, concrete, and tangible result.
Courts have held that if a software process is not an abstract process but claims
a "real world activity", then even if the idea underlying an invention
may be considered to reside in a mathematical method, such a software claim is an
abstract mathematical algorithm.
You should keep in mind that granted software/Internet/business method patents can
be revoked if found to be invalid, so development of new ideas is therefore not
blocked by bad patents. If members of the public feel that an examiner has allowed
an overly general claim in a patent, they may file an interpartes examination in
the US, an opposition in Europe, or a lawsuit in Court, to argue that claims are
overly broad and should not be allowed. Thus, it is always a good idea to have a
professional patent novelty search performed to help avoid this issue before filing.
Despite the ever increasing volume of non-patent prior art, the average software/Internet/business
method patent is citing only 1 to 2 non-patent prior art items, which is far too
few. Worse yet, the vast majority of software patents (about 60%) still cite no
non-patent prior art. Thus, to strengthen your software/Internet/business method
patent it is strongly advisable to find at least 10 pertinent non-patent prior art
reference to cite in your patent case and design around in the specification.
Some software patents are particularly subject to invalidity findings based
on lack of enablement and/or utility. The first paragraph of 35
U.S.C. §112 requires an applicant to describe the claimed invention
sufficiently to enable one skilled in the art to make and use the invention. 35 U.S.C. §101 requires
that the invention have a useful purpose, or Utility. Problems can arise when one
or both of these requirements are not met. In one situation, an applicant fails
to disclose a credible utility in the specification (referred to below as the "no
utility situation"). In the other situation, an applicant provides evidence
to address doubts about a utility stated in the specification (referred to below
as the "no evidence situation"). Each of these situations has a different
consequence. The different consequences can be critical, especially in the context
of an interference.
With regard to the "no utility situation," it is well settled that an
application must disclose a utility as required in §101,
and enable the utility as required in §112,
as of the filing date. If a utility is not disclosed and enabled in the application
as filed, the application is in violation of §101 and 112,
and does not accord the benefit of its filing date to later continuing applications. With
regard to the "no evidence" situation, it is equally well settled that
an applicant may provide evidence after the filing date to further support a utility
already set forth in the specification as filed, and still maintain the original
In practice, almost no patents in the US are challenged in an interpartes reexamination
since it weakens an infringer's ability to defend themselves if they fail in
the interpartes reexamination and are then sued for patent infringement. Moreover,
because software/Internet/business patents, like all patents, are presumed valid
there is a very high, often insurmountable, burden on competitors to work the patent
process towards invalidating your patent. The costs of determining if a particular
piece of software or business method infringes any issued software/Internet/business
method patents is almost always too high and the results are too uncertain to be
Competitors (your potential licensees) usually find that spending time and money
challenging software/Internet/business method patents is a waste of valuable resources
and tend to license instead. Typically, they conclude that defending against the
blocking patent requires that significant funds be diverted away from their research
and development and is not worth fighting. This is in part due to the fact that
patents can be obtained on relatively small incremental improvements in software.
Thus a new innovative product might require hundreds of patents to protect and might
in turn be covered, at least to some extent, by thousands of prior issued patents.
Any one of these prior issued patents could prevent a new product from being made
used or sold in the marketplace. As such, the small to mid sized player can leverage
significant opportunity to license even a patent of limited scope to large entities
that require that technology to roll out a new product or service.
Scope of Software Patents
There seems to be an increasing trend over the past several years for reading patents
narrowly based on
patent specifications. Historically, courts had not really addressed the scope of
a business method patent in light of potentially limiting language found in its
patent specification. Those whom you assert your patent against will immediately
be poring over your patent specification to locate limiting language, which remains
a sound but tedious option when faced with a process patent infringement suit.
Thus, Patentees should take care to include in their patent specifications as many
and permutations of their claimed processes as possible, and do so with language
that describes the claimed process with some specificity without reading too narrowly.
The Federal Circuit decides In re Bilski in 2008 -
a landmark decision
In a 9-3 majority decision authored by Chief Judge Paul Michel, the Federal Circuit
declared the machine-or-transformation test as the touchstone inquiry for determining
patent-eligibility of process claims under 35 U.S.C. § 101 ("§ 101"). The
court reaffirmed the patent-eligibility for both business methods and software and
carefully avoided overruling its own precedent estab lished in the State Street
Bank' and AT&T4 cases. The majority decision also clarifies
other areas of uncertainty by affirmatively rejecting alternative § 101 tests. The
Patent Office rejected a petition from applicants Bernard Bilski and Rand Warsaw
because it decided that the process described was not confined to a particular machine
and amounted to patenting a "mental Leap" or an "abstract idea".
The invention at the heart of the Bilski appeal is a financial method
for hedging consumption risk for commodities sold at fixed prices. While the invention
could be implemented using a machine such as a computer, the claims are not so limited.
The Board of Patent Appeals and Interferences ("BPAI") found Bilski's
claim unpatentable as failing to recite statutory subject matter under three distinct
§ 101 tests including (1) the "transformation" test, (2) the "abstraction"
test and (3) the "useful, concrete, and tangible result" test. Bilski
appealed the decision to the Federal Circuit who initially heard oral arguments
on October 1, 2007. Soon thereafter, the Federal Circuit sua sponte ordered
a rehearing on May 8, 2008 before an en banc court.
In Bilski, the Federal Circuit endeavored to realign its § 101 jurisprudence
with Supreme Court precedent. Both the Supreme Court and the Federal Circuit have
long recognized that "fundamental principles" such as laws of nature,
natural phenomena, or abstract ideas are not patentable. However, the majority struggled
to otherwise identify a unifying test common throughout the Benson, Flook, and Diehr trilogy.
Upon synthesizing the case law, the Federal Circuit pronounced the machine -or-transformation
test as the "definitive test to determine whether a process claim is tailored
narrowly enough to encompass only a particular application of a fundamental principle
rather than to pre-empt the principle itself."'
According to the machine-or-transfor mation test, a process claim is patent eligible
subject matter if: (1) it is tied to a particular machine or apparatus, or (2) it
transforms a particular article into a different state or thing. Thus, the question
before the Federal Circuit was whether Bilski's "claim recites a fundamental
principle and if so, whether the claim would preempt substantially all uses of the
fundamental principle if allowed."
Applying the two pronged machine - or-transformation test to the Bilski facts,
the court immediately disregarded the "machine" inquiry as not being ripe
for discussion given the absence of machine limitations in Bilski's claims. Therefore,
under current law, software is patentable subject matter in the USA so long at is
executed on a machine (e.g., a computer) or stored on a computer readable medium.