[Note: this version does not include footnotes. For a full copy of this article, including footnotes and references, please send an email to [email protected]]

For many years, software companies have been obtaining patents. A patent can provide broad protection for a technological development implemented in software. For example, a patent can be obtained on a new software application, a new high level algorithm or a new communications protocol. Electronic commerce developments are primarily developments in software, algorithms and networks, and are thus prime candidates for patent protection. Many enterprises are already filing and obtaining patents on electronic commerce technology.

Patents are relevant not just to high technology companies. Banks and financial institutions, as users and developers of e-commerce technology, are discovering that patents are apply to their businesses too. Sophisticated financial institutions are using the patent system to protect their investment in technology.

Electronic commerce technology can be protected by patent in United States and elsewhere. At present, most of the e-commerce patent activity is taking place in the United States, but public records show that e-commerce patents are being filed and granted in many other countries.

When involved in developing or implementing new technologies, there are two patent-related issues that should be considered. First, should I protect this technology by patent? Failure to do so may allow competitors to freely use the same technology or offer the same product. Second, does this technology infringe another’s patent? Infringing a patent can result in serious financial loss. The best known example is when Polaroid successfully sued Kodak for patent infringement, and Kodak was required by pay hundreds of million dollars of damages and close down a complete division of the company. Recently, Microsoft was found to infringe a patent of Stac Electronics, and paid approximately $100 million to Stac in damages.

The following are some examples which show the reach of patents into the electronic commerce and financial fields:

• American Express, Visa, Mastercard, Reuters, Cybercash, IBM and Microsoft, to name just a few, all have patents and applications on e-commerce technology and products. Microsoft, for example, has filed a PCT patent application titled "Untraceable electronic cash".
• In 1997 alone, 132 Internet commerce and electronic money patent applications were published as PCT applications. A PCT application is the first stage of protecting an invention internationally.
• Citibank NA owns at least 8 patents, including, for example, a patent on a process for transferring funds through a communications network "allowing funds to be transferred instantly to an account so that the funds are available to the beneficiary at the time they are sent."
• Open Market announced in March 1998 that it had obtained three patents on key areas of electronic commerce, discussed in more detail below.
• E-Data Corp. is currently suing a number of companies for patent infringement. E-Data claims that its patent covers on-demand electronic distribution of products.
• State Street Bank was sued by Signature Financial Group Inc. for patent infringement of its "hub & spoke" patent. State Street prevailed at trial, but an appeal (which will likely determine the reach of patents over financial applications) is currently pending.
• The Depository Trust Company was publicly accused of patent infringement relating to its system for settling share transactions.

This article will summarize some relevant principles of U.S. patent law, examine the areas of electronic commerce that are currently being patented, and provide some practical steps for those developing electronic commerce applications.

Simply, a patent gives its owner the right to prevent others from making, using, selling or importing into the United States what is covered by the patent. It is a right, granted by the government after an examination of a patent application, to prevent others from exploiting what is covered by the claims of the patent.

A patent is a right to exclude or prevent. Strictly speaking, a patent is not a monopoly. A patentee has no right to practice what is patented. An example will make this clear. Company X invents and obtains a patent on the first word processor computer program. The next year, Company Y improves this technology and obtains a patent on a word processor program with an automatic spelling corrector. Company Y cannot make or sell what is covered by its own patent. To do so, Company Y would need to make a word processor, which is covered by Company X’s patent. Company X has what is called a blocking patent.

A patent is granted to a patentee for an invention. The subject of the patent must be both novel and non-obvious. The rules determining what is new and non-obvious are complex, and to some, appear rather subjective. However, one does not need to make a major breakthrough to be awarded a patent. Very few patentees invent the laser or discover the cure for Parkinson’s disease. Most patented inventions are improvements, some critics of the patent system would say minor improvements, on existing technology.

The subject matter that can be covered by patent is extremely broad, "anything under the sun that is made by man" can be patented. Generally, patent provides protection for novel and non-obvious technological developments. For example, patents can be granted over new machines, industrial methods, drugs, methods for making drugs, computer hardware, computer software and toys. The list is limited only by human ingenuity. However, a patent should not be granted on abstract ideas or works of fine art, such as literature, painting and poetry.

In relation to electronic commerce, the following can be protected by patent if new and non-obvious:

• all types of computer programs and algorithms relating to electronic commerce
• Internet applications
• electronic commerce products
• data processing systems
• hardware devices such as ATMs and card readers
• possibly, new financial products

Importantly, algorithms can be protected by patent. For example, new algorithms for compression, encryption, searching, indexing or authentication can all be the subject matter of a patent. A patent on an algorithm can be extremely broad, covering any implementation of the algorithm, regardless of the computer language, operating system or processor that is used.

To obtain a patent, one must file an application. The patent application describes how to make and use the invention, and includes a number of claims that seek to define the legal boundary of the invention. In United States, patent applications are examined by the U.S. Patent and Trademark Office. The Patent Office maintains a register of all patents granted in United States and an extensive prior art collection.

A patent is limited in time and in territory. In most countries, a patent has a term of 20 years from when the application is filed for the patent. Each country has its own patent system. A United States patent only covers activities in the United States. An Australian patent only covers Australia. One will not infringe a United States patent by making what is patented in Singapore and selling it in France. There is no "world patent." A patent application must be filed in each country where a patent is desired to obtain patent protection in that country.

A valid patent can be a valuable asset. As mentioned above, a patent is a right to exclude others doing what is covered by the claims of the patent. Thus, if a competitor makes, uses or sells what is patented, the patentee may bring an action for patent infringement. The patentee is entitled to an injunction preventing the competitor doing what is patented, as well as damages, if the patent is valid and infringed. The damages can either be a reasonable royalty or, often more significantly, the profit the patentee would have made from using or selling the infringing items or process.

A key point in relation to patent infringement is that you can infringe a patent even if unaware of the patent and unaware of the patentee’s product. The patent owner does not have to prove knowledge or copying to succeed in a patent infringement suit.

Care should be taken if hiring others to develop technology for your business. A patent is initially owned by the inventor or inventors. Thus, if an independent contractor is hired by a company to develop a new product, the independent contractor owns the rights to the patent over the product. Because patent assignments must be in writing, unless the independent contractor enters a written agreement with the company assigning patent rights in the product to the company, the company will have no patent ownership rights in what was developed, even if the company paid for the development.

Patent law is rather complex, and patents are often difficult to read. The above is a very brief outline of patent law. There are many misconceptions about patents, and not everything said in Internet discussion groups about patents is true. To conclude and summarize, these are some of the facts about patents:

• software and e-commerce developments can be protected both by patent and copyright -- copyright is the main form of protection for most software-based products, and patent can provide additional protection
• one does not need a major breakthrough to obtain a patent -- most inventions are improvements on existing technology
• patents are territorial -- there is no "world patent"
• a business can infringe a patent even if unaware of the patent or the invention
• a patent lasts for 20 years from the filing date -- use of "older" technology may infringe an "older" patent
• in most cases, if one infringes a patent, both damages and an injunction will be awarded to the patent owner -- the patent owner is under no obligation to license the infringer

There is no sure way to determine the number of electronic commerce patents or how many people and businesses are applying for patents on electronic commerce technology.

The U.S. Patent Office has a system of classification for inventions. However, there is no classification category for e-commerce inventions. E-commerce products are classified in many different areas. For example, underlying technology used in e-commerce applications is generally classified according to the technology, not the potential areas of use for the technology. Some electronic commerce applications are classified in broad categories, such as "application programs." The patent applicant drafts the patent application, and each applicant may use different terminology for the same concept, making keyword searching unreliable. Some patents are drafted in a way that is difficult to understand or determine exactly what the invention relates to. For these reasons, one cannot be sure how many e-commerce patents have issued.

It is also difficult to determine whether there are many pending patent applications relating to e-commerce. Pending U.S. patent applications are kept secret by the Patent Office until issuance. Because it often takes two or three years for a patent to issue, patent applications for the latest developments are likely not to have issued as patents. Even though many applications may have been filed relating to e-commerce in recent years, most are likely to still be pending and secret. In short, it is almost impossible to determine how many companies and individuals involved in electronic commerce are filing for patent protection.

Talk amongst patent attorneys suggest that there is a significant amount of activity in filing patents on e-commerce developments. Some statistics may give a clue as to the prevalence of e-commerce patents and applications.

In 1996, approximately 8,500 software patents issued in the United States. In the period January to July 1997, approximately 5,400 software patents issued. Of course, not all software patents relate to e-commerce. Roughly, the percentage of issued patents in areas possibly relating to electronic commerce is set out in Table 1.

One can assume that some of the patents in the categories above are relevant to electronic commerce.

Applications filed outside the United States are published 18 months after the first filing date. Filing under the Patent Cooperation Treaty (PCT) is a common way to commence a foreign patent filing program, and PCT applications are also published 18 months after the corresponding United States application was filed. Examining published PCT applications is one way to glimpse patent trends. However, because (a) only 15% of United States applications are published as PCT applications; and (b) some PCT applications never issue as patents, statistics relating to PCT applications do not paint the full picture. Over 500 PCT applications published in 1997 related to the Internet, and as Table 2 shows, some of these patent applications cover electronic commerce developments.

Public records indicate that many companies are involved in patenting Internet related inventions, including (to select companies somewhat at random) IBM, AT&T, Microsoft, Apple, Netscape, Citibank, Mastercard, American Express, Reuters, Cybercash, Sun, Time Warner, US West, MCI, Sony and Ericsson. Individuals and start-up companies are also filing for patent protection.

To illustrate the breadth of the subject matter that can be covered by patent, and to provide some indication of recent patent activity relating to electronic commerce, Table 3 lists a random sample of some recently issued United States patents.

E-commerce application developers and financial institutions should consider patent protection if creating new technology. As a "rule of thumb", anything involving computers or communications is potentially patentable.

Patents can protect technologies underlying e-commerce products, such as encryption, compression and authentication algorithms. Algorithms developed specifically for e-commerce applications can be patented, such as targeted advertisement delivery algorithms. Patents can also protect features of e-commerce applications, such as electronic shopping carts. New e-commerce applications and architectures can be protected, for example an on-line banking application, a smart card system or an electronic bill presentment architecture.

Even new financial products and services can be patented. Many financial products and services are implemented in software. A patent may cover the software that implements a financial product or processes data relating to the product. The patent could, in effect, prevent a competitor from offering the financial product.

There are a number of reasons why people file for patent protection:

• Offensive: to stop competitors using the same technology. This is the most common motivation for seeking a patent.
• Defensive: so if sued by a competitor for patent infringement, you possibly will have some bargaining power, as the competitor may infringe or want to use your patented technology. IBM would often counter-sue for patent infringement when accused of infringing another’s patent. Microsoft has used its patent portfolio to obtain patent cross-licenses from (and in effect neutralizing) competitors such as Wang, IBM, Apple and Hewlett-Packard.
• Licensing Revenues: to license technology for a fee. For example, Texas Instrument has collected more than a billion dollars from patent licenses.
• To assist raising finance: some venture capitalists will only invest in companies that have patents. Some start-up companies believe that having patents will assist in raising venture capital and make their company more valuable.
• Copyright Protection is Weak: courts have weakened copyright protection for software in recent years. For example, it is difficult to succeed in a copyright case where a competitor has copied the underlying functionality or the "look & feel" of your product. Also, to succeed in a copyright suit, you must prove that the infringer actually copied something, and what was copied was "expression," not an idea. Patents can protect high level algorithms, and there is no requirement to prove copying.
• Because your competitor is filing patents
• Ego: some people file patents to make themselves feel important.

There are important time limits that must be considered if a patent is to be filed. Using or disclosing the invention may prevent one from obtaining a patent on the invention. For example, in the United States, a valid patent will not issue if:

• the invention was patented or described in a printed publication anywhere in the world more than a year prior to the filing date;
• the invention was in public use in the United States more than a year prior to the filing date; or
• the invention was sold or offered for sale in the United States more than a year prior to the filing date.

If you test your invention in public on the Internet or offer it for sale, then you have one year from that date to file for your U.S. patent. As another example, a U.S. patent should not issue on an algorithm if the algorithm is described in a printed publication anywhere in the world more than one year prior to the filing date of the patent application.

Other countries have much stricter rules than in the United States, and if you want to obtain patent protection outside the United States, you must follow these rules.

In most countries, a patent application must be filed before the invention is disclosed. If the inventor tests the invention on a public Internet site prior to filing for a patent, it is often too late to then file the patent. Unless correct agreements are in place, discussing the invention with a joint venture partner, technology provider or any other outside party will prevent the inventor from obtaining a patent on the invention in most countries.

As e-commerce and the Internet have an international reach, obtaining patents in foreign countries may be the only way to adequately protect the invention.

Additionally, a business should ensure that appropriate agreements are signed by those developing the technology, such as employees and contractors, so that the business owns all patent rights. Merely because the business pays for the development or use of the technology does not mean that it owns the patent rights in the technology.

Patent Offices around the world are issuing patents relating to e-commerce at an exponential rate. The likelihood that a financial institution or technology provider will infringe a patent is therefore increasing. One can infringe a patent even if unaware of the patent.

Because it is often irrelevant where an Internet server is located, some people have proposed that they can avoid infringement of a U.S. patent by locating the server (which performs the patented process or runs the patented software) offshore in a jurisdiction where there is no patent. In some instances, this may work. However, there are two points to keep in mind:

• for Internet and e-commerce applications, patents are often drafted to "catch" activities of the user and are aimed at actions where the user is located. (As well, they should cover actions where the server or central processor is located.) If most of the users or customers are in the United States, it may be irrelevant that the server is located offshore.
• the Patent Act makes it an infringement to import into the United States the product of an infringing process, even if the process takes place outside the United States. Although there is no reported case directly on point, it is believed that if data is processed offshore and the results of the processing are transmitted into the United States, this "importation" of the resultant data may be patent infringement if the process is protected by patent in the United States.

As the world becomes interconnected, there is also an increasing risk of infringing foreign patents. For example, a U.S. customer conducting an Internet banking transaction while on vacation in Europe may cause a U.S. bank to infringe a European patent. An Australian financial institution processing data in Australia and sending the results to a customer in the U.S. may infringe a U.S. patent.

There are a number of strategies to reduce patent infringement risks. These include:

• conducting patent clearance searches prior to the introduction of technology
• obtaining an explicit patent indemnity from third party suppliers of technology
• ensuring that your liability insurance covers patent infringement or obtain specialist patent insurance

All patents and some patent applications are published. The patent system is a great source of knowledge. For example, one can search patent databases to find:

• all patents owned by a competitor
• the technical details of another’s system (if patented)
• all patents on a particular topic
• some pending patent applications in countries other than the United States

Some patent information can be obtained for free on the Internet. See, for example, the IBM Patent Server.

Open Market, Inc. has generated much publicity by claiming that it has been granted three broad U.S. patents on widely used technologies for Internet commerce and marketing.

The most significant patent is said to be U.S. Pat. No. 5,724,424, titled "Digital Active Advertising". This patent was filed in December 1993 and issued March 3, 1998. It appears to be carefully drafted. The abstract of the ‘424 patent summarizes what Open Market believes its patent is about. Note that the abstract of a patent is of no legal significance, and does not have any bearing on whether one infringes the patent or not. The abstract of the ‘424 patent states:

The '424 patent is complex, with 58 different patent claims. A claim defines the legal boundary of the invention. A business would infringe this patent if the business made, used or sold what is covered by any one of the 58 claims. Broadly, some claims are directed to an open network payment system for transferring funds from a buyer's account to a merchant's account with a "financial authorization network" acting as an intermediary to ensure the buyer has adequate funds. Other claims are directed to displaying digital advertisements received from merchants. Open Market has said it believes the patent covers Internet credit or debit card payments that get immediate authorization over the Internet. A detailed legal analysis is required to determine what is actually covered by the claims of this patent.

One thing to keep in mind is that, even though a Patent Act states that an issued patent is presumed valid, some or all of the claims of a patent can be held to be invalid. If sued for patent infringement, a possible defense is that some or all of the claims are invalid because of prior art and that the patent should never have issued. Alternatively, anyone can petition the Patent Office to re-examine the patent if prior art not considered by the Patent Office is found. Due to the complexity of the claims of the ‘424 patent, a detailed review of Internet technology as it existed in and prior to 1993 is required to determine whether this patent is valid.

The patent system is becoming increasingly relevant to e-commerce technology developers, financial institutions and service providers. Patent protection should be considered if one develops new technology. One should also ensure that the technology one uses does not infringe another’s patent.

John V. Swinson is a Senior Associate specializing in electronic commerce issues at the Australian law firm, Mallesons Stephen Jaques. Swinson was previously an associate at Kenyon & Kenyon in New York. He graduated from Harvard Law School with a Master of Law degree in 1991, and has an undergraduate degree in computer science.

For a full copy of this article, including footnotes and references, please send an email to [email protected]. Source of some of statistical information is Patent News Service.

March 22, 1998

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