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Mercata Inc. thought it had achieved a coup earlier this year when the U.S. Patent and Trademark Office issued the company a patent for a method of group buying online. But its edge over competitors proved to be short-lived as the PTO yanked the patent two months later. Patent attorneys say this was an extraordinary move by the PTO and reflects the agency’s increased caution in reviewing business method patent applications. Pulling a patent immediately after its issuance is “unheard of in 25 years, or if not unheard of, incredibly rare,” said Henry Bunsow, a partner at San Francisco’s Keker & Van Nest who represents MobShop, a Mercata competitor. The PTO also had second thoughts about a similar MobShop patent. The agency recently issued — and then withdrew — a notice of allowance for the company’s patent on aggregate buying over the Internet. These retractions come in the wake of negative publicity over several business method patents. High-tech companies and members of the legal community contend that many of these patents are overly broad. To appease critics and better manage the influx of business method patent applications, the PTO implemented a second layer of review for such applications in March. At the time, PTO Director Q. Todd Dickinson said the agency wished to “minimize our mistakes.” Since the new procedure was implemented, the agency has seen about a 10 percent drop in the number of software-related business method patents it has allowed. Attorneys say they anticipate a continued decline in business method patents and a narrowing of claims within these patents. PATENT PRIZE The PTO has been at the eye of a storm for the past two years. The turbulent times began after the U.S. Court of Appeals for the Federal Circuit ruled that software generally — and business methods in particular — could be patented. Following the July 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368, the PTO saw the number of software-related business method patent applications soar from 925 in 1997 to 2,600 in 1999. The agency issued 205 such patents in 1997 and 583 in 1999. This year the PTO projects it will receive 7,500 applications and issue 1,000 patents. Several of these new patents — as well as older patents that have recently been asserted — have provoked an outcry in the business and legal communities. Companies charged with infringement contend that the PTO has issued patents that cover ways of doing business on the Internet that are common in the offline world and therefore obvious and not novel. One of the most controversial patents is Amazon.com’s so-called one-click purchasing method that allows Internet customers to buy products with a single mouse click. The company won a preliminary injunction against Barnes & Noble.com last year and an appeal is pending before the U.S. Court of Appeals for the Federal Circuit. British Telecommunications also caused an uproar when it announced in June that it planned to enforce a 1989 patent on hyperlinks, the coded, highlighted text that links one Web page to another. While attorneys disagree on the merits of particular patents, they say some questionable claims have gotten through the patent office. “Some patents look awfully suspicious,” said former patent examiner Michael Smith. He cited Amazon.com’s one-click patent as a case in point, adding that he thinks the claim will eventually be narrowed. Attorneys also are critical of companies that have attempted to expand old patent claims to cover new Internet technology. “People are culling through patents that issued maybe five or 10 years ago and stretching them to get an interpretation that would cover the Internet,” said Maurice Pirio, a partner at Seattle’s Perkins Coie and prosecutor of Amazon’s one-click patent. Pirio said some patent holders have chosen to assert their patents against companies that are on the verge of going public and especially vulnerable to the threat of litigation. “It seems to be almost like blackmail,” Pirio said. A company “may decide it’s cheaper to pay $300,000, regardless of how frivolous the claim of infringement,” rather than revise their preliminary prospectus and delay an IPO filing. MORE STRINGENT REVIEWS The PTO seems to have taken these complaints to heart. In March, the agency launched an initiative to give business method patents a second level of review. Under this system, whenever an examiner has some question about an application, he or she forwards it to a supervisor for further consideration. “We’re being very conservative,” said Allen MacDonald, director of one of the PTO’s technology centers. “If there is any question, even if the examiners think they know the answer, they will send it to a supervisor.” As of Oct. 23, 187 of 460 applications were given a second review, and 28 of these were reopened for further prosecution. The overall affect, MacDonald said, has been to cut the allowance rate for such patents from 55-57 percent to about 45 percent. The PTO is not alone in seeking greater scrutiny of business method patents. Congress has also taken on the issue. Two congressmen introduced legislation that would require the patent office to publish business method patent applications 18 months after their filing to enable individuals to submit prior art to the PTO or request a hearing. The Business Method Patent Improvement Act of 2000, H.R. 5364, introduced in October by Reps. Howard Berman, D-Calif., and Rick Boucher, D-Va., would also limit the types of activities that can be patented. Specifically, the bill would prohibit the patenting of known business practices that are adapted to the Internet unless there is a preponderance of evidence that the invention is not obvious. In introducing the bill, Berman said he was not wed to any particular provision but wanted to stimulate dialogue on the issue. His staffers said they expect the congressman to introduce a new bill in the next legislative session. The legal community also is drafting recommendations on the issue. The American Intellectual Property Law Association plans to publish a white paper by the end of the year. “We won’t come out saying, ‘Do away with something,’ ” said executive director Michael Kirk. Rather, the group will offer suggestions to both Congress and the PTO as to how the system of review could be improved. For one, “ Congress can take its hand” out of the PTO’s pocketbook, Kirk said, referring to the congressional diversion of funds from the agency’s budget each year. Given such increased scrutiny, examiners have become skittish about approving patents that may prove controversial. “The patent office has received so much bad publicity over some patents, the examiners are getting very stingy about allowing claims,” said Smith, who left the PTO 18 months ago to join Minneapolis-based Schwegman, Lundberg, Woessner & Kluth. “I am hearing from my colleagues around the country that examiners are being very unreasonable” and rejecting claims that should be allowed. Pirio concurs that examiners are being more cautious. They don’t want to face “the publicity of issuing a patent that the industry ridicules,” he said. Examiners have told him they would prefer the PTO’s appeal board to decide whether certain types of inventions should be patented “so they don’t have egg on their faces.” Such wariness apparently led to reconsideration of the online shopping patent applications submitted by Bellevue, Wash.-based Mercata and San Francisco’s MobShop. An examiner asked the PTO to review nine patent applications in an interference hearing to determine the first inventor of the technology. “The patent office is having trouble saying whether anyone should get this patent” for a method of holding Internet auctions, Bunsow said. Regardless of the outcome, the case may portend a new era for Internet-related patents. “The viability of business method patents is increasingly being called into question with the patent office indicating its reluctance to continue issuing them,” Bunsow said.

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