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What do disparate companies such as Amazon.com, Priceline.com, Teledynamics Inc., DE Technologies Inc. and British Telecom have in common? They are all proud owners of broad patents on Internet business methods awarded by the U.S. Patent and Trademark Office (PTO). And each has either commenced litigation to enforce its patent rights or has announced that it intends to do so. The patents are so broad — covering such business methods as one-click checkout systems (Amazon), buyer-driven auction methods (priceline.com), interactive lead generation (Teledynamics), international deals over the Internet (DE Technologies), and hyperlinks (BT) — as to create, if enforced, an effective private tax on many, if not most, companies operating on the Internet. In the past year, a storm over business method patents has been brewing, which has led to increasing litigation over the bona fides of these patents. The past few months have only seen continued issuance of these questionable Internet patents and additional litigation. PATENTS GIVE HOLDERS BARRIERS TO COMPETITION The importance of this issue cannot be overstated. For the technology company whose business plan turns on the ability to capitalize on proprietary technology, the enforceability of its patents is crucial. This is particularly true for Internet companies, as there are few barriers to entry in the industry. As a result, these patents can often provide their holders with one of the better barriers to competition and a symbol of legitimacy in the marketplace. For investors trying to value companies — whether privately held or publicly traded — the validity and enforceability of these patents, which are often the core of the companies’ business models, presents quite a conundrum. For companies conducting business over the Internet, where widespread business method patents may present costly obstacles to its operations, the risks of these patents being enforced are substantial. The recent example of Eli Lilly’s experience with its Prozac patent in the bricks-and-mortar pharmaceutical world is illustrative of the risks associated with patent enforceability. Lilly’s stock plummeted 30 percent after the U.S. Court of Appeals for the Federal Circuit ruled that Barr Laboratories Inc. could begin selling a less-expensive generic version of Lilly’s blockbuster drug, Prozac, without violating Lilly’s patent. One can only imagine the impact of such a ruling on a company that has no product other than the one covered by the patent in question — as opposed to Lilly, which has other sources of revenue. Rationalization of this patent marketplace is yet to come. Notwithstanding the PTO’s March 29 announcement that it is going to give greater scrutiny to business methods/ Internet patents, there has been precious little change apparent to the outside world. Quite the contrary, during the past few months the PTO has approved applications for several business method patents that may be among the broadest and most susceptible to challenge they have approved to date. DE TECHNOLOGIES SEEKS VERY BROAD PATENT On Aug. 28, the Wall Street Journalran an article in which it reported that the PTO was about to award to DE Technologies a broad patent that would cover “a process for carrying out an international transaction … using computer-to-computer communication.” The business method that DE Technologies seeks to patent enables pre-transactional assessment of any international transaction by translating the transaction into any language of the consumer’s choice and calculating the price and any charges involved in the consumer’s currency of choice. SeeDE Technology’s Application No. 00651156. What’s more, DE Technologies has already announced (before the patent has even been issued) that it will embark on a program of enforcement against any company conducting international trade transactions over the Internet. The patent bar was salivating — both those who were going to prosecute the litigations on contingency and those who would be defending them. In another example, TeleDynamics announced in June that it had been awarded a patent for an “interactive lead generation.” The patent, according to Wired News, “covers just about any automated information practice in which a company harvests a customer’s information and then provides it to a third party.” And, of course, for those following this evolving story, the granddaddy of all was the announcement in June 2000 by British Telecom that it would consider enforcing its patent for “hyperlinking,” which elicited an outcry from the tech community. These broad patents are not the only such examples. Even though the dilemma of the business method/ Internet patent has achieved front-page celebrity status over the past year, the PTO continues to approve these controversial patents. While many companies base their entire business model on the validity of their patents, it is unclear whether the courts will ultimately uphold them. CONGRESS PROPOSES LEGISLATION ON THE ISSUE In an attempt to remedy the problems that have been created by the issuance of these controversial business method patents, Representative Howard Berman, D-Calif., introduced the Business Method Patent Improvement Act of 2000 on Oct. 2. H.R. 5364. The legislation is designed to reform the process by which the PTO reviews and approves business method patents, in hopes of reducing the number of controversial patent applications that are approved. Primarily, the Berman bill proposes two major reforms. First, the legislation would require that all applications for business method patents filed with the PTO be published within 18 months of filing, even if the patent has not been granted. This would afford challengers the opportunity to mount pre-grant opposition to proposed patents, something that U.S. officials have long sought to persuade other countries to abandon. Second, the bill would empower examiners to reject, as obvious, applications that merely employ computer technology to carry out existing business methods. The Berman bill has received a cool reception by many, if not most, in the patent bar. Of particular concern to many is the notion that the legislation would create a different process for approving one particular type of patent. In fact, the problem does not lie in the current law, but rather, in the difficulty that the PTO confronts in conducting searches for prior art. As a result, given additional resources and more time to familiarize itself with these new technologies, the PTO may well remedy many of the problems previously seen within the framework of its current review process. Finally, to complicate matters more, there is another component to this brew: patent developments in Europe. The European Union and European patent examiners have tended to be much more conservative than their U.S. brethren in issuing software or business method patents, but this, too, is changing. Under the European Patent Convention (EPC), “programs for computers” are expressly excluded from the definition of “inventions” which are patentable under Art. 52. However, Art. 52(3) of the convention also states that the exclusion bars patentability “only to the extent to which a European patent application or European patent relates to such subject matter or activities as such.” This has been interpreted to permit the issuance of patents for software-related inventions when the software is related to an industrial invention. An example is a decision by the Boards of Appeal of the European Patent Office (EPO) with respect to IBM patent application No. 96305851.6, Case No. T 0935/97-3.5.1 (Feb. 4, 1999). The board’s opinion makes it explicit that software is patentable as long as it can produce a “technical effect”: “Consequently a patent may be granted not only in the case of an invention where a piece of software manages, by means of computer, an industrial process or the working of a piece of machinery, but also in every case where a program for a computer is the only means, or one of the necessary means, of obtaining a technical effect within the meaning specified above, where, for instance, a technical effect of that kind is achieved by the internal functioning of a computer itself under the influence of said program. In other words, on condition that they are able to produce a technical effect in the above sense, all computer programs must be considered as inventions within the meaning of Article 52(1) EPC, and may be the subject-matter of a patent if the other requirements provided for by the EPC are satisfied.” Id.at 6.5. In November, at a conference, the member states of the European Patent Organization rejected a proposal to eliminate software patents from the excluded category. That organization is now discussing other revisions to the EPC that could remove computer programs from the excluded category altogether. STUDY SHOWS EPO’S VIEWS ON BUSINESS METHOD PATENTS The increasing sympathy for software patents is now moving to business method patents. The EPO’s views on business method patents was recently set out in the Report on Comparative Study Carried Out Under the Trilateral Project B3b, issued at the Trilateral Technical Meeting of the U.S., Japan and E.U. patent offices, held on June 14-16. The bulk of the report focused on a comparative study between the PTO and JPO of several hypothetical computer-implemented business method patent claims in which the EPO did not participate. But the EPO expressed its views on business method patents in Appendix 6 to the report. Those views are as follows: � Business method claims that are just abstract business methods and do not specify any apparatus used to carry out the method should be rejected. � Business method claims that specify computers, computer networks or conventional programmable digital apparatus for carrying out at least some of the steps (“computer-implemented business methods”) should be treated like any other computer-implemented invention. � Claims that specify other apparatuses (including those in addition to computers) should be treated as computer-implemented inventions. In short, the views of the EPO regarding computer programs and business-method patent claims may be converging with that of the United States. As such, there is a chance that we may soon see patents issued by the EPO that are analogous to those being issued by the PTO. Andrew J. Frackman is a partner, and Robert M. Stern an associate, in the New York office of O’Melveny & Myers. Frackman has particular expertise in high-technology, intellectual property and antitrust matters. Stern has focused principally on antitrust issues and the high-technology industry.

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