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JILT 2001 (1) - Henderson and Kane


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Internet Patents:
Will They Hinder the Development of E-Commerce?

Kay Henderson
Department of Information Science
University of Strathclyde

Hilary Kane
Dept of Computing & Information Systems
University of Paisley


Organisations have recognised that the Internet is a new medium through which business can be conducted. To capture the benefits of reaching consumers globally, businesses in the US attempt to protect new ways of reaching the market place by patenting business models used in electronic commerce transactions. This development means that confronted with possible monopolisation by a small number of companies who patent their business models the scope of what can be patented becomes an important issue for the development of web based enterprises.

This paper reviews patent law in regard to Internet from a mainly US perspective as there is a lack of related examples in the UK and Europe. (Thus resulting in lack of case law and related academic writing on the topic.) This situation is likely to change and the purpose of the paper is to raise awareness of the need for patent law to address the growing number of Internet patents by discussing existing legal provisions in this area. Recent decisions by the US courts which have granted patents to inventions which enable on-line business are outlined. The paper concludes with a discussion of the issues such as monoploy, litigation, jurisdiction, infringement in relation to the increasing number of Internet patent applications being filed.

Keywords: Internet, Patents, Intellectual Property, E-Commerce

This is a Refereed article published on 4 December 2000.

Citation: Henderson K and Kane H, 'Internet Patents: Will They Hinder the Development of E-Commerce?', 2001 (1) The Journal of Information, Law and Technology (JILT) . <>. New citation as at 1/1/04: <>.

1. Introduction

Intellectual property rights (IPR) is a generic term referring to a set of more specific rights such as author's rights, copyright, moral rights, trademarks and patents. The aim of IP law is to offer protection to an individual for their intellectual creation. The underlying 'idea' is that in business terms this 'creation' represents an asset to which monetary value can be attributed. Thus if there were no laws to protect such creations there would be no motivation for invention therefore society would not progress and there would be a lack of economic and social development.

Many companies have intellectual property without even being aware of it or understanding the need to protect it. Most products sell, not for the cost involved in making a physical product but for a price which reflects heavy research costs, (e.g. a new drug), an ingenious idea, (e.g. software), or spending on branding, (e.g. cosmetics). Therefore organisations need to prevent others from abusing their intellectual property. There are two types of IPR:

  • Industrial property: inventions, trademarks and industrial designs

  • Copyright and related rights (eg: database right)

This paper is concerned with the first set of rights- industrial property, in relation to patent law and Internet development. The paper concentrates primarily on the subject of patenting business models/methods which allow business or transactions to take place on the Internet. The US case of Baker v Seldon (1879) examined the case for patenting methods of doing business in relation to ledgers incorporating a book keeping system. The ruling stated that 'Book-keeping which is a method of business contributed to the 'useful arts.' and that a patent should be sought for the system. This case clearly indicates that business methods, i.e: ways of conducting business are protected by industrial property law, eg: patents rather than copyright legislation. Over a hundred years on from that case companies are now patenting methods of doing business over the Internet (Rothenberg, 2000). The Internet patents discussed in this paper refer to methods of doing business via the Internet. Although recent developments indicate that software protection (according to interpretation of the legislation) may be incorporated within patent legislation this is not within the scope of this discussion. The authors nevertheless note that it is a relevant issue.

Given that the UK is generally 12 to 18 months behind in the development of the Internet and operates different legal systems it is no surprise that most of the Internet patent cases which have reached the courts in the last year, have originated in the US. The US is reputed to be the world's largest producer of intellectual property offering strong legal protection to innovators (Field, 1999). However as Europe's Internet and electronic commerce business continues to develop Internet patents and the existing law will become of concern to interested parties, especially if the US sets a legal precedent.

In the United States patents are granted by the Patent Office on behalf of the government. The present law is contained in Article 1, §. 6 of the Constitution enacting laws to protect inventors' discoveries. In the UK, the law governing patents is The Patents Act 1977. The European Patent Convention (EPC) set up by the EU establishes a single procedure for granting patents for subsequent registration in the national Contracting States and to establish a certain standard rules governing those patents.

A European patent, when registered in a national state, has the effect of a national patent in each of the designated EPC contracting states and is subject to the same conditions as a national patent granted by that State.

The discussion which follows shows, the rise in the number of Internet patents being filed in the US is challenging existing US legislation and raises issues which Europe will have to consider.

2. Current Patent Law

2.1 United States

In the US a patent is defined as 'a legal right to keep others from making, using, or selling an invention without the permission of the patent owner' (Ladas & Parry, 1999). Another definition as provided in the Act for a patent is:

'any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof' (Mota, 1997).

In the United States patents are granted by the Patent Office on behalf of the government. The present law is contained in Article 1, §. 6 of the Constitution enacting laws to protect inventors' discoveries. The legislation in Title 35 of the US Code and the Patent Act 1952 grants inventors the right for a period of between 14 and 20 years to prohibit others from using or producing the intellectual property covered by another patent. Although supplemented later with treaties and bilateral agreements, for a patent to be granted in the US it must conform to the statutory requirements in the 1952 Act.

Not everything can be patented the exceptions being 'laws of nature, natural phenomena and abstract ideas' (Lee, 1999) The specific statutory requirements are that it must have utility (35 USC §. 101), be novel (35 USC §. 102) and be non-obvious (35 USC §. 103). For utility to exist the invention must not be 'frivolous or injurious to the well-being, good policy, or sound morals of society' (Lowell v.Lewis, 1817) Novel means that the invention must be new and not replicate some 'prior art', i.e. inventions that have been discovered before. It is not enough that they are an extension of some previous invention but they must differ sufficiently so that it would not be obvious to someone with skill in that field (Carroll, 1995).

The most common types of patent are:

  • patents of invention - protect how technology works, e.g. new chemical compounds;

  • design patents - protect how things look, covering a product's shape or appearance;

  • utility model patents - protect functional aspects of products although generally not granted in the US (Ladas & Parry, 1999).

With a utility model patent, its lifetime is twenty years from the effective filing date and there are four types of utility model patents (Title 35, §101) these being:

'machines, man-made products, compositions of matter and processing methods' and the law may also covers any new use of the above (Lee, 1998).

In addition to this the US operates a different system from other countries in that it provides a 'first to invent' system as opposed to a 'first to file' system. This means that records must be kept of the inventor's workings (Ladas & Parry, 1999) This specific piece of legislation is §. 102 (b) of the Patent Act 1952 which states that no one can patent an invention that has been 'on sale' more than one year before filing a patent application. In Pfaff v. Wells Electronics (1998) the court held a patent invalid because the invention had been on sale for more than one year in the US before an application was filed. The court stated that this 1-year period began to run when the invention was offered for sale commercially, not when it was reduced to practice.

2.2 Patent Legislation in the UK and Europe

The case for patent law in the UK and Europe is some what different from the US. In the UK patents are protected under the terms of The Patent Act 1977. In the EU the legislation is The European Patent Convention. The European Convention is not solely an EU measure, Switzerland and Liechtenstein have signed the Convention and a number of Eastern European States have been invited to join. The Convention and The Patents Act are linked by S130 (7) of the Act which stated that much of the Act is worded to have the same effect as the Convention.

In the UK the Patent Act 1977 s1 (2) (c) states what cannot be patented:

(2) It is hereby declared that the following (among other things) are not inventions for the purposes of this Act, that is to say, anything which consists of:

(a) discovery, scientific theory or mathematical method;

(b) a literary, dramatic, musical or artistic work or any other aesthetic creation whatsoever;

(c) a scheme, rule or method for performing a mental act, playing a game or doing business, or a program for a computer;

(d) the presentation of information;

Article 52 (2) c of the European Patent Convention has similar provisions:

(2) The following in particular shall not be regarded as inventions within the meaning of paragraph 1:

(a) discoveries, scientific theories and mathematical methods;

(b) aesthetic creations;

(c) schemes, rules and methods for performing mental acts, playing games or doing business, and programs for computers;

(d) presentations of information.

However both the Act s1 (2) and the Convention52 (3) state that the exclusions only applies to applications 'as such.' This is important as it means that the exclusions are not absolute and could be open to interpretation. The 'as such' has been applied to the case law surrounding software patents[1] (Widdison, 2000 ).

Therefore in both the UK and EU it is possible to patent a business method provided that the application is not for a method of doing business 'as such'! However it might be that at least the EU has some flexibility with regard to granting a patent for a method of doing business. The Technical Board of Appeal for European Patent Office (EPO) dismissed an appeal against refusal to grant a patent to IBM for ATM technology which could read any card. The Board stated that the subject matter of a patent must have a technical character and be industrially applicable. Applying the term 'technical' means to perform a business activity and does not mean that the business activity has a technical character and is thus an invention. In Australia IBM was granted a patent for a method of creating a visual representation of a curve by a series of calculations. Although entirely software based it was deemed 'useful.' It is now possible that in future patents may be granted for computer programs in the US and Australia. These cases demonstrate that the EU and other countries are perhaps applying American thinking and interpretation to the law granting patents. Although US and EU legislation forbid patenting of business models it would appear that the law is open to interpretation.

Although the European Patent Office has taken a broad view of interpretation their approach has been stricter than the US (Ladas & Parry, 1999a) The problem is that they look at these inventions as merely computerised versions of mental acts and therefore do fall within their prohibition on the patenting of mental acts (Ladas & Parry, 1999b). As the Internet is unique because of its global nature this raises 'jurisdictional boundaries' for the legal community, even if laws are established they are only effective if they are enforceable (Donnelly, 1999).

A person can apply for a European patent from the EPO. Thus if an application is filed in the UK for both a national and European patent it will be treated as a national patent only for the UK from the date of the grant. The other difficulty that arises is that under the European Patent Convention a person is allowed to oppose the grant of a European patent. This also applies retrospectively as long as the opposition is entered within nine months from the date it is published and applies in all contracting states. In the UK, a third party may only make observations but may not oppose the grant.

Clearly patent law is a complex area and open to wide interpretation. In addition to national laws, there is legislation through international agreements, at European level and treaties. There are discrepancies between the US and the UK in their treatment of granting patents and in any litigation that occurs the courts appear to apply different tests.

As already stated patent law in the UK is covered by the Patents Act 1977. The Act is divided in to three sections, the first dealing with domestic legal provisions, the second covering the UK's obligations internationally and the final part detailing miscellaneous provisions.

Section 1(1) defines a patentable invention as an invention that satisfies four conditions, these being:

  • the invention is new;

  • it involves an inventive step;

  • it is capable of industrial application; and

  • the grant of a patent is not excluded by subsections (2) and (3) of section 1.

Whether something has industrial application is also defined and means that as long as it can be made or used in 'any kind of industry, including agriculture' in can be patented. This provides a very broad construction and will generally cover both a product or a process.

From the terms of the Act it is evident that the legislation in the UK does not appear to be as broad as the provisions in the US. The list of exclusions is not exhaustive allowing the courts discretion regarding application. Thus in Merrill Lynch Inc.'s Application (1988) the court determined that if anything in the excluded categories constituted the inventive step then no patent could be granted regardless of how the claim was drafted, however this reasoning was rejected on appeal. In Gale's Patent Application (1991) it was decided that provided the claim was in substance as well as form a claim to a product or process embodying or employing the excluded matter a patent could validly be granted even if the invention entailed the incorporation of the excluded product or process.

The UK legislation also refers to 'novelty' and here it means that an invention is taken to be novel if it does not form part of the state of the art. This is defined in s.2 (2) and comprises:

'...all matter (whether product, process or any information relating to either) which has been made available to the public whether in the UK or elsewhere prior to the priority date of the invention by written or oral description, by use or in any other way (Patent Act,1977).

Given its terms, if there is knowledge available about something anywhere in the world this can potentially exclude the invention being patented in the UK. The priority date is the date of filing. In addition to these rules, the UK operates a first to file system unlike the US and also allows comments on patents to be taken after they are published (approximately eighteen months after receipt) but prior to the patent being granted. In the US the application remains secret until granted.

2.3 International Perspective

Historically, patents are designed to protect new inventions. A patent must be enforced in each individual jurisdiction. Whether an invention is eligible for a patent is determined by the nation granting the patent and its rights are limited to the territory under the governing authority's jurisdiction. In the US, international agreements are federal laws and are supreme over state law (US §111(1)). However, if an international agreement is not 'self executing' then it requires internal legislation to give it effect and means that the agreement is not superior to federal law. The worst potential scenario would be if a provision of an international agreement was inconsistent with the US Constitution as it would not then be given effect in the US.

There have been a number of attempts at harmonising the laws of individual states. The first attempt at a global patent treaty came with the Paris Convention of 1884 . It is in force among 144 member states. The convention established certain principles. These were 'national treatment', 'right of priority' and 'special agreements'. 'National treatment' means that member states have to accord nationals of other member states the same advantages under their domestic patent laws as they accord to their nationals. 'Right of priority' means that a person applying for a patent has twelve months from the date of the application a member country to apply for protection in all of the other member countries. 'Special agreements' can be made by individual member countries and these could be bilateral or multilateral so long as they did not contravene any other provision of the convention. However the convention does not define what is patentable, set the duration of the patent or give guidance to patent claims or enforcement.

The World Intellectual Property Organisation (WIPO), established in the 1970s, co-ordinates the basic activities established by the Paris Convention and there are currently 197 member states. The Patent Co-operation Treaty, in force in 1978, is administered by WIPO. This treaty streamlined a patent application system but has not taken over the member states' role in determining whether an application should be granted. Although there has been a harmonisation of the procedural aspects there has still been a failure to focus on the substance of patent law. In December 1996 under the auspices of WIPO two new international treaties were agreed upon: to cover Copyright and Performances and Phonogram. Neither agreement deals with intellectual property law.

The North American Free Trade Agreement (NAFTA), effective January 1994, is an agreement between the US, Canada and Mexico. It extends the concept of 'national treatment' under the Paris Convention to all forms of intellectual property and provides patent grants for 20 years from date of filing between these countries.

The General Agreement on Tariffs and Trade (GATT) formulated the Trade Related aspects of Intellectual Property (TRIPs) agreement. This brought about the creation of the World Trade Organisation (WTO), amended dispute-settlement procedures along with other measures. Basic standards for patentability of inventions were agreed with a basic term for a patent being 20 years. The end result is that patents are still issued country by country except where a group of countries have agreed to designate a single patent office to deal with this. In the US, the text of the trade agreements does not supersede US law so that any state laws in conflict can only be declared invalid where there is an action by the US, not private, for the reason of declaring such law or application invalid (Permit, 1996).

2.4. US & UK Differentiation

There is a difference between legislation and operation of Patent Office is different in the UK and US. US courts appear to have adopted a more liberal approach with this culminating in the decision in the State Street Bank & Trust case. In this case the court took the view that software could be patented if it produced a 'useful, concrete and tangible result'. Therefore it is clear why companies such as Priceline and Cybergold have received a patent. Both companies have produced a system, albeit computerised and ideal for Internet transactions, which fulfils these categories.

In the UK the unifying influence of Europe could mean that the law will need to become more liberal. Thus closing the gap that presently exists between the US and the UK. However at present it would seem that changes in the European Patent Convention are not likely due to a lack of cases. This would mean that the difference in standards would remain between the two countries. A potential result is that more companies and inventors will choose to seek protection in the US, particularly, if they are seen to have a more liberal approach to what can be patented and jurisdiction affords sufficient protection for online transactions.

US Patent Office statistics show that there is a higher proportion of US individuals receiving patents compared with foreign applications. In addition, when comparing figures for companies and countries with US figures on the whole, national residents appear to be treated favourably.

There could be a number of reasons for this. The US is more liberal in its application of the law it has allowed patent grants to companies like Priceline. Alternatively, it could be because as US is a large market and therefore it is worthwhile to obtain a patent in that country. This is coupled with the fact that the cost of patenting may be more cost-effective. Whichever reason is underlying, the relevance is that if companies perceive the Internet as a new and potentially lucrative way of conducting business, then it is in their interests to obtain patents under the US system. Companies like Priceline and Cybergold have used the legal system to their advantage and, based on the court's interpretation of what is patentable subject matter, these companies have created a potential niche in online business.

3. US Case Law & The Implications for Electronic Commerce

The growth of software and related inventions means that courts are having to re-interpret existing patent law. The main case law in point in the US can be summarised in the following cases:

Gottschalk v Benson (1972) - a mathematical algorithm is unpatentable;

Parker v Flook (1978), similar decision to (a);

Diamond v Diehr (1981), whilst upholding the mathematical algorithm test, made a distinction in this case;

In Re Alappat (1994) - refers to a decision of the Court of Appeals for the Federal Circuit. This stated that patentability is not lost on a patent claim that contains a mathematical formula or other non-statutory matter if it also contains otherwise patentable material;

State Street Bank and Trust Co. v Signature Financial Group (1998) - this case has two key points: it expands the scope of patent protection so that if a software application provides a 'useful, concrete and tangible result' then it qualifies for protection and it eliminates the business method exception (Lee, 1999).

The relevance of these cases is that with the growth of online business there have been a spate of decisions by the US Patent Office to grant patents on what have been described as 'underlying business models'. At the present time there is a great deal of debate concerning whether these decisions are acceptable and if this is a relaxation of the current legislation.

Caruso (1999) suggests that the actual legislation was designed to stimulate innovation and that the practice of granting these online patents undermines this. Using the example of, the writer states claims to patents are becoming increasingly 'specious'. The patent held by this company claims to control the 'sale of audio or video recordings in download fashion over the Internet'. A comparison that it is like 'patenting the combination of a pencil, piece of paper and a stamp as a method for writing a letter'.

However Kuester (1999) states that there has been an evolution in protecting software towards obtaining patent protection because the traditional approach to obtain copyright no longer affords sufficient protection. The writer uses the example of IBM. Nearly one third of its 1,724 patents issued in 1997 were software related with this portfolio generating about $1 billion in annual royalties. It is then argued that companies can use cross licensing agreements to resolve arguments over patent infringements. Riordan (1999 ) believes that this could be important for small companies as often patents ownership can have a major impact on obtaining financing from the banking sector. Caruso (1999) takes this further suggesting companies collect patents to exert an unfair position, thus stifling change and innovation. This fact did not escape Jay Walker founder of who has started a laboratory for the sole purpose of developing strategies and ideas which could be turned into Internet business ideas and patented (Rothenburg, 2000).

Should a company decide that another has infringed their patent legal proceedings may ensue. A movement in the US has led to companies raising actions in the District Court for the Eastern District of Virginia, the reasoning being that they are dealt with far more speedily there (Sandburg, 1998). The legal basis for this is that in the case of V.E. Holding Corp. v Johnson Gas Appliance (1990) the court decided that a company can be sued anywhere it does business. Whilst in the case of Beverly Hills Fan v Royal Sovereign Corp (1994 ) it was decided that a manufacturer can be sued wherever its product reaches the market.

The importance of what is happening in the US is enhanced by the fact that in 1996 the US Patent Office changed their guidelines so that any business idea that is performed on a computer or one that results in a tangible outcome can be classed as intellectual property (Lash, 1998). The implication in this is that the law in the US is evolving as computers are used more widely in business. From this it would appear that the US attempts to offer as much protection as possible to its inventors in the current legislation and case law interpreting them as broadly as possible.

4. Recent Patent Decisions by the US Patent and Trademark Office

It has been suggested that software patents have assumed increasing importance with the commercialisation of the Internet providing the potential for companies using patent protection to create a monopoly (BNA, 1998). It has also been argued that with the granting of patents, this could signify the beginning of legal problems surrounding Internet technologies (Betts, 1999). Patents are supposed to be about promoting innovation' but it has been questioned how far removed software is from mathematical algorithms to make it eligible for patent protection (Lipton, 1998). There are potentially serious implications for example if Eolas Technologies pending patent is granted, it could mean that Sun's programming language for Java would be an infringement (Betts 1999). However as the next section will illustrate companies in the US are being granted Internet patents despite a lack of specific legislation.

4.1 Open Market

Open Market has been granted a number of patents including, real-time credit/debit card processing, the use of electronic shopping carts and digital coupons and the ability to record and analyse user-browsing histories. It is argued that the granting of these patents has enable the company to gain control over the most critical aspects of Internet commerce (Narucki, 1998).

Press releases from the company suggest that they are attempting to negotiate licenses for their patents but it has been reported that they will pursue any infringement of the patent (Kane & Kersetter, 1998). By licensing the technology there is an opportunity for Open Market to generate revenue. This article suggests that what will happen in the future depends on the outcome of any civil proceedings that arise. Should the courts choose a broader interpretation of the existing law this could have an enormous impact on the electronic commerce industry.

4.2 Priceline

Priceline has gained a great deal of media coverage as that they have been granted a number of different patents. Walker Digital has applied for 250 patents to cover various aspects of Priceline's business and they intend to pursue a vigorous policy of enforcement (Bloomberg, 1999). The head of Walker Digital and Priceline, Jay Walker, states that the thinking behind Priceline is as 'a buyer driven e-commerce system.' (Noonan, 1998). Examples of patents granted are:

  • No. 5,862,223 - issued 19/01/1999 establishes a market mechanism to connect users of professional services to a world-wide database of professionals who can dispense advice over the Web, e.g. could be used by a doctor seeking advice concerning a particular medical condition.

  • No. 5,884,272 - issued 16/06/1999 creates 'a system for anonymous communication between people' (abstract of patent).

  • No 5,797,127 - issued 18/08/1998 describes the selling of options on airline seats, this being the most widely reported. The individual logs on to the site, selects a destination and price they are willing to pay then the company searches to find a suitable seller.

Priceline has attempted to convince the US Patent & Trademark office (USPTO) that they have invented a new way of doing business (Lewis, 1999). This could set a precedent where companies use patents in an attempt to control the development of electronic commerce. Internet development could suffer, sparking a war in electronic commerce. A company such as Priceline would have 20 year monopoly on a method of doing business. Challenges have been made to Priceline on the basis that the challenger has a prior right. A legal challenge to the company's 'name your price' patent for airline tickets has been made by MercExchange, who claim they filed an original application for the patent in November 1995. Priceline filed in September 1996 but their patent was granted earlier (Clark, 1999). Despite MercExchange's allegations, Priceline do not accept that there is a conflict between the two patents (Duvall, 1999). This case is even more interesting given that MercExchange is headed by patents attorney Thomas Woolston.

The patent itself is not unusual and can be compared with the way in which government tenders conditional purchase orders to contractors. However some parties expressed surprise that the patent has been granted to Priceline, with the implication that it is possible to patent a business model (Buchanan, 1998). According to the guidelines by the USPTO, a patent can be granted as long as it meets the 'new and useful' criteria and business models appear to meet these criteria.

4.3 Signature Financial Group

Signature Financial Grouphas paved the way for business models to be patentable. They were granted a patent, no. 5,193,056, for a program that calculates the allocation of assets in a mutual fund and also tracks information for tax purposes. State Street Bank & Trust Co. raised an action (despite allegedly infringing Signature's patent) seeking a declaration from the court concerning the patent's validity (State Street Bank & Trust Co. v. Signature Financial Group, 1998). The initial decision went in favour of State Street, but when appealed, the court decided in favour of Signature Financial Group due to the patents 'practical utility' and it was sufficient that the computer process 'produced a useful, concrete and tangible result'.

This raises the question - as to how generic and abstract can a concept be and still be patented while also paving the way for thousands of new patent applications. This case has been seen as a turning point, raising patents as a form of protection and expanding their scope (Betts, 1999).

This ruling also has implications for the financial and online banking sector, as greater numbers of software to manage finance will be patented. Thus companies will have a potential competitive advantage.

The USPTO has been issuing patents on business models for some time, but anticipates many more applications as a result of this decision (Sandburg, 1998). The significance of granting patents such as these is that they are the first to detail Internet applications that have been in use in traditional business for many years.

4.4 Netcentives

Netcentives have been granted a patent for the way they conduct part of their business on the Internet. The actual terms of the patent are that it is for its 'online interactive frequency awards program', patent, no. 5,774,870. This type of patent can help small companies protect themselves against large companies trying to steal their innovations and gain a monopoly.

4.5 Cybergold

Cybergold , granted patent no. 5,794,210, covers, they claim, 'the sole right to pay consumers online incentives'. This company's scheme is similar in presentation to a shop loyalty card but with a range of participant traders.

4.6 Amazon. com has patented a technology, which allows other web sites to send it customers in exchange for a commission. These affiliate programs allow web sites to display part of another web site's catalogue with a link to the retailer if the consumer wishes to make a purchase. The affiliate then gets a percentage of the transaction fee. When Amazon received a patent for its One Click technology it then sued (the suit is still pending), (Associated Press, 2000).

These situations have real implications for the development of e-commerce and for the growth of companies. There appears to be no clear position taken by any individual. This suggests that there is no clear way forward in the way potential inventions are dealt with and if these are appropriate for the Internet. As well as this, it is clear that there is still scope for companies to use patents to create a presence on the Web thereby preventing others benefiting. In turn this could have a detrimental effect on growth in electronic commerce.

5. Future Issues to Consider

5.1 Jurisdiction

Although there are international treaties, agreements and European conventions, the law relating to patents is still essentially territorial in nature. Thus infringement could be pursued notwithstanding that it took place over the Internet. For example if compression software, which is patented in the US, were offered for sale over the Internet this would potentially infringe the patent if offered by someone other than the patentee. This is an obvious example. However companies must be able to show that another has used their patent as it is not always immediately evident where the patentable item is a process and not something tangible.

Clearly if there is no agreement this is in large part due to the dearth of case law in this area. Although there is evidence to suggest that the US attitude is quite liberal in allowing actions to take place (V.E. Holding Corp. v. Johnson Gas, 1990), until there is a case across all territories then there is unlikely to be any clear view. This unfortunately is not an ideal answer for companies who require to deal with this issue now. In the extreme it could be possible that companies could infringe another's patent with the processes that they use. Albeit that this may seem like an absurd suggestion, there seems no reason for it to be untrue in light of the decision in the State Street Bank case.

If jurisdiction remains unresolved it has great significance in light of the rising numbers of Internet users and electronic commerce transactions as businesses need to meet the needs of consumers. Assuming this can be achieved in a way that provides a monopoly through patent protection, then companies are in a position to secure a competitive advantage. Alternatively, if there are fewer users that predicted, this does not negate the importance of obtaining a patent for a software-related invention as it is becoming increasingly difficult to find inventions and tasks that do not involve computer processing.

Companies are already aware that patenting business models might provide revenue, eg: Priceline. When looking at the overall figures for applications and grants, it emerges that there has been a year on year increase for both. Given that there is a delay of approximately 18 months between the time an application is made and a grant issued, it is evident that companies have been steadily increasing their output in this area. This is particularly evident where the comparison is made between foreign and US corporations. It could either mean that the US is more aware of the evolution in patent protection or that following on from the State Street decision, there has been a spate of applications that are only now reaching the grant phase.

5.2. Monopoly Potential & Increased Litigation

As the US operates a different system from that of the UK and Europe and appears to be taking a more flexible approach to patent legislation there is the possibility that a monopoly situation could arise. Due to lack of case law it is difficult to predict if this is indeed the case. Although the US files the greatest number of patents on a yearly basis the market is also much larger. In addition it is only recently that Internet patents have come to public attention.

Therefore it may simply be too early to make any judgement as these patents have not been available until recently and it will only be evident through the patent's life cycle, ie: from the R&D stage of the invention until an application is applied for. If a business can take a patented invention and alter it in some new and novel way, they themselves may be able to patent their invention thereby undermining the efficacy of the original patent granted.

A monopoly such as may be available to a company like Priceline, is only of value if the projections concerning consumer use of the Internet are accurate. It could be argued a monopoly is of little value where there is no market with which to exert leverage.

There is also the potential for increased litigation (Kane & Kerstetter 1998) and there is increased potential for the patentees to litigate against those that they believe are infringing their patent. This could result in the financial sector (one of the key areas for electronic commerce development) being affected as in the case of the State Street Bank.

The fundamental problem with foreseeing increased litigation is that until there is a spate of cases there is no evidence to support this view and cases can take a number of years to reach the court. Thus there will be no definitive position for some time if these patents are only now being granted. The other factor is that some companies may simply choose to enter in to licensing agreements as a cheaper method of circumventing solicitors' fees for lengthy legal cases.

Whether there is increased litigation does not address the fact that it may well be in a company's interest to try and obtain as many patents as possible as this would provide 'assets for leverage'. It would appear, from the business perspective, that these patents will continue to be granted. Taking that as a start point means that they require to prepare their own portfolio.

It may also be possible that companies, instead of releasing details of how their business processes work choose to retain them as trade secrets. This would leave them less open to potential actions of infringement. However, this would be detrimental to the intention of patent protection, to reward innovative endeavour. It would also restrict their use, thus hindering their use on the Internet.

5.3. Patent Scope & Pace of Change

Allied to patent scope (i.e. what constitutes a patent) is the contention that the US system, potentially creates low entry barriers for business. If a patent office is seen to be issuing what might be termed overly broad patents, it brings their capabilities into question.

To view a patent as potentially 'too' broad could imply that there is concern that the industry's power is being eroded. The combination of the broad scope of patents and the favourable system in the US is cause for concern in the software industry.

Whether a patent is broad relates to the issue of increased litigation. It may be that industry is concerned that applications that have been in use for a number of years suddenly become the subject of an infringement action. This is substantiated by the fact that in the US, a patent is not published until it is granted, at which point it affords the patentee the power to raise proceedings.

Whether there is any merit in this view is open to doubt. IBM have not stopped filing applications for patents, indeed they, as the top ranked company in the US for grants, are arguably in an extremely strong position to use their patents as marketable assets. In addition, they probably possess both the intellectual and financial resources to circumvent or challenge these overly broad patents. The 2657 patents they received in 1998 are more than 10 times the number of patent applications pending that have been filed by Walker Digital (

Although there appear to be low entry barriers, small inventors as individuals are unlikely to have the funds available to produce even a percentage of the patents awarded to IBM. Simply because costs are not awarded against the loser in action in the US does not mean that there is no expense in raising proceedings. It is therefore contended that this issue is not quite as unfavourable to business as first posited.

Technological change has implications for patent law. As patent protection exists for a limited period, 20 years from date of filing, and technology changes at an ever increasing rate, there is always the possibility that by the time a patent is granted it will have been surpassed by some new technological innovation.

Taking this as an issue, it is worth considering whether patenting in its present form should continue. There may be an argument for abandonment of the system of patent protection altogether, although that could have a detrimental effect on stimulating invention as there would no longer be a reward. A middle course might be to reduce the period of protection but also reduce the costs in making an application as cognisance of the shortened period of exclusivity.

The problem with both of these approaches is evident when looking at business model patents and the Internet. If consumer use of the Web grows, it is in the interests of those holding patents for doing business to retain a monopoly for as long as possible. For a company such as Priceline, who in effect trawl the market for the air fare that a consumer has committed to purchase at a predetermined cost by them, this may be an attractive proposal. They are unlikely to support any diminution of the market advantage. However the other aspect is that companies like IBM, holding large quantities of IP assets, are likely to resist any attempt also. However, they probably have to expend large sums at present for this protection whilst also spending on keeping apace with technology innovations.

5.4. Infringement

As previously mentioned the increasing commercialisation of the Internet has implications for jurisdiction. Companies have set up business on the Internet displaying prior art which provides others with the opportunity to copy and make use of the work of others. In terms of the present legislation this could obviously amount to infringement of a patent due to the fact that the patentee is having their exclusive use affected.

This is an important area because if it is possible to download software that is patented and utilise it in business, there are two effects. Firstly, the business will derive benefit from the fact that they have not paid anything for its use yet may realise a greater profit. Secondly, unless there is some method of tracking the downloading, then there is the potential that the patentee may never be aware that their patent has been infringed. Following on from this is a concurrent problem. Assuming a patented process is downloaded in the UK from a US site and used by a business exclusively in the UK, then a problem may arise pursuing that infringement. The reason is that as mentioned in the V. E. Holding Corp. case (1990), the court decided that a company could be sued anywhere it does business. However, this does not necessarily extend beyond the US as an American decision. Whether there would be jurisdiction in those circumstances is open to question.

For business, it is important if they invest a substantial amount of money developing an invention that they should be able to derive benefit from it. If there is the possibility that it can be infringed readily over the Internet then the likelihood is that inventions will remain trade secrets and at least that way the company can derive benefit.

However given that there is a potential divergence between the pace of technological change and the length of time it takes to acquire a patent. If technology is fast moving, there is no advantage to infringing because they are always behind the 'first mover'. In the same way that Direct Line revolutionised the sale of car insurance, selling over the phone, the inventor is poised to gain the advantage with others forced to follow on. Secondly, there is an inherent assumption that in taking another's invention, the infringer will have the requisite knowledge to implement it in their own environment and that it will be of benefit. Although Cybergold offer a patented online reward system on the Internet, not dissimilar to the concept of shop loyalty cards, there does not appear to have been a similar response by high street retailers, perhaps indicating that they do not see this as a threat, nor necessary for their business needs.

Finally, a patent such as that owned by Cybergold or Priceline is potentially only of use if growth of e-commerce continues at its current rate. If the numbers using the Web are lower, the potential market decreases, making the risks of infringement less attractive set against the potential business benefits that can be derived.

6. Conclusion

There is no doubt that it is important to have patent protection. The US is the largest producer of intellectual property and appears to provide strong legal protection to a company's intellectual assets.

For example the patent granted to Priceline for its method of offering options on airline tickets provides the company with an important asset. Essentially, they have a monopoly on this method of selling airline tickets and if any person infringes this, the are potentially liable to Priceline.

Overall, with broad agreement about the benefits of patenting inventions it would seem that the discrepancies arise in the way that countries administer their systems, effectively providing little uniformity of decision process in granting patents. As there is no supranational arrangement each country can apply their own standards, thus leaving inventors without any uniform approach. The result is that an apparent anomaly such as Priceline arises and obtains a monopoly on what is essentially a method of selling airline tickets.

The US appears to have adopted a more liberal approach with this culminating in the decision in the State Street Bank & Trust case. As was stated, in this case the court took the view that software could be patented if it produced a 'useful, concrete and tangible result'. On this basis it is clear why companies such as Priceline and Cybergold have received a patent. Both companies have produced a system, albeit computerised and ideal for Internet transactions, which fulfils these categories.

The relative cost of obtaining a patent is cheaper in the US. Infringement actions do not award costs against the loser, also cases can go before juries which provides for a potentially fairer hearing. Given the global nature of the Internet and the concept of the virtual organisation many businesses may seek patent protection in the US.

This could be due to the liberal attitude in the US and because it is a larger market and therefore it is worthwhile to obtain a patent in that country. This is coupled with the fact that the cost of patenting may be more cost-effective. Whichever reason is underlying, the relevance is that if companies perceive the Internet as a new and potentially lucrative way of conducting business, then it is in their interests to obtain patents under the US system. Companies like Priceline and Cybergold have used the legal system to their advantage and, based on the court's interpretation of what is patentable subject matter, these companies have created a potential niche in online business.

At present there is no consensus on issues relating to patents and the Internet.

Given that these patents appear only to have been granted recently, it is almost a situation of 'wait and see.' Essentially it is too early in the life cycle of Internet patents to assess the likelihood of them having a detrimental impact on business in general or the use of the Internet. However as is always the case with technological innovation the technology moves much faster than the law governing it. Therefore perhaps now during these initial stages legislators and interested parties should be concerned with ways to deal with Internet patents as the situations is likely to continue. The question remains are new laws required to deal with Internet patents or can existing legislation be applied in a broader context and more liberal fashion? Europe must look at its existing legislation in light of the US situation and be prepared to make decisions which facilitate the growth of e-commerce whilst protecting the interests of the inventor.


1 . Please refer to Robin Widdison's article Software Patents Pending
<> for fuller discussion of this issue.


Baker v Seldon, 101 U.S 99 (1879) 24.

Lowell v. Lewis (1817) 15 F. Cas. 1018 This case enunciates the principle that utility exists in a patent so long as if no 'frivolous or injurious to the well-being, good policy or sound morals of society.

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Gottschalk v. Benson (1972) 409 U.S. 63 Supreme Court decision held in this case that a machine programmed to convert binary-coded decimal numbers to binary was not statutory subject matter. This was based on the interpretation that the US Patent Act did not cover mathematical algorithms.

Parker v. Flook (1978) 437 U.S. 584 Court held that a computerised method for updating alarm set points of a chemical process (i.e. a process using a mathematical algorithm) was statutory subject matter. This was based on the view that there was nothing innovative except for the algorithm, which was unpatentable.

Diamond v. Diehr (1981) 450 U.S. 175 Supreme Court Decision, holding that a computerised method was statutory subject matter where the method was tied directly into a process for curing synthetic rubber. In this case the court emphasised the transformation process, here from raw to treated, still maintaining the position in the Parker case.

In Re Alappat (1994) 33 F.3d 1526 A Federal Court Circuit decision which held that data mathematically transformed by a machine to produce a smooth waveform on a display constituted a patentable application of an abstract idea as it produced a 'useful, concrete and tangible result' i.e. the smooth waveform.

State Street Bank & Trust Co. v. Signature Financial Group (1998) 149 F 3d 1368. The first appeal since In Re Alappat where litigation arose over the question of whether a business method constituted statutory subject matter under 35 USC §101 when the claims were drafted as a computer 'means' for performing business functions.

V. E. Holding Corp. v. Johnson Gas Appliance (1990) 917 F.2d 1574. Ruling of the court of appeals maintained that a company could be sued wherever it does business.

Beverly Hills Fan v. Royal Sovereign Corp. (1994) 21 F.3d 1558. Following the previous decision there was a further liberalisation when the court in this case stated that a manufacturer could be sued wherever their product reached the market.


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