A Business Model of One's Own

A recent decision by the U.S. Patent and Trademark Office has allowed an Internet-based company to patent its own business model. Will this be a barrier to new businesses on the Web?

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Can you actually patent a business model? A recent decision from the patent and trademark office says you can. And that isn't good news for entrepreneurs

We have met the enemy and he is us.com. That was the conclusion of a number of CEOs last August, when two Web-based companies unveiled a couple of big hairy patents: not on their products, not on their technologies, but on their business models. Claiming that they had created fundamentally new ways of doing business, priceline.com and CyberGold Inc. attempted to cordon off their market niches from anyone not willing to pay licensing fees. The CEOs of both companies insisted that their actions were--and that their terms would be--reasonable. Still, if the patents represent a trend rather than an aberration, some entrepreneurs, particularly those panting after the Internet, may ultimately have to buy or fight their way into commercial spaces.

The patent announcements, unprecedented in the on-line realm, and with only a couple of antecedents among terra-firma companies, have at least had the welcome effect of putting to rest one of the most irritating clichÉs about the Internet: that it is a place where upstart Davids routinely fell bloated, convention-bound Goliaths. Priceline.com, a sort of "reverse auction" for airline tickets that launched in April, and three-year-old CyberGold Inc., which pays consumers to eyeball advertising, bear no resemblance to the Barnes & Nobles and Toys 'R' Us's that trailed start-ups to the Web and now stand accused of spoiling the party with their powerful brands and bounteous marketing and technology budgets. No, priceline.com and CyberGold are small entrepreneurial companies, the kind lauded by electronic-commerce boosters for blazing trails, not digging moats. When their patents were announced, many Internet purists began rummaging through their closets for "The End Is Nigh" signs. "If more such patents are awarded and upheld, business on the Internet could suffer," warned The Economist.

Within hours of the announcements, Web-company lawyers were all over the situation like transistors on a microchip. But it soon became clear that the doomsayers had wasted a lot of really good dudgeon on what is, for now anyway, a minor annoyance to a handful of businesses. Even as they awaited their attorneys' judgment, company owners were guardedly dismissive of the patent strategy. "First, we're skeptical that these broad patents are really valid," says Glen Meakem, whose three-year-old, $8-million FreeMarkets OnLine is an electronic marketplace for industrial supplies. "Second, we're skeptical that these kinds of claims can survive in court. And third, we're skeptical that there's value to be derived from these kinds of patents."

That skepticism notwithstanding, Meakem says that FreeMarkets has been pursuing its own parcel of patents for some time. The strategy may be chiefly defensive--Meakem concedes it is--but it suggests that even if the war is still won on execution, some company owners also anticipate fighting a battle or two in court. "Our focus has been on creating real achievement in the marketplace, not legal-paper-trail achievement," Meakem says. "But we'll play the game however it's structured."

What surprised people most about the priceline.com patent (announced nearly two weeks before CyberGold's) was that it was, in fact, possible to assert ownership of a business model. The terms just seemed so...broad. Of course the U.S. Patent Office has long suffered from a sort of "Ado Annie" reputation among technology companies, especially after the dark day in 1993 when it awarded Compton's NewMedia of Carlsbad, Calif., a patent that essentially covered a huge chunk of multimedia. (The patent was later revoked.) "If no one has any objections," read a typical entry posted to a newsgroup at the time, "I would like to patent the book (a vertical stack of equal-sized rectangular laminae of compressed wood pulp or other flexible media, bound along one edge so as to open exposing the laminae a pair at a time)."

Well, it turns out that you can patent a business model, so long as it meets the "new and useful" criteria spelled out by the Patent Office and the courts. But in the history of American business there have been few attempts to do so, and most of those--including efforts by Horn and Hardart to patent the automat business model and by a beverage company to patent something similar to the focus group--died in the courts (where, some observers predict, the current crop may also meet their Waterloo).

In July a federal appellate court upheld a patent issued to mutual-fund company Signature Financial Group for a computer-based investment model--largely because it was computer-based. Using that logic, many financial instruments--as well as other business mechanisms both on and off the Internet--would become fair game for patents. "The question raised in this case is how generic and abstract can a concept be, and still be patented?" says Richard Stern of the Washington, D.C., law firm Ablondi, Foster, Sobin, & Davidow, and a former chief of intellectual property in the Department of Justice. "The claims in these cases are so general that they amount to the use of a computer to do 'X'--and there isn't any other way to do 'X."

Although Signature is a flesh-and-blood company, the decision in its favor would seem at first blush to apply to many first-of-their-kind-on-the-Web ventures. But inventions that win patents must also be unique and nonobvious, and even when the cockles of entrepreneurial hearts were first being warmed by the Internet, most on-line commerce wasn't radically different from what had come before it. Buy a book. Bid on cattle. Check your account balance.

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Leigh Buchanan

Leigh Buchanan is an editor at large for Inc. Magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture, and she contributes Inc.'s capsule book reviews, "A Skimmer's Guide to the Latest Business Books."

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