A company that develops a new way of conducting e-commerce may be able to prevent others fromusing it for almost two decades. Since 1998, an increasing number of patents have been issued to software and Internet companies thathave devised novel ways of doing business -- for example, new online ordering processes or a uniqueInternet advertising scheme. These patents, which usually combine software with business methodology,are commonly referred to as Internet patents or business method patents. These patents are importantbecause any company that develops or acquires such a patent can stop others from using the patentedbusiness method for approximately 17 years. And, of course, the owner of the patent can exploit it bylicensing the method -- that is, charging a fee for others to use it.

Amazon.com devised a method for expediting online orders known as the "1-Click" system. The method allows a repeat customer to bypass address and credit card data-entry forms, because Amazon can access that information directly from the customer's computer. Amazon, which was granted a patent on this business method in September 1999 (U.S. Pat No. 5,960,411), promptly filed a widely reported lawsuit alleging that BarnesandNoble.com copied the 1-Click process, renaming it "Express Lane." In December 1999, a court ordered BarnesandNoble.com to stop using the patented process until the lawsuit is resolved.

New Protection for Business Methods: The State Street Case

Business method patents are part of a larger family of patents known as utility patents that protectinventions, chemical formulas, and other discoveries. A business method is classified as process becauseit is not a physical object like a mechanical invention or chemical composition. Traditionally, the U.S.Patent and Trademark Office (PTO) rarely granted business method patents, claiming that a process couldnot be patented if it was simply an abstract idea, something the PTO believed described most businessmethods. Similarly, software patents were usually held to be unpatentable by the PTO and the courts,based on the view that they were algorithms that could not be protected.

These rules changed in July 1998, when a federal court upheld a patent for a method of calculating the netasset value of mutual funds. State Street Bank & Trust Co. v. Signal Financial Group Inc. 149 F.3d1368 (Fed. Cir. 1998) cert denied 119 S. Ct. 851 (1999). The courtruled that patent laws were intended to protect any method, whether or not it required the aid of acomputer, so long as it produced a "useful, concrete, and tangible result." Thus with one stroke, the courtlegitimized both software patents and methods of doing business, opening the way for Internet-relatedpatents. In the six months following the ruling, patent filings for software/Internet business methodsincreased by 40%, and the PTO created a new classification for applications: "Data processing: financial,business practice, management, or cost/price determination."

Since the State Street case, patents have been issued for an online shopping rewards program, referred toas the "ClickReward" (U.S. Pat. No. 5,774,870); a system that provides financial incentives for citizens toview political messages on the Internet (U.S. Pat. No. 5,855,008); an online auction system by whichconsumers name the price they are willing to pay and the first willing seller gets the sale (also known as"name your price" or as a "reverse auction," U.S. Pat. No. 5,794,207); and a process that supposedlyblocks the auction practices described in the previous patent (U.S. Pat. No. 5,845,265).