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Patent here, patent there, patent, patent everywhere

One of the hottest topics in the Internet community is the discussion around the patent-ability of Internet business models.

Hey, what's that sound,
Everybody look what's going down.

--"For What It's Worth," Stephen Stills

One of the hottest topics in the Internet community is the discussion around the patent-ability of Internet business models. On the one hand, you have the early market leaders who were savvy enough to file for patents and believe that the government should protect their business interests. On the other hand, there are many people who believe that business models are not sufficiently unique as to be awarded a patent. This issue is further complicated by the current state of the U.S. Patent and Trademark Office and the limited precedent that exists with regard to the protection of bit-based businesses.

Patents are awarded for processes, machines, manufacturers, or compositions of matter. As they are not physical things, software and Internet business have typically been considered a "process." While processes (such as chemical processes) are clearly patentable, it is generally observed that "ideas" are not (Gottschalk v. Benson, 1972; Parker v. Flook, 1978). In addition to these classification requirements, an invention also must be "useful," "novel," and "unobvious" in order to be patented. It is the fine line between "processes" and "ideas," and the subjective nature of using the terms "novel" and "unobvious" when applied to high-tech businesses, that are the core of the confusion.

Interestingly, it is the software industry's search for some type of intellectual property protection that laid the groundwork for patents on Internet business models. Until recently it was assumed that copyrights offered the greatest protection. However, in a landmark case, Signature Financial was awarded a patent for a computer "process" that helped implement a particular financial services offering (State Street Bank v. Signature Financial, 1996). Many Internet companies point to the Signature case as precedent for the right to patent Internet businesses.

Most arguments over patents and Internet businesses digress into a semantic argument around the terms "process" and "novel" and fail to address the heart of the issue at hand. Perhaps it would make more sense to focus on the spirit or intent of patent laws and whether or not that intent is served by the current interpretation. Patents have historically been granted for two intents: to protect the intellectual rights of the inventor and to provide an incentive that spurs innovation. Both of these efforts are assumed to protect the welfare of the general population or, in other words, the common good. However, a world where patents are granted for broadly defined Internet business models will not protect the common good but increase unnecessary litigation and offer rents to the few at the detriment of the many.

The first issue to consider is the enforceability of such patents. If we are mired in confusion with just a handful of Internet patents granted, imagine where we will be if every business in existence is pressured to file patents in order to protect its ability to do business. Patents are required to be "novel"" and "unobvious," yet many of the currently awarded patents are merely a common practice or metaphor with phrase "on the Internet" appended as some suggestion of innovation. With 58 million Americans on the Web monthly, the Internet is pervasive and is therefore prima face, or un-novel. Does GM have a patent for selling cars on the Internet? Should it need one? Does Dell have a patent for selling custom computers on the Internet? Should they? If things progress as they have to date, the patent office will need to grow tenfold in size, as every business in existence will need to file patents just to prevent paying "Internet" taxes to some opportunist entrepreneur that set out to arbitrate the vagaries of our patent system.

Patents in general are supposed to be "unobvious" to "a person having ordinary skill in the art to which said subject matter pertains." When we are discussing the Internet, it is unclear that the patent office has a point of view by which to ascertain "obviousness." For instance, Priceline.com's U.S. #5,794,207 was issued for "the world's first buyer driven e-commerce system." Based on a press release announcing the patent, Priceline.com declared that "using Priceline.com's patented system, consumers can go to the Internet to name their price for goods and services, and sellers electronically decide whether to accept the customer's price."

Ironically, an October 1997 copy of this very column, which was published nationally in the pages of Fortune magazine, outlined a remarkably similar service--seven months before Priceline.com launched and with no knowledge whatsoever of Priceline.com's business.

From "Above the Crowd," October 20, 1997:
"?this buyer-focused market can emerge simply by allowing consumers to advertise to buyers. Before the advent of the Web, advertising was affordable only to large corporations. Going forward, consumers will be able to broadcast that they are looking to buy product A with features B and C with a price between D and E. Companies will then be able to sort through that data and determine whether the are interested in serving that customer?"

The point here is not to "wave our own flag"--rather, it is to prove a point. How can an idea that so easily pops into the head of an Internet pundit be considered "unobvious" to the general Internet practitioner? Is an idea so easily formed remotely comparable to other patentable items that require ridiculous amounts of time and money to develop, such as the discovery of a new AIDS drug?

Also to be considered is the efficient flow of the general economy. Are we better off as a nation with all companies having "online shopping cart technologies," or would we be better off with every business paying OpenMarket a royalty for this? If a business chooses to let its customers name a price online (as the auto industry has done in the terrestrial world for decades), should Priceline.com receive an "idea tax?" We must recognize these ideas as common components of an Internet system. A failure to do so would be overly burdensome on our richly developing online economy.

Internet business model patents also are much more likely to increase litigiousness than promote efficient commerce. It would surely be ironic to see all the efficiency gains of e-commerce wasted on unnecessary litigation. Priceline.com's patents already have resulted in two inbound challenges, and we can only guess at how many outbound challenges there may be. Do we really want to create a world where up-and-coming companies must spend millions of dollars and a substantial amount of time on litigation? Is this the fate of the supposedly efficient "Internet Economy?" It appears that patents on broad Internet business models could do more to thwart innovation than to encourage it by burdening start-ups with an unnecessary legal responsibility.

The last point to address is the necessity of patents as an incentive to spur innovation. In many industries, such as biotech, the cost and time required to develop a new product are enormously high. In these markets, it is sensible for the government to grant an award to innovators such that investors have the proper incentives to fund new health discoveries. According to the MoneyTree Survey, more than 500 Internet deals received more than $3.5 billion dollars in funding in 1998. This represents a 218 percent increase over 1997, and Internet investments are the fastest-growing segment of venture capital. Since 1994 more than 212 Internet companies have filed to go public, and 59 have gone public in 1999, up from 30 in all of 1998. To argue that the Internet sector suffers from a lack of funding incentive would be, pardon the pun, patently absurd.

There is a Latin phrase, typically associated with the Hippocratic Oath, that reads "Primum non nocere," or "first do no harm." The U.S. Patent Office would do well by itself to use this tenet as a guide as it moves forward. The current path of policy will serve to encourage all businesses to rush the patent office, reward quick and frequent legal filing over true innovation, create roadblocks to the rollout of the Internet, and increase the litigation requirements for small business. What's more, there has never been anyone less in need of a financial incentive that today's Internet entrepreneur. Primum non nocere. It ain't broken.

J. William Gurley 1999. All rights reserved. Above the Crowd is a monthly publication focusing on the evolution and economics of high-technology business and strategy. This column also can be found on CNET online and in Fortune magazine. To be placed on the email distribution list, please send an email to subscribe-above_the_crowd@atc.revnet.com. To be removed from the email distribution list, please send an email to unsubscribe-above_the_crowd@atc.revnet.com. The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete, and its accuracy cannot be guaranteed. Any opinions expressed herein are subject to change without notice. The author is a general partner of Benchmark Capital, a Venture Capital firm in Menlo Park, California. Benchmark Capital and its affiliated companies and/or individuals may, from time to time, have positions in the securities discussed herein. ABOVE THE CROWD is a service mark of J. William Gurley.