Patents, Like Bridges, are Prime Draws for Trolls

But while their bridge-dwelling cousins have a taste for billy goats, patent trolls have a more costly appetite for technology companies and their work. Patent trolls forage for intellectual property on the cheap, then demand booty in the form of royalty payments or legal settlements from companies that actually make things that other people buy. This tactic has become so common and so aggravatingly effective that some technology companies began imitating it with their own patent portfolios.

The prevalence of companies aggressively acquiring and litigating computer-related patents have led to calls for legislative reform. In the meantime, the state of such patents range from the perfectly legitimate to the semi-absurd. (In one high-profile example, patent owner Jim Logan sued various podcasters, claiming that his 1996 patent on reading magazine articles aloud and distributing them via cassette tape means that he has a claim on the idea of any syndicated audio content sent directly to the listener.)

Software patents are undoubtedly important, because there are new and better software innovations still to be invented. But patents on “business methods” are another matter. Many business method patents amount to little more than the hypothetical or trivially challenging application of a well-established principle to some aspect of everyday commerce. Patents are supposed to protect genuine inventions, not mere ideas. (Time travel would be neat. Maybe I’ll patent the idea of using a computer to run a time-travel machine.)

For a more immediate example, consider Amazon.com’s “1-Click” ordering system. 1-Click is not only a registered trademark; Amazon (AMZN) patented the process as well. At least, it sought to do so, with varying degrees of success. Europe denied the application for a patent outright. Canada’s patent office eventually granted the patent, after being ordered by the courts to re-examine the patent’s initial rejection. The U.S. granted the patent; when that patent was challenged, Amazon narrowed it slightly, and the patent office re-examined and ultimately approved the amended version.

Why the differences between patent offices? It has to do with the nature of what Amazon sought to patent. If you think of Amazon as a large department store, 1-Click is the equivalent of allowing the customer to say, “Charge it to my account and send it to my house.” Wealthy matrons have said as much in physical stores for the past 100 years. All 1-Click did was compress and consolidate many existing steps: entering your address, entering your credit card information, reviewing everything and clicking confirm. Amazon did not invent cookies (the way such information is stored), and the patent had nothing to do with the way the payment was actually processed. It was just about eliminating redundant steps.

The idea of streamlining multi-step processes has been around forever. There was a particular movement toward efficiency in business a century ago, led by Frederick Winslow Taylor, whose disciples included Henry Ford. Taylor’s ideas are credited with leading to the principles of mass production that drove early 20th century industrialization. Today, efficiency consultants are common in business. They don’t, by and large, make whole new processes. Instead, they look at existing business practices and suggest ways those practices can be conducted quicker or more accurately.

The Amazon 1-Click method simply said: “What if we saved customers’ information when they entered it the first time, so customers didn’t have to enter the same information over again?” If that idea is a patentable business process, we have a problem.

The government has decided it is patentable, at least in America. The recently argued Supreme Court case Alice Corp. v. CLS Bank International indicates that we do, indeed, have a problem.

At issue in the case is a claimed invention that serves as a sort of computerized escrow system. Alice Corp. managed to secure a patent on the system because, though escrow agents are not generally patentable, the system’s computerized component was deemed integral to the process. CLS Bank arguably infringed on Alice Bank’s patent when it, too, set up a computerized system to track the various transactions banks make with one another throughout the day in order to keep any party from promising more than it could deliver.

A trial court invalidated Alice’s patents, on the grounds that they represented abstract concepts, which are not eligible to patent. The Federal Circuit Court of Appeals upheld the trial judge’s ruling. However, that appellate decision was split seven ways, and yielded no clear majority opinion.

It is not clear if the Supreme Court will go further than it has in previous intellectual property cases. While many observers expected Alice to be a decision affecting software patents specifically, the arguments seemed to suggest the Court will instead focus on when, if ever, business method patents are appropriate. In the absence of Congress writing clear rules, the courts are left to decide where the boundaries of patent law are located.

Justice Stephen Breyer expressed concern that allowing patents that merely protect the idea of using a computer to do something useful – like time travel – will shift the system’s focus away from encouraging genuinely useful innovation.

Experience shows that patents are currently being issued broadly to cover ideas instead of inventions. Amazon didn’t invent the computer, the mouse, the click or the credit card. It patented the idea of combining these existing tools more efficiently – an idea that is exactly what business schools have been teaching for decades. While the Supreme Court may not be prepared to effectively outlaw patents on business methods, I hope it will at least limit such patents to inventors who develop both a genuinely novel idea and a practical way to apply it.

And I won’t mourn at all if the Supreme Court concludes that business methods are ideas, not inventions, and are thus unpatentable. It might leave some trolls hungry, but I trust they can find more useful ways to earn a living.

About Larry M. Elkin 553 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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