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ALEXANDRA GICK* / BEAT WEIBEL**

Don't risk your business, protect your innovation

Workshop on the topic of Software and Business Method Patents at the SwissRe Centre in Rüschlikon

Over the last ten years Software and Business Method Patents have become two of the fastest growing categories of patents filed with the United States Patent Office. At the height of the Internet boom such patents had become almost a standard «requirement» in a portfolio of intellectual property rights, at least in the view of investors. Is this someday also to become true for the financial services of banks and insurances? Can innovations in this area also be protected in Europe? Can this be achieved with the current legal structure or does Europe have to change its legal requirements?

SwissRe and UBS tried to find answers to such and other questions by organising a workshop on the topic of Software and Business Method Patents. The workshop was held over two days (June 23/24, 2003) at the famous SwissRe Center in Rüschlikon near Zurich. Here, top managers and patent law experts were brought together, and the US legal view met with the European legal tradition.

In his welcoming speech Peter Forstmoser, Chairman of the Board of Directors of SwissRe, emphasised the importance of patent protection not only for industrial innovations but also for innovations in the field of banking and insurance. He hoped that this first meeting among patent experts and experts of financial industries would help to better protect financial methods in the future. In his introduction Frank Cuypers, Head of Intellectual Property of SwissRe and organizer of the workshop argued that two institutions enabled the rise of the industrial society: insurance and the stock market by sharing risk, and patents by sharing knowledge. He wondered why these two fundamental foundations of the industrial society never were put in relation with each other. In this respect the workshop set a precedent by bringing together experts from the finance and the patent worlds for the first time, to investigate the prospects of patenting in insurance and banking. In Cuypers' opinion these prospects are bright, because as in any other industry patents generate also in the realms of finance the incentives to innovate, to invest and to disclose. Is this the chance for one of the most conservative industries to rejuvenate?

The first lecture was given by J.D. Harriman, Patent Attorney, Coudert Brothers, who gave a brief and colourful introduction on patent basics in the US. He then went on to state that the importance of an intellectual property portfolio is still increasing. With the collapse of the stock-market bubble and the new economy the value of patents will be tested when companies decide to enforce their patent rights as a method for generating revenue or controlling competition for the rare customer dollars. He further addressed the current state of the law as it applies to software and business method patents. Harriman questioned whether Business Method Patents are actually constituting something new. New is the implementation of the methods on a computer. The methods themselves are very often already known. Finally, he contrasted patent strategy and trade secret strategy and presented «dos and don'ts» in pursuing patents for Software and Business Methods. Thereby he particularly focussed on the insurance and financial industries and on how existing practices might change as a result of the possibility of patenting Software and Business Methods and to enforce such patents.

The second lecturer, Josh Lerner, Professor, Harvard Business School, took an initial look at the competitive implications of the changing environment for protecting financial methods by patents (financial patents). After combining large-sample analyses with interviews from practitioners, he found that patent protection for Software and Business Method is rather like a two-edged sword. Why? He presented a number of interesting findings: First, the increased protection offered to financial product and process is consistent with the overall increase in patent protection in the United States. In parallel with this increase, worries about the quality of issued Business Method patents have been raised. Second, the strengthening of patent protection has led to a variety of strategic instructions, many of them worrisome. According to J. Lerner there is little reason to believe that the financial services will remain unaffected. Third, the number of issued financial patents has grown rapidly, whereby the bulk of the awards are going to US financial institutions. The distribution is very uneven and will probably remain so, with a small number of institutions accounting for a disproportionate share of the awards. These institutions, he said, tend to be institutions with strong ties to academia. Fourth, while financial institutions have historically differed in the extent to which they pursued patent protection, in recent years many major institutions have started to pay attention to these issues. Finally, Professor Lerner argued, albeit speculatively, that the creation of large patent portfolios would only reinforce the market power of established financial institutions with broad distribution networks. Prof. Lerner concluded his presentation by comparing the discussion about Business Method Patents with the past two debates about patentability of biotechnology inventions and that of semi-conductor inventions. In the field of biotechnology, lively litigation resulted; in the case of semi-conductor technology, the parties very often concluded with cross-license agreements. Lerner left the question open as to which scenario would probably apply to the patenting of Business Methods but suspected that the exploitation of Business Method Patents will probably turn out to be smaller than feared.

The next lecturer, Honourable Gerald J. Mossinghoff, Senior Counsel, Oblon, Spivak, McClelland, Maier&Neustadt, talked about the background of patenting Business Methods. He presented two important examples of US Business Method patents, such as «AT&T v. Excel» and «State Street Bank». In the case of State Street Bank the following test for patentability was applied: The claims must achieve a useful, concrete and tangible result. In the case of AT&T v. Excel, this test was confirmed to be applicable for method claims too. Mr Mossinghoff then tried to answer the question what a Business Method Patent actually is. Not surprisingly, nobody knows for sure, but it is typical that the US Classification class 705, that is used for Business Method Patents, is called «Computer-implemented Business Methods»! Following this, Mr Mossinghoff tried to explain the necessity to obtain Business Method patents. He sees four main reasons: (1) diversification to protect all segments of activity of a company, (2) creation of tangible assets for a company, (3) use as a marketing tool since patents can open closed markets and (4) opportunity to add more claims to a patent for more flexibility in litigation.

Finally Mossinghoff expressed reservations about the legal certainty of Business Method patents in view of the overload of the examiners and the difficulty to search prior art. As a remedy he recommended to introduce a post grant review process with a one-year term from the day of the patent issuance. This would allow to tie the competitors into the granting procedure. Mr Mossinghoff concluded his presentation with the practical advice to include Business Method claims in all kind of applications and to add more types of claims in one patent in order to increase its value.

Henry Garrana, Vice-president, Legal of Dell, was next and discussed Business Method patents in practice. In his introduction, he stated that Business Method patents allow new opportunities and challenges by expanding patent protection to areas of commercial activity that had previously been assumed to be outside the scope of patent protection. He then presented Dell's patent strategy. Its main goal is to leverage commercial relationships (1) by taking advantage of existing industry patent cross licences or indemnities and (2) by trading licenses for business relationships and by striving for higher levels of product integration and broad use indemnities. In general, licensing and enforcing of patent rights are secondary for Dell. For Dell it is of primary importance to market its products. Licensing income is a welcome side effect for a successful company. In Garrana's opinion, valuable patents are valuable because the enterprise or the underlying product is successful and not because of the patent itself. Thus, Dell uses its patent portfolio primarily for defence purposes.

Henry Fradkin, Principal IP-Consultant of Value Extraction LLC was the next lecturer to speak. Mr Fradkin focussed on the key elements needed to develop a systematic way to extract value from patented or know-how protected Business Methods. To illustrate the problems with licensing out business methods, Mr Fradkin used two public domain case studies. In the first case, he discussed how Ford Motor Company successfully licensed out the rights to use its Best Practices Replication Process. In the second case, he discussed the great success of Priceline.com which has been able to leverage its growing patent portfolio related to its novel purchasing processes.

At the end of the first morning of the workshop Michael Ritscher, Dr. iur. Swiss lawyer, first secretary of Ingres, Beat Weibel, patent attorney, IP-Counsel of ABB and Dan Mac Curdy, Ceo Think Fire, debated from different perspectives about whether Business Method patents are a benefit or a liability. Under certain circumstances, looking at the evolution and the success of the patent system, Business Method patents have the potential to become a benefit, rather than a burden to society, argued M. Ritscher. These circumstances are:

(1) the established criteria for patentability must be applied correctly;

(2) the particularities of Computer Programs and Business Methods are to be taken into consideration, e.g. by improving the examination and by limiting the protection and

(3) the costs of patent litigation have to be reduced.

Software patents are of course a benefit to the manufacturing industry, B. Weibel asserted, because they protect a new kind of technology and there is no reason why this technology should be regarded differently from conventional ones. However, with Business Method patents, he said, it depends. If the Business Method is implemented in a Software, they are a benefit, because in fact the Software is protected and not the Business Method. On the other hand, pure and real Business Methods are by definition a commercial method for earning a profit. Blocking execution of a pure Business Method by enforcement of a corresponding patent would mean that that competition would be eliminated. Competition is however needed for healthy companies. Therefore patenting pure Business Methods could be a liability for the manufacturing industry. Weibel left the question open whether protection of pure Business Methods would not be better realised by unfair competition law.

Dan McCurdy argued that patents encourage market players to innovate. In that sense they are a benefit for innovators and to society more broadly, but they are a liability to followers since they must pay royalties for use of the patented inventions. Whereas in the 19th and 20th centuries, the bulk of innovation surrounded manufacturing and technological advances, in the 21st century, wealth will be more and more generated by novel means to create value through knowledge-based services. Dan McCurdy questioned whether it is possible that the financial industry, in spite of investing large amounts in its human capital, generates no truly novel, useful and non-obvious invention. Whether it is possible that the level of investment required in innovation is lower in the financial industry than in «high tech». And whether, it is worth investing in innovation, it is not as well worth to enjoy the full economic rewards of that investment.

Stefan Steinbrenner, Chairman of the Technical board of Appeal at the EPO, presented an up-date of the development at the EPO. In his introduction he pointed out that jurisprudence always has to apply the existing law and can only reply to questions that are relevant to the actual case. So, the wish to develop law through jurisprudence needs an increasing number of cases in the same area of law. For some time this was actually not the case for Software and Business Method patents. Only recently the number of cases in this area has increased substantially. Secondly, he presented the problematic legal regulations and problems of construction.

The starting point for assessing the patentability of inventions is Article 52 of the European Patent Convention (EPC). Article 52 (1) EPC sets out the patentability requirements, but it does not contain a legal definition of the term «invention». It is, however, part of the European tradition that patent protection should be reserved for creations in the technical area. The subject matter of a patentable invention must therefore have a «technical character». Article 52 (2) contains a list of subjects or activities that are particularly excluded from patent protection on the grounds that they are not considered as having a technical character and do not count as «inventions». The list is not exhaustive but enumerates the major exclusions, including «methods for doing business» and «programs for computers».

These exceptions have to be interpreted strictly because the exclusion applies to these two categories only as such. The granting practice of the EPO and the case law of its boards of appeal are based on this interpretation of the term «invention». According to practice, computer implemented inventions can normally be patented if they are novel and involve an inventive technical contribution to the prior art. In particular «genuine» program related inventions should be patentable. Business Methods as such are, however, excluded from patentability because they are considered as mathematical methods or mental acts. On the other hand, the claimed subject matter has to be examined as whole. If, for example, the claimed Business Method consists of a mixture of technical and non technical features and has as a whole a technical character, the Business Method can be patentable if the totality of the features contributing to the technical character involve an inventive step (see 931/95, OJ EPO 2001, 441; T 641/00, to be published OJ EPO 7/2003).

Harald Hagedorn, Patent Attorney SAP AG, talked about the proposed EU Directive on the patentability of Computer Implemented Inventions. The Directive would harmonise the conditions of the national laws under which computer implemented inventions are patentable. The proposed text widely corresponds to the current EPO practice (see above). The presentation outlined the current situation, the industry position and the need for a Directive. Mr Hagedorn pointed out the common arguments for and against the Directive and placed a special focus on software related patents for financial related services. He further pointed out that just like a complex piece of physical machinery such as a car or a refrigerator, a software application might depend on the proper functioning of many different components. Only some of them can normally be patented. This is an important difference to copyright protection of Software. While copyright protects the entire code of a Software against unauthorised copying, distribution and use, a patent would cover only the specifically-patented components.

Fritz Teufel, Manager Intellectual Property Department of IBM Germany, presented Practical aspects of Software Patenting in Europe. He defined the computer as a technical device and posed the provocative question why inventions concerning a technical device like a computer should not be patentable. In Europe a Software Patent can only be granted for a technical invention embodied as a computer program (= computer implemented invention). Mr Teufel recalled that a program without a technical character would not be considered patentable. He presented the current case law of the German Supreme Court (GRUR 2002, 143, «Faulty character strings») and the board of Appeal of the EPO. Mr Teufel also touched on the new EPO examination guidelines and explained the «two step examination». This examination first considers the technical character of a claim and then in a second step assesses novelty and inventive step and decides whether the technical contribution to the prior art (= invention) is non-obvious. He criticized the basic message of the proposed EU Directive on the patentability of Computer Implemented Inventions because the major part of modern technology would be excluded from patent protection. He stressed that the criterion of the Directive for patentability, i.e. «the technical contribution», is already an adequate criterion to distinguish patentable from non-patentable matter. He ended his talk stating that the proposed EU Directive will hopefully confirm the current examination practice of the EPO. However he requested that patent offices initiate a reasonable threshold for inventive steps in order to avoid trivial patents. Finally, he invited the Financial Industry to show why Business Method patents are a benefit to society.

John Love, Group Director of the USPTO started his presentation with a discussion on patent basics: What is a patent? What can and cannot be patented in the USA? What is the potential value of a patent? His presentation covered the examination process and the search tools that are available to the public and to the patent examiners. He defined the business method patent as a computer-implemented Business Method according to class 705 of the US classification system. In order to address the searching problems of Business Method applications, all applications issued in class 705 go though a second level of review. To this end, he invited the industry to share and identify the relevant prior art with the USPTO. He left questions open as to whether pure Business Methods are simply abstract ideas and thus not patentable even under US patent law.

Tim Wilson, Senior Corporate Counsel of SAS Institute Inc. discussed the patent examination system and its shortcomings. He introduced a concept of automated prior art and proposed a possible solution to at least part of the problem faced by patent offices.

Daniel W. Huber, Head Patent Group of the UBS and organizer of the workshop addressed the patent management from a risk management point of view. He presented UBS' well-elaborated patent management system. Peter Kurer, Group General Counsel of UBS, ended the set of presentations in this interesting workshop. For UBS, branding is the most important issue of IP, whereas patents play a rather defensive role.

The workshop ended with a discussion panel among representatives of the financial industry. The goal of the panel was to define the next steps based on the different views and presentations given during these two days.