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Patently Obvious

Patently Obvious

Not everyone is convinced that patenting is the best way to protect the intellectual property associated with online business.

The arrival of Australia's innovation patent this month should make it easier for business to protect intellectual property associated with e-commerce processes and, in some cases, secure an eight-year monopoly over best practice.

Reader ROI

In this story, learn about

The benefits of patent holding and trade secrets.

The dangers of both of those.

Precautions that will serve you well in court.

When Amazon patented its 1-Click process, which allows preregistered customers to quickly complete online purchases, any-one involved in e-commerce should have sat up and taken notice. If they did not, then they certainly should have when a US District court banned Amazon's arch rival, Barnes & Noble, from using a one-click technique on its Web site in December 1999 after finding that it had infringed Amazon's patent.

By patent protecting its process, Amazon had apparently dealt itself a monopoly over best practice when it came to selling books online. Since February, however, that injunction has been lifted pending an appeal slated for September this year when Amazon hopes to again have Barnes & Noble banned from using a one-click technique. Not all patents are fought over so vigorously through the courts; but the Amazon and Barnes & Noble stoush signals what might be at stake if a company is able to get dibs on an e-commerce process.

According to the IP Australia Web site, "a patent is a right granted for any device, sub-stance, method or process which is new, inventive and useful. A patent is legally enforceable and gives the owner the exclusive right to commercially exploit the invention for the life of the patent." "A patent gives you exclusive rights to use an invention for a period of time," Dr Vivenne Thom, commissioner of patents, says. That invention does not need to be a "thing" and can, indeed, be a business process such as an e-commerce technique.

There have traditionally been two patents available in this country, both through IP Australia, the government body that administers the system. First is the standard patent which lasts for 20 years; second is the petty patent which lasts for six years. The standard patent requires a high level of innovation; the petty patent's innovation threshold is lower. The petty patent is now being superseded by the innovation patent, which comes into effect on May 24 and is based on a lower threshold of invention than the standard patent. It will last for eight years and is the first patent in Australia that can be applied for online.

It is important to note that holding a patent does not automatically grant you the right to use it. For example, if the patent referred to a weapon outlawed under other laws, although the patent would remain valid, the holder might not legally be able to exploit it. And, while a patent might be granted for an e-commerce process to allow online gambling, the existence of the patent would not overcome the government's moratorium on Internet gaming. If the patented thing or process is commercially viable, however, there are occasions when it makes good sense to seek patent protection.

Dr Thom explains that the criteria of patentability for an e-commerce process are exactly the same as they would be for, say, a chemical invention. For a standard patent, the applicant would have to demonstrate that the e-commerce process was new and that it was inventive (that is, not obvious). For an innovation patent, it would be necessary to demonstrate the process was different and the difference was substantial. Making a few cosmetic changes to a previously developed process would not be sufficient to have an innovation patent awarded.

"That is the challenge in doing e-commerce patents." Dr Thom says. "When we assess it, we compare it to the [previous process]. The challenge with e-commerce patents is assessing what is new. We don't just look at the patent literature but also at what is on the Internet."

However, for a company to secure an innovation patent, the patent application will not, in fact, be examined until it is challenged. This is both a strength and a weakness of the new system. A company, for example, could register its innovation patent application online if it wishes and then be granted the innovation patent within a matter of weeks. If it is never challenged over that patent, or never seeks to stop someone else infringing its patent, the original patent application will never be examined.

According to some patent attorneys, this is a fundamental flaw in the system.

Although many applaud the government's attempts to make it easer, cheaper and faster to get patents in fast-moving sectors, they are concerned that the eight-year lifespan of the innovation patent is too short. They are also concerned that the patent's debut will downgrade the entire Australian patent system by granting them without examination until a dispute makes this necessary.

Mischief Making?

Greg Turner, principal of patent and trade market attorney Spruson & Ferguson, says that Australia's patent system has until now been highly regarded internationally. "All of a sudden you are putting in a patent which is not examined. It might not be valid. I can apply for a patent for something that is old hat," he argues.

Dr Thom counters this, saying that, although the innovation patent won't be routinely examined, "in 95 per cent of cases, the validity of the patent is not at issue. Only when someone wants to make use of the patent will there be an [immediate] examination." That examination can be requested either by the holder of the patent or an entity that wants to challenge the patent.

"If [the innovation patent] is clearly of no substance, then it could not cause mischief in the market," Dr Thom says, arguing that, if the process which holds the innovation patent were of no value, then no one would try to copy it anyway. If, on the other hand, an innovation patent were held and a business competitor wished to challenge it, then that competitor could apply to have the patent examined. (To discourage frivolous applications, the challenger pays a proportion of the examination costs).

Steve White, principal of White SW Computer Law, remains unconvinced. "The easier it is to get a patent, the more it will be misused by big business. I have seen abuse by large companies which have been pressuring the petty patents held by smaller companies. To get halfway to defending that petty patent would cost a company $120,000 just to get the advice and get started. To fight the case would cost $200,000 to $500,000.

"You can see why petty patents are less important to little companies than to big companies if you have to defend them through litigation," White says. "What is supposed to be easy for small companies is a good [way] for the big company to oppress the small company."

White believes that just as the petty patent has not helped small business, neither will the innovation patent. He is also disturbed about the idea that more small companies with fledgling online businesses will try to use the innovation patent to protect their e-commerce business. "Many big companies will just run some of the small companies into liquidation with e-commerce patents. There is the opportunity for much mischief-making," says White.

Patent Protected.

Not all large companies are as unscrupulous as White suggests. They do, however, recognise the value in holding patent protection. One company which has patented e-commerce processes is EDS. It has US and Australian patents (Australian patent number 720436) over an automated system for identifying alternative low-cost business travel arrangements.

This patented process obtains inventory information, specifying the rates and availability of a range of travel arrangements, from one or more computer reservation systems. The inventory information is stored in a database with one or more portfolios of information (relating to a travel agency and each business entity customer of the travel agency) that can be used to discount the listed rates of the travel arrangements. Responding to information from travel requests received from a customer, the system automatically retrieves the inventory and discount information from the database and determines a range of low-cost alternative travel arrangements that is available to the customer.

It is important to make the distinction that this patent does not grant EDS a monopoly over selling travel online; it does, however, deliver a 20-year monopoly over this way of selling travel online.

According to Nick Boymel, legal counsel for EDS Australia, patents offer a significant value to corporations.

"The right to exclude others from making, using, or selling the invention can be a valuable right. Obviously, it provides a mechanism for the patent owner to seek monetary damages against competitors who infringe the patent. In addition, the patent owner's right to exclude others includes a right to license the invention to competitors and generate a source of revenue from the sales of competitors' products.

"Apart from the direct revenue-generating aspects of patent ownership, the right to exclude others includes the right to refuse to grant a licence to a competitor, thus precluding the competitor's entrance into the market for the invention. In addition, patents can be valuable negotiating tools.

"For example, EDS may cross-license one or more of its patents with one or more of a competitor's patents, thus allowing EDS to practise the invention of a competitor with impunity. As another example, patents can be valuable in negotiating settlements in litigation. For instance, EDS may be involved in a lawsuit that has nothing to do with the patent; however, EDS can offer a licence under the patent as a bargaining chip to encourage the opposing party to settle," Boymel says.

Losers Weepers.

Although remaining sceptical about the innovation patent, Spruson & Ferguson's Turner believes that the patent process is still a "huge bargain" for companies that are inventive and come up with new products and processes. "The patent system is a bit of a bargain. If you spend millions developing something, how do you recoup the investment? Well, the patent system keeps your competitors off your back for 20 years - only then do you have to compete with everyone else," Turner says. He adds, however, that too few Australian companies exploit the patent system as fully as they ought.

"Within Australia, the awareness is low - I don't know why. As a society, the US tends to be more aware of the patent "ystem for the protection of research and development. Yet Australians spend time, effort and money developing things and processes and then don't worry about protecting it.

"Say you come up with a novel program for selling air tickets online. Now the breadth of the protection is proportional to how new it is, how much innovation there is. However, if you have something that is very new, then you will get good protection. If your development is just a squeak away from what someone else does, then you'll get a squeak of protection.

"To patent you need to have invented something; and I don't mean you've painted something blue instead of white or used a weld instead of a nut and bolt. The test of innovation under a standard patent is that what you have done is not obvious to a skilled person in that industry in Australia and has not been described or used before in a printed publication." The innovation patent still requires novelty, but has a lower threshold of inventiveness, Turner says.

Kieran Power is a patent attorney for Griffith Hack, and has a background in computer science. He believes that there are significant opportunities for Australian companies engaged in e-commerce to protect their business processes either through the standard or new innovation patent systems.

"Business methods, traditionally on their own, were not [able to be patented]: something had to result in a useful apparatus or an artificially created state of affairs.

Basically, the turning point came in a federal court decision in IBM vs the Commissioner of Patents in the 1990s. Until then, software had been viewed as artistic and source code had always been the domain of copyright [law]. In [that lawsuit] it was recognised that software was patentable.

"Any way of conducting business that was implemented in software was patentable," says Power. "I guess over the last few years the number of people seeking to patent processes has started to increase; but I think that a lot of people think they still can't patent a way of doing business."

The Amazon case has helped awareness, he says, particularly among those companies which are conducting business online. "You can't patent the idea of selling the airline tickets online, but [you can patent] the way you run the auction. You can't patent the concept; anyone is free to sell tickets online. But you can get a patent on how you sell them," Power explains.

More Than One Way to Protect a Process.

Not everyone is convinced that patenting is the best way to protect the intellectual property associated with online business. Philip Catania is a partner at Corrs Chambers Westgarth and national IT practice leader for the firm. He has just conducted a course called "Intellectual Property and the Internet" in the law school masters program run by Monash University. Catania believes that there are three ways to protect e-commerce practices.

One way is through seeking patent protection. The second way is that a company might seek copyright protection to the extent that the processes consist of works, such as computer software or layouts or formats or designs. This does not protect the idea as such but, says Catania, it protects the form of the idea and can help stop copying. The third protection is to enforce common law regarding confidential information to keep details of the procedures inhouse.

Although more and more e-commerce patents have been granted in recent years, he warns that "the problem with patent protection is that it publicises your process and often you don't want that publicity". In addition, he says that the "courts in Australia have not [particularly supported] patentees and have made their life difficult; but they are changing their ways".

And that's not the least of it, says Catania. He considers patent protection expensive and warns that, to be effective in the global online trading environment, patent applications would have to be made in a number of jurisdictions. "To have one in Australia only would be quite useless. You need one in Australia, the UK and the US, and, depending on the complexity, that is going to cost you $15,000 to $100,000."

Catania does, however, acknowledge that "the beauty is that [the patent] gives you a monopoly over that process. It prevents someone else from using it, even if they independently created it. It can give you the market edge," he says, "but then you trade getting that monopoly for publishing it. In some instances, it would be better to rely on copyright and confidentiality."

The would-be patent holder also needs to consider how difficult it is for a competitor to copy the process, Catania says. "If it is very difficult then don't worry about patenting it." He also reminds patent applicants seeking IP protection for software to get assignments of copyright from any contractors who worked on the system. If the applicant doesn't, copyright flows back to the contractor.

Clearly, patents can be useful allies as corporations seek out their slice of online commerce. Organisations should not overlook them when seeking to protect their intellectual property. However, neither should they overestimate the power of the patent nor underestimate the cost of attaining truly useful, and therefore international, patents.

For information regarding the innovation patent, go to: http://www.ipaustralia.gov.au/textonly/patents/P_innvopat.htm.

To read the government response to Recommendations of the Advisory Council on Intellectual Property (ACIP) report "Review of the Petty Patent System", go to:http://www.ipaustralia.gov.au/textonly/about/A_innovat.htm.

Steps to Take Given these tumultuous times, companies need to act carefully. There are several steps CIOs can take to help protect their company from competitors' business process patents - and to protect their own novel processes.

Determine whether your company has any patentable inventions. Often patents can be used as shields as well as swords. And though it sounds contradictory from a philosophical standpoint, if others are going to use them, maybe you should too. You're less likely to get sued for patent infringement if you also hold patents related to the industry. Once you determine whether you have patentable inventions, start your process to obtain a patent.

Help your company take steps to avoid committing patent infringement. Each patent includes claims that define the invention. For a product or process to infringe on a patent, it must incorporate all of the patent's claims. Your company should compare its processes to patents covering the same processes to determine whether they may be infringing. But be sure to seek the assistance of competent patent counsel in doing this review.

Consider whether to challenge the validity of known patents. The CIO may be in a position to assist in determining whether or not a patent should be chall-enged. A patent is invalid if the claimed process was known or used by others before the patent application was filed. You can challenge a patent in court, but it's an expensive process. Further, you will be unable to go to court to enforce the innovation patent until it has been examined.

Rapid technological and cultural changes are transforming the way people conduct business. Patent law is adjusting to these changes - as evidenced by the innovation patent - which may unfortunately produce some turmoil. In the meantime, the key is to keep on top of your industry and be prepared to fight this new weapon - or even to wield it yourself.

- Brett Dorny

Secret Sharers.

Two seemingly unrelated business trends combine to bring a second intellectual property peril to executives. One is the increased mobility of the workforce. Nobody knows better than an IT manager how fast employees come and go in today's economy. At the same time, more and more companies are choosing to bypass the patent system and protect their intellectual assets by simply keeping them secret, as Philip Catania, national IT practice leader at Corrs Chambers Westgarth suggests. Each of those phenomena makes the other more troubling.

Horror stories of trade secret losses abound. Most common is when an employer thinks it's made itself safe from an employee telling secrets to its competitors, only to discover that the contract the employee signed to that effect is legally unenforceable. Or that the employee never signed a contract at all. Clearly, a volatile workforce makes secret-keeping a relentless challenge. If a departing employee knows even a piece of the employer's secret strategies, technologies, processes, suppliers or customers, he or she can suddenly become the company's biggest threat. Who knew that Joan in sales could bring the company to its knees with her specialised knowledge and memory of customer lists? All she has to do is tell her new employer about the company's distribution plan or secret technology that cuts valuable hours out of the production process. Or, worse yet, post that information on the Web out of spite and revenge. Then the secret is spoiled forever, and with it the employer's competitive advantage or even survival.

Trade secret law attempts to strike a balance between protecting a company's intellectual assets and an employee's right to change jobs and benefit from knowledge amassed by working in a particular industry. Many companies rely on "noncompete" agreements without realising that they are often unenforceable.

Another problem with noncompetes is that they are very expensive. Employees rightfully resent being told where they can and cannot work. You may have trouble recruiting if you ask people for something that's not commonly done in the industry, unless you're willing to pay them above the market rate.

By comparison, confidentiality or non-disclosure agreements between employers and employees usually are enforceable, and are an effective way to protect trade secrets. They force employers to identify their trade secrets, and put employees on notice. Identifying a trade secret is as simple as a manager or executive declaring it is secret. There is no legal aspect in the identification process; lawyers come in to draft contracts that will prevent employees from stealing those secrets.

Companies should organise their processes so that secrets are disclosed to employees on a need-to-know basis. For example, if a company's competitive advantage comes from a relationship with an inexpensive supplier, the company should code all communications with the supplier so that few employees know its identity.

- Jennifer Bresnahan

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

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