Critics say patents on methods stifling innovation in business

BOSTON -- In the early 1990s, Tim O'Reilly's company had a new and potentially lucrative idea: Use advertising revenue to run a Web portal. Essentially, O'Reilly claims, Global Network Navigator invented the Internet banner ad.

According to a landmark court decision handed down five years ago this month, O'Reilly may have been able to patent the idea as a "business method" -- a move that could have changed the course of Internet history.

But even if he could have, O'Reilly says he wouldn't have.

"If I had been able to put a patent on that and collect from everybody else who did it, that would have held back the industry tremendously," said O'Reilly, who after the sale of GNN to America Online now heads O'Reilly Associates, a tech publishing company. He is a critic of broad patent protections.

That's one view of patents. The other is held by the likes of Jay Walker.

Like O'Reilly, Walker is an e-commerce pioneer -- he founded Priceline.com -- and considers himself a champion of innovation.

But Walker's company, Walker Digital LLC of Stamford, Conn., has made a business of patenting just about any business method it can. He owns more than 200, including ones on online dating and running slot machines.

Walker applauds O'Reilly's selflessness, but disputes the logic. Patent rights don't slow technological innovation, he says; they spur it.

"If you want to give your house to the city for a public park, great," he said. "On the other hand, we shouldn't deny people the right to have houses."

Also about ideas

Experts say the 1998 State Street v. Signature Financial decision from the U.S. Court of Appeals for the Federal Circuit was an acknowledgment that intellectual property was as much about ideas as about things. The U.S. Patent Office had been granting business method patents for years and the court simply signaled its approval.

But the decision inspired thousands to file patents on things like new kinds of credit-card offers and methods for teaching a golf swing.

In 1997, the year before the ruling, the Patent Office received 927 applications under its main classification for business methods. In 2001, that number rose to 8,700, falling to 5,000 last year as many small companies went out of business.

"In the dot-com era, the first thing they did was go get a patent, because that's what the investors were looking for," said Tom Turano, an attorney at Testa, Hurwitz & Thibeault, a Boston firm with a large technology practice.

Patents are designed to encourage innovation by guaranteeing inventors some reward -- generally exclusive rights for 20 years. The idea must be considered useful, new and "non-obvious."

In computers, the definition of "obvious" is blurry. Programs are instructions telling a computer to do something. The "something" may sound obvious, but the instructions may not be.

That fuzziness has sparked concerns that too many "obvious" ideas are getting patented.

Among the criticized:

"One-click" shopping. Between 1999 and 2001, Amazon.com and Barnesandnoble. com battled in court over whether Barnesandnoble.com's "Express Lane" feature infringed on Amazon's patent for letting customers complete their orders with one click. The parties settled, but not before Barnesandnoble.com shut down the feature for two Christmas seasons.

Online auctions. In May, a jury ruled that one of eBay's Internet-based auction systems violated a patent filed by a Virginia attorney. It ordered the company to pay him $35 million. EBay is asking that the verdict be overturned.

Online DVD rentals. Last month, Netflix won a patent for the technology that allows customers to set up a rental list of movies they want mailed to them. The news sent Netflix's stock soaring; investors bet it would help the company muscle out rivals Wal-Mart and Blockbuster.

To Walker, patent protections spur innovation by requiring the inventor to tell the world how an idea works, instead of locking it away as a trade secret.

Walker also notes that every new wave of technology has brought cries it should be kept "above" the patent system. A previous generation worried electricity would fall in the hands of a few monopolies; instead, Walker said, patent protection attracted investment and inspired a wave of marvelously creative uses.

But O'Reilly says the computer revolution really is different.

"The Internet was very much a culture of leapfrog, not king of the hill," he said. "There was this sort of orgy of copying, which I think led to some pretty substantial innovation. As we see more patents, I see the innovation slowing down."

'Regret every patent I filed'

Programmers, he said, waste time finding different ways to solve problems somebody else already figured out.

"I regret every patent I ever filed," said Doug Cutting, a programmer who helped file patents for former employers Apple and Xerox but says he won't file any more because he wants to be able to reuse his own code.

Too many small companies are spending their money on patent lawyers, not research, says O'Reilly. And Walker, he says, isn't helping.

"I think he's abusing the system," O'Reilly said. "At the end of the day, when you look at his company, his R&D department consists of lawyers."

Walker denies that, saying his company spends millions on research and hardly anything on lawyers. His goal is to license technology, not fight over it in court.

O'Reilly says that's still a problem.

"It's not innovation. It's a business model of ripping off the patent system," he said. "Maybe he should patent that."