The rate of technology patent actions has accelerated.  In the technology industry, Internet and other firms have been awarded patents covering search technology, computer-based postage metering and a variety of other inventions.  New laws have developed to facilitate patent filings and many companies understand that patents constitute a source of revenue and potential leverage against large businesses.

Patentability of Software
The PTO has issued patents on business models for many years.  The PTO stated in March 1996 guidelines to examiners that it was improper to reject a patent claim because it constituted a business application.  The question of whether methods of doing business may be patented was decided by the Federal Circuit in State Street Bank & Trust v. Signature Financial Group.

The U.S. Court of Appeals for the Federal Circuit in State Street Bank & Trust v. Signature Financial Group, Inc. held that almost any software-related invention is patentable subject matter.  The court overruled the use of the traditional Freeman-Walter-Abele test in determining whether an invention is statutory subject matter.

This case has broad implications since it will allow protection for many forms of software-related subject matter which utilize numbers to represent tangible items.

The court broadly decided that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces a useful, concrete and tangible result, a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades.  The court held that the calculation of numbers representing dollar amounts is sufficient transformation.

In effect, the focus of the statutory subject matter analysis is on whether operation of the mathematical algorithm produces a "useful, concrete and tangible result."  The presence of a mathematical algorithm is not critical because the statutory nature of an invention is not decided by the mere presence of an algorithm.

In summary, the emphasis on producing a "useful, concrete and tangible result," is key concept for determining statutory subject matter.  The "transformation" analysis was expanded to the extent that an invention which makes calculations using data representative of tangible objects (i.e., not an arbitrary abstract number) may be deemed statutory subject matter.

If the software has a practical application, then the invention may satisfy the statutory subject matter requirements.  The decision requires the subject to provide "a useful, concrete, and tangible result" and indicates that "price, profit, percentage, cost, or loss" may meet the criterion. Patents for Business Methods

The court also invalidated the "business method" exception, stating that it should not be utilized for holding an invention unpatentable.  The court held that the business method exception should be subject to the same legal requirements for patentability as applied to any other process or method.  The court concluded that methods of doing business are not unpatentable subject matter per se.

Internet Business Patents
The U.S. Patent and Trademark Office recently granted broad patents covering methods for conducting Internet business.  These patents are among the earliest covering Internet applications.  They involve business practices that are commonplace in general business.

Since the State Street decision, there probably will be several new e-commerce patent filings.  If broad Internet patents are issued, Internet business could be affected significantly.  The owner of an Internet patent may of course exclude others from using the technology or, in order to maximize its value, may pursue patent licensing to other Internet companies.

CyberGold, an online marketing company, was awarded a patent covering the practice of paying consumers to look at advertisements on the Internet.  CyberGold asserts that that it owns the sole right to pay consumers online incentives, including cash, points, frequent-flyer miles or other forms of compensation.

Various companies give consumers points for visiting Web sites, making on-line purchases, for downloading information and for agreeing to receive advertisements via e-mail.  These points may be redeemable toward frequent-flyer miles, gift certificates, food, or other benefits.

Competitors of CyberGold may dispute the validity of CyberGold's patent on the basis that it constitutes a concept which is too broad to protect.  It is important to examine the claims and specifications to determine if they are useful and novel in light of prior art.  Other companies are pursuing patents for their own technology.  For instance, a patent has been issued covering online interactive frequency awards program.  Priceline.com obtained a patent for reverse sellers' auctions, in which shoppers specify the terms for purchasing items and Priceline finds the seller.  Another patent covered a method for embedding Web addresses in e-mail postings.

One Year on Sale Patent Bar Expanded
Companies need to re-examine their sales practices after the recent Supreme Court decision in Pfaff v. Wells Electronics Inc., 119 S. Ct. 304 (Nov. 10, 1998).  The Pfaff decision means that inventors and their companies run a significant risk of inadvertently losing their patent rights when they market patentable technology to potential purchasers.  Corporate counsel and corporate sales staffs need to exercise caution.

The court clarified the Patent Act provision that no one is entitled to patent an invention that has been on sale more than one year before the filing of a patent application.  The court held that the preparation of detailed written drawings of an invention establishes that the invention, if offered for sale, is sufficiently developed to begin tolling the one-year bar set forth in the Patent Act.  Competitors relying upon the on-sale bar to challenge patents need not show that the proposed invention was reduced to practice or even worked more than a year before the patent application was filed.

The Federal Circuit, which has exclusive jurisdiction over patent infringement appeals, held that the patent laws do not require that an invention be reduced to practice or exist in physical form to trigger the on-sale bar.  The court stated that the question is whether the invention was substantially complete at the time of sale to the extent that there was reason to expect that it would work for its intended purpose upon completion.  An invention which is an uncomplicated mechanical invention and which would readily work when manufactured may be adequately developed. 

The court expressed concern that the lack of a clear standard would allow inventors to extend their patent monopoly by delaying their application while commercially exploiting the product.

The high court stressed the importance of providing inventors with a clear standard to identify the onset of the one-year period.  The court concluded that the substantially complete standard did not provide sufficient certainty that inventors need to determine whether their marketing and development activities would trigger the statutory period. The court stated concern that the lack of a clear standard would allow inventors to extend their patent monopoly by delaying their patent application while commercially exploiting the product.

Even though the invention had not been constructed, the court noted that the inventor could have obtained a patent at the time he offered to sell the invention to a company.  It is well-established that an inventor can obtain a patent for an invention that has not yet been built or tested as long as the patent application describes the invention in sufficient detail to enable an ordinary creator to make and use the invention.  In Pfaff's case, the engineering drawings that were sent to the manufacturer more than one year before the patent application was filed were nearly identical to the drawings eventually filed with the application.

The case outlines the two requirements for commencing the one-year statutory period.  First, the invention must be subject to a commercial offer for sale.  Second, the invention must be ready for patenting.  This condition may be established by showing that the invention has actually been reduced to practice or by showing that the inventor had prepared drawings or other descriptions of the invention which were sufficiently detailed to enable a person skilled in the art to practice the invention.  A detailed written description which may form the basis for a subsequent patent application is sufficient.  Patents will not be invalidated under Pfaff if the only evidence of the invention is the inventor's unwritten marketing communications.

The court reaffirmed the experimental use exception which allows an inventor to conduct extensive testing without losing his right to obtain a patent, even if such testing occurs in public.  This exception has several limitations which make it difficult for an inventor to establish that an early sale was for experimental purposes.

The Pfaff decision may require that the offer for sale be commercial in scope to trigger the statutory bar.  A noncommercial offer may not initiate the one-year period, however, it is uncertain whether the commercial nature relates to the type of purchaser, the quantity of goods sold, or both.  The Federal Circuit previously has held that a single sale or offer is sufficient to subject an invention to the on-sale bar. Yet sales made to a wholly owned subsidiary of the corporation owning the patent rights generally do not implicate the statutory bar.  Revised Sales

Strategies for Inventions
After the Pfaff decision, companies and inventors must re-assess their marketing practices.  An offer to sell an invention which exists only on paper may invalidate a later-issued patent if the sales offer was made more than one year before the patent application was filed.  A company which provides a detailed marketing presentation stating that it could build or supply a proposed invention may inadvertently start the one-year period.  The period could commence even if the invention details exist in written form, but are not disclosed as part of the marketing effort.  Imposing confidentiality obligations on the potential customers apparently will not make the offered sale immune from the statutory bar.

Companies may attempt to control the timing of a sales offer by entering into collaborative development projects with other companies, and by stating in any discussions or written documents that no offer for sale is intended.  Transactions must be carefully structured, however, because an offer may invalidate a patent even if it does not meet formal contract law requirements.  The court stated that even the free distribution of a prototype may trigger the statutory bar if the distribution is intended to generate sales.

Companies intending to rely on the experimental use exception must rigorously monitor testing of the invention to ensure that any commercialization is incidental.  Inventors and companies should maintain control over testing, keep progress records, conduct tests confidentially, limit testing to patentable features, and minimize the number of sales during the testing period.  Testing arrangements should be memorialized in writing and any payments should be deferred until after successful testing is completed.  Any purchase agreements should be explicitly dependent on the successful outcome of the experimental testing.

In view of the high risks and rewards involved in developing patentable technology and the stringent restrictions placed on the sale of the technology by the Pfaff decision, inventors and corporations should review their methods to preserve their patent rights before sales offers are made.  Valuable patents and other intellectual property rights should not be risked through premature marketing efforts.

Liabilities of Internet Operators
One example is the liability of Internet system operators for torts committed through the medium they provide. The users of an electronic means of communication are liable for torts-such as invasion of privacy and defamation-they commit on line.  However, the liability of system operators which form part of the link in the user's tort should is not clear.  For example, if a person illegally accesses a user's mailbox, will the system operator be liable for permitting access to private data. 

Will a system operator be liable for defamation based on its failure to control or remove the defaming information from the system?  In general, under the rules suggested by recent cases, then, the standard of liability for systems operators is negligence rather than strict liability.  The negligence standard will probably evolve over time as  technology and industry practices change.

Recently, in the case of Lunney v. Prodigy Services issued by the New York Appellate Division in December 1998, the court held that an on-line service provider which had no editorial control over the content of e-mail messages and bulletin board postings, could not be held liable for defamation.

Issues In Electronic Commerce
Businesses engaging, or contemplating engaging, in commerce on the Internet need to pay careful attention to issues of jurisdiction and the impact that its Internet use may have exposure to litigation in remote forums. 

Most cases have required individuals to conduct some activity with the forum to support personal jurisdiction.  The requirement for activity will be satisfied when there is interaction between the Web site and residents of the forum state.  However, the extent of activity is not clearly defined.

A business which is going on-line should protect its trademark and future domain name.  Domain names and trademarks should be searched.  If the business’ trademark is not registered, registration is advisable to prevent subsequent use by others and future litigation.  If the company’s trademark is registered as a domain name, it may initiate third-party dispute resolution procedures with NSI to stop an infringing use.Future For Computer

Inventions
In the State Street case, the Federal Circuit broadened and/or deviated from the U.S. Patent and Trademark 1996 Examination Guidelines for Computer Related Inventions which stated that converting one set of numbers into another set of numbers, does not manipulate appropriate subject matter and thus cannot constitute a statutory process.  Based on the Federal Circuit’s holding, these portions of the Guidelines no longer apply, or have lost their relevance to the extent that they required the invention to perform physical acts.

There are still several other issues relating to the field of software patents which need to be addressed carefully.  These include issues regarding articles of manufacture particularly relating to the Internet, as well as other issues, which affect software.

Summary
The Pfaff ruling will permit competitors and alleged infringers to contest the validity of patents which were sought more than one year after the underlying idea was first marketed to a potential customer.  The decision will have a significant impact on how patentable ideas are marketed to potential purchasers.