4 Va. J.L. & Tech. 9 (Fall 1999) <http://vjolt.student.virginia.edu>
1522-1687 / © 1999 Virginia Journal of Law and Technology Association

VIRGINIA JOURNAL of LAW and TECHNOLOGY

UNIVERSITY OF VIRGINIA

FALL 1999

4 VA. J.L. & TECH. 9


Internet Business Methods: What Role Does and Should Patent Law Play?

By: Jared Earl Grusd

 

I. Introduction

  1. The MP3 format, a compression technology used for the exchange of digital music over the Internet, has been the subject of much discussion within the intellectual property community as of late. The focus of the discussion has been on trying to find an effective enforcement mechanism to curb the extensive copyright infringement of musical works and sound recordings facilitated by the MP3 format. While the copyright problems associated with the MP3 format are indeed significant and need to be addressed, there exists another important and often overlooked intellectual property issue presented by the digital exchange of music files over the Internet. This other issue implicates the patent laws.

  2. The central patent issue presented by the MP3 format concerns the threshold question of whether a company can and should be allowed to monopolize the exchange of digital music over the Internet by obtaining a patent on the method of conducting such business. For instance, Sightsound.com maintains that it holds a patent covering the sale of any digital audio or video recording over the Internet.[1] Based on this patent, Sightsound.com sued CDNow, which runs the two most successful music sites on the web, for patent infringement; it demanded that such digital music sites as MP3.com, Goodnoise and Amplified.com pay royalties on every sale involving the downloading of music.[2]

  3. The issuance of the Sightsound patent raises several descriptive and normative questions that are common to all Internet business method patents. The descriptive questions are essentially twofold. First, do business methods, as a general class, constitute patentable subject matter within the meaning of Section 101 of the Patent Act?[3] Second, if so, does the particular business method in question satisfy the other substantive requirements of the Patent Act?[4]

  4. The normative questions follow from these descriptive ones. Should business methods be considered patentable subject matter? How broad a monopoly should patent law confer to business methods? And, how should patent doctrine be interpreted to promote the efficient tradeoff of incentives to invest in the research and development of business methods, while maintaining the restriction of access to those business methods?[5]

  5. The answers to these questions bear not only on the digital music context, but also on many other Internet business methods. For example, Priceline.com, which received a patent on Internet-based "reverse auctions," may be able to prevent others from using any business transactions in which buyers propose a price for a product or service and sellers bid to supply it.[6] Likewise, Cybergold, which earned a patent on a pay-per-view advertising method, may be able to block all methods in which users are offered pecuniary rewards for viewing Internet-based advertisements.[7] Similarly, Slashdot.org may be entitled to exclude all other methods that employ certain aspects of playing three-dimensional games on the Internet.[8] Additionally, Open Market may be able to preclude all methods that employ a secure, real-time payment method over the Internet using debit and credit cards.[9] Likewise, Netcentives, Inc may be permitted to prevent all methods that employ an on-line frequent-buyer program. [10] Finally, Netdelivery may be able to block all methods that use proprietary billing and cataloguing processes.[11]

  6. If the validity of these patents and others like them are upheld when challenged in court, then the patent law may be overextended in its role in the regulation of competition on the Internet and elsewhere. The effect of patents in this context may be to stifle competition, give a few patent holders huge windfall profits, and slow the spread of valuable commercial innovations. On the other hand, these patents may encourage efficiency by creating incentives for business people to invest in the research and development of new business methods and thus improve business productivity.

  7. Although it may be unclear, ex ante, which of these two results will follow from the issuance of patents on business methods, it is clear that further exploration of the matter is required. Such exploration must begin with the oft discussed and highly controversial State Street Bank & Trust Co. v. Signature Financial Group, Inc. ("State Street") opinion.[12] In State Street, the Court of Appeals for the Federal Circuit (hereinafter the "Federal Circuit") held that business methods do in fact constitute patentable subject matter.[13]

  8. Unlike most commentators,[14] the author will argue that the State Street holding does not necessarily lower the standard for obtaining patents on business methods. The State Street holding merely shifts the patent inquiry away from the 35 U.S.C. §101 subject matter analysis to the novelty, utility, nonobviousness, and specification inquiries.[15] This shift implies only that business method claims will be analyzed individually rather than collectively. While this may mean that the United States Patent and Trademark Office (hereinafter the "USPTO") will see more patent applications related to business methods filed, it does not mean that the USPTO will or should relax its standards in reviewing such applications. Only future legislation or litigation challenging the scope of business methods will determine the standards to be applied to patent claims and the role that these patents will play in electronic commerce, the development of the Internet, and the global economy.

  9. As such, there is a need to discuss the various descriptive and normative issues implicated by State Street. Until now, commentators have almost uniformly been concerned with how State Street conformed to prior case law as a doctrinal matter.[16] Little regard has been given to the various policy considerations underlying the decision. Without offering any substantial policy justifications, their papers assumed that patents on business methods are undesirable. As such, their calls for changes in patent doctrine or practice were premature. By offering a more coherent and concrete explanation of the costs and benefits of patents on Internet business methods, this paper offers a more useful mechanism by which to evaluate the intuitions of these earlier commentators and guide future courts in their application of patent doctrine to the Internet.

  10. This paper will argue that although a justifiable intuition exists, that patents should not be granted to Internet business methods, courts have the power to construe patent doctrine in such a manner as to mitigate, if not eliminate, potential economic harms of such patents. To resolve the perceived problems presented by business method patents, courts should (and ultimately will have to) re-examine their interpretations of traditional patent doctrine. For guidance in this re-examination, courts should look to biotechnology jurisprudence[17]. The biotechnology cases provide a good illustration of courts’ willingness to manipulate established doctrine to achieve desired policy outcomes.[18] Just as they did with biotechnology patents, the courts examining business method patents, must determine which policy goals are desirable and the manner of construing patent doctrine to achieve them.

    II. Subject Matter under §101 and the State Street Decision

  11. The subject matter of patents is defined in Section 101 of the Patent Act.[19] In the landmark Diamond v. Chakrabarty decision,[20] the Supreme Court interpreted this section quite broadly. The Court held that the subject matter of patents includes "anything under the sun that is made by man."[21] In doing so, the Supreme Court made it clear that all inventions "made by man" satisfy the subject matter requirement of §101. Conversely stated, the Supreme Court established that the product of nature doctrine constitutes the only limitation on the scope of patentable subject matter. This doctrine denies patent protection of the laws of nature, physical phenomena, and abstract ideas.[22] Under this doctrine, for example, a new mineral discovered in the earth or a new plant found in the wild would not be considered patentable subject matter because mineral and plants are discovered but not created by man. Similarly, Einstein’s celebrated theory of relativity and Newton’s famous laws of gravity would not warrant patent protection because they too were discovered rather than created by man.

  12. The Supreme Court’s interpretation of the subject matter requirement of §101 reflects the policy judgment[23] that patent law should not preempt the basic building blocks of the sciences and useful arts. [24] The alternative would have the adverse consequence of impeding progress, rather than promoting it. For instance, allowing a patent on the second law of thermodynamics or the Pythagorean Theorem would mean that the basic principles of the physical sciences and mathematics could be monopolized. Such a monopoly would be expected to lead to a significant reduction in the research and development of socially beneficial applications of these underlying principles. This would likely occur because inventors desiring to create an application using the underlying principle would need to identify and obtain permission from the patent owner. The process of obtaining permission is not free. On the contrary, receiving permission requires search costs, transaction costs, licensing fees, hold-out costs, and the like. The result is an undue restriction on access to the basic principles of math and sciences. As such, these costs would lead to underdevelopment of an efficient number of useful applications. Thus, the Supreme Court has announced that "if there is to be invention from such a discovery, it must come from the application of the law of nature to a new and useful end," and not from the law of nature itself.[25]

  13. Although these principles and their rationales are easy to state, they have been difficult to apply in the context of business methods. This difficulty stems from the line-drawing problem associated with the determination of whether a business method reflects the creation of man or the product of nature doctrine.

  14. For much of United States patent history, the USPTO and courts have wavered in the treatment of business methods. Early decisions of the USPTO and lower courts reflected the view that business methods were considered to be the products of nature. As such, they were not deemed worthy of patentable subject matter. In ex Parte Abraham, for example,the Patent Commissioner observed that "it is contrary to the spirit of law…to grant patents for methods of book-keeping."[26] Similarly, the district court in United States Credit Sys. Co v. American Credit Indemnity Co., noted that a "method of transacting common business" was unpatentable.[27]

  15. The first time an appellate court decided the subject matter issue as it applied to business methods was not until 1908, when the Second Circuit decided Hotel Security Checking Co. v. Lorraine Co ("Hotel Security").[28] In that case, the court concluded, albeit in dicta, that a "method and means for cash-registering and account-checking" designed to prevent fraud by restaurant employees was merely an abstract idea.[29] The system in question employed various forms that tracked sales and ensured that waiters returned funds at the close of each business day. The court stated that "a system of transacting business disconnected from the means of carrying out the system is not, within the most liberal interpretation, art. Advice is not patentable."[30] The line between man-made and product of nature, therefore, rested on the presence of some physical or tangible mechanism for practicing a technique. As one commentator observed, "only a physical structure exhibiting a functional relationship between the substrate and written material would enter the realm of the patentable." Because the patent in question did not contain a physical embodiment, it was invalidated.[31]

  16. In issuing its standard for patentability, the USPTO chose to interpret Hotel Security in an excessively broad manner. Though the case was not decided on subject matter grounds, the USPTO began to bar all claims directed at business methods without deciding the merits of the individual claims.[32] This practice was eventually codified in the USPTO’s Manual of Patent Examining Procedure (MPEP) §706.03. The relevant provision read that "though seemingly within the category of process or method, a method of doing business can be rejected as not being within the statutory classes."[33] This provision remained in the MPEP until 1996. As a result of this provision, few business method patent applications were filed during the years between Hotel Security (decided in 1908) and 1996.[34] Moreover, those applications that sought patent protection for business methods tried to disguise the true nature of their claims as being other than business methods. For instance, in one case examining such a patent, the patentee disguised the fact that it was claiming a business method by casting its claims "in terms of apparatus, that is, ‘means for’ performing certain tasks or steps, rather than in terms of the method steps themselves."[35]

  17. Although inventors, patent lawyers, the USPTO, and the courts operated for almost 90 years under the assumption that the subject matter question concerning business methods had been resolved in Hotel Security,[36] such an assumption was erroneous. To be sure, Hotel Security was ultimately decided on novelty, not subject matter.[37] As such, the court’s comments concerning the subject matter of business methods were not binding; they were simply dicta. Indeed, Hotel Security did not carefully distinguish between denying a patent on the basis of the subject matter provision or on some other patent law provision. This led to much doctrinal confusion in subsequent cases concerning the role of the subject matter requirement in deciding business method patent claims. A famous law review article, noted that "to date [1998], no court majority has ever held that a step-by-step method that incorporated a novel and nonobvious physical means to accomplish that method was per se unpatentable simply because the method was directed to a way to conduct business rather than a way to make or manufacture."[38] Thus, although for almost 90 years there was a presumption that business methods were not proper patent subject matter unless embodied in some tangible form, courts have not formally endorsed such a presumption.

  18. State Street marked the most recent and important effort to clarify the proper status of business methods under the Patent Act.[39] In that case, the Federal Circuit overturned the district court’s holding that business methods are abstract ideas barred from statutory subject matter. The Federal Circuit held that business methods are proper subject matter under 35 U.S.C. §101.[40] In doing so, the court did not indicate a desire to lower the standard for the patentability of business methods, but rather a desire to clarify the current confused state of the law. As such, the court saw its task as descriptive, not as normative or policy-oriented.

  19. The claim in question in State Street, for a "Data Processing System for Hub and Spoke Financial Services Configuration," was directed at a data processing system for implementing an investment structure. This system enabled individual mutual funds (known as "Spokes") to pool their assets in an investment portfolio (known as a "Hub") that was organized as a partnership. The advantages of this patent were twofold. First, it produced economies of scale in the administration of investments.[41] Second, it offered the tax benefits of a partnership.[42]

  20. The Federal Circuit, under the pen of the esteemed Judge Rich, concluded that business methods in general did constitute patent subject matter. Judge Rich expressed his desire to lay the "ill conceived [business method] exception to rest."[43] In laying the groundwork for this conclusion, Rich recalled the observations of two previous works. First, Judge Rich echoed Judge Newman’s In re Schraeder dissent,[44] which had described the business method exception as "an unwarranted encumbrance to the definition of statutory subject matter in §101, that [ought to have been] discarded as error-prone, redundant, and obsolete."[45] Second, Rich repeated the observation of Del Gallo, who noted that the business method exception had never been used as the determinative factor for rejection of a business method claim.[46] Instead, such claims had always been rejected on some other ground. Footnoting the aforementioned law review article, Rich noted that "[t]he business method exception has never been invoked by this court, or the CCPA [the Federal Circuit predecessor], to deem an invention unpatentable."[47]

  21. Rich concluded that "[p]atentability does not turn on whether the claimed method does ‘business’ instead of something else, but on whether the method, viewed as a whole, meets the requirements of patentability set forth in Sections 102, 103, and 112 of the Patent Act."[48] By shifting the patent inquiry away from subject matter and onto the other doctrinal requirements, Rich did not indicate a desire to relax the status quo patent standards. Instead, he expressed a desire to articulate those standards as a descriptive matter. As such, Rich’s opinion reaffirms the Supreme Court’s opinion in Diamond v. Chakrabarty[49] that almost everything can be considered patentable subject matter, but not everything is patentable.

  22. This assertion finds support in Rich’s discussion of the district court opinion. According to Rich, the basic problem with the district court’s opinion was that it conflated the distinction between patentable subject matter and patentability.[50] The court’s decision was not based on its interpretation of the subject matter provision. The primary reason for holding that the patent claims did not constitute patentable subject matter was the court’s fear that the antithetical holding would lead to undesirable policy results.[51] The district court stated that:


      If Signature’s invention were patentable, any financial institution desirous of implementing a multi-tiered funding complex modelled (sic) on a Hub and Spoke Configuration would be required to seek Signature’s permission before embarking on such a project. This is so because the ‘056 Patent is claimed sufficiently broadly to foreclose virtually any computer-implemented accounting method necessary to manage this type of financial structure.[52]

  23. This language suggests that the district court perceived a problem with the scope of the patent and not the subject matter. Instead of invalidating the patent claim on the basis of enablement or written description (i.e. that the scope of the claims was too broad), as it should have, the court tried to achieve this same result by applying the subject matter doctrine. According to Rich, the problem with the district court’s opinion was not in its invalidation of the patent, but rather in its choice of doctrines to do so.[53]

  24. As such, the Federal Circuit’s State Street opinion simply returns the focus of the patentability inquiry as applied to business methods to the substantive doctrines of patent law and away from the subject matter provision.[54] The implication is that courts should spend more time analyzing the scope, novelty, utility and obviousness of a claim rather than whether it is a product of nature or not. Indeed, Rich concluded his opinion by noting that "whether the patent’s claims are too broad to be patentable is not to be judged under §101, but rather under §102, 103, and 112. Assuming the above statement to be correct, it has nothing to do with whether what is claimed is statutory subject matter."[55] Thus, Rich’s opinion can be viewed as an attempt to clarify existing law rather than as an attempt to revolutionize the law as it pertains to business methods.

  25. The implication is not that State Street relaxed the standards for obtaining a patent on a business method, but that State Street has forced the USPTO and lower courts to examine each claim for a business method on the merits. It is premature to conclude, from just State Street, the relative stringency of the standards that will be applied to claims for business methods. This is because neither the Federal Circuit nor the district court addressed the question of whether the "Hub and Spoke" patent in question in State Street was valid or whether it had been infringed. Indeed, Judge Rich remanded the case to the district court for further determinations on the merits based on §102, 103 and 112 of the Patent Act.[56] Thus, it will be several years before these questions are answered. This means that future legislation, litigation and the future practices of the USPTO will determine the standards that are to be applied in these cases. As such, there is a need to identify the manner in which the courts should apply existing doctrine to lead to the most desirable (i.e. efficient) outcomes.

    III. Application of Patent Doctrine to Internet Business Methods

  26. State Street makes it clear that the focus of the patent inquiry should not be on subject matter, but rather on the other patent doctrines. Currently, the USPTO is interpreting these doctrines so as to permit a large number of patents to be issued to firms claiming Internet business methods that seem excessively broad or obvious to people skilled in the relevant art. This implies that the USPTO is construing the scope and nonobviousness requirements in a lax manner or that the current standards are inappropriate in the Internet context.[57]

  27. The Sightsound.com patent, for instance, represents a good example of a patent that was issued despite excessively broad claims. This patent may permit Sightsound.com to exclude all competitors from selling any digital audio or video recording over the Internet. If upheld in court, this patent would give Sightsound an extremely broad monopoly and, in effect, eliminate competition in the digital audio and video markets.

  28. The patent issued to Priceline.com is a better example of this point. This patent could permit Priceline.com to exclude all other business methods in which buyers propose a price for a product or service, and then sellers bid to supply it. The reach of this patent could extend beyond the airfare context (as it is currently being used) to all industries. Accordingly, it would seem as though the scope of the patent would render it too broad to satisfy the various scope provisions. The issuance of the Priceline.com patent suggests that the USPTO is willing to permit potential patentee’s to claim extremely broad matter in the Internet context.

  29. The Priceline.com patent also represents a good example of the lenient treatment of the nonobviousness requirement as applied to Internet business methods. Although reverse Dutch Auctions have existed for centuries,[58] the USPTO did not find that it was obvious for Priceline.com to apply the reverse Dutch Auction method to the Internet. The issuance of this patent implies that it would not be obvious for a firm to take any standard business practice and apply it to the Internet. Such a loose interpretation of the nonobviousness doctrine implies that the nonobviousness requirement is no longer being used as a significant bar on commonplace inventions. As such, this interpretation seems to pave the way for the issuance of many Internet business method patents on seemingly regular business methods.

  30. The most significant reason why so many patents like the Sightsound.com patent and the Priceline.com patents are issuing, is the fact that there is no case law making explicit the standards that must be used with regard to Internet business methods. As such, the USPTO is forced to apply precedent that may make sense in the context of some inventions but not necessarily in the context of Internet business methods. This may ultimately lead to undesirable consequences for the development of the Internet.

  31. The courts should re-evaluate their current interpretations of these patent doctrines. Courts should look to policy analysis instead of traditional doctrine in order to create new and more efficient standards that cater to the specific needs and concerns of Internet business methods. Only when the courts adopt standards molded to the context of Internet business methods will the USPTO be able to engage in practices that promote efficiency.

  32. This suggestion to sacrifice strict doctrinal analysis in favor of policy goals is not as radical as it may appear. In the past several years, the courts have made it clear that they are willing to make this kind of tradeoff in order to promote emerging technologies. Most notably, the courts have molded traditional interpretations of nonobviousness doctrine in order to achieve policy ends in the field of biotechnology.[59] The courts should follow this example in order to achieve the policy goals of patent law as applied to Internet.

    A. Manipulation of the Nonobviousness Doctrine in Biotechnology Cases

  33. The Federal Circuit has consistently interpreted the nonobviousness doctrine as applied to biotechnology with less regard for preserving traditional standards than for achieving policy goals.[60] Specifically, courts have relaxed traditional nonobviousness standards in the biotechnology context in order to facilitate the development and commercialization of biotechnology inventions.[61] Courts interpreting patent doctrine in the Internet domain should look to these biotechnology cases not for the actual standards that were created therein, but as precedent for manipulating doctrine in order to achieve policy goals. To the extent that the policy goals related to the Internet are different than those related to biotechnology, courts need not be concerned with the specific holdings of the biotechnology cases. Instead, they should continue the trend set in these cases (i.e. looking to policy considerations before doctrinal matters). Courts can promote efficiency goals by tailoring their interpretation of doctrine to the specific needs of the Internet. This section will provide an overview of the Federal Circuit’s biotechnology jurisprudence in order to establish the precedent of subordinating traditional doctrine to policy judgments.

  34. The basic issue under the nonobviousness provision of the Patent Act concerns a determination of the degree to which the prior art suggests the claimed invention.[62] Prior to the biotechnology cases[63], courts did not require a close nexus between the suggestion from the prior art and the actual claimed invention in order to rule the latter obvious. Relatively general suggestions from the prior art were enough to deem a claimed invention obvious and invalidate it.[64]

  35. However, the Federal Circuit made it much more difficult to invalidate biotechnology claims. In a series of cases, the Federal Circuit established that it would not deem a claimed biotechnology invention obvious unless there was an explicit suggestion from the prior art and even then only if the secondary considerations supported such a finding.[65] By requiring such a close nexus before determining the claimed art to be obvious, the Federal Circuit implied a jurisprudence that was reluctant to find a claim obvious.

  36. The Federal Circuit affirmed this reluctance to find biotechnology claims obvious.[66] The court explained that a prior art disclosure of an amino acid sequence of a protein does not necessarily render particular DNA molecules encoding the protein obvious because the redundancy of the genetic code permits one to hypothesize an enormous number of DNA sequences coding for the protein. The court thereby concluded that "[n]o particular one of these DNAs can be obvious unless there is something in the prior art to lead to the particular DNA and indicate that it should be prepared."[67] The implication of this holding is that the Federal Circuit requires an extremely close nexus between the suggestion from the prior art and the claimed art before it will determine the latter obvious.

  37. The Federal Circuit came to the same conclusion in In re Bell.[68] In that case, the Federal Circuit held that while "[i]t may be true that, knowing the structure of the protein, one can use the genetic code to hypothesize possible structures for the corresponding gene and that one thus has the potential for obtaining that gene[,]" and the degeneracy of the code is such that there are many different possible nucleotide sequences in a gene that might code for that protein.[69] The implication of this view is that unless there is something in the prior art that would suggest a particular gene in question to a researcher, as opposed to the thousands or millions of other possible nucleotide sequences that might possibly encode the particular protein, the resulting isolated and purified DNA molecules are nonobvious. This also implies that an extremely close nexus between the prior art and the claimed invention must exist before the latter is deemed obvious.

  38. Indeed, even when a claimed invention seems to bear the kind of nexus with the prior art that would render it obvious under the standard of Bell[70] or Deuel[71], the Federal Circuit has been inclined to find other reasons, notably the secondary factors, by which to render the invention nonobvious. For example, in Hyrbitech v. Monoclonal Antibodies, the Federal Circuit held that Hybritech’s claims for a variety of sandwich assays using monoclonal antibodies were not obvious in light of the prior art, even though the district court found that the prior art suggested both the method and the result of the process used by Hybritech to develop their sandwich assays.[72] This type of analysis reinforces the point that courts will do whatever they can in order to validate biotechnology claims. Specifically, this case represents an example of the court’s willingness to subordinate the basic inquiries under Section 103 in order to achieve desired policy results. The court made this point explicit by holding that even an extremely close nexus between the suggestion and the claimed invention was not enough to hold the claims obvious.[73]

  39. Thus, the biotechnology nonobviousness cases[74] suggest that the Federal Circuit is willing to sacrifice strict doctrinal analysis in favor of obtaining policy results. Courts should continue to interpret patent doctrines with policy goals in mind when examining Internet patents. This does not mean that courts should apply the same standards that were used in the biotechnology cases.[75] To the extent that the policy goals regarding biotechnology differ from those regarding the Internet, different standards need to be applied to each of these cases. Nonetheless, the biotechnology cases[76] provide an excellent precedent; future courts should focus on policy matters, even at the expense of traditional interpretations of patent doctrine.

  40. Ultimately, the determination of whether courts should relax or tighten the standards applied to claims for Internet business methods depends on the conclusions drawn from a policy analysis. The next section of this paper will examine the policy considerations implicated by Internet business methods. Ultimately, courts should adapt patent doctrine to achieve these policy goals. Specifically, courts should tighten their interpretations of patent doctrine in order to make it more difficult to obtain patents on Internet business methods.

    IV. Policy Considerations

  41. Two central policy inquiries are implicated by the patenting of Internet business methods. The first concerns whether patents should ever be granted to claims for Internet business methods. Another form of this question is, are patents necessary to promote invention and innovation on the Internet? Or, would invention and innovation occur without patent protection? The second, and perhaps more important, inquiry concerns the breadth of the monopoly right patent law should extend to these Internet business methods.

  42. Essentially, economists have noted that patents can serve two different economizing functions.[77] Patents promote invention or innovation or both. In this context, invention is distinguished from innovation. The former refers to initial acts of creation and the latter refers to the process of bringing that creation to market. This section will examine how these standard economic justifications of patent law apply to the context of the Internet.

    A. Invention Motivation Theory

  43. The invention motivation theory is perhaps the most traditional and widely endorsed view of the economic role of patent law.[78] Under this theory, the role of patents is to motivate useful invention that would not occur absent patent protection.[79] This theory assumes that the patent lure is a necessary condition for achieving efficient levels of invention. This assumption implies there is no need to issue patents on inventions which would be invented if patent protection were unavailable. Thus, a central question related to the invention motivation theory is whether patents are a necessary incentive leading to the particular invention in question.

  44. This question is particularly relevant in the Internet context. In many cases, patents are simply not necessary to encourage the invention of new Internet business methods. There are two main justifications for this argument. First, other appropriability mechanisms (i.e. head start advantage, trade secrets, and promotional values) provide enough incentive for inventors to invest in the creation of new and useful business methods. Second, the market provides enough incentive for these kinds of inventions.

  45. The head start advantage, enhanced by both promotional values and trade secrets, may indeed render the patentability incentive unnecessary for Internet business methods. The head start advantage refers to the financial return an inventor of a business method enjoys exclusively as a result of being the first to invent. Generally, the inventor continues to enjoy an economic advantage over her competitors for the period of time it takes for the competitors to develop methods that enable them to compete in the marketplace.

  46. This advantage can be prolonged if firms decide to pursue promotional values. A clever firm, for example, could employ effective marketing and promotional campaigns which would publicly establish that the firm is the inventor of, and market leader with respect to, a particular business method. To the extent that firms can capture this message in their trademarks, they can use their trademarks to maximize their head start advantage. This is true because trademarks can signify to the public the quality and value of the underlying invention or inventor to which they are attached.[80] Thus, an effective trademark is likely to prolong a firm’s competitive advantage, even after its competitors have implemented the relevant business methods and other technologies.

  47. Indeed, anecdotal evidence suggests that the combination of being first to invent and having a valuable trademark can lead to a significant head start advantage for Internet businesses. An example of this is Amazon.com, which has enjoyed a head-start advantage over its competitors as a result of being the first company to sell books over the Internet and investing in its trademark development. Similarly, Yahoo! has enjoyed the same market advantage as related to Internet search engines. Additionally, eBay has enjoyed this same advantage over on-line auction competitors.

  48. Moreover, the experiences of these companies, and dozens of others, suggest that the head-start advantage may be even more significant in the on-line world than in traditional commerce. This is true because the barriers to entry are significantly lower for on-line than off-line firms. As such, the Internet enables the entrance of many new competitors in almost all Internet industries. With so much competition for the same product or service, it can be difficult for consumers to gauge the quality of the respective competitors or their products or services. As such, consumers have seemed and continue to seem willing to endorse the first firm to enter a given market. This explains the success of the aforementioned companies.

  49. Additionally, the use of trade secrets to protect business methods may also prolong a firm’s head-start advantage and ultimately render patents unnecessary in this context. Small companies and start-up firms usually opt for trade secret protection over patent protection when given the choice. A study conducted by Josh Lerner, at the Harvard Business School, concluded that small firms usually do not have the resources to incur the enormous costs associated with patent prosecution and litigation. Lerner’s data indicates "that trade secrets, though important to all firms, are absolutely crucial for the small companies that drive innovation in many developing fields."[81]

  50. The Lerner study conclusions seem particularly appropriate to the Internet context. To the extent that the Internet has been, and continues to be, pioneered by start-up companies, it seems reasonable to deduce that trade secret protection is preferable over patent protection in this context. The fact that there has been so much growth and development in Internet commerce over the past decade implies that substantial incentives to conduct business on the Internet in the absence of patent protection exist. Competition provides a market-driven incentive to develop superior business methods.

  51. In many cases, trade secrets can offer the kind of protection needed to keep a firm’s business methods secret without stifling competition. Trade secrets have been traditionally and effectively used to protect business methods. As an empirical matter, it is only after these business methods have produced significant financial returns that they become widely available by reverse engineering.[82] Thus, by keeping the particular method secret for an initial period of time, firms can enjoy the rewards of the head start that will continue until competitors find alternative methods by which to compete. In the Internet context, this may be superior to patent protection because patents enable patent holders to exclude others’ use of given business methods and thereby restrict healthy competition and increase administrative costs.

  52. Moreover, a patent regime would impose significant costs on Internet commerce that would not be incurred under a non-patent regime. The issuance of patent will lead to a reduction in the amount of competition on the Internet because patents give the patentee a monopoly. Because there are many ways in which a new business method might be adapted to particular business situations, it might be inefficient to give one patentee exclusive rights to the method or technique. The costs, in the form of foregone applications and modifications, may outweigh the gains of increased incentives to invent. This may be particularly true for the Internet. This is so because, under the doctrine of equivalents, patents enable the patent holder to exclude the development of similar, non-identical, useful inventions. To the extent that Internet business methods are likely to vary from one another in only subtle ways, the patent monopoly may exclude the implementation of too many useful business methods.

  53. Moreover, there are other substantial costs that are unique to the patent system. For instance, patents may encourage inefficient races and over-fishing.[83] Other than the wasteful use of resources that follows from inefficient races and overfishing, these two problems may also deter otherwise willing parties from engaging in inventive work. Parties may drop out of the race altogether once they realize they have no chance of winning. In the context of the Internet, this may translate to less competition in particular areas of business and ultimately inefficient levels of business method invention.

  54. Thus, it is not at all clear that the invention motivation theory leads to the conclusion that patents on business methods are necessary. In fact, an examination of the issues implicated by this theory may lead to the opposite conclusion. The market and other appropriability mechanisms seem to provide more than adequate incentives for invention. They also avoid the costs that accompany the patent monopoly (i.e. stifled competition, inefficient races, and overfishing). Thus, in the final analysis, patents on business methods make sense only if they offer incentives beyond those offered by these other mechanisms and if they do not impose costs that interfere with this comparative advantage in incentives. These conditions do not seem to be satisfied.

    B. Innovation Theory

  55. Under the innovation theory,[84] the purpose of patent law is not to stimulate invention, but rather to stimulate innovation. Patents encourage innovation by achieving three main functions. First, patents advertise the presence of inventions. Second, patents facilitate the licensing of inventions. Third, patents enable patent holders to go to capital markets to get development financing.[85]

    1. Advertising and Licensing Functions

  56. According to innovation theory, firms are likely to be more willing to advertise and license their business methods under a patent regime than under a non-patent (presumably, trade secret) regime.[86] In exchange for the patent monopoly, the Patent Act forces inventors to disclose the know-how embodied in the patent. This disclosure has the effect of increasing public access and knowledge of the business method that would have been kept secret otherwise. However, in order for the gains associated with the disclosure function to be realized before the patent expires, the patent holder must decide to license her patent to other interested parties.[87] Patents facilitate licensing by reducing the transaction costs between the licensor and the licensee.[88]

  57. In general, patent holders will be willing to license their inventions under two conditions.[89] First, patent holders will be likely to license their inventions in circumstances in which they do not possess the resources to develop the invention (i.e. to bring the invention to market). Second, patent holders may be willing to license their inventions to firms in other lines of business who desire to use the invention for different uses than the patent holder. By increasing the advertising and licensing of inventions, patents ultimately increase the overall amount of innovation across a broad spectrum of industries.

  58. However, there are substantial costs that result from increased innovation. The most significant of these costs results from the stifling of competition in industries in which one of the players holds a patent.[90] By giving the patent holder a monopoly on a business method, patents enable patent holders to exclude competitors in the same industry from using that same business method. Thus, although the existence of a patent can lead to widespread use of a given business methods throughout large number of different industries, it also can restrict competition within the industry in which the business method was patented.

  59. Therefore, under innovation theory, the critical question is whether the gains associated with increased innovation will exceed the costs associated with the competition blocking in the industry in which patents have been granted. If so, then broad patent should be issued. If not, less broad patents, if any, should be issued.

  60. In the context of Internet business methods, it is unlikely that the innovation gains will outweigh the costs associated with competition blocking. Indeed, there is good reason to believe that the costs associated with competition blocking will be particularly amplified with regard to the Internet. This is so because patents on Internet business methods may signal the end of barrier-free entry to commerce that has been the hallmark of the Internet. Not only can the existence of patents on Internet business methods impede new entrants from entering the marketplace, but it can ultimately bar existing parties from the market. This leads to reduced competition and ultimately market inefficiency.

  61. There is an even more important reason that the costs associated with blocked competition will outweigh the gains from increased innovation across industries on the Internet. This is because the Internet functions to bridge the gap between disparate industries. Businesses that may seem completely different in the physical world may not be that different in the on-line world. To the extent that the Internet redefines the contours of the market, firms competing on the Internet may be less likely to license their business methods than firms competing in physical space. An example of this reluctance can be extrapolated from the suit between Wal-Mart and Amazon.com.[91] Wal-Mart sued Amazon.com for appropriation of trade secrets that pertained to business methods.[92] Although that suit concerned trade secrets and not patents, it indicates the more important point that traditional lines demarcating different industries erode on the Internet. Traditional innovation theories would expect firms like Wal-Mart, a retail store giant, to be willing to license their business methods to a company like Amazon.com, an on-line bookstore. Their reluctance to do so, and indeed their willingness to sue, suggests that the basic rationales regarding increased licensing may not ring true in the on-line world of commerce. This may lead to the conclusion that the costs of blocked competition exceed the gains from innovation in the Internet realm.

  62. Another cost of Internet business methods patents may be a decrease in the number of start-up firms that can compete with the established firms.[93] This result stems from the hefty price tag attached to patent prosecution and litigation. Additionally, various patent litigation strategies may enable established companies to combat competition from the start-ups. For instance, a big firm may have the resources to continually challenge the validity of a start-up company’s patent. This may have the effect of forcing the start-up to waste resources defending itself, or even worse, if the start-up does not have the resources to defend its patent, of forcing it to leave the marketplace.

  63. Another significant problem that may result from the ability to patent Internet business methods has been referred to as the "tragedy of the anticommons."[94] The tragedy of the anticommons refers to the under-use of a resource that results from diffuse ownership of interrelated property rights. In the context of the Internet, the tragedy occurs when the various underlying patent rights needed to create a further invention are held by many different entities.[95] Granting patent rights to Internet business methods contributes to a patent regime that encourages the proliferation and fragmentation of rights. If this condition exists, the high costs of bargaining, the heterogeneous interests among owners, and the cognitive biases of innovators may lead to the underdevelopment of various business methods.[96]

  64. Ultimately, business method patents are justified only if the gains associated with increased innovation outweigh the costs associated with reduced competition in the industry in which a patent exists. This section has demonstrated that this condition is not satisfied and that, in fact, the costs associated with competition blocking will exceed the gains of increased innovation. As such, another justification for Internet business method patents needs to be found.

    2. Development and Commercialization Function

  65. Many people argue that this other justification can be found in the third economizing function of patents under the innovation theory. Under this theory, patents enable the patent holder to go to capital markets for development financing. Although this may be true, some negative externalities result from this practice. Venture capital firms may become increasingly reluctant to fund start-up companies that have profitable yet unpatentable ideas. Additionally, venture capital firms may be reluctant capitalize a business method that can potentially be preempted by another firm’s patent. Moreover, a new venture not having any patents may be denied funding because of the perception that it cannot protect its own turf. Also, "even if a venture is seeking or has obtained its own patents, it could easily be infringing other patents."[97]

  66. The implication of the preceding analysis is that although a patent regime may facilitate funding for firms that possess patents, it may also lead to less funding for firms that do not possess patents but that would have received funding in the absence of a patent regime. Although an empirical study may be useful in this regard, the anecdotal evidence suggests that, at the least, the costs associated with the lack of venture capital to prospective businesses without patent rights equal the benefits to firms with patents or with patents pending.[98] Moreover, it is clear that patents in this context extend and complicate the due diligence process and thus increase costs to both the venture capital firms and those firms seeking the capital.[99]

    3. Economic Analysis Conclusions

  67. Both the invention and innovation theories support the conclusion that courts should restrict the availability of patents on Internet business methods. Patents do not seem necessary to foster invention or innovation in this context. The market and other appropriability mechanisms provide adequate incentives for invention. Additionally, the costs associated with competition blocking and restricted venture capital availability seem to outweigh the benefits associated with innovation.

    V. Conclusion

  68. State Street makes it clear that courts should turn their attention away from subject matter and towards other patent doctrine. Ultimately, the courts’ interpretation of these doctrines will effect the development of the Internet, Internet commerce, and the economy. An economic analysis of the merits of patents on these methods suggests that patents are not needed to provide the necessary incentives to invent and innovate business methods for the Internet. As such, courts should construe patent doctrine in such a way as to limit both the scope of each individual patent and the number of business method patents to be awarded overall. The biotechnology cases suggest that courts have a great deal of discretion to interpret the patent law in order to effectuate these goals. Specifically, courts should narrowly construe the nonbviousness requirement of 35 U.S.C. §103 and the enablement provision of 35 U.S.C. §112.

    A. Nonobviousness

  69. The nonobviousness requirement functions to restrict the domain of patentable inventions and thereby reduce access costs. It achieves this function by awarding patents to those inventions that represent a significant enough advance over the prior art. The requirement prevents inventors from monopolizing an invention that could have been created by any person skilled in a given art. As such, this requirement promotes efficiency by leaving common knowledge and skills in the public domain.

  70. The biotechnology cases illustrate that courts have discretion in their interpretation of the nonobviousness doctrine. Courts should allow a more general nexus between the prior art and the invention in question to render the latter obvious. For instance, the courts should not allow patents for Internet business methods that merely apply traditional business methods to the Internet. Employing traditional methods of commerce to the Internet may be new and useful, but it is also obvious. After courts make it tougher to satisfy the nonobviousness burden, it will be more difficult to obtain Internet business method patents.

  71. The USPTO should hire examiners trained in business to examine these patents. Currently, examiners are required to have technical degrees in order to analyze the technical arts effectively. These same examiners do not have the requisite business training or knowledge to effectively analyze business method claims or implement the court’s nonbviouness doctrine with respect to these claims. By hiring examiners with at least a bachelor’s degree in economics or finance, the USPTO can mitigate the costs associated with patents.

    B. Enablement

  72. The enablement requirement also promotes the goal of efficiency, but does so in a manner different than the nonobviousness requirement. Rather than restricting the domain of patentable inventions, the enablement provision promotes efficiency by restricting the scope of the monopoly that accrues to a patented invention. The enablement provision requires an inventor to describe her invention sufficiently so that one skilled in the art can understand it well enough to make and use it, without having to undergo undue experimentation. A corollary of this provision is that the scope of enablement must be roughly commensurate with the scope of claims. In economic terms, the enablement requirement promotes efficiency by restricting the metes and bounds, i.e. the scope, of the patent. If the description is so vague or uncertain that no one can determine, except by unnecessary experiments, how to construct the patented device, the patent is void.

  73. Courts should restrict the scope of business method claims using the enablement provision. This means that courts should carefully examine the claims of each patent in order to determine and mitigate the potential access costs imposed by a broad construction. By reducing the penumbra of each claim, the courts can reduce the amount of competition blocking and thus promote efficiency on the Internet.

Footnotes

[1] Richard Poydner, A Patently Damaging Firefight, FINANCIAL TIMES, May 12, 1999.

[2] Id.

[3] 35 U.S.C. §101 (1994).

[4] The requirements include the novelty, nonobviousness, and specification requirements under 35 U.S.C. §§102, 103, and 112.

[5] Underlying these questions is fundamental concern with the proper role of patents in the economy, the role of §101, the subject matter provision in achieving the underlying goals of patents and finally, the proper scope of claims needed to prevent the stifling of competition that results from the patent monopoly.

[6] Josh McHugh, Barbed Wire on the Internet, FORBES, May 17, 1999, at 183.

[7] Teresa Riordan, A Dangerous Monopoly? Paying Computers Users to Read Internet Ads and Then Storing Their Data, N.Y. TIMES, Feb. 1, 1999, at C2.

[8] Id.

[9] McHugh, supra note 6 at 183.

[10] Scott Thurm, Online: A Flood of Web Patents Stirs Dispute Over Tactics, WALL ST. J., Oct. 9, 1998, at B1.

[11] Mo Krochmal, Patents Sought for E-Commerce Models, TECHWEB NEWS, Aug. 28, 1998.

[12] State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 47 U.S.P.Q.2d 1596 (Fed. Cir. 1998).

[13] Id. at 1377.

[14] See generally, Francisc Marius Keeley-Domokos, Intellectual Property: State Street Bank & Trust Co. v. Signature Financial Group, Inc., BERKELEY TECH. L. J. (1999). See also Richard Stern, Scope of Protection Problems with Patents and Copyrights on Methods of Doing Business, Symposium: Intellectual Property Rights in Methods of Doing Business, FORDHAM INTELL. PROP. MEDIA & ENT. L.J. (forthcoming 2000); John Thomas, The Patenting of the Liberal Professions, Symposium: Intellectual Property Rights in Methods of Doing Business, FORDHAM INTELL. PROP. MEDIA & ENT. L.J. (forthcoming 2000); Peter Kang & Kristin Snyder, A Practitioner’s Approach to Strategic Enforcement and Analysis of Business Method Patents in the Post State Street Era, Symposium: Intellectual Property Rights in Methods of Doing Business, FORDHAM INTELL. PROP. MEDIA & ENT. L.J. (forthcoming 2000); Robert Scheinfeld & Parker Bagley, Virtually Anything is Patentable, Symposium: Intellectual Property Rights in Methods of Doing Business, FORDHAM INTELL. PROP. MEDIA & ENT. L.J. (forthcoming 2000).

[15] See supra note 4.

[16] Id.

[17] See notes notes 66, 68, and 72, infra.

[18] Id.

[19] It reads: "whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter; or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title." 35 U.S.C. §101 (1994).

[20] Diamond v. Chakrabarty, 447 U.S. 303 (1980).

[21] Id. at 309.

[22] Id.

[23] See generally Chakrabarty, supra note 20. The Supreme Court’s broad interpretation of Section 101 of the Patent Act also implies other policy judgments. For instance, that the subject matter provision is not designed to bar entire categories of claims from patent consideration ex ante. The provision is not designed to preclude those categories of claims, like mathematical algorithms of business methods, whose very nature straddles the line between man-made and product of nature. The Supreme Court opinion implies that these categories of claims should continue to be analyzed individually even if doing so poses significant interpretative challenges for the courts and conflicting results in similar cases. Similarly, the Supreme Court’s opinion implies that subject matter provision is not supposed to prevent those categories of claims that produce administrative costs that far exceed the gains that result from the patent monopoly. Generally these types of claims have little chance for success on the merits. The burden to the system of processing so many of these low probability claims may ultimately be greater than the gains that accrue to the narrow subset of these claims that actually survive the patent analysis. Instead, the Supreme Court implied that this economizing function should be left to other sections of the Patent Act.

[24] See generally Chakrabarty, supra note 20. There are several other potential justifications for the existence of the product of nature doctrine. The first justification is constitutional. The Constitution authorizes Congress to grant patents only to subject matter that is deemed either a science or useful art. Art. 1 §8. To the extent that courts have decided that products of nature can not reasonably be categorized as science or useful art, this constitutional argument holds that they should be denied patent protection. The second justification is somewhat epistemological. To the extent that products of nature are considered "manifestations of nature, [the courts have said that they ought to be] free to all men and reserved exclusively to none." Underlying this argument is a moral or religious imperative whereby laws of nature should be off limits to the patent system simply because they are considered to be laws of nature. Implicit in this argument is that there is something unidentifiably special about nature that it should merit special protection. It is unclear how much support this argument would garner today. Nonetheless, it is one that the courts have used from time to time.

[25] Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127, 130 (1948).

[26] Ex parte Abraham, 1868 Comm’r Dec. 59, 59 (Comm’r Pat. 1868).

[27] United States Credit Sys. Co. v. American Credit Indemnity Co., 53 F.818, 819 (S.D.N.Y. 1893).

[28] Hotel Security Checking Co. v. Lorraine Co., 167 F. 460 (2d Cir. 1908).

[29] Id.

[30] Id. at 469.

[31] Hotel Security, supra note 28.

[32] See generally Hotel Security, supra, note 28, and Sandburg, infra, note 34.

[33] Manual of Patent Examining Procedure §706.03(a) (August 1993).

[34] Brenda Sandburg, Patent Applications Flow Freely, LEGAL TIMES, Feb. 22, 1999, at 12.

[35] Paine, Webber, Jackson & Curtis, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 564 F. Supp. 1358, 1365, 218 U.S.P.Q. (BNA) 212 (D. Del. 1983). Ultimately, the claim was upheld as statutory subject matter on the grounds that the patentee claimed "a method of operation on a computer to effectuate business activity." Id. at 1369. This case was decided in 1983. Some commentators have noted that it marked the beginning of the trend towards accepting business method claims as patentable subject matter. Even though a business method was not literally claimed, it is clear that the invention in question was nothing more than an application of a business method.

[36] See note 28, supra.

[37] See note 28, supra.

[38] Rinaldo Del Gallo, Are Methods of Doing Business Finally Out of Business as a Statutory Rejection?, 38 IDEA 403-404 (1998).

[39] State Street also implicated another controversial issue, the subject matter of mathematical algorithms. State Street, supra note 12.

[40] Id.

[41] Id. at 1371.

[42] Id.

[43] Id. at 1375.

[44] In re Schraeder, 22 F.3d 290, 296 (Fed. Cir. 1994) (Newman dissenting).

[45] Id. at 298.

[46] See note 38.

[47] State Street, supra note 12 at 1603.

[48] Id.

[49] See note 20, supra.

[50] State Street, supra note 12 at 1602-03.

[51] State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 927 F. Supp. 502 (D. Mass. 1996).

[52] Id. at 516.

[53] State Street, supra note 12 at 1604.

[54] See note 12, supra.

[55] Id.

[56] Id.

[57] These loose constructions are based on the USPTO’s interpretation of current case law that applies to contexts other than business methods. However, to the extent that this case law does not deal with business methods generally or Internet business specifically, they will not be analyzed here.

[58] See McAfee & Mcmillan, Bidding and Auctions, 25. J. ECON. LIT. 699, 702 (June 1987).

[59] These cases will be analyzed in the next section.

[60] See notes notes 66, 68, and 72, infra.

[61] ROBERT PATRICK MERGES, PATENT LAW AND POLICY: CASES AND MATERIALS, 513-24 (Michie Law Publishers 2d ed. 1997).

[62] 35 U.S.C. §103(a) reads (in relevant part), "A patent may not be obtained … if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains."

[63] See notes notes 66, 68, and 72, infra.

[64] Graham v. John Deere Co., 383 U.S. 1, 17-18 (1966) (explaining the method by which the "nonobviousness" requirement is to be applied. The Supreme Court announced a three-pronged test that determines (1) the scope and content of the prior art, (2) the differences between the prior art and the claims at issue, and (3) the level of ordinary skill in the pertinent art. The court also held that the use of secondary or objective factors might be relevant to the nonobviousness inquiry). See also Sakraida v. Ag Pro, 425 U.S. 273 (1976) (stating reluctance to use secondary factors to supersede other parts of Graham test); Stratoflex v. Aeroquip, 713 F.2d 1530; United States v. Adams, 383 U.S. 39, 148 U.S.P.Q. (BNA) 479 (1966); Edmund Kitch, Graham v. John Deere Co: New Standards for Patents, 1966 SUP. CT. REV. 293.

[65] See notes 66, 68, and 72, infra.

[66] In re Deuel, 51 F.3d 1552, 34 U.S.P.Q.2d 1210 (Fed. Cir. 1995).

[67] Id. at 1558-59.

[68] In re Bell, 991 F.2d 781, 26 U.S.P.Q.2d (BNA) 1529 (Fed. Cir. 1993).

[69] Id. at 784.

[70] Id.

[71] See note 66, supra.

[72] Hybritech v. Monoclonal Antibodies, 802 F.2d 1367, 231 U.S.P.Q. 81 (Fed. Cir. 1986).

[73] In fact, courts seem willing to render a claim obvious only in cases like In re O’Farell whereby the prior art explicitly suggests that a future inventor try certain choices in order to reach specified results. In that case, the prior art relating to O’Farell’s invention consisted of an article that O’Farell himself co-authored. The article contained "a detailed enabling methodology for practicing the claimed invention, a suggestion to modify the prior art to practice the claimed invention, and evidence suggesting that it would be successful." To the extent that the O’ Farell invention primarily put into practice that which was suggested by the article, the court concluded the O’Farell claims to be obvious.

[74] See notes 66, 68, and 72, supra.

[75] Id.

[76] Id.

[77] ROBERTO MAZZOLENI & RICHARD NELSON, ECONOMIC THEORIES ABOUT THE BENEFITS AND COSTS OF PATENTS (1996).

[78] Id.

[79] According to this theory, patents promote efficient levels of invention by enhancing the incentives for inventors to invest in invention. The incentives that follow from the patent monopoly also have attendant costs, in the form of access costs, which lead to under-use of the useful invention. Under this theory, patents should be granted only when the tradeoff between incentives to invent and access costs militates in favor of the former. Presumably this condition occurs most often in cases that involve particularly risky or expensive inventions. This is true because, without the patent monopoly, inventors may be deterred from investing in these types of inventions.

[80] See William Landes & Richard Posner, Trademark Law: An Economic Perspective 30 J. L. & ECON. 265 (1987).

[81] See MERGES, supra note 61 at 1237-68.

[82] Id.

[83] MAZZOLENI & NELSON, supra note 77 at 3.

[84] Some commentators prefer to further sub-divide the innovation theory in to its four constituent parts. Ultimately there is no analytical difference between that classification and the one employed in this paper. The difference is one in organization but not in substance. See generally MAZZOLENI & NELSON, Id.

[85] To the extent that patent holders may not be able to foresee all possible uses of their invention ex ante or do not have the resources to develop and implement their own inventions, these three economizing functions facilitate the development and commercialization of inventions.

[86] MAZZOLENI & NELSON, supra note 77 at 3.

[87] Id.

[88] The reduction in transaction costs results from the property right inherent in the patent. This refers to the fact that patents identify the metes and bounds of the patentee’s right in the invention. By defining the physical locus of the patent holder’s rights, patents enable both patent holder and licensee to know exactly what rights are being conveyed by the license and, because of this, reduce transaction costs.

[89] MAZZOLENI & NELSON, supra note 77 at 3.

[90] Id.

[91] Wal-Mart Agrees to Settle Law Suit Against Amazon, N.Y. TIMES, April 6, 1999, at C6.

[92] Id.

[93] Andrew Katz, 'State Street' May Place Start-Ups in Peril, N.Y.L.J., SUPPLEMENT: TECH TRENDS, Jan. 19, 1999 at C.

[94] See Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, May 1, 1998.

[95] For instance, this could mean that the patent on a business method is owned by one person, the patent on the needed encryption technology is owned by another person, the patent on the underlying format is owned by yet another, and the patent on the hardware is owned by yet another or even several different people, and so on.

[96] See Heller & Eisenberg, supra note 94. However, to the extent that innovators are willing to participate in a cross-licensing scheme, the problems associated with the tragedy of the anticommons will be mitigated. Ultimately, social norms within industries may determine whether the tragedy of the anticommons will materialize or not. If cross-licensing arrangements are worked out, then the tragedy of the anticommons may be less problematic than would appear otherwise.

[97] Katz, supra note 93.

[98] Id.

[99] Id.