[Random-bits] Julia Angwin: 'Business-Method' Patents Create Growing Controversy

[James Love]

Oct 3, 2000

'Business-Method' Patents
Create Growing Controversy

By JULIA ANGWIN
Staff Reporter of THE WALL STREET JOURNAL

On his lunch break recently, Lloyd Roberts stopped at a Kentucky Fried
Chicken outlet in New York City and ordered chicken and macaroni with
cheese. The total came to $6.48.

Before the 53-year-old camera-store manager could pull out his wallet,
the cashier said, "I have a deal for you. For your leftover change, you
can either get a small drink or a chicken strip." He chose the small
soda, which normally sells for $1.29, bringing his total to an even $7.

Such "upselling," as the promotion is called, has boosted the chicken
outlet's revenue by about 4% over the past few weeks. Yet the store
won't keep all of this sales growth to itself.

Instead, a cut will go to Jay Walker, the billionaire founder of
Priceline.com Inc. Another of his companies, Walker Digital Corp., of
Stamford, Conn., holds a patent on this particular form of upselling. A
Walker Digital subsidiary called Retail DNA plans to collect a royalty
on each successful upsell at restaurants that are testing the system,
including outlets of Burger King and McDonald's.

Walker Digital thought up the idea and patented the method of putting
together such an offer. Retail DNA then built software that plugs into
the cash registers at fast-food outlets. The companies that provide the
cash register software and hardware also will get a portion of the
upselling revenue.

It's a pretty sweet business proposition -- and one that is increasingly
controversial. Such patents on "business methods," which have been
soaring in recent years, have been denounced for allowing the patent
owners to put a lock on innovation or to profit unfairly from it. The
U.S. Patent and Trademark Office has been accused of issuing way too
many such patents, and for dubious innovations.

The issue is heating up in Washington. Tuesday, two House Democrats plan
to offer a bill they say would make it easier and quicker to challenge
business-method patents, in part by proposing a controversial step:
making such patent applications publicly available, unlike applications
for other types of patents. The bill would permit a challenger to
present evidence why the patent shouldn't be granted.

Opponents of such a move worry about theft of ideas. But the measure's
two authors, Reps. Howard Berman of California and Rick Boucher of
Virginia, say that revamping the system would, in the end, benefit
patent holders by making their claims stronger.

No one expects the issue to be settled anytime soon. The bill, which
isn't likely to go anywhere in the current Congress's final days, is
more an initial shot across the bow. "The bill I am introducing is a
work in progress, and one that will likely generate great debate," Rep.
Berman says.

The proposal is likely to face opposition from independent inventors and
people who don't like the idea of creating different procedures for
different types of patents. Such a move could create conflicts with
international treaties that bar the U.S. from discriminating among types
of patents, some experts say. Moreover, Congress generally has shied
away from these sorts of distinctions.

Patents today have become an increasingly popular business tool,
particularly for business methods. Many have been controversial -- such
as a patent won by British Telecommunications PLC for a method of
clicking between Web pages similar to hyperlinks and Amazon.com Inc.'s
patent for "1-Click" shopping, which allows online customers to buy
things with a single mouse click.

Patent proponents argue that such intellectual property is the fuel of
the New Economy -- that without these patents, inventors would be too
afraid of copycats to go forward with their creations. Mr. Walker says
that business-method patents are no different than patented factory
processes for making steel or chemicals; it's just that the raw material
of the digital age is information.

Critics say just the opposite is true: that patent protections stifle
innovators who are afraid of getting sued by patent holders. They argue
that business-method patents often allow the "first mover" to corner a
market. "What I find most offensive about business-method patents is
that fundamentally they allow somebody to patent an idea," says Tim
O'Reilly, a California publisher of technology books who is a leader in
the fight against such patents. "That is at odds with so much that we
hold sacred."

   [snip]

Microsoft Corp. has a similarly conflicted position. As one of the most
prolific customers of the patent office, winning 352 patents in 1999
alone, it can ill afford to criticize patents. But when Priceline.com
sued Microsoft for copying its name-your-own-price system on the Expedia
travel Web site, Microsoft lashed out.

"We respect intellectual-property rights, but we don't respect some
companies abusing the system," says Microsoft spokesman Jim Cullinan. He
contends Priceline's patent is not valid, but he declines to elaborate
on why. The lawsuit between Priceline and Microsoft is pending.

   [snip]


Traditionally, patents were granted primarily for physical inventions
such as the light bulb and the telephone. But in the 1981, the Supreme
Court ruled that a computerized method of molding tires was patentable
despite its reliance on software algorithms. An avalanche of software
patents followed.

The floodgates were opened further in 1998 when the U.S. Court of
Appeals for the Federal Circuit ruled in favor of Signature Financial
Group's patent for a method of managing mutual funds. The decision
legitimized the business-method patent, which the court defined as "the
transformation of data."

The patent office argues that business-method patents were around
before. It points to patents from the 1800s for things such as a method
of compiling statistics that were the foundation of the tabulating
machine.

Even so, the trickle of business-method patents has become a flood since
the 1998 court decision. The patent office says applications in the
category of software and business methods have soared to 1,300 in 1999
from 700 in 1996, becoming the fastest-growing category.

Mr. Walker is one of the patent office's best customers. Walker Digital
earns money from licensing its inventions -- including, most notably,
the patents for Priceline.com's name-your-own-price Web site. Closely
held Walker Digital says its portfolio of 66 patents and 400 pending
patents has earned it a $1 billion valuation with private investors.

Walker Digital has raised more than $200 million from a roster of
high-profile investors including Microsoft co-founder Paul Allen's
Vulcan Ventures, media financier Herb Allen's Allen & Co., Goldman Sachs
Group Inc., Bain & Co. and Wit Soundview Group Inc.

To keep its patent machine humming, Mr. Walker has launched an
aggressive lobbying operation that is focused on speeding up the
patenting process. In July, Walker Digital hired Jim Rowe, a former top
lobbyist for General Electric Co.'s NBC and former staffer for Rep.
Chuck Schumer, to open a full-time Washington office. Mr. Rowe says his
most pressing goal is to oppose the budget cuts being proposed in
Congress for the patent office, which could slow down patent issuance.

Mr. Walker says the lobbying is perfectly normal for a company the size
of Priceline.com, though the office is run on behalf of the smaller
Walker Digital. He also says he feels an obligation to "educate"
lawmakers about the validity of business-method patents.

Mr. Walker became interested in patents when he started a company that
stuffed magazine subscription pitches into credit-card billing
statements. He decided to patent the idea. When Mr. Walker started
researching his application, he became fascinated by the idea that many
successful business ideas could have been even more successful if they
had been patented.

To test his theory, in 1994, Mr. Walker paid a group of 20 influential
Manhattan attorneys to have lunch and talk about patent law. He asked
them if the credit card could have been patented. They said yes. Then he
asked about the ATM machine. They said yes. Finally, he asked about
frequent-flier miles. And they said yes.

Mr. Walker was stunned. He couldn't figure out why nobody was patenting
these great ideas. Later, at a conference, he asked Robert Crandall, the
former chief executive of American Airlines parent AMR Corp., why he had
never patented his creation of frequent-flier mileage.

Mr. Crandall said he doesn't recall the exact conversation, but that
patenting frequent-flier miles never occurred to him at the time.
However, he added that he's not entirely sure that patenting such things
is a good idea. "It seems to me that if business processes were
patentable you would very severely limit competition," he says.

Spurred by the prospect of patenting the next "big idea" like credit
cards, Mr. Walker formed Walker Digital in 1995. He envisioned it as a
think tank similar to Thomas Edison's laboratory in Menlo Park, N.J.,
which produced more than 1,000 patents during the late 1800s.

Unlike Mr. Edison, however, Mr. Walker wasn't looking to hire brainy
technologists. He wanted marketing men like himself. Walker Digital
employs about 50 inventors -- many of them marketing and business
experts -- who spend their days dreaming up better ways to do business
and filing patent applications for them. On average, his firm files for
a patent every two weeks.

The inventors sit in standard-issue conference rooms to brainstorm on
topics ranging from how to help employers find the right hires to how to
motivate shoppers to spend more. "We try to break apart a marketing
moment and say how can we add more value to the moment and more value to
the retailer," says Vikas Kapoor, president and chief operating officer
of Walker Digital.

Some inventions that have emerged include an online system of selling
expert advice, a method of comparison shopping for payment plans at a
retail checkout and a way for news organizations to sell information
that ends up unused in articles.

Walker Digital's best-known creation, however, is the
name-your-own-price process that is used to sell airline tickets,
groceries, gasoline and other goods and services on Priceline.com's Web
site. Walker Digital has a stake of almost 4% in Priceline.

Mr. Walker says the Priceline patents have given him an important right:
to sue to protect the effort he put into creating and obtaining them.
"This is a perfect example of the system working," he says.

-- Robert S. Greenberger and Scott Thurm contributed to this article.

Write to Julia Angwin at julia.angwin@wsj.com