Business Will Feel Impact Of Changes In Patent Law

Some recent court decisions on patents have unleashed conditions that dictate that most all business will soon "live in interesting times."

State Street & Trust Co. v. Signature Financial Group Inc., and AT&T Corp. v. Excel Communications clarify exceptions to subject matter that is eligible for patent protection: business methods, such as bookkeeping methods and systems, explains John W. Bagby, professor of business law in Penn State's Smeal College of Business Administration.

Methods of doing business (MoDB), such as bookkeeping methods and systems, were widely considered unpatentable in the United States as early as the late nineteenth century, says Bagby. He recently authored a journal article, "Business Method Patent Proliferation: Convergence: of Transactional Analytics and Technical Scientifics," for The Business Lawyer (November 2000).

For example, techniques such as double-entry bookkeeping, just-in-time inventory controls, economic order quantity processes, discounted cash flow techniques and options pricing, at one time were considered unpatentable. While these well-known and valuable business operations techniques have been in general use by business and, Bagby believes, should remain part of the public domain, other business and analytical methods will be patented in the future.

"State Street is opening the floodgates to MoDB patents, simultaneously spurring their development, but also provoking considerable litigation," says Bagby. "These types of business methods can be expected to migrate from the public domain or protection under trade secret status into MoDB patent protection," says Bagby.

This is important, because trade secrets can be less valuable than patents because they are vulnerable to reverse engineering, employee misappropriation, and the weaknesses of employment contract terms requiring confidentiality.

"The patentability of methods of doing business may have significant repercussions for entrepreneurship and small business, particularly in the near to the medium term," says Bagby.

Large entities with significant intellectual property litigation budgets will be emboldened to intimidate small businesses from using MoDB to compete.

"This will enhance the opportunity to extract royalties for these business techniques. Small businesses outside the high-technology sector are ill-quipped for the expense and surprise of MoDB asset management or infringement risk management," says Bagby.

The article appears in the November 2000 issue of The Business Lawyer .