| P R O B A T E & P R O P E R T Y May/June 2007 Vol. 21 No.3 Other articles from this issue |
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A Primer on Business Method Patents:
What You Need to Know for Your Real Estate Practice
By Andrew F. Palmieri and Corinne Marie Pouliquen
Andrew F. Palmieri is a partner in the Alexandria, Virginia, office of Vorys, Sater, Seymour and Pease LLP, and the supervisory council member of the Hospitality, Community Recreation and Common Interest Developments Group. Corinne Marie Pouliquen is an intellectual property attorney in the Washington, D.C., office of Vorys, Sater, Seymour and Pease LLP.
Plato instructed that necessity is the mother of invention. Of course, inventions come in varied forms and need not be products, but can also be methods. Moreover, the “necessity” that drives a creative mind to invent often comes from an inspiration for wealth enhancement as much as from a desire to seek a novel or non-obvious solution to a complex problem. As mentioned in the accompanying article, the model for imposing a covenant for “transfer fee rights” on real property is protected by a “business method” patent. What is a business method patent, and how might such patents affect real estate practice?
Business method patents are a class of patents that are defined by the U.S. Patent and Trademark Office (USPTO) as an “apparatus [such as a computer] and corresponding methods for performing data processing operations . . . uniquely designed for or utilized in the practice, administration, or management of an enterprise, or in the processing of financial data” (as distinguished from the more traditional mechanical, electrical, and chemical classes of inventions for purposes of patentability). U.S. Patent Classification System, Classification Definitions, Class 705 (June 30, 2005), available at www.uspto.gov/web/offices/ac/ido/oeip/taf/def/
705.htm. In other words, business method patents protect processes, generally implemented by computers, that are involved in operating a business or that define a product or service provided by a business. Business method patents are seen in industries such as health care, insurance, electronic shopping, inventory management, accounting, finance, and, of course, real estate.
Consequently, a business method patent may be described as a federally protected invention relating to a novel way of doing business. Before 1998, the USPTO did not recognize business method patents, claiming that such patents did not constitute statutory subject matter. This changed when the U.S. Court of Appeals for the Federal Circuit ruled in StateStreet Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), cert. denied, 525 U.S. 1093 (1999), rejecting the theory that a “method of doing business” was an excluded category of invention and reiterating that a business method patent may be granted on the same basis as any other invention. Subsequently, the USPTO issued guidelines that asserted that a method, including a method of doing business, is patentable if the method produces a useful, concrete, and tangible result. U.S. Patent Office, Interim Guidelines for Examination of Patent Applications for Patent Subject Matter Eligibility, available at www.uspto.gov/go/og/2005/week47/patgupa.htm. Since that time, tens of thousands of business method patent applications have been filed with the USPTO, with hundreds of these applications relating to tax strategy, real estate, and business processes that relate to commercial finance.
To qualify for patent protection, a business method must meet four criteria:
1. The method must fall within defined classes of patentable subject matter,including processes, machines, articles of manufacture, and compositions of matter. For instance, anything that is created by a human will fall within at least one of these classes, while laws of nature, natural phenomena, and abstract ideas do not. 35 U.S.C. § 101 (2000).
2. The method must be useful. Hence, the method must yield some concrete, tangible result. Id.
3. The method must be novel, meaning that it does not exist in the prior art, that is, all previous knowledge and inventions. Id. § 102.
4. The method must be non-obvious, meaning that someone with ordinary skill in the relevant technology could not easily think of it in light of the prior art. Id. § 103.
Although applying for and prosecuting a business method patent may be costly and time-consuming, the benefits are significant. The full application process, also called the “patent prosecution” process, may take many years (estimates range from three to 14 years). Once a patent application publishes (approximately 18 months from the priority date), provisional rights are available to the applicant. These rights entitle the applicant to demand reasonable royalty payments from a third party that infringes on a published claim, for the period of time that begins on publication and ends when the patent actually issues, provided that notice is given to the third party and the invention as claimed in the issued patent is “substantially identical” to the invention as claimed in the published application. As a consequence, damages for pre-patent grant infringement are available once a patent actually issues. Moreover, federal law provides for strict penalties, including punitive damages for willful infringement, injunctive relief, and attorney’s fees as a further deterrent against violation of a patent, including business method patents. Id. §§ 283–85. It stands to reason that, as a greater number of business method patents are approved by the USPTO, the chances of infringing on a third party’s intellectual property rights in a patented business method will grow, including in the area of real estate law. In addition to the method for structuring “transfer fee rights” referenced above, business method patents have issued in connection with
• structuring tenancy-in-common (TIC) transactions as a means to create an investment vehicle for tax-deferred exchanges under Code § 1031 (see U.S. Patent No. 6,292,788),
• systems and methods for facilitating the flow of capital through the housing finance industry (see U.S. Patent No. 6,988,082),
• a method of securitizing and trading real estate brokerage options (see U.S. Patent No. 6,615,187), and
• a system for the creation and collateralization of real estate mortgage investment conduit securities (see U.S. Patent No. 6,070,151).
The proliferation of business method patents relating to tax planning, estate planning, real estate, commercial lending, and other areas of law might suggest that attorneys should attempt to take note of developments in the patent area and monitor published applications that may be of relevance to their specific areas of practice and clients. This issue, however, is so fresh that an industry standard for due care by attorneys against delivering advice to clients in violation of business method patents has yet to be established. Attorneys practicing in firms with intellectual property departments may wish to discuss whether existing firm resources are available to monitor patent applications published by the USPTO to identify business method patents that fall within identified practice areas, and if such resources are not available, one may wish to engage a third-party search firm to periodically research and report on such publications. The costs associated with such a level of care, however, may be prohibitive.
There are also insurance implications to consider. Legal counsel may be exposed to liability if it is alleged to have induced its client to infringe on a patent. Moreover, a client who has been successfully enjoined from infringing a business method patent and has incurred monetary damages may seek retributive action against its legal counsel. Because this is a developing area, there is little guidance on loss prevention measures that may be proactively implemented; however, attorneys may wish to review their firm’s professional liability policy, their firm’s comprehensive insurance policy, and their personal umbrella coverage policy to ascertain whether they include or exclude from coverage claims for patent infringement.
The American Bar Association also has taken an interest in this subject. The Section of Real Property, Probate and Trust Law has teamed with the Section of Taxation to conduct a series of meetings with the USPTO to discuss the subject of patentable concepts in relation to tax, estates, and real estate law. These efforts, however, will not halt the continued flow of new business method patents in the short term, nor will they immediately alleviate the risks of patent infringement in real estate law practice.
