Litigating the Business Method Patent: Pitfalls for Unwary Defendants

The lion's share of business method and e-commerce patents is grouped in the now infamous Class 705 at the U.S. Patent and Trademark Office ('USPTO'). This specialized class that encompasses data processing involving financial, business practice, management, and cost/price determination has experienced a surge in popularity rivaled only by the likes of nanotechnology. From 2001 to 2005, more than 5000 U.S. patents were issued in Class 705. Growth in 705 patenting has been so pronounced that this 5-year period has produced about the same number of new patents as the previous 15-year period.

Fear of the 705 patent troll ' the small entity or holding company without a tangible product that wields an intangible asset in the form of a patent deed in order to procure large damage awards or settlements ' has recently led Class 705's most prominent litigation targets to ask Congress to reform the patent laws to provide relief. Despite this legislative wrangling, the Class 705 plaintiff remains potent, aggressive, and seemingly ever-present.

To the dismay of the traditional Class 705 patentees in the computer and information technology industries as well as the financial services sector, a new brand of posturing by patent plaintiffs and plaintiffs' counsel now presents defendants with a difficult assortment of issues from a fairly disturbing perspective. These companies are not being sued by a competitor. Nonetheless, they are being drawn into showdowns involving a complex matrix of business and litigation risks.

Litigations based on business method patents are often filed in a plaintiff-friendly jurisdiction, involve large numbers of claims that defy straightforward claim construction, and concomitantly subject defendants to significant exposure for damages and disruption of their business. The vagueness in claim scope of many business method patents (in contrast, for example, to the comparatively clear-cut claims typically written to cover mechanical devices) presents tremendous uncertainty to a decision-maker engaged in an early cost-benefit analysis of weighing mounting-a-defense costs against making-it-go-away settlement options. To drive the point home, after years of highly unsuccessful patent litigation involving a large number of patents and patent claims, and during which investors took notice of the substantial business risks, the purveyors of the lucrative Blackberry' business, Re-search in Motion, this year inked a settlement with patent holding company NTP for $612.5 million. The NTP patents-in-suit actually were not Class 705 intellectual property but instead were similar patents in telecommunications and telephonic communications classes. Like many business method patent cases, this litigation involved a patent holding company, the assertion of multiple patents, and alleged infringement of a large number of patent claims.

The publicized windfalls have attracted many players ' offensive and defensive ' into the arena. There no longer is a garden variety Class 705 patentee. For example, the U.S. Postal Service has patented a method of matching an address in a database to improve delivery of express mail (U.S. Patent 7,031,959) while the U.S. Navy was granted protection for a method of assessing the skills of its workforce capable of handling maintenance, alteration, and modernization of sea-going vessels (U.S. Patent 6,591,246). Deere & Company recently was issued a patent on a method and system of evaluating the performance of a crop (U.S. Patent 7,047,135), and The Coca-Cola Company received a patent for a system and method for purchasing a product from an automatic vending machine by means of a consumer's cellular telephone (U.S. Patent 6,584,309). It seems that nothing is out of the realm of possibility and Chief Justice Warren Burger's adopted standard of 'everything under the sun made by man' has been taken to heart. See Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980).

The following brief statistical review and guide to risk analysis should give pause to Class 705 patent litigation defendants. Statistics were obtained from searching in the Utility Patents database available from LexisNexis' as well as the USPTO Full Text and Image Database. In addition, the review of patents is based on current U.S. classification; Class 705 actually was created in 1997 by merging previously distinct numerical classes in the business methods area. See Automated Financial or Management Data Processing Methods (Business Methods), USPTO White Paper.

The numbers speak for themselves. District court actions have been filed for more than 425 patents in Class 705, with nearly 200 of these patents having issued since the year 2000. Litigation of business method patents is on the rise.

Beware of the continuing application. Of the more than 425 patents in Class 705 that have been litigated, about 40% have been continuations or continuations-in-part. This approach to obtaining claims is not particularly new, however. U.S. Patent 3,938,095, which issued in 1976 and is titled 'Computer Responsive Postage Meter,' was a continuation-in-part that Pitney Bowes later litigated in 1983. It should also be recognized that many plaintiffs engage in continuation application practice concurrently with litigation and thus a victory over one patent may only lead to a later allegation of in-fringement of that patent's kin.

Beware of mega-claim patents. Historically, about 20% of the Class 705 patents that have been litigated have included at least 50 claims. That same trend continues for the Class 705 patents issued and litigated since the year 2000. By comparison, only about 10% of the Class 705 patents that issued since the year 2000 had at least 50 claims. Obviously, it only takes infringement of one claim to infringe a patent. It needs scarcely to be emphasized that patents are presumed valid under 35 U.S.C. '282 and claim invalidity can only be proven by clear and convincing evidence. Thus, the task of invalidating a large number of claims at issue in a Class 705 patent litigation should not be underestimated. Because plaintiffs' counsel strongly favor jury trials, and a jury need only find one claim to be valid and infringed among the raft of claims that may be asserted, mega-claim patents present a substantial risk to defendants.

Ut res magis valeat quam pereat, but where's the beef? The Federal Circuit has instructed that patent claims are to be construed, when possible, to 'survive' rather than 'perish' with the limitation that courts cannot engage in wholesale rewriting of claims to preserve their validity. See, e.g., Nazomi Commc'ns, Inc. v. ARM Holdings, PLC, 403 F.3d 1364, 1368 (Fed. Cir. 2005), quoting the Latin legal maxim set forth in Turrill v. Mich. S. & N. Ind. R.R., 68 U.S. 491, 510 (1863). From this perspective, the amorphous language often employed in business method patent claims creates a quandary for the defendant: How fast can a claim construction be pinned down with some degree of certainty? Unfortu-nately, except for those patents repeatedly asserted by a plaintiff and thus already subject to a circumscribed claim construction from prior litigation, defendants are hard pressed to ascertain a claim construction from which to make a reliable infringement assessment. And because business method patents typically present large numbers of claims written to implore differentiation in the construction of terms used from one claim to another, the task to grasp the substance of the asserted claims for a cost/benefit litigation analysis, in an expedited manner, can be particularly challenging.

Don't mess with Texas. Since the year 2000, almost 70 patent infringement complaints have been filed in the District Court for the Eastern District of Texas on Class 705 subject matter (with the vast majority being filed in recent years). This 'rocket docket' venue has become a plaintiff's paradise for business method patent litigation mainly due to a perception that it is friendly to patent holders and also because of the difficulty of defendants' being able to dispose of actions by summary judgment either pre- or post-Markman. See, e.g., Alan Cohen, 'From PI to IP: Texas Attorneys Transform Their Practices After Tort Overhaul,' Texas Lawyer, Nov. 7, 2005 ('Since 1994, patent owners have prevailed in 88 percent of all jury trials and 75 percent of bench trials in Marshall, according to a survey by LegalMetric.'); but see Chuck Lindell, 'Marshall Juries Lean Toward Patent Holders. Many Cases Settle Rather Than Risk Jury Trial.' Austin American-Statesman, April 16, 2006 ('The three judges who typically hear patent cases in Marshall have presided over only 10 trials since 1992, and only seven were before juries, according to LegalMetric.'). But other venues also have been extremely popular, particularly the district courts in California and New York.

Interestingly, the earliest Class 705 patent litigation that we could identify was for U.S. Patent 3,872,448, which issued March 18, 1975 and is titled 'Hospital Data Processing System.' The University of Texas System sued Community Health Computing, Inc. in 1979 in the District Court for the Southern District of Texas (Houston).

Re-examination is not necessarily the answer. Of the Class 705 patents that have issued and have also been litigated since the year 2000, less than 10% have been subject to re-examination (a similar statistic applies to all Class 705 patents historically litigated). Re-examination, of course, must be considered in a timely fashion if a stay of litigation is to be successfully procured. More importantly, defendants should be aware that patents rarely emerge from re-examination proceedings with all claims canceled. Instead, at least some of the claims typically are found to be patentable (in some cases in amended form) while patentees often are able to present and obtain new claims during the proceeding.

Beware of entities both large and small. Not all business method patent litigation has been a David versus Goliath epic pitting a patent troll against the Fortune 500. In eSpeed v. BrokerTec, the formidable financial resources of Class 705 patent holder Cantor Fitzgerald and an alleged infringer, interdealer broker ICAP, were put in play over trading methods of securities and other commodities. In Amazon.com v. Barnesandnoble.com (the 1-click patent) as well as Priceline v. Microsoft (the name-your-price patent), the litigants engaged in these Class 705 patent disputes were quite the opposite of patent holding companies.

Conclusion

Class 705 patentees-turned-litigants and their unwary defendants have been multiplying in recent years. Defendants' posturing is always important in addressing unwelcome infringement allegations but may be even more important in the context of business method patent litigation. It certainly is not in a defendant's best long-term interest to foster a reputation of being quick to settle by throwing money at patent 'problems' to make them go away, and this is particularly true in an age of well-informed patent holding companies litigating with a mindset of nothing-to-lose and everything-to-gain. Sending the wrong message to the plaintiffs' bar can have far-reaching consequences in terms of the number of cease-and-desist letters and unsolicited licensing offers that a defendant can expect to receive in the future from other plaintiffs who have taken notice of a capitulatory, deep-pocket defendant. Moreover, with patentees emboldened in a post-Lundgren world that has clearly set business method patent claims free from being tied to a computer, interest in business method patents continues to be strong. See Ex parte Lundgren, 76 USPQ2d 1385 (BPAI 2005).

However, the Blackberry case, to mention one of many, instructs that early settlement can be the best strategy, and aggressive, uncompromising defense can be a disaster.

Defendants should engage in hardheaded risk assessment early in Class 705 patent litigation. Such analyses should focus on considerations that include:

• the nature of the plaintiff (eg, business competitor or patent holding company);
• the nature of the asserted patent (eg, the number of asserted claims, the vagueness of the claim scope, any estoppels applying to the claim construction, and the use of continuing application practice);
• whether the technology at issue goes to the heart of the defendant's business, thereby potentially holding the entire business hostage;
• the venue and any opportunities, if necessary, to transfer to a more defendant-friendly court;
• the number of concurrent litigations filed by the plaintiff and any opportunities for joint defense to save costs, pool resources, and ferret out prior art;
• the advisability of concurrent patent re-examination;
• the cost of litigation in terms of the financial resources that must be committed to a vigorous defense as well as the uncertainty the litigation creates in the marketplace and for investors;
• the cost of settlement in terms of the financial resources and the defendant's reputation;
• the potential financial exposure if the plaintiff prevails; and
• the potential loss of business due to an injunction or adverse decision.

The appropriate Class 705 litigation defense strategy must be chosen on a case-by-case basis after gaining at least a basic understanding of the nature and extent of the risks. Class 705 patents present considerations that while not unique to business method patents, in general involve a more complex landscape of baffling claim scope, large families of related patents, and large numbers of claims. Defendants should not instantly conclude that all business method patent litigations are losers that don't warrant a strong defense and should be quickly settled, but defendants also should be cautious to avoid falling into a pit of spiraling litigation costs accompanied by an increasing loss of confidence that a desired outcome can be achieved.

William G. Pecau is a partner in the Washington, DC, office of Steptoe & Johnson LLP and can be reached at [email protected]. Seth A. Watkins, Ph.D. is special counsel in the firm's Washington, DC, office and can be reached at [email protected].

The lion's share of business method and e-commerce patents is grouped in the now infamous Class 705 at the U.S. Patent and Trademark Office ('USPTO'). This specialized class that encompasses data processing involving financial, business practice, management, and cost/price determination has experienced a surge in popularity rivaled only by the likes of nanotechnology. From 2001 to 2005, more than 5000 U.S. patents were issued in Class 705. Growth in 705 patenting has been so pronounced that this 5-year period has produced about the same number of new patents as the previous 15-year period.

Fear of the 705 patent troll ' the small entity or holding company without a tangible product that wields an intangible asset in the form of a patent deed in order to procure large damage awards or settlements ' has recently led Class 705's most prominent litigation targets to ask Congress to reform the patent laws to provide relief. Despite this legislative wrangling, the Class 705 plaintiff remains potent, aggressive, and seemingly ever-present.

To the dismay of the traditional Class 705 patentees in the computer and information technology industries as well as the financial services sector, a new brand of posturing by patent plaintiffs and plaintiffs' counsel now presents defendants with a difficult assortment of issues from a fairly disturbing perspective. These companies are not being sued by a competitor. Nonetheless, they are being drawn into showdowns involving a complex matrix of business and litigation risks.

Litigations based on business method patents are often filed in a plaintiff-friendly jurisdiction, involve large numbers of claims that defy straightforward claim construction, and concomitantly subject defendants to significant exposure for damages and disruption of their business. The vagueness in claim scope of many business method patents (in contrast, for example, to the comparatively clear-cut claims typically written to cover mechanical devices) presents tremendous uncertainty to a decision-maker engaged in an early cost-benefit analysis of weighing mounting-a-defense costs against making-it-go-away settlement options. To drive the point home, after years of highly unsuccessful patent litigation involving a large number of patents and patent claims, and during which investors took notice of the substantial business risks, the purveyors of the lucrative Blackberry' business, Re-search in Motion, this year inked a settlement with patent holding company NTP for $612.5 million. The NTP patents-in-suit actually were not Class 705 intellectual property but instead were similar patents in telecommunications and telephonic communications classes. Like many business method patent cases, this litigation involved a patent holding company, the assertion of multiple patents, and alleged infringement of a large number of patent claims.

The publicized windfalls have attracted many players ' offensive and defensive ' into the arena. There no longer is a garden variety Class 705 patentee. For example, the U.S. Postal Service has patented a method of matching an address in a database to improve delivery of express mail (U.S. Patent 7,031,959) while the U.S. Navy was granted protection for a method of assessing the skills of its workforce capable of handling maintenance, alteration, and modernization of sea-going vessels (U.S. Patent 6,591,246). Deere & Company recently was issued a patent on a method and system of evaluating the performance of a crop (U.S. Patent 7,047,135), and The Coca-Cola Company received a patent for a system and method for purchasing a product from an automatic vending machine by means of a consumer's cellular telephone (U.S. Patent 6,584,309). It seems that nothing is out of the realm of possibility and Chief Justice Warren Burger's adopted standard of 'everything under the sun made by man' has been taken to heart. See Diamond v. Chakrabarty , 447 U.S. 303, 309 (1980).

The following brief statistical review and guide to risk analysis should give pause to Class 705 patent litigation defendants. Statistics were obtained from searching in the Utility Patents database available from LexisNexis' as well as the USPTO Full Text and Image Database. In addition, the review of patents is based on current U.S. classification; Class 705 actually was created in 1997 by merging previously distinct numerical classes in the business methods area. See Automated Financial or Management Data Processing Methods (Business Methods), USPTO White Paper.

The numbers speak for themselves. District court actions have been filed for more than 425 patents in Class 705, with nearly 200 of these patents having issued since the year 2000. Litigation of business method patents is on the rise.

Beware of the continuing application. Of the more than 425 patents in Class 705 that have been litigated, about 40% have been continuations or continuations-in-part. This approach to obtaining claims is not particularly new, however. U.S. Patent 3,938,095, which issued in 1976 and is titled 'Computer Responsive Postage Meter,' was a continuation-in-part that Pitney Bowes later litigated in 1983. It should also be recognized that many plaintiffs engage in continuation application practice concurrently with litigation and thus a victory over one patent may only lead to a later allegation of in-fringement of that patent's kin.

Beware of mega-claim patents. Historically, about 20% of the Class 705 patents that have been litigated have included at least 50 claims. That same trend continues for the Class 705 patents issued and litigated since the year 2000. By comparison, only about 10% of the Class 705 patents that issued since the year 2000 had at least 50 claims. Obviously, it only takes infringement of one claim to infringe a patent. It needs scarcely to be emphasized that patents are presumed valid under 35 U.S.C. '282 and claim invalidity can only be proven by clear and convincing evidence. Thus, the task of invalidating a large number of claims at issue in a Class 705 patent litigation should not be underestimated. Because plaintiffs' counsel strongly favor jury trials, and a jury need only find one claim to be valid and infringed among the raft of claims that may be asserted, mega-claim patents present a substantial risk to defendants.

Ut res magis valeat quam pereat, but where's the beef? The Federal Circuit has instructed that patent claims are to be construed, when possible, to 'survive' rather than 'perish' with the limitation that courts cannot engage in wholesale rewriting of claims to preserve their validity. See, e.g., Nazomi Commc'ns, Inc. v. ARM Holdings, PLC , 403 F.3d 1364, 1368 (Fed. Cir. 2005), quoting the Latin legal maxim set forth in Turrill v. Mich. S. & N. Ind. R.R. , 68 U.S. 491, 510 (1863). From this perspective, the amorphous language often employed in business method patent claims creates a quandary for the defendant: How fast can a claim construction be pinned down with some degree of certainty? Unfortu-nately, except for those patents repeatedly asserted by a plaintiff and thus already subject to a circumscribed claim construction from prior litigation, defendants are hard pressed to ascertain a claim construction from which to make a reliable infringement assessment. And because business method patents typically present large numbers of claims written to implore differentiation in the construction of terms used from one claim to another, the task to grasp the substance of the asserted claims for a cost/benefit litigation analysis, in an expedited manner, can be particularly challenging.

Don't mess with Texas. Since the year 2000, almost 70 patent infringement complaints have been filed in the District Court for the Eastern District of Texas on Class 705 subject matter (with the vast majority being filed in recent years). This 'rocket docket' venue has become a plaintiff's paradise for business method patent litigation mainly due to a perception that it is friendly to patent holders and also because of the difficulty of defendants' being able to dispose of actions by summary judgment either pre- or post-Markman. See, e.g., Alan Cohen, 'From PI to IP: Texas Attorneys Transform Their Practices After Tort Overhaul,' Texas Lawyer, Nov. 7, 2005 ('Since 1994, patent owners have prevailed in 88 percent of all jury trials and 75 percent of bench trials in Marshall, according to a survey by LegalMetric.'); but see Chuck Lindell, 'Marshall Juries Lean Toward Patent Holders. Many Cases Settle Rather Than Risk Jury Trial.' Austin American-Statesman, April 16, 2006 ('The three judges who typically hear patent cases in Marshall have presided over only 10 trials since 1992, and only seven were before juries, according to LegalMetric.'). But other venues also have been extremely popular, particularly the district courts in California and New York.

Interestingly, the earliest Class 705 patent litigation that we could identify was for U.S. Patent 3,872,448, which issued March 18, 1975 and is titled 'Hospital Data Processing System.' The University of Texas System sued Community Health Computing, Inc. in 1979 in the District Court for the Southern District of Texas (Houston).

Re-examination is not necessarily the answer. Of the Class 705 patents that have issued and have also been litigated since the year 2000, less than 10% have been subject to re-examination (a similar statistic applies to all Class 705 patents historically litigated). Re-examination, of course, must be considered in a timely fashion if a stay of litigation is to be successfully procured. More importantly, defendants should be aware that patents rarely emerge from re-examination proceedings with all claims canceled. Instead, at least some of the claims typically are found to be patentable (in some cases in amended form) while patentees often are able to present and obtain new claims during the proceeding.

Beware of entities both large and small. Not all business method patent litigation has been a David versus Goliath epic pitting a patent troll against the Fortune 500. In eSpeed v. BrokerTec, the formidable financial resources of Class 705 patent holder Cantor Fitzgerald and an alleged infringer, interdealer broker ICAP, were put in play over trading methods of securities and other commodities. In Amazon.com v. Barnesandnoble.com (the 1-click patent) as well as Priceline v. Microsoft (the name-your-price patent), the litigants engaged in these Class 705 patent disputes were quite the opposite of patent holding companies.

Conclusion

Class 705 patentees-turned-litigants and their unwary defendants have been multiplying in recent years. Defendants' posturing is always important in addressing unwelcome infringement allegations but may be even more important in the context of business method patent litigation. It certainly is not in a defendant's best long-term interest to foster a reputation of being quick to settle by throwing money at patent 'problems' to make them go away, and this is particularly true in an age of well-informed patent holding companies litigating with a mindset of nothing-to-lose and everything-to-gain. Sending the wrong message to the plaintiffs' bar can have far-reaching consequences in terms of the number of cease-and-desist letters and unsolicited licensing offers that a defendant can expect to receive in the future from other plaintiffs who have taken notice of a capitulatory, deep-pocket defendant. Moreover, with patentees emboldened in a post-Lundgren world that has clearly set business method patent claims free from being tied to a computer, interest in business method patents continues to be strong. See Ex parte Lundgren, 76 USPQ2d 1385 (BPAI 2005).

However, the Blackberry case, to mention one of many, instructs that early settlement can be the best strategy, and aggressive, uncompromising defense can be a disaster.

Defendants should engage in hardheaded risk assessment early in Class 705 patent litigation. Such analyses should focus on considerations that include:

• the nature of the plaintiff (eg, business competitor or patent holding company);
• the nature of the asserted patent (eg, the number of asserted claims, the vagueness of the claim scope, any estoppels applying to the claim construction, and the use of continuing application practice);
• whether the technology at issue goes to the heart of the defendant's business, thereby potentially holding the entire business hostage;
• the venue and any opportunities, if necessary, to transfer to a more defendant-friendly court;
• the number of concurrent litigations filed by the plaintiff and any opportunities for joint defense to save costs, pool resources, and ferret out prior art;
• the advisability of concurrent patent re-examination;
• the cost of litigation in terms of the financial resources that must be committed to a vigorous defense as well as the uncertainty the litigation creates in the marketplace and for investors;
• the cost of settlement in terms of the financial resources and the defendant's reputation;
• the potential financial exposure if the plaintiff prevails; and
• the potential loss of business due to an injunction or adverse decision.

The appropriate Class 705 litigation defense strategy must be chosen on a case-by-case basis after gaining at least a basic understanding of the nature and extent of the risks. Class 705 patents present considerations that while not unique to business method patents, in general involve a more complex landscape of baffling claim scope, large families of related patents, and large numbers of claims. Defendants should not instantly conclude that all business method patent litigations are losers that don't warrant a strong defense and should be quickly settled, but defendants also should be cautious to avoid falling into a pit of spiraling litigation costs accompanied by an increasing loss of confidence that a desired outcome can be achieved.

William G. Pecau is a partner in the Washington, DC, office of Steptoe & Johnson LLP and can be reached at [email protected]. Seth A. Watkins, Ph.D. is special counsel in the firm's Washington, DC, office and can be reached at [email protected].