Business method patents create a tax or at the very least, an unnecessary cost on doing businesses in the Internet economy. Many investors in technology or technology-enabled businesses have come to expect companies to file for patent protection and assume eligibility on the basis that the idea involves a novel implementation and some computer code. While not every business will get a patent nor do investors expect companies to always get them, this market expectation forces many businesses to at least file for patents even when they have a trivial chance of obtaining the patents. The very act of filing at least gives possible competitors pause because they may now have to worry about building an entire business around a model that may be owned by their competition. They may also force competitors to start filing patents for some derivative works or models to create a bargaining chip with the original innovator or build up a defensive patent portfolio for future usage in lawsuits.
All these consequences impact small businesses and individual innovators the most. They get hit by patent infringement lawsuits first because they are less likely to have the financial resources to defend themselves. They will settle quickly and the volume of settlements will give weight to the the claims of the patent holders to pursue larger targets. The cost of patent filing and defense relative to total financial resources is much higher for smaller companies. Just how expensive is it?
Well, for the two software patent applications I have filed, the total legal and filing cost was $40,000. This number includes roughly $10,000 for provisional patents and $30,000 for the final patent filings. This cost also overlooks the time spent by the inventor in preparing the filing and not working on the business. These figures don’t capture all the effort exerted in searching for prior art and examples of business methods. The total hours associated working with lawyers and preparing patent filings was well over two hundred man hours.
To put it in context, the average American income is about $50,000 and the typical work week is forty hours. So, if the lonely individual inventor or small business owner was like the average American, he or she would be expending significant cost and time towards legal and regulatory overhead rather than capital investment in their business.
Disallowing business method patents (which would require a definition people can agree on) would likely not disincentivize Internet entrepreneurs from starting companies. They rely chiefly on execution of ideas rather than the ideas themselves to succeed; the execution produces new types of advantages like network effects that exist for information goods and largely doesn’t exist for physical goods. Creating an artificial monopoly for coming up with an idea could have made sense in the industrial age and even for certain modern industries like pharmaceuticals which cannot produce natural monopolies or protection for perfecting the implementation of the idea; however, in the information age most businesses do not need patent protection to achieve defensibility or be incentivized to innovate.
Removing the cost of associated with business method patents would be a boon to startups. True technological advantages should be given protection. Admittedly, defining what constitutes a business method and what constitutes true technology is very hard. However, raising the requirement for protection, as In re Bilski has done, is a step in the right direction. Startups face enough problems as it is, and business method patents shouldn’t be one of them.
3 thoughts on “A Startup View of Business Method Patents – by “Victor W””
The $40,000 — where does that go? How much of it goes to the USPTO and how much of it goes to legal overhead?
I believe it was around $5k per patent on filing fees and $1k per patent for the provisional applications. Most of our total cost was for lawyers. You can prepare your own patent filings of course but it’s actually quite difficult for software patents (relative to if you invented a better bird feeder or something).
So the “tax” on business method patents essentially feeds lawyers and legal firms (rather than the government budget) while simultaneously harming the U.S. economy… Brutal.