FOCUS BLOG: Fighting Patent Trolls With the Covered Business Method

FOCUS BLOG: Fighting Patent Trolls With the Covered Business Method

atm-thumbPatent trolls try to make easy money by patenting routine business processes and methods already in use. To protect against such extortionary behavior, the U.S. Patent and Trademark Office (PTO) has implemented the Covered Business Method (CBM) program. The CBM program has been especially helpful to the financial industry, whose business methods are increasingly frequent targets for patent trolls. Patent litigation against financial services companies alone is up almost 290% from 2009 to 2013.

The Covered Business Method program was established as a provisional program under the America Invents Act of 2011. It enables businesses being sued by patent trolls to petition the PTO to review the validity of business processes and method patents that are financial in nature. This is a narrowly construed program that has high standards for entry, but provides a cost-effective and expedient alternative to litigation. Consequently, it saves businesses time and money and allows them to focus on productive activities, while maintaining a robust patent system focused on patent quality and encouraging real innovation.

The 2014 Supreme Court ruling in Alice Corp. v. CLS Bank International established some guidelines for determining the quality of business method patents, and the PTO uses these guidelines during a CBM review. High quality patents offer significant, substantial and non-obvious (novel) improvement on existing methods. The idea behind a high quality patent is actually patentable—not a law of nature or natural phenomenon to which everyone is already subject. And, the initial filing date of a high quality patent clearly predates any prior use or sale by other parties, proving that it was first. The CBM review process has become essential in the elimination of the low quality patents that are driving frivolous litigation.

So how do trolls make money on flimsy patents? They begin by filing for or acquiring a low quality patent that violates some or all of the criteria established in Alice. They then attempt to assert their patent against an operational company. One common troll tactic is to send a vague letter to a business demanding payment and threatening litigation for allegedly infringing their patent. Trolls leave out important information including who owns the patent, exactly what the patent entails, and how the business is infringing the patent. Oftentimes, businesses don’t know how to respond to these letters and are forced to choose between paying the troll’s ransom and facing uncertain and high legal fees.

The CBM review program is a valuable alternative to either of these unfortunate outcomes. Sophisticated patent trolls establish shell corporations for their patents, without having any other assets, and then pursue operational companies looking for large payouts. Consequently, the discovery

costs of litigation are unfairly borne by operational companies. The CBM review program equalizes the costs between the troll and the operational company by requiring the troll to put its asset—the patent—on the table.

While there are several post grant review procedures available to patent holders and businesses, the CBM program reviews patents specifically pertaining to business methods and practices that are greater than 9 months old, and considers questions of subject matter eligibility and prior use and sale. Because of this, CBM is widely applicable to many industries and is the most utilized of the post grant review processes. Of the patents being reviewed under CBM, approximately 30% relate to the finance industry, with the largest portion of the remaining 70% involving the computer and tech industry.

The CBM program has numerous safeguards in place to protect legitimate patent holders. For example, patents may only be considered for CBM review after they have been asserted by the patent holder and the petitioner has demonstrated that the patent is “more likely than not” to be invalidated. Currently, the PTO rejects nearly 25% of petitions for patent review. The remaining 75% that are accepted for review are invalidated. The CBM program is working as expected to invalidate low quality patents in the system, protecting businesses from litigious trolls and ultimately improving patent quality for everyone.

The CBM program was written as a provisional part of the AIA in 2011 and is set to expire in 2020, which will create a variety of problems. Without CBM, no post grant review program can help sufficiently defend against flimsy method patents that are financial in nature. The encroaching sunset incentivizes trolls to wait to assert patents until the program expires in 2020. As a result, many patents will escape review because the program will expire before their case can be heard. As the universe of eligible patents under Alice increases, the CBM program is becoming more widely utilized and its expiration would leave a void in the patent review process. Importantly, while businesses that do not rely on the Alice ruling will still have access to post grant review to address patent validity, businesses alleged to have infringed a financial patent must once again either pay the troll’s ransom fee or resort to costly litigation.

The CBM program should be made permanent. It is an efficient, cost-effective alternative to patent litigation, and in many cases it is the only reasonable option for fighting trolls who attempt to patent things they should not.

 

Anthony Cimino is the Senior Vice President of Government Affairs for Risk Management at Financial Services Roundtable