Patenting Business Methods in the United States and Abroad
By Stephen A. Becker
In 1998, the U.S. Federal Circuit Court of Appeals issued a stunning opinion in a case (the State Street decision) by which patentability of a system using a computer to manage a mutual fund partnership was in contention. The Court not only found this business technology to be patentable, but it went further by holding that business methods in general can be patented.
For more than a century, it had been assumed that business methods fell into a category of limited subjects that are simply incapable of being patented no matter how meritorious. However, the case changed these ideas. According to one of the judges, the former business method exception to patentability was "an unwanted encumbrance to the definition of… (what is patentable) that should be discarded as error-prone, redundant and obsolete."
Since this decision, two issues have played out. The first is that the U.S. Patent and Trademark Office has been flooded with patent applications on business methods, most involving computers and the Internet. The second is that other industrialized countries have followed this course, but they have not gone as far as the United States in legitimizing patents on methods of conducting business.
The U.S. Patent and Trademark Office is now examining and issuing patents, largely in the field of e-commerce, by which business is carried out using specially programmed computers often in the environment of the Internet and other technical equipment such as cell phones, pagers and Personal Digital Assistants. Because the State Street decision discarded the business method exception to patentability, patents on pure business methods that do not rely on equipment or software appear to be possible in the United States (although most will involve e-commerce methodologies).
Japan has not gone as far. Although Japan issued guidelines accepting business method patents shortly after the State Street decision in the Unites States, it directed its patent application examiners not to issue patents on pure business methods alone. Instead, the method must have a technology aspect. A few examples include the implementation on the Internet or the use of information to produce something tangible, such as manufactured products.
In Europe, pure business methods are not patentable, although computer-implemented methods or even computer programs themselves, designed to carry out business in e-commerce, may be patented. As in Japan, Europe requires the method to have a "technical effect," which is often missing from most pure business environments.
The question of the patentability of pure business methods is not settled in Canada. Patents may be granted, however, for e-commerce and several other types of business methods implemented in computer software. Korea is similar, which excludes patents for pure business methods but issues patents for business automation.
Attention is now being shifted to create a standard for determining when a business method has sufficient merit that will warrant a patent. Quite a bit of public concern has been raised that patents in the field of e-commerce are being issued too easily and cover, in some instances, old methods or trivial adaptation of known methods into the Internet.
In response, the U.S. Patent and Trademark Office has provided its patent application examiners with a comprehensive set of guidelines regarding how to determine when a business method reached patentable merit, because it is not obvious compared to what was done previously by others. The examiners are cautioned to use all available resources in order to determine the existing level of business technology for comparison with the patent applicant’s contribution. The guidelines make it clear that an obvious implementation of a known business method into an e-commerce environment will not be patented. Similar guidelines have recently been published in Japan and are being developed in Europe.
If you have a business that has developed a new business methodology, you must consider applying for a patent and will have a good chance of obtaining one if the methodology is not an obvious method of conducting business in e-commerce.
If the methodology is pure business-based, the battle will be uphill in the United States and virtually impossible elsewhere. Patenting these business models is possible in the United States, less favorable in Japan and speculative in Europe. But the ground abroad continues to shift, and business methodologies that are currently not patentable in those countries and others may become patentable later when an application is examined.
Recent Changes in U.S. Patent Law: An International Perspective
By Ronald R. Demsher
Last year, the American Inventors Protection Act of 1999 (AIPA) was signed into law. The AIPA includes eight subtitles (A-H), including Inventor’s Rights Act of 1999, Patent and Trademark Fee Fairness Act of 1999, First Inventor Defense Act of 1999, Patent Term Guarantee Act of 1999 and others. The most applicable subtitle to the international community is Subtitle E, the Domestic Publication of Foreign Filed Patent Applications Act of 1999.
Effective for applications filed on or after November 29, 2000, the Domestic Publication of Foreign Filed Patent Applications Act (The "Act") of 1999 states that a U.S. filed patent application will be published 18 months after the earliest effective filing date. This can be avoided if the applicant requests no publication at the time of filing and can certify that he or she has not and will not file in a foreign country or pursuant to an international agreement that publishes 18 months after the filing date.
The Act tends to harmonize the U.S. patent system with patent systems in other countries and with the Patent Cooperation Treaty (PCT). It does so by providing for the publication of the application 18 months after the earliest effective filing date (i.e., the priority date) of the application if it is or will be filed in a foreign country that has an 18-month publication requirement.
For years PCT applications, along with applications filed in many foreign patent offices, such as the European Patent Office, Australia, Canada, France, Japan and the UK, have been published 18 months after the earliest effective filing date. From an international applicant’s perspective, this means that an English language version of their application filed in the United States will be available to the public much earlier than it was before this subtitle became effective.
A number of exceptions to this publication requirement are included in Subtitle E. For example, applications that are abandoned will not be published nor will provisional or design applications. Also, if the invention has not been and will not be the subject of an application filed in a foreign country that has an 18-month publication requirement, the applicant may request that it is not published. Such a request must occur at the time of filing, and the request may be rescinded if the applicant later decides to file in a foreign patent office. Although some patent offices in other countries provide for opposition to published applications, Subtitle E includes measures to ensure that no protest or pre-issuance opposition is available.
In exchange for pre-issuance publication, Subtitle E offers provisional rights to the applicant. Such provisional rights include the right to obtain (under particular circumstances) a reasonable royalty if another makes, uses, sells or imports the nvention during the period from publication of the application to issuance of the patent. Prior to the AIPA, a U.S. patent applicant had no recourse against such activities of another prior to issuance. A "patent pending" notice provided a mere warning to potential infringers that legal action could be taken once the patent issued, but it did little to prevent infringing activities prior to issuance. Subtitle E provides a remedy to U.S. applicants for such pre-issuance infringement.
Carl W. Schwarz
Carl W. Schwarz is a partner in the Intellectual Property Department of McDermott, Will & Emery’s Washington, D.C. office and a member of the firm’s Antitrust and Trade Regulation Practice Group. He has been with the firm for more than 14 years.
Carl focuses his practice on the litigation of antitrust, international trade and intellectual property matters. His experience includes the defense of several bank merger cases prosecuted by the Antitrust Division of the U.S. Department of Justice, predatory pricing and conspiracy antitrust proceedings, antidumping proceedings, patent infringement and private antitrust cases.
He has represented Japanese defendants in a variety of antidumping, antitrust, patent infringement and other actions arising from allegations of anti-competitive pricing conduct in the semiconductor trade. He has also represented several companies such as Hitachi, Ltd., Laker Airways and the Polish golf cart industry.
According to Carl, there are a few major issues international audiences must address when dealing with IP issues. These are the speed, intensity and potential damage risk in litigation in the United States and the expansive jurisdiction of U.S. courts.
This seasoned professional also warns that there is upcoming legislation that might affect international business. He said that legislation will soon be introduced to overturn the incredibly "shortsighted and unfair provisions" Sen. Byrd recently passed through the U.S. Congress, signed into law by President Clinton. This new law gives the contingent fee plaintiff’s bar an obvious incentive to start suing foreign exporters, according to Carl.
Another legislative act that will affect foreign business relations, Carl said, is the U.S. Supreme Court action that will decide whether to grant certiorari in CSI vs. Xerox Corp. and to clarify how the antitrust and intellectual property laws interact.
Carl is a member of the bars of the District of Columbia, the U.S. Supreme Court, various U.S. District Courts and circuits of the U.S. Court of Appeals and the U.S. Court of International Trade. Before entering private practice, he was a trial attorney with the U.S. Department of Justice, Antitrust Division, Foreign Commerce Section, where he supervised several investigations involving international cartel activity.
He received his bachelor’s degree in civil engineering from Cornell University in 1958 and his law degree, with honors, in 1962 from George Washington University Law School. In 1966, he received his master of law degree in foreign trade and investment law from George Washington University Law School.
Antitrust & Intellectual Property Practice
Antitrust issues most commonly arise in intellectual property cases in two areas. First and foremost, antitrust concerns are raised with respect to licensing. In general, patent and copyright owners can decide whom to license to and under what terms. However, discriminatory licensing practices (such as exclusive patent cross-licensing or pooling arrangements with other companies) or tying agreements (requiring licensure of unpatented or unwanted items as a condition of a patent license) have been found to violate the antitrust laws. Courts have also refused to enforce patents and copyrights by which the license unduly restricts the licensee’s ability to compete with the licensor.
Second, antitrust claims can limit or prevent intellectual property owners from enforcing their rights. Attempts to implement patents that are known to be invalid have resulted in antitrust liability. Under the doctrines of patent and copyright misuse, anti-competitive practices may prevent an intellectual property owner from enforcing his rights until, and unless, those practices are purged.
McDermott, Will & Emery helps companies develop practical defensive and offensive strategies for dealing with antitrust issues in the context of intellectual property. We assist companies by reviewing current and proposed license agreements in order to avoid potential antitrust pitfalls, such as field of use and geographical and pricing restrictions. Our lawyers also investigate and pursue antitrust claims as affirmative defenses in suits for patent or copyright infringement or even as preemptive litigation.
Conversely, the threat of an intellectual property lawsuit also can be a potent negotiating and litigation tool. McDermott, Will & Emery lawyers have successfully assisted companies faced with antitrust claims by crafting counterclaims based on patent infringement.
Antitrust Guidelines Govern Joint Ventures
By Raymond A. Jacobsen, Jr.
On April 7, 2000, the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) issued new guidelines governing all forms of horizontal arrangements among competitors, short of a merger. Thus, the new guidelines apply to joint research and development, purchasing, production, marketing and/or sales ventures; patent licensing arrangements; internet procurement ventures; teaming agreements and "strategic alliances." The guidelines apply to companies doing business in the U.S. or those whose business might affect U.S. exporters. In brief, the new guidelines provide the following:
Certain Joint Ventures May Be Per Se Unlawful
The guidelines make clear that merely "labeling an arrangement a ‘joint venture’ will not protect what is merely a device to raise prices or restrict output; the nature of the conduct, not its designation, is determinative." (Guidelines §3.2.) A "strategic alliance" in which the participants merely coordinate decisions on R&D efforts, prices, output, customers or territories is subject to being held unlawful per se and prosecuted criminally.
New Safe Harbors for Certain Joint Ventures
To encourage companies to enter into pro-competitive arrangements, the guidelines establish "safe harbors." Ventures which qualify for these safe harbors are presumed legal.
R&D Innovation Markets
For joint R&D ventures, patent licensing arrangements and other ventures involving two or more companies’ R&D efforts, the guidelines provide that FTC/DOJ will not challenge such an arrangement "where three or more independently controlled research efforts," in addition to those of the ventures, "possess the required specialized assets or characteristics and the incentive to engage in R&D that is a close substitute for the R&D activity" of the venture.
Ventures Not Qualifying for Safe Harbor Treatment
Joint ventures not qualifying for "safe harbor" treatment, as involving firms having combined shares of over 20 percent in any market, are analyzed under the "Rule of Reason," which balances the venture’s anti-competitive and pro-competitive effects. In addition to considering the ventures’ market shares, the guidelines consider the purpose of the arrangement, the duration of the arrangement and the extent to which it is exclusive, entry conditions into the relevant market and pro-competitive effects of the arrangement including efficiencies.
Potential Anti-Competitive Effects
Under the guidelines, a joint venture may raise significant antitrust issues if it prevents participants from engaging in competing ventures, if its duration is 10 years or longer and if other firms are unlikely to enter into the markets affected by the venture.
In sum, the new FTC/DOJ guidelines provide a roadmap for Japanese companies contemplating joint ventures or other transactions in the United States or with U.S. companies. They are intended to encourage joint ventures, which comply with the guidelines.
The New Corporate Income Tax System in Germany
By Dr. Juergen Killius
Oppenhoff & Rädler, Linklaters & Alliance
In 1977, Germany introduced an imputation system of corporate taxation. It was fully integrated into the taxation of the income of a resident individual or corporate shareholders if dividends were distributed. This was achieved by a gross-up of the amount of the dividend by the amount of corporate income tax paid by the distributing corporation and a full credit of such corporate income tax against the income tax of the shareholder. In the last taxable year in which this system was fully operative, i.e. in fiscal 2000, the corporate income tax for retained earnings amounted to 40 percent, which was reduced to 30 percent if and to the extent that dividends were distributed. The 30 percent corporate income tax was then credited against the individual or corporate income tax of the shareholder.
However, this imputation system applied only to resident shareholders. Non-resident shareholders could not claim the imputation credit, and Germany did not extend any of the imputation credit to non-resident shareholders under any of the German tax treaties. This caused growing complaints, in particular, within the European Union. The complaints were at least one of the factors that prompted the government to propose a change of the corporate income tax system earlier this year.
The new system was written into law on October 23, 2000 and, while three correction bills are pending in Parliament, it is now possible for corporate taxpayers and their resident and non-resident shareholders to discuss the new rule — most of which will become effective as of taxable year 2001 with several transition rules.
In a way, the new system is an old one. It is a classic corporate income tax system with a flat rate of 25 percent. In order to avoid a cascading effect of the corporate income tax, dividends distributed by a corporation, as well as capital gains realized from the sale of shares in another corporation, will be exempt from corporate income tax if received by a corporation. For a German parent company, such an exemption for 95 percent of foreign dividends as well as capital gains from the sale of a share interest in a foreign subsidiary was already available under most of the German tax treaties. But, they required a 10 percent minimum shareholding by the German parent company. The minimum shareholding requirement no longer applies under the new system. Because these changes are affected under German domestic law, treaty protection is no longer required. To the contrary, dividends from German subsidiaries under prior law were fully included in income under the imputation system and, therefore, no exemption was granted.
The most important change for German parent companies concerns capital gains from the disposition of share interests in German subsidiaries because such gains were fully taxable under the imputation system but will be exempt for taxable years beginning in 2002. Furthermore, in order to mitigate economic double taxation at the level of corporations and resident individual shareholders, such shareholders have to include only 50 percent of the dividend in gross income.
These rules are, in principle, applicable to non-resident corporate shareholders as well. If a non-resident corporation, e.g., maintains a permanent establishment in Germany, its taxable income attributable to such permanent establishment will be taxed at the flat rate of 25 percent corporate income tax plus a 5.5 percent surcharge and municipal trade tax of about 13 percent, which results in an overall German tax burden of about 38 percent. Capital gains by foreign corporations from the sale of a share interest in a German corporation will be exempt from German corporate income tax even if the share participation should have formed part of the business assets of German’s permanent establishment.
No minimum shareholding or holding period is required for the exemption to apply. Dividends paid by a German corporation to a non-resident corporate shareholder will likewise be exempt irrespective of a minimum share holding or a holding period. Nevertheless, the application of German dividend withholding tax regarding distributions is still in dispute. As the imposition of a withholding tax normally requires that the dividend is taxable under German domestic law, one could argue that no withholding taxes should be imposed on distributions to non-resident corporate shareholders. An alternative would be to permit the imposition of the withholding tax at the now reduced 20 percent dividend withholding tax with a subsequent claim for a refund of such tax. The tax administration tends to require the imposition of the withholding tax with a reduction to a lower treaty rate or the refund of withholding taxes imposed in excess of such a treaty rate.
Non-resident individual shareholders will be able to claim an exclusion of 50 percent of German source dividends received. However, tax on such dividends is imposed not by way of assessment but by withholding. Nevertheless, the 20 percent dividend withholding tax (or the lower treaty rate) will be imposed on the full amount of the dividend.
The foregoing is a brief review of the new German corporate tax system. It shows that many existing structures will require adjustment, and that Germany should seriously consider locating a holding company structure.
This publication is an overview of the Nineteenth International Tax Roundtable meeting held in Lisbon, Portugal on April 28, 2000.