THE BUSINESS METHOD PATENT MYTH By John R. Allison and Emerson H. Tillert ABSTRACT Internet business method patents have been roundly criticized by most observers as being singularly inferior to most other patents. Many have even argued that business methods should not be patentable subject matter. As a result, Congress and the Patent and Trademark Office ("PTO") singled them out for special treatment. All of these criticisms were, however, voiced without empirical support. We gathered data on most Internet business method patents issued through the end of 1999 and compared them with a large contemporaneous data set of patents in general. We also compared them with patents in fourteen individual technology areas within the general patent data set. Our comparison focused on several metrics that we believe serve as good proxies for patent quality and value. We found that Internet business method patents appear to have been no worse than the average patent, and possibly even better than most. They also appear to have been no worse, and possibly even better, than patents in most individual technology areas. These findings lead us to question the conventional wisdom that Internet business method patents were uniquely deficient. We briefly explore some possible explanations for the chasm between the accepted © 2003 John R. Allison and Emerson H. Tiller f John R. Allison is the Spence Centennial Professor of Business Administration, McCombs School of Business, and Professor of Intellectual Property Law, McCombs School and the College of Engineering, University of Texas at Austin. Emerson H. Tiller is Professor of Law, Northwestern University School of Law. Partial funding for this study was provided by the National Academy of Sci- ences ("NAS"), Science, Technology, and Policy Board ("STEP"). We appreciate the ideas and suggestions offered by several members of STEP's Committee on Intellectual Property Rights in the Knowledge-Based Economy. The authors thank Thomas Bohman and Xinlei Wang of the Information Tech- nology Services at the University of Texas for statistical consulting. The authors also thank participants at the University of Chicago Law School's Law and Economics Work- shop, University of California at Berkeley, Workshop on Institutional Analysis, North- western Law School's Faculty Workshop, the University of Southern California Law School's Workshop on Law, Economics and Organization, and the Huber-Hurst Research Seminar, University of Florida, for comments on this Article or portions thereof, as well as several individuals who provided especially helpful comments on earlier drafts, includ- ing Connie Bagley and Mark Lemley. BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 18:987 view and what we believe to have been the reality, including the possibility that negative opinions about these patents may have been the result of an information cascade. More importantly, we believe that efforts to single out these patents for special treatment not only lacked sound justification in the particular case but also reveal more fundamental problems associated with ex ante definitions to carve out any particular technology area for different treatment. TABLE OF CONTENTS 1. INTRO DUCTION ....................................................................................................... 989 II. CRITICISMS OF BUSINESS METHOD PATENTS ....................................................... 1007 A. The Diverse Nature of the Outcry ............................................................... 1007 B. A Bit of Software Patent DdjA Vu ............................................................... 1012 C. Prior Art-Related Criticisms Migrating from Software to Business Method P atents ......................................................................................................... 10 15 III. RESPONSES BY CONGRESS AND THE PTO ............................................................ 1018 A . Congressional Responses ............................................................................ 1018 1. The FirstInventor Defense Act ............................................................ 1018 2 . H.R . 53 64 .............................................................................................102 1 3 . H.R . 1332 .............................................................................................1023 B . PT O R esponses ........................................................................................... 1024 IV. DATA ON INTERNET BUSINESS METHOD PATENTS AND GENERAL PATENTS ........ 1026 A . The General Patent D ata Set ....................................................................... 1026 1. Defining the Technology Areas ............................................................ 1027 2. The Fourteen Technology Areas .......................................................... 1028 B. The Internet Business Method Patent Data Set ........................................... 1031 1. Constructing the D ata Set .................................................................... 1032 2. CategorizingInternet Patents .............................................................. 1034 3. Excluding the Last Category................................................................ 1036 V. COMPARISON OF PATENT CHARACTERISTICS ....................................................... 1036 A. Number of Prior Art References .................................................................. 1036 1. Internet Business Method Patents Compared With the Average Patent1039 2. Internet Business Method Patents Compared With Patents in Individual Technology Areas ............................................................... 1043 B. Types of Nonpatent Prior Art References ................................................... 1045 1. InternetBusiness Method Patents Compared With the Average Patentl048 2. Internet Business Method Patents Compared With Patents in Individual Technology Areas ............................................................... 1050 C . Total Patent C laims ..................................................................................... 1052 1. InternetBusiness Method Patents Compared With the Average Patent1057 2. Internet Business Method Patents Compared With Patents in Individual Technology Areas ............................................................... 1057 D . N um ber of Inventors ................................................................................... 1058 1. Internet Business Method Patents Compared With the Average Patent1060 2. Internet Business Method Patents Compared With Patents in Individual Technology Areas ............................................................... 1061 E. Time Spent in the Patent Office .................................................................. 1063 1. The Effect ofAncestor Applications on Average Pendency Times ....... 1063 20031 THE BUSINESS METHOD PATENT MYTH 2. Other Reasonsfor Variation in Pendency Times .................................1065 3. M ethod of Comparison......................................................................... 1070 4. Pendency Times from the Original Priority Filing Date: Internet Business Method Patents Compared With General Patents and With Patents in Each Technology Area ........................................................1071 5. Pendency Times from the Most Recent FilingDate: Internet Business Method Patents Compared With GeneralPatents and With Patents in Each Technology Area ................................. 1074 VI. SUGGESTED EXPLANATIONS FOR THE GAP BETWEEN CONVENTIONAL WISDOM A N D R EA LITY .......................................................................................................1077 A . Possible Explanations ..................................................................................1077 B. An Information Cascade of Negative Opinion ............................................1079 V II. C ON CLU SION ........................................................................................................1081 I. INTRODUCTION A patent represents a bargain with society. In return for the right to exclude others from making, using, or selling an invention for twenty years, the inventor must disclose the invention's details to the public instead of keeping them secret.' To justify such a grant, the inventor must introduce and reveal a technological advance that is both different from what has been done before-the requirement of "novelty"-and different enough so that it represents more than a trivial extension of what is2' already in the public domain-the requirement of "nonobviousness. Although it is the exceedingly rare patent that, by itself, confers significant market power on its owner, such exclusive rights to control knowledge that is otherwise free for the taking may cause a number of economic distortions.3 Thus, there is cause for concern when patents are granted erroneously. 4 If patents are issued that should not be, the public does not 1. 35 U.S.C. § 112 (2000) (disclosure requirement). 2. Id. § 102 (novelty requirement); id § 103 (nonobviousness requirement). 3. There is a vast literature on the economics of patents. One example is the in- creasingly large theoretical literature on various approaches to the proper scope and allo- cation of patent rights, thoroughly surveyed in Dan L. Burk & Mark A. Lemley, Policy Levers in Patent Law, 89 VA. L. REV. 1575, 1595-1630 (2003). 4. We assume, as do most observers, that patent quality matters. Staking out a dis- tinctly minority