Method Patents Face Legal Infringement Loophole

Last Updated Aug 20, 2008 6:22 AM EDT

Settling disputes the old-fashioned way.Muniauction v. Thomson Corp. and i-Deal is a case, decided last month by the Court of Appeals for the Federal Circuit(CAFC), that could open the door for companies to use a patented method, including but not limited to business methods, without technically infringing the patent.

Muniauction sued Thomson and i-Deal for infringing its online municipal bond auction patent. A U.S. District Court jury trial awarded Muniauction $77 million. The defendants appealed and, last month, the CAFC ruled that infringement had not taken place:

[A] method claim is only infringed when a single party can be charged with performing each step of the asserted claim. Here, Muni's claims required action by both a bidder and an auction system.

There are times when infringement can be found despite multiple actors. However, in those cases, a single party must be shown to exercise "control or direction" over the entire infringement.

Some industry patent watchers are concerned that a twist in the ruling effectively undercuts many existing method patents by letting a company outsource steps to another party in such a way as to technically avoid the "control or direction" standard.

We spoke to Herbert C. Wamsley, executive director of the Intellectual Property Owners Association, which filed a friend of the court brief in support of a rehearing of the Muniauction in front of the full CAFC and not just the three judges that originally heard the case.

BNET: Why is the Muniauction case important? Herbert Wamsley: We're concerned about the case because the Federal Circuit's language in the Muniauction opinion was broader [than] the earlier opinion in BMC Resources v. Paymentech from about a year ago. In BMC Resources, the court said that to infringe a process patent, the alleged infringer has to perform every step of the process or have someone else perform steps under his direction or control.

Now direction or control is the key phrase. In the Muniauction case, the Federal Circuit was applying the BMC resources test, but then at the end of the auction opinion, the court went on to use very broad language in which, as we read it, they said that mere direction of someone else to perform one or more steps is not enough. The Federal Circuit said that Thomson, which is the alleged infringer, controls access to its system and instructs bidders on its use. They said that was not direction or control within the meaning of BMC resources.

We are concerned that the broad language, which seems to depart form the direction or control test of BMC resources, will enable potential infringers to avoid liabilities by having someone else perform single steps of the process for them. In this case, the parties performing the step was their customers. We read "direction or control" to encompass situations where a party is given access to the system and given instructions on how to use this system. We think the court may have opened the door to making it easy to circumvent process claims.

BNET: How serious is the problem? HW: We receive about 25 requests per year to file amicus briefs, and usually only file about half a dozen. We have to get a three-fourths majority of our 50-member board to file a brief, so we don't take this likely.

BNET: So past patents could be affected? HW: One of the patent blogs pointed out that the concern is partly about the patents that are already in force. Arguably, going forward, the claims can be written in a different way [to maintain protection]. But patents that are already out there were granted when the claim drafters thought that BMC Resources or earlier cases would prevent people from circumventing the process steps. The concern in part is what effect it would have on the patents already granted.

BNET: Is the concern limited to business method patents? HW: I don't think it's limited to business method patents. The subject matter of this Muniauction case is a business method patent, but you could conceivably have chemical processes or pharmaceutical processes where you direct another party to perform one step of the process, and therefore you are able to avoid infringing the patent. You could have situations where two companies operating independently [might] not be infringing. We think that direction or control is as loose as you should get. The language in Muniauction seems looser than that.

BNET: What is the next step? HW: We would hope that the court would rehear this case and issue a new opinion that would be more precise about the test and the situation where someone is performing one part of the steps and having another party perform other steps.

BNET: When would there be word on a rehearing? HW: The court doesn't have an exact time table for rehearing ... but they tend to move relatively rapidly on this, so I anticipate that there could be a decision to rehear in September. If the court denies the rehearing, it would probably be pretty soon.

Jousters image courtesy Erik Sherman, all rights reserved.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.