March/April 2005

Business Method Patents: A No-Win Proposition for Nonprofits

by Shabbir Safdar, Acting Secretary, Nonprofit Innovation Alliance (http://www.nonprofitinnovation.org/)

The highly controversial "business method" patent is causing concern within the nonprofit community, and rightly so. What began as an effort by major e-commerce companies like Amazon and Priceline to gain any and every advantage over competitors in intensely contested consumer markets now threatens to stifle technological innovation and raise fundraising costs for mission-driven nonprofits.

Business method patents are controversial for good reasons. First, unlike patents for inventions, business method patents typically do not cover innovations that solve a particular technology problem. Instead, holders of business method patents are claiming to be the first to engage in a transaction over the Internet in a particular way. Examples of business method patents include Amazon's one-click patent and Priceline's reverse auction patent.

Second, business method patents are also a new and novel type of patent, legally recognized less than ten years ago. Business method patents, first validated by the courts in the State Street Bank decision in 1998, have produced a lot of criticism about the ability of the U.S. Patent and Trademark Office (USPTO) to adequately review the applications for such patents. In 2003, the Federal Trade Commission studied the problem of patents in the area of innovative technology and found that "the PTO's procedures to evaluate patent applications seem inadequate to handle this burden." (See page 9 of http://www.ftc.gov/os/2003/10/innovationrptsummary.pdf)

Since 1998, business method patent applications have flooded the USPTO. The patent office has been understaffed to handle this flood, and does not have the experience and resources for conducting comprehensive non-patent prior art research, which is critical for reviewing these requests for patents. Consequently, a number of very questionable business method patents have issued and in their wake has followed a steady chorus of criticism, legal challenges and debate about the appropriateness of business method patents.

Consider, then, an application for a business method patent that is expected to issue any day now that takes dead aim at the nonprofit sector. The following is the claimed invention described in a patent application filed with the U.S. Patent and Trademark Office:

"A method for conducting a fundraising campaign by an organization or person over a wide-area network, comprising the steps of: hosting a website including a plurality of linked web pages, the website providing information about the fundraising campaign and soliciting potential donors to make a charitable contribution to the fundraising campaign; registering on the website; contacting third parties via email messages soliciting charitable donations; and providing one or more reports, on the website, including information on the status of the fundraising campaign." (Patent application entitled: "Method and system for an efficient fundraising campaign over a wide area network" application number 764787.)

Viewed by many to be a scourge in the for-profit world, business method patents would be even more so for the nonprofit sector. Charitable organizations today are increasing their reliance on Internet solutions for efficiently reaching their constituencies and fulfilling their missions. But business method patents are prone to abuse. A company or individual that secures a patent for common ways of using the Internet can then sue or threaten to sue anyone that uses the same business method for patent infringement and seek to collect licensing fees, effectively extracting a "patent tax" on nonprofits for common ways of doing business.

If nonprofits become subject to business method patents for common ways of fundraising, communicating, advocating and managing events over the Internet, they will be forced to spend much more out of every dollar raised on coercive license fees simply to operate, diverting funds away from the delivery of programs and services to constituents. Obviously, this would be very inefficient and at odds with how donors want to see their contributions utilized. Alternatively, nonprofits may simply take the path of least resistance and use sub-optimal technology solutions to avoid the threat of being sued. In the latter scenario, nonprofits will lose access to the most innovative technology available today.

To help protect nonprofits from the potential adverse impacts of business method patents, a number of leading technology and consulting companies that serve nonprofit organizations launched the Nonprofit Innovation Alliance (NIA) in January. NIA members have agreed to cross-license any current and future business method patents on a royalty-free basis. Not surprisingly, nonprofits back the goals of the NIA - United Way and the American Diabetes Association are among those groups that have signed an NIA pledge of support. Also not surprising has been the strong interest among news media covering the nonprofit sector, technology, and politics and democracy. (For more information on the NIA and how to get involved, please visit http://www.nonprofitinnovation.org/.)

Business practices that might make sense for the private sector (and the jury is still out on business method patents for the commercial world) do not always make sense for nonprofits. Business method patents are an example. They could cause nonprofits to choose less than optimal technology solutions due to the threat of litigation or result in donor dollars being siphoned off to pay the equivalent of a tax to patent holders. Nonprofits need every dollar possible for service delivery and mission-related activities; they cannot afford to make patent royalties payments that equate to taxes and patent infringement litigation part of their operations. The nonprofit sector benefits from innovation and open competition but will suffer if holders of business method patents stifle the market by abusively threatening patent enforcement.

Shabbir Safdar is the acting secretary of the Nonprofit Innovation Alliance. He also is chief technology officer of Mindshare Interactive Campaigns, LLC. He can be reached at ssafdar@mindshare.net or 202.654.0821.

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