Snap, Crackle ... Patents
Can you patent the business method of selling cereal? One company gave it a
By Christopher Hayes

Back in 2000, David Roth had one of those "eureka" moments that are the
stuff of American entreprenurial legend. After spotting a box of Cocoa Puffs
hidden behind the desk of a Wall Street executive, Roth dreamed up a retail
business that would sell cereal all the time. He and a partner opened the
first Cereality in Tempe, Arizona, on the campus of Arizona State
University. College students flocked; Roth followed up with stores in
Philadelphia and Chicago; and news outlets from Time to CNN fawned.

But as is so often the case with good ideas, Roth wasn't the only one to
have it. Across the country, Rocco Monteleone was getting set to open Bowls,
a cereal cafe in Gainesville, Florida, (near the University of Florida) when
he found out that Cereality had beaten him to the punch. OK, he figured, no
harm, no foul: It's America. Anyone can open a restaurant selling cereal.

Well, kind of. In May, Monteleone received a letter from Cereality's
attorney warning him that he may be in violation of a patent application the
company had filed for its "methods and system" of selling cereal. These
included: "displaying and mixing competitively branded food products" and
adding "a third portion of liquid."
Cuckoo for patent law

Just 10 years ago, this kind of a patent would have been impossible even to
consider. But a landmark shift in the law has made it possible to patent
entire ways of doing business--a change that has prompted a rush on patent
claims, opened a Pandora's Box of litigation and threatens to put large
swaths of American innovation under the control of big business. Given the
transition from an industrial to digital economy, changes in patent law were
inevitable and necessary. But critics argue that when it comes to business
methods the traditional rationales for granting patents--they incentivize
expensive research and encourage inventors to share their knowledge--don't

"You need incentives for people to innovate in technology," says Jason
Schultz, an attorney with the Electronic Frontier Foundation's Patent
Busting project. "You've never needed that in businesses because if a
business is successful you make money. It's its own incentive."

When the first U.S. patent board convened in 1790, with Thomas Jefferson
serving as one of the members, it required inventors to submit a miniature
model of their invention. The board expected to issue patents for machines
and industrial processes, things like cotton gins or the proverbial "better
mouse trap" that were the engine of American economic growth. And for the
first 200 years of the country's history, that's pretty much what they did.

But over the last three decades the category of patentable subject matter
has expanded significantly beyond the widgets of the industrial age: In
1980, the Supreme Court decided that life-forms such as bacteria were
patentable; soon thereafter the United States Patent and Trade Office
(USPTO) began issuing patents for isolated genes, and in 1998, in the
landmark case State Street Bank v. Signature Financial Group, Inc., the
Third Circuit Court of Appeals ruled business methods patentable as well.

Signature had secured a patent for software it had developed that managed
its system of pooled mutual fund assets. State Street used a similar system
and when Signature told them to knock it off, State Street challenged the
patent. A lower court sided with State Street, striking down the patent.
Because it was software, the court ruled it was, at base, a mathematical
algorithm, which the courts had traditionally viewed as an unpatentable
"abstract idea." Also, since Signature's entire business depended on the
value of the mutual funds, the software qualified as a "business method,"
which, since 1908, courts had also viewed as unpatentable. But the Third
Circuit disagreed and ruled that as long as a given business method or
software produced a "useful, concrete, and tangible" result--in this case
the numerical value of the pooled mutual funds--it was suitable for a

The decision came just as Internet commerce was exploding, and the USPTO,
taking its marching orders from the courts, began issuing patents for
everything from the hyperlink to the pop-up window to a "method of effecting
commerce in a networked computer environment in a computerized system." In
an early seminal case, Amazon patented its "one-click" method of purchasing
products, which forced Barnes and Noble to add an extraneous click to its
own system to avoid a lawsuit. Between 1997 and 2001, the number of business
method patent applications increased twenty-fold, and the litigation
associated with patent infringements exploded.
Patent thickets

Schultz argues that conferring monopolies on certain business methods
stifles competition and creates artificially high prices for consumers,
since competitors must pay licensing fees to the patent holder. And since
violations are enforced by the patent holder, the system benefits those with
the resources to hire good lawyers.

"Let's say you get a patent on something like a pop-up window," says
Schultz. "Of course, you could, in theory, go after everyone on the
Internet, but you don't. What you end up doing is picking off the weak
members of the herd, companies that don't have the money to defend
themselves or independent Web sites, or occasionally big companies that you
think will not have very much backbone and will quickly settle."

The proliferation of business method patents creates, in Schultz's words,
"patent thickets," areas of e-commerce so overgrown with patents they
discourage anyone but the largest corporations from wading in. For all of
these reasons, Europe, Japan and Canada do not allow business method

Just four short years after the State Street decision, mounting criticism
led the USPTO to tighten the scrutiny it applied to business method patents.
While it reduced the percentage of business method applications it accepts,
it has also continued to expand the domain of patentable subject matter,
ruling earlier this year that business method patents don't need to have a
technological component in order to be patented. If these rules had applied
for the last century, there conceivably could have been patents on
everything from drive-thru fast food to overnight shipping.

If a tussle over Lucky Charms and Froot Loops seems like low stakes,
consider that it's just one small part of a growing trend toward privatizing
more and more of what free culture proponents refer to as the "knowledge
commons." Kembrew McLeod, author of Freedom of Expression (and holder of a
trademark for the phrase "Freedom of Expression"), says "whether we're
talking about genes in patent law or what is essentially the elimination of
the public domain with the extension of copyright," in the last 25 years the
entire intellectual property (IP) regime has moved toward "creating new
private property."

McLeod says the shift started happening "around the same time the U.S.
government and the business interests were finally coming to terms with the
fact that IP exports exceeded manufacturing exports. The reason we've seen
the shift is simply because there's so much money at stake."

The few voices advocating a less rigidly privatized sphere of knowledge
constitute an unlikely coalition of free-market libertarians, who view
things like business method patents as odious forms of state interference
with natural competition, and progressive "copyleft" and free culture
activists. "The real quandary is whether business method patents are
ultimately good for business or not," says Nicholas Reville, of the free
culture group Downhill Battle. "They enrich specific, usually entrenched
companies--which is what gets the Bush administration excited--but they are
terrible for the economy as a whole because they reduce competition and add
an incredible legal strain on innovators."

While groups like the Electronic Frontier Foundation, FreeCulture and
Downhill Battle are growing, intellectual property issues still don't
command the same kind of attention as other progressive mainstays. But if
the public doesn't start agitating for reform, Americans are going to find
themselves increasingly at the whim of the large corporations who own the
ideas that form the foundation of the American economy.

As long as the laws (and their interpretation) stay the same, businesses
like Cereality will continue to protect their competitive advantage by any
legal means possible. Back at Bowls, Monteleone's lawyer told him to ignore
Cereality's letter, which was probably good advice. In August, the USPTO
issued a provisional ruling rejecting the application. Cereality's
spokesperson, Lisa Kovitz, could hardly muster a defense of the patent,
saying that the company was instead focusing on its trademarks of the
various aspects of the store's branding, which include the name
"Cereologists" for its pajama-clad employees, and the name "Moo Machines"
for its milk dispensers.

This may prove more effective: A cereal store set to open in Iowa City
decided to change its name from Cereology to the Cereal Cabinet after
receiving a letter from Cereality's attorneys. But name aside, Cereal
Cabinet proprietor Ahmad Choudhry thinks his idea can't miss. As he told the
local paper: "I've talked to so many other people, so many other students,
and they all are very excited about this concept."
Christopher Hayes is a Senior Editor of In These Times.

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