ost of us have thought of new payment methods, but few among us have bothered to go out and get patents on those methods. Holding a patent on a payment method or process is, theoretically and potentially, very profitable. In reality, however, it can be costly and sometimes impossible for patent holders to collect royalties from all businesses that use their methods.

Why you should care

It's important for payment professionals to be aware of method or process patents. Why? All participants in our industry are potentially at risk of having a patent holder demand payment for use of a patented payment method.

Let's say (for discussion purposes only) that someone has a U.S. patent on the methods underlying online registration systems used to sign up new merchants. If that patent is valid, the patent holder could prevent anyone in the United States from signing up new merchants through an online registration system without permission from the patent holder.

Just like the patent holder on a new carburetor has a monopoly on that device, holders of business method or process patents have a monopoly on the use of specific business methods or processes. Patent law allows patent holders to exercise a monopoly over the use of their patents.

What is a business method or process patent?

A business method or process patent is just like any other patent, except it relates to a specific, novel business method or process.

To illustrate how far-reaching payment business process patents can be, here are brief descriptions of two such patents:

· EInvoicing: U.S. Patent No. 6,578,015, held by Oracle International Corp., is a "computer-implemented method of presenting an electronic bill from a biller to a customer over a computer network [and] includes steps of receiving biller-originated bill data and bill format data over the network into a bill presentment and payment database." In plain English, the patent is on a method of presenting bills over the Internet, a practice common among telephone, cable and utility suppliers.

· Automated Payment: U.S. Patent No. 6,941,281, held by AdvanceMe Inc., is a method to allow the automatic repayment of a merchant obligation.

What can a patent holder do with a patent?

Patent law permits holders of valid patents to forcibly prevent others from using their patents. In the case of business payment method patents, patent holders could prevent anyone in the industry from using their methods without permission.

The usual approach is to demand a license fee in exchange for the right to use the patent. Levying of such fees can potentially result in a patent holder effectively levying a tax on a whole segment of the market that happens to be using its idea. This is true even if the holder hasn't sold a single product embodying its idea.

Problems with payment method patents

Business method patents have been heavily criticized lately. Some people believe they make it too easy to essentially levy a tax on an entire market segment for simply being the first to put an idea on paper. Payment method patents are problematic because they could, perhaps, have the unintended effect of stifling creativity and competition in the payments market.

Sales organizations are already facing stiff competition and slim profit margins. They cannot generally afford to pay a material percentage of their revenue to a patent holder that isn't contributing to the commercial success of the method over which it holds a patent.

With the large number of business process patents that have been filed in recent years, payment professionals should be prepared to receive cease and desist notices from new and existing patent holders that wish to levy license fees on their inventions.

What you can do

To remain valid, patents have to be novel and inventive. You can't patent the wheel; it has already been invented. One way of testing this is to review what is called the "prior art" related to the patent. Prior art includes a huge assortment of sources. Industry publications like The Green Sheet and any document that is published and available to the public are examples.

So, if you have a new payments idea, and you don't want to see it patented, write an article about it, or publish a Web page that describes the idea. If you do that before someone else applies for a patent on the method, it will not be patentable. Alternatively, if you want to patent your new idea and perhaps profit from it, call your lawyer.

Is this phenomenon boon or bane? The answer is likely in the eye of the patent holder ... or nonholder.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, e-mail Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.