• Patenting the Franchise -- the Good, the Bad, and the Ugly
  • May 2, 2003
  • Law Firm: Dinsmore & Shohl LLP - Cincinnati Office
  • A patent holder can exclude others from making, using, importing, selling or offering to sell the patented invention during the term of the patent (for recent utility patents, the term is 20 years from the filing date, subject to adjustment if the application process is delayed).

    The cornerstone of many franchises is a unique, proprietary business method or system. Until recently, most franchisors have sought to protect their methods or systems as trade secrets, with little thought given to patent law. This was largely due to the fact that the patent bar was under the general impression that business methods could not be patented.

    This changed in 1998, when the Court of Appeals for the Federal Circuit in State Street Bank of Trust Co. v. Signature Financial Corp., 149 F.3d 1368 (Fed. Cir. 1998), cert. denied Jan. 11, 1999, firmly held that business methods could be patented. Following the principle that "anything under the sun that is made by man" can be patented, the court found that business methods producing a "useful, concrete and tangible result" could be patented. This has created both opportunities and pitfalls for franchises.

    The Good

    There are significant advantages to obtaining a business method patent as a means of protecting the franchise. A patent holder can exclude others from making, using, importing, selling or offering to sell the patented invention during the term of the patent (for recent utility patents, the term is 20 years from the filing date, subject to adjustment if the application process is delayed). This right extends to exclude even those who discover or develop the same business method independently, which is not the case for trade secrets. Infringement of the patent can also lead to treble damages as well as attorneys' fees. In addition, this stronger protection can make the franchise more attractive to prospective franchisees.

    The Bad

    The immediate downside is that obtaining a patent requires public disclosure of the business method. As a matter of public policy, inventors are encouraged to make his/her inventions known publicly and, in return, are granted a limited monopoly for the use and exploitation of the inventions. An inventor who seeks to keep the invention secret will end up forfeiting the right of patent protection. Thus, a franchisor considering patenting a business method first faces the issue of whether it would be better to treat it as a trade secret as opposed to making it public by obtaining a patent for it.

    This presumes, of course, that the business method being considered is patentable. As mentioned above, the business method must produce a "useful, concrete and tangible result." Abstract ideas and algorithms cannot be patented. The business method must be novel, new, and not previously in the public domain.

    It also must be nonobvious at the time of invention; it must not have been an obvious extension of the prior art to one having ordinary skill in the art.

    One problem that long-standing franchises may face is the statutory bar to patentability if the invention has been described in a printed publication, sold, offered for sale, or placed in public or commercial use more than one year prior to filing a patent application. Commercial exploitation of the business method by the inventor, even if treated as a trade secret, constitutes public use or sale of the method and triggers this bar. This will preclude most existing franchises from patenting their particular business methods, unless the franchise is very new or consults its patent attorney in advance of implementing new methods and processes. A recent improvement or modification of an existing system or method may be patentable, however, and franchisors should keep their eyes open for these opportunities.

    The Ugly

    A gap in this one-year statutory bar creates a potential hazard to franchises because secret commercial use by a third party generally is not a statutory bar to obtaining a patent. Thus, the potential exists for a third party to independently invent and obtain a patent for a business method that is the same as the one being secretly used by an existing franchise. That third party could then assert a patent infringement claim against the franchisor and all its franchisees.

    Given the presumption that patents are valid, this puts the franchise in a tough position.

    The First Inventor Defense Act of 1999 does provide some limited protection. A franchisor would not be liable for patent infringement in the above circumstance if it can show clear and convincing evidence that it - in good faith - developed the same method on its own and was commercially using the method a year or more before the third party applied for the patent. Proving this may require evidence several years old, however, as it may take three years or more for the patent application to be processed. Good record keeping and documentation is essential. More troubling, the defense may only be asserted by the person who performed the acts necessary to establish the defense, and the right to assert the defense can only be transferred to another person as part of an assignment or transfer of the entire enterprise or line of business. Thus, even if franchisees using the franchise business method more than one year before the patent application date can assert the defense, a narrow interpretation of the law could prevent the business method from being sold to new franchisees, and prevent the franchise from growing.

    The best defense may be a good offense. Many patent applications are now published 18 months after the effective filing date of the application, thus creating an opportunity for a sharp-eyed franchisor to file a "protest" prior to the granting of the patent. The scope of the protest is limited, however, and does not give the franchisor an opportunity to actively participate in the patent application process.

    If the patent has already been granted, the franchisor can request a "re-examination" by the Patent and Trademark Office. There is the possibility of an inter partes re-exam, which allows more participation by third parties, but the scope of the re-exam is limited to prior publications or patents. Prior use as a trade secret will be to no avail. Given the weight placed on prior publications and patents, serious consideration should be allotted to publishing the business method in some form, or obtaining a patent on an improvement or related business method in order to prevent others from patenting the method.

    Business method patents are now with us. Franchisors and franchisees alike need to pay attention to changes in this developing area of patent law, and be prepared to take offensive and defensive actions to protect their business interests.