ANDREW B. STEINBERG
Executive Vice President and General Counsel
Travelocity.com
Hearing On
Business Method Patents
Subcommittee on Courts, the Internet, and Intellectual Property
House Committee on the Judiciary
April 4, 2001
Chairman Coble, Congressman Berman, and Members of the Subcommittee, my name is Andrew B. Steinberg and I am Executive Vice President and General Counsel of Travelocity.com, which operates the world's largest on-line travel web site. I appreciate the opportunity to share the views of my company with you this afternoon regarding the important subject of so-called business method patents. We believe that the proliferation of these patents represents a serious threat to the growth of electronic commerce and, if left unchecked, could impede the ability of many businesses to adapt to the Internet. We urge Congress to take prompt action to prevent this from occurring.
To establish the right context for my testimony, I think it may be helpful to provide a bit of background about our business and a glimpse of what we are doing today to change the way our customers shop for and purchase travel services.
Travelocity yesterday celebrated its fifth anniversary, dating from the introduction of our web site in March 1996. Travelocity today employs nearly 1600
persons, including more than 1,000 customer service professionals. We have sold more than 13 million airline tickets and registered more than 25 million
members. Earlier this year we announced that our operations will be at or close to cash profitability by the end of this fiscal quarter and will thereafter be
profitable for the full year 2001. As measured by the number of unique visitors arriving at our web site each month, we rank as the third largest e-commerce
retailer on the Internet, behind Amazon.com and eBay.
Five years of operations gives us a long history when compared to many Internet companies but, in fact, Travelocity was not "invented" in 1996. The
introduction of a consumer-direct travel reservation service on the Internet was a natural outgrowth of the computerized reservation systems business, originally
pioneered by Sabre Inc. and other companies over more than two decades. The Travelocity business unit grew from within Sabre, and was originally referred
to as "Sabre Interactive." SI, as it was then known, had operated easySabre since the 1980s, when it was introduced as a service on several dial-up networks,
such as Prodigy and Compuserve. (Travelocity is now a separate, publicly traded company, with Sabre as our majority shareholder having approximately a
70% interest in the business.)
Today, Travelocity.com is as much a database-driven travel marketing and transaction company as an online travel agency. Like many travel agencies we offer
consumers a wide array of services -- in our case from more than 700 airlines, 50,000 hotels and 50 car rental companies. We also offer several thousand
vacation packages, tour and cruise departures. But unlike a traditional travel agency, our customers can book directly on the Internet (using devices ranging
from personal computers, to wireless web phones, to PDA's like the Palm VII). They don't see static brochures but rather a vast library of interactive destination
and related content, which we continually update. We have a national brand. We offer a comprehensive shopping experience. We provide travel suppliers with
the opportunity to place point-of-sale advertising and context-sensitive promotions. And within our vast membership, we can target customized offers to
millions of users and reach them instantaneously via email.
As you can see, our business at its core relies on technology and our success depends on constant innovation and information that consumers want. Indeed, if
there is one thing that distinguishes the business environment today from that which preceded the commercial use of the Internet, it is the need continually to
reinvent methods of competing and doing business. I outline for the record below several innovations that we believe have been important to our success. And
although we do have several patents, and of necessity many more in the works, my firm view is that Travelocity has offered these innovations notwithstanding
the potential ability to patent them -- we're doing these things because they benefit our customers and give us a competitive advantage. Certainly in our case,
business method patents have been neither a prerequisite to nor even a catalyst for innovation.
I'd like to outline briefly some of these exciting innovations, all of which we introduced as a way of convincing our customers of the benefits of planning and
booking their travel online rather than relying on the telephone.
Best Fare Finder
Best fare finder is a revolutionary new tool that has turned the airline-developed pricing and yield management system on its head. Let me explain. I'm sure
every Member of this Committee has had experience with the traditional way of searching for airline flights. A customer sees an advertisement in the
newspaper for a $199 roundtrip fare, and calls the airline and asks for the fare. The agents then tell the customer that it is not possible to search by fare, only by
flight and date of travel. And once the customer picks a flight, the $199 fare may or may not be available. Travelocity technology lets its customers search for
the lowest fare in a market, and then choose travel dates from a calendar that is highlighted to show when a seat at that fare is actually available for purchase.
Alternate Airports
Since many Members of Congress fly every week, I suspect you are aware that fares from some airports may be inexplicably higher than fares from others.
Recognizing that our customers are looking for the lowest fare, we inform our customers when they can save money by traveling to an alternate airport. For
example, if you searched for a flight between Reagan National and Los Angeles, you might at the top of the flight results screen on your computer a notice that
by driving the 40 miles to BWI, you could save $200. We do this by automatically comparing fares from alternate cities to ones in the cities that the customer
has requested. Most leisure travelers would be happy to drive to Baltimore to save $800 for their family of four.
Dream Maps
Recognizing that the price of an airline ticket has no correlation to the distance traveled, we've developed a product called Dream Maps. If you have $300 to
spend on a ticket, Travelocity will show you on a map everywhere you could go for $300 or less. We now customize our maps to focus on particular interests
(such as ski areas, national parks, or Caribbean beach destinations in the appropriate time of year).
Seat Maps
If there is one lesson we have learned, it's that our customers aspire to control their travel decisions from start to finish. If we are to persuade them to book
online, we must provide them with tools they cannot have offline. That's really what Travelocity is all about. One of the ways we do this is by giving our
customers the tools to choose their own seat on an airplane. We bring up a seating diagram, and let the customer choose the exact seat he or she wants. We do
the same thing with cabins on a cruise ship, providing pictures of what an actual cabin looks like before a customer makes a purchase decision.
I provide these examples, again, to illustrate that the innovation underlying our success was critical to our business and one can reasonably expect that we would
have done exactly what we did - as part of our transformation into an on-line travel agency and then a database-driven marketing and transactions company -
regardless of our ability to patent each of these advancements.
Mr. Chairman, the purpose of a patent is to encourage innovation. Rather than keeping secret a new invention that will benefit consumers, a patent allows an
inventor to share that invention so that others can exploit it while still maintaining proprietary rights in the invention and the appropriate benefits that come with
that. I question, however, whether many of the business method patents that have been issued for activity on the Internet accomplish this goal. Certainly, a
mechanical process in the offline world can be patented. But taking a commercial process or business method that has existed in the brick-and-mortar world
and allowing it to be patented because it can now be accomplished or even improved online does not serve the purpose of the patent laws.
To demonstrate that point, and to show the perverse results of the current permissive policy toward business method patents, I would like to discuss the subject
of auctions. Public auctions took place as early as ancient Greece, and have been used for products ranging from tobacco leaves to fine art. This traditional
concept of an auction has been applied to the Internet arena with great success. Founded in September 1995, eBay today is the world's largest online trading
community with 18.9 million registered users, and is among the most popular shopping sites on the Internet according to the Media Metrix September 2000 web
report. eBay continues to grow rapidly. To my knowledge, eBay does not have an overarching business method patent on online auctions, and plenty of other
Internet sites, including Yahoo!, CNet, Amazon, ZDNet, and Excite have established online auctions. The result is ferocious competition among the various
industry participants to see who can provide the best auction service. Today, millions of people participate in and benefit from online auctions, taking
advantage of the breadth of the Internet.
I believe this could never have happened if one of the players had a business method patent on the online auction. Why? Compare the success of the traditional
online auction to so-called "reverse auctions." In a reverse auction, the buyer announces his or her preferred price, and sellers are allowed to bid in response.
Of course, like the traditional auction, reverse auctions have existed in various forms in the offline world, including the Dutch auction. But when Walker Asset
Management was issued U.S. Patent No. 5,794,207 on August 11, 1998, it was clear that there would be no widespread implementation of or technology
competition as to reverse auctions over the Internet.
The Walker Asset Management patent, which is used by Priceline.com, is described as "method and apparatus for a cryptographically assisted commercial
network system designed to facilitate buyer-driven conditional purchase offers." Let me translate: a customer says he is willing to pay $250 for an airline ticket
between Greensboro-High Point, North Carolina and Las Vegas, Nevada departing on April 14 and returning on April 17. If that price offer is acceptable to one
of Priceline's participating carriers, the customer's credit card is charged and the ticket is issued. If it's not acceptable, the customer's offer is declined.
The airline inventory that Priceline is selling is not necessarily unique. But because Priceline.com has enjoyed a well-publicized patent on "name your own
price on-line," few companies have entered the field of reverse auctions via the Internet, lessening the amount of technical innovation. Moreover, the patent has
effectively limited the methods by which discounted or last-minute travel inventory can be presented to consumers.
At Travelocity, we had two choices. Although we doubted the validity of the Walker Asset Management patent, we would have risked being sued. That's what
one of our competitors, Expedia, chose to do, setting up a hotel reservation system that Priceline then alleged violated its "name your own price" patent.
Priceline filed a patent infringement suit against Expedia, and after presumably significant expense to both sides, the case was recently settled.
We chose a second path. We reached a marketing referral agreement with Priceline, in which Travelocity customers who wished to name their own price for an
airline ticket could follow a link to Priceline. Priceline customers whose offers were not accepted and who wished to search for fares and flights in the usual
way were provided a link to Travelocity. This agreement was not a license. We did not concede the validity of the patent. However, by reaching a marketing
referral agreement with Priceline, we avoided the costs that might have been involved in contesting the "name your own price" patent. Of course, there were
several factors behind our agreement with Priceline but certainly an important factor was our reluctance to deploy a reverse-auction capability ourselves and
possibly become involved in a protracted and expensive lawsuit.
The relative ease with which business method patents can now be obtained has spawned thousands of such applications. No prudent business would allow its
competitors to patent key business processes without attempting to obtain some patents of their own. And so we, and virtually every other large Internet
company, must accept the law as it is and aggressively attempt to obtain patents wherever we can. This has a price for our company and our nation: in addition
to the substantial direct legal costs of prosecuting new patent applications, one must consider in such circumstances the enormous time that technical and
programming staff devotes to a patent application, taking them away from developing the kind of innovations I outlined above.
The experience with reverse auctions is just one of many illustrations of how business method patents don't make much sense. One shudders to think what
might have happened if this kind of patent had been liberally permitted throughout the last half century. If Signature Financial Group is permitted to obtain a
patent on the hub-and-spoke system for mutual fund investment allocations, shouldn't similar protection have logically been available for the original
hub-and-spoke system of the airline industry? If electronic coupons distributed online can be patented, then what of paper coupons? Indeed, if Sabre had
simply patented a "method for direct sales of airline tickets through electronic means" when it launched easySabre in the 1980s, there would today be a single
online retailer for travel. Obviously, these results would have been bad for consumers.
I think our experience is representative of a larger problem. I read with interest the article in Friday's Wall Street Journal about the continuing saga of the
"inventor" who is suing the American Red Cross for violating his business method patent on online fundraising. The number of patents issued with the word
"Internet" in their description has skyrocketed since State Street. Our Patent and Trademark Office is clearly overburdened by the huge number of patent
applications for business methods and, lacking the resources to conduct a thorough prior art review for each such application, the results are predictable.
In order to remedy this situation, Congress and the PTO must institute some basic changes to the procedures by which business method patents are examined as
well as providing more meaningful opportunity for the affected business community to challenge the validity of a business method patent claim.
As a threshold matter, we do not accept the contention that business method patents are no different than any other patent. Clearly, these patents can be
distinguished from more traditional patents, and are already subject to different rules than other patent claims. For instance, pursuant to the American Inventors
Protection Act, supported overwhelmingly by this Committee and enacted into law last Congress, business method patents may not be enforced against prior
users. The PTO's Business Methods Patent Initiative also properly recognizes these patents as a distinct class.
We wholeheartedly supported the American Inventors Protection Act, and believe that this legislation has significantly improved the American patent system.
We congratulate the Chairman and other Members of the Subcommittee on their role in its enactment. However, as the Members are well aware, this bill did
not go as far as it might have in improving the patent system. For instance, reform of the PTO's funding mechanisms and publication of all patent applications
continue to be priority matters for Congress to address.
In addition, within the specific area of business method patents, significant reforms are necessary. Most importantly, the patent process for business method
patents must be more transparent and provide greater opportunity for input by experts and those knowledgeable in the field. Many of these applications are
highly technical or involve the identification of "prior art" that may not be easily unearthed by a patent examiner.
Business method patent claims based on Internet applications of obvious or well-known "bricks and mortar" business techniques should also be given greater
scrutiny than a truly novel business method claim. Merely transferring a familiar or obvious process into a new communications medium should not provide an
"inventor" with a twenty-year monopoly on that procedure. In the dynamic and innovative world of the Internet, transient monopolies and the leverage of "first
movers" are common phenomena. However, if these nascent powers are given exclusive control over a mode of business by statute, then innovation, consumer
choice, and competition will founder. Congress and the PTO should be reluctant to provide this monopoly status without a fair degree of certainty that the
patent claims are valid.
Finally, the patent system should permit a more equitable means of challenging the validity of a patent grant. For instance, as I have discussed, we are
convinced that the "reverse auction" patent was wrongly issued. However, in order to vindicate our position we would be forced to initiate litigation that would
likely end up costing our company hundreds of thousands of dollars, if not millions. For a company striving to achieve profitability, such a significant charge
on our earnings without any assurance of success is not a good investment. Other companies and developing start-ups in our industry have even fewer resources
upon which to draw. There ought to be recourse other than the costly path of litigation to discharge this flawed patent. Sensible legislation would release
competitive forces in this stagnant area of business.
We recognize that the Patent and Trademark Office has undertaken steps to address some of the complaints regarding business method patents. The PTO
reports that it has hired additional, highly qualified examiners, and that it is providing added educational and training assistance for these examiners. Improving
the Scientific & Technical Information Center - Electronic Information Center and supplementing other PTO resources are also important and useful
undertakings. The PTO is also apparently reviewing patent review guidelines and procedures, which is obviously necessary.
We think the recommendations put forward by the American Intellectual Property Law Association are helpful, though they don't go far enough. Many of these
echo efforts already underway in the PTO, but their legislative proposals are also noteworthy. AIPLA has also proposed amending current law to provide for
early reexamination of patents with a right of judicial appeal by a third party, and with no estoppel attaching to PTO determinations not reviewed by the court.
While the reexamination process is often biased in favor of patent holders and appellate litigation is often a difficult and costly proposition, third parties should
at least have the option to actively participate in these proceedings and should not be prejudiced in court by determinations made by the PTO Board of Patent
Appeals and Interferences. AIPLA's proposal would be an improvement over current law, but likely would not provide an adequate remedy to this problem.
Separately, we also strongly support the longstanding efforts of AIPLA, the Committee, and others to restore all patent fees to the use of the PTO, rather than
having them diverted to the general Treasury. Patent owners and applicants should not be forced to fund unrelated government programs, particularly in an era
of budget surpluses. Such a "tax on innovation" is intolerable in a nation that thrives on the power of its ideas and ingenuity.
At bottom, we believe even more must be done to resolve the problems we are addressing in this hearing. Legislation introduced by Congressmen Berman and
Boucher in the last Congress, H.R. 5364, the Business Method Patent Improvement Act, would be a significant advance in addressing this problem and we urge
the Subcommittee's favorable review of such a bill in the current session.
The publication of business method patents after 18 months is sound policy and consistent with the laws of nearly every other world economic power. We
regret that this did not become law in the last Congress. By publishing all business method patents after 18 months, experts in the relevant field will have a
timely opportunity to raise issues before the PTO and submit prior art, as provided in the bill. The bill also permits members of the public to request that the
PTO hold a hearing to determine whether the business method was known or used, or was in public use, or on sale in the U.S. prior to the filing of the
application. Such hearings would be very useful in bringing relevant prior art and expert views before the PTO before a patent claim is granted.
The Berman-Boucher bill also creates a desperately needed post-grant opposition procedure for business method patents. While third parties objecting to patent
claims do have the ability to avail themselves of the existing reexamination procedure, this process is profoundly biased in favor of the patent holder, and does
not provide the challenger a meaningful opportunity to participate in the proceedings or raise all relevant challenges. Conversely, the Berman-Boucher bill
creates an expert tribunal, with ample evidentiary rights for all parties. This process would be far less burdensome and costly than judicial litigation, would be
concluded within 18 months of its initiation, and would still offer the opportunity for a judicial appeal for either party.
We would point out several areas for improvement in the legislation. Parties to the opposition proceeding are estopped from raising matters adjudicated in that
proceeding. We would urge that the legislation be amended to permit de novo review of any issue in a subsequent judicial appeal.
Another vital reform in this legislation is the modification of the burden of proof with regard to business method patent claims. Whereas now a third party must
produce "clear and convincing" evidence to invalidate a claim, the Berman-Boucher bill would permit a successful challenge upon a showing by a
"preponderance" of the evidence. Because of the inherent difficulties in producing tangible evidence of prior art demonstrating a business practice, particularly
in the transient world of the Internet, the "preponderance" standard is a much more reasonable burden to place on a patent challenger.
We would go one step further. In addition to modifying the burden of proof for those contesting a business method patent, we believe that the Congress should
consider adopting the English rule of attorneys fees for such contests. That is, the prevailing party in any dispute over the validity of a business method patent
should be entitled to recover its attorneys fees. This would discourage those with such patents from prosecuting infringement actions that did not have a high
probability of success and would encourage those with limited resources to pursue a contest, and would likewise deter frivolous challenges.
Finally, the Berman-Boucher bill creates a rebuttable presumption of "obviousness" for any patent claim that merely implements an existing practice with the
use of computer technology, which we support. While this would seem to be a simple proposition, Travelocity's experience with online patents leads us to
believe this clarification is needed.
While we believe passage of this legislation would vastly improve America's patent system and would prevent many of the abuses we have experienced in the
past, we remain concerned that the bill does not go far enough to rectify problems that would predate its enactment. We recognize that there may be due process
and takings issues and difficult administrative complexities in resolving problems with existing patents, but we do not believe this should absolve Congress
from confronting the problem. Clearly, there are a number of dubious patents that would not be subject to this bill, and we do not believe that the marketplace
should be forced to deal with these aberrations for 20 years. The Internet and electronic commerce are now in their formative years and if significant market
spaces continue to be occupied by dubious patent holders, the growth and utility of the Net will be severely harmed.
Another potential avenue of relief could be congressional clarification of the "misuse" defense to patent infringement. Under this recognized legal defense to
infringement, the holder of a patent that is valid may still be required to license it broadly on reasonable terms if that business method is the only efficient means
to conduct a particular process. By invigorating this defense in the field of business method patents, Congress would enliven competition in various fields
dominated by companies who have obtained patents on processes for which there is no viable substitute.
Many scholars and practitioners have called for the elimination of all business method patents. Recently, the Patent Office of the United Kingdom, after extensive consideration, chose to preclude the issuance of patents on methods of doing business (1)
. The office's logic was compelling:
"Business methods are of course as old as business itself. The traditional arguments against patenting them are that innovations in ways of doing business are
not like new drugs or pesticides which require much costly R & D. The advantages of stealing a march on competitors, albeit temporarily, are incentive enough
to seek to develop them. Moreover the nature of business methods can lead to very wide patents - a patent for a particular sales method can affect all the sectors
in which that sales method might be useful…
There is no sign, at least to date, of a want of innovation in computer-implemented business methods, and nor was there in the US before business methods
became patentable in 1998. Intense innovation has characterized this field. The Government's conclusion is that those who favour some form of patentability
for business methods have not provided the necessary evidence that it would be likely to increase innovation."
Ultimately, it may become necessary for Congress to go as far as the UK in order to rectify the current problems with these patents. We do believe that urgent
action is necessary and that significant harm could occur to important sectors of our economy if current policies and practices remain in place. The PTO has
taken positive steps toward addressing the shortcomings in its review process, and some progress has been made. Other proposals to modify the examination
and post-grant challenge process, such as those by AIPLA and Congressmen Berman and Boucher, should also be quickly adopted.
Mr. Chairman, Congressman Berman, thank you for the opportunity to appear before the Subcommittee this afternoon. I'm pleased to answer any questions you and your colleagues may have.
1. See http://www.patent.gov.uk/about/consultations/conclusions