Figuring out if and when to apply for a patent is becoming increasingly difficult for e-commerce startups.

Cheyenne Ehrlich, CEO of clickthebutton.com, is seeking patents on several of the company's e-commerce processes.

According to Ehrlich, he's doing so despite his belief that it's wrong for the US government to hand out exclusive patents on e-business tools and processes.

So why go against his own will? Because if he doesn't, someone else will obtain the rights for his technology, potentially landing him in a lawsuit.

"What can I do? I have no choice" but to aggressively pursue patents on clickthebutton.com's price comparison technologies to protect the company's R&D investment, said Ehrlich.

Ehrlich may be savvy enough to immunise his dot-com startup from unwanted lawsuits. Unfortunately, the leaders at many companies don't realise they could get sued for patent infringement by competitors that have beaten them to claiming the rights to certain e-business processes.

But figuring out when to apply for a patent and whether a technology or proprietary business process is suitable for a patent is becoming increasingly difficult and controversial for e-commerce startups. And observers say there's no way to eliminate the legal risks, since there's no public record of technologies under consideration for patents.

The lack of a way to research pending patents is only half the problem. Patents, intended to protect inventors of tangible items, take one to two years to obtain from the US Patent and Trademark Office, which most believe is too slow when companies are working in Internet time. Furthermore, critics claim the majority of software patentsââ,¬"which have a 17-year life spanââ,¬"will likely be issued to large businesses, thus hurting small startups.

But by doing some homeworkââ,¬"researching previously awarded patentsââ,¬"and hiring competent legal advisers, you can substantially cut the risk of violating a software or e-commerce patent, experts say. This will add to your legal bills in the short run but could save US$3 million to US$4 millionââ,¬"the average cost of a patent trial in the United States, according to expertsââ,¬"in the long run.

Perhaps the best defense in all of this is a willingness to compromise. Even in the event of a lawsuit, you may be able to hammer out a workable solution.

Take the now-notorious Amazon.com feud with Barnesandnoble.com. Last year, Amazon sued its rival for "willfully infringing" on a patented, single-click online ordering system. In December, a federal court sided with Amazon. As a result, Barnesandnoble.com instituted a two-click ordering systemââ,¬"one that, most observers agree, has not caused significant harm to its bottom line.

In Ehrlich's case, if it turns out that another company developed similar tools and sought a patent on them at roughly the same time, he'll likely negotiate for a cross-licensing deal with that company, he said.

"It's really all a horse trade. You need to get in there as early as you can, so you're in position to negotiate" should a legal dispute arise with another would-be patent holder, he said.

Others in the industry agree that swift action is key to protecting proprietary technology.

"You can't paralyse yourself," said Andy Adams, chief technology officer of How2.com Inc., a CRM (customer relationship management) software maker. "You need to move ahead in business." How2.com, which has been awarded "provisional" US patents on its post-sale customer care and online rebate processing technologies, employs a full-time in-house patent attorney along with outside legal contractors to help it navigate the patent minefield, Adams said. (A provisional patent gives an inventor claim to certain rights over the invention for 12 months, at which time the inventor can file for an official, full-blown "utility" patent, according to the patent agency.)

One way to help reduce patent replication, according to Adams, is to make public some data about provisional patents to keep competitors updated on progress. This way, you may be able to negotiate a settlement with a competitor over similar, patent-pending technologies, before the case goes to trial, he said.

Patent reform for e-business
Critics of the patent system, however, say this rush to claim patents on online technology and processes is not helping move the digital economy forward.

Tim O'Reilly, president of computer book publisher O'Reilly & Associates, said he believes an increase in patent-related legal squabbles would have a chilling impact on high-tech innovation, especially by small companies.

"People are rushing to patent things whether the idea's been out there already or not," O'Reilly said. "People say, 'Our lawyers won't let us look first to see if there is a prior use of this ideaââ,¬"it's better if we don't know.' "

O'Reilly fears e-commerce patents will end up disproportionately in the hands of larger players, harming small startups. "You don't see any more desktop application startups, for example," he said. "The big players will consolidate and create barriers to entry for the new players."

To voice his concern, earlier this month O'Reilly headed to Capitol Hill to ask lawmakers to consider patent reforms. Ironically, his travel partner was Jeff Bezos, CEO of Amazon, who has recently been a big supporter of e-business patents.

But the industry heavyweights came to something of a truce in their long-standing dispute on the question. "Jeff and I basically see eye to eye now," O'Reilly said. "He came to agree with me that the system is broken, but he still thinks he has no choice" but to aggressively seek patents, O'Reilly said.

Last month, Bezos conceded that he had changed his mind and that "the chief rules governing business method and software patents could end up harming us all." He called for the patent life span to be cut from 17 years to three to five years. But he stopped short of saying Amazon would give up its existing patents, possibly because of the patent Amazon received last month for its third-party affiliate buying program.

O'Reilly slammed Amazon when the affiliate program patent was issued, saying then that "once the Web becomes fenced in by competing patents and other attempts to make this glorious open playing field into a proprietary wasteland, the springs of further innovation will dry up."

Although admitting he'd had a change of heart, Bezos responded that Amazon's patent strategy was aimed at helping it avoid Netscape Communications's fate.

"How would you feel if Amazon ended up being acquired by Wal-Mart as Netscape was acquired by AOL? Don't you wonder what might have happened if Netscape had filed a few patents?" Bezos wrote in an online dialogue with O'Reilly, posted on the O'Reilly & Associates Web site last month.

Bezos and O'Reilly will soon meet with ranking members of the US House and Senate Judiciary Committees to ask for more efficient documentation of evidence of past use of a technology or business idea, known in legal circles as "prior art."

"We need fewer, better patents," O'Reilly said.

For its part, the patent office last month announced plans to tighten oversight of new e-commerce patent applicationsââ,¬"which doubled from 1998 to 1999ââ,¬"so Web commerce pioneers don't lose out to newcomers who might, knowingly or not, be on the verge of stealing their ideas.

The patent office will add new checks on technology patent applications, requiring a broader search on "prior art," or past uses of identical or similar tools or processes. An agency official defended the patent process in an interview, saying the process, which averages about 15 months, weeds out 85 percent of first-time applicants, although two-thirds of patent applications are granted.

"The examiner looks at all existing US and foreign patents and searches out a very large portion of the prior art," said Joseph Rolla, director of the patent office's Telecommunications and Data Processing unit. Examiners are continually retrained on the latest technologies, and they only review applications based on technologies they are well-versed in, Rolla said.

"The patent laws are technology-neutral," he said. "We don't approach patent applications with any bias for or against a certain technology or business process."

Patent protection
Even while these online patent-reform efforts take place, advocates of the current system fear that if the critics get their way and patents on software and e-commerce processes are eliminated, it will leave small businesses vulnerable to large companies with greater technology and legal resources.

"The patent system was designed to encourage innovation and to protect smaller companies who've invested time and effort to develop new products," said Alan Neely, CEO of InvoiceLink, a maker of online billing and payment tools.

The privately held company, with 60 employees, began designing those tools in 1996. InvoiceLink was awarded a full utility patent on them last month.

"Were it not for the protection that the US patent office offers to small inventors, I'd never have been able to start this company," Neely said. Giving startups the exclusive right to the licensing of technologies and processes their inventors worked hard to perfectââ,¬"even if the tools and processes become an integral part of e-commerceââ,¬""actively fosters innovation" and is good for the Internet marketplace as a whole, he said.

It also provides business patent holders with credibility.

"This patent does give us a competitive advantage," he said. "Our customers are obviously risk-averse, and this lets them know that we're paying attention to the legal landscape and we're interested in safeguarding their well-being, as well as protecting our own interests."

clickthebutton.com's Ehrlich disagrees, however. The patent office's rules, established to protect inventors of tangible products, seem quaint when applied to evolving Web processes, he points out. "This practice of [issuing] 17-year patents is the only thing that really has the potential to destroy the high-tech economy," Ehrlich said.

But, counters Neely, until there are changes to the process, e-businesses must abide by the rules.

"Getting mad about the way this process works is like getting mad at the guy in the right lane driving the speed limit," Neely said. "You might not like it, but it's still the law."

Copyright © 2009 CBS Interactive, a CBS Company. All Rights Reserved.
ZDNET is a registered service mark of CBS Interactive. ZDNET Logo is a service mark of CBS Interactive.