3 Things to Ask an ISO Sales Rep

by Ron on Wednesday, September 1st, 2010

All Zavee merchants accept credit/debit cards, and many are frustrated by the complexity of their merchant services agreement. Their frustration only increases when they are pitched by representatives of other merchant services companies, many of whom offer deals that sound too good to be true and/or are hard to compare to their current plan.

This lack of transparency is bad for everyone: it may keep a merchant from making changes that would save money or spur growth; or it may dupe a merchant into making changes that result in higher costs, false economies or unwise capital investments. This post, and several others to follow, are intended to help guide local merchants to making decisions about merchant services that best serve their business.

All Credit Cards Accepted (creative commons)

Some basics about the business: merchant services is a pure commodity in that every bank and processing company processes the same data and remits or collects the same funds in accordance with the same rules. Nevertheless, the business is extremely competitive, with sales reps constantly calling on merchants and urging them to change processors. It’s probably happened to you already.

When you swipe a customer’s card the customer’s bank checks the customer’s account and extends credit to your bank by authorizing the transaction. When your merchant services bank clears the transaction and pays you it is extending credit to you. This process is highly data-intensive and most merchant services banks outsource the processing of transaction data to one or more large “back-end” data processing firms.

At the front end, many banks that offer merchant processing services outsource the sales role (and sometimes other services, such as underwriting) to independent sales organizations, or ISOs. ISOs usually represent one or a small number of banks and back-end processors. An ISO’s “feet on the street” is the merchant level sales rep, or MLS. An MLS typically works on commission, and often gets part of the ISO’s net revenue from you for the duration of your contract with that ISO.

How can you tell how well the processing deal an ISO offers you today stacks up against the one you already have? It isn’t easy. Beyond some basic fees that are passed through from the card associations (Visa and MasterCard), ISOs differ in the names they use for similar charges, in the extent to which charges are separate or bundled, and of course in the amount of all of their charges. Even basic “per-transaction” fees can’t always be compared on an apples to apples basis.

Here are three things to ask about the next time you hear a pitch about changing processors.

Termination fees. Your current processing agreement probably includes an early termination fee. If you have to pay it when you change processors you should factor that cost into the overall cost of the new deal. But an MLS sometimes will offer to pay some or all of your termination fee to induce you to switch. So ask about that. And ask whether your monthly fees change if the sales rep does pay off your termination fee – after all, nothing is free. And ask about the termination fee in the new deal, because it’s almost certain that someone from another processor will be trying to induce you to switch yet again.

Equipment. Depending on the terminal equipment you currently have, you may or may not have to change equipment when you change processors. Even if you don’t have to acquire new equipment it might make sense to do so, if your current equipment is old and unreliable, or if the new equipment contains features and capabilities that can help your business grow. For example, you might want to be able to connect with your bank over an IP (computer) line rather than a phone line, which tends to be faster, more reliable and cheaper. Or you might want to acquire a handheld wireless terminal so customers don’t have to pay at the register. If you do want to upgrade your equipment be sure to shop around for the best package of services and equipment. ISOs can subsidize low processing fees by charging high equipment lease fees. They also can do the opposite: offer low-cost or even free terminal equipment that is subsidized by higher processing fees.

PCI Compliance fees. Almost everyone who collects and stores credit card data, including merchants who transmit card data over IP, is required to comply with the Payment Card Industry Data Security Standards, usually abbreviated PCI. ISOs are required to comply but can’t meet the standards unless their (IP) merchants do. Merchant processing agreements therefore typically include a charge to ensure PCI compliance. This fee normally has two components: a monthly (or sometimes annual) fee for compliance testing that a third party firm conducts for the ISO; and a separate charge for each month that the merchant is not PCI compliant. The compliance fee is normally marked up from the ISO’s actual cost, often dramatically. Ask about the amount of the mark-up. It may be negotiable, and even if it isn’t it’s one more way to comparison shop different ISO deals. The non-compliance fee is meant to be punitive and is less likely to be negotiable.

In future posts we will take a look at other aspects of ISO pricing, value-added services, and technology that may have an impact on how ISOs and merchants interact.

The Zavee takeaway:

  • It may not be easy, but it’s worth the effort to compare the total cost of your current merchant services contract with the total cost of anything you are being offered. If the only difference is money (and not equipment or other services), decide how much savings is enough to make you switch. And don’t forget about those termination fees.
  • Equipment upgrades don’t have to be a rip-off. They may make perfect sense for your business. Remember to evaluate the total cost of any proposed plan, including equipment charges. Don’t get talked into equipment with features you don’t need and will never use. And if you are otherwise satisfied with your current processor, find out what deals they can offer on the equipment upgrades you want.
  • Your best protection as a merchant services customer is to read and understand your monthly statement. Make sure you know what you are being charged for and that the charges are calculated correctly. And don’t be afraid to ask for changes to an existing deal. The longer you have been with the same processor the greater your leverage. Use it.

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What Can We Learn From Airline “Unbundling”?

by Ron on Tuesday, August 24th, 2010

Anyone who has flown recently has experienced what the airlines call “unbundling”: separate fees for optional services that used to be bound up in the ticket price. Unbundling means, for example, that a passenger who flies with just a laptop bag will pay less than a passenger who checks baggage in the hold. The passenger who fills up at McDonalds or Starbucks before boarding will pay less than the passenger who wants an airline meal. The economics of unbundling fees for ancillary services have been amply discussed elsewhere: The airlines do well and the passengers … well, it depends.

From the passenger’s perspective, unbundling works best when (1) the service really is optional (i.e, the passenger isn’t coerced to to incur the fee) and (2) the fee itself doesn’t seem like an unreasonable money grab by the airline. Airlines are most likely to be successful unbundling services that a substantial number of passengers either don’t want or need or that they can easily live without or replace on their own.

Suitcases (via Malias - Creative Commons)

Airline food is a perfect candidate for unbundling: It’s easy to get cheaper and better food on the concourse and the airlines no longer forbid passengers from bringing their own on board. Seating is another example. Want a reserved seat? Pay for it. Willing to take your chances on your seatmate? Save your money. Some airlines charge more for seats that are larger or closer to the exit. Worth the extra fee? You decide. These fees are relatively easy to explain to passengers, but airlines on the whole have been lax in communicating with their customers.


Checked baggage fees are also economically defensible, since every piece of checked baggage adds to the fuel required for the trip and thus to the airline’s cost. But airlines are fooling themselves, and doing a disservice to their customers, if they think the economic rationale is self explanatory. While many passengers, especially those on business, don’t check bags and don’t pay the fee, other passengers, especially families, find the policy coercive. One unintended consequence is that passengers have an economic incentive to carry on bags they might otherwise have checked. As the Steven Slater incident reminds us, trying to stuff oversized carry-ons into undersized bins can end badly.

As Bill Hanifin points out, it’s essential that airlines communicate the policy both on the plane and via social media. This is especially important with airline policies that are new, subject to change and may be perceived (rightly or wrongly) as unfair to the passenger. Why are airlines so lax about communicating with their customers? One guess is that there hasn’t been a storm of complaint about most of these fees. But the likely reason for such acquiescence is not consumer satisfaction, but its opposite. As a frequent flyer I hear a lot of grumbling, but most of it sounds more resigned than angry. Many airlines survive consumer dissatisfaction, but only because consumers often have few alternatives and, except for the most egregious service issues, have simply given up. This is the sign of an industry in trouble.


The Zavee takeaway:

  • Communication of any significant business change is essential. Customer dissatisfaction will fill the void if you let it.
  • Don’t assume that customers understand the economics of business decisions that affect them. They aren’t stupid, but economic rationales require explanation.
  • Don’t confuse the absence of complaint for approval. In fact, if you do something that should generate (some) complaints and don’t get them you have a problem that you need to address immediately. Unlike airlines, few small businesses can count on getting away with taking their customers for granted.

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Employees: Your Brand Evangelists

by Ron on Wednesday, August 18th, 2010

One of the drivers of growth in the social shopping space is the recognition that personal recommendations are among the most trusted marketing communications. What many companies in the space, including Zavee, are trying to accomplish is to maximize the timeliness, reach and relevance of those recommendations. This need is most acute for smaller merchants, who don’t have the option of simply buying reach through conventional media.

Word of Mouth

Word of Mouth (via Mo - Creative Commons 2.0)

Smaller merchants do have one significant advantage over larger competitors: because they are close to their customers they should be better able to deliver the kind of customer experience that results in credible, actionable, recommendations. Because they know that word of mouth is so important, and because they are more likely to be competing on service than on price, smaller local merchants are uniquely positioned to provide the Wow! factor that launches word of mouth recommendations.

Smaller merchants also have a related advantage, one they should leverage more fully. Unlike much larger competitors, most small company employees are customer-facing at least part of the time. These employees should be hired, trained and required to promote significant, relevant brand equities at every customer interaction. They also should be encouraged (and empowered) to provide the same Wow! factor as the sales associate or the owner/manager herself.

But just as word of mouth is no longer restricted to face-to-face interactions, the role of employees in promoting the brand can also extend beyond individual encounters. In particular, merchants should require – or at least encourage – all employees to actively promote the company’s brand equities through social media.

As companies consider how to implement a social media program, the role of employees should be an integral element of the strategy rather than an afterthought. What role might employees play in a social media program? Here are some suggestions:

  • Create a group blog for employees. It’s easy to do, you can link from your web site and blog posts are indexed by search engines. Some content could be expressly about the company (e.g., as a workplace, if that is a key equity) but most of the content could be about what interests the bloggers. Here the message is more subtle but potentially very effective: You should shop here because this company hires people like us. Amazon now has numerous blogs with this subtext – even a car blog – something they may have learned from having acquired Zappos, which pioneered the concept.
  • Let your employees run your Facebook page. Facebook is now so flexible that a company’s fan page easily can accommodate both “official” content from the company and less structured content from employees. Employees can leverage their own social graph to expand the company’s reach. One objective should be to pierce the wall between the company and its customers. Here’s a simple example: instead of the company simply announcing its “Employee of the Month,” why not post nominations (perhaps including video clips of the employees in action) on Facebook and let the community vote?
  • Get your employees Tweeting. There are many ways in which employees can use Twitter to benefit their company. One is simply to tweet actively about topics that relate to the company’s business. This does not necessarily mean promoting specific products or deals, although (with disclosure) there is nothing wrong with that. But the employees of, say, a fashion boutique should be on Twitter constantly providing value-added content about fashion, art, music or anything else the clientele would find interesting (and bringing useful information back to the company). Employees also can be the “canary in the coal mine” for their company. By setting up keyword and hashtag searches on Twitter they can see and respond to mentions of the company, its products, suppliers, etc. and respond appropriately. The scope of this task will vary by company and it needs to be handled carefully, but any established company that isn’t using Twitter in this way simply has its hands over its ears.

One final note about empowering employees to use social media on behalf of the company. It’s in everyone’s interest to clearly specify what employees must, can and may not do. Transparency and disclosure are vital to every social media plan, and it’s important to have someone in charge of ensuring compliance. Mistakes are inevitable but they need to be addressed promptly, lest your lawyers come in and advise you to prohibit employees from using social media altogether (note: pdf download req’d).

The Zavee takeaway:

  • Your employees can help provide the kind of experience that produces word of mouth recommendations.
  • They also can help you increase the reach and impact of your word of mouth marketing if you integrate them into your social media strategy.
  • There are countless ways to leverage employee involvement in social media – be creative!

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A New Aviation-Internet Creation

by Ron on Tuesday, August 10th, 2010

Remember Captain Chesley “Sully” Sullenberger? He’s the US Airways pilot who landed a fully loaded jet in the Hudson River in January 2009 with only minor injuries to the 155 people on board. His skill and heroism brought him well-deserved fame, but the quick actions of smartphone-enabled witnesses brought his actions to light nearly in real time, as they posted photos to Twitter almost before the plane stopped moving. This event didn’t just catapult Capt. Sullenberger into the public eye. It also changed the perception of Twitter from a forum for narcissistic ramblings to a mainstream social media tool.

Emergency Slide (via NASA)

Now the airlines have given us another social media star, Steven Slater. Mr. Slater is the JetBlue flight attendant who got into an altercation with a passenger as his flight approached the gate at JFK, then grabbed his bags, grabbed a beer and fled down the plane’s emergency chute. In addition to extensive coverage by local media in New York, Mr. Slater’s own Facebook page has more than 25,000 friends and growing at the rate of several thousand friends per hour. Other Facebook users have started their own pages about the incident, including one called “Free Steven Slater”. On Twitter, the event is reported to be the number one trending topic in New York and several other cities

Will Mr. Slater’s instant celebrity, which is owed in no small part to social media, make him, as some suggest, “an online folk hero”? That depends, I think, on whether Mr. Slater’s actions tap into something authentic about how we feel about employers, airlines or both. The urge to tell your boss to “take this job and shove it” is timeless, but people rarely act on the sentiment. (Although this resignation by storyboard is pretty classic). The combination of tighter security, increased baggage fees and, perhaps, fuller planes has led to either customer service failures on the part of the airlines or more abuse from passengers, depending on who is asked.


Perhaps, then, it is timely to remind businesses of every size how valuable social media can be as a customer service channel. With all the buzz that this event has created, there is no good reason for JetBlue, no stranger to social media, to have stayed largely quiet about it. Whether to reassure passengers about their safety (and the airline’s hiring standards) or even to laugh it off, JetBlue should be much more engaged with its customers.


The Zavee takeaway:

  • Of course he shouldn’t have done it, but the getaway slide is pretty impressive.
  • JetBlue is doing no favors to itself or its customers by yielding the social media (and conventional media) environment so completely to Mr. Slater.
  • There is a difference between being a folk hero and a real one, even online, and most people know which is which.

Update (8/11/10): TechCrunch confirms that the “resignation by dry erase board” is a hoax.

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Loyalty: More Than Just Points

by Ron on Tuesday, August 3rd, 2010

In a recent post, Bill Hanifin observes a trend in loyalty marketing to develop programs that keep score “as much by social behaviors as by transactional.” What Bill is saying, I believe, is that marketers can and should look beyond points-based programs that are oriented solely toward attracting one more customer, one more sale and one more item in the basket.

Nurses at Veterans Hospital, 1951

Social behaviors can include writing a review, posting a video or playing an online game. All of these behaviors are evidence of increased customer engagement with the brand, all can result directly in increased sales and profitability, and all can be measured and evaluated. Some of these behaviors, especially recommendations and user-generated content, can leverage social media channels to result in astonishing ROI. For example, who could even guess at the value of the Old Spice social media campaign?

Marketers should not lose sight, however, of the benefits of old-fashioned “surprise and delight”. I recently had several of these experiences, all in unusual contexts. As readers are aware, my house caught fire last week and was saved by the alertness of our central station alarm company and the skill and bravery of our volunteer firefighters. As I mentioned in a post about the fire, the firefighters used tarps to cover furniture that was directly below the fire (and the water). That makes me “loyal”: our vollies are getting as big a check as I can afford this year – more than if they had just focused on the fire and ignored the contents, which the insurance adjuster fully expected.

My exciting couple of weeks also included a serious automobile accident, courtesy of a very drunk driver. I spent a few days in the hospital, where the doctors and staff did everything possible to make my stay easier. I’m not naming the hospital because I don’t want to get anyone in trouble, but I know I was bumped up in line for several procedures, had more visitors (and at later hours) than the rules allowed and generally was made to feel as much like a guest as a patient. And I’ll be happy to recommend the hospital in a private conversation.

The Zavee takeaway:

  • The most effective loyalty programs track behavior as well as transactions.
  • You don’t need a loyalty program to increase consumer loyalty.
  • Don’t forget to surprise and delight.

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The Social “Ask”

by Ron on Tuesday, July 27th, 2010

Remember Ask.com? Back before Google became almost synonymous with internet search (sorry, Yahoo!), Ask had users enter natural language questions rather than strings of keywords. Ask is about to relaunch with an interesting new structure. First, the search engine now returns natural language answers instead of links. Second, and even more interesting, users will be able to open their query to the user community for a crowd-sourced answer.

via Horia Varlan (Creative Commons 2.0)

Ask is hardly alone in making Q&A part of social search. A startup called Aardvark enables social Q&A by finding a person in the user’s network to answer a question. Aardvark may have been onto something, as it was recently acquired by Google. Other social search sites that have enabled social Q&A are Quora and Formspring. Quora considers itself a “continually improving collection” of user-generated questions and answers. Formspring is oriented toward “conversational Q&A [that] helps you express yourself”. Among the major social networks, Facebook is developing a Q&A application, which is currently in private beta. LinkedIn long has supported the ability to ask questions and hold threaded discussions within user groups, while Twitter can support Q&A but doesn’t have a specific application.

We think that Q&A is a natural extension of social search and will become a permanent part of the social media landscape. We think Q&A is particularly relevant to social shopping. The process that now begins with a shopper’s review or recommendation can just as easily begin with another shopper’s request for information. Like writing reviews, answering questions is a way for shoppers to provide value, demonstrate expertise and gain influence. Of course, we at Zavee are continuing to develop and refine our own social search capabilities, so you can look forward to exciting new features over the next several months.

The Zavee takeaway:

  • Social Q&A is suddenly hot, but that doesn’t make it a fad.
  • Q&A is a natural extension of the social shopping feature set.
  • Look for exciting new social search features coming soon from Zavee.

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ADT Saved My House

by Ron on Friday, July 23rd, 2010

Those of you who follow Zavee Thinking may have noticed that this week’s post is a few days late. I was a little tied up this week and when I explain why I hope you will understand that the delay couldn’t be helped.

I was planning to blog about the new Old Spice campaign, in which Wieden + Kennedy’s creative team first seeded Social Media influentials with the idea of tweeting Old Spice pitch-hunk Isaiah Mustafa to ask for a personalized video – and then produced the video “responses” almost in real time. You can read about this amazing campaign here.

But I’m not going to blog about Old Spice. I’m going to blog about my fire, and about how ADT (and others) saved my house.

At 10:06 on Monday morning, ADT, which provides central station monitoring services, detected a fire alarm on the second floor of my home in New Jersey. They called the local fire department, which responded within minutes. Soon, firefighters from no less than 10 different companies – mostly volunteers – were working to put out the fire, which began when wires shorted inside a wall between a bathroom and a closet. No one was home when the fire broke out and none of the firefighters or police was injured.

Because ADT called in the alarm so quickly, the fire damage was confined to a relatively small space. The fire chief told my wife, however, that if we hadn’t had central station monitoring the house would likely have burned to the ground. Since my neighbors were either at work or on vacation it isn’t likely that anyone would have called 911 before it was too late.

As soon as the firefighters finished, we called our insurance company, Chubb. They dispatched a demolition and restoration crew immediately and by that afternoon a dozen people were working to clean and dry out the house. The amount of smoke and water damage is surprising for such a small fire, but while heat goes up, water goes down and smoke and soot go everywhere – especially on a hot day when the air conditioning is blowing. In fact, much of the damage isn’t even close to the site of the fire.

I’m blogging about my fire first, because I want to thank the firefighters and police who burst into a smoke-filled house on a hot July day not knowing what they would find and who used sensitivity as well as skill in fighting the blaze. They could have torn my house apart while trying to save it. Instead they put tarps over the furniture so it wouldn’t be damaged by water and falling debris. Our local firefighters are volunteers and they are at the top of the list of local causes my family and I support.

Second, I want to emphasize the value of central station monitoring. We use ADT and we credit them with saving our house, but any good central station company will do. We were pretty cavalier about our service because we looked at it mainly as a burglar alarm and the house is rarely vacant. And house fires happen to other people. At least we had fresh batteries in the heat detectors. We had changed ours recently and if the fire had happened only a couple of months ago it could have been much worse.

Finally, I think everyone should take a hard look at their fire and casualty insurance policies and make sure that (a) they are adequately covered and (b) their insurance company is willing and able to handle the kind of losses that a house fire can cause. One thing we learned from our fire is that different insurance companies have different perspectives on losses like ours. The Chubb adjuster and everyone else on the team assures us that they have seen far worse than ours. Their overriding message is one that we needed to hear: Don’t worry. Knowing that we aren’t going to have to fight over every penny provides enormous relief at a time of great stress. If you don’t get the same feeling from your insurance company, you need a new one. And if it costs a little more to be confident that you won’t have a battle on your hands if you make a claim, it’s probably worth it.

The Zavee takeaway:

  • Central station monitoring can save your house – and perhaps your life.
  • Fire insurance isn’t a commodity – get the coverage and service you need and deserve.
  • Firefighters are amazing – they deserve everyone’s respect and support. They certainly have mine.

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Facebook vs. Twitter: Do You Have to Choose? (Pt.2)

by Ron on Tuesday, July 13th, 2010

Last week we blogged about how valuable Facebook can be for local businesses and suggested that it wouldn’t take much additional time to add Twitter to the marketing mix. We are strong believers in Twitter as a complement to Facebook, but we realize that many local merchants are able to devote only limited time to Social Media.

HootSuite logo

The key to making Twitter easier and more efficient is to use one of the free third party Twitter management tools instead of Twitter’s own site. HootSuite and TweetDeck let you do two things that can save a lot of time: manage multiple searches and cross-post into multiple Social Media streams.

In a previous post we blogged about four ways that local businesses can use Twitter. Some involve more time and attention than others. First, we suggested using Twitter as a listening post, gathering information from other users. The net you cast can be as wide or narrow as you want. Use your Twitter manager to set up searches for your industry, competitors, community, etc. If you can’t do all of these, establish some priorities and set up fewer searches. Checking them should only take a few minutes a day.

Second, we discussed using Twitter to build your brand. This is the most time-consuming aspect of making Twitter work, and while we think it’s worth the time not everyone will agree. This is where cross-posting can come in handy. You can use your Twitter manager to publish your Facebook posts as tweets – same content, two streams. You can do the same with blog posts (every Zavee Thinking post is automatically tweeted as soon as it’s published). Cross-posting isn’t a substitute for frequent tweeting, but it’s a reasonable compromise between committing to a major brand-building campaign on Twitter and ignoring your brand altogether.

Third, we pointed out how Twitter can generate leads. There is a passive and an active component to using Twitter this way. The passive part involves setting up searches for keywords that potential customers are likely to use when tweeting. The active part involves tweeting with those same keywords. Not enough time to do both? Just set up and monitor the searches and see how that works. You may need to adjust the search terms but that still should take less time than actively tweeting to gain leads. As you get better at finding potential customers on Twitter, however, don’t be surprised if you find yourself spending more time building those relationships online.

Finally, we recommended using Twitter as a customer service channel. At a minimum, you should use your Twitter manager to display mentions of your business on Twitter. Whether and how you respond to tweets that mention your business is up to you, but there is no reason not to see what people tweet about you.

We think that this minimalist approach to Twitter is a good way to start, especially if you don’t think you have a lot of time for Twitter. We also think it’s likely that you will ramp up your Twitter strategy as you gain experience with the medium. Take an hour or two on a weekend afternoon to get familiar with one of the Twitter management applications and play around with both searches and cross-posting. Let the technology do some of the work and you can get value out of Twitter without putting in more time than you want.

The Zavee takeaway:

  • Use a third party Twitter manager for multiple searches and to publish Facebook posts on Twitter (and vice versa).
  • An active tweeting strategy takes more time than reading relevant tweets, so if time is an issue focus on using Twitter passively – at least for now.
  • Don’t be surprised if you find yourself spending more time on Twitter than you expected – not because it wastes your time but because it builds your business.

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The Supreme Court Punts on Business Method Patents

by Ron on Tuesday, June 29th, 2010

You may not know it, but the co-founders of Zavee have a background as practicing lawyers. That fact is usually enough to keep us from blogging about legal topics on Zavee Thinking, but one of the end-of-term Supreme Court decisions issued yesterday is both interesting and important to small businesses: a patent case called Bilski v. Kappos.

via Cliff1066 Creative Commons

Thomas Jefferson

The Court doesn’t handle patent cases very often, both because the legal issues rarely become Supreme-worthy and because the underlying facts are often very technical. Bilski is an exception on both counts, as the issue is extremely important and the facts aren’t very difficult.

Bilski filed for what is called a “business method” patent, in this case a procedure for instructing buyers and sellers how to hedge against the risk of price fluctuations in the energy sector. The patent application was originally denied because the Appeals Court held that a “process” was patent-eligible only if it either was tied to a particular machine or apparatus or physically transformed a particular article into a different state or thing (think of a process for cutting a diamond or desalinating seawater). This is called the “machine or transformation” test and it played a central role in the Bilsky decision.

No one can patent natural phenomena, laws of nature or (and this is critical) abstract ideas. In fact, the Supreme Court held that the Bilski patent was properly denied not because it failed the “machine or transformation” test – the Court rejected that as a litmus test for process patents – but because it was an abstract idea. The problem for business people is that the Court explicitly refused to define what kinds of business methods could both fail the “machine or transformation” test and pass the “abstract ideas” test – and thus be patent-eligible.

Why is this a big deal? The purpose of patent law (which was pioneered by Thomas Jefferson) is to encourage innovation by granting inventors who disclose their invention a monopoly over the subject of the patent. Some inventors don’t like that bargain: the formula for Coca-Cola has never been patented because its owners think disclosure is too risky – they worry that flavor chemists could reverse-engineer the formula and come up with something that tastes like almost like Coke but doesn’t violate the patent.

With business method patents the risk is the opposite: that despite disclosure businesses could inadvertently infringe on a patent just by conducting their business. Although the patent described in this famous Onion article would never be upheld, Congress was nervous enough about business method patents that in 1999 it enacted a specific defense against certain infringement claims relating to business methods. Even with this defense, however, businesses will have to choose between investing in resources to effectively monitor both new patents and their own business to prevent infringement or take the risk of possible litigation. Either choice is risky and potentially very expensive.

The fundamental question about business method patents is whether they help or hinder innovation. Another way to ask the question is whether the absence of patent protection would deter inventors from incurring the cost and risk of invention. In science and technology, the benefits of patents are clear: no one would invest in drug discovery if the results of their efforts immediately had to be shared – for free – with drug companies that hadn’t put any time or money into the research. On the other hand, methods of doing business have been competing in the marketplace for centuries without patent protection.

Using a similar analysis, four of the nine Justices concluded that business methods should not be patent-eligible, but they were outvoted (all nine agreed that the Bilski patent was too abstract to be eligible). The Court’s opinion has received critical reviews, since it was so narrowly decided that it leaves the important questions unanswered. Yet it seems inevitable that the Court will have to grapple with the issue of business method patents before too long. The lines are blurring between technology that is clearly patent-eligible and abstractions that clearly are not – a factor, perhaps, in the Court’s non-decision – and the risk to both businesses and inventors is great.

The Zavee takeaway:

  • Whether methods of doing business are patentable is an important question, one the Supreme Court should have answered yesterday.
  • If you are developing a novel way to do business, think twice before investing in a patent. Bilski didn’t kill the business method patent but it didn’t offer a strong endorsement, either.
  • It’s not impossible that someday you will be on the receiving end of an infringement claim. If it happens, find the best patent lawyer you can and don’t give up hope – you may be able to beat the claim or even the patent itself.

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