cuit put this idea to rest. The patent law reached business processes just as
any other, and patents for business methods were, the court held, not in-
valid because of the subject matter.[11-87]

The case in which this issue arose was one where a financial services
company had developed a new kind of mutual fund service, one that would
manage a pool of mutual funds through a software-based technology. The
court upheld both the software patent and the patent on the business
method. Both, the court said, were inventions that the patent law could
reach. This decision, in turn, gave birth to an explosion of business method
patent applications. And by 1999, many were beginning to be approved in a
way that surprised the industry. Applications for computer-related business
methods jumped from about 1,000 in 1997 to over 2,500 in 1999.[11-88] High on
that list was the Amazon 1-Click patent, but also on the list were Price-
line.com's reverse auction patent, and British Telecom's claim that it owned
the invention of hypertext links (and hence the World Wide Web!).[11-89]

In all these cases, the question the monopoly-granting body asked was
simply this: Was this sort of "invention" sufficiently like others that were the
subject of patents? If so, then the patent was granted for this field of innova-
tion.

Economists, however, are likely to ask a much different question. While
it is clear that patents spur innovation in many important fields, it is also
clear that for some fields of innovation, patents may do more harm than
good.[11-90] While increasing the incentives to innovate, patents also increase
the costs of innovation. And when the costs outweigh the benefits, patents
make little sense.

How could this be? The answer links to an argument we've seen in many
different contexts before. The ordinary argument for a strong patent right is
a kind of prospecting theory. First advanced by Edward Kitch, the prospect
theory says there is good reason to hand out broad, strong patents because
then others will know with whom they should negotiate if they want to build
upon a certain innovation.[11-91] This in turn will create incentives for people to
invent, and as information is a by-product of invention, it will induce
"progress" in the "useful arts."[11-92]

The problem with this theory, however, is its very strong assumption (in
some contexts, at least) that the parties will know enough to properly license
the initial foundational invention, or that other issues won't muck up the in-
centives to license.[11-93]

Both limitations on the ability to license are what economists would call
transaction costs.[11-94] The transaction cost from ignorance is similar to the in-

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