Q. WHY PATENT A BUSINESS METHOD?
A. REVENUE GENERATED FROM PATENT LICENSING
Prior to the recent Federal Circuit decision in State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998), companies relied upon trade secrets to protect their business methods. Today, companies are able to receive patents on their business methods, and several are reaping the benefits. For example:
Priceline.com has patented an electronic version of an ancient bazaar. Its dozens of issued patents have given it an exclusive niche in the booming field of e-commerce, including airline ticket auctions (U.S. Patent No. 5,797,127). It has filed numerous patent applications on a wide array of business practices.
A recent (7/26/99) article in the New York Times describes one of Priceline's latest patents covering point-of-sale magazine subscriptions (U.S. Patent No. 5,926,796).
The electronic gadfly publication, Salon.com, recently estimated that these patents and the business built around them have made Priceline's founder and inventor, Jay Walker, a billionaire, 4 times over.
Patent licensing of business methods offers huge advantages over licensing business methods that are only protected by trade secrets. A patent holder is in a position of strength since they can assert their patent against a potential licensee. In contrast, a licensee of a trade secret may be unwilling to pay royalties due to lack of proof that it is a trade secret, or because others might be using it for free. Thus, a patent holder of a business method can command a higher royalty than a trade secret holder of a business method.
Q. SHOULD PATENTS BE GRANTED ON OFFLINE BUSINESS PROCESSES BY ADDING AN ONLINE COMPONENT?
A. THE PRESS SAYS NO; THE FEDERAL CIRCUIT SAYS YES.
Influential press (electronic & print) have roundly criticized the grant of patents covering business methods. An August 18, 1999 column in the San Jose Mercury harshly criticized what one columnist saw as the practice of granting patents on "every kind of offline business process by simply adding an online component." The hostility of that columnist to patenting business methods is exemplified by the title of his article "Absurdity Can Be Patented - The Patent Office Proves It." Salon.com recently raised the rhetorical bar by asserting that the owner of Priceline, Jay Walker, is "accumulating new patents, each seemingly broader than the last, that would theoretically give him ownership of the business models common in whole industries." Sounds like the same complaints that have circulated over the past decade about Lemelson's patents.
Whatever the press thinks, the Federal Circuit has left no doubt as to the enforceability of business method patents in its decision in State Street.
Q. HOW DID COURTS TREAT PATENTING METHODS OF DOING BUSINESS PRIOR TO THE STATE STREET DECISION?
A. THEY WERE PROHIBITED.
For almost a century, a generally accepted principle of patent law viewed "methods of doing business" as not falling within the scope of subject matter eligible for patent protection. This negative view as to the patentability of business methods dated at least as far back as the 1908 case of Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908), in which the Second Circuit Court of Appeals in New York held that a patent covering a bookkeeping system was invalid since "a system of transacting business disconnected from the means for carrying out the system" was not within the categories of "arts" that were patentable.
The U.S. Patent and Trademark Office ("PTO") perpetuated the view that business methods are unpatentable, notwithstanding that the courts have never consistently subscribed to it, particularly after enactment of the Patent Act of 1952. This view, however, slowly eroded over time.
The first step in the erosion of the business methods exception occurred in In re Schrader, 22 F.3d 290 (Fed. Cir. 1994), in which a majority of judges on the Federal Circuit panel upheld a decision of unpatentability by the Board of Patent Appeals. The Schrader application related to a method for competitive bidding on a number of related items such as continuous tracts of land. Among the reasons cited by the Board of Patent Appeals for finding the application in question to be unpatentable was that it related to a business method. However, Judge Pauline Newman's dissent to the majority opinion stated: "I discern no purpose in perpetuating a poorly defined, redundant, and unnecessary 'business methods' exception, indeed enlarging (and enhancing the fuzziness of) that exception by applying it in this case."
Judge Newman's dissent in Schrader influenced on the drafters of the "Examination Guidelines for Computer-Related Inventions" of the PTO that became effective on March 29, 1996. Citing Judge Newman's dissent several times, the Guidelines subscribe to a broad definition of "technological usefulness" and provide some practical advice as to how to draft allowable patent applications covering "business methods." Section I of the Guidelines states that "[C]laims should not be categorized as methods of doing business ... [but rather] such claims should be treated like any other process claims pursuant to [the] Guidelines."
The Guidelines recognize that patent claims to computer-related inventions may fall within the following categories of statutory subject matter: (1) a process: a series of steps of specific operational steps to be performed on or with the aid of a computer; (2) a machine: a computer or other programmable apparatus whose actions are directed by a computer program or other form of software; and (3) an article of manufacture: a computer-readable memory that can be used to direct a computer to function in a particular manner when used by the computer. This is consistent with prior Federal Circuit precedent, and is further supported by their decisions in State Street and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999). The Guidelines thus provide more lenient standards for determining the patentability of computer-related inventions, including methods of doing business.
Another step in the erosion of the business method exception was the PTO's deletion of a paragraph from § 706.03(a) of the Manual of Patent Examining Procedure (MPEP). The former paragraph read:
Though seemingly within the category of process or method, a method of doing business can be rejected as not being within the statutory classes.
Q. WHAT DID THE FEDERAL CIRCUIT HOLD IN STATE STREET?
A. IT LEFT NO DOUBT THAT METHODS OF DOING BUSINESS MUST BE TREATED LIKE ANY OTHER PROCESS CLAIMS.
The procedural background of State Street is fairly straightforward. The District of Massachusetts granted a motion for summary judgment finding that U.S. Patent No. 5,193,056 ('056 patent) invalid under 35 U.S.C. § 101, i.e., that the claimed process was not directed to statutory subject matter. The '056 patent was directed to a process for marshaling mutual fund assets into an investment portfolio organized as a partnership. This arrangement, referred to in the '056 patent as a spoke (mutual funds) and hub (partnership), resulted in certain administrative accounting and tax advantages.
Specifically, the '056 patent disclosed a data processing system that implemented an investment structure for efficient administration of large-scale portfolios of mutual funds. The system performed a set of elaborate calculations required to maintain a complex investment portfolio. The system initialized itself daily by determining and allocating the assets of the portfolio's individual funds based on the most recent records. The system then determined the percentage share that each fund constituted in the portfolio, while accounting for dynamic changes in the value of individual investment securities and in the asset value of each fund. Relevant data pertaining to individual investment funds were continuously monitored to facilitate annual accounting and tax assessment.
Relying on its decision In re Alapatt, 33 F.3d 1526, 1540-41, 1545 (Fed. Cir. 1994), the Federal Circuit held that functional process limitations wrapped around conventional computer components satisfied 35 U.S.C. § 101. The Federal Circuit approved the following format for writing such claims, noting the bracketed structural limitations essentially breath life into the functional components of the claim.
- A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:
- computer processor means [a personal computer including a CPU] for processing data;
- storage means [a data disk] for storing data on a storage medium.
The Federal Circuit also dismissed other arguments that the claims were directed to a "mathematical algorithm" and merely claimed a method of doing business.
The Court was unequivocal in overruling the lower court's reliance on the "business method exception," citing with approval both Judge Newman's dissent in Schrader and the PTO's Examination Guidelines. The Court pronounced: "We take this opportunity to lay this ill-conceived exception to rest." State Street, 149 F.3d at 1375. The Court went on to state that "[w]hether the claims are directed to subject matter within § 101 should not turn on whether the claimed subject matter does 'business' instead of something else." Id. at 1377.
The Court also noted that previous "mathematical algorithm" cases had merely found that "unpatentable mathematical algorithms are identifiable by showing that they are merely abstract ideas constituting disembodied concepts or truths that are not 'useful.'" The Court then held:
[T]ransformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula or calculation, because it produces "a useful, concrete and tangible result" - a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades. Id. at 1373.
The Court then rejected the Freeman-Walter-Able test as having "little, if any, applicability to determining the presence of statutory subject matter" after Diamond v. Diehr, 450 U.S. 175 (1981), and Diamond v. Chakrabarty, 447 U.S. 303 (1980). The Court concluded by saying that a patent claim may contain statutory subject matter "even if the useful result is expressed in numbers, such as price, profit, percentage, cost, or loss." Thus, the Federal Circuit has not firmly held that there is no requirement whatsoever that an invention show any physical transformation of matter or a process in order to be patentable. In AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), the Federal Circuit extended the reasoning of the State Street decision to method (or process) claims that "apply" a mathematical algorithm to produce a useful, concrete and tangible result without preempting other uses.
Q. WHAT ARE THE PRACTICAL IMPLICATIONS OF THE STATE STREET AND AT&T DECISIONS?
A. FOR BANKS AND FINANCIAL INSTITUTIONS, PARTICULARLY, THERE IS A NEED TO AGGRESSIVELY PURSUE PATENTING OF ALL NEW BUSINESS METHODS, WITH A CAREFUL EYE TO THE EXAMINATION GUIDELINES.
PROBLEMS:
There are several problems created by these decisions:
Prior to State Street, many businesses protected their business methods as trade secrets. These companies are precluded from seeking patent protection on their secret methods that have been in commercial use for more than one year. A competitor that later independently invents any such business method may be able to patent it. This could lead to the unfair result of the prior trade secret owner having to pay the subsequent patent owner a royalty to continue to use his own earlier-developed trade secret.
Many broad patents have issued and will issue.
The validity of many of these patents is questionable in light of the scant art cited in them (on average, less than five references), and the inundation of the already overloaded PTO. The PTO reports a boom in business method patent applications, expecting 300 to issue in 1999.
Creates the potential for a Lemelson-type stranglehold of several industries, perhaps by Mr. Walker.
BENEFITS AND SOLUTIONS:
On the other hand, there are several benefits and solutions created by these decisions:
On November 19, 1999, the United States Senate passed and sent to the President an omnibus spending bill that has appended the 1999 patent reform provisions that have previously received so much attention. The bill was signed into law by the President on Nov. 29, 1999. The patent reform provisions introduce a prior user right defense into U.S. law only for a "method" patent. The statutory definition of "method" for purposes of the prior user right is that "that the term 'method' means a method of doing or conducting business[.]" Seemingly, the original intent to protect trade secret chemical processes is excluded from the legislation. (Or, is a chemical method a "method of . . . conducting business?"). Trade secret holders who are able to file a patent application and maintain it in secrecy for several years will have a superior defense to a prior user right. If the secret application is eventually published under the new law, it will be § 102(e) prior art as of the first filing. The prior user right defense requires reduction to practice more than one year before a later applicant's filing date, commercialization before the filing date, and is limited in several other important respects. There will be complete retroactivity for prior user rights, except in the case of litigation commenced before enactment or already concluded.
The old saying that the best defense is a good offense is extremely apt in this situation. It is clear that aggressive entrepreneurs will attempt to patent as many "methods" as they can. Therefore, it behooves businesses to beat them to the punch. Businesses should wrap their latest business practices around standard computer equipment and promptly seek patent protection.
After State Street, the focus is not on whether a claim recites a mathematical algorithm or business method. Rather, courts (and hopefully the PTO) will conduct a two-step inquiry: (1) does the claim recite § 101 statutory subject matter (process, machine, manufacture, or composition of matter); and (2) does the claim recite a "useful, concrete, and tangible result."
State Street seems to indicate that to be patentable, business methods must achieve concrete and material results, e.g., decrease costs or increase productivity, and be useful.
The claims involved in State Street and AT&T were directed to a machine, machine manipulation, or a process within a machine. These types of claims should always be valid. Thus, most patentable business method claims will involve computer software. A careful review of the "Examination Guidelines for Computer-Related Inventions" is therefore highly recommended.
Prior cases sometimes upheld claims directed to transformation or generation of a physical entity or data representing a physical entity, without stating structure. These types of claims are still questionable.
Claims reciting pure algorithms without hardware, or reciting a number of steps performed by a person have always been found nonstatutory. These claims should remain nonstatutory, despite the holdings in State Street and AT&T. Thus, dependent claims reciting computer hardware should be drafted in conjunction with these types of claims to hedge against invalidity.