Many commentators and newspaper articles reported about State Street Bank v. Signature Financial , 149 F.3d 1368, 1374-75, 47 USPQ2d 1596, 1602 (Fed. Cir. 1998), cert. denied, 119 S. Ct. 851 (1999) and have given the impression that now it is much easier to obtain business method patents, and that the floodgates were opened by this case.
State Street Bank and Signature Financial were companies that acted as administrators and accounting agents of mutual funds. Signature Financial owned U.S. Patent No. 5,193,056 entitled "Data Processing System for Hub and Spoke Financial Services Configuration" The invention related to a financial investment vehicle, which Signature Financial called by its own proprietary mark, a "Hub and Spoke" configuration. A Hub and Spoke arrangement is an investment structure whereby mutual funds ("Spokes") pool their assets in an investment portfolio ("Hub") organized as a partnership. This financial services configuration involves an entity that is treated as a partnership for federal income tax purposes and that holds the investment portfolio . . . and funds that invest as partners in the partnership portfolio. Enabling mutual funds to pool their assets in this manner provides for economies of scale with regard to the costs of fund administration and has beneficial tax consequences. This complex financial structure, however, created its own set of administrative challenges. As a partnership, the Hub portfolio assesses all economic gains and losses with respect to the Spoke funds on a pro rata basis. Because each of the Spokes are themselves investment vehicles, which are subject to constant changes in assets as individual investors add or withdraw funds and market prices fluctuate, the partnership interest of the Spokes in the Hub constantly varies. Administering this structure requires a daily allocation of income, capital gains, and expenses or investment losses. The daily allocations are made on the basis of the Spoke funds' percentage share in the total assets of the Hub portfolio.
Signature's invention was directed to a data processing system for administering this Hub and Spoke configuration. The disclosure provides extensive flowcharts and a detailed description of the invention's preferred embodiment. The system is operated by means of a personal computer, software capable of performing the various functions described in the claims and detailed in the preferred embodiment and flowcharts, data storage means such as a floppy disk, and display means such as printed output and a computer screen. Signature informed State Street that any data processing system designed to perform book accounting for a multi-tiered fund arranged in a Hub and Spoke configuration likely would infringe the Patent. State Street had negotiated with Signature for a license for its patented data processing system. When negotiations broke down, State Street brought an action in district court seeking to invalidate Signature's patent on the basis that it covered subject matter that should not be capable of being patented. The district court held that the patent was invalid because it was directed to a business method. On appeal, the appeals court held that a "business method" exception was not a reason that could be used to invalidate a patent.
My personal view is that the State Street Bank case is not as significant or dramatic as commentators have made it out to be. My experience has been that most so called business method inventions make use of software, and there is no question that software inventions are patentable, if properly claimed (e.g. a computer readable medium bearing program code, a carrier wave embodying program code, or a computer programmed to carry out various steps). Some commentators give the impression that State Street stands for the proposition that it is possible to claim inventions without requiring any hardware or anything tangible at all in the patent claims. I personally don't agree.
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The Business Method rejections made by patent examiners in the past usually cited Hotel Security Checking Co. v. Lorraine Co. I have not had any significant problems in the past convincing the patent office that a business method rejection was improper. I would distinguish over the Hotel Security Checking Co. case by pointing to hardware in my claims, using arguments such as the following:
"The claims stand rejected under 35 U.S.C. § 101 as directed to a method of doing business. This rejection is traversed. A system of transacting business disconnected from the means for carrying out the system is not ... [a process]. See Hotel Security Checking Co. v. Lorraine Co., 160 Fed. 467 (1908). Applicant, on the other hand, has disclosed and claimed a particular system including hardware. Applicant's claims are closer to those presented in In re Johnston, 502 F.2d 765, 83 U.S.P.Q. 172 (C.C.P.A. 1974), rev'd on other grounds, 425 U.S. 219, 96 S. Ct. 1393, U.S.P.Q. 257 (1976). In that case, the Court of Customs and Patent Appeals upheld as statutory an automatic record keeping system under which banks could provide bookkeeping services on regular periodic statements. The claims were for a method of operation on a computer to effectuate a business activity. The claims were drafted in "means" apparatus form. Similarly, applicant's apparatus claims are directed to a machine, defined as an appropriately programmed digital computer, rather than for the system as a process. Applicant's method claims also require hardware. Applicant's claims are therefore not non-statutory under 35 U.S.C. §101 as a method of doing business."
The State Street Bank case merely held, in my view, that the Business Method Exception was not a proper rejection. Consider the following excerpts from State Street Bank:
"In view of this background, it comes as no surprise that in the most recent edition of the Manual of Patent Examining Procedures (MPEP) (1996), a paragraph of § 706.03(a) was deleted. In past editions it 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. See Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2nd Cir. 1908) and In re Wait, 24 USPQ 88, 22 CCPA 822 (1934). MPEP § 706.03(a) (1994). This acknowledgment is buttressed by the U.S. Patent and Trademark 1996 Examination Guidelines for Computer Related Inventions which now read: Office personnel have had difficulty in properly treating claims directed to methods of doing business. Claims should not be categorized as methods of doing business. Instead such claims should be treated like any other process claims. Examination Guidelines, 61 Fed. Reg. 7478, 7479 (1996). We agree that this is precisely the manner in which this type of claim should be treated. Whether the claims are directed to subject matter within § 101 should not turn on whether the claimed subject matter does "business" instead of something else."
The holding in State Street Bank does not, in my view, imply that the standard procedures for evaluating whether a software claim is statutory have in any way been relaxed. In fact, the claims in this case recited hardware. The claims were "means for" claims that the court interpreted as being directed towards a machine; i.e., including an arithmetic logic unit. Note the following quote from State Street Bank:
"Today, we hold that the transformation 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." [emphasis added]
An open question is whether the courts will broaden the scope of what they hold to be statutory subject matter (i.e., subject matter capable of being patented). In a case decided after the State Street case, called AT&T Corp. v. Excel Communications, Inc., the court seemed to move that way. That case repeated a quote by the Supreme Court from a case years ago in which the Supreme Court stated that Congress intended that "anything under the sun that is made by man" should be capable of being patented. In this case, Excel did not own or operate the facilities over which phone calls are placed. AT&T did not charge Excel with infringement of a hardware claim, but instead limited its infringement charge to method or process claims relating to a process of making a long distance phone call. Excel contended that because the process claims lack physical limitations, the claims are not patentable subject matter. The court disagreed and stated that because "the claims at issue in this case are directed to a process in the first instance, a structural inquiry is unnecessary." This case goes a long way towards the proposition that hardware may not required in a patent claim for a software-related invention and, in my opinion, is much more significant than the State Street case.
I have prepared a history of selected important cases relating to the patenting of software related inventions: http://patentsusa.blogspot.com
The law has evolved substantially over time. Reviewing the history starting with the older cases first will provide the reader with an appreciation of how difficult it was in the past to obtain patent protection for software related inventions, and how resistance has softened over the years. However, some challenges remain. If an invention becomes classified as a "business method," there are now two tiers of review. There is now much reluctance on the part of the U.S. Patent and Trademark Office to grant a patent on a business method despite the progress made in the AT&T v. Excel case. While allowance rates for business method inventions were relatively high after the AT&T v Excel case, they are now near an all time low.
Recently, the U.S. Patent and Trademark Office's Board of Appeals set up a business method case for review by the Federal Circuit. This case is Ex parte Bilski.
Bilski's patent application is Serial No. 08/833,892 and relates to commodity trading.
Claim 1 is representative and recites:
1. A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:
(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;
(b) identifying market participants for said commodity having a counter-risk position to said consumers; and
(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.
No hardware is required to perform the steps. This is thus what would be called a "pure" business method patent application.
During prosecution, the Examiner stated that "the invention is not directed to the technological arts."
The Bilski Board also stated that: AT+T involved a machine-implement process. Machines are physical things that nominally fall within the class of a "machine" in section 101, and the machine-implemented methods inherently act on and transform physical subject matter, such as objects or electrical signals, and nominally fall within the definition of a process under section 101. No machine is required by the present claims. Until instructed otherwise, we interpret State Street and AT+T to address the 'special case' of subject matter that nominally falls within section 101, a general purpose machine or machine-implemented process, but which is nonetheless unpatentable because the machine performs an 'abstract idea.'
Thus, case law is unfortunately a bit unsettled in the area of business methods, and the Patent and Trademark Office is a bit hostile to such inventions at present. On the other hand, there is little question that business methods are capable of being patented if software is involved and the patent claims are drafted in a form that has been determined to be capable of being patented, though some substantial argument with U.S. Patent and Trademark Office may be necessary. Filing an appeal early in the proceedings may be advisable if an Examiner is being unreasonable.
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