Dot.com (patent pending): Patents are now central to business strategy.

• Author: Reich, Lance D.
• Position: Software and Internet companies patenting business methods

Many companies are now rushing to the U.S. Patent Office to procure patents on the companies' main areas of business, especially companies that have software as their main product or that conduct business across the Internet. There are several reasons why there is a recent surge in companies filing for patents at the U.S. Patent Office. The most significant reason is that recent changes in case law have removed the prohibition against business methods being patented. Another major reason is the modern process of creating an enterprise and the corresponding demands on start-up companies to seek and obtain patents. A further reason is that many of the modern patents procured and patent-related litigation conducted receive significant publicity in nonlegal realms and the more savvy businesspersons are aware of these activities. Accordingly, because of this increasing prominence of patents in the business world, managers must be aware of the potential issues of both their company's own patent strategy and the probable strategy of the company's major competitors with regard to patent procurement, licensing, and infringement.

Reasons for the Patent Office Rush

In the calendar year 1999, the U.S. Patent and Trademark Office granted a record 169,154 patents, which was an increase of 3.6 percent over the previous record year of 1998.(1) The rate of patenting by U.S. residents and corporations relative to the nation's size and spending has been increasing for over 12 years.(2) This increase in patent applications filed and issued is due in large part to a significant increase in patent applications being filed in the electronic and computer arts, and especially for inventions concerning the Internet.

If nothing else grabs the attention of the businessperson, solely the shear weight of the number of issuing patents should alert a businessperson that it is likely that someone has obtained a patent that directly affects the business area in which the businessperson practices. And logically, the most probable affected area from the surge of patents will be in the software and Internet arena.

Many of the reasons for the surge of patents in the software and Internet area are straightforward. One major reason is that a recent change in U.S. case law has allowed the business methodology underlying the software's function to be patented.(3) Another significant reason comes from the shifting economy and the increasing dominance of e-commerce and its associated software and Internet applications.

However, other less obvious factors are also motivating the increased patent filings. The venture capital arena is quite savvy to the importance of an intellectual property portfolio. Further, the increasing publicity of recent Internet and software patents and patent-related litigation has heightened awareness of the combative patent arena and has business management clamoring to obtain their patent swords and shields.

Changes in Software Patent Law

The U.S. Patent and Trademark Office and the federal courts were traditionally hostile to software being patentable subject matter because of the long-standing principle that software was simply an algorithmic mathematical expression.(4) Thus, as software is simply a glorified mathematical formula, the prohibition against patenting a mathematical formula was used to reject patent applications on software. Moreover, the algorithm itself which the executing software follows is a series of steps in a process that often an individual can perform himself or herself without the use of a computer system.

Many of the more recent financial software patents comprise algorithms executing steps for a specific "business method" which is a simple algorithm that can be practiced without the use of a computer system. There is another traditional prohibition at the U.S. Patent Office against the patenting of business methods. When applications were previously filed claiming financial software, the Patent Office rejected the application not only for being a mathematical expression, but also for being a business method per se.(5)

Some in the software industry foresaw a sea change in the U.S. patent law that would lead to the patenting of software.(6) Even so, the main prohibitions against patenting software, especially financial software, were clearly removed by the U.S. Court of Appeals for the Federal Circuit and its 1998 decision of State Street Bank & Trust Co., v. Signature Financial Group, Inc., 149 F.3d 1368, 47 USPQ2d 1596 (Fed. Cir. 1998).

In State Street, Signature Financial Group obtained a U.S. patent on a system for managing mutual funds whereby mutual funds pool their assets in an investment portfolio that is organized as a partnership. The system represented an advantage as it could better provide an economy of scale in administering investments with the tax advantages of a partnership.(7) Signature sued State Street Bank for infringement of the patent and the federal district court held that the patent was invalid as it was directed to subject matter that was not protectable because the patent was comprised of a mathematical algorithm and a business method.(8) The federal circuit reversed the district court and held that the patent was valid, and that it contained patentable subject matter.

The federal circuit held that instead of being a mathematical algorithm, the patent was instead claiming a system (or machine) which is programmed with the software to thus produce a tangible and concrete result. In regard to the patent claiming a business method, the federal circuit noted that while business methods were generally unpatentable, they were not "inherently unpatentable" subject matter but rather are subject to other grounds of patentability such as novelty.(9) In sum, the federal circuit in State Street permitted the patenting of software as a system and the business method utilized by the system.

In the later case of AT&T Corp., v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), the federal circuit held that the solely mathematical steps which software performs can constitute patentable subject matter. The federal circuit again restated that the focus of the inquiry is upon the patentability of the outcome from the steps from the software's process, and not upon the nature of the individual steps themselves. The court put forth the rule that the proscription against the patenting of a mathematical...