Risks Associated With Restricting Business Method and E-commerce Patents

• Publication year: 2010

Risks Associated with Restricting Business Method and E-Commerce Patents

Jeffrey R. Kuester and Lawrence E. Thompson

Introduction

Business method patents have taken a severe beating since the Federal Circuit decided State Street Bank & Trust Co. v. Signature Financial Group, Inc.[3] in July of 1998. Business method patents are practically as old as the patent system; however, given the rise of the Internet, business method patents raise new concerns. Despite their long history, there was considerable doubt prior to State Street whether business methods were patentable subject matter.[4] State Street has unified the patent system by eliminating the business method exception to patentability and by placing the emphasis on whether the claimed invention is useful, novel, and non-obvious.[5] Thus, business methods are now subject to the same tests for patentability as all other subject matter.

Critics of business method patents have complained that the Internet is different from previous patentable technologies, and because of the difference, critics argue that Internet business method patents do not promote innovation.[6] This criticism, however, relies upon anecdotal evidence rather than economic analysis to advocate changing the patent system. But such

anecdotal evidence is of little use in evaluating whether changes are necessary to the patent system itself. A proper review, prior to changing the patent system, would be a thorough analysis that weighs the costs and benefits of potential changes.

One of the significant benefits of the current patent system is that it evaluates technologies in an objective manner. However, critics seeking to change the patent system in response to State Street largely ignore this benefit and propose changes that would treat business method patents as a separate class that would require a new method of analysis.[7] Under the cry of "patently obvious," the critics would introduce a subjective evaluation as part of the analysis for business method patents.[8] Although there may be classes that warrant such special treatment, creating such a class without considering the potential costs would be imprudent. To determine whether a new class is warranted, Congress must weigh the costs and benefits of creating such an exception from the perspective of whether treating business method patents as a separate class promotes or hinders innovation.

The only constitutionally-permissible purpose for the patent system is to promote science and useful arts.[9] The patent system presumes that only new and non-obvious inventions will promote the useful arts.[10] Thus, the patent system is designed to evaluate objectively whether an invention is useful, new, and non-obvious. Objectively evaluating claimed inventions necessarily minimizes the ability of the Patent and Trademark Office (PTO) to look at a claimed invention and determine that the invention is "seemingly obvious" or "patently obvious." The system requires objective evidence that inherently demonstrates that the claimed invention is unique and non-obvious.[11] Yet critics would change the patent system to create an exception to the objective analysis, thereby forcing a new "patently obvious" standard on those inventions that can be compartmentalized into the created exception.[12]

Part I of this Article summarizes the Federal Circuit's State Street decision. Part II reviews the criticism of business method patents. Part III reviews proposed solutions to the business method "crisis." Part IV examines the constitutional, statutory, economic, and practical considerations necessary for a proper evaluation of the need for business method patents. Finally, Part V presents issues (costs) that must be considered prior to limiting the patentability of business method patents.

I. State Street Bank & Trust Co. v. Signature Financial Group, Inc.

State Street Bank & Trust Co. v. Signature Financial Group, Inc.^[13] is often credited with creating the business method patent. Arguably, however, the PTO has always issued business method patents: in fact, the third patent to be issued by the PTO was arguably a business method patent.[14] Nevertheless, prior to State Street, most practitioners believed there was a business method bias that had to be considered in preparing an application.[15] This bias became known as the "business method exception." The bias was strong enough that many practitioners would attempt to claim the method as an apparatus prior to filing an application or else discourage the filing altogether. Usually, the solution was to prepare a creative application to make the subject matter resemble a run-of-the-mill application rather than a business method patent. Thus, in effect, the business method exception became a trap for unimaginative claim drafters.[16]

Regardless of the status or usefulness of a business method exception to patentability, the Federal Circuit Court used State Street as an "opportunity to lay this ill-conceived exception to rest."[17] State Street involved U.S. Patent No. 5,193,056 (the ‘056 patent), assigned to Signature Financial Group, Inc., for a "Data Processing System for Hub and Spoke Financial Services Configuration."[18] According to Judge Rich:

The ‘056 patent is generally directed to a data processing system (the system) for implementing an investment structure which was developed for use in Signature's business as an administrator and accounting agent for mutual funds. In essence, the system, identified by the proprietary name Hub and Spoke®, facilitates a structure whereby mutual funds (Spokes) pool their assets in an investment portfolio (Hub) organized as a partnership. This investment configuration provides the administrator of a mutual fund with the advantageous combination of economies of scale in administering investments coupled with the tax advantages of a partnership.[19]

State Street Bank & Trust argued that the ‘056 patent was not directed to statutory subject matter, suggesting that it was either a mathematical algorithm or a business method, neither of which were patentable.[20] Judge Rich, writing for the court, disagreed, stating that the patent was not invalid as a mathematical algorithm because in the ‘056 patent, the algorithm was applied in a "useful" way.[21] Judge Rich further wrote that in order to determine whether the claimed invention was unpatentable as either a mathematical algorithm or a business method, one must look to whether the claimed invention produced a "useful, concrete and tangible result."[22]

The State Street court relied upon the broad language of the Patent Act, as well as the Act's legislative history, to define the statutory subject matter as encompassing business methods. Section 101 of the Patent Act, which deals with statutory subject matter, states: "Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title."[23] The Patent Act defines "process" to include an "art or method."[24] In interpreting section 101, the Federal Circuit Court recognized that Congress intended the section to apply to "anything under the sun that is made by man."[25] Given that the Federal Circuit had considerable trouble determining patentability in the software and bioengineering fields, the State Street court's broad statements regarding patentability brought stability and predictability to the analysis.[26]

As far as the Federal Circuit Court is concerned, State Street has simply ended the debate regarding the patentability of business methods.[27] The Supreme Court declined to review the decision,[28] and the Federal Circuit has not shown any interest in revisiting the subject. The State Street decision is generally accepted as sound legal analysis and result, although the practical effect of the decision has been the subject of a tremendous amount of criticism.[29]

II. Discussion Regarding the Patentability of Business Method Patents

The patent system is a balance between two extremely strong national interests. The first interest is the encouragement of innovation and commercialization, and second interest is the encouragement of vigorous competition. The most powerful lever for encouraging innovation is the promise of a grant of exclusive rights to the innovation in the marketplace. Granting of exclusive rights also encourages commercialization, even if at the cost of monopoly pricing. However, the second interest, encouragement of vigorous competition, is furthered by avoiding a grant of exclusive rights in the marketplace.

The United States Constitution reflects both interests by granting Congress the power to "promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."[30] This provision is a grant of power and a positive assertion regarding limitations on the use of that power;[31] thus, Congress has the power to grant an "exclusive Right" to an author or inventor, but that power is limited to situations in which that exclusive right would "promote the Progress of Science and useful Arts."[32] The current debate regarding business method patents reflects deep disagreement as to whether the patent system, in its current form, promotes useful Arts or discoveries in the field of business methods.

The Constitution mandates an economic analysis of the effect a proposed patent statute will have on the promotion of useful arts and discoveries. Congress must weigh the costs and benefits prior to modifying the patent system. Judicial interpretation of the patent system must also take into consideration the promotion of useful arts or discoveries when interpreting the Patent Act.[33] Surprisingly, the patent system has not been subjected to as thorough an economic analysis and debate...