Why business method patents?

• Author: Duffy, John F.
• Position: Symposium

INTRODUCTION I. THE ACTIVIST COURT HYPOTHESIS AND ITS FLAWS A. The Patent in State Street Was an Issued Patent B. The Executive Branch Moved First in Eliminating Its Business Method Exception C. State Street Followed En Banc Precedent D. The Supreme Court's Case Law Supported a Broad Approach to Patentable Subject Matter II. AN ALTERNATIVE THESIS: LAW FOLLOWED TECHNOLOGY III. BILSKI V. KAPPOS: THE FATE OF BUSINESS METHOD PATENTS A. Textualism's Triumph in Bilski 1. The trend toward textualism 2. Bilski and textualism B. Wary Acceptance of Business Method Patents: Statutory Structure and the Breadth of Patentable Subject Matter CONCLUSION: LEGAL METHOD AND THE FUTURE OF PATENTABLE SUBJECT MATTER APPENDIX: FINANCIAL ENGINEERING AT TOP 20 ENGINEERING UNIVERSITIES INTRODUCTION

The past dozen years have witnessed an extraordinary and at times pitched controversy over the fundamental legitimacy of so-called "business method patents"--i.e., patents in which the inventor's contribution is directed toward improving processes in fields of business such as finance, credit, insurance, marketing, sales, management, and the like. (1) The controversy has spilled out across hundreds of pages of law review articles, amicus briefs, and fractured and conflicting judicial opinions. In the past year, the controversy finally came to the Supreme Court and, on the very last day of its Term, the Court issued a closely divided decision in Bilski v. Kappos in which a bare five-to-four majority definitively established business methods to be patentable. (2) Still, the Supreme Court's Bilski decision was not a complete victory for business method patents. The Court held all of the specific claimed inventions in the case to be outside the scope of patentable subject matter, and the Court explicitly stated that its interpretation of the Patent Act might "not suggest broad patentability" for business method patents. (3)

The Supreme Court's decision in Bilski seems unlikely to end all controversy over business method patents. Rather, the debate over business method patents will now turn from the question whether any business methods are patentable to the question how broad the scope of patentable subject matter should be for business methods. As the debate shifts in the wake of the Court's Bilski decision, it is an especially good time to ask a basic and important question that has not been thoroughly examined or satisfactorily answered: Why? Why did the controversy over the patentability of business methods arise at this particular time in our history, and why did the legal system ultimately accept the patentability of such methods? In short, why did business patents arise, and why did they survive? Each of these questions is not easy to answer, but good, thorough answers are urgently needed if legal decisionmakers and scholars are to appreciate the forces that have so far created and shaped the controversy, and that are likely to control its course in the future.

This Article seeks those answers and finds that the complete story underlying the why of business method patents requires not only an understanding of the legal doctrines, case law, and jurisprudential trends that have shaped patentable subject matter in the last three decades, but also a deep appreciation of the larger commercial, technological, and industrial circumstances that gave rise to the controversy. A comprehensive account of business method patents provides insights into the directions that the doctrines of patentable subject matter may take in the coming years, and it is also an extraordinarily rich case study in legal method, revealing how the developing law in a complex regulatory area is influenced by a broad set of forces arising both inside and outside of the legal system.

Patents and business have existed in the United States since the inception of the country, and so, at least at first glance, there does not appear to be an obvious catalyst to explain the timing of the controversy--i.e., why business method patents, with their attendant controversy, arose in the last dozen years. Critics of business method patents have, however, put forward one thesis. They assign responsibility for the controversy to the judges of the Federal Circuit, who first recognized the patentability of business methods in the 1998 decision State Street Bank & Trust Co. v. Signature Financial Group, in which the Federal Circuit had sustained the patentability of a computerized system for managing a financial portfolio in an innovative manner. (4) In its most extreme form, this thesis could be accurately labeled "the activist court hypothesis." The theory is that biased and activist judges of the newly created specialized court for patent law sought to expand their specialty by overturning long-settled law that had barred the patentability of business methods. That view is well presented by Peter Menell, who argues that "the unification of appellate decision making in a single body had the effect of creating a strong pro-patent bias in the interpretation of patent law." (5) As one of the "more notable" examples of such bias, Menell points to the court's State Street decision, which he describes as having "laid to rest the traditional rule barring patents on business methods." (6) Similarly, Leo Raskind describes State Street as "so sweeping a departure from precedent as to invite a search for its justification." (7) Such excerpts are not isolated. In academic articles, judicial opinions, political white papers, and other writings, the analysis of business method patents almost invariably traces the origins of the controversy to the State Street case, with the implication that credit or blame for business method patents should be fixed there.

The thesis has been influential. It has also entered the political arena, as shown by a report issued by the Computer and Communications Industry Association (CCIA), a Washington, D.C., trade association that accused the Federal Circuit of being an "activist court" that "summarily eliminated the judicial rule against business method patents" as a means of expanding the domain of the patent system by "judicial flat." (8) And the view has even found its way into the judiciary. For example, in his dissent from the en banc decision that the Supreme Court reviewed in Bilski v. Kappos, Judge Mayer colorfully describes State Street as representing a judicial "decision to jettison the prohibition against patenting methods of doing business [that] contravenes congressional intent"; that "launched a legal tsunami, inundating the patent office with applications seeking protection for common business practices"; that led to the patenting of "the somewhat ridiculous to the truly absurd"; and that has "generated a thundering chorus of criticism." (9)

Superficially, the activist court hypothesis appears to be supported even by the sheer fame of the State Street decision. In the years since it was decided, State Street has risen to a level of notoriety seldom achieved by panel decisions from the courts of appeals, with Shepard's citation service now showing the case cited over 1200 times in other judicial opinions and, predominantly, in academic articles in the legal field. (10) It is not hyperbole to say that the case has generated a whole vein of academic literature. The decision has gained even international notoriety, as it has been repeatedly cited, sometimes favorably and sometimes not, in multiple foreign jurisdictions. (11) It is thus natural to view the State Street decision as a species of judicial activism in the sense that it appears to be a new and dramatic change in legal doctrine that is precipitated purely by judicial decision. (12)

Part I of this Article critically examines the activist court hypothesis and finds little historical evidence to support it. Long before the Federal Circuit rendered its State Street decision, the Patent and Trademark Office (PTO) decided to issue patents like the one at issue in State Street, and two years prior to the State Street decision, the agency decided to drop from its Manual of Patent Examining Procedure (MPEP) any reference to a "business method" exception to patentable subject matter. If credit or blame for business method patents were to be affixed to an actor in our legal system, the executive branch would be a far better candidate for pinning responsibility for the change. (13)

More importantly, however, any attempt to explain the rise in business method patents must take into account the enormously important developments that were occurring outside the legal system. As shown in Part II of this Article, methods of business, finance, and management underwent a tremendous transformation during the last quarter of the twentieth century as vastly better information technologies and empirical tools became available. Increasingly rigorous and mathematical approaches were deployed to address problems of economics and business, and scientific methods were generally extended into these fields. As economics and other social sciences came increasingly to resemble physical sciences, so too did their applied branches begin to resemble engineering. While the intellectual predicate for this transformation began as early as the 1950s, the practical revolution did not occur until the last two decades of the century. It was then that branches of business accelerated their ventures into the technological realm, that the line between a physicist and financier blurred, that employers on Wall Street began to seek out physicists and engineers, and that academic institutions began to develop not only wholly new literature, but also wholly new departments, dedicated to fields with labels such as "financial engineering."

Unsurprisingly, as the practitioners of those transformed disciplines began to think of themselves as technologists and engineers--and indeed as these fields drew in people trained in traditional...