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BUSINESS METHOD PATENTS: What Are They & Why Should My Clients, Especially Service Providers, and I Care?  July 2000 MD Bar Journal, pp. 24-29.

Business method patents have the potential to significantly influence the direction and growth of the American economy.  They present a tremendous opportunity for inventive entrepreneurs, while at the same time presenting a critical economic threat to a wide range of businesses, especially those in service industries and e-Commerce. 

Business method patents are a potential means for many people, including those without the heightened technical aptitudes of the typical inventors of new products, machines and manufacturing processes, to create property of great value.   For example, the Internet company “Priceline.com.” is currently valued at nearly ten billion dollars, with a significant part of this valuation being based on the over twenty business method patents that it has recently been issued.  Because of their tremendous potential for wealth generation, the U.S. Patent & Trademark Office (USPTO) is currently being flooded with applications for business method patents.

However, these new, soon-to-be-issued, business method patents can also threaten the continued economic viability of many service businesses – those which find that many vital methods for improving and practicing their businesses are only available to them at great costs – the price of taking one or more licenses from the owners of such new, business method patents or defending themselves in costly patent infringement litigation.

What Are “Business Method” Patents? 

A business method patent can be defined as a U.S. utility patent whose subject matter, or the nature of the invention for which a patent has been granted, is “a method of doing or conducting business” -- subject matter that heretofore was generally considered to be non-patentable, and only recently has been broadly held to be patentable by the U.S. Court of Appeals for the Federal Circuit (CAFC). 

In an attempt to help clarify what types of “methods of doing or conducting business” are patentable, it’s instructive to look at some examples:

“a method of parking cars at a drive-in theater that optimizes viewing angles,” Loew’s Drive-In Theatres, Inc. v. Park-In Theatres, Inc., 174 F.2d 547 (1st Cir. 1949); this court also mentioned the example of “a cafeteria, as an improvement over prior restaurant businesses,”

“a business form with novel headings,” U.S. Credit System Co. v. American Credit Indemnity Co., 59 F.139 (2nd Cir. 1893),

“a method of accounting and cash registering to prevent fraud,” Hotel Checking Co. v. Lorraine Co., 160 F. 467 (2nd Cir. 1908),

“a vending process for use in selling stocks and other commodities,” In re Wait, 24 USPQ 88 (CCPA 1934);

“a method for implementing an interstate and national fire-fighting system,” In re Patton, 127 F.2d 324 (CCPA 1942);

“online reverse auctioning services for items such as airline tickets, automobiles, hotel rooms, mortgages, etc.,”  U.S. Patent No. 5,794,207 issued August 11, 1998 and assigned to indirectly to “Priceline.com” --this is apparently one of the key patents that they are using as the basis for suing Microsoft for its Microsoft Expedia Web site’s infringement of the reverse auctioning of hotel rooms;

“online dating services,” U.S. Patent No. 5,884,272,

“an electronic marketplace for the sale of expert advice,” U.S. Patent No. 5,862,223,           

 “electronic-monetary system,” U.S. Patent No. 5,953,423,   

“sales and marketing support system using a customer information database,” U.S. Patent No. 5,930,764,   

“a method for training janitors,” U.S. Patent No. 5,851,117, and  

“methods for improving one’s golf putting stroke,” U.S. Patent No. 6,004,230.

From reviewing these examples, one would appear to be well advised to think as broadly as possible when trying to identify the limits of patentable subject matter for business method patents.

 U.S. Patent Laws

To better understand business method patents, one needs to examine the legal history of this subject.  This begins with a review of the pertinent sections of the U.S. patent laws.

The founders of the United States provided in the Constitution that "Congress shall have 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." U.S. Const. Art. 1, § 8, cl. 8. 

The Patent Act is broad and general in its language describing the proper subject matter for a patent:

            “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.... 35 U.S.C. § 101

            .... A patent may not be obtained, ..., if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains....”, 35 U.S.C. § 103(a).

Non-Statutory Subject Matter  

Thus, Congress clearly included in patentable subject matter only those things that qualify as “any  ...  process, machine, (article of) manufacture (i.e., product), or composition of matter, or any  ... improvement thereof ...”  Therefore, the courts often have been faced with the task of trying to find the right words to define those things that are to be excluded as non-statutory subject matter. 

This task has been especially challenging during the past forty years when technological advances have made possible the creation of many totally revolutionary products (e.g., computers and computer software) and services (e.g., financial service companies offering combined banking, insurance and brokerage services over the Internet).

Listed below are some of the exclusionary words that the U.S. District and Circuit Courts have used to define non-statutory subject matter:

            “printed matter” for inventions that relate merely to the meaning or significance of an arrangement of printed matter without a reference to the process, product or machine that is used to prepare the printed matter, See In re Miller, 164 USPQ 46 (CCPA 1969);

            “naturally occurring article” for inventions that occur in nature and are merely found; See Ex Parte Grayson, 51 USPQ 413, for the denial of a patent for a shrimp with the head and the digestive tract removed;

“mental steps” for inventions that include only steps capable of being carried out by the human mind and thus not applied to physical elements or process steps,  See In re Meyer, 688 F.2d 789 (CCPA 1982) for denial of a patent for a computer program that assists a neurologist in diagnosing a patent;

            “mathematical algorithm” for those elements of inventions which were generally expressed as mathematical equations, and where the invention was not drawn to a practical purpose for producing a new and useful result, See In re Walter, 618 F.2d 758 (CCPA 1980) for denial of a patent for  improved mathematical methods for interpreting the results of seismic prospecting, and

            “method of doing business” for inventions consisting of business schemes that are not related to a physical process or method carried out in connection with a workpiece or product, and thus not within the “useful arts,” Hotel Security Checking v. Lorraine Co., 160 F. 467 (2nd. Cir. 1908).

Meanwhile, the Supreme Court has tended to construe statutory subject matter broadly, noting that Congress intended statutory subject matter to “include anything under the sun that is made by man.” See Diamond v. Chakrabarty, 477 U.S. 303, 309 (1980), quoting S. Rep. No. 82-1798, at 5 (1952) and H.R. Rep. No. 82-1923, at 6 (1952).   However, despite this seemingly limitless expanse, the Supreme Court has specifically identified three categories of unpatentable subject matter as: “laws of nature, natural phenomena, and abstract ideas.” See Diamond v. Diehr, 450 U.S. 175 at 185 (1981).

Computer Software  Challenges To “Non-Statutory Subject Matter” Rejections

The frequent use by the USPTO of these types of non-statutory subject matter rejections might have continued had it not been for the tremendous growth in the importance of computer software for the U.S. economy and the gradually evolving perception that traditional means, copyright law, of protecting computer software was inadequate.

The USPTO initially took the position that computer software primarily involved merely abstract mathematical processes and the computerization of mental processes.  In 1968, the USPTO published guidelines essentially rejecting the notion that computer software was patentable. See 33 Fed. Reg. 15581, 15609-10 (1968).

However, beginning in 1994, the Court of Appeals for the Federal Circuit (CAFC) decided several cases that generally tend to broaden the scope of patent protection for computer software inventions, see In re Alappat, 33 F.3d 1526 (1994, en banc); In re Warmerdam, 33 F.3d 1354 (1994); In re Lowry, 32 F.3d 1579 (1994); In re Trovato, 60 F.3d 805 (1995, en banc), and In re Beauregard, 53 F.3d 1583 (1995).

In response to this trend, the USPTO issued on March 29, 1996 new guidelines for the patentability examination of computer-related inventions.  These guidelines indicate that there are three general ways whereby software can be used in an invention to satisfy the statutory subject matter requirement of 35 U.S.C. § 101.  Additionally, these new guidelines require that such software inventions claim a technological utility -- a sufficient “tangible benefit” so that it cannot be viewed as merely an abstract idea.

Legal Challenges To “Method of Doing Business” Rejections

Because so many novel “business methods” are implemented with computer software, it was probably inevitable that the courts would eventually be asked to decide a computer software case that also involved a “business method” statutory subject matter issue.

On July 23, 1998, the CAFC decided such a case.  It held in State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368 (Fed. Cir. 1998), that a financial service provider’s “business method” software that does nothing more than transform numbers to produce a useful, concrete and tangible result is eligible for patent protection, and that the “business method” and “mathematical algorithm” statutory subject-matter exception categories have little, if any applicability -- the inquiry should focus not on exclusionary categories, but on the invention’s claimed practical utility.

This decision was quickly followed on April 14, 1999 by another CAFC holding that a telecommunication service provider’s method for modifying the message records, used by local and long-distance telephone service providers to monitor and eventually bill for long-distance calls, to allow for them to easily identify a caller’s long-distance service provider is statutory subject matter and therefore eligible for patent protection; the District Court’s contrary holding on the grounds that the invention could be categorized as reciting a “mathematical algorithm” was improper, the court’s analysis should have addressed whether the algorithm-containing invention, as a whole, produces a tangible, useful result.  See AT&T v. Excel, 172 F.3d 1352 (Fed. Cir. 1999).

Consequences of Court Decisions and New USPTO Patentability Guidelines

With these recent court decisions expanding the scope of patent protection, and the issuance of new USPTO guidelines that increase the probability that patents will more readily issue, there has been a significant increase in the rate at which software and “business method” patents are being issued.

Up until 1987, only approximately 2,000 computer software patents were issued -- by 1997 this number had increased to over 13,000.  By the end of this year, the total number of U.S. software patents issued is expected to exceed 80,000.   The top software companies generally have aggressively pursued patent protection for their software.  It is estimated that the top one-hundred software companies now control sixty percent of all issued software patents.  Meanwhile, it has been estimated that the number of “business method” patent applications filed with the USPTO increased by over forty percent in the year following the State Street decision.  During fiscal year 1999, the USPTO is expected to issue over 1,000 “business method” patents.

Furthermore, it should be noted that these results are being achieved in spite of the often heard criticism that the USPTO lacks adequate manpower and databases of prior art in order to provide for an effective, expeditious examination of software and business method patent applications to ensure that their disclosed inventions meet the statutory requirement that they be novel and nonobvious with respect to the prior art, See 35 U.S.C. § 102 and § 103.  This situation has led some to the opinion that many invalid software and business method patents will be issued.

“First Inventor Defense” To Infringement Of A ‘Business Method’ Patent

The consequences of the State Street case have even been felt in Congress.  On November 29, 1999 the President signed the Omnibus Appropriations Bill, H.R. 3194.  One of the bills included in H.R. 3194 was the Patent Reform Bill of 1999.  Among other things, this bill creates a “First Inventor Defense” to infringement of a “business method” patent on an infringement action initiated on or after November 29, 1999.  It adds a new section, 35 U.S.C. § 273, to the patent code which reads in part:

“...It shall be a defense to an action for infringement under section 271 of this title with respect to any subject matter that would otherwise infringe one or more claims of a method in the patent being asserted against a person, if such person had, acting in good faith, actually reduced the subject matter to practice at least one year before the effective filing date of such patent, and commercially used the subject matter before the effective filing date of such patent.” 35 U.S.C. § 273(b)(1).

The justification generally provided for Congress’ enactment of this legislation is as follows: Before the State Street case, it was universally thought that methods of doing or conducting business were not the statutory subject matter that could be patented.  Before that case, everybody would keep their methods of doing or conducting business as secret as they could and never tried to patent them.  In recognition of this pioneer clarification in the law, Congress felt that those who kept their business practices secret had an equitable cause not to be stopped by someone who subsequently reinvented the method of doing or conducting business and obtained a patent.  Therefore, Congress limited the “first inventor” defense” solely to that class of rights dealing with “methods of doing or conducting business.” 

How Does One Go About Being Granted A “Business Method” Patent? 

In order to be granted a patent, an inventor must contribute to the U.S. knowledge base by filing with the USPTO a confidential, carefully drafted patent application that: (a) reveals to one skilled in the technology of the invention how to make and practice the invention, (b) distinctly claims and defines that which is patently novel in the invention, and (c) is subsequently judged by the USPTO to have met the statutory requirements for the invention’s patentability.  If these requirements are met and the applicant has paid the required fees, the USPTO will grant a patent to the inventor and make the application’s contents available to the public.

Because patent protection is only available for new, useful and nonobvious inventions, and because the legal expenses associated with applying for a patent can be significant (note: typical legal fees for the drafting of a patent application and its supporting paperwork are $4,000 to $10,000, depending upon the complexity of the invention, with typical filing fees of $355 to $710), it is often advisable to first make a relatively low-cost assessment as to whether it is likely that a patent will issue for the invention.  This usually involves searching the U.S. patent files to investigate technology similar to the proposed invention in order to determine the state of the art in the area of the invention and what, if any, scope of patent protection may be available for the invention.

If the results of a novelty search yield no prior patents that substantially disclose the proposed invention, this situation usually will serve to justify incurring the greater expenses associated with preparing a formal patent application.  Typical fees for a patentability search are $250 to $600, with the legal fees for the preparation of an opinion letter being $400 to $1,000 and depending upon how much time is required to draft a representative claim to the invention.

After the patent application has been filed with the USPTO, a patent examiner carefully reviews the application in order to determine the invention’s patentability. The examination workload and staffing of the USPTO are such that this examination process usually extends over a period of 12 to 18 months.  When the examiner has made his/her initial patentability determination, the USPTO responds by sending the applicant what is known as an “Office Action” containing its determination and the reasons for it.  If the Office Action contains a rejection of the claims (which occurs on the first Office Action about 80% of the time) and there exist arguable grounds for contesting the examiner’s determination, one typically files a “Response,” usually in the form of an Amendment, to overcome the rejection. There are usually only two Office Actions and Responses before a final determination is made by the examiner as to the invention’s patentability.  If this determination is detrimental to the applicant’s interests, it can be appealed -- a time consuming and expensive process (note: typical legal fees for responding to Office Actions are $1,000 to $3,000, depending upon the complexity of the arguments).

After the examiner has agreed to allow the application to issue as a patent, the inventor presently must pay the USPTO a patent issuance fee of $6205 to $1,240, which is, in part, to pay for the expenses associated with preparing the application’s contents for publication. Periodically during the life of the patent (up to 20 years from the date of filing for those applications filed on or after 6/8/95),  the inventor must pay USPTO maintenance fees in order to allow his/her patent rights to continue to be in effect .  These come due at times that are measured from the patent’s date of issuance.  Their amounts increase with time under the assumption that the inventor will realize greater profits on the invention the longer that it has been in existence. For the small entity inventor, these maintenance fees and their due dates are: @3.5 years: $425, @7.5 years: $970 and @11.5 years: $1,495.

What Impact Might New Business Method Patents Have?

How might new e-Commerce businesses with their business method patents impact the traditional service industries?  Is it possible that an on-line business, such as Amazon.com, might obtain a patent for an improved, novel means to distribute products and services over the Internet that will conflict with the means sought to be used by traditional service institutions to sell their services and products on-line?

            Should businesses reconsider how they use outside consultants?  Consider the fact that many traditional service industries license base computer software and then customized it in order to have it optimally deal with the service provider’s particular line of products or services.  For the smaller service providers, these customizations are often performed by outside consultants, who consequently have the opportunity to become intimately knowledgeable regarding the service provider’s business. 

            With the scope of patentable subject matter having increased, the likelihood exists that more of these software customizations can result in the creation and invention of valuable, patentable matter.  To whom will this patentable matter belong?  Is it possible that outside consultants could come to be in the position of being the owners of “business method” patents that are vital to their former clients’ survival?

            The financial services industry is one in which the patenting of business methods is proceeding at a rapid pace.   This is due in part to the unprecedented change which this industry is now undergoing. These changes are being brought about by a unique combination of circumstances, including changes in consumer needs, continuing deregulation, globalization, demographic changes, technological advancements, and recent legislation that removes depression era barriers and allows banks, investment firms and insurance companies to sell each other’s products and provide one-stop shopping for financial services.  At stake is an estimated $350 billion that Americans spend annually on fees and commissions for banking, brokerage and insurance services.

            These forces could well lead to a period of explosive growth in the development of new financial products, along with equally innovative ways to deliver and service such products.  For example, insurance companies may have to develop new financial products in order to compete with banks, which traditionally have had  greater capital resources for product development efforts, greater access to the customers and more opportunities to build better customer relationships.   In this new environment, the ability to acquire and protect competitive advantages through patents for “business methods” could play a significant role in determining which companies succeed and fail.

            The traditional business practice in the financial services industry of introducing “me too” products could be all but eliminated by the effective enforcement of the monopoly rights of new patented, financial products and services.  Staff personnel in financial institutions may need to see themselves as potential “inventors” of products and services that may be eligible for patent protection.

When one thinks of the advantages of patent ownership, one often thinks first of using them as offensive weapons to extract royalties from or enjoin the activities of competitors.  However, in many instances, patent ownership can serve a much more important, defensive purpose.  Because of the threats presented by new business method patents, many companies may elect to try to develop their own business method patent portfolios for primarily defensive purposes.  Then, when accused of infringement, they can seek to resolve such disputes by entering into cross-licensing arrangements whereby each company is granted a license under the other’s patents.                       

            Despite the threats and opportunities presented by new business method patents, there are also valid concerns about the degree and speed with which individuals and business entities should take action.  For example, it is understood that patents can be costly to acquire and have often been invalidated by the courts.  Thus, there is reason to wonder about how such new business method patents will eventually fare in the courts.   If “Priceline.com” and others are successful in their lawsuits, they will send a powerful message -- the consequences of such a legal precedent could  be highly significantly for all attorneys.

Conclusion

            With business method patents rapidly becoming a significant part of the American economy, they have the potential to significantly influence it, especially its traditional service industries and its new e-Commerce merchants.   Vast fortunes have already been made and will continue to be made based in large part of the valuation of this new type of intellectual property.   Shouldn’t all attorneys be concerned, both on behalf of their clients’ interests and their own, regarding these matters?  Business method patents truly have the potential to significantly influence the direction of the American economy for many years to come.