Business Method Patents :

A Study in the US and the EU

Sudipta De Sarkar.

LL.M. 08-35.

LL.M. 2nd Year (IPR)

NALSAR University of Law, Hyderabad.

What it is :

• “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 therefore, subject to the conditions and requirements of this title”……..Section 101,Title 35.

• can be defined as an utility patent which involves “a method of doing or conducting business”;

• 1) manufacturing: producing the goods or services;

• (2) selling: marketing and distributing the goods or services;

• (3) accounting: keeping records about the goods or services;

The Business Method Patent Improvement Act, 2000Section 2 of the Act defined the term ‘business method’ as

(1) a method of administering, managing, or otherwise operating an enterprise or organization, including a technique used in doing or conducting business; or (B) processing financial data;” and as

(2) any technique used in athletics, instruction, or personal skills; and as

(3) any computer-assisted implementation of a method described in (1) or technique described in (2).

Some Examples of BMPs :

• a business form with novel headings ;• A method of parking cars at a drive-in theatre that

optimizes viewing angles ;• a vending process for use in selling stocks and

other commodities ;• a method for implementing an interstate and

national fire-fighting system ;• a “one-click checkout method” for use on the

Internet, as patented by Amazon.com

……..examples contd.

• an “online reverse auctioning service” for items such as airline tickets, automobiles, hotel rooms, mortgages, etc., as patented by Priceline.com ;

• a “process for selling content (including downloadable books and film) directly to consumers at remote locations without having to stock warehouses full of products at those locations”, assigned to E-Data Corp ;

• a “method for administering mutual funds” assigned to Signature Financial Group, Inc

Software patents and BMPs

Similarity in confusion persists due to : lack of physical existence;

no definite location; and

the capacity to blur idea and expression.

The relationship :

Universal Truth + Construction = New Method + New Machine

Algorithm + Software Design = New Business Method

………but difference is there

• One Product-Many Patents

• One Patent-Many Products, et al.

Development in the USLegislative and administrative.

• Removal of the business method exception, Post State Street, results in a huge rush;

• The issuance of ‘bad’ business method patents;

for example : business method “for quickly choosing and measuring the correct

spices for specific cuisines”;

a method for swallowing a pill;

a method for putting a golf ball;

method for doing exercise by lifting a box. etc.

• The First Inventor Defense Act,2000 brings in the “First inventor defence”.

• The Business Method Patent Improvement Act of 2000 introduced in the House of Representatives.

• Similar Bill introduced in 2001.

• U.S.P.T.O. action : The Business Methods Patents Initiative,2000.

• It was a two-pronged program : Industry outreach and quality improvement.

• The Quality Improvement Plan and Second Pair of Eyes Review (SPER).

• The Community Patent Review Project : Peer to Peer Patent Review.

Judicial Approach in the US

• Second Circuit develops this exception in Hotel Security Checking Co. v. Lorraine Co; but ground of rejection was lack of novelty.

• Court of Appeals for the Federal Circuit , formed in 1982, favours adopting this approach.

• But the US Supreme Court adopts expansive interpretation in Diamond v. Chakraborty

The build-up to State Street……..

• USPTO sticks to its original position, citing federal circuit rulings, and holds BMPs as non-patentable subject matter;

• Section 706.03 MPEP, issued by the PTO, classifies BMPs as not being within the statutory classes;

• Dissenting opinion in In Re Schrader(Fed. Cir.1994), deems the ‘exception’ as being obsolete and error prone, worthy of retirement from Section 101.

• In 1996, PTO deletes Section 706.03 from the MPEP;

• PTO 1996 guidelines for computer related inventions asks for BM claims to be treated as normal process claims;

• These prepare the ground for the ruling in State Street Bank.

State Street v. Signature Financial.

• Patent directed at a hub-and-spoke system for implementing an investment structure;

• Unanimous decision favours the BMPs as patentable subject matter;

• Held, “so long as algorithms are reduced to some type of practical application (that is, a useful, concrete, and tangible result), they become patentable.”

• The business method exception was rejected as an “ill-conceived doctrine merely represented the application of some general, but no longer applicable legal principle”

• The Court concludes that “patentability should not turn on whether the claimed subject matter does

‘business’ instead of something else”;• “ any overly broad patent claims should be handled by the

traditional patentability requirements of novelty, non-obviousness and definiteness”;

• Decision re-affirmed in AT&T Corp v. Excel Communications : Court upholds the State Street test over the ‘physical transformation test’.

Consequences of the ruling…..• State Street ruling hailed as the advent of a ‘industrial

age’; the judiciary was complemented for shedding the “illusions of physicality” and recognizing “innovations” in a much broader sense.

• The First Inventor defence was predicted for widespread usage;

• USPTO flooded with BM claims. In 1999, 2600 applications received, of which 301 were granted; In 2000, over 7500 applications were received, of which over 1000 were granted.

Status of BMPs in the EU

• In 2000. the European Commission invites consultation on patentability of “computer-related inventions”.

• The prime motive was the US position after State Street case, and economic considerations.

• Study Contract and Consultation paper issued for checking feasibility.

• Study Contract recommended that lowering patentability threshold might result in issuance of bad patents. Thus , technical contribution by the BMP was said to be a requisite.

• The Consultation Paper suggested harmonization of EU and US laws, but stated requirements of being “susceptible of industrial application”, which can be satisfied only if it makes any “technical contribution”.

The Consultation Paper divided BMPs into 2 categories :

Technical BMPs, and

Non Technical BMPs.

Pension Benefits Systems case - T 0931/95 [2002]

The judgment in the case held that “the technical character of the invention is not enough, but that the inventive step should be of a technical nature as well”

This has given rise to the “technical contributions requirement”

The EPOs Position

• If the claimed invention is a method of conducting business, disconnected with an apparatus from carrying out that claim, it will fail under Articles 52(2) and 52(3) of the EPC.

• However, if directed at an apparatus, it will be judged under the steps of industrial application, novelty and involving an inventive step, which must make some “technical contribution”

The Problem faced in cases of BMPs.

• Database limitations in the search of prior art;

• Patent examiners lacking expertise;

• Over-zealous patenting may harm competition; etc.

Remedial Measures.

• The First Inventor Defense;• Jeff Bezo’s recommendations to reduce the life

span of these ‘special patents’ to about 3-5 years, with at least 1 month time given for public comments, prior to its issuance.

• The USPTO plan involving Industry outreach and Quality Improvement;

• Recommendations of AIPLA.• …………contd.

Contd…..

BMPs should be protected under the same framework of laws as governing other patents;

PTO should build a database adequate for prior art search;

PTO must hire well trained examiners;

Third party examination should be allowed;

The inventor in US should not be unfairly disadvantaged against his competitor as in the EU or any other jurisdiction.et.

The judgment in Bilski

• It rejected the “useful, concrete and tangible” test of State Street judgment.

• In its place, it reaffirmed the “machine or transformation” test.

• Had left the ‘machine” part of the test to future cases but ruled that the “transformation’ must be central to the purpose of the claimed process.

Bilski and other tests :

• Freeman-Walter-Abele Test: Deemed “inadequate.”

• Alappat’s and State Street’s Useful, Concrete, and Tangible Test: Deemed “insufficient.”

• Technological Arts Test: Deemed “unclear.”• Categorical Business Method Exclusion: Deemed

“unlawful.”• Physical Steps Test: Deemed nonexistent

Possible Outcome of Bilski’s appeal…..

• Supreme Court may substantively follow the “machine or transformation” test but make it less restrictive;

• The Supreme Court can adopt a stricter approach, by making the test definitive;

• It can hold that pure business methods are not patent-eligible because they are essentially abstract ideas, and remain silent for the time what types of hybrid business method patents may qualify.

• the Supreme Court can create a general categorical exclusion for business methods, making both pure business method and hybrid business method processes unpatentable

• I believe that the Court is more likely to adopt the first option ,i.e., make the test as a guiding test. Moreover, there will be

There will be judgment on the “machine” part of the test;

There will be a division among BMPs, on the grounds as in EU;

Any recent development in the US will have a reaction on EU, possibly bringing the much awaited EU legislation on the subject

Thank You