Patenting Business Methods

This paper discusses the reasons for and against allowing business method patents to be protected and the position in the United States, the European Patent Office and Singapore.

The United States, like the rest of the world, had until 1998 taken the view that 'business method patents' were not the proper subject of patent protection. The reasons for this were that they were not considered 'technical': (a) they could not be competently examined by the government authorities/patent offices; (b) the most relevant 'prior art' was not available in an organised or readily accessible form; and (c) the scope, content and inventor of the 'invention' was difficult to identify.

In 1998, the issue was directly confronted by the United States Court of Appeals for the Federal Circuit in State Street Bank & Trust Co v Signature Financial Group Inc (149 F3d (Fed Cir, 1998)) ('State Street' case) which held that a 'Hub and Spoke' software produced a 'useful, concrete and tangible result' and was patentable even though the useful result was expressed in numbers, such as price, profit, percentage, cost or loss. This decision introduced substantial disquiet into patent law by opening up a whole new realm of potentially patentable innovations of a kind previously held to be unpatentable.

Are such patents the inevitable consequence of the rapid development of and advancement in information technology, the internet and e-commerce?

As the United States ('US') is in the forefront of the information technology and internet revolution, it would be appropriate to begin by looking at the US's position.

Business method patents are considered part of a larger family of patents known as utility patents that protect inventions, chemical formulae and other discoveries. A business method is classified as a process because it is not a physical object such as a mechanical invention or chemical composition.

Since 1952, s 101 has defined the subject matter of patentable inventions. Despite the wide ambit of the statute, the Manual of Patent Examining Procedure, the unabridged manual of US patent laws, including the rules and regulations governing patent practice, states that:

The US Patent and Trademark Office ('USPTO') had therefore traditionally rarely granted business method patents as it was considered an abstract idea. In the same manner, software programs were considered unpatentable by the USPTO and the US courts as they were algorithms which could not be protected. Patent practitioners, since as early as 1908, advised their clients that a new business method was not patentable.

In July 1998, the decision of the US Court of Appeals for the Federal Circuit in the State Street case changed the rules. As this is a watershed decision, this paper will visit the case in some detail.

'Signature' (the defendant/appellant) is the assignee of a patent entitled 'Data Processing System for Hub and Spoke Financial Services Configuration'. The patent is generally directed to a data processing system for implementing an investment structure which was developed for use in Signature's business as an administrator and accounting agent for mutual funds based in countries investing using various foreign currencies. This 'Hub and Spoke' system facilitates a structure whereby international mutual funds ('spokes') pool their assets in an investment portfolio ('hub') organised 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.

Both State Street and Signature are in the business of acting as custodians and accounting agents for multi-tiered partnership fund financial services.

State Street negotiated with Signature for a licence to use its patented data processing system. When negotiations broke down, State Street brought a declaratory judgment asserting invalidity, unenforceability and non-infringement and then filed a motion for partial summary judgment of patent invalidity for failure to claim statutory subject matter under s 101. The motion was granted and, subsequently, Signature appealed.

The District Court held that when independent claim 1 was properly construed in accordance with s 112, para 6, it was directed to a 'machine' (namely, a computerised system) which is proper statutory subject matter under s 101. However, the claimed subject matter fell into one of two alternative judicially-created exceptions to statutory subject matter namely, the 'mathematical algorithm' and the 'business method' exception.

The Federal Circuit held that the declaratory judgment plaintiff (State Street) was not entitled to the grant of summary judgment of invalidity of the patent under s 101 as a matter of law because the patent claims are directed to statutory subject matter. According to the plain and unambiguous meaning of s 101, any invention falling within the four stated categories of statutory subject matter, namely:

may be patented, provided it meets the other requirements for patentability set out in Title 35 found in ss 102, 103 and 112, para 2(2).¹

The holding of the State Street case was reaffirmed for a system, and applied to a method in the case of AT&T Corp Excel Communications Inc² (172 F3d 1352 (Fed Cir, 1999)) where the Federal Circuit commented that:

The Federal Circuit continued, in finding the method to be statutory, that the inquiry for a business method is much the same. Specifically, without mentioning the need for any reference to hardware or software, the court stated that:

The USPTO and the industry viewed these decisions as clear indication that the test for patentability was not hardware but a 'practical application' evidenced by a 'useful, concrete and tangible result'. As a result of this decision, the USPTO has implemented new training materials for business method inventions and revisions to its formal guidelines for examination of computer-based inventions, including business method inventions.³

The USPTO has also implemented programmes to add expertise to the USPTO examination corps,⁴ increase the available prior art,⁵ enhance the quality of examination⁶ and obtain the input and assistance of industry.⁷

The US Congress acknowledged the enhanced scope of business method inventions and chose not to restrict or otherwise limit them. Instead a new s 273 has been added to the American Inventors Protection Act 1999 to establish a limited 'prior user defence' for those who can demonstrate a prior use of a 'business method invention' in the US.

The rapid evolution of the internet and its recognition as a powerful interactive medium for establishing commercial relations, placing orders, paying invoices, recording transactions and delivery of information services and products, such as audio, video, software and games online has also led to a flood of business method patent applications in the USPTO.⁸

The hardware and software patents to e-commerce inventions covers virtually all of the elements of the internet that act and interact to provide the exchange or delivery of information related to B2B and B2C transactions. In addition to the generic innovations underlying telecommunication and processing, such as personal computers, servers and telecommunication networks, there are other categories of innovation that may merit protection as patentable inventions, such as:

The State Street case made it clear that the focus of the patent inquiry should not be on the subject matter, but rather on the other patent doctrines. Currently the USPTO is interpreting these doctrines so as to permit a large number of patents to be issued to applicants claiming internet business methods that seem excessively broad or obvious to people skilled in the relevant art. It would appear that the USPTO is construing the scope and non-obviousness requirements more broadly or implying that the current standards are inappropriate in the internet context.

An illustration of an e-commerce invention can be found in the '1-Click' system devised by Amazon.com as a method for expediting online orders. This method allows a repeat customer to bypass address and credit card data entry forms, because Amazon.com can access that information directly from the customer's computer. Amazon.com, who was granted a patent on this business method in September 1999,⁹ promptly filed a lawsuit alleging that BarnesandNoble.com copied the 1-Click process, renaming it 'Express Lane' (Amazon.com Inc v BarnesandNoble.com Inc and BarnesandNoble.com LLC). In December 1999, the US District Court in Seattle ordered BarnesandNoble.com to stop using the patented process until the lawsuit was resolved.

The patent granted to Priceline.com¹⁰ is an example of a patent that was issued despite excessively broad claims. The patent could enable Priceline.com to exclude all other business methods in which buyers propose a price for product or service, and then sellers bid to supply it. The patent also represents an example of the lenient treatment of the non-obviousness requirement as applied to the internet business methods. Although reverse Dutch Auctions have existed for centuries, the USPTO did not find that it was obvious for Priceline.com to apply the reverse Dutch Auctions method to the internet. Priceline.com has sued to prevent Microsoft from establishing a competitive 'reverse auction' concept in the Web environment (Priceline.com Inc v Microsoft Corp and Expedia Inc (D Ct Conn, 1999)).

The subject matter of patent protection is continually evolving as technology and innovation continue at such breathtaking pace with boundaries being pushed by those who insist that their 'new inventions' should be protected. Only the US courts and legislature can limit the rapid expansion but to date have not shown an inclination to do so; presumably to maintain the US lead in information technology. As the US Supreme Court has held in 1980 in the case of Chakrabarty (Diamond v Chakrabarty (447 US 303)) (upholding the patentability of biotechnology inventions) that 'anything under the sun made by man' may be patented. The US continues to be the trend-setter in the patenting of business method inventions.

The European Patent Office ('EPO') has noted in June 2000 that there is controversy about patentability of business and administrative methods.¹¹

There has been a large increase in the number of applications in these areas as a result of the expansion of e-commerce and the decisions of the US Court of Appeals for the Federal Circuit that business methods are not necessarily excluded from patentability in the US. The EPO report states that the number of such applications waiting to be searched and examined has more than doubled over the last two years and at present totals around 400.

The European Patent Convention ('EPC') explicitly excludes the patentability of methods of doing business as such. The vast majority of the applications do not merely claim abstract business methods but describe the technical means (for example, computer networks) for carrying out these methods. They are distinguished from methods of doing business 'as such' and are examined in exactly the same way as any other application. Business methods are therefore patentable in Europe if they fulfil the normal requirements for patentability, including novelty, inventive step and industrial applicability. In strict interpretation of patent law, an invention must overcome an objective technical problem in a non-obvious way.

Under art 52(1) EPC, a European patent shall be granted for any inventions which are susceptible of industrial application, are new and involve an inventive step. In accordance with rr 27 and 29 EPC, in order to be patentable, an invention must be of a technical character to the extent that it must: (a) relate to a technical field; (b) be concerned with a technical problem; and (c) have technical features in terms of which the matter for which protection is sought can be defined in the patent claim.

The EPC does not define 'invention' but provides a list of subject matter and activities that are deemed not to be inventions. Article 52(2) EPC¹² provides, inter alia, that methods for doing business, mathematical methods, presentations of information and programs for computers shall not be regarded as inventions. However, art 52(3) EPC goes on to say that this provision shall exclude patentability of the subject matter or activities referred to only to the extent to which a European patent application relates to such subject matter or activities 'as such'.

It would appear that although methods for doing business are 'as such' explicitly excluded from patentability, a product or a method which is of a technical character may be patentable even if the claimed subject matter defines or at least involves a business method.

After examining the provisions of art 52(2) and (3) and rr 27 and 29 EPC and the case law in detail, the Boards of Appeal of the EPO ('Board') in their decision of 1 July 1998 (Case
No T 1173/97 (3.5.1)) held that a computer program product is not excluded from patentability if, when it is run on a computer, it produces a further technical effect which goes beyond the 'normal' physical interactions between program (software) and computer (hardware).

As this is a landmark decision, it is instructive to take a closer look at the reasoning of the Board although the application relates to a computer program (and not a business method). The decision is equally applicable to a business method application.

The appellant, International Business Machines Corporation ('IBM'), appealed against a decision of the examining division refusing their European patent application¹³ on the grounds that the subject matter of independent claims 20 and 21 was a computer program 'as such' and was therefore excluded from patentability under art 52(2)(c) and (3) EPC.

The Board took the view that the combination of art 52(2) and (3) demonstrates that the legislators did not want to exclude from patentability all programs for computers. The fact that only patent applications relating to programs for computers 'as such' are excluded from patentability means that patentability may be allowed for patent applications relating to programs for computers where the latter are not considered to be programs for computers 'as such'.

The exclusion from patentability of programs for computers 'as such' was construed to mean that such programs are considered to be mere abstract creations, lacking in 'technical character'. Hence, programs for computers must be considered patentable inventions when they have a technical character.

The Board then went on to define the meaning of the feature 'technical character' in the case with specific reference to programs for computers and to discuss the concept of 'further technical effect'.

What is an interesting development is that the Board took cognisance of the current practice in the USPTO and the Japanese Patent Office ('JPO') where, according to their recently revised guidelines for examination, claims for computer programs are now allowed - despite the fact that the two legal systems 'differ greatly from that under the EPC in that it is only the EPC which contains an exclusion such as the one in [art] 52(2) and (3)'.¹⁴

The Board went on to express their opinion that 'these developments represent a useful indication of modern trends ... they may contribute to the further highly desirable (worldwide) harmonisation of patent law'.

The Board also expressed the opinion that, although the Agreement on Trade-Related Aspects of Intellectual Property Rights ('TRIPS') may not be applied directly to the EPC (as it only applies to member states), it is appropriate to take it into consideration since it is aimed at setting common standards and principles concerning the availability, scope and use of trade-related intellectual property rights and, therefore, of patent rights. 'Thus TRIPS gives a clear indication of the current trends.'

In the Board's opinion, art 27(1), (2) and (3) TRIPS can be correctly interpreted 'as meaning that it is the clear intention of TRIPS not to exclude from patentability any inventions, whatever field of technology they belong to, and therefore, in particular, not to exclude programs for computers as mentioned in and excluded under [art] 52(2)(c) EPC'.

At the Trilateral Technical Meeting in Tokyo, Japan, on 14 to 16 June 2000, the JPO, EPO and USPTO confirmed the current practices on business method-related inventions. The consensus among the Trilateral Offices resulting from their comparative study of computer-implemented business methods is as follows:¹⁵

The EPO submitted a paper on 'Examination of "Business Method" Application' to the Trilateral Offices on 19 May 2000 which reflects the developments consequential upon the Board's decision in T 1173/97.

The majority of applications currently pending fall in the second category. Thus, whilst initial claims may sometimes fall within the first category, the applicant may amend them to specify computer means for carrying out at least part of the method. Claims which fall within the third category are rare but are by no means unheard of.

The EPO listed the following approaches to examination to be applied in each of the cases:

The same approaches are to be applied for Patent Co-operation Treaty ('PCT'), Chapter II, whereby claims to abstract business methods 'as such' would lead to non-examination as to novelty, inventive step and industrial applicability according to art 34(4)(a)(i) and r 67 PCT.

The writer is of the view that, in the light of the above developments, the EPO will, in the near future, adjust its practice in respect of business method patents in line with TRIPS, the provisions of the Patent Law Treaty and the USPTO.

The law of patents in Singapore is governed by the Patents Act (Cap 221) ('Act') which came into force on 23 February 1995.¹⁷ The Act (based generally on the UK Patents Act 1977) provided Singapore with an independent patent system. It was amended in 1995 to bring the law into conformity with TRIPS. Singapore has also acceded to several major international conventions dealing with, inter alia, patent protection, including the Paris Convention, PCT and Budapest Treaty, which came into force with respect to Singapore on 23 February 1995.

Singapore, as a member, is required to comply with 'TRIPS-specific' provisions on patents. TRIPS contains specific provisions dealing with patentability and exclusions, rights conferred and exceptions thereto, term of protection, process patents, government use and compulsory licences. Article 27.1 of TRIPS makes patent protection available for any invention, whether products or processes, in all fields of technology, provided they satisfy the requirement of being new, involving an inventive step ('non-obvious') and are capable of industrial application ('useful'). Such rights are available and enjoyed without discrimination as to the place of invention, the field of technology and whether the products are imported or locally produced.

The earlier discussion in this paper on the approach of TRIPS to computer programs and business method patents is relevant and applicable in the Singapore context with even greater force as Singapore is a member state.

The earlier Singapore Patents Act 1994 contained s 13(2) (which is similar to art 52(2) and (3) EPC) which expressly excluded, inter alia, the patentability of method for doing business 'as such'. Section 13(2) was deleted from the Act with effect from 1 January 1996.¹⁸ One view taken is that, notwithstanding the deletion, patentability of business methods remains open and is dependent on whether they constitute 'inventions' under the Act. Another view is that the deletion was merely declaratory and does not render business methods patentable.

The writer submits that the deletion is intended to give the Registrar of Patents and the courts the discretion to determine whether business method inventions are patentable in line with current global trends.

Singapore practises a 'self-assessing' regime of patents. The Intellectual Property Office of Singapore ('IPOS') will grant a patent regardless of the outcome of the search and examination process. Validity of a patent will be put to the test in any subsequent proceedings for revocation and/or infringement. IPOS has no examiners, and specifications are sent either to Australia or Austria.

Singapore is a small island nation-state with no natural resources and no hinterland. To survive in the New Economy, Singapore has to harness the information technology and internet revolution and plug into the global economy. It is therefore likely that IPOS will, in line with the current trend, grant a business method patent if the invention satisfies the requirement of novelty, inventive step and industrial applicability.

What makes patenting business methods exciting is that everything on the internet is new and rapidly evolving. No one has sold airline tickets online by way of customer-driven auction before nor developed the code to take orders over the internet. The law on business method patents is still in its infancy.

Intense attention has been focused on the availability of patent protection for business methods at international,¹⁹ multinational²⁰ and national levels. National and regional patent offices have, however, not embraced the full scope of the new trend in the US. The JPO and the Korean Intellectual Property Office have issued patents focused on business models, but have limited those patents to inventions generally satisfying the requirements for patenting computer or software inventions under existing guidelines. The position of the EPO has been discussed earlier in relation to the Trilateral Project B3b Report.

In conclusion, the writer submits that patent offices around the world will take the cue from the US and move towards protection of 'business method' form of invention and worldwide harmonisation of their patent laws. Countries currently engaged in global business strategy, particularly through the internet, will inevitably be in contact with the US or other countries that embrace a liberal view towards protection of business method invention, and will thereby be faced with the harsh reality of a need for an offensive and defensive business method patent strategy.

1	In order to qualify for patent protection, a process (in this case a business method or software) must meet four requirements: the method or software must fall within the classes of patentable subject matter; the method or software must be useful; the method or software must be novel; and the method or software must be non-obvious.
2	The court applied the logic of State Street to process claims directed to a process for the manipulation of numbers where its operation produced a 'useful, concrete and tangible result'.
3	Revisions to the Examination Guidelines for Computer-Related Inventions (26 March 1996), originally announced in March 2000 and was expected in August 2000.
4	USPTO Tech Centre 2700 had 12 examiners in 1997 dedicated to examining applications in US Patent Class 705 (Financial and Business Data Processing Systems and Methods), which has increased to 38 examiners in FY 2000, including engineers with business, finance, banking management and library and information science backgrounds. The number of examiners is expected to increase to between 400 to 900 by FY 2005 - comments of Allen MacDonald, Technology Centre 2700, at AIPLA Spring 2000 Meeting, Pittsburgh Pa.
5	Since March 2000, the USPTO has implemented advanced search strategies involving non-patent literature ('NPL'), commercial databases (DIALOG, STN/CAS, etc) and established a Search Strategy Advisory Panel, Web-based NPL Resources Project and Kay NPL Digest Development Project.
6	In March 2000, the USPTO implemented a second review programme for all allowed business method applications and utilises a Sensitive Application Warning System ('SAWS') which is intended to identify and monitor patent applications that may have a significant impact on the marketplace.
7	The USPTO had issued a Notice of Roundtable on Computer-Implemented Business Method Patent Issues inviting various 'stakeholders', such as start-up and established e-commerce companies, attorneys, database managers, academia representatives and trade associations to a public meeting on 27 July 2000 where feedback and suggestions with regard to quality programmes, prior art issues, examination guidelines, etc will be solicited. Federal Register: 22 June 2000 (vol 65, No 121, pp 38811-38813).
8	The number of computer-implemented business method patent applications grew from 1,300 to 2,658 between FY 1998 and FY 1999 and is expected to continue at the same rate with 5,000 filed in 2000. USPTO White Paper, 'Automated Business Methods', Section III, Class 705.
9	US Patent No 5,960,411, 'Method and System for Placing a Purchase Order via a Communications Network'.
10	US Patent No 5,794,207, 'Method and Apparatus for Cryptographically Assisted Commercial Network System Designed to Facilitate Buyer-Driven Conditional Purchase Orders'.
11	Report on the 80th Meeting of the Administrative Council of the EPO (6 to 8 June 2000).
12	Article 52(2)(a) to (d) EPC. This is similar to the UK Patents Act 1977, s 1(2)(c).
13	Title of Invention: 'Asynchronous Resynchronisation of a Commit Procedure'.
14	Board's decision in Case No T 1173/97 at 11 (2.5).
15	Trilateral Projects - Report on Comparative Study Carried Out under Trilateral Project B3b.
16	In the US, the 'in the technological arts' feature may be implicitly recited in the claim. The EPO and JPO require that the technical aspect be expressed in the claim.
17	Singapore Statutes: Patents Act (Cap 221) (Rev Ed) as amended by the Patents (Amendment) Act 1995 (No 40 of 1995 with effect from 1 January 1996). Also the Patents Rules (Cap 221, R1) (1996, Rev Ed) and Amendments thereto.
18	Patents (Amendment) Act 1995 (No 40 of 1995), s 3.
19	G8 Summit Meeting in Okinawa (21 to 23 July 2000) and Preliminary Meeting at Miyazaki, Kyushu, Japan, on 12 to 13 July 2000.
20	Trilateral Project B3b Report (EPO, JPO and USPTO) of 26 June 2000.