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The History of Software Patents IV: State Street Bank


Written by Gene Quinn
President & Founder of IPWatchdog, Inc.
Patent Attorney, Reg. No. 44,294
Zies, Widerman & Malek
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Posted: June 25, 2010 @ 5:13 pm
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When last we left off our History of Software Patents series we were talking about In re Alappat, which by implication did away with the Freeman-Walter-Abele test for patentable subject matter by not mentioning the test whatsoever. Shortly after Alappat, a three-judge panel once again resorted to and applied the Freeman-Walter-Abele test in In re Trovato, but that was quickly withdrawn by an en banc panel of the Federal Circuit. So it seemed relatively clear that the FWA test had been abandoned. This believe was bolstered by the famous, or infamous depending on your view, case of State Street Bank & Trust Co. v. Signature Financial Group, Inc. and ultimately in AT&T Corp. v. Excel Communications, Inc., where the Federal Circuit reaffirmed its decisions in State Street Bank and Alappat.

In State Street the patent in question was U.S. Patent No. 5,193,056, which issued to Signature Financial Group on March 9, 1993. The ‘056 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. 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. State Street was in talks with Signature Financial to acquire a license, and when talks broke down they brought a declaratory judgment action to have the ‘056 patent claims declared invalid.

There were several critical issues in play in State Street. First was the so-called mathematical algorithm exception to patentable subject matter, and the other was the business method exception to patentable subject matter. Starting first with the mathematical algorithm exception the Federal Circuit, per Judge Rich, explained:

The Supreme Court has identified three categories of subject matter that are unpatentable, namely “laws of nature, natural phenomena, and abstract ideas.” Of particular relevance to this case, the Court has held that mathematical algorithms are not patentable subject matter to the extent that they are merely abstract ideas. In Diehr , the Court explained that certain types of mathematical subject matter, standing alone, represent nothing more than abstract ideas until reduced to some type of practical application, i.e., “a useful, concrete and tangible result.”

Unpatentable mathematical algorithms are identifiable by showing they are merely abstract ideas constituting disembodied concepts or truths that are not “useful.” From a practical standpoint, this means that to be patentable an algorithm must be applied in a “useful” way.

Subsequently, the Federal Circuit acknowledged that:

After Diehr and Chakrabarty, the Freeman-Walter-Abele test has little, if any, applicability to determining the presence of statutory subject matter.

Judge Rich then explained:

The question of whether a claim encompasses statutory subject matter should not focus on which of the four categories of subject matter a claim is directed to… but rather on the essential characteristics of the subject matter, in particular, its practical utility.

The characterization of the mathematical algorithm exception, which for all intents and purposes simply says that a mathematical equation or abstract idea cannot be considered patentable subject matter, was but the first step in the two-step process necessary for Judge Rich to find software to be patentable subject matter.



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Next, the Federal Circuit addressed the business method exception to patentability.

What came next was the unceremonious dismissal of an exception to patentability that never existed.  Judge Rich explained that the business method exception was a judicially created exception to patentability that rendered an invention unpatentable because the subject matter of the patent application covered a method of doing business. In casting away the business method exception, he stated:

We take this opportunity to lay this ill-conceived exception to rest. Since its inception, the “business method” exception has merely represented the application of some general, but no longer applicable legal principle, perhaps arising out of the “requirement for invention”–which was eliminated by § 103. Since the 1952 Patent Act, business methods have been, and should have been, subject to the same legal requirements for patentability as applied to any other process or method.

As you can see, it is really incorrect to say that the Federal Circuit eliminated the business method exception in State Street Bank, although the same net effect admittedly occurred regardless of how you characterize the ruling.  It is, however, better to say that the Federal Circuit went out of its way to explain that the business method exception had really never existed in the first place. The court explained that neither it nor its predecessor court, the CCPA, had ever applied the business method exception to a single case.  Furthermore, Rich  explained that the cases relied upon to support the existence of the business method exception were In re Maucorps (1979) and In re Meyer (1982) were both rendered prior to the Supreme Court’s decision in Diehr, and prior to the Federal Circuit’s abandonment of the Freeman-Walter-Abele test. Furthermore, the Maucorps and Meyer cases were decided not on the business method exception, but on the mathematical algorithm exception.

Still further, Rich explained that even the district court case frequently cited as establishing the business method exception, Hotel Security Checking Co. v. Lorraine Co. (1908) did not ultimately rely on that exception to deny patentability, rather finding the patent at issue invalid “for lack of novelty and ‘invention.”  Thus, it was relatively easy for the Federal Circuit to come reach the conclusion that the claims were patentable, which created the rush on business method patents seen in the last 1990s and early part of this century.  Simply stated, after State Street Bank, business methods and software were widely understood to be patentable, and did in fact become patentable.

As a result of the useful, concrete and tangible result test and in conjunction with the disposition of the business method exception that never existed in the first place, software could come out of the closet and out into polite patent society.  Gone were the days that patent attorneys would protect software by pretending that it was the hardware that presented the magic.  So rather than claim a machine that accomplished a certain task patent attorneys could acknowledge that the machine is not the piece that makes things unique, but rather the software that drives the machine is the patentable innovation, of course presuming that it is new and nonobvious.

Shortly after State Street the Federal Circuit reaffirmed its decisions in State Street Bank and Alappat in AT&T Corp. v. Excel Communications, Inc. In so doing the Federal Circuit, per Judge Plager, explained:

This court recently pointed out that any step-by-step process, be it electronic, chemical, or mechanical, involves an “algorithm” in the broad sense of the term. Because § 101 includes processes as a category of patentable subject matter, the judicially-defined proscription against patenting of a “mathematical algorithm,” to the extent such a proscription still exists, is narrowly limited to mathematical algorithms in the abstract.

The Court further explained that the Alappat inquiry, which is the relevant test in determining patentability if the claimed matter involves an algorithm,

requires an examination of the contested claims to see if the claimed subject matter as a whole is a disembodied mathematical concept representing nothing more than a “law of nature” or an “abstract idea,” or if the mathematical concept has been reduced to some practical application rendering it “useful.” In Alappat, we held that more than an abstract idea was claimed because the claimed invention as a whole was directed toward forming a specific machine that produced the useful, concrete, and tangible result of a smooth waveform display.

Any lingering doubt whether the Freeman-Walter-Abele test was dead was put to rest as a result of the Court’s decision in AT&T Corp. v. Excel Communications, Inc. The death of the Freeman-Walter-Abele test is of particular importance because in order for software to be patentable under that test the mathematical algorithms in question were required to be applied to or limited by physical elements or process steps. Under the mathematical algorithm exception, no such requirement exists. The focus of the patentability inquiry, at least insofar as computer software is involved, became whether the mathematical algorithms, formulas, or calculations in question produce a useful, concrete and tangible result. This shift to a result-based inquiry laid to rest the question of whether computer software was in fact patentable subject matter under 35 U.S.C. § 101, at least until Bilski.

The reason to spend so much of the History of Software patents series on the rise and fall of the Freeman-Walter-Abele test is two-fold.  First, the test was widely criticized (rightfully so) as being so flexible that any District Court Judge or three-Judge panel of the Federal Circuit could apply it and come to whatever decision they wanted.  It proved to be anything but objective, and allowed Judges who seemed to legitimately seemed to be attempting to apply the test to reach whatever preconceived notions they had regarding the patentability of software.  In fact, it was an unworkable test that did not introduce certainty; it introduced unpredictability.

The second reason to focus on the Freeman-Walter-Abele test is because there is no way to ignore the fact that the Bilski machine or transformation test is a version of the Freeman-Walter-Abele test in disguise.  Under the Freeman-Walter-Abele test there needed to be physical elements or process steps, which looks eerily like the machine component of the Bilski machine or transformation test.  When you learn that so far nothing litigated has been viewed as satisfying the transformation element of the Bilski CAFC test then you realize that in practice the Bilski machine or transformation test is really a machine test in reality.  Once that reality is accepted it becomes difficult to see how the Bilski test is functionally different than the Freeman-Walter-Abele test, which was anything but objective and was summarily dismissed as being unacceptable and inadequate to protect innovations in an increasingly digital era.

To the extent that there are any truths remaining that relate to software patents it is this — over the years the Courts on every level have made a mess of software and truly intangible innovation.  We have gone from it not being patentable, to it being patentable under certain limited circumstances, to it being completely patentable, to it being patentable in limited circumstances.  We have yet to come full circle, and hopefully the Supreme Court decision in Bilski will not close the circle of software and return it to unpatentable status.

We will know soon enough.  It seems virtually certain that the United States Supreme Court will issue its much anticipated decision in Bilski v. Kappos on Monday, June 28, 2010.  IPWatchdog.com will be providing complete coverage that day and throughout the week (and beyond).  So check back regularly throughout the day on Monday.  The decision if it is going to come will come sometime between 10:00am and 11:00am Eastern.

RETURN TO PART 3 —> The History of Software Patents III: In re Alappat

RETURN TO PART 2 —> The History of Software Patents II: Arrhythmia Research

RETURN TO PART 1 —> The History of Software Patents

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About the Author

is a Patent Attorney and the founder of the popular blog IPWatchdog.com, which has for three of the last four years (i.e., 2010, 2012 and 2103) been recognized as the top intellectual property blog by the American Bar Association. He is also a principal lecturer in the PLI Patent Bar Review Course. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.

 

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