Business Methods (and Software) are Still Patentable!

For at least the past 15 years, the legal, technical and academic communities have been debating the patentability of business methods and software. Despite much negative press ink, talk, legislative activity and court opinions, the answer with respect to patent eligibility is still a resounding and categorical “yes.” That’s the easy part. What types of business methods and software exactly are patentable? That is the difficult question to answer.

What is Patentable?

U.S. Patent Law recognizes four broad categories of inventions eligible for patent protection: processes; machines; article of manufacture; and compositions of matter. 35 U.S.C. Section 101. Despite the oft-quoted recognition that the patent laws were made to cover “anything under the sun that is made by man,” Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980) (quoting S. Rep. No. 1979, 82d Cong. 2d. Sess., 5 (1952)), the U.S. Supreme Court, has long recognized that there are three exceptions to these four broad patent-eligibility categories: laws of nature; physical phenomena; and abstract ideas. Id. These three exceptions are necessary because “[s]uch discoveries are manifestations of … nature, free to all men and reserved exclusively to none.” Id. (citations omitted). Yet, “a process is not unpatentable simply because it contains a law of nature or a mathematical algorithm,” and “an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection.” Diamond v. Diehr, 450 U.S. 175, 187 (1981).

What is a Business Method?

I have often pointed out that there is no precise definition of what exactly is a “business method” patent. Thus, in the past, I have offered the following definition to frame the discussion below: “A (software or manual) process employed in an entity’s business model in order to facilitate services related to insurance, securities trading, health care management, reservation systems, electronic shopping, auction systems, catalog systems, incentive programs, redemption of coupons, banking, billing, point of sale systems, accounting, inventory management and the like.” Further, I note that a business method patent may also be a software patent, but the reverse is not always true.

The Case that Paved the Street

In State Street Bank & Trust Co. v. Signature Fin. Group, 149 F.3d 1368 (Fed. Cir. 1998), while affirming that pure mathematical algorithms remain per se unpatentable, a three-judge panel of the U.S. Court of Appeals for the Federal Circuit (CAFC) took the “opportunity to lay th[e] ill-conceived [business method] exception to rest…. [B]usiness methods have been, and should have been, subject to the same legal requirements for patentability as applied to any other process or method.” 149 F.3d at 1375. The court went on to add that “[w]hether the claims are directed to [patentable] subject matter…should not turn on whether the claimed subject matter does ‘business’ instead of something else.” Id. at 1377. Rather, any method that can be described as a whole in a manner in which it produces “a useful, concrete and tangible [i.e., ‘real-world’] result,” is eligible for patent protection. Id. at 1373. Claim 1 of U.S. Patent No. 5,193,056 that was at issue in State Street reads:

A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:
(a) computer processor means for processing data;
(b) storage means for storing data on a storage medium;
(c) first means for initializing the storage medium;
(d) second means for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds[’] assets and for allocating the percentage share that each fund holds in the portfolio;
(e) third means for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;
(f) fourth means for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and
(g) fifth means for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds.

Finding the claim patentable, the State Street court reasoned that Claim 1 was directed to “a data processing system for managing a financial services configuration of a portfolio established as a partnership.” Id. at 1372. The court then noted that, for the purposes of a 35 U.S.C. Section 101 patent-eligibility analysis, “it is of little relevance whether claim 1 is directed to a ‘machine’ or a ‘process,’ as long as it falls within at least one of the four enumerated categories of patentable subject matter [specified in 35 U.S.C. Section 101], ‘machine’ and ‘process’ being such categories.” Id.

Supreme Court Round 1 (2010)

Twelve years after State Street, the Supreme Court tackled the issue of patentability of business methods and concluded “the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter.” Bilski v. Kappos, 130 S.Ct. 3218, 3229 (2010). The Bilski applicants, in U.S. Patent Application Serial No. 08/833,892, sought to patent the following claim:

A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:
(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;
(b) identifying market participants for said commodity having a counter-risk position to said consumers; and
(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

The U.S. Patent and Trademark Office (USPTO) and the CAFC both rejected the Bilski application as being directed to a non-patentable process under Section 101 using the “machine-or-transformation” test. Under this test, a claimed process is patent-eligible under Section 101 only if: “(1) it is tied to a particular machine or apparatus; or (2) it transforms a particular article into a different state or thing.” The Supreme Court, however, unanimously ruled that: “[T]he machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under [Section] 101. The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible ‘process.’” 130 S.Ct. at 3227. The Supreme Court also ruled that Section 101 “precludes the broad contention that the term ‘process’ categorically excludes business methods.” Id. at 3228.

The Supreme Court reasoned that Section 101 is a “dynamic provision designed to encompass new and unforeseen inventions.” Id. at 3239. “[T]he machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals. … As a result, in deciding whether previously unforeseen inventions qualify as patentable ‘process[es],’ it may not make sense to require courts to confine themselves to asking the questions posed by the machine-or-transformation test.” Id. at 3228. Thus, the Supreme Court encouraged the CAFC to develop “other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.” Id. at 3231.

In the specific claims at issue in Bilski, the Supreme Court affirmed the USPTO and CAFC’s rejection of the Bilski patent application because: “[Bilski seeks] to patent both the concept of hedging risk and the application of that concept to energy markets. Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis … that [Bilski’s] claims are not patentable processes because they are attempts to patent abstract ideas.”

Supreme Court – Round 2 (2012)

In Mayo v. Prometheus, 132 S.Ct. 1289 (2012), the Supreme Court again revisited the bounds of patent eligible subject matter while reviewing U.S. Patent No. 6,355,623, entitled “Method of Treating IBD/Crohn’s Disease and Related Conditions Wherein Drug Metabolite Levels in Host Blood Cells Determine Subsequent Dosage,” issued in March of 2002. Representative Claim 1 of that patent reads:

A method of optimizing therapeutic efficacy for treatment of an immune-mediated gastrointestinal disorder, comprising:
(a) administering a drug providing 6-thioguanine to a subject having said immune-mediated gastrointestinal disorder; and
(b) determining the level of 6-thioguanine in said subject having said immune-mediated gastrointestinal disorder,
wherein the level of 6-thioguanine less than about 230 pmol per 8108 red blood cells indicates a need to increase the amount of said drug subsequently administered to said subject and
wherein the level of 6-thioguanine greater than about 400 pmol per 8108 red blood cells indicates a need to decrease the amount of said drug subsequently administered to said subject.

The Supreme Court’s defined its task in Mayo as follows: “[T]he question before us is whether the claims do significantly more than simply describe these natural relations. To put the matter more precisely, do the patent claims add enough to their statements of correlations to allow the processes they describe to qualify as patent eligible processes that apply natural laws?” 132 S.Ct. at 1297. In answering this question negatively, Justice Breyer speaking for a unanimous Court stated: “If a law of nature is not patentable, then neither is a process reciting a law of nature, unless that process has additional features that provide practical assurance that the process is more than a [patent attorney’s claims] drafting effort designed to monopolize the law of nature itself.” Id.

Recent Trends at the CAFC

Last month, on July 9, 2012, a divided panel of the CAFC attempting to apply Bilski and Prometheus decided that a computerized trading platform for exchanging obligations so as to eliminate “settlement risk,” defined patent-eligible subject matter under 35 U.S.C. Section 101. CLS Bank Int’l v. Alice Corp. Pty. Ltd., 685 F.3d 1341 (Fed. Cir. 2012). Claim 33 of U.S. Patent No. 5,970,479, entitled “Methods and Apparatus Relating to the Formulation and Trading of Risk Management Contracts,” is representative of the method claims that were at issue, and reads:

A method of exchanging obligations as between parties, each party holding a credit record and a debit record with an exchange institution, the credit records and debit records for exchange of predetermined obligations, the method comprising the steps of:
(a) creating a shadow credit record and a shadow debit record for each stakeholder party to be held independently by a supervisory institution from the exchange institutions;
(b) obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;
(c) for every transaction resulting in an exchange obligation, the supervisory institution adjusting each respective party’s shadow credit record or shadow debit record, allowing only these transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order; and
(d) at the end-of-day, the supervisory institution instructing ones of the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions.

The panel defined its task as determining “whether the claimed inventions fall within the ‘abstract ideas’ exception to patent eligibility,” but admitted that the Supreme Court in Prometheus did not directly address how to make that determination. Id. at 1348. Applying Bilski and Prometheus, the panel “that when—after taking all of the claim recitations into consideration—it is not manifestly evident that a claim is directed to a patent ineligible abstract idea, that claim must not be deemed for that reason to be inadequate under § 101.” Id. at 1352. Applying this new “manifestly evident” test, the panel concluded that: “it is difficult to conclude that the computer limitations here do not play a significant part in the performance of the invention or that the claims are not limited to a very specific application of the concept of using an intermediary to help consummate exchanges between parties,” id. at 1355, and were thus patent-eligible matter.

Two weeks after CLS Bank was decided, on July 26, 2012, a different panel of the CAFC unanimously decided that a computerized system and method for administering and tracking the value of life insurance policies in separate accounts did not define patent-eligible subject matter under 35 U.S.C. Section 101. Bancorp Services, L.L.C. v. Sun Life Assur. Co. of Canada, 2012 WL 3037176 (CAFC 2012). Claim 9 of U.S. Patent No. 5,926,792, entitled “System for Managing a Stable Value Protected Investment Plan,” is representative of the method claims that were at issue, and reads:

A method for managing a life insurance policy on behalf of a policy holder, the method comprising the steps of:
[a] generating a life insurance policy including a stable value protected investment with an initial value based on a value of underlying securities;
[b] calculating fee units for members of a management group which manage the life insurance policy;
[c] calculating surrender value protected investment credits for the life insurance policy;
[d] determining an investment value and a value of the underlying securities for the current day;
[e] calculating a policy value and a policy unit value for the current day;
[f] storing the policy unit value for the current day; and
[g] one of the steps of:
[i] removing the fee units for members of the management group which manage the life insurance policy, and
[ii] accumulating fee units on behalf of the management group.

Like CLS Bank, the issue facing the panel was whether the claim was directed to an abstract idea. Although the panel did not employ the new “manifestly evident” test of CLS Bank, in finding the claims not patent eligible, it stated that “our conclusion is not inconsistent with CLS,” because: “[T]he computer limitations do not play a ‘significant part’ in the performance of the claimed invention. And unlike in CLS, the claims here are not directed to a ‘very specific application’ of the inventive concept; as noted, Bancorp seeks to broadly claim the unpatentable abstract concept of managing a stable value protected life insurance policy.” 2012 WL 3037176 at *12. The Bancorp panel further reasoned that: “Rather, the claims merely employ computers to track, reconcile, and administer a life insurance policy with a stable value component—i.e., the computer simply performs more efficiently what could otherwise be accomplished manually.” Id. at *11.

What Do We Know for Sure?

After reading Bilski, Prometheus, CLS Bank and Bancorp, we know two things for sure: (1) simply adding a “computer-aided” or “computer-implemented” limitation to a claim covering an abstract concept, without more, is insufficient to render the claim patent eligible; and (2) to save an otherwise patent-ineligible process, a computer must be integral to the claimed invention (i.e., facilitating the process in a way that a person making hand calculations or computations could not). Other than that, when exactly is a business method (or software) claim patentable versus being simply an abstract idea “free to all men and reserved exclusively to none” remains somewhat of a mystery!

Testing for Abstractness

So what should be the test for patent eligibility of business methods and software? This is the $25m question! The Supreme Court (and Congress) has not stepped up to the plate to provide a clear bright-line test. Thus, how do we patent practitioners give “useful, concrete and tangible” advice to our clients about their “manifestly evident” inventions that may relate to “machine[s]-or-transformation[s]!?” Maybe we should admit that: “[We] shall not today attempt further to define the kinds of [business methods and software we] understand to be embraced within [patent-eligible subject matter]; and perhaps [we] could never succeed in intelligibly doing so. But [we] know it when [we] see it.” Jacobellis v. Ohio, 378 U.S. 184, 197 (1964) (Stewart, J. concurring) (describing his threshold test for obscenity).

If “knowing it when we see it” seems like a cop out and too easy, consider the following excerpt from an article entitled “Wait a Second” in the August 11, 2012, issue of The Economist:

On August 1st Knight Capital started to use a new software programme to execute its trades. Within an hour the programme had caused turmoil in the market, sending errant buy-and-sell orders that cost Knight $440m. Shares in the company plunged on the day and, by August 6th, shareholders were forced to accept a rescue that heavily diluted their stakes [in excess of 70%]. … The Knight glitch was just the latest in a series of cock-ups that have been linked to computerised trading. The most serious of these was the “flash crash” of May 2010, when the Dow Jones Industrial Average plunged 1,000 points within minutes and shares in Accenture, a consultancy, were briefly marked down to a preposterous one cent.

I wonder if any business method/software patent naysaying lawmakers, judges, law professors, attorneys and businesspersons (or their respective close relatives) took any part of Knight’s $440m hit or lost their jobs as a result? If so, would any of them find such software and methods directed to a “manifestly evident” abstract idea!? Thus, perhaps the test should be: If the integrally computer-implemented claimed invention did not function as advertised, would it affect real commerce and make real people lose real money?” Hmm … just a thought!