1998: Federal Circuit Says Yes to Business Methods

This is part 4 of a multi-part series exploring the history of software patents in America. To start reading from the beginning please see The History of Software Patents in the United States. For all of our articles in this series please visit History of Software Patents


Judge Giles Sutherland Rich, circa 1994.

In State Street Bank & Trust v. Signature Financial Group, 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 was 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.

Next, the Federal Circuit addressed the business method exception to patentability, which resulted in 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 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, Judge Rich explained that the cases relied upon to support the existence of the business method exception were In re Maucorps and In re Meyer 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, Judge Rich explained that even the district court case frequently cited as establishing the business method exception, Hotel Security Checking Co. v. Lorraine Co. 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 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 was 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 Alice.

TO BE CONTINUED… Up next is a discussion of the Supreme Court’s decision in Bilski v. Kappos.


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2 comments so far.

  • [Avatar for federally circuitous]
    federally circuitous
    December 16, 2014 02:34 pm

    “Simply stated, after State Street Bank, business methods and software … did in fact become patentable.”

    I don’t quite understand what you mean by they “in fact became patentable” after SSB. You just stated that according to Rich, business methods were patentable (meaning eligible) circa 1952, it was just that nobody appreciated it at the time. I thought the author was taking Rich’s position. So, according to the author when did the patentability (eligibility) of what we’ll call business methods begin?

    Is it 1952? Or only after SSB?

  • [Avatar for federally circuitous]
    federally circuitous
    December 16, 2014 02:28 pm

    “As you can see, it is really incorrect to say that the Federal Circuit eliminated the business method exception in State Street Bank,”

    I can appreciate fully and entirely what you’re saying, but if what Rich said here be so then congress should have been more explicit about things which they were extending patent protection to that nobody would think they were at the time. And that should have happened way back in 52′. Just as a matter of good governance. Specifically, they should have announced to the world that “business methods” were now being included in “the useful arts” under their interpretation of the US constitution. Likewise, they should have announced if they intended to include abstract ideas, laws of nature, or natural phenomena, along with claims drafted to be preemptive thereto. All of that should have happened if for no other reason than simply so that someone could more easily seek judicial recourse to have the whole statute declared unconstitutional, regardless of whether the courts actually did declare it to be so. For pete’s sakes, if they wanted to do that then they needed to do so in the light of day, not “hide an elephant in a mouse hole”.

    But instead what happened was that we had 50 years of everyone thinking business was simply as usual under the 52′ act regarding 101’s conditions. Then all of a sudden we have an overturning of that order resulting in considerable chaos and enormous costs, legal and illegal, for the last 15 years. And that is quite a shame. Right on top of our government.