Patentability of Business Methods

Mark A. Wright
Director and Chair, Intellectual Property Practice Group
October 1, 1999 and have done it, should you?

Have you ever thought that your company’s particular way of doing business is so innovative that it deserves patent protection? On the other hand, have you ever considered that your company’s way of doing business may be infringing another company’s patented “business method?” Recent court decisions make it clear that businesses need to undertake these considerations.

The patentability of business methods was recently addressed in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), and in June 1998 the Court of Appeals for the Federal Circuit laid to rest any notion that business methods could not be patented. State Street involved a patent covering software for a data processing system that could be used to manage a “hub-and-spoke” mutual fund arrangement. The system utilized a small group of funds whose assets were pooled into a partnership arrangement so that the sponsor could utilize the tax advantages of a partnership along with the economies of scale of pooling investments.

The data processing system faced two distinct challenges to its patentability. First, the court addressed whether the technology was, in it simplest manner, a mere mathematical algorithm. Longstanding patent law has prohibited the grant of a patent to laws of nature or abstract ideas. For instance, Einstein could not patent his physical law that E=mc2, nor could Newton have patented the law of gravity. The theory behind the prohibition is that granting a patent monopoly on the use of a specific scientific principle would impede rather than “promote the Progress of Science.” In State Street, the court dismissed this challenge holding that the patent on the data processing system was not a patent on a mathematical algorithm itself, but rather a patent on a practical application of a mathematical algorithm that produced a useful, concrete and tangible result.

The court also dismissed the contention that the data processing system was an unpatentable business method. Many courts in the past have denied patentability of business methods on the basis that a system or method of transacting business is not a “science” or an “art” worthy of patent protection. The court in State Street emphatically abolished any lingering precept that business methods were undeserving of patent protection. The court explained that inventions involving a company’s way of doing business should not be separately categorized as a “business method” for purposes of determining patentability. Rather, the patentability of a particular business method should be determined pursuant to the normal tests for patentability. That is, if the method is novel, nonobvious and is not barred by any other statutory prohibitions, it deserves patent protection.

Patents are becoming an increasingly important weapon in commercial competition. A patent entitles its owner to prevent others from making, using or selling the patented invention in the United States for twenty years from the date the patent application is filed. By patenting innovative business methods, companies can generate new sources of revenue by patenting and licensing those methods.

Businesses of all types are unquestionably affected by the State Street decision, and the stampede to the patent office is off and running. The number of 1999 patent applications for business methods is way up, and the wave of internet related businesses promises that the number will continue to increase. and are examples of companies that have already secured business method type patents. Accordingly, companies need to assess their patent portfolios to ensure that they have received protection for patentable business methods. A patent can serve as a barrier to competitors entering the same business market, and equally important, can serve as a defense to another entity’s claim for infringement. Companies also need to stay abreast of issued patents to ensure that they are not subject to a costly suit for the infringement of a patented business method.