Order Code RL30572
CRS Report for Congress
Received through the CRS Web
Patents on Methods of Doing Business
June 1, 2000
Visiting Scholar in Economic Growth and Entrepreneurship
Resources, Science and Industry Division
Congressional Research Service ˜ The Library of Congress
The courts and Patent and Trademark Office have recently confirmed that inventors may
obtain patents on methods of doing business. This report explains these legal developments
and considers their economic consequences. The principal arguments of proponents and
detractors of business method patents, perceived problems of patent quality, and the effect of
business method patenting upon entrepreneurs and small firms are reviewed. This report also
considers the First Inventor Defense Act of 1999 (P.L. 106-113) and other possible procedural
and substantive patent law reforms relating to business method patents. This report will be
updated if events warrant.
Patents on Methods of Doing Business
The decision of the United States Court of Appeals for the Federal Circuit in
State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed.
Cir. 1998), held that inventors may obtain patents on methods of doing business.
Subsequent judicial opinions have confirmed this holding. Recently issued patents in
fields such as architecture, investment, marketing, psychological analysis and sports
methods also suggest that inventions from virtually any human endeavor may be the
subject of proprietary rights through the patent system.
Since State Street Bank, proprietors of patents concerning Internet-based
electronic commerce concepts have launched enforcement litigation against
Notable among this litigation is Amazon.com, Inc. v.
Barnesandnoble.com, Inc., 73 F. Supp.2d 1228 (W.D. Wash. 1999), where a federal
district court enjoined the use of one-click ordering system on a website on the eve
of the holiday shopping season. Both Congress, by enacting the First Inventor
Defense Act of 1999 (P.L. 106-113), and the United States Patent and Trademark
Office, through its Business Methods Patent Initiative, have also addressed business
method patent issues.
The opening of the patent system to inventions outside traditional industrial
technologies has been the subject of an ongoing public debate. Proponents of
business method patenting have urged that the patent system should keep pace with
technologies of the Information Age, including electronic commerce and data
processing. Proponents have also observed the difficulty of distinguishing business
methods from traditionally patentable processes. In contrast, detractors have noted
the lack of empirical evidence that economic gains will result from business method
patents and expressed concerns that business method patents will hinder competition.
Commentators have also expressed concerns that many business method patents
should not have been granted, stating that such patents too often appropriate wellknown commercial activities rather than inventive advances over public domain
Observers differ on whether a legislative response to the phenomenon of business
method patenting is desirable. Possibilities include amendment of the First Inventor
Protection Act to provide a more detailed definition of the term “method of doing or
conducting business.” In addition, possible substantive reforms include imposing a
ban upon business method patents, adoption of an industrial application requirement
or a moratorium upon their offensive use. Possible procedural reforms include
provision for an obligatory reevaluation of business method patents prior to
enforcement litigation, as well as improved resources for the United States Patent and
Trademark Office to examine business method patent applications.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Principles of Patentability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The State Street Bank Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Subsequent Judicial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
AT&T v. Excel Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Amazon.com v. BarnesandNoble.com . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Other Internet-Based Patent Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The First Inventor Defense Act of 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The Debate Over Patenting Methods of Doing Business . . . . . . . . . . . . . . . . .
Perceived Benefits of Business Method Patents . . . . . . . . . . . . . . . . . . . .
Perceived Negative Consequences of Business Method Patents . . . . . . . .
The Perceived Patent Quality Problem . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of Business Method Patents Upon Entrepreneurs and Small, Entrepreneurial
Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Legislative Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
The First Inventor Defense Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Possibilities for Further Legislative Activity . . . . . . . . . . . . . . . . . . . . . . . 30
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Patents on Methods of Doing Business
The patent system has recently attracted considerable public attention.
Numerous mainstream publications have issued articles and editorials explaining or
contributing to a debate over the patent law.1 A catalyst for this exchange of views
appears to be the recent patenting of methods of doing business. Issues under
discussion include the appropriate subject matter for patent protection, the potential
impact of business method patents upon Internet-based electronic commerce and
whether policy makers should respond with substantive or procedural patent law
Much of the present controversy appears to flow from the 1998 decision of the
United States Court of Appeals for the Federal Circuit in State Street Bank & Trust
Co. v. Signature Financial Group, Inc.2 Prior to State Street Bank, many legal texts
stated that business methods were not patentable, and inventors did not routinely seek
patents for business developments.3 However, the State Street Bank court decided
that a data processing system consisting of software for managing a stock mutual fund
could be the subject of a patent. In so doing, the Federal Circuit ruled that patents
could issue for innovative methods of doing business.4
The State Street Bank opinion held consequences for the executive, judiciary and
legislature. In the wake of State Street Bank, the United States Patent and Trademark
Office (PTO) has received numerous patent applications concerning business
methods. To date, several hundred of these applications have issued as granted
patents.5 Disputes over the validity and scope of business method patents have
quickly made their way to the courts. One noteworthy business method patent
enforcement litigation involved an Amazon.com patent claiming single-click ordering
from an Internet web site.6 The result of the litigation was the award of a preliminary
injunction against Internet bookseller BarnesandNoble.com on the eve of the holiday
Muehlbauer, Jan, “Patent Pundits On Parade,” The Standard, 16 March 2000, available at
149 F.3d 1368 (Fed. Cir. 1998).
Greene, Jenna, “Staking a Claim,” Legal Times IP Magazine (10 April 2000), 14, 18.
Stern, Richard H., “Scope-of-Protection Problems with Patents and Copyrights on Methods
of Doing Business,” Fordham Intellectual Property, Media and Entertainment Law Journal
10 (1999), 105, 125-26.
Hoffman, Gary M. & Coman, Gabriela I., “Business Method Patents,” National Law
Journal 22 (Feb. 14, 2000): B8. In the field of banking alone, Hoffman and Coman report that
the PTO had issued over 500 patents since the State Street Bank decision. Ibid.
Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp.2d 1228 (W.D. Wash. 1999).
shopping season. Finally, Congress enacted the First Inventor Defense Act of 1999,
P.L. 106-113, creating an infringement defense for an earlier inventor of a “method
of doing or conducting business” that was later patented by another.7
Although these developments have yet to yield a precise definition of “methods
of doing business,” this term appears to include any systematic way of accomplishing
a commercial objective. The following patents suggest that techniques from finance,
investment, marketing and management are among the arguable business methods that
are subject to proprietary rights.
Education Finance. For example, U.S. Patent No. 5,809,484 (Sept.
15, 1998) (“Method and apparatus for funding education by acquiring
shares of students’ future earnings”), claims a technique through
which students pledge a portion of their future income in exchange for
Insurance. For example, U.S. Patent No. 6,014,632 (Jan. 11, 2000)
(“Apparatus and method for determining insurance benefit amounts
based on groupings of long-term care patients with common
characteristics”), claims a health insurance management method.
Investment Banking. For example, U.S. Patent No. 6,052,673 (April
18, 2000) (“Investment management”), claims a method of managing
financial accounts between depositors, marketing agents, financial
intermediaries, mortgage brokers and borrowers in an inflationadjusted financing program.
Marketing. For example, U.S. Patent No. 5,668,736 (Sept. 16, 1997)
(“Method for designing and illustrating architectural enhancements to
existing buildings”), claims a home remodeling business that
comprises cataloging ideas, presenting the ideas to a client, allowing
the client to select an idea, and the preparing a visual image of the
The impact of the State Street opinion may not be limited to business method
patents, however. As Federal Circuit Judge Raymond Clevenger counseled in an
opinion issued shortly after State Street Bank, “virtually anything is patentable.”8
Innovators in other endeavors in which patents were not traditionally sought appear
to have heeded this advice, for they have also obtained patents from the PTO. A
review of the PTO Official Gazette also demonstrates that among the disciplines
recently subjected to patenting are:
U.S. Library of Congress, Congressional Research Service. Patent Law Reform: An
Analysis of the American Inventors Protection Act of 1999 and Its Effect on Small,
Entrepreneurial Firms, by (name redacted), Report RL30451,29 February 2000, 8-10.
Hughes Aircraft Co. v. United States, 148 F.3d 1384 (1998) (Clevenger, J., dissenting from
denial of rehearing in banc.)
Architecture. For example, U.S. Patent No. 5,761,857 (June 6, 1998)
(“Lots configuration and building position and method for residential
housing”), claims an architectural scheme for eliminating hallways by
placing staircases on the outside of buildings.
Personal Instruction. For example, U.S. Patent No. 5,851,117 (Dec.
22, 1998) (“Building Block Training Systems and Training
Methods”), claims a method for teaching custodial staff basic cleaning
Psychological Analysis. For example, U.S. Patent No. 5,190,458
(Mar. 2, 1993) ("Character assessment method"), claims a method of
analyzing the drawings of subjects in order to obtain a psychological
Sports Methods. For example, U.S. Patent No. 5,616,089 (April 1,
1997) (“Method of putting”), claims a technique for swinging a golf
This report explores recent trends concerning the patenting of methods of doing
business, as well as techniques from other disciplines. This report begins by reviewing
basic legal principles concerning patentable subject matter. The State Street
Bank decision and subsequent judicial developments are then discussed. This report
next details the First Inventors Defense Act of 1999 and explores its consequences for
the validity and enforceability of business method patents.
This report then summarizes the positions of proponents and detractors of the
patenting of business methods. Next, this report considers the consequences of
business method patents upon entrepreneurs and small, entrepreneurial firms. Finally,
this report considers possible legislative responses to the phenomenon of patents in
business methods and other disciplines.
Principles of Patentability
The patent law allows individuals to obtain proprietary rights in their inventions.9
Unlike other forms of intellectual property, such as copyrights and trademarks, patent
rights arise only through governmental intervention. Inventors must submit
applications to the PTO if they wish to obtain patent rights.10 PTO officials known
as examiners then assess whether the application merits the award of a patent.11
In deciding whether to approve a patent application, a PTO examiner will
consider whether the submitted application fully discloses and distinctly claims the
35 U.S.C. § 271(a) (providing patentee with exclusive rights to make, use, offer to sell, or
sell within the United States, or import into the United States, the patented invention).
35 U.S.C. § 111.
35 U.S.C. § 131.
invention.12 The examiner will also determine whether the invention itself fulfills
certain substantive standards set by the patent statute.13 Among the more important
requirements are that the invention must be useful, novel and nonobvious. The
requirement of usefulness, or utility, is satisfied if the invention is operable and
provides a tangible benefit.14 To be judged novel, the invention must not be fully
anticipated by a prior patent, publication or other knowledge within the public
domain.15 A nonobvious invention must not have been readily within the ordinary
skills of a competent artisan at the time the invention was made.16
Beyond utility, novelty and nonobviousness, there is a fourth, distinct
requirement for an invention to be patented. The invention must also be judged to
comprise subject matter the patent law was designed to protect.17 This final
gatekeeper to patentability is variously known as the requirement of “patent
eligibility,” “patentable subject matter,” or “statutory subject matter.”18 This report
principally focuses upon this requirement of patentable subject matter, and in
particular the propriety of the patenting of business methods.
Section 101 of the current patent law, the Patent Act of 1952, governs whether
or not an invention comprises patentable subject matter. Section 101 allows patents
to be granted for any “process, machine, manufacture, or composition of matter.” As
a result, an invention is eligible for patenting if it is a "process," which the Patent Act
defines as a “process, art or method.”19 Alternatively, the invention may be a
"machine," which has been interpreted to include any apparatus;20 a “composition of
matter,” including synthesized chemical compounds and composite articles;21 or a
“manufacture,” a broadly oriented, residual designation.22 These definitions are not
exclusive. A patentable invention may fall into multiple categories.23
The definition of patentable subject matter under the 1952 Act is nearly identical
to that which appeared in predecessor federal patent statutes enacted as early as
35 U.S.C. § 112.
These requirement apply to so-called “utility patents.” The patent statues also allow for
design patents, see 35 U.S.C. § 171, and plant patents, see 35 U.S.C. § 161. Subject matter
and other patentability standards differ somewhat for these more specialized patent regimes.
35 U.S.C. § 101; see also Brenner v. Manson, 383 U.S. 519 (1966).
35 U.S.C. § 102.
35 U.S.C. § 103.
Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980).
Adelman, Martin J. et al. Patent Law: Cases and Materials (Minnesota: West Publishing
35 U.S.C. § 100(b).
Nestle-Le Mur Co. v. Eugene, Ltd., 55 F.2d 854 (6th Cir. 1932).
Diamond v. Chakrabarty, 447 U.S. 303 (1980).
Bandag, Inc. v. Al Bolser's Tire Stores, Inc., 750 F.2d 903 (Fed. Cir. 1984).
1793.24 On its face, the § 101 definition seems quite expansive. Many sorts of
behavioral engagements, techniques and protocols could be characterized as a process
within the meaning of the patent law. Further, almost any tangible product, artifact
or thing could be seen as a composition of matter under § 101.25 The only statutory
exclusion from these broad categories of patentable subject matter concerns
inventions useful solely to utilize special nuclear material or atomic energy in an
Despite this broad statutory language, the courts had traditionally crafted several
exceptions to patentability. Variously expressed as bars to patents on business
methods,27 as well as such things as “mental steps,” “algorithms,” and “laws of
nature,” these doctrines held that certain subject matter was unpatentable per se.28
Most of these rules were corollary to the well-established tenet that the patent law
does not protect abstract ideas.29 In order to receive patent protection, inventors
must claim discrete, operable products and processes, not broad categories of
generalized intellectual concepts. By protecting downstream technology rather than
upstream knowledge, the patent law is said to preserve “the basic tools of scientific
and technological work” for all to employ.30
In particular, the business methods exception may be traced back at least as early
as 1868. In Ex parte Abraham, the Patent Commissioner sensed that “[i]t is contrary
to the spirit of the law . . . to grant patents for methods of book-keeping.”31
Nineteenth century courts also opined that “a method of transacting common
business”32 or “a mere contract”33 were unpatentable. Perhaps the most thorough
review of the proscription on business method patents was provided in the 1908
opinion of the United States Court of Appeals for the Second Circuit in Hotel
Security Checking Co. v. Lorraine Co.34 The patent at issue in Hotel Security
Checking concerned a “method and means for cash-registering and account-checking”
Diamond v. Diehr, 450 U.S. 175, 192 (1981).
Thomas, John R., “The Patenting of the Liberal Professions,” Boston College Law Review
40 (1999), 1144.
42 U.S.C. § 2181(a).
See generally Yoches, E. Robert & Pollack, Howard G., “Is the ‘Method of Doing
Business” Rejection Bankrupt?,” Federal Circuit Bar Journal 3 (Spring 1993): 73; Tew, Geo.
E., Method of Doing Business, Journal of the Patent Office Society 16 (Aug. 1934): 607.
Thomas, supra note 25, at 1145.
See Pioneer Hi-Bred International, Inc. v. J.E.M. Ag Supply, Inc., 200 F.3d 1374, 1376
(Fed. Cir. 2000).
Gottschalk v. Benson, 409 U.S. 63 (1972).
1868 Comm’r Dec. 59, 59.
United States Credit Sys. Co. v. American Credit Indemnity Co., 53 F. 818, 819 (S.D.N.Y.
In re Moeser, 27 App. D.C. 397, 310 (1906).
160 F. 467 (2d Cir. 1908).
designed to prevent fraud by waiters and cashiers. The system employed certain
forms that tracked sales and ensured that waiters submitted appropriate funds at the
close of business. The Second Circuit invalidated the patent on the basis of
knowledge within the public domain, finding that the patented invention “would occur
to anyone conversant with the business.”35 However, the court further observed that
“[a] system of transacting business disconnected from the means of carrying out the
system is not, within the most liberal interpretation of the term, an art” that could be
Most of the judicial and Patent Office decisions discussing the business method
exception arose under predecessor versions of the 1952 Patent Act. As noted above,
the 1952 Act essentially maintained earlier definitions of patentable subject matter.37
However, although the legislative history pertaining to the 1952 Act is relatively
sparse, it suggested that Congress intended to liberalize statutory subject matter
requirements. In particular, committee reports accompanying the legislation included
the following statement:
A person may have "invented" a machine or a manufacture, which may include
anything under the sun that is made by man . . . .38
In its 1980 decision in Diamond v. Chakrabarty,39 the Supreme Court relied in part
upon this legislative history in order to approve the patentability of a genetically
engineered microorganism. As the Court confirmed in its later opinion in Diamond v.
Diehr, it read this language to reveal a legislative intent to open the patent system to
anything artificial.40 During the 1990's, several Federal Circuit decisions followed this
reasoning in order to ease and ultimately eliminate earlier restrictions upon the
patenting of computer software.41
Mindful of these legislative and judicial developments, commentators questioned
the continued vitality of the business methods exception to patentable subject matter.42
When the Federal Circuit first turned to the issue in 1998 in its decision in State Street
Bank v. Signature Financial Group, the court proved that these concerns were
Ibid at 471.
Ibid at 468.
See supra notes 19-24 and accompanying text.
82d Cong., 2d sess. (1952), 5, S.Rept. 1979; 82d Cong., 2d Sess. (1952), 6, H.Rept. 1923.
447 U.S. 303 (1980).
450 U.S. 175, 182 (1981).
See In re Alappat, 33 F.3d 1568 (Fed. Cir. 1994) (in banc); In re Warmerdam, 33 F.3d
1354 (Fed. Cir. 1994); Arrhythmia Research Technology, Inc. v. Corazonix Corp., 958 F.2d
1053 (Fed. Cir. 1992).
Del Gallo III, Rinaldo, “Are ‘Methods of Doing Business’ Finally Out of Business as a
Statutory Rejection?,” IDEA: Journal of Law & Technology 38 (1998), 403.
warranted. Given the significance of the State Street Bank decision, a detailed review
of the facts and outcome of that litigation is appropriate here.43
The State Street Bank Case
Signature Financial Group held U.S. Patent No. 5,193,056, which was entitled
"Data Processing System for Hub and Spoke Financial Services Configuration.” The
patent described a data processing system for implementing an investment structure
known as a “Hub and Spoke” system. This system allowed individual mutual funds
(Spokes) to pool their assets in an investment portfolio (Hub) organized as a
partnership. According to the patent, this investment regime provided the
advantageous combination of economies of scale in administering investments coupled
with the tax advantages of a partnership.44
Maintaining a proper accounting of this sophisticated financial structure proved
difficult. Indeed, due to “the complexity of the calculations, a computer or equivalent
device is a virtual necessity to perform the task.”45 Signature’s patented system
purported to allow administrators to “monitor and record the financial information
flow and make all calculations necessary for maintaining a partner fund financial
services configuration.”46 In addition it tracked “all the relevant data determined on
a daily basis for the Hub and each Spoke, so that aggregate year end income,
expenses, and capital gain or loss can be determined for accounting and for tax
purposes for the Hub and, as a result, for each publicly traded Spoke.”47
Following PTO issuance of the patent, Signature entered into licensing
negotiations with a competitor, State Street Bank, that ultimately proved
unsuccessful. State Street Bank then brought a declaratory judgment action against
Signature, seeking the invalidity of the patent. The district court granted summary
judgment in favor of State Street Bank under two alternative grounds.48 First, the
court concluded that the invention was merely an abstract mathematical algorithm:
At bottom, the invention is an accounting system for a certain type of financial
investment vehicle claimed as means for performing a series of mathematical
functions. Quite simply, it involves no further physical transformation or reduction
than inputting numbers, calculating numbers, outputting numbers, and storing
See also Keeley-Domokos, Francisc Marius, “State Street Bank & Trust Co. v. Signature
Financial Group, Inc.,” Berkeley Technology Law Journal 14 (1998),153.
149 F.3d at 1370.
149 F.3d at 1371.
149 F.3d at 1371.
149 F.3d at 1371.
State Street Bank and Trust Co. v. Signature Financial Group, Inc., 927 F. Supp. 502 (D.
numbers. The same functions could be performed, albeit less efficiently, by an
accountant armed with pencil, paper, calculator, and a filing system.49
The district court then buttressed its holding by turning to “the long-established
principle that business 'plans' and 'systems' are not patentable.”50 The court judged
that “patenting an accounting system necessary to carry on a certain type of business
is tantamount to a patent on the business itself. Because such abstract ideas are not
patentable, either as methods of doing business or as mathematical algorithms,” the
patent was held invalid.51
On appeal, the Federal Circuit reversed. Writing for a three-judge panel, the late
Judge Giles S. Rich found the patent claimed not an abstract idea but a programmed
machine that produced a “useful, concrete, and tangible result.”52 “This renders it
statutory subject matter, even if the useful result is expressed in numbers, such as
price, profit, percentage, cost, or loss.”53 According to the court, “[t]he 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--process, machine,
manufacture, or composition of matter--but rather on the essential characteristics of
the subject matter, in particular, its practical utility.”54 The Federal Circuit further
Today, we hold that the transformation of data, representing discrete dollar
amounts, by a machine through a series of mathematical calculations into a final
share price, constitutes a practical application of a mathematical algorithm,
formula, or calculation, because it produces “a useful, concrete and tangible
result” -- a final share price momentarily fixed for recording and reporting
purposes and even accepted and relied upon by regulatory authorities and in
The Federal Circuit then turned to the district court’s business methods rejection,
opting to “take the opportunity to lay this ill-conceived exception to rest.”56 Judge
Rich analyzed Hotel Security Checking and other cases denying patents upon methods
of doing business. He concluded that each of these decisions had actually been
decided on other grounds, such as that the patented invention would have been
obvious over knowledge within the public domain. The Federal Circuit also reasoned
that the case law on business methods had largely been decided prior to the 1952
Patent Act. The Federal Circuit closed by directing that methods of doing business
were to be subject only to the same patentability analysis as any other sort of process.
927 F. Supp. at 515.
927 F. Supp. at 515-16.
927 F. Supp. at 516.
149 F.3d at 1373 (quoting In re Alappat, 33 F.3d at 1544).
149 F.3d at 1375.
149 F.3d at 1375.
149 F.3d at 1373.
149 F.3d at 1375.
The Supreme Court announced that it would decline review of the Federal
Circuit’s State Street Bank decision on January 11, 1999.57 Some observers believe
that unless the Supreme Court develops an interest in patent eligibility issues in the
future, a decision from the lower courts contrary to State Street Bank is unlikely.58
As a result, the business methods exception to patentable subject matter is no longer
extant. Subject to the other requirements of the patent laws, business methods may
be the subject of patent protection within the United States.
Subsequent Judicial Developments
Judicial encounters with business method patents did not end in State Street
Bank. Subsequent litigation has provided further details on the scope and
enforceability of patents towards business methods. These developments have
confirmed and to some degree extended the holding that methods of doing business
constitute patentable subject matter.
AT&T v. Excel Communications
A second Federal Circuit decision, AT&T Corp. v. Excel Communications Inc.,59
followed the reasoning of State Street Bank in upholding a patent claiming a data
processing technique.60 This litigation arose from AT&T’s efforts to enforce U.S.
Patent No. 5,333,184, which was directed towards the composition of billing records
used in telephone networks.61 The AT&T patent claimed a method for a telephone
company to determine whether both the caller and the recipient of a long-distance
telephone subscribed to the company’s network. If so, the telephone company could
provide a different billing treatment to such calls, most likely discounting the fee in
order to encourage both individuals to subscribe to its services.
The invention relied upon the fact that when a customer makes a long-distance
telephone call, the telephone network contemporaneously maintains billing records.
These records include such information as the originating and terminating telephone
numbers, as well as the length of the call. Also associated with the call is data
indicating an individual’s chosen “primary interexchange carrier,” or PIC. A PIC is
essentially the equivalent of a long-distance telephone service provider.
The claimed invention called for the addition of a discrete item of data, termed
the “PIC indicator,” to the billing record. The value of the PIC indicator was
determined by analyzing the data identifying the primary interexchange carriers of the
525 U.S. 1093 (1999) (denying petition for certiorari).
See Stern, supra note 4.
172 F.3d 1352 (Fed. Cir.), cert. denied, 120 S.Ct. 368 (1999).
See Cretsinger, Cathy E., “AT&T Corp. v. Excel Communications Corp.,” Berkeley
Techology Law Journal 15 (2000): 165.
U.S. Patent No. 5,333,184 (July 26, 1994) (“Call message recording for telephone
originator and recipient of the long-distance call. If both customers have subscribed
to the same phone company, the PIC indicator is set to a logical “one.” Otherwise the
PIC indicator remains at the value of “zero.” The phone company may then readily
apply its discounted rate to any call where the PIC indicator is set to one, without
more extensive data processing at the time of billing.
In an opinion issued prior to the release of State Street Bank, the United States
District Court for the District of Delaware held that the claimed invention was not
patentable subject matter.62 Judge Robinson described the patent as “claiming an
invention whereby certain information that is already known within a
telecommunications system (the PICs of the originating and terminating subscribers)
is simply retrieved for an allegedly new use in billing.”63 With this sense of the
claimed invention, the court held that “a change in the data’s format should not serve
to convert nonpatentable subject matter into patentable subject matter.”64
Following an appeal, the Federal Circuit reversed. Writing for a three-judge
panel, Judge Plager held that the patented invention “comfortably” fell within the
scope of statutory subject matter.65 Judge Plager followed the holding of State Street
Bank in concluding that the test for patentable subject matter was whether an
invention achieved a “useful, concrete, tangible result.”66 Because AT&T’s claimed
process produced “a number which had specific meaning,” it could be employed in a
discrete setting and was therefore patentable.67
In closing the AT&T v. Excel opinion, the Federal Circuit was quick to note that
it had only addressed the subject of patent eligibility. According to Judge Plager,“the
ultimate validity of these claims depends upon satisfying the other requirements for
patentability . . . .”68 These words proved prophetic. Upon the return of the litigation
to the Delaware district court, Judge Robinson concluded that the invention claimed
in the AT&T patent was already known within the public domain. More particularly,
the court judged that the well-known MCI Friends & Family program either wholly
anticipated or made obvious the patented invention.69 As a result, the district court
held that the AT&T patent was invalid under the legal requirements of novelty and
1998 WL 175878 (D. Del. March 27, 1998).
Ibid at *6.
Ibid at *7.
172 F.3d at 1361.
172 F.3d at 1358.
172 F.3d at 1358.
172 F.3d at 1361.
52 U.S.P.Q.2d 1865 (D. Del. Oct 25, 1999).
52 U.S.P.Q.2d at 1879-84.
The AT&T v. Excel opinion suggests that the Federal Circuit will continue to
follow its earlier decision in State Street Bank.71 The nature of the invention in AT&T
v. Excel also indicates that the Federal Circuit considers inventions in the fields of
data processing and information transformation to comprise patentable subject matter.
Finally, AT&T v. Excel reminds the reader that all patented inventions are subject to
the full range of requirements under the Patent Act. Particularly noteworthy are the
patentability standards of novelty and nonobviousness. Because an invention must be
both new and beyond the ordinary skills of a artisan within that technical field, simply
because an invention may comprise patentable subject matter does not necessarily
mean that the invention may be the subject of a valid patent.72
Amazon.com v. BarnesandNoble.com
The federal district courts have also considered patents concerning methods of
doing business. Perhaps the most well-known lawsuit to date is Amazon.com, Inc.
v. Barnesandnoble.com, Inc.73 Amazon.com obtained a patent on a method and
system through which a consumer may complete a purchase order for an item through
the Internet using only a single action, such as one click of a mouse button.74 The
patent was issued on September 28, 1999. On October 21, 1999, Amazon.com
brought a patent infringement suit against a rival website, Barnesandnoble.com. On
December 1, 1999, the District Court for the Western District of Washington enjoined
Barnesandnoble.com from using its so-called “Express Lane” one-click ordering
system on its website. The Court of Appeals for the Federal Circuit declined to
intervene, resulting in the deletion of one-click ordering from the Barnesandnoble.com
website on the eve of the holiday shopping season.75 The Amazon.com litigation
resulted in a considerable debate about the proprietry of patent rights on electronic
Other Internet-Based Patent Litigation
Other proprietors of electronic commerce patents have commenced enforcement
efforts in the federal courts. For example, in October, 1999, Trilogy Software Inc.
filed a patent infringement suit in the Austin, Texas, federal court against
CarsDirect.com.77 On October 20, 1998, Trilogy was issued U.S. Patent No.
5,825,651, entitled “Method and Apparatus for Maintaining and Configuring
Systems.” The patented invention allows Internet purchasers to construct a car online
Thomas, supra note 25, at 1161 n.170.
See supra notes 12-18 and accompanying text.
73 F. Supp.2d 1228 (W.D. Wash. 1999).
U.S. Patent No. 5,960,411 (28 Sept. 1999) (“Method and system for placing a purchase
order via a communications network”).
“BarnesandNoble.com Ordering System Is Enjoyed As Infringing Amazon.com Patent,”
Bureau of National Affairs Patent, Trademark & Copyright Journal 59 (10 Dec. 1999), 355.
Muehlbauer, supra note 1.
Trilogy Software, Inc. v. CarsDirect.com, No. 99CA-690JN (W.D. Texas).
by selecting from various design and configuration options. According to Trilogy, the
CarsDirect.com website, which works with auto dealers to fulfill customer orders for
specifically configured automobiles, infringes its patented business method.
FantasySports.com filed another such lawsuit on December 28, 1999, asserting
that Sportsline.com, Yahoo!, ESPN and Sandbox Entertainment infringed U.S.
Patent No. 4,918,603.78 FantasySport’s complaint alleges that each of the accused
web sites produces a fantasy football game that infringes upon the claimed method for
playing fantasy football using a computer.79
A final example of electronic commerce patent litigation involves priceline.com’s
patent claiming an online reverse auction. In August 11, 1998, priceline.com obtained
U.S. Patent No. 5,794,207 for its system of allowing consumers to name their own
price for a variety of goods and services.80 The priceline.com system assembles the
consumer demand and presents it to sellers, which may fill as much of the demand as
they wish at the specified prices. On October 13, 1999, priceline.com filed suit in
U.S. District Court against Microsoft Corporation and its Expedia Inc. subsidiary,
contending that Expedia.com's Hotel Price Matcher service infringes the reverse
Other commentators have collected more extensive compilations of business
method patent enforcement litigation.82 Along with PTO data, these studies suggest
that innovative business methods are being patented at a growing rate. These studies
also reveal that some proprietors of business method patents have not hesitated to
enforce their patent rights through litigation.83
The First Inventor Defense Act of 1999
Legal developments with respect to business methods patents have not been
limited to the courts. On November 19, 1999, Congress lent final approval to the
American Inventors Protection Act of 1999, P.L. 106-113, as part of the Intellectual
Property and Communications Omnibus Reform Act of 1999 (S. 1948), attached by
U.S. Patent No. 4,918,603 (17 Apr. 1990) (“Computerized statistical football game”).
“Fantasysports.com Files Patent Infringement Suit Against Four Leading Online Sports
Sites,” (28 Dec. 1999), available at http://www.fantasysports.com/lawsuit_pr.html.
U.S. Patent No. 5,794,207 (11 Aug. 1998) (“Method and apparatus for a cryptographically
assisted commercial network system designed to facilitate buyer-driven conditional purchase
“Priceline.com Sues Microsoft for Patent Infringement,” (13 Oct. 1999), available at
See, e.g., Wilmer, Cutler & Pickering, “Spotlight on Business Process Patents,” Monday
Business Briefing (21 Mar. 2000).
Zirin, James D., “So Sue Me,” Forbes (22 May 2000), 44; Petty, W. Scott, “Internet Patent
Lawsuits Multiply as E-Commerce Revenues Soar,” Intellectual Property Today 7 (Feb.
reference to the Consolidated Appropriations Act for Fiscal Year 2000. President
Clinton signed this bill into law on November 29, 1999. Subtitle C of the American
Inventors Protection Act, known as the First Inventor Defense Act of 1999, creates
an infringement defense for an earlier inventor of a “method of doing or conducting
business” that was later patented by another. The defendant must have reduced the
infringing subject matter to practice at least one year before the effective filing date
of the patent and made commercial use of that subject matter in the United States
before the effective filing date.
The impetus for this provision lies in the rather complex relationship between the
law of trade secrets and the patent system. Trade secrecy protects individuals from
misappropriation of valuable information that is useful in commerce. One reason an
inventor might maintain the invention as a trade secret rather than seek patent
protection is that the subject matter of the invention may not be regarded as
patentable. Such inventions as customer lists or data compilations have traditionally
been regarded as amenable to trade secret protection but not to patenting.84 Inventors
might also maintain trade secret protection due to ignorance of the patent system or
because they believe they can keep their invention as a secret longer than the period
of exclusivity granted through the patent system.85
It is important to note from the outset that the patent system has not favored
trade secret holders. Well-established patent law provides that an inventor who
makes a secret, commercial use of an invention for more than one year prior to filing
a patent application at the PTO forfeits his own right to a patent.86 This policy is
based principally upon the desire to maintain the integrity of the statutory proscribed
patent term. The patent law grants patents a term of twenty years, commencing from
the date a patent application is filed.87 If the trade secret holder could make
commercial use of an invention for many years before choosing to file a patent
application, he could disrupt this regime by delaying the expiration date of his patent.
On the other hand, settled patent law principles established that prior secret uses
would not defeat the patents of later inventors.88 If an earlier inventor made secret
commercial use of an invention, and another person independently invented the same
technology later and obtained patent protection, then the trade secret holder could
face liability for patent infringement. This policy was based upon the reasoning that
once issued, published patent instruments fully inform the public about the invention,
while trade secrets do not. As between a subsequent inventor who patented the
invention, and thus had disclosed the invention to the public, and an earlier trade
secret holder who had not, the law favored the patent holder.
Restatement of Unfair Competition § 39.
Friedman, David D. “Some Economics of Trade Secret Law,” 5 Journal of Economic
Perspectives (1991), 61, 64.
35 U.S.C. § 102(b). See Metallizing Engineering Co. v. Kenyon Bearing & Auto Parts,
153 F.2d 516, cert. denied, 328 U.S. 840 (1946).
35 U.S.C. § 154.
W.L. Gore & Associates. v. Garlock, Inc., 721 F.2d 1540 (Fed. Cir. 1983), cert. denied,
469 U.S. 851 (1984).
The State Street Bank decision focused attention upon the relationship between
patents and trade secrets. Inventors of methods of doing business traditionally relied
upon trade secret protection because such inventions had long been regarded as
unpatentable subject matter. As a result, inventors of innovative business methods
obtained legal advice not to file applications at the PTO on their inventions. This
advice was sound under the patent law as it then stood.
State Street Bank overturned the historical bar denying patents on methods of
doing business. As a consequence, inventors in fields ranging from such sectors as
finance, insurance and services have sought proprietary interests in their inventions
through the patent system. The change in this background principle was perceived
to have harmed individuals that invented business methods prior to the issuance of the
State Street Bank opinion. Many of these inventors had maintained their innovative
business methods as trade secrets for many years. As a result, they were unable
belatedly to obtain patent protection on their business methods. As well, because
trade secrets did not constitute prior art against the patent applications of others, a
subsequent inventor would be able to obtain patent protection. Under these
circumstances, a trade secret holder could find himself an adjudicated infringer of a
patented business method that he actually invented first.89
The First Inventor Defense Act of 1999 reconciled these principles by providing
an infringement defense for an earlier inventor of a method of doing business that was
later patented by another. This infringement defense is subject to several
qualifications. First, the defendant must have reduced the infringing subject matter
to practice at least one year before the effective filing date of the application. Second,
the defendant must have commercially used the infringing subject matter prior to the
effective filing date of the patent. Finally, any reduction to practice or use must have
been made in good faith, without derivation from the patentee or persons in privity
with the patentee.
Although the First Inventor Defense Act addresses transition problems between
the regimes of trade secrets and patents, it does not directly assess the propriety of
patenting business methods in the first instance. It may be implied that the First
Inventor Defense Act assumes an approving posture towards patented methods of
doing business, however. As a result, subsequent courts would most likely consider
Congress to have condoned business methods patents when considering them in the
The Debate Over Patenting Methods of Doing Business
There has been considerable debate over the desirability of extending the reach
of the patent system to methods of doing business. Both proponents and detractors
of business method patents have emerged. Before considering the views of various
participants in the business method patent debate, it should be noted that most
Thomas, John R.. “The Post-Industrial Patent System,” Fordham Intellectual Property,
Media & Entertainment Law Journal 10 (1999), 32 n.156.
commentators consider this issue to be an important one.90 In the patent law, few
constraining doctrines allay the proprietary rights associated with granted patents.91
The adjudicated infringer need not have derived the patented invention from the
patentee, as liability rests solely upon a comparison of the text of the patent
instrument with an accused infringement.92 The patent law also lacks a robust
experimental use exemption in the nature of copyright law’s fair use privilege.93
Although accused infringers theoretically may employ the defense of patent misuse,
most commentators agree that the Federal Circuit has minimized the application of the
patent misuse doctrine.94 The decision to subject particular areas of endeavor to the
patent system is therefore of particular importance. Once an invention has been
patented, it is subject to a robust set of proprietary rights.
Perceived Benefits of Business Method Patents
Supporters of State Street Bank have urged that business methods are as subject
to costly research and development efforts as the inventions traditionally amenable to
patenting. For example, suppose a diversified enterprise spends considerable
resources on research in traditional manufacturing processes, and spends the same
amount on research on business methods. It may be questioned why the reward of
exclusive patent rights is available in one field of costly research and not in another.95
Observers have also argued that future technological process will occur as much
in activities as business methods and information processing as in traditional
manufacturing techniques. This argument urges that the patent system should not be
confined to technologies of the Industrial Revolution, but should embrace the
inventions of the Information Age as well.96 To do otherwise would be arbitrary and
unfair, according to commentator Sari Gabay. As with other observers, Gabay
Thomas, supra note 25, at 1141.
See 35 U.S.C. § 271(a) (1994) (the patentee has the exclusive right to make, use, sell, offer
to sell, or import into the United States the patented invention).
Adelman, supra note 18, at 860-61.
See Rebecca S. Eisenberg, Patents and the Progress of Science: Exclusive Rights and
Experimental Use, UNIVERSITY OF CHICAGO LAW REVIEW 56 (1989), 1017, 1023; Rebecca
S. Eisenberg, Proprietary Rights and the Norms of Science in Biotechnology Research,
YALE LAW JOURNAL 97 (1987), 177, 222.
See Note, Is the Patent Misuse Doctrine Obsolete?, HARVARD LAW REVIEW 110 (1997),
1922; Mark A. Lemley, Comments, The Economic Irrationality of the Patent Misuse
Doctrine, CALIFORNIA LAW REVIEW 78 (1990), 1599.
See Melton, Michael E., “The Business of Business Method Patents,” Practising Law
Institute Patents, Copyrights, Trademarks and Literary Property Course Handbook Series
589 (Feb. 2000), 97 (cataloguing sorts of innovative business methods).
See Richard Poynder, “Who Pays, Who Plays? Internet Patents Test The Limits of
National Authority on The Web,” 9 Corporate Legal Times no. 96 at 11, col. 1 (Nov. 1999).
contends that incentives to innovate are required in this arena as well as in fields
traditionally considered amenable to patenting.97
Proponents of business method patenting have also argued that the U.S. patent
system has granted and enforced these sorts of patents for some time. They point to
such decisions as Markman v. Westview Instruments,98 a well-known patent
infringement case from the Supreme Court.99 The Markman litigation involved a
patent entitled “Inventory Control and Reporting System for Drycleaning Stores.”100
This patent allowed dry cleaning establishments to track the location of individual
articles of clothing as they moved throughout the cleaning process. The Markman
patent could easily be characterized as directed towards a method of doing of
business, supporters say, yet the patentability of this system was never questioned by
any court or commentator.
Commentators such as attorney Carl Oppendahl further note that such
enterprises as Merrill Lynch and Citibank obtained numerous patents on financial
service products long before the Federal Circuit issued State Street Bank. One of the
Merrill Lynch patents, U.S. Patent No. 4,346,442., was involved in litigation before
the District Court for the District of Delaware.101 This patent, entitled “Securities
Brokerage–Cash Management System,” claimed a computerized method of managing
certain financial services. In 1983, the Delaware federal district court expressly found
that the asserted patent “claims statutory subject matter because the claims allegedly
teach a method of operation on a computer to effectuate a business activity.”102
Attorney Walter Hanchuk therefore explains that State Street Bank merely confirmed
and focused attention upon a trend that had occurred for many years.103 As stated
most succinctly by attorney Thomas S. Hahn, “There is no revolution here.”104
Similarly, some patent law experts argue that no meaningful distinction separates
a method of doing business as opposed to a method of doing some other activity.
Patented inventions are generally put to commercial uses by business enterprises.
According to some commentators, whether an observer chooses to view an invention
Gabay, Sari, “The Patentability of Electronic Commerce Business Systems in the Aftermath
of State Street Bank & Trust Co. v. Signature Financial Group, Inc.,” Journal of Law and
Policy 8 (1999), 179, 226.
116 S.Ct. 1384 (1996).
Thomas, supra note 25, at 1161 n.171.
U.S. Patent No. Re. 33,054.
Paine, Webber, Jackson & Curtis, Inc. v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.,
564 F. Supp. 1358 (D. Del. 1983).
Ibid at 1369.
Hanchuk, Walter, “Assessing the Real Impact of State Street,” New York Law Journal
223 (24 April 2000), 7.
Hahn, Thomas S., “Much Ado About Method Patents,” The San Francisco Recorder,
January 1999, Intellectual Property Supplement, S21.
as a “business method” or something else is a matter of characterization rather than
a meaningful substantive difference.105
Commentators have also lauded the State Street Bank decision as simplifying the
law concerning the patentability of computer software.106 In recent years, the rules
determining whether software could be patented or not could be characterized as
complex. Whether a particular software program could be patented or not was often
determined not by the substance of the invention, but by the form in which the patent
application was drafted. More specifically, skillful patent drafters would often claim
software-related inventions as a hard-wired computer, so that the invention looked
less like a mathematical algorithm and more like a machine. This trend tended to
place a premium on artful claims drafting and made patents more difficult to read.107
Following State Street Bank, proponents contend that less need should arise for
elaborate claims drafting exercises in the area of software inventions. Any software
is patent eligible if it achieves a useful, concrete and tangible result.
Finally, attorneys Michael T. Platt, Francis X. Gindhart, and Laurence E. Stein
observe that in order to obtain patent protection, inventors must fully disclose their
inventions such that a skilled artisan could practice the invention without undue
experimentation.108 Platt, Gindhart and Stein believe that information available in
published patent applications serves as a rich library of prior knowledge that serves
as a starting point for subsequent inventors. A patent system that denied protection
to business methods would cause business method innovators to conceal their
inventions as trade secrets. Other valuable business methods might simply go
unknown for want of publicity. According to Platt, Gindhart and Stein, now that the
patentability of business methods has been confirmed, the commercial community
should benefit from the public disclosure that accompanies patent issuance.109
Perceived Negative Consequences of Business Method Patents
Detractors of the State Street Bank opinion have attempted to counter the
argument of proponents of business method patents. Some of these detractors have
expressed concerns about the lack of empirical evidence supporting the extension of
the patent system towards business methods.110 The Federal Circuit decided State
Street Bank based upon its interpretation of terms that have appeared for over two
centuries in our patent statute, rather than strong evidence that economic gains would
Del Gallo III, supra note 42, at 434-47.
Cantzler, Christopher S., “State Street: Leading the Way to Consistency for Patentability
of Computer Software,” University of Colorado Law Review 71 (Spring 2000), 423.
Thomas, John R., “Of Text, Technique and the Tangible: Drafting Patent Claims Around
Patent Rules,” 17 John Marshall Journal of Computer and Information Law (1998), 219,
35 U.S.C. § 112 ¶ 1.
Platt, Michael T., et al., “Patenting Business Genius,” Metropolitan Corporate Counsel
7 (Feb. 1999), 19.
Thomas, supra note 25, at 1165-66.
result from business method patenting. These commentators believe that historical
experience teaches that the patent system is susceptible to abuse by the monopolist
and speculator. Absent compelling evidence for market interference in business
method innovation, Professor Lawrence Lessig and other commentators contend that
the stewards of the patent system should proceed with moderation when assessing the
scope of patentable subject matter.111
In his book, OWNING THE FUTURE, Seth Shulman also suggests that a broad
sense of patentable subject matter may harm rather than foster economic progress.112
According to Shulman, the existence of numerous proprietary interests in particular
market segments may create barriers to entry that stifle competition.113 Attorney
Jeffrey A. Berkowitz notes the particular concern that the expansive and innovative
Internet of the late 1990's may instead be constrained by owners of patents claiming
electronic commerce business concepts.114 A New York Times Magazine article was
to similar effect, deeming State Street Bank and its progeny a “ridiculous phenomenon
[that] could kill e-commerce.”115
Detractors also argue that effort alone is insufficient to justify the reward of
patent protection for an innovative business methods. They point to the Supreme
Court’s opinion in Feist Publications, Inc. v. Rural Telephone Service Co.,116 which
adopted this position with respect to the copyright laws. There, the Court rejected
“sweat of the brow” as a basis for copyright protection by reasoning that effort alone
was not enough to make particular subject matter copyrightable. The Feist Court
concluded that an ordinary “white pages” telephone directory was not subject to the
copyright laws because it lacked even a minimal degree of creative expression.
Because a telephone directory is not a work of authorship within the meaning of the
copyright laws, it was not the kind of work the copyright laws were designed to
protect.117 Applied to the patenting of business methods, the Feist opinion may
suggest that the mere expenditure of resources should not by itself result in an award
of intellectual property rights.
Lessig, Lawrence, The Problem with Patents, The Industry Standard (“Rather than
unbounded protection, our tradition teaches balance and the dangers inherent in overly strong
intellectual- property regimes.”) (April 23, 1999) (available at
Shulman, Seth, Owning the Future (Boston: Houghton Mifflin, 1999), 3-6.
See also Maeir, Gregory J., et al., “Patent Protection Provides Long-term Net Strategy,”
National Law Journal 22 (18 Oct. 1999), B11; Raskind, Leo J., “The State Street
Bank Decision: The Bad Business of Unlimited Patent Protection for Methods of Doing
Business,” Fordham Intellectual Property, Media and Entertainment Law Journal 10
Berkowitz, Jeffrey A., “Patenting the Com in ‘.Com,’” Practicing Law Institute/Patent 588
(Jan. 2000), 331, 334.
Gleick, James, “Patently Absurd,” The New York Times Magazine (12 March 2000), 47.
499 U.S. 340 (1991).
See Ginsburg, Jane C., “No Sweat?’ Copyright and Other Protection of Works of
Information After Feist v. Rural Telephone,” Columbia Law Review 92 (1992), 338.
Some patent law experts believe that business method patents may be
successfully distinguished from other types of patents. They point to the First
Inventor Protection Act of 1999, which creates an infringement defense only for
practitioners of “methods of doing or conducting business.”118 They also note that
Article 52 of the European Patent Convention has for many years expressly
disallowed patents on “schemes, rules and methods for performing mental acts,
playing games or doing business.”119 Each of these measures necessarily requires
courts to distinguish between business methods and other sorts of inventions,
suggesting that a plausible distinction can be drawn.
Professor Robert A. Kreiss and other commentators have argued that business
methods do not fall within the “useful Arts,” the Constitutional expression of the
subject matter appropriate for patenting.120 These detractors have urged that the
sparse materials available regarding the term “useful Arts” suggest that the Framers
of the Constitution were unlikely to view every created thing as patentable.121 The
Framers undoubtedly contemplated the industrial, mechanical and manual arts of the
late eighteenth century, in contrast to the seven “liberal arts” and the four “fine arts”
of classical learning.122
Patent law experts have also suggested that the Framers were undoubtedly aware
of the English experience leading to the Statute of Monopolies. Parliament enacted
the Statute of Monopolies in 1624 in order to curb the grant of abusive monopolies
by the Crown. In order to generate income, the Crown had awarded exclusive rights
to private parties for such activities as manufacturing playing cards and importing salt.
These monopolies resulted in higher consumer prices and were subject to considerable
public disapproval. Parliament reacted by enacting the Statute of Monopolies, which
proscribed the grant of monopolies except in one area: “the sole working or makinge
See supra notes 85-89 and accompanying text.
Thomas, supra note 25, at 1179. See Convention on the Grant of European Patents, 13
International Legal Materials 268 (1974) (amended by Decision of the Administrative Council
of the European Patent Organization of 21 Dec. 1978).
Kreiss, Robert A., “Patent Protection for Computer Programs and Mathematical
Algorithms: The Constitutional Limitations on Patentable Subject Matter,” New Mexico Law
Review 29 (1999), 31. See also Durham, Alan L., “‘Useful Arts’ in the Information Age,”
Brigham Young University Law Review 1999 (1999), 1419; Thomas, supra note 25, at 1164.
See The Federalist No. 43, at 271-72 (James Madison) (Clinton Rossiter ed. 1961) (“The
copyright of authors has been solemnly judged in Great Britain to be a right of common law.
The right to useful inventions seems with equal reason to belong to the inventors. The public
good fully coincides in both cases with the claims of individuals.”).
See Coulter, Robert I., “The Field of the Statutory Useful Arts, Part II,” Journal of the
Patent Office Society 34 (1952), 487, 494 (“The seven historic ‘liberal arts’ were: grammar,
logic (dialectics), rhetoric, arithmetic, geometry, music and astronomy[.] The four ‘fine arts’
were: painting, drawing, architecture and sculpture; to which were often added: poetry, music,
dancing and drama.”).
of any manner of New Manufactures with this Realme, to the first and true
The Court of Customs and Patent Appeals, a predecessor of the Federal Circuit,
commented on the Statute of Monopolies in 1951. The court explained that the
Constitution authorized Congress to enact a patent law because “those who
formulated the Constitution were familiar with the long struggle over monopolies so
prominent in English history, where exclusive rights to engage even in ordinary
business activities were granted so frequently by the Crown . . . .” Professor Robert
P. Merges and other commentators have suggested that the State Street Bank court
did not sufficiently respect the policy concerns animating the Statute of
Monopolies.124 Citing more familiar historical events such as the Boston Tea Party,
attorney Richard H. Stern has also noted an American antipathy to exclusive rights
in business methods.125
Appraisals of the State Street Bank decision have also questioned the Federal
Circuit’s adoption of what appears to be a very lenient standard of patentable subject
matter.126 According to State Street Bank, whether a particular invention is eligible
for patenting depends upon “the essential characteristics of the subject matter, in
particular, its practical utility.”127 This holding appears to collapse the patentable
subject matter into another patentability requirement known as utility.128 A perceived
difficulty with this approach is that, since the early nineteenth century, the utility
standard has been understood to present a distinct, additional hurdle to
patentability.129 One commentator concludes that State Street Bank “reduces the
statutory categories of patentable subject matter [process, machine, machine and
composition of matter] into claim-formatting protocols. . . . After State Street, it is
hardly an exaggeration to say that if you can name, you can claim it.”130
The Perceived Patent Quality Problem
Although observers differ in their support or opposition of patents on business
methods, many have stated their view that the quality of issued business method
patents is poor. In particular, numerous commentators believe that the PTO should
21 Jam. I, ch.3, § 6. See generally Kyle, Chris, “But a New Button to an Old Coat: The
Enactment of the Statute of Monopolies,” Journal of Legal History 19 (1998), 203.
Merges, Robert P., “As Many As Six Impossible Patents Before Breakfast: Property
Rights for Business Concepts and Patent System Reform,” Berkeley Technology Law Journal
14 (1999), 577.
Stern, supra note 4, at 106.
Thomas, supra note 25, at 1160.
State Street Bank, 149 F.3d at 1375.
See supra note 14 and accompanying text.
See Bedford v. Hunt, 3 F. Cas. 37, 37 (C.C.D. Mass. 1817) (No. 1,217); Lowell v. Lewis,
15 F. Cas. 1018, 1019 (C.C.D. Mass. 1817 (No. 8,568).
Thomas, supra note 25, at 1160.
have rejected many business method patent applications rather than have allowed
them to issue as granted patents. A complaint that is frequently made is that many
business method patents merely appropriate well-known business activities that have
been adopted to the Internet in a straightforward fashion.131 As stated by attorney
Robert Gorman, “There are going to be a lot of patents that issue that shouldn’t be,
and it will cause a lot of problems. Companies are trying to patent inventions as old
as the wheel. They’re just doing it with the Internet.”132
Attorney John Altmiller has offered an explanation for this perception of poor
patent quality. Because the patentability of business methods was unclear prior to the
Federal Circuit’s State Street Bank decision, the PTO has not developed a library of
prior art materials that examiners may consult when considering whether to grant or
deny a business method patent application.133 Even if a prior art library were
available, Professor Rochelle Dreyfuss has also observed that many business methods
are not routinely memorialized in written form. They instead are maintained in the
heads and practices of business persons.134 While such practices should ordinarily be
considered prior art under U.S. law,135 they are not readily located by PTO examiners.
Of course, the PTO has issued many patents that were later invalidated during
litigation. In part this possibility occurs because U.S. patent law features a very
encompassing definition of the prior art that bears upon each patent or patent
application. For example, a publication in an obscure foreign language may render
a U.S. patent invalid, even if the knowledge within that publication was never held
within the United States.136 Knowledge publicly available within the United States
may also have patent-defeating effect, even if it has never been memorialized in
written form.137 The PTO simply lacks the resources to perform an exhaustive search
of such references. Further, because most patented inventions are probably never
commercialized,138 an exhaustive search in connection with every patent application
may present needless costs. When the patent holder later attempts to enforce the
issued patent in court, an accused infringer often has significant incentives to locate
such patent-defeating prior art.
See Mullaney, Timothy J., “These Web Patents Aren’t Advancing the Ball,” Business
Week (17 April 2000), 62; Scott Thurm, “The Ultimate Weapon: It’s the patent,” The Wall
Street Journal (17 April 2000), R18.
Greene, supra note 3, at 16.
Dreyfuss, Rochelle Cooper, “Testimony Before the House Judiciary Committee,
Subcommittee on Courts and Intellectual Property,” (9 March 2000) (available on Westlaw
at 2000 WL 11069340).
35 U.S.C. § 102.
35 U.S.C. § 102(b).
35 U.S.C. § 102(a).
Dreyfuss, supra note 134.
The stakes may be higher for business method patents, however. Professor
Dreyfuss has observed business method and data transformation patents concern
information rather than industrial products. As noted by economists Carl Shapiro and
Hal Varian, information products tend to exhibit lock-in and network externalities.139
Lock-in occurs when consumers face high costs in switching from one brand of
technology to another.140 Network externalities result from a situation of positive
feedback, where the value of connecting to a network depends upon the number of
other people connected to it. Applied to economic competition, the typical result of
network effects is a monopolistic, winner-take-all market. Telephony and computer
operating systems present examples of markets with network externalities.141
Professor Dreyfuss explains that business method patents need not be considered
valid for very long in order to have substantial market impact due to lock-in and
network externalities.142 Suppose, for example, that an Internet-based electronic
retailer obtains a patent on a method of ordering merchandise, conducting an auction
or enlisting associated retailers. Such patents may be invalid because they merely
claim obvious electronic variants of well-known commercial activities. Competitors
of the patentee may face delays of several years as they seek to strike down such
patents, however.143 Indeed, the high costs of patent litigation may discourage other
retailers from challenging a patent at all.144 As a result, competitors of the patentee
may be discouraged from engaging in the patented method. Consumers who wish to
take advantage of the patented business features must transact with the patentee.
According to Professor Dreyfuss, the market distortions caused by the issuance
of an invalid business method patent may be significant. Once a consumer has entered
his name, address and billing information into one company’s site, he may be reluctant
to engage in the same tedious task with another Internet retailer. As a result, the
consumer is locked into that retailer, even if the patent is later invalidated.145
Network effects may also play a role here. Internet retailers often analyze the
information they receive from consumers in order to predict what other products
individual consumers might enjoy. The accuracy of these predictions depends in part
upon the number of consumers. Thus, the larger the network of consumers who
patronize a particular web site, the more valuable it is to patronize that web site.
Internet auction houses also appear to operate more effectively with more propsective
Shapiro, Carl, & Varian, Hal, Information Rules: A Strategic Guide to the Network
Economy (Boston: Harvard Business School Press, 1999).
Ibid at 104.
Ibid at 173-79.
Dreyfuss, supra note 134.
sellers and bidders available. In sum, the issuance of invalid business method patents
may produce significant market distortions.146
PTO management has noted these concerns and attempted to respond. On
March 29, 2000, PTO Director Q. Todd Dickinson announced that the PTO had
established a “Business Methods Patent Initiative” in order to improve patent
quality.147 The Initiative consists of two principal components. The first component
consists of an “industry outreach” towards representatives of the software, Internet
and electronic commerce communities. The second component is directed towards
patent quality. The Initiative calls for the enhanced technical training of examiners,
with particular emphasis upon practices in banking, finance, electronic commerce,
insurance and Internet infrastructure. Perhaps most significantly, the PTO has also
pledged to expand its search activities as follows:
Mandatory Search: A mandatory search for all applications in Class 705148
to include a classified U.S. patent document search, and a text search of
U.S. patent documents, foreign patent documents, and non-patent literature
(NPL), with NPL searches to include required search areas
mapped/correlated to U.S. classification system for Class 705, which will
provide a more fully developed prior art record;
Second Review: A new second-level review of all allowed applications in
Class 705 will be required, with an eye toward ensuring compliance with
search requirements, reasons for allowance, and a determination whether
the scope of the claims should be reconsidered; and
Expand Sampling Size: The sampling size for quality review by the Office
of Patent Quality Review will be substantially expanded, and a new inprocess review of Office actions will be introduced with an emphasis on the
field of search of prior art and patentability determinations under
See Sapp, Geneva, “Net patents process receives an overhaul”, InfoWorld 22 (3 April
Class 705 is entitled “Data Processing: Financial, Business Practice, Management, or
Cost/Price Determination.” See United States Patent & Trademark Office, Manual of U.S.
Patent Classification (1999). According to the PTO, “This is the generic class for apparatus
and corresponding methods for performing data processing operations, in which there is a
significant change in the data or for performing calculation operations wherein the apparatus
or method is uniquely designed for or utilized in the practice, administration, or management
of an enterprise, or in the processing of financial data. This class also provides for apparatus
and corresponding methods for performing data processing or calculating operations in which
a charge for goods or services is determined.”
35 U.S.C. § 102 is that portion of the patent statute that addresses the patentability
requirement of novelty. 35 U.S.C. § 103 concerns the nonobviousness requirement. See
supra notes 15-16 and accompanying text.
Response to the Business Method Patents Initiative has been mixed. Lawyer
Harold C. Wegner called the Initiative "nothing more than a rehash of stale proposals
from a decade ago."150 Commentator Gregory Aharonian also dismissed the new
procedures as little more than public relations. He contends that the expanded PTO
review of one class of inventions will come at the expense of other patent
applications.151 However, observers such as attorney Henry Petri believe the Initiative
is a step in the right direction that should “improve the quality” of business method
Effect of Business Method Patents Upon Entrepreneurs
and Small, Entrepreneurial Firms
Commentators have differed in their views on whether the State Street
Bank decision will help or hinder entrepreneurs and small, entrepreneurial firms.
Much of this discussion has focused on start-up companies planning to do business
on the Internet.
Some observers believe the availability of patent protection will enhance the
ability of start-up companies to obtain venture capital and to prevent others from free
riding off their innovative business concepts. The Internet has been lauded as a
market with few barriers to entry,153 both for legitimate competitors and for pirates.
Given that most Internet innovations are available in a readily copied digital format,
patent rights may stand as one of the more enduring assets a start-up firm possesses.
As explained in the ECONOMIST magazine, “Internet entrepreneurs have realized that
one of the few things to stand between them and death by copying is a patent.”154
Although business method patents may benefit entrepreneurs and small firms,
attorney Michael E. Melton notes that the availability of patent protection can act as
a “double-edged sword.”155 Many patentees may also infringe business method
patents held by competitors. According to Melton, such a patentee “could force a
company to pay a royalty for practicing a business method the company considered
Slind-Flor, Victoria, “Business Patents Get 2d Look: But Critics Assert that PTO’s New
Policies Won’t Solve Problems,” National Law Journal 22 (17 April 2000), B6.
Sapp, supra note 147.
See generally Levine, Rick et al., The Cluetrain Manifesto (Cambridge, Massachusetts:
Perseus Publishing, 2000.
“Patent wars: The Knowledge Monopolies,” The Economist (8 April 2000).
Melton, supra note 95.
Ibid at 102.
Attorney Andrew B. Katz is representative of observers who are more
pessimistic about the impact of State Street Bank on smaller firms.157 Katz observes
that patents come into existence only after a costly and time-consuming examination
procedure at the PTO. Citing figures from the American Bar Association, Katz
estimates the average fee for merely filing a patent application for computer software
or hardware is $7,500. Continued prosecution of that application at the PTO may
result in the doubling of this figure. Katz further notes that patent litigation is
notoriously expensive. He observes that the cost of trying and appealing a patent
infringement case may run well over one million dollars. Katz concludes that
commercial entities require a level of financial and legal wherewithal in order to
pursue patent protection, enforce their patents and defend themselves from charges
of patent infringement.
Katz believes that this situation will deleteriously impact smaller enterprises.158
Predicting that “big businesses will not sit idly up and watch their market share
become vulnerable to start-ups,” Katz concludes:
Most small businesses will find themselves at the mercy of large companies with
software patents. Raising the defenses of invalidity and non-infringement are not
options, as proof of these “theories” lies beyond the means of a company whose
entire business is funded by five million dollars of venture capital. A sole
proprietor has no chance.159
While considering Katz’s contentions, it should be noted that the Patent Act does
allow inventors to file a so-called “statutory invention registration” with the PTO. 160
Although a statutory invention registration does not lead to an issued patent, it is
inexpensive and readily allows PTO examiners to employ the registration against
subsequent patent applicants. A statutory invention registration may reduce the need
for so-called “defensive patenting.”161 As well, a proceeding known as reexamination
does provide a mechanism to challenge issued patents that is less expensive than
litigation.162 Neither the statutory invention registration and reexamination
proceedings can be considered full substitutes for patent acquisition and litigation,
however, and it should be noted that both proceedings have their critics.163
Katz, Andrew B., “‘State Street’ May Place Start-Ups in Peril,” New York Law Journal
221 (19 Jan. 1999), C2.
See also Leibowitz, Wendy R., “Patents and E-Business,” National Law Journal 22 (14
June 1999), A19.
Katz, supra note 157.
35 U.S.C. § 157.
Guffey, Wendell Ray, “Statutory Invention Registration: Defensive Patentability,” Golden
Gate University Law Review 16 (1986), 291.
35 U.S.C. § 302.
Guffey, supra note 161; Janis,, Mark D., “Rethinking Reexamination: Toward A Viable
Administrative Revocation System for U.S. Patent Law,” Harvard Journal of Law and
Technology 11 (1997), 1.
Stepping beyond electronic commerce patents, State Street Bank appears to
provide many other sorts of industry actors with the opportunity to appropriate
business and other techniques through the patent system. Prior to State Street Bank,
legal, financial, insurance and service industries were generally faced with two
options: either protect an innovation as a trade secret or allow the innovation to enter
the public domain. The sudden injection of the patent system into existing markets
provides market entrants with a third option, in effect subjecting them to a private
regulatory environment. Private parties are now able to limit the conduct of their
competitors through proprietary patent interests.164
One apparent difficulty for small businesses is that the PTO issues new patents
each week.165 Often no prior notice accompanies the issuance of a patent.166 As a
result, many patent instruments are only available for public inspection after they have
been granted legal effect. In our fast-moving contemporary economy, business
method patents can issue long after many electronic merchants have adopted that
commercial strategy on their web sites. As a result, almost any business method
patent has the potential to be a so-called “submarine patent,” rising unexpectedly from
the PTO and poised to torpedo established electronic industries. Submarine patents
remain a particular concern of the National Commission on Entrepreneurship, which
believes that “some current intellectual property and patent procedures and
regulations impede entrepreneurs seeking to create and commercialize new
Although no firm conclusion about the impact of business method patents upon
small business is possible at this time, most commentators agree that businesses of all
sizes should be more attentive to the patent system. Attorney Mark Plotkin advises
commercial enterprises to employ due diligence when embarking upon new ventures.
Not only should the patentability of the enterprise’s own business methods be
assessed, enterprises should consider whether any proposed activities would infringe
the patents of others.168 Other observers have encouraged small businesses to perform
Thomas, supra note 25, at 1141.
See Stross, Randall E., “Patently absurd claims,” U.S. News & World Report (20 March
Traditionally, the PTO did not published pending applications. Under U.S. law, patents
were traditionally published only at the time they were formally granted. The American
Inventors Protection Act of 1999 altered this principle, calling for the publication of some
pending patent applications eighteen months after they have been filed. However, if the patent
applicant certifies that it will not seek corresponding patent rights abroad, then the PTO will
not publish the application. These changes do not guarantee that industry participants will
be provided with notice of the patent rights of others prior to that patent’s issuance. U.S.
Library of Congress, Congressional Research Service. Patent Law Reform: An Analysis of
the American Inventors Protection Act of 1999 and Its Effect on Small, Entrepreneurial
Firms, by (name redacted), Report RL30451,29 February 2000, 8-10.
Pages, Erik R., “Priorities for Federal Innovation Reform,” National Commission on
Entrepreneurship, available at http://www.ncoe.org//policy/ostp.html.
Plotkin, Mark, “Mind Your Own Business Method: Innovators Must Help Themselves as
an intellectual property audit. Such an audit allows businesses to identify intangible
intellectual assets, confirm their ownership and assess their value.169 Of course,
tracking the patent portfolios of competitors may prove to be a task that involves
considerable resources and legal wherewithal, assets that small companies may not
possess in abundance.
The possibility of a legislative response to State Street Bank has gained
considerable currency in the popular press. Professor Lawrence Lessig considers the
advent of business method patents to be such a significant development that he has
unequivocally stated: “There is no more important issue about cyberspace for
Congress to address than this, and now rather than later. It is the Issue of the Year
Other observers suggest that no legislative response is necessary. According to
attorney Jonathon Band, the patent system has a capacity for self-correction. Band
believes that PTO examiners will climb the learning curve of business methods patents
over time, just as they have with new technologies in the past.171 This view suggests
that business method patenting brings no fundamental changes to U.S. law, but merely
presents problems that are transitional in character.
If Congress elects to address this issue, a number of legislative options are
available. One possibility is modification of the First Inventor Defense Act of 1999.
Further legislative activity might introduce substantive changes in the law of patent
eligibility per se, or instead create procedural reforms to create administrative
mechanisms for dealing with the perceived difficulties surrounding business method
patents. A brief review of some of these options follows.
The First Inventor Defense Act
The First Inventor Defense Act of 1999, Title C of P.L. 106-113, presents
several opportunities for further clarification. First, the Act provides only a brief
explanation of the patented subject matter to which it applies. In contrast to its
fulsome definition of "commercially used," the statute provides only that "the term
'method' means a method of doing or conducting business." This succinct delineation
may contain some ambiguity. As an example, consider an accused infringer whose
sole commercial practice is the manufacturing of a particular chemical compound.
PTO Issues Out Dot-Com Patents,” Legal Times 23 (14 Feb. 2000), 31.
Buff, Ernest D.& Restaino, Leslie Gladstone, “Using Intellectual Property Audits in
Acquiring and Exploiting Technology,” New Jersey Law Journal 155 (29 March 1999) 1361
Lessig, Lawrence, “Patent Problems,” The Standard, available
http://www.thestandard.com/article/display/0,1151,8999,00.html (21 Jan. 2000).
See Schwartz, John, “Online Patents to Face Tighter Review,” Washington Post, 30 March
2000, sec. E, 1.
Methods of manufacturing have traditionally been among the subject matter of the
patent system. Yet, should another patent that method, the accused infringer may
well argue that a chemical manufacturing technique is also a method of doing
Given that the statute's legislative history makes clear that the First Inventor
Defense Act of 1999 was inspired by the Federal Circuit opinion in State Street Bank,
this argument may at first appear untenable. The House Report to accompany H.R.
1907 expressly states, however, that this legislation is "not confined to the financial
services industry."172 Further, while the State Street Bank opinion undoubtedly
triggered a boom in filing patents on such inventions in such industries as finance and
insurance, a review of patents issued prior to that opinion suggests that numerous
previous patents had issued that could arguably be described as business methods.173
Two such issued patents, one relating to managing a dry cleaning establishment and
the other relating to a plan for saving for college tuition expenses, were the subject
of recent opinions from the United States Supreme Court.174 With no articulated
definition of the term "method of doing or conducting business" in the statute, no
clear record of congressional intent, and no shared meaning of this term prevalent
within the patent community, judicial interpretation of this term will be crucial.175
The First Inventor Defense Act also calls for consideration of the manner in
which the patent claim is drafted. The statute provides that "[a] person may not assert
the defense under this section unless the invention for which the defense is asserted
is for a method." However, the House Report to accompany H.R. 1907 provides:
An invention is considered to be a process or method if it is used in connection
with the production of a useful end-product or -service and is or could have been
claimed in the form of a business process or method in a patent. A softwarerelated invention, for example, that was claimed by the patent draftsman as a
programmed machine when the same invention could have been protected with
process or method patent claims is a process or method for purposes of § 273.176
Some observers contend that virtually any invention can be drafted in either product
and method format.177 The choice of one format or the other is most typically a
House Committee on the Judiciary, American Inventors Protection Act of 1999, 106th
Cong., 1st sess., 1999, H.Rept. 106-287, 46.
See supra notes 98-104 and accompanying text.
Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527
U.S. 627 (1999); Markman v. Westview Instruments Inc., 517 U.S. 370 (1996).
“Signing of IP Reforms Amends Work-for-Hire, Leaves 'First Inventor Defense' Unclear,”
59 Patent, Trademark & Copyright Journal (2 Dec. 1999), 330, 331-32.
House Committee on the Judiciary, American Inventors Protection Act of 1999, 106th
Cong., 1st sess., 1999, H.Rept. 106-287, 46.
Thomas, John R., “Of Text, Technique and the Tangible: Drafting Patent Claims Around
Patent Rules,” 17 John Marshall Journal of Computer and Information Law (1998), 219,
matter of drafting style. That the first inventor defense is supposedly limited to
methods appears to have almost no substantive legal effect whatsoever.
Looking forward, Congress may wish to explore an expansion of the First
Inventor Defense Act of 1999. This statute could be amended to embrace a more
expansive group of patentable subject matter.178 In this regard the first inventor
defense could prove quite similar to those prevailing in other countries.179 These
statutes are commonly referred to as creating "prior user rights." Unlike the more
limited regime created by the First Inventor Defense Act of 1999, prior user rights
abroad are not limited to methods of doing or conducting business. They instead
apply to any sort of invention. Experience with the First Inventor Defense Act of
1999 might suggest whether the United States should consider a more full-fledged
prior user rights regime, or be maintained as a limited cure of a specific problem.
Finally, to whatever range of inventions it applies, a first inventor defense
appears to augment the value of trade secrets at the expense of the patent regime. In
a system where trade secret holders may face liability for patent infringement in the
future, inventors face significant incentives to file applications at the PTO. Even if
inventors never plan to enforce their patents against competitors, the patents
nonetheless possess defensive value should others come to the same invention later.
But where trade secret holders may employ a first inventor defense, the incentive to
obtain patent protection is diminished. A prior trade secret status will block liability
for patent infringement. This system may reduce the number of filed patents, and as
a consequence diminish the public trove of knowledge that appears only in issued
patent instruments.180 Observers may wish to devote some attention to the impact of
the First Inventor Defense Act upon the willingness of inventors to seek patent
Possibilities for Further Legislative Activity
A number of additional legislative possibilities suggest themselves for responding
to business method patents. Some opponents of business method patents have called
for a ban on their issuance.181 This change would likely require modifications to § 101
of the Patent Act. Such a ban could employ the same wording as Article 52 of the
European Patent Convention, which denies patents on methods of doing business.182
Jean Hubert, Pierre. “The Prior User Right of H.R. 400: A Careful Balancing of
Competing Interests,” 14 Santa Clara Computer & High Technology Law Journal (1998),
The Advisory Commission on Patent Law Reform, A Report to the Secretary of Commerce
Rohrback, Robert L. “Prior User Rights: Roses or Thorns?,” 2 University of Baltimore
Intellectual Property Journal (1993), 1.
See Thomas, supra note 25, at 1181.
See Convention on the Grant of European Patents, 13 International Legal Materials 268
(1974) (amended by Decision of the Administrative Council of the European Patent
Organization of 21 Dec. 1978).
To similar effect is a proposal that an “Industrial Application” standard of
patentability be introduced into the U.S. patent law.183 This standard presently stands
within the European Patent Convention and Japanese patent statute.184 This standard
would require a “technical rule for the control of natural forces,”185 or “a teaching for
systematic activity using controllable natural forces for the attainment of a causally
predictable result”186 for an invention to be patentable. It would eliminate matters of
business practice, social observation and personal skill from the patent system.
Less extreme proposals include the suggestion of economist Joseph Farrell that
Congress should declare a moratorium on the offensive use of software and business
method patents.187 Inventors would be allowed to apply for software and business
method patents but, at least initially, would not be permitted to enforce them against
infringers. Such a grace period might allow the PTO to augment its examination staff
and improve its collection of prior art, better enabling an assessment of the
patentability of individual applications.
Another possibility is the creation of a specialized, sui generis protection regime
that is specially crafted for business methods. Boat hulls188 and semiconductor
masks189 are among the categories of inventions for which particularized schemes of
intellectual property rights are now available under federal law. Professor Pamela
Samuelson and other commentators have elaborated upon a proposed registration
system for computer software that might be applied to computer-based business
methods as well.190
The President of Amazon.com, Jeff Bezos, has also proposed legal reforms with
respect to business method patents. In an open letter issued, on March 9, 2000,
Bezos urged that “the patent laws should recognize that business method and
software patents are fundamentally different than other kinds of patents.” Bezos
suggested that business method patents have a reduced duration of three to five years.
He also proposed that business method and software patents be subjected to a public
comment period prior to grant, purportedly allowing “the Internet community the
Thomas, supra note 25, at 1178-85.
A.E.K. v. Federal Patent Office, International Review of Industrial Property and Copyright
Law 15 (1984), 82, 83 (reporting the September 21, 1982, opinion of the Swiss Supreme
Gert Kolle, The Patentable Invention in the European Patent Convention,International
Review of Industrial Property and Copyright Law 5 (1974) 140, 146.
See Lessig, Lawrence, “Online Patents: Leave Them Pending,” Wall Street Journal, 23
March 2000, sec. A, 22.
Vessel Hull Design Protection Act, Title V of the Digital Millennium Copyright Act, Pub.
L. No. 105-304, 112 Stat. 2860 (Oct. 28, 1998).
The Semiconductor Chip Protection Act of 1984, 17 U.S.C. §§ 901-914.
Samuelson, Pamela et al., “A Manifesto Concerning the Legal Protection of Computer
Programs,” Columbia Law Review 94 (1994), 2308.
opportunity to provide prior art references to the patent examiners at a time when it
could really help.”191
Although a thorough review of the legal ramifications of these proposals exceeds
the scope of this report, it should be noted that the United States has committed to
maintaining certain minimal standards of patent protection. A particular source of
obligations is the TRIPS Agreement, the Trade-Related Aspects of Intellectual
Property Rights Agreement of the World Trade Organization.192 Some of the patent
law reforms noted above might run counter to provisions of the TRIPS Agreement.
For example, the TRIPS Agreement both requires the United States to preserve a
specified patent term, and disallows the United States from granting compulsory
patent licenses except in limited circumstances.193
Possible procedural changes include the provision of additional guarantees of
patent validity at the PTO prior to costly litigation of patented business methods in
the courts. For example, prior to filing a charge of infringement in the courts, the
business method patentee might be required to undergo an obligatory reevaluation
proceeding to ensure that the patent is valid and enforceable. Another possibility is
a directive and additional funding for the PTO to improve its handling of patent
applications claiming methods of doing business. An improved collection of prior art
literature might allow the PTO to better assess whether business methods claimed in
patent applications are novel and nonobvious over the prior art.194
The patenting of business methods has focused considerable public attention to
a traditionally obscure legal discipline. Commentators have been both intrigued and
dismayed by patent law trends that subject inventions from business, the social
sciences and virtually any other human endeavor to private appropriation. Although
opinions vary on the propriety of these patents, there is broad concern about the
adaptability of the patent system towards these unfamiliar disciplines. Whether
business method patents will promote or stifle the efforts of entrepreneurs and small
firms also remains to be seen. As innovations in many sectors play a significant role
in the growth and international competitiveness of the U.S. economy, the postindustrial patent system should remain a matter for continued public concern and
possible legislative oversight.
Slind-Flor, supra note 150.
Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994,
Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 33 I.L.M. 1197
See generally Reichman, J.H., “GATT/WTO Universal Minimum Standards of Intellectual
Property Protection Under the TRIPS Component of the WTO Agreement,” International
Lawyer 29 (1995), 345.
Sandburg, Brenda, “Business Method Patents Come Under Increased Scrutiny,” The Legal
Intelligencer, 222 (31 March 2000), 4.
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