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I. Introduction
So-called business method
patents have been the subject of mounting interest and controversy among
internet and e-commerce businesses. Many internet startups, e-commerce
inventors, and venture capital groups have implemented formal patent programs.
Even small internet companies and individual internet entrepreneurs are seeking
patent protection for what they believe to be key aspects of their products,
services, and web sites. Conversely some internet companies have shunned patent
protection. For them, the aversion to seeking patent protection for business
method and internet inventions is philosophical or economic.
Deciding whether to pursue patent protection for business method inventions is a
management decision that must take into consideration the individual goals,
financial position, technology, relevant market, and a host of other factors
unique to each company. An informed decision requires that management and
counsel be educated about the current and evolving state of the law concerning
business method patents, and about their effect on the e-commerce industry.
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II. HISTORICAL
BACKGROUND
Prior to the Federal Circuit's ruling in State Street v. Signature Financial
business methods were considered by many to be unpatentable. In Hotel Security
Checking Co. v. Lorraine Co. the court held that a method for cash registering
and account-checking designed to prevent fraud by waiters was unpatentable
because "a system of transacting business disconnected from the means for
carrying out the system is not" worthy of protection. In In re Johnston,
the Federal Circuit's predecessor, the Court of Customs and Patent Appeals,
decided that an automatic record keeping system which allowed banks to provide
bookkeeping services was patentable because the claims were directed to a
machine, rather than a system or process.
As a result of those cases, business methods themselves were largely considered
unpatentable. In contrast, the machines or system that implement a novel method
was patentable. In In re Schrader, Judge Newman's dissent sharply criticized the
business method exception and stated that it is an "unwarranted encumbrance
to the definition of statutory subject matter." He thought the business
method exception ought to "be discarded as error prone, redundant, and
obsolete." According to Judge Newman "the decisions that have spoken
to methods of doing business, have or could have, resolved the issue in each
case simply by relying on the statutory requirements of patentability such as
novelty and non-obviousness." However, until 1998, the question of whether
a patent directed to a pure method of doing business remained unanswered. In
1998, the case State Street v. Signature Financial cleared the way for business
method patents.
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III. THE PATENT
AT ISSUE IN STATE STREET
The United States
Patent Office issued Signature Financial Group a Patent entitled "Data
Processing System for Hub and Spoke Financial Services Configuration." More
specifically, the patent covers a computer programmed to implement an investment
structure that was developed by the patent owner to manage mutual funds. The
program, identified by the proprietary name "Hub and Spoke,"
facilitates a structure whereby mutual funds (the "spokes") pool their
assets in an investment portfolio (the "hub") that is organized as a
partnership.
This investment configuration provides the administrator of a mutual fund with
the advantageous combination of economies of scale in administering investments,
coupled with the tax advantages of a partnership. It accomplishes this by
calculating daily changes in the allocation of assets among the spokes invested
in the hub, based on the daily changes in the hub's investment securities and
the percentage share of each spoke in the hub -- including each spoke's share of
the hub's daily expenses, income, and net realized and unrealized gain or loss,
using the concept of book capital account. The program also tracks the data
relevant to determining aggregate year-end income, expenses and capital gain or
loss for accounting and tax purposes. Accurate calculations of these figures are
required within an hour and a half of the close of the market because the spokes
sell shares to the public, and the price of those shares is dependent on the
spokes' percentage interest in the hub portfolio.
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IV. RESULT OF THE STATE
STREET DECISION
Method and process claims directed specifically to methods of doing business
cannot be rejected by the Patent Office solely on the basis of the business
method exception. Evidence of this ruling is reflected in the latest revision of
the Manual of Patent Examining Procedure (MPEP), which eliminates the prior
language that read, "though seemingly within the category of process or
method, a method of doing business can be rejected as not being within the
statutory classes."
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V. THE BOTTOM LINE
Business methods can be patented. In fact, business methods are currently being
filed with the United States Patent Office at a record pace.
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DISCLAIMER: This discussion is general in nature and is not intended to
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way be relied upon or construed as legal advice, particularly since most legal
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