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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.

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.

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.

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."

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.

Disclaimer: This discussion is general in nature and is not intended to and does not create a lawyer/client relationship. This discussion should in no way be relied upon or construed as legal advice, particularly since most legal outcomes are highly dependent on the facts of a particular case or situation. This discussion is provided on the condition that it cannot be referred to or quoted in any legal proceeding; if this condition is unacceptable to you, immediately delete this email and do not keep a copy of it in any form. The reader or recipient is strongly urged to consult with a lawyer for legal advice on these matters. Any reliance on the discussion information by someone who has not entered into a written retainer agreement with the lawyer providing the discussion information is at the reader's or recipient's own risk.

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