Patents on Methods of Doing Business

Congressional research reportJun 1, 2000

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Order Code RL30572

CRS Report for Congress

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Patents on Methods of Doing Business

June 1, 2000

(name redacted)

Visiting Scholar in Economic Growth and Entrepreneurship

Resources, Science and Industry Division

Congressional Research Service ˜ The Library of Congress

ABSTRACT

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

Summary

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

competitors.

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

knowledge.

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.

Contents

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 . . . . . . . . . . . . . . . . . 15

Perceived Benefits of Business Method Patents . . . . . . . . . . . . . . . . . . . . 15

Perceived Negative Consequences of Business Method Patents . . . . . . . . 18

The Perceived Patent Quality Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

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

Introduction

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

reform.

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

http://www.thestandard.com/article/display/0,1151,13019,00.html.

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).

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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

tuition payments.

•

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

selection.

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.)

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•

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

tasks.

•

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

diagnosis.

•

Sports Methods. For example, U.S. Patent No. 5,616,089 (April 1,

1997) (“Method of putting”), claims a technique for swinging a golf

club.

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.

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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

Co., 1998).

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).

Ibid.

Bandag, Inc. v. Al Bolser's Tire Stores, Inc., 750 F.2d 903 (Fed. Cir. 1984).

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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

atomic weapon.26

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.

1893).

In re Moeser, 27 App. D.C. 397, 310 (1906).

160 F. 467 (2d Cir. 1908).

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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

patented.36

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.

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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.

State Street Bank and Trust Co. v. Signature Financial Group, Inc., 927 F. Supp. 502 (D.

Mass. 1996).

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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

explained that:

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

subsequent trades.55

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 1373.

149 F.3d at 1375.

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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

systems.”).

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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

nonobviousness.70

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 1361.

52 U.S.P.Q.2d 1865 (D. Del. Oct 25, 1999).

52 U.S.P.Q.2d at 1879-84.

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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

commerce concepts.76

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).

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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

auction patent.81

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

offers”).

“Priceline.com Sues Microsoft for Patent Infringement,” (13 Oct. 1999), available at

http://www.corporate-ir.net.

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.

2000), 46.

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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).

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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

future.

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.

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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).

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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.

100

U.S. Patent No. Re. 33,054.

101

Paine, Webber, Jackson & Curtis, Inc. v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.,

564 F. Supp. 1358 (D. Del. 1983).

102

Ibid at 1369.

103

Hanchuk, Walter, “Assessing the Real Impact of State Street,” New York Law Journal

223 (24 April 2000), 7.

104

Hahn, Thomas S., “Much Ado About Method Patents,” The San Francisco Recorder,

January 1999, Intellectual Property Supplement, S21.

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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

105

Del Gallo III, supra note 42, at 434-47.

106

Cantzler, Christopher S., “State Street: Leading the Way to Consistency for Patentability

of Computer Software,” University of Colorado Law Review 71 (Spring 2000), 423.

107

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,

222.

108

35 U.S.C. § 112 ¶ 1.

109

Platt, Michael T., et al., “Patenting Business Genius,” Metropolitan Corporate Counsel

7 (Feb. 1999), 19.

110

Thomas, supra note 25, at 1165-66.

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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

Because a telephone directory is not a work of authorship within the meaning of the

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.

111

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

http://www.thestandard.com/article/display/0,1151,4296,00.html).

112

Shulman, Seth, Owning the Future (Boston: Houghton Mifflin, 1999), 3-6.

113

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

(1999), 61.

114

Berkowitz, Jeffrey A., “Patenting the Com in ‘.Com,’” Practicing Law Institute/Patent 588

(Jan. 2000), 331, 334.

115

Gleick, James, “Patently Absurd,” The New York Times Magazine (12 March 2000), 47.

116

499 U.S. 340 (1991).

117

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.

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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

118

See supra notes 85-89 and accompanying text.

119

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).

120

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.

121

See The Federalist No. 43, at 271-72 (James Madison) (Clinton Rossiter ed. 1961) (“The

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.”).

122

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.”).

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of any manner of New Manufactures with this Realme, to the first and true

Inventor.”123

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

123

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.

124

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.

125

Stern, supra note 4, at 106.

126

Thomas, supra note 25, at 1160.

127

State Street Bank, 149 F.3d at 1375.

128

See supra note 14 and accompanying text.

129

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).

130

Thomas, supra note 25, at 1160.

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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.

131

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.

132

Greene, supra note 3, at 16.

133

Ibid.

134

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).

135

35 U.S.C. § 102.

136

35 U.S.C. § 102(b).

137

35 U.S.C. § 102(a).

138

Dreyfuss, supra note 134.

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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

139

Shapiro, Carl, & Varian, Hal, Information Rules: A Strategic Guide to the Network

Economy (Boston: Harvard Business School Press, 1999).

140

Ibid at 104.

141

Ibid at 173-79.

142

Dreyfuss, supra note 134.

143

Ibid.

144

Ibid.

145

Ibid.

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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

102/103.149

146

Ibid.

147

See Sapp, Geneva, “Net patents process receives an overhaul”, InfoWorld 22 (3 April

2000).

148

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.”

149

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.

CRS-24

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

patents.152

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

proprietary.”156

150

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.

151

Ibid.

152

Sapp, supra note 147.

153

See generally Levine, Rick et al., The Cluetrain Manifesto (Cambridge, Massachusetts:

Perseus Publishing, 2000.

154

“Patent wars: The Knowledge Monopolies,” The Economist (8 April 2000).

155

Melton, supra note 95.

156

Ibid at 102.

CRS-25

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

157

Katz, Andrew B., “‘State Street’ May Place Start-Ups in Peril,” New York Law Journal

221 (19 Jan. 1999), C2.

158

See also Leibowitz, Wendy R., “Patents and E-Business,” National Law Journal 22 (14

June 1999), A19.

159

Katz, supra note 157.

160

35 U.S.C. § 157.

161

Guffey, Wendell Ray, “Statutory Invention Registration: Defensive Patentability,” Golden

Gate University Law Review 16 (1986), 291.

162

163

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.

CRS-26

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

technologies.”167

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

164

Thomas, supra note 25, at 1141.

165

See Stross, Randall E., “Patently absurd claims,” U.S. News & World Report (20 March

2000), 56.

166

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.

167

Pages, Erik R., “Priorities for Federal Innovation Reform,” National Commission on

Entrepreneurship, available at http://www.ncoe.org//policy/ostp.html.

168

Plotkin, Mark, “Mind Your Own Business Method: Innovators Must Help Themselves as

(continued...)

CRS-27

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.

Legislative Options

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

for 2000.”170

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.

168

(...continued)

PTO Issues Out Dot-Com Patents,” Legal Times 23 (14 Feb. 2000), 31.

169

Buff, Ernest D.& Restaino, Leslie Gladstone, “Using Intellectual Property Audits in

Acquiring and Exploiting Technology,” New Jersey Law Journal 155 (29 March 1999) 1361

170

Lessig, Lawrence, “Patent Problems,” The Standard, available

http://www.thestandard.com/article/display/0,1151,8999,00.html (21 Jan. 2000).

171

See Schwartz, John, “Online Patents to Face Tighter Review,” Washington Post, 30 March

2000, sec. E, 1.

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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

business.

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

172

House Committee on the Judiciary, American Inventors Protection Act of 1999, 106th

Cong., 1st sess., 1999, H.Rept. 106-287, 46.

173

See supra notes 98-104 and accompanying text.

174

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).

175

“Signing of IP Reforms Amends Work-for-Hire, Leaves 'First Inventor Defense' Unclear,”

59 Patent, Trademark & Copyright Journal (2 Dec. 1999), 330, 331-32.

176

House Committee on the Judiciary, American Inventors Protection Act of 1999, 106th

Cong., 1st sess., 1999, H.Rept. 106-287, 46.

177

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,

222.

CRS-29

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

protection.

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

178

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),

189.

179

The Advisory Commission on Patent Law Reform, A Report to the Secretary of Commerce

(1992), 48.

180

Rohrback, Robert L. “Prior User Rights: Roses or Thorns?,” 2 University of Baltimore

Intellectual Property Journal (1993), 1.

181

182

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).

CRS-30

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

183

Thomas, supra note 25, at 1178-85.

184

Ibid.

185

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

Court).

186

Gert Kolle, The Patentable Invention in the European Patent Convention,International

Review of Industrial Property and Copyright Law 5 (1974) 140, 146.

187

See Lessig, Lawrence, “Online Patents: Leave Them Pending,” Wall Street Journal, 23

March 2000, sec. A, 22.

188

Vessel Hull Design Protection Act, Title V of the Digital Millennium Copyright Act, Pub.

L. No. 105-304, 112 Stat. 2860 (Oct. 28, 1998).

189

190

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.

CRS-31

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

Conclusion

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.

191

Slind-Flor, supra note 150.

192

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

(1994).

193

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.

194

Sandburg, Brenda, “Business Method Patents Come Under Increased Scrutiny,” The Legal

Intelligencer, 222 (31 March 2000), 4.

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