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Special project: Internet Law
  Business Method Patents
    • Introduction
    • Issues & short answers
    • Previous state of the law
    • Discussion
    • Authorities cited
The Internet Business Method Patent
III. Discussion

A. 35 U.S.C. § 101 - Patentable Subject Matter

Section 101 of 35 U.S.C. limits the subject matter of patents to four broad categories that include: any new and useful (1) process; (2) machine; (3) manufacture; or (4) composition of matter ("or any new and useful improvement thereof … subject to the conditions and requirements of this title").44 The definition of "process" under § 100(b) is a "process, art or method, … [or] a new use of a known process, machine, manufacture, composition of matter, or material."45 The term "manufacture" means "the production of articles for use from raw or prepared materials by giving to these materials new forms, qualities, properties, or combinations, whether by hand-labor or by machinery."46 The courts have defined "composition of matter" to mean "all composite articles whether they be the results of chemical union, or of mechanical mixture, or whether they be gases, fluids, powders or solids."47

Although these terms are explicitly defined, determining which specific category an invention fits into is often unnecessary, as long as the invention falls comfortably within §101 (i.e. "falls within one of the four enumerated categories of patentable subject matter"48). Congress intended that patent laws be given wide latitude.49 In fact, legislative history shows that Congress intended statutory subject matter to basically "include anything under the sun that is made by man."50

However, the judiciary has put a limit to these endless possibilities by identifying three categories of unpatentable subject matter. These three categories are: abstract ideas; 51 laws of nature 52 (e.g. Einstein could not patent his law that E = mc2); and physical/natural phenomena (e.g. a new plant found in the wild is not patentable subject matter).53 The mathematical algorithm derives from the abstract idea category.54 Until the decision in State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998) (abolishing the business method exception rule and establishing that business method claims are to be treated the same as any other patent claim) business methods were also considered unpatentable subject matter - per se.55

B. The State Street Decision and its Clarification of Patentable Subject Matter

The patent in State Street was for a computer-implemented data processing system for managing financial services.56 This system utilized a "Hub and Spoke" investment structure under which mutual funds ("Spokes") would pool their assets into a single portfolio ("Hub").57 The investment portfolio was organized as a partnership, which allowed certain tax and administrative advantages.58 The district court found the patent invalid because it fell into one of two judicially-created exceptions to statutory subject matter - either the mathematical algorithm exception or business method exception.59 (The court seemed also to indicate that the patent was too broad and thus, invalid.)60 The appellate court reversed and remanded, holding that a proper determination of the patent's validity (including its broadness) would have to be made using § 102, § 103, and § 112 because the claimed process was patentable subject matter under § 101.61 In so holding, the court established the validity of patents on business methods.

1. Business Method Exception

The State Street decision explicitly abolished the business method. Now business methods are subject to the same statutory requirements for patentability as any other process or method and patentability no longer turns on whether a claimed method "does business," but on whether the method as a whole meets "the requirements of patentability as set forth in § 101, § 102, § 103, and § 112 of the Patent Act".62

The State Street court gave several reasons for explicitly abolishing the business method exception. First, previous courts had never invoked the business method exception to rule an invention unpatentable.63 When confronted with the issue, courts always found other reasons to strike down the patents (e.g. lack of novelty, a mathematical algorithm, lack of obviousness, etc.).64 Hence, courts generally found it "unnecessary to consider the issue of whether a method of doing business is inherently unpatentable."65 Second, the business judgment exception was ineffective by itself because a patent must also be evaluated under the other sections of the Patent Act. Thus, the exception was "error-prone, redundant, and obsolete" and has especially become outdated since the passage of the 1952 Patent Act.66

2. Mathematical Algorithm Exception

State Street also clarified the mathematical algorithm exception to patentable subject matter, by narrowing its scope. The implication of the decision is that the exception is now a subset of the unpatentable abstract ideas category.67 A mathematical algorithm is basically a mathematical equation or formula.68 The exception is relevant because many business methods (especially Internet) involve the process of manipulating numbers, which in itself is a fundamental part of computer technology.69 For example in State Street, the mathematical algorithm in the patent was for a process that transformed dollar amount data into final stock share prices.70

This judicially created exception states that mathematical algorithms are not patentable subject matter to the extent that they are just abstract ideas or laws of nature.71 In other words, a mathematical algorithm may not be patented until it is practically applied (i.e. to produce a "useful, concrete, and tangible" result), assuming it meets the other statutory requirements.72 For example, one court held that a machine that transformed data through a series of mathematical equations was patentable because the mathematical equations produced a "useful, concrete, and tangible result" in the form of a smooth waveform display.73

It should be emphasized that the standard is not whether there is a physical transformation/conversion or physical step in the claimed process,74 but whether the mathematical algorithm is applied in a "practical manner to produce a useful result."75 "The notion of 'physical transformation' can be misunderstood … [and is only] one example of how a mathematical algorithm may bring about a useful application."76 Similarly, the presence of a physical "step" is also just one example of how a practical result may ensue, for the focus remains on whether the mathematical algorithm produces a useful result.77 Just because a claimed invention involves inputting/outputting numbers, calculating numbers, and storing numbers, "in and of itself, [this] would not render it nonstatutory subject matter, unless, of course, its operation does not produce a 'useful, concrete and tangible result'."78

C. Implications of State Street in Relation to the Internet Business Methods

Following the State Street decision, the United States Patent and Trademark Office ("USPTO"), which is the Federal agency responsible for administrating patent laws,79 issued a statement summarizing its approach to "Automated Financial or Management Data Processing Methods (Business Methods)."80 In this statement, the USPTO acknowledged that State Street triggered an awareness of the "business method claim" as a viable form of patent protection.81 The USPTO also outlined its plan to keep pace with the rapidly changing technologies and to improve its quality in examining patents relating to electronic commerce and business methods.82

The practical implication of State Street at the judicial level is that courts will treat business method and Internet business method patents like any other patent.83 Business method claims will be analyzed individually rather than collectively.84 Thus, all patents must satisfy the same statutory requirements dictated in 35 U.S.C. § 101, § 102, § 103, and § 112.

D. Problems of Obviousness under 35 U.S.C. § 103 - The Amazon.com Controversy

35 U.S.C. § 103(a) (Conditions for patentability; non-obvious subject matter) states: "A patent may not be obtained … if the difference between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains."85

Amazon.com v. Barnesandnoble.com, 239 F.3d 1343 (Fed. Cir. 2001) was one of the first court decisions involving an Internet business method patent. 86 This case illustrates that an Internet business method patent may, like any other patent, be found invalid based on obviousness grounds.87 The case involved a patent infringement suit brought by Amazon.com against Barnesandnoble.com (BN), for BN's infringement of Amazon's "1-click" system in its "Express Lane."88 Although the district court granted Amazon's motion for a preliminary injunction, this ruling has since been vacated and the case remanded on appeal.89 The appellate court found that, although Amazon demonstrated a likelihood of infringement by BN, BN had raised substantial questions as to the validity of the Amazon patent that needed to be addressed before BN could be found to have infringed.90 Thus, the appellate court determined that there was insufficient ground for granting the preliminary injunction and remanded the case for further review.

Amazon's patent was on a "1-click" online ordering system, which stored a customer's identity, credit card, and billing/shipping information on the seller's website, ready for a later retrieval.91 The goal of the patent was to reduce the number of interactions between a consumer and server system, while the consumer was placing an order. Specifically, the patent sought to reduce the amount of sensitive information (e.g. credit card information) transmitted and to make the consumer's online shopping experience easier and more convenient. BN had a similar ordering system, which it called the "Express Lane."92 The federal appellate court affirmed the district court's conclusion that Amazon demonstrated likely literal infringement of at least four independent claims in their patent.93 However, the appellate court also found that the district court erred in rejecting BN's defense that the Amazon patent was invalid on grounds of obviousness.94 BN provided several examples of prior art, which the appellate court concluded were sufficient to raise substantial questions of validity that should be resolved at trial.95 This case was being considered on remand as of February, 2002.

E. Conclusion

The State Street decision triggered a general awareness that "business method patents" are now available as a viable form of patent protection. As a result, the number of Internet business method patents claimed and filed with the USPTO has increased and will continue to do so. State Street clarified previous case law to establish that the business method patent should be treated the same as any other patent claim, requiring that it satisfy 35 U.S.C. § 101, § 102, § 103, and § 112

Prepared by Erin Kubota, ('03).

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