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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
II. Previous State of the Law

A. Patent Requirements

One may obtain a valid patent on any "process, machine, manufacture, or composition of matter, or any new and useful improvement." 16 In addition, a patent must meet four other statutory requirements: the invention must be (1) new;17 (2) useful;18 (3) non-obvious;19 and (4) in accordance with the specification requirement.20 The "new"21 requirement is further explained in 35 U.S.C. § 102 (Conditions for patentability; novelty and the loss of right to patent).22 The usefulness requirement is satisfied if the utility of the patent convinces one of ordinary skill in the art.23 The non-obviousness element requires that, at the time the invention is created, the invention must not be obvious to a person with ordinary skill in the invention's subject matter. The specification element requires disclosure of the invention in a way that enables any person skilled in the art to which it pertains (or is connected) to use or make the invention.24

B. The Business Method Exception

The business method exception was a judicially-created doctrine that held patent claims per se invalid if they involved a method of conducting business, rather than a method of manufacture or process.25 This exception stood for decades, although only as dicta.26 Despite its longevity the rule remained dicta because courts regularly found other reasons (e.g. lack of novelty) to invalidate business method patents.

Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908) is often cited as the first case to establish the business method exception.27 In that case, the patent claim was for a spreadsheet (bookkeeping) system designed to prevent fraud by waiters and cashiers in hotels and restaurants. In dicta, the court articulated the business method exception, stating that any business method was per se unpatentable. However, the court ultimately ruled that the patent at issue in the case was invalid not because it was a business method but because of a lack of novelty.

C. Mathematical Algorithm Exception

A mathematical algorithm is any mathematical formula or equation.28 Contemporary business methods (especially those involving the Internet) frequently include computer programs that utilize mathematical formulas to perform complex calculations.29 Valid patent claims (including business method claims) may include mathematical algorithms, as long as the algorithms produce "useful, concrete, and tangible results."30 However, this was not always the case.

Prior to the State Street decision, courts often struck down business method patent claims that had mathematical calculations, under either the business method exception or the mathematical algorithm exception.31 Like the business method exception, the mathematical algorithm exception is a per se exception to statutory subject matter under 35 U.S.C. § 101. This exception holds that mathematical algorithms are not patentable subject matter, to the extent that they only represent abstract ideas.32 In other words, a mathematical formula standing alone is not patentable.33 Prior to State Street, this exception was often applied in a way that blocked business method patents. State Street reassessed the mathematical algorithm exception, discredited the previous test, and clarifying its overall scope.

Previous courts often relied on the Freeman-Walter-Abele test to determine the validity of mathematical algorithm patent claims.34 Courts no longer use this test because it is confusing and only reaffirms the presence of a math algorithm;35 the test fails to determine whether the algorithm produces a useful result.36 The Freeman-Walter-Abele test was a two-prong test that sought to extract and identify unpatentable mathematical algorithms from the rest of the patent claim.37 Under the first prong, the claim was analyzed for the presence of any mathematical algorithm.38 If a mathematical algorithm was found, the claim was further evaluated to determine whether that algorithm applied to any "physical elements or process steps."39 If so, the claim satisfied §101.40 Courts often misapplied the second prong of the test by focusing on whether there was a "physical transformation" (e.g. whether the mathematical formula transformed, for example, "physical, electrical signals from one form into another"41) or "physical process step," rather than focusing on the end result of the claim.42 See also In re Grams (finding that data-gathering is not a process for producing a product).43

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