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Software and business method patents - Patentability

Preamble

This page is about software and business method patents. Even for those who live from filing, examining and ruling them software and business method patents are a new and evolving domain. Forming an opinion about what is an invention, what can be patented and whether a program infringes a patent requires:

  • A knowledge of law and of examiner guidelines and manuals.

  • An understanding of past patent practices. The historical perspective is necessary to understand why some things are patentable and some other things requiring as much ingenuity are not.

  • An understanding of current patent practices. The time of the independent inventors, spending their own money and working alone to develop their invention, has gone. Today inventors are usually salary men working in teams and without incentive and time to create outstanding inventions and patents.

  • An understanding of the inventive work.

This page is not a cookbook on writing or reading software and business method patents. Such cookbook would be useful but is impossible to write. I would like to explain why. When you write a program, you create a small universe that you and your users can observe from outside. Because you are outside you can present this program in a simple and undisputable way. For Intellectual Property and law in general we are in a completely different situation. If you find something new you expect a benefit from that. If I’m not the one who found this thing I will minimize the finding and try to copy it. To arbitrate the conflict we will ask the help of an authority. This authority has an unfeasible task because the judge, the plaintiff and the defendant are in the same universe. As Goedel demonstrated there are proposals whose truthfulness cannot be determined if we observe this universe from inside. Trying to overcome this problem is like seeking the secret of perpetual motion. Hence, to be consistently close to what is best for all of us, the Society has no choice but to have plenty of rules "if this and this then do that" and case laws. The Society also has to keep these rules and case laws consistent both spatially (for instance, handle in the same way chemists and programmers) and temporally (the big bang is not an option). Therefore the law and notably the Intellectual Property law are necessarily complex.

Law aims to classify issues and to define how to deal with each class of issues. Law is designed to be equitable in most cases but it cannot be equitable all the time because (1) a classification implies a simplification (2) the law is reactive, not proactive. The world changes and then law adapts. The Society cannot expect from law more than making sense of data in a consistent way. Therefore the Society complements law with jury trials and equity and an important function of law is to allow parsing the inputs of parties and experts to generate facts that can be submitted to juries, made of persons independent from the parties and randomly chosen, or, to say it in the Goedelian way, of the best possible approximation of outsiders.

There are many cases in which a simple judgment for either party will not do entire justice to either party. In the same way as a patent office applies procedures, courts and juries apply the common law described above, which is essentially a method of proceeding. This method limits their capability to modify the rights of the parties or to restrain one party. In UK and USA such issues are addressed by courts of equity. More precisely these courts have jurisdiction in cases where a plain, adequate and complete remedy cannot be had at law. In Middle Age a court of equity ruled the case of a farmer whose neighbor did not return his only milk cow, which wandered onto the neighbor's property. A court of law could only award monetary damage but the farmer could want that particular cow back and not just its monetary value. A court of equity could order the neighbor to return the cow.

The procedures are more flexible in equity than in law though equity courts are not anymore taking discretionary decisions based on the specific facts of a single case. Preliminary and permanent injunctions are a matter of equity in Intellectual Property.

I assume that the reader understands words and phrases like patent, business method or prior art. I also assume that the reader knows how to make a search on the US Patent and Trademark Office (USPTO) and on the European Patent Office (EPO). To learn these prerequisites you can read Patent search on this site. For an introduction to business method issues you can also read Social Meaning of the Patentable Subject Matter – the case of Business Method Patents by Nari Lee that compares the law in USA, Japan and Europe.

Patentability

Countries have to adapt their Intellectual Property law to economical and technical evolutions with two main constraints, which are to (1) conform to the international treaties these countries have signed and (2) to keep the system compatible with their legal tradition. This is therefore not surprising to find differences between the countries’ laws though principles are similar. The American law allows patenting "anything under the sun that is made by man". This definition excludes discoveries and mathematical algorithms because they are the expressions of natural laws that are merely abstract ideas constituting disembodied concepts or truths that are not useful. This definition does not exclude algorithms that do not manipulate abstract ideas. In Japan a patentable invention is "a highly advanced creation of technical ideas, utilizing a law of nature." The European Patent Office proposed "European patents shall be granted for inventions in all fields of technology, as far as they are new, involve an inventive step and are susceptible of industrial application."

In this section I present the International framework defined by TRIPS, the European law, which put some restrictions on the sort of software patents that can be patented and forbid patenting pure business methods and the USA law that allows patenting "anything under the sun that is made by man" with some substantial exceptions.

TRIPS

Governments agree on a common understanding of patents, defined by the Agreement on Trade-Related aspects of Intellectual Property rights (TRIPs) that was signed at the end of the Uruguay round. Article 27(1) of TRIPS states that "patents shall be available for any inventions, whether products or processes, in all fields of technology, provided they are new, involve an inventive step and are capable of industrial application". This document leaves some space for interpretation. Technology is not defined. Experts generally believe that technology includes software and excludes business methods but the issue is less obvious than it looks.

Programs are used to solve problems, which can be technical or not. Patenting a software invention that solves an organizational problem is close to patenting a business method, which must be computerized to be useful. However this is not exactly the same thing. If only software patents are allowed the inventor is granted an exclusive right for a particular way of implementing the business method whereas when business method patents are allowed too the inventor is granted an exclusive right for the business method itself. But again the difference is slim. The business method patent must include a preferred embodiment, which is a software apparatus to clarify the exact function of the implementation. A software patent can use common sense means to implement a business method.

Europe

The European law is primarily defined in Article 52:

"1 European patents shall be granted for any inventions which are susceptible of industrial application, which are new and which involve an inventive step.

2 The following in particular shall not be regarded as inventions within the meaning of paragraph 1

  • discoveries, scientific theories and mathematical methods;

  • aesthetic creations;

  • schemes, rules and methods for performing mental acts, playing games or doing business, and programs for computers;

  • presentations of information.

3 The provisions of paragraph 2 shall exclude patentability of the subject-matter or activities referred to in that provision only to the extent to which a European patent application or European patent relates to such subject-matter or activities as such."

Business methods fall in the "schemes, rules and methods for performing mental acts" category and software patents describe "programs for computers". This does not mean that you cannot patent a software invention or even a business method invention. Paragraph 3 means that you cannot patent a software or a business method invention whose subject matter is a program, scheme, rule and method for performing mental acts. This also means that most software inventions can be patented because usually their subject matter is not programming and most business method inventions cannot be patented because their subject matter is indeed a method for performing mental acts.

Paragraph 2 has both a weakness (this is an exclusion list) and a strength (this is a workable definition of technology). A European patent must have a technical character. The way to proceed is further clarified by the examiner manual that, in case of doubt, recommends "proceeding directly to the questions of novelty and inventive step, without considering beforehand the question of technical character. In assessing whether there is an inventive step, the examiner must establish an objective technical problem which has been overcome." For instance "A computer system suitably programmed for use in a particular field, even if that is, for example, the field of business and economy, has the character of a concrete apparatus, in the sense of a physical entity or product, and thus is an invention within the meaning of Art. 52."

In Europe the patent prosecution has a prerequisite, the international search report. If the invention does not solve a technical problem the search examiner may answer something like "In view of the fact that the claims are worded in such a way that they claim such subject matter or the technological achievement thereof by means of trivial features, the search examiner has been unable to identify a technical problem whose solution might involve an inventive step" or "No meaningful research is possible in respect of all of the claims because the claims relate to a scheme, rule or method of doing business". In such cases the search examiner does not issue the prior art search report. When the international search report is established the examination normally takes place. The examiner can disagree with the conclusion of the search report and find that the "the claims relate to subject matter that is excluded from patentability" or find new prior art or revert a negative conclusion of the search report. The applicant may also ask for a EPO search report.

You can also read The patentability of business methods at the European Patent Office, a good document that presents this subject in a different way.

USA

In 1998 a Court of Appeals for the Federal Circuit ruled an appeal from a decision of a District Court, which had found a patent 5,193,056 invalid on the ground that the claimed subject matter was not patentable. The Court of Appeal reversed the District Court decision and concluded that business method matter were statutory subject matter. You can find this case law at http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=fed&navby=case&no=961327.

The Court of Appeals describes 5,193,056 in the following way: "The patented invention relates generally to a system that allows an administrator to monitor and record the financial information flow and makes all calculations necessary for maintaining a partner fund financial services configuration. [...] A partner fund financial services configuration essentially allows several mutual funds, or 'Spokes,' to pool their investment funds into a single portfolio, or 'Hub,' allowing for consolidation of, inter alia, the [operating] costs of administering the fund combined with the tax advantages of a partnership. In particular, this system provides means for a daily allocation of assets for two or more Spokes that are invested in the same Hub. The system determines the percentage share that each Spoke maintains in the Hub, while taking into consideration daily changes both in the value of the Hub's investment securities and in the concomitant amount of each Spoke's assets." The description of 5,193,056 is well structured and well written. The inventor presents the goal of the invention, explains why this goal is desirable and uses eight figures on fourteen sleeves to show in detail how the invention works and can be implemented with programs. 5,193,056 has six claims and only the first one is independent. These claims enumerate means that are well disclosed in the description. The prosecution of 5,193,056 was fast (two years and a half) though the applicant (Signature Financial Group) had to abandon six method claims. Then another company (State Street Bank) went to the District Court to invalidate 5,193,056.

http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=fed&navby=case&no=961327 is remarkable. In my view the key points are:

  1. "The 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."

  2. The court reaffirm the other exceptions to patentability, namely "laws of nature, natural phenomena, and abstract ideas" including mathematical algorithms.

The first topic goes beyond enabling business methods when just supporting business methods was hard enough, the novelty of something whose means is abstract being difficult to establish. I further think that the difficulty in prior art search is only a symptom of a deeper problem.

Today companies file business method patents, in which they aim to protect the specification rather than the actual designs, notably because they put in place procedures to ensure that their designs are the most obvious and safest way to meet the specifications. In a way this illustrates the trend toward more abstract inventions. To invent the vulcanization Goodyear could only use rubber, salts, solvents and similar things. A software inventor uses computers, networks and general-purpose programs such as Operating Systems and databases. Though most of these items are not visible they form a matter - we could say a vocabulary - as suitable for inventive activities as the salts and rubber of Goodyear. Today a company can hire a contractor to implement a specification. The specification deliverables compare to the parts ordered by Watt to develop his steam engine. These parts had never been ordered before and Watt had to make sure that they could be produced. If Watt could patent his combination of parts a company should be allowed to patent a combination of specifications.

But specification is not new. For 4000 years architects specify how pyramids, palaces, houses and ships should be built and, so far, architects cannot get utility patents for their drafts though some of these drafts are better than others and though their work requires ingenuity. I think that inventions differ from that kind of specification work in three ways:

  1. Freedom. An inventor has a goal and constraints including laws of nature. But he is free in his design choices. An architect has project-specific constraints such as the shape and nature of the building land. He further must show preliminary drafts and mockups and needs the approval of the customer to go on. In some cases it may even be difficult to find out who is the real author, the draft proceeding from the customer requests and feedback.

  2. Possible secrecy. An inventor can keep his invention secret. Nobody can deduce from the invention result the exact way the result was produced. For instance China successfully kept the silk and china inventions secret for centuries though Europeans had bought huge quantities of silk and china. With patents the Society proposes a deal to inventors, which is to give an exclusive right on the invention in return of an invention disclosure. It is enough for a person of the art to visit a building or a ship to identify its novel parts and be able to reproduce them. Because the novel matter is disclosed anyway the Society has no need to grant an exclusive right.

  3. Feasible prior art search. For prior art search to be possible there must be conscious disclosures. An examiner cannot visit all buildings or ships in the World to make sure that what an architect would like to patent was not already made before. For a conscious disclosure to exist something that could have been kept secret had to be disclosed. So this topic is linked to the second topic.

A business method can be an invention (when it uses more abstract building blocks to achieve an inventive effect) though in most cases it is not. Most of the time a business method is an architect work. It is novel in the same way as a building is different from buildings drawn before. There is a test that should allow making the difference between the former case in which a patent can be granted and the latter case in which the application should be rejected. A invention can be reproduced as such, which means that if you combine an independent claim with the parts of the description that support this claim you should get something that you can reproduce to solve the problem addressed by the invention. With an architect work you must adapt or you must complement or you can simplify the combination, before reproducing it to solve the problem that the architect work pretends to address. For instance the presence in the specification of elements that do not go to the solution of the problem addressed by the invention is a sure sign of architect work.

Granting a patent for an architect work raises two problems. If a company A files a patent application disclosing precisely the way it solved a problem that it faced because of its culture and organization there is almost no chance that another company will have the same problem. So if the patent office grants a patent to company A for its application nobody is hurt. Company A simply wasted its money. Most business method patents are of this sort. This is a problem because a patent office is like a University. If a University gives a degree to all students who register and pay the fees no company will regard the degree as valuable. If companies file thousands of patents without getting a single dollar in return (license fee, monopole) analysts will lose confidence in the system and regard patents as expensive legal paper. Patents have to be hard to obtain.

The second problem comes from improper claims. Let’s imagine that an architect is asked to build a house in Antarctic. This will be the first house in Antarctic. Though this house must accommodate a colder temperature and more wind than other houses the architect can build it with proven methods. This house will be essentially a combination of Canadian and Siberian house. What happens with improper claims is the same thing as if the architect could get an exclusive right on building Antarctic houses. Instead of claiming a novel way of building houses the architect would claim the invention of the Antarctic house. He could then get a valuable patent because the patent office could not oppose prior art in Antarctic or find that the means was not new, nobody having ever described log cabins and isbas in Intellectual Property terms.

In Europe an invention must solve a technical problem, which makes easier to check if an invention is an architect work. A technical problem usually has a simple and precise definition. When the problem is not technical most of the time its definition must be construed with elements of economical, cultural and even social nature. For centuries solutions to technical problems are recorded in a relatively consistent way when solutions to non-technical problems are passed and taught in an informal way. In that respect the European law looks more workable than the American law that put fewer constraints on the problem nature.

The USPTO had to enforce and explain the case law that came out from the 5,193,056 appeal while it knew how difficult it was. It did two apparently contradicting things. It explained that the US patent system granted business method patents since its creation and defined a new type of patents, the modern business data processing patents.

Regarding the first topic the USPTO presented evidences of different merit. It is unclear to me if "A mode of preventing counterfeiting" granted to John Kneass on April 28, 1815 represented a progress in useful arts and if the patent office did not simply erred when it granted this patent. On the other hand the Art of Compiling Statistics patents, 395,781, 395,782 and 395,783 filed by Hollerith in 1889 were seminal patents.

Improper claims turned to be difficult to rule even when people were less specialized than today. The "inventor" of the telegraph, Samuel Morse was a painter hardly closer to be a domain expert than people who examined his invention. I quoted inventor because the novelty and non-obviousness of some of his claims was debatable. You can read in http://www.du.edu/~jcalvert/tel/morse/morse.htm: "The mechanical parts of the telegraph had every right to patent protection, by Vail as part of the Morse Group. These were good, useful inventions of great commercial value. Morse had achieved the federal subsidy by his persistence and devotion, and had seen the enterprise through. It was very unjust, however, to claim exclusive rights to things that others had discovered, and were well-known or had been given to the public by men like Faraday, Henry and Steinheil." A court ruled the Morse patent case in this remarkable way:

  • It ignored European prior art (which was questionable, scientists like Faraday being European)

  • It rejected the eighth claim of the Morse patent "I do not propose to limit myself to the specific machinery, or parts of machinery, described in the foregoing specifications and claims; the essence of my invention being the use of the motive power of the electric or galvanic current, which I call electro-magnetism, however developed, for making or printing intelligible characters, letters, or signs, at any distances, being a new application of that power, of which I claim to be the first inventor or discovered" on the ground that "Professor Morse has not discovered, that the electric or galvanic current will always print at a distance, no matter what may be the form of the machinery or mechanical contrivances through which it passes. You may use electro-magnetism as a motive power, and yet not produce the described effect, that is, print at a distance intelligible marks or signs. To produce that effect, it must be combined with, and passed through, and operate upon, certain complicated and delicate machinery, adjusted and arranged upon philosophical principles, and prepared by the highest mechanical skill. And it is the high praise of Professor Morse, that he has been able, by a new combination of known powers, of which electro-magnetism is one, to discover a method by which intelligible marks or signs may be printed at a distance. And for the method or process thus discovered, he is entitled to a patent. But he has not discovered that the electro-magnetic current, used as motive power, in any other method, and with any other combination, will do as well." So the court correctly rejected an improper claim. [It seems that Morse had the intuition that his invention could also work without wire. Though he did not achieve practical results and did not know how a wireless system could work he tried to protect further developments of his invention.]

  • It confirmed the validity of the fifth, sixth and seventh claims whose subject matter was certainly not of technical nature in the context of the invention. These claims relate to the definition of a system of signs, composed of dots, spaces, and horizontal lines and to the art of marking the signs, composed of dots, spaces, and horizontal lines, (susceptible of being variously combined, representing numerals, words, and sentences,) by closing and breaking a galvanic circuit more or less rapidly for telegraphing. This decision was certainly correct. Morse first described a simple and practical means for information encoding.

Under the USA law (103) the patent office examiners must determine the scope and content of the prior art, ascertain the differences between the prior art and the claims and resolve the level of ordinary skill in the pertinent art. Supporting "anything under the sun that is made by man" as statutory subject matter is not a workable approach in a modern world, in which all activities are so specialized that only domain experts using specialized prior art databases have can examine patents. I think that the USPTO after:

  1. observing that most business method applications filed in 1998 related to e-commerce and therefore to data processing,

  2. finding that the most important business method patents granted before also loosely related to data processing,

logically decided to introduce a new type of patents, the modern business data processing patents and to establish a non-patent prior art database of business data processing methods.

Nari Lee wrote in his thesis "The knowledge that the USPTO classified as business data includes the knowledge concerning the identification of the customers and their preferences (operations research or market analysis data), publicizing data (advertising management, catalogue systems, incentive programs, coupon redemptions), processing of knowledge that concerns the monetary exchange throughout the business transactions (credit and loan processing, point of sale systems, billing, fund transfer, banking, clearing houses, tax processing, investment planning), and data that concerns the tracking resources, money and products (human resource management, scheduling, accounting, and inventory monitoring)."

The "modern business data processing” class (705) is defined like this: "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."

Since 1998 the meaning of State Street has been clarified. State Street didn’t abolish the technological test established by Toma as acknowledged by the Board of Patent Appeals and Inferences (BPAI) in affirming that a claimed invention (Bowman) was not statutory. The Toma case was an appeal from the BPAI that was decided by the Court of Customs and Patent Appeals (CCPA). The CCPA said: "The 'technological' or 'useful' art inquiry must focus on whether the claimed subject matter... is statutory, not on whether the product of the claimed subject matter... is statutory, not on whether the prior art which the claimed subject matter purports to replace... is statutory, and not on whether the claimed subject matter is presently perceived to be an improvement over the prior art, e.g., whether it 'enhances' the operation of a machine." The Toma test is a two-prong test of:

  1. whether the invention is within the technological arts; and

  2. whether the invention produces a useful, concrete and tangible result.

It established whether the invention has a statutory object matter [35 U.S.C. 101].

State Street didn’t abolish Toma because State Street decided about the validity of a patent that had passed the Toma test, and though the State Street decision ("The 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") seems to refer 35 U.S.C. 101 that reads: "Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title." To summarize:

  1. The first prong of Toma still applies.

  2. State Street refines the meaning of the second prong of Toma (stress on usefulness rather than concreteness).

So the claims of an invention have to be within the technological arts for the invention to be granted in USA. This measure, better prior art databases and a better training of patent examiners may be enough to address the business patent issue. A decreasing percentage of business method patents lead to patent grants.

The U.S. Congress also tried to address business method patents. In late 1999, Congress enacted the American Inventors Protection Act, which added a new Section 273 to the Patent Act. 20 Section 273 provides a limited defense against a charge of patent infringement in a case involving a method of "doing or conducting business." The defense provides that if the alleged infringer had, in good faith, actually used the method at least one year before the effective filing date of the patent, and also commercially used it before the effective filing date, then it would be shielded from infringement liability. This has become known as the "First Inventor Defense." On October 3, 2000, Representatives Howard Berman and Rick Boucher introduced H.R. 5364, the "Business Method Patent Improvement Act of 2000" that contained notably these proposals:

  1. Lower the standard of proof required for rebutting the presumption of validity for a business method patent from a "clear and convincing evidence" standard to a "preponderance of the evidence" standard;

  2. Create a presumption of obviousness for business method patents if the subject matter in the application is the combination or modification of prior art references and the only difference between the references and the claimed invention is the computer implementation of the business method;

  3. Provide for a period in which the public could challenge the validity of the business method invention before a patent would issue;

I think that H.R. 5364 would have created de facto a second class of patent. When a "classical" patent has been examined and duly granted, "judicial review must give due weight to the presumption of validity." So applicants would have tried to get "classical" patents for applications that were perhaps business methods. Alleged infringers of business method patents would not have hesitated to go to court. Now, the U.S. already depends more heavily on judicial scrutiny when patentees bring infringement actions than other countries. So a litigation increase was not welcome. H.R. 5364 was never enacted.

On April 3, 2001, Congressman Berman introduced H.R. 1332, the "Business Method Improvement Act of 2001." This bill is much like H.R. 5364. Its prospects of being enacted, however, may be far from certain.

Conclusion

All patent systems follow the same principle which is to grant an exclusive right to inventors of "anything under the sun that is made by man" except expressions of natural laws and abstract things like mathematical algorithms but the exact borders of what is patentable or not vary depending on the patent system. We can also note that tolerant systems are almost supersets of most restrictive systems. For instance if you file an application whose description unequivocally supports a claim set meeting the requirements of the most restrictive patent system:

  1. you will be able to patent this application with this claim set everywhere;

  2. you will also be able to patent this application with a claim set adapted to the target patent system, and therefore wider for less restrictive patent systems

The American system seems more complicated than his European counterpart. Both are fascinating. The EPO is the first multi-country patent office, at least at this scale. EPO membership is a prerequisite to enter European Union. But the American system processes more patents and is more tested in courts, which may explain its complexity. For centuries it is politically, culturally and economically important. It was defined in the US Constitution and Jefferson contributed to its creation. It participated to the American dream (file a patent and become the next Edison). It played a role in the creation of powerful corporations.

I think that the public interest is to have a strong patent system also for software and business method patents, for two reasons:

  1. To ban secrecy as exposed in Patent search. A company should ultimately have two options, file a patent or make its design public (for instance through Open Source development).

To allow patent mergers. Today companies merge to have a bigger market or make economies of scale. The public interest is that mergers are made as much for intellectual property as much as for market and finance.

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