Balancing the "Triumph" of Business Method Patentability against Institutional Obstacles

and the Policy Implications

John W. Bagby

e-BRC - Smeal College

Pennsylvania State University

Business Methods ARE Patentable

• Anything [Human-made] Under the Sun is Patentable

• The BusMthd Exception was Illusory

• Methods of Doing Business (MoDB) Patents are the 21st Century Gold Rush

• MoDB Offer Significant Research Opportunity

Patentability Overview

§101 Subject Matter:Machine, Manufacture, Composition of Matter &

Process

Exceptions: Laws of nature, abstract ideas, natural

phenomenon

§102 Novelty, §103 Non-Obviousness, §112 Adequate Description

The Illusory Business Method Exception

• Baker v. Selden Denied © Protection for Accounting Systems – Paper embodiment already known

• Process Patents Were Long Disfavored • Physicality Requirement Tradition

– Vendible Substance under English law – Physical Transformation under U.S. law

• Process as Mere Collection of Ideas • Safeguarding the Public Domain

MoDB Parallels Development of BioTech & Software Patentability

• Early Stage – Unpatentable: naturally occurring - life form,

law of nature - algorithm

• Maturing – Contradictory caselaw aspiring toward

acceptance

• Recognition – Chakrabarty, Allapat, State Street

Hotel Security Checking v. Lorraine Co. (2d Cir.1908)

Facts: Monitoring & reconciling system for restaurant food orders: head waiter to compare food deliveries w/ customer payments to deter embezzlement by cashiers & waiters.

Holding: Process patent physicality requirement introduced, subject matter excluded if w/o physical or tangible result.

Hotel Security Checking

Discussion: Processes patentable only as “new & useful art.” Physicality for MoDB preempts the most useful aspect of business technique: analysis that informs decision-making, “Advice is not patentable.” Cited as per se rule preempting MoDB, but really lack of novelty; today likely obvious. Invention’s fundamental principle is “as old as the art of bookkeeping, i.e., charging the goods of the employer to the agent who takes them.”

In re Wait (CCPA 1934)

Facts: Remote posting of commodity or security price offers, convening buyers & sellers, posting completed sales.

Holding: Novelty lacking in posting of investment price system.

Discussion: Steps described here “surely are & have always been, essential steps in all dealings . . .” MoDB might be patentable so wrongly cited for subject matter unsuitability. Anticipates Priceline?

Loew’s Drive In Theaters vs. Park-in Theaters (1st Cir. 1949)

Facts: ‘537 patent describes drive-in theater grading & aligning of parking space design for viewing large outdoor movie screen. In 1st season, 1937, Park-In Theaters paid % of gross as royalties, but halted pmts in ‘38.

Holding: Drive-in obvious improvement over contemporary indoor theaters.

Loew’s Drive-In Theater Discussion: “There is nothing inventive in adapting

the old arcuate arrangement of seats in a theatre to automobiles in a parking lot as the means to achieve horizontal pointing.” Dicta on physical embodiment requirement often inappropriately cited for subject matter unsuitability: “however novel, useful, or commercially successful . . . not patentable apart from the [physical] means for making the system practically useful . . .”

State St. Bank v. Signature Financial (Fed.Cir. 7/23/98)

• ‘056 Hub & Spoke Financial Settlement System now Patentable Subject Matter

• Publicly Traded Partner Spokes Pool Funds into Single Hub Portfolio

• Facilitates Collective Fund Administration:– Daily computation of spoke asset values, income,

expense, (un)realized gains/losses, – Annual: aggregate income, expense, capital

gain/loss

AT&T v. Excel (Fed.Cir.) cert. denied (10/12/99)

Case History: AT&T won appeal of Smry J/ for Excel on infringement of AT&T’s ‘184

Facts: AT&T’s ‘184 Patent describes method: field added to data burst accompanying long distance calls enabling marketing program, e.g., affinity discounting like MCI’s “friends & family” program

Issue: Are pure MoDB methods claims, w/o physical transformation of matter, statutory subject matter under §101?

AT&T v. Excel

Holding: • Extends State Street to Pure Methods Claims

– Only apparatus claims in State Street

• Physical Transformation Not a Requirement – Physicality is merely an example, citing Deihr

• Useful, Concrete, Tangible Result (UCTR) all that is needed

• Little is Left from Freeman-Walter-Abele

Defining Business Methods

Essential to IP Audits & MoDB Claim Construction • Methods Are Business Methods • Business Plans for VC Review• Trade Secrets • Business Models • Need Business Modeling Conventions

– Components orchestrated to achieve UCTR

• Financial, accounting, manufacturing, logistics, etc.

Experience with MoDB

• Considerable MoDB Applications & Issuances already for:

• Commercial & Investment Banking Methods

• Payment Systems • Internet Business Models

– DoubleClick– Reverse Auctions

Prospective Market Impact

• Public Markets Function as Venture Capital

• Monetize Innovations as MoDB Patents – Exploit in house – License, assign, acquire, merge

• Defensive: Audit & Awareness - use it or lose it

• MoDB as Blocking Barrier to Entry

MoDB Classification Under PTO Guidelines

• 1996 PTO MPEP deleted MoDB prohibition found in §706.03(a)

• Software et.al. Categories include MoDB – 380, 395, 364, 405, 340, 902, 707, 379

• Recent PTO Guideline: MoDB in 705

• Considerable MoDB Applications & Issuances already for:– Commercial & Investment Banks– Internet Businesses

MoDB’s Downside

• Potential Societal Costs – Direct prosecution costs $10-$15K/– PTO direct examination costs & opportunity

costs for deserving technologies– Private sector opportunity costs

• IP audits • Deterrence of innovation• Small business impact m

• International Competitive Ramifications?

Quality Patents: Winners vs. Losers

• PTO has not yet “ramped up” sufficiently to weed out known MoDB

• More adversariness needed – European-style opposition, – US insistence on patent application secrecy

• “Bad patent busters" BountyQuest™ – Reminiscent of Compton’s multi-media blocking

patent, PTO reexamined & invalidated

Quality Patents: Winners vs. Losers

• Winners: public, small business, patent system integrity, PTO reputation, innovators of legitimately new/useful business methods, court system , Wall Street, few legitimate dot.com startups

• Losers: traditional patent bar (largely specialists in software, systems & communications); 1st movers, most dot.com startups in 2000

Criticism

• Much ado about nothing

• Boon for Patent Bar

• MoDB block others eCommerce uses

• Recent history: dot.coms had low barriers to entry, MoDBs increase costs

• Slow adjustment to the new world raises risk exposure of the MoDB clueless

MoDB Fueled dot.com Bubble

• 1997 until the 1st quarter of 2000

• MoDB permitted dot.coms burn rate – Enormous amounts of VC

• Some big monopoly asset primary basis for VC investments

Ubiquity of MoDB Innovations

• Business innovation: – highly distributed, individualized process – MoDB development is incremental

• Patenting costs & avoiding infringement – $10-$50K patenting costs, $000,000s for infringe.litig.– Such costs are beyond most small to medium-sized firms’

means

• Routine innovations, likely obvious or already in the “prior art” – AIPA’s Prior User Defense – Business Methods Patent Improvements Act ‘00

Ubiquity of MoDB Innovations

• Chilling impact on small – medium businesses• Routine innovations, likely obvious or already in

the “prior art” – AIPA’s Prior User Defense

• Business Methods Patent Improvements Act ‘00 • Chilling impact on small – medium businesses

– Need for IP counsel very rude awakening – Cede MoDB innovation to large, technology-savvy

organizations with significant IP budgets?

The Future of MoDB Patents

• Rough Start for MoDB • Similar Uncertain Trajectory for Claims

Construction & Interpretation– Biotechnology patents

– Software patents

• PTO Learning Curve – Later caselaw may clarify

– PTO now examines MoDB as imbedded in software