B2B, B2C AND OTHER BUSINESS METHODS : TO BE OR NOT TO BE PATENT ELIGIBLE? International Chamber of Commerce

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1 B2B, B2C AND OTHER BUSINESS METHODS : TO BE OR NOT TO BE PATENT ELIGIBLE? PREPARED BY RICK D. NYDEGGER 1 International Chamber of Commerce THE FIFTH INTERNATIONAL SYMPOSIUM PROTECTING IP ASSETS IN THE NEW MILLENNIUM PARIS, FRANCE FEBRUARY 15 16, The author is Second Vice-President of the American Intellectual Property Law Association, a U.S. association of 11,000 members from both private and corporate practice, universities and government, whose interests lie in the area of patent, copyright, trademark, and other areas of intellectual property law. The author has also served as an Adjunct Professor of Law since 1988 for both the University of Utah College of Law, and for the BYU Law School. He is a founding shareholder and director of the Salt Lake City firm of Workman, Nydegger & Seeley, which specializes in the practice of intellectual property law. The opinions are those of the author and are not to be ascribed to any other person or entity. Copyright 2001 All Rights Reserved.

2 Introduction In the final report of the Advisory Commission on Patent Law Reform to the Secretary of Commerce (1992) 2 (hereinafter referred to as the Report ) the Commission found that the software industry was the fastest growing industry in the U.S. At the time of the Report, the software industry accounted for over $36.7 billion of the U.S. domestic gross product. As observed by the Commission (Report, p. 145): Besides being a major industry in its own right, software is a "driver technology" critical to many other industries. Advances in software technology drive technological developments in industries such as aerospace, chemicals and allied products, computers, construction, drugs and pharmaceuticals, electronic components and equipment, machine tools, motor vehicles, and telecommunications. The impact of software development in such industries illustrates the magnitude of importance of software development. Those observations would seem, if anything, to have taken on added force during the decade of the nineties, for in addition to the impact of the software industry on the development and advancement of technology as such, the internet has brought with it a revolution of it own. Consider, for example, that by the year 2000, over fifty percent of the U.S. population had access to the internet, and that by the year 2005, it is projected that the internet will rank fourth in overall spending of advertising dollars, ranking ahead of the Yellow Pages, magazine ads, and even cable TV. 3 Through the medium of the Internet, the software industry has joined technology with commerce. Where there was once a clear demarcation between the two, today technological methods of operating a computer network are often virtually indistinguishable from computerized methods of transacting business over the Internet. As a logical outgrowth of using the internet to electronically transact commerce, U.S. law and other major legal systems for intellectual property protection have struggled with the question of to what extent protection is needed for this new hybrid of both 2 See, e.g., the final report of the Advisory Commission, part XI. Protection of Computer-Related Inventions--A. Introduction and Overview. 3 The Washington Post, Aug. 24,

3 commerce and technology, now commonly referred to as e-commerce. 4 Many have criticized the need for traditional forms of protection, particularly patents, 5 questioning whether such protection is necessary to continued development of the software industry in general, and e-commerce technology in particular. Ultimately any answer to this question must be tested in terms of whether the granting of such protection will tend to support and strengthen, as a matter of policy, the continued growth and competitiveness of the software industry, the ability of the software industry to continue to play a vital role as a driver industry throughout other sectors of the economy, and the continued development of the internet, its supporting technology, and new applications for its utilization. In part I, this paper first looks at the question of what are business methods, and how did we come by them in patent law? Part II examines the current legal and administrative standards for determining patent eligibility of internet and e-commerce technology. Lastly, in part III, the admittedly more difficult question of whether patents for internet and e-commerce technology are defensible from the perspective of patent law policy is addressed. I What Are Business Methods And How Did We Come By Them In Patent Law? The question of patenting a so-called business method appears to have first arisen in U.S. jurisprudence in 1908, in a case decided in the U.S. Court of Appeals for the Second Circuit, Hotel Security Checking Co. v. Lorraine Co. 6 That case dealt with a method for cash-registering and account-checking. The Second Circuit ultimately struck the patent claims as invalid based on prior knowledge. After observing that the 4 As noted in Section I below, the term e-commerce more accurately describes the subject matter of socalled business method patents as used in the context of the Internet and electronic transactions carried out through the medium of the Internet. 5 See generally, Patenting Business Methods A White Paper of the American Intellectual Property Law Association (Sep. 2000) (hereinafter referred to as the AIPLA White Paper ). The AIPLA White Paper, while noting the criticisms and concerns voiced in opposition to the patenting of so-called business methods, makes an argument in support of patenting business methods, together with recommendations for strengthening the process by which such patents are examined by the USPTO F

4 patented technology would occur to anyone conversant with the business, the court noted by way of dictum that business methods abstracted from the means of carrying them out cannot be within the statutory requirement that patents be issued for new and useful art. 7 If one looks at the facts presented in Hotel Security and at what the court did as opposed to the court s dictum, it seems clear that the court was not concerned so much with whether the claimed method constituted eligible subject matter under the patent laws, but rather that the method was not novel. Nevertheless, the Second Circuit s dictum appears have to have been adopted and followed 8 with little or no question. Indeed at least until 1996, Hotel Security was cited in the Manual of Patent Examining Procedure as support for a so-called business method exception to statutory subject matter. 9 In 1996, following the landmark decision handed down two years earlier by the U.S. Court of Appeals for the Federal Circuit in In re Alappat, 10 the U.S. Patent and Trademark Office published new Examination Guidelines for Computer Related Inventions which stated: 11 Office personnel have had difficulty in properly treating claims directed to methods of doing business. Claims should not be categorized as methods of doing business. Instead such claims should be treated like any other process claims. Thereafter, the so-called business method exception to statutory categories of subject matter under 35 U.S.C. 101 was eliminated from the Manual of Patent Examining Procedure. 12 The business method exception to statutory subject matter was laid to rest with unmistakable finality by the Federal Circuit in a 1998 decision that was soon to become 7 Id. at See, e.g., Berardini v. Tocci, 190 F. 329 (C.C.S.D.N.Y. 1911); In re Wait, 24 U.S.P.Q. 88 (CCPA 1934); In re Patton, 127 F.2d 324 (CCPA 1942); Loew s Drive-in Theatres v. Park-in Theatres, 174 F.2d 547 (1 st Cir. 1949); In re Howard, 394 F.2d 869 (CCPA 1968). 9 Though seemingly within the category of process or method, a method of doing business can be rejected as not being within the statutory classes. MPEP (a) (5 th Ed. March 1994) (citations omitted) F.3d 1526 (1994) (en banc). The court held in Allapat that a computer program converting waveform data samples into pixel illumination data samples was not a disembodied mathematical concept but rather, as claimed, was directed to a specific machine (rasterizer) which produced a useful, concrete, and tangible result Fed.Reg. 7478, 7479 (1996) (emphasis added). 12 See MPEP (a) (1996). 4

5 widely known as opening the floodgate to patents for business methods, State Street Bank & Trust Co. v. Signature Financial Group, Inc. 13 State Street presented a case in which a claim for a data processing system for managing a financial services configuration of a portfolio established as a partnership had been invalidated by the District Court on grounds that the claim did not encompass statutory subject matter under 35 U.S.C The claim in question had been held by the District Court to be directed to a mathematical algorithm, or in the alternative, to a business method. In an opinion authored by the venerable Judge Rich, after holding that as properly construed the claim was directed to a machine and noting that the mathematical algorithm exception has little, if any, applicability to determining the presence of statutory subject matter, 14 the court addressed the business method exception, stating: As an alternative ground for invalidating the 056 patent under 101, the court relied on the judicially-created, so-called business method exception to statutory subject matter. We take this opportunity to lay this ill-conceived exception to rest. Since its inception, the business method exception has merely represented the application of some general, but no longer applicable legal principle, perhaps arising out of the requirement for invention which was eliminated by 103. Since the 1952 Patent Act, business methods have been, and should have been, subject to the same legal requirements for patentability as applied to any other process or method.... Application of this particular exception has always been preceded by a ruling based on some clearer concept of Title 35 or, more commonly, application of the abstract idea exception Even the case frequently cited as establishing the business method exception to statutory subject matter, Hotel Security Co. v. Lorraine Co., did not rely on the exception to strike the patent. In that case, the patent was found invalid for lack of novelty and invention, not because it was improper subject matter for a patent. 15 State Street s holding was quickly reaffirmed by the Federal Circuit in AT&T Corp. v. Excel Communications, Inc., 16 which applied the rule in State Street to method claims directed to a computer process for inserting data into a long distance call record in order to enable proper billing of the call F.3d 1368 (1998), cert. denied, U.S., 119 S.Ct. 851 (1999) F.3d at F.3d at (citations omitted and emphasis added) F.3d 1352 (1999). 5

6 Because it so firmly confirmed the demise of the business method exception to statutory subject matter, State Street is now commonly understood to have given rise to the patenting of business methods. 17 Moreover, because the particular business method at issue in State Street was a data processing system for managing a financial services configuration, business methods are now commonly equated with internet and e-commerce technology. 18 However, as the historical context of the so-called business method exception to statutory subject matter makes clear, that term did not arise in the context of software technology. It had its genesis in a mechanical field, namely, cash- registering and account-taking. 19 Indeed, as a concept of eligible subject matter under patent law, the term business method even today is not limited to internet and e-commerce technology. 20 Thus, strictly speaking, it is more accurate to refer to e-commerce as simply one type of business method rather than to use the term business method to refer to Internet and e-commerce technology in general. 17 Indeed, prior to 1986, there were 246 patents classified as business and management data processing patents (now contained in class 705 Data Processing: Financial, Business Practice, Management or Cost/Price Determination ). By the end of this year, that number is expected to exceed In 1998, the year State Street was decided, the number of patent filings for business methods was about 1300, and has rapidly grown over the last two years to the point that annual filings in the year 2000 were approximately 7000 in number. 18 For a brief sampling of so-called business method patents, see, for example, U.S. Patent 5,950,169 (Sep. 7, 1999) (system for managing insurance claim processing); U.S. Patent 5,918,217 (Jun. 29, 1999) (user interface for a financial advisory system); U.S. Patent 5,918,215 (Jun. 29, 1999) (content sales price accounting system); U.S. Patent 5,897,619 (Apr. 27, 1999) (farm management system); U.S. Patent 5,839,112 (Nov. 17, 1999) (method for displaying and selecting vehicle parts); U.S. Patent 5,832,456 (Nov. 3, 1998) (system for weather adapted, business performance forecasting); U.S. Patent 5,822,737 (Oct. 13, 1998) (on-line credit card processing by third parties); U.S. Patent 5, 794,210 (Aug. 11, 1998) ( attention brokerage system that provides awards to Web users willing to view on-line advertising); U.S. Patent 5,774,879 (June 30, 1998) (on-line award systems for Web purchases); U.S. Patent 5,724,424 (Mar. 3, 1998) (system for integrating on-line advertising and electronic purchasing processes); and U.S. Patent 5,557,518 (Sep. 17, 1996) (system for using intelligent software agents for electronic purchase transactions). 19 Hotel Security, supra note For example, methods of teaching athletic skills such as golf and swimming are classified by the USPTO in Class 434 (Education and Demonstration); methods of improving crop yields are classified in Class 47 (Plant Husbandry). Only computer-implemented processes related to e-commerce, the internet and data processing involving finance, business practices, management or cost/price determinations are classified in the USPTO s newly formed Business Methods class 705 (technically entitled Data Processing: Financial, Business Practice, Management, or Cost/Price Determination ). 6

7 II How Effective Is State Street As A Standard for Determining Patent Eligibility of Internet and E-commerce Technology? State Street has given us a rule of law for determining when a claimed e- commerce business method qualifies as eligible subject matter under 101, e.g., whether, as claimed, the invention is directed to a machine (e.g., system) or process (e.g., method) which produces, in the language of the case law, a useful, concrete, and tangible result. However, as is so often the case, statement of the rule is infinitely easier than its application to a specific set of facts. At the heart of the difficulty is the problem of properly interpreting the claim in question, in other words, determining in the first instance What did the applicant invent? In State Street Judge Rich looked to the claim language and the underlying language in the specification, and found a machine 21 that consisted of a CPU, a data 21 This is clearly evident from the way in which Judge Rich rewrote claim 1to include the bracketed corresponding structure found in the specification for each claim limitation: 1. A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising: (a) computer processor means [a personal computer including a CPU] for processing data; (b) storage means [a data disk] for storing data on a storage medium; (c) first means [an arithmetic logic circuit configured to prepare the data disk to magnetically store selected data] for initializing the storage medium; (d) second means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases or decreases based on specific input, allocate the results on a percentage basis, and store the output in a separate file] for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds, [sic, funds ] assets and for allocating the percentage share that each fund holds in the portfolio; (e) third means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases and decreases based on specific input, allocate the results on a percentage basis and store the output in a separate file] for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund; (f) fourth means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases and decreases based on specific input, allocate the results on a percentage basis and store the output in a separate file] for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and 7

8 disk, and configured logic circuits. In contrast, the lower court saw the invention not as a combination of CPU, data disk, and logic circuits, but rather as the series of computations performed by an otherwise conventional computer. On the one hand the rationale used by Judge Rich can be criticized as an overly simplistic way of claim interpretation which would lead in virtually every case to finding a statutory machine. However, a closer look at the nature of software and its relationship to computer hardware perhaps illustrate why that rationale in not necessarily flawed. From a strictly technical point of view, distinctions between "software" on the one hand and "hardware" on the other are often difficult to draw. This is because the underlying functionality provided by both "software" and "hardware" technologies is often very similar in terms of design considerations. For example, hardware may include a series of interconnected computer chips. Each chip in turn will include thousands of active electronic devices interconnected in complex microcircuits. There are often hundreds of thousands of such microcircuits on a single chip. Of course, none of these microcircuits (in particular their feature dimensions) can be seen with the naked eye, although they can be viewed with the aide of modern magnification techniques. Since there are so many interconnected electronic devices and microcircuits in such computer chips, it is common to describe the structure of the overall chip in functional terms using block diagrams and functional descriptions (e.g., as functionally grouped logic circuits configured to do certain things). Note the similarity between this type of "hardware" structure and its accompanying functional description and "software." Software is often stored in many thousands of magnetically polarized areas placed on a magnetic medium (or, in the case of an optical disc, reflective and non-reflective areas placed on the optical disc). These minute areas constitute in the aggregate the encoded instructions for operating a computer once the encoded instructions are downloaded into the computer s system memory from the magnetic medium or optical disc. Although they are too small to be seen with the (g) fifth means [an arithmetic logic circuit configured to retrieve information from specific files, calculate that information on an aggregate basis and store the output in a separate file] for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds. 8

9 naked eye, these encoded areas, particularly in the case of an optical disc, can be viewed using modern magnification techniques. Just as in the case of hardware, where the many thousands of small interconnected electronic devices and micro circuits cannot be easily understood except by reference to functional descriptions using block diagrams, so also software can typically be more easily comprehended through the use of high level functional descriptions. In either case, whether "hardware" or "software," it is the functional interrelationship between the interconnected microcircuits or the functional interrelationship between the steps performed by the encoded program instructions which provides useful application for the technology. This interrelationship between a computer program and computer hardware is the reason why persons skilled in the art can usually implement a desired series of functions in either hardware or software. Similarly, patent claims can be written as hardware claims and vice versa. This point can perhaps be better understood by reference to the claims shown in Appendix A for purposes of comparison. Parts of each claim which are identical are identified by italics, whereas parts of each claim which differ are identified by bold typeface. It can be quickly seen from this example that the only difference is that one claim sets forth the recited functional interrelationships in reference to "computer readable code means," whereas the other describes exactly the same functional interrelationships but does so in reference to discrete components of an electronic circuit means (e.g., a computer chip) interconnected to form the recited "means" for performing the specified functions. 22 The type of hardware versus software dichotomy which was evident in State Street was also at the heart of the disagreement between the majority and dissent in Alappat. 23 The majority viewed Alappat s invention as a rasterizer while the dissent saw the invention as converting one set of numbers (input waveform magnitude) into another set of numbers (illumination intensity data), e.g., a non-statutory abstract idea. 22 It may be argued that the hardware claim defines a transitory structure that changes moment to moment, but on the other hand even under that view, such a claim should not be precluded. Claims to intermediates are common in chemical practice, and should be no less allowable in the electronic arts. 23 Supra, note 10. 9

10 The problem at hand is well illustrated by yet one further case of considerable renown, In re Beauregard. 24 Beauregard s invention related to a method for utilizing fast polygon fill routines in a graphics display system. Computer graphic systems use certain routines to perform specific graphic tasks, such as drawing lines, circles, or arcs, as well as filling in the area defined by the boundaries of a polygon which is being displayed on a graphical raster display system. An important objective of Beauregard s invention was to optimize the processing time required to fill a polygon. Fulfilling that objective depended upon the particular shape of the polygon, and to that end, several different types of tests were used in Beauregard s method to determine if a given polygon fell within a particular class of polygon shapes which could be filled more quickly and efficiently using one type of routine rather than another. The claims on appeal were so-called "computer program product" claims directed to an article of manufacture which recited the basic combination of a "computer usable medium having computer readable code means embodied therein for causing a polygon... on a graphics display to be filled." Each claim recited as separate elements different "computer readable program code means" or steps for performing certain specified functions which carried out the desired technique of filling polygons on the graphics display. In a closely split decision, a seven member panel of the Board of Patent Appeals and Interferences held that the encoded program instructions that were functionally recited in the claims were analogous to printed matter that is functionally unrelated to the substrate, or computer readable medium, which carried the encoded program instructions, and as such were non-statutory. 25 Beauregard is the landmark case that never happened. After briefing had been completed, the USPTO Solicitor moved to remand the case back to the Patent Office for further consideration of the claims in light of the Federal Circuit s decision in In re Lowry, 26 (reversing the PTO Board s determination that Lowry s claim to a data structure was analogous to printed matter and that the functionally defined features of the claimed data elements deserved no patentable weight in the absence of any functional relationship between the data elements and the medium or substrate itself). After 24 Appeal No (Fed. Cir. 1995). 25 Ex parte Beauregard, No , slip op. at 5 (1993) F.3d 1579 (1994). 10

11 remand, the 101 rejections in Beauregard were withdrawn, and the USPTO issued new Examination Guidelines for Computer Related Inventions, 27 which acknowledged that such claims were not to be per se excluded as non-statutory, but were to be analyzed for statutory subject matter like other types of computer-related claims directed to systems or methods. 28 The common thread in terms of the fundamental problem faced by the court is the same in each of the Alappat, Lowry, Beauregard and State Street cases, namely, whether the court interpreted the claims at issue as representing something more than the mere processing of the underlying data. In Alappat the court ultimately concluded the claims were directed to a rasterizer, in Lowry to a memory device with a stored data structure, in Beauregard to a disk or computer readable medium with stored program instructions for generating computer graphics, and in State Street to a machine which included in combination a CPU, a data disk and logic circuits configured for implementing certain financial transaction allocations. To state the outcome in each case merely highlights the difficulty of applying the test as to whether what was being claimed was more in the nature of a statutory article (e.g., rasterizer, memory device, storage medium, machine, etc.) as opposed to the mere disembodied processing of computer instructions (characterized by the lower court or tribunal in each case, as either a mathematical algorithm (Alappat), printed matter (Lowry and Beauregard), or business method (State Street) respectively). This very difficulty appears to be what ultimately has led the courts to throw in the towel with respect to the kind of artificial line drawing required by categorizing something as a mathematical algorithm, 29 mental steps, 30 printed matter, 31 or business method Supra note U.S. Patent and Trademark 1996 Examination Guidelines for Computer Related Inventions, 61 Fed.Reg The mathematical algorithm exception to statutory subject matter essentially met its demise in State Street, 149 F.3d at 1374 ( After Diehr and Chakrabarty, the Freeman-Walter-Abele [mathematical algorithm] test has little, if any applicability to determining the presence of statutory subject ). 30 The mental steps doctrine was effectively laid to rest relatively early in In re Musgrave, 431 F.2d 882, 893 (C.C.P.A. 1970) (reversing a rejection by the Board under 101 and refusing to extend the mental steps doctrine to claims directed to a data processing method for obtaining seismograms used to precisely delineate subsurface formations, and emphasizing instead that all that is necessary is that the claims, as a whole, define a process that is in the technological arts ). 11

12 Each of these now defunct exceptions to statutory subject matter tended to rely more on the nature of what was being claimed and less on what the particular result was of the claimed invention. As the foregoing comparison of hardware and software design makes clear, however, whether one relies on a particular hardware as opposed to software design, is often less important than what is functionally accomplished by the design. Stated in other terms, and as noted by Judge Rich in State Street, 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. 33 (emphasis added). The court s focus on tangible results, and practical application as representative of the essential characteristics of the invention is more consistent with the reality of how software technology is implemented, as noted. The unfortunate aspect of the court s opinion is the troubling ambiguity introduced by the court s reference to practical utility, practical application, and useful, concrete, and tangible results, which leads one to wonder what the differences are between those various terms, if any, as well as whether practical utility for purposes of determining eligibility of subject matter is the same as practical utility for purposes of determining utility in the classic sense as a separate requirement of patentability. Nevertheless, notwithstanding these criticisms, the State Street test is in the end more consistent with the true nature of software technology, since it intrinsically tends to focus attention on the functionality performed by the software. 31 Printed matter effectively came to an end as an exception to statutory subject matter in Lowry, supra note 24 (noting that the Board had again erroneously extended a printed matter rejection under [ 101] to a new field... which involves information stored in a memory ). 32 State Street, 149 F.3d at 1375 ( We take this opportunity to lay this ill-conceived [business method] exception to rest. ) F.3d at Judge Rich s use of the term practical utility in this statement is unfortunate, since by doing so, the court appears to collapse together what has long been considered to be two separate requirements under 101, eligibility and utility. This is something of a curiosity, since on the other hand the court, and Judge Rich in particular, has steadfastly resisted any attempt to collapse analysis under the statutory term new of 101 into the requirement for determining eligibility. Indeed, in State Street, 149 F.3d at 1372 n. 2, Judge Rich, citing an opinion which he authored while on the C.C.P.A. (the Federal Circuit s predecessor court), In re Bergy, 596 F.2d 952, 969 (1979), pointedly stated Notwithstanding the words new and useful in 101, the invention is not examined under that statute for novelty because that is not the statutory scheme of things or the long-established administrative practice. One is left to wonder, on the one hand, why the apparent willingness to merge the analysis of patent eligibility with utility while on the other, adamantly holding to strict separation of new from the patent eligibility question? 12

13 The Examination Guidelines for Computer Related Inventions 34 (hereinafter the Guidelines ) which were adopted shortly after Beauregard and prior to the decision in State Street, continue to provide helpful guidance and perhaps the most workable framework for determining patent eligibility for Internet and e-commerce business methods and other types of software-related inventions. The Guidelines in many ways foreshadowed the direction that would ultimately be taken by the Federal Circuit in State Street by eliminating the business method exception, by instructing Examiners to curtail reliance in the Freeman-Walter-Abele test, and by looking instead to the practical application of the claimed invention. In reality this is not much different from the ultimate inquiry in State Street in terms of the search for concrete, tangible results. Both require focus on what the computer-implemented process or system is doing in a functional sense. The real difference between in the Guidelines and State Street is that the Guidelines provide further specific, detailed guidance on how to make that determination. In particular, the Guidelines adopt the helpful mechanism of identifying whether a claimed invention falls into a safe harbor. 35 As originally formulated, these safe harbors were designed to assist Examiners to identify statutory subject matter in claims to the extent the claims defined sufficient post-computer or sufficient pre-computer activity. Helpful examples of each are given in the Guidelines. 36 In short, notwithstanding some of the shortcomings of the State Street formulation, the Guidelines Fed.Reg (Feb. 28, 1996), and reprinted in the current Manual of Patent Examining Procedure 2106 (7 th Ed., Rev. 1, Feb. 2000). 35 Safe harbors (e.g., kinds of post computer and pre-computer activity which help to identify statutory subject matter in claims) as originally formulated prior to State Street are defined in the MPEP at 2106(B)(2)(b)(i) (7 th Ed., Rev. 1, Feb. 2000). 36 As an example of post computer activity the Guidelines describe A method of controlling a mechanical robot which relies upon storing data in a computer that represents various types of mechanical movements of the robot, using a computer processor to calculate positioning of the robot in relation to given tasks to be performed by the robot, and controlling the robot s movement and position based on the position. This type of safe harbor in effect exists where the claims include physical acts to be performed outside the computer, independent of and following the processing of data performed by the computer. As an example of pre computer activity the Guidelines describe A method of using a computer processor to analyze electrical signals and data representative of human cardiac activity by converting the signals to time segments, applying the time segments in reverse order to a high pass filter means, and using the computer processor to compare the value to a predetermined value. In this example, the Guidelines explain that the data is an intangible representation (e.g., transformation ) of human cardiac activity, a physical activity, which produces real world value in predicting vulnerability to ventricular tachycardia immediately after a heart attack. 13

14 adopted by the USPTO make up for those shortcomings with the specific detail and concrete examples provided Currently, the greatest difficulty under the Guidelines is how to take the rule of State Street into account given the potential ambiguities of the opinion as noted above. Following State Street and AT&T, the Guidelines were revised to include discussion of those cases. MPEP 2106(B)(2)(b)(ii) (7 th Ed., Rev.1, Feb. 2000). The current Guidelines treat State Street s useful, concrete, tangible results formulation as a separate safe harbor but then go on to state that A claim is limited to a practical application when the method, as claimed, produces a concrete, tangible and useful result.... Id. Presumably, this boils down to meaning that State Street s useful, concrete, tangible results is simply redundant of the practical application criteria already set out in some detail in the preceding portions of the Guidelines. Further, the Guidelines make no mention of how to take into account the direction set out in State Street that questions of patent eligibility should focus on the essential characteristics of the subject matter, in particular, its practical utility. Here again, presumably the USPTO will simply continue to treat utility as it always has, namely, a separate requirement for patentability in addition to 101 statutory subject matter, and 102 and 103 novelty and non-obviousness. 14

15 III Are Patents for Internet and E-commerce Technology Defensible From the Perspective of Patent Law Policy? Notwithstanding the much more hospitable climate which the Guidelines and State Street have created with respect to patent eligibility of Internet and e-commerce type business methods, these developments in general and State Street in particular, have not been without its critics in regard to the underlying policy questions presented. 38 This is not a new debate for those familiar with the developments in the patent law surrounding software. In 1965, President Johnson, by executive order, commissioned a comprehensive study of the U.S. patent system. 39 The President s Commission was comprised of ten members of the public and representatives of four government agencies, the Department of Commerce, the Department of Defense, the Small Business Administration, and the National Science Foundation. Edward J. Brenner, then Commissioner of the Patent and Trademark Office, participated as designee of the Secretary of Commerce. Official observers were also sent from the office of the Secretary of State and the Office of Science and Technology. The Commission held thirteen meetings, each lasting from one to four days, and produced its final report to the President on Nov. 17, As noted by one commentator: [There is] good reason to doubt whether such innovations [e.g., business methods ] lie within the useful arts, the constitutional stricture concerning patentable subject matter. The sparse materials we possess regarding this term suggests that the Framers were unlikely to see every created thing as encompassed within it. They 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. The Framers were also likely aware of the English experience leading to the Statute of Monopolies.... In a passage especially worthy of consideration..., the Court of Customs and Patent Appeals explained that the inclusion of the patent and copyright clause in the Constitution doubtlessly was due to the fact that 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. In re Shao Wen Yuan, 188 F.2d 377, 380 (CCPA 1951) (emphasis added).... Whether the State Street panel has respected the policy concerns that animated the Statute of Monopolies remains questionable. Thomas, John R., The Patenting of the Liberal Professions, 40 Boston College L. Rev. 1139, 1148 (1999) (bracketed statements added); but cf. the comments of Judge Newman in Alappat, see infra at note Exec. Order No. 11,215, 30 Fed.Reg

16 Noting in its report that the patent law had not seen any basic change in some 130 years, the Commission recommended a number of sweeping changes, driven by what the Commission saw as fundamental changes resulting from a largely agricultural economy in the 1800 s to an exploding technological economy. In addition to the recommended changes to the basic patent law, the Commission also took occasion to make recommendations as to the advisability of granting patents for software: Uncertainty now exists as to whether the statute permits a valid patent to be granted on programs. Direct attempts to patent programs have been rejected on the ground of non-statutory subject matter. Indirect attempts to obtain patents and avoid the rejection, by drafting claims as a process, or a machine or components thereof programmed in a given manner, rather than as a program itself, have confused the issue further and should not be permitted. The Patent Office now cannot examine applications for programs because of the lack of a classification technique and the requisite search files. Even if these were available, reliable searches would not be feasible or economic because of the tremendous volume of prior art being generated. Without this search, the patenting of programs would be tantamount to mere registration and the presumption of validity would be all but nonexistent. It is noted that the creation of programs has undergone substantial and satisfactory growth in the absence of patent protection and that copyright protection for programs is presently available. 40 While the Commission s recommendations in its Report were published and debated, for the most part they were not adopted. Indeed, subsequent events have demonstrated that the Commission was either simply wrong, or that the problems noted were largely later resolved. On the question of uncertainty in the law, as noted in the preceding parts of this paper, that question is largely moot now, irrespective of whether one agrees or disagrees with the outcome. On the question of whether the USPTO was capable of developing an adequate classification system for software technology, subsequent events have shown that the Commission was simply wrong. The Commission s third point continues to be troublesome, and has been and is the subject of ongoing effort and debate even today, 41 although often overlooked is the related of Report of the President s Commission on the Patent System at p See, for example, the recent USPTO Business Method Initiative: An Action Plan announced on Mar. 29, 2000 (available at the USPTO Web site at This Initiative describes a number of things the USPTO is doing to improve the quality of its examination process for Business Methods, including ways of improving its search expertise and the scope of searching that is conducted, as well as several level of substantive review of the outcome of the examination. 16

17 question of whether this problem is unique to Internet and e-commerce patents as opposed to those granted in other arts. The Commission s last point is likewise the subject of ongoing debate, although now the argument centers on the whether granting patents for Internet and e-commerce business methods is necessary or desirable for continued growth and development of the Internet and its supporting technologies. Again, the oft-overlooked question here is whether this is any different for Internet and e- commerce technologies than it is for biotechnology or other arts. The debate resurfaced in 1976, but this time in the context of the copyright laws, specifically in connection with the National Commission on New Technological Uses of Copyrighted Works (CONTU) created by Congress to evaluate the adequacy of copyright law regarding computer-based information systems. In CONTU s Final Report 42 once again several problems were identified in relation to patenting of software. Key among those was uncertainty in the state of the law 43 (essentially the same point raised in the 1966 Report of the President s Commission on the Patent System). 44 As already noted, this is now simply a moot point for the most part. The debate surfaced yet again in the context of public hearings held by the USPTO during the winter of 1994 in San Jose and Washington, D.C., and again at the USPTO Business Methods Roundtable hearings held last summer in Washington, D.C. These hearing were quite similar, with the exception that at the Business Method Roundtable comments were taken only from the invited participants, not from the audience in general, whereas the 1994 hearings permitted testimony from essentially anyone who requested to speak in advance of the hearings. 45 At both the 1994 and the Roundtable hearings the most common themes were essentially the same points raised by the 1966 President s Commission, namely, inability of the USPTO to adequately do its job in searching the prior art (in other words, the criticism voiced was that the USPTO Official Gazette (Jul. 31, 1978). 43 Final Report of CONTU at p. 8 n The other problems noted by the Software Subcommittee were not really problems at all, rather, they are more accurately reflections on the differences between the nature of the protection afforded by patents (e.g., protection for the underlying idea as it were) as opposed to copyrights (e.g., protection for expression of the idea), and the differences in the requirements for obtaining such protection (requirements of novelty and non-obviousness, for example, in the case of patents). Final Report at The author was a participant in both the 1994 hearings (he gave testimony at the Washington, D.C. hearings), and was also invited to be on the Roundtable as a panelist at the Business Method Roundtable last summer. 17

18 was issuing patents that were far too broad and not warranted given the prior art). 46 In effect, the underlying problem on this point has to do with questions as to how accessible the prior art is or is not for Internet, e-commerce and indeed software technology in general during the examination process, and how adequately the Examiners are conducting the examination process prior to issuance of patents in this area (e.g., how well are they applying the statutory criteria of 102 and 103). Lastly, and to some extent as an extension of the foregoing criticism, the argument was once again raised that patent protection for e-commerce and Internet technologies is not needed and in fact hinders its development. As already noted, on the question of adequacy of examination procedures, the USPTO has taken the initiative to improve the quality of examination for business method patents. Among those initiatives are the hiring of more examiners, with particular background and expertise in the financial commercial applications presented by e-commerce technology, the hiring of experts to assist in searching this technology, the expansion of the non-patent databases which are accessible for search, increasing management and supervisory resources, and second level review procedures by the most experienced examiners in the group. 47 The USPTO has also worked diligently to establish workable guidelines and training examples that will provide meaningful assistance to examiners as they carry out the responsibility of examination Gregory Ahronian is one of the most vocal critics of the USPTO s search capability. He publishes an e- mail newsletter called the Internet Patent News Service, and maintains a Web site which contains, among other things, information which is claimed to be helpful in invalidating software patents. The obvious flaw in the argument often advanced by critics such a Ahronian and others that software patents are bad (based on the perception of such critics that the USPTO has issued patents which are alleged to be too broad) is that this of course has little to do with whether, as a matter of policy, Internet, e-commerce and software in general should be ineligible for patent protection in the first instance. The stated argument of such critics as Ahronian is more properly directed to questions of novelty and non-obviousness under 102 and 103. This was in fact noted by Judge Rich in State Street: Whether the patent s claims are too broad to be patentable is not to be judged under 101, but rather under 102, 103 and F.3d at Thus, criticism of the USPTO for issuing software and business method patents is in reality misdirected. Given Supreme Court and Federal Circuit precedent, whether to examine such patents is not discretionary with the USPTO. The USPTO, as a federal agency, is required to follow the decisions of the court. Thus, the USPTO s efforts to improve the quality of the examination process represents a responsible effort to comply with the law as handed down by the courts. 47 USPTO Business Method Initiative: An Action Plan announced on Mar. 29, 2000, supra note Both the Guidelines and the Business Method Initiatives contain detailed working examples as to claims and how to analyze them, as well as how to make proper rejections under not only 101, but also 102 and

19 Setting aside for the moment the question of adequacy of examination procedures for Internet and e-commerce technologies, the remaining policy argument which deserves attention is that patents are not needed and indeed hinder growth and development of those technologies. This is of course no longer a matter on which the USPTO, nor the courts, in light of State Street and other decisional law, have any real room for debate. If it is to be debated at all, it is a matter for Congressional consideration. Moreover, it is unlikely that such a debate will soon, if ever, be satisfactorily concluded. There is little if any real empirical economic evidence which conclusively points one way or the other in terms of whether patents actually do what the Framers of the Constitution intended, namely, promote the progress of... the useful arts. Those who argue that they do typically cite statistics as to the size of investment which industry makes in research and development, and the need for patents in order to protect that investment. That argument certainly holds true as much for internet and e-commerce technology as for other kinds of technologies such as pharmaceuticals, biotechnology, manufacturing technologies and the like. However, on the other side of the argument, if the profit motive is strong enough, it seems logical to expect that investment in R & D will be made whether or not patents are obtainable. Indeed, one can find strong examples suggesting that to be the case. Consider, for example, that from 1985 through 1992, Microsoft obtained on average six patents per year for its software technology. Yet during that time, it was fast becoming a dominant player in the software industry. One could certainly argue from this example that the 1966 President s Commission and the 1976 CONTU findings seemed correct: patents are not needed in this technology. Yet, protecting development of market share, and dollars invested in R & D are not necessarily the only motives for obtaining patents. Consider further that patents are assets, and like any other assets they add to bottom line value of a company, as evidenced as much as anywhere in the IPO markets for emerging companies. Indeed, even in the case of Microsoft, which arguably had no need for patents in terms of developing and holding its market share, nor in terms of incentive to develop its products, Microsoft has 19

20 apparently attached significant value to the role that patents play in its strategic plan, since as of Jan. 2000, it held some 1150 issued patents in its portfolio. 49 As a final point, where, as noted above, there are equally conflicting arguments on the question of whether eligibility of patent protection for a technology is or is not needed for the growth and development of the technology, one should give careful consideration to the proper role which a statute such as 101 ought to play within the overall framework of patent law. In other words, in a certain sense should the burden of proof be on a requirement to show why a given class of technology such as Internet and e- commerce technology should be included within the reach of 101, or should the burden of proof so to speak be on a requirement to show why such technology is not within the embrace of 101? In its now famous pronouncement concerning the role of 101, the Supreme Court stated that Congress intended that section to embrace anything under the sun that is made by man. 50 Section 101 is thus, for reasons rooted in policy, primarily intended to be inclusive, not exclusive, of subject matter. In its most recent explication of 101, the Supreme Court made it clear that excluded subject matter was narrowly circumscribed and limited to laws of nature, natural phenomena, and abstract ideas. As aptly explained by Judge Newman in her concurring opinion in Alappat: 51 Phenomena of nature and abstract scientific and mathematical principles have always been excluded from the patent system. Some have justified this exclusion simply on the ground of lack of utility ; some on the ground of lack of novelty ; and some on the ground that laws of nature, albeit newly discovered, are the heritage of humankind. On whatever theory, the unpatentability of the principle does not defeat patentability of its practical application. (emphasis added). 49 Some have speculated that the dramatic increase in Microsoft s patent portfolio is directly related to Stac Electronic s patent infringement suit against Microsoft, filed in 1993, and which resulted about a year later in a jury verdict of $120 million against Microsoft. Stac Electronic v. Microsoft Corp., No (C.D. Cal. Jan. 23, 1994). It was shortly after the jury s verdict that there was a quantum leap in the number of patents issuing to Microsoft. That speculation is belied, however, by the fact that average pendency for most U.S. applications at that time was on the order of 24 months, meaning that Microsoft had obviously begun significantly increasing the number of its patent filings per year well prior to initiation of the Stac case. 50 Diamond v. Chakrabarty, 447 U.S. 303, S.Ct (1980) F.3d at