Software and Business Method Patents in the United States

Gregory J. KirschAtlanta, Georgia U.S.A.

Telephone: +1-678-420-9366gkirsch@needlerosenberg.com

Software Patents

• Case law well-settled in U.S.• Early cases – a bit confused

• Diamond v. Diehr (S.Ct. 1981)

• More recent case law• Software is patentable• A computer is simply a programmable

machine

Business Method Patents(A brief history)

• What is a “business method”?• Pre-1998

• U.S. Patent Office has been issuing “business method” patents for hundreds of years

• 1799 – Perkins – “Detecting Counterfeit Notes”• 1815 – Kneass – “Mode of Preventing

Counterfeiting”• 1790-1840 – 41 financial patents granted

• bank notes, bills of credit, bills of exchange, check blanks, detecting and preventing counterfeiting, coin counting, interest calculation tables, and lotteries

Business Method Patents(A brief history)

• Merrill Lynch v. Paine Webber (1983)• ML’s patent on the Cash Management

Account (CMA)• U.S. Patent 4,346,442• Brokerage, money market and credit card/checking

account combined into one• Patentable subject matter upheld• Case settled shortly thereafter

Business Method Patents(A brief history)

• State Street Bank v. Signature Financial (Fed. Cir 1998)• Hub and spoke model for tax benefit

• Business method patentable if useful, concrete and tangible result

• Court: not new law• There never was a “business method

exception”

Business Method Patents(A brief history)

• AT&T v. Excel (1999)• Claim 1

• … generating a message record for an interexchange call between an originating subscriber and a terminating subscriber, and

• including, in said message record, a primary interexchange carrier (PIC) indicator having a value which is a function of whether or not the interexchange carrier associated with said terminating subscriber is a predetermined one of said interexchange carriers.

• Focus not on whether “mathematical algorithm at work?”

• Rather, “whether the algorithm-containing invention, as a whole, produces a tangible, useful result.”

Business Method Patents(Recent Trends)

• Post State Street (1998)• “the floodgates opened”

• Many credit State Street

• Other factors?• Growth of Internet, and new business

methods that followed?• Perhaps State Street simply legitimized a

trend that already existed?

Patent Filing TrendsClass 705

(Data Processing: Financial, Business Practice, Management, Or Cost/Price Determination)

0100020003000400050006000700080009000

Filings

1997 1998 1999 2000 2001 2002 2003 2004

Year

Source: U.S. Patent and Trademark Office

Patent Assignees 1999-2004(Class 705)

IBM

Pitney-Bowes

FujitsuNCR

Hitachi

Walker Digital

Citibank

Microsoft

AT&T

Matsushita

Source: U.S. Patent and Trademark Office

Recent Enforcement Trends

• More patent litigation• Patent holding company model

• Company solely in the patent enforcement business

• All types of patents (including business methods)• Buying old or inactive patent portfolios, such as

business method patents from Internet boom• Can’t usually be counter-sued, since they aren’t by

definition infringing• “Patent Trolls”

Recent Enforcement Trends• Patent Holding Companies

• Acacia• Publicly traded• Large acquired patent portfolio• Large war chest• Quite aggressive

• Intellectual Ventures• Nathan Myhrvold (former CTO of

Microsoft)• Invention house• $350M war chest

• More and more others

Recent Enforcement Trends

• Patent Holding Companies• NTP v. RIM

• NTP formed by inventor and patent attorney• Patents cover coupling of wireless e-mail devices

to traditional e-mail systems• NTP has largely prevailed in litigation, yet USPTO

has rejected many of the claims• Injunction hearing set for February 24, 2006• High-stakes for both companies• $450M $1B?

Recent Enforcement Trends

• 35 U.S.C. 271(f)• Whoever without authority supplies … in or

from the United States … the components of a patented invention, where such components are uncombined … to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

Recent Enforcement Trends• 35 U.S.C. 271(f)

• Eolas v. Microsoft, 399 F.3d 1325 (Fed. Cir. 2005)• Export of “master disks” containing infringing software for

inclusion into a foreign-made infringing product constitutes the “supply” of a “component”, under § 271(f)

• AT&T v. Microsoft, Appeal No. 04-1285 (Fed. Cir. July 13, 2005)

• Foreign-made copies of the master disks were “components” of the patented invention “supplied from” the United States under § 271(f), even though the copying occurred entirely outside the United States

Software and Business Method Patents

• Arguments against such patents• Lack of prior art• Lack of Patent Office expertise• Unnecessary – innovation will occur without

patents• High transaction (defense) costs• Many patented methods are simply

automated versions of old manual processes

Software and Business Method Patents

• Rebuttal

• Availability of prior art getting better• Examination expertise getting better• Development costs high in a complex world

• Patents are needed to recoup such investments.• Transaction costs high in other technology areas as

well• A cost of doing business

• Automated business methods often can do what manual processes can’t

• Non-obviousness hurdle must still be overcome.

Software and Business Method Patents

• Similar to arguments against software patents years ago• However, no evidence of widespread

harm to software industry• Patents have become part of business

plans for software companies• Many innovative software companies

have been built around strong patent portfolios

Studies• Bronwyn Hall, “Business Method Patents,

Innovation and Policy”, (2003) http://repositories.cdlib.org/iber/econ/E03-331• Patent system provides incentives for

innovations with high development costs• Less beneficial for incremental innovations

that must be combined• Business methods are more likely to fall into

latter category• No definitive conclusion

Studies• Allison and Tiller, “The Business Method Patent

Myth,” 18 Berk Tech. L.J. 987, 1003-04 (Fall 2003)http://btlj.boalt.org/data/articles/18-4_fall-2003_2-allison.pdf• Internet business method patents no worse

than patents in other fields, and possibly better

• Chasm between perception and reality• Efforts to single out business method patents

for special treatment not sound

Recent Legal Developments(Are major changes imminent?)

• Ex Parte Lundgren• U.S. Patent Office Board of Appeals• No more “technical arts” requirement

• US Patent Office Interim Examination Guidelines• Published by U.S. Patent Office in late 2005• Generally affirmed State Street• Invention must be useful, concrete, tangible• What does this mean?

• Laboratory Corp. v. Metabolite• On appeal to the US Supreme Court• Not “business method” per se, but relevant• Claim directed to “scientific principle”

• assaying a body fluid, and correlating an elevated level of total homocysteine in the body fluid with a deficiency of cobalamin or folate

• Will the Supreme Court change anything (everything)?

Ongoing Challenges

• Definitions• Useful?• Concrete?• Tangible?

• Prior art• Very difficult problem• Most relevant prior art isn’t published, or is

difficult to obtain or extract• No clear answers

Ongoing Challenges

• Expertise at U.S.Patent Office• Ability to search for prior art• Understanding of business processes• Situation has improved

• Better training• Second level of review

• Has pendulum swung too far?• Its become quite difficult to have business

method patents granted

Ongoing Challenges

• Term of patents• Is (20-x) years too long for software and

business method patents?• How do business methods/software compare to

the often-cited pharmaceutical innovations?

• Do we need different terms for different types of technologies

• A nightmare to implement• Would this promote gamesmanship?• Do longer terms really hurt anybody?

The Future

• Potential Patent Reform• Possible changes directly affecting

Software/BM patents• Post grant opposition• Mandatory publication after 18 months• First-to-invent First inventor to file• Elimination of best mode requirement

• Other possible changes• Limits on continuation applications• Limits on number of claims

The Future

• U.S. Patent Office prior art initiatives• Open source initiative

• Organize open source software into different searchable categories

• Make available to patent examiners and the public

• Patent quality index

“… everything that can be invented has been invented.”

Charles H. DuellU.S. Patent Commissioner

1899

Software and Business Method Patents in the United States

Atlanta, GeorgiaTelephone: (678) 420-9366

gkirsch@needlerosenberg.com