During the last decade, the world of patentable innovations has expanded to include what are now known as “business methods” patents. While there is an argument that business methods have always been considered at least theoretically patentable in the U.S., as a practical matter, this type of patent has only gained popularity after the seminal State Street Bank Case, where the Court of Appeals for the Federal Circuit (C.A.F.C.) upheld the patentability of a method for automatic calculation of mutual fund prices using software. Software patents and business method patents are not necessarily identical, but both sometimes come close to failing the 35 U.S.C. § 101 requirement that all patents have “utility.” This requirement is often understood to mean that an invention must create a useful, physical transformation in the real world. For this reason, abstract mathematical equations are not patentable, where a machine that operates using those principles could be.

Another requirement for utility is that the invention be concrete. For example, a set of steps that a person could follow using her own knowledge and experience would not be patentable, because her personal knowledge is not considered a concrete invention such as a machine or device. However, if a piece of software performs the same steps and replaces the person’s subjective mental processes, that may be enough to qualify as a concrete invention, even if there is no practical difference in the end result. (see Diamond v. Diehr).

In the last decade, the utility requirement has drawn closer and closer to allowing business methods to gain patent protection, despite a great deal of concern that these patents are too broad and contribute little to the advancement of knowledge and commerce. However, the era of business method patents may be coming to an end, or at the very least entering an era of new restrictions. The C.A.F.C. has recently decided to hear the case of In re Bilski, en banc as discussed on CNet.com. Bilski seems squarely aimed at addressing utility, and while the C.A.F.C. has yet to issue a ruling, it appears that the court is interested in at least amending the rules for inovations that are considered patentable. The issues the court wishes to consider indicate that the utility requirement for patentabilty is front and center for review.

At present, we can only prognosticate on the C.A.F.C.’s holding. However, here are a few recommendations that might help clear up some of the controversy surrounding business method patents. First, software patents should be clearly separated from business method patents. A piece of software in the abstract is certainly not patentable, but denying all patents to inventions that use software would be akin to denying patentability to any device that uses steel if steel were somehow considered a controversial building material. Software is merely a component that can be part of an invention, as long as it does not act as an obvious substitute for a human’s (non-patentable) mental processes. This reform may reduce the number of patents on software inventions, but fewer and higher quality patents will go a long way to quelling the controversy that surrounds these patents.

Secondly, after separating software itself from business methods, the next question is what protection, if any, a “business method” ought to receive. The problem with business method patents is slightly more philosophical. It may very well be that there is a business method in existence that could meet the requirements of patentability, and also be described narrowly enough to avoid becoming a license to engage in litigation for the sake of litigation. However, this platonic ideal may very well be too difficult to achieve in the real world. Unlike a concrete invention, a business method is often far too vague and requires too much subjective analysis to determine whether or not an infringement has occurred. This relates directly to the concreteness requirement of utility, and also touches on the patentability requirement that an invention be non-obvious to others skilled in the art. Given the lackluster results of business method patents, Bilski may spur the C.A.F.C. to institute severe restrictions on the patentable subject matter of business method patents, while leaving the theoretical door open for a new class of business method patents that will be far less broad, but also far less controversial.

C.A.F.C. order for en banc review: In re Bilski

- Chuck Fox

3 Responses to In re Bilski: An New Standard for Business Method and Software Patents?

  1. martinzwilling says:

    This is a good article on software patent issues. I’m convinced that it’s time to eliminate the software patent process, and simply use the existing copyright and trademark protection for software. See my article on blog.startupprofessionals.com titled “Software Patents: Time for a Change” for specifics.

    Marty Zwilling, Founder & CEO, Startup Professionals, Inc.

  2. Ricky says:

    Hey Marc- I just read that story on Politico and it is wild. This company is using BMPs like WMDs to threaten financial institutions. They have already made financial giant PNC settle outside of court and now they have their sights set on 50 other banks. The worst part is that they didn’t even create the BMP they patented. I completely agree, we need a new federal policy for patents that encourages innovation because of current policy stifles creativity.

  3. Marc says:

    I read the perfect complement to this posting last week on Politico.
    http://www.politico.com/news/stories/0608/10808.html

    It outlines the mess created by a couple of business method patents owned by DataTreasury, a basically pure patent troll that is litigating the heck out of the financial industry. It is a very potent illustration of the practical difficulties involved in BMPs and in legislating against patent trolls. Congress has preliminarily considered erasing financial institutions’ liability to DataTreasury, and to me this seems like the best policy solution by far, until the judiciary takes care of BMPs.