From PLI`s Course Handbook 2nd Annual Patent Law Institute

From PLI’s Course Handbook
2nd Annual Patent Law Institute
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Kimberly N. Van Voorhis
Morrison & Foerster LLP
To the extent any opinions are offered
in this article, they are those of the author,
not Morrison & Foerster, LLP.
The Business Method Patent 360: Have They Come Full Circle (or Did They Never
Kimberly N. Van Voorhis1
With the Federal Circuit taking a closer look at statutory subject matter under 35 U.S.C. §
101 and the Supreme Court adopting what some consider to be an expansive view of
obviousness under Section 103, one may wonder whether there is anything left for business
method patents. The law is too unsettled at this point to answer that question, but a close
examination of what courts are focusing on today and how the Patent Office is reacting to these
patents may help practitioners shape the business method patents of tomorrow.
A Short History of Business Method Patents in The Courts
A brief review of key business method patent cases provides useful background for
understanding how the courts view business method patents, including whether the judicial
mindset about these patents has changed over time.
Hotel Security Checking Co. v. Lorraine, 160 F.467 (2d Cir. 1908)
The patent in this case concerned a “method and means for cash-registering and accountchecking,” and was designed to prevent fraud by waiters/cashiers in restaurants. The patent was
challenged as not new or useful. Although the court recognized that abstract ideas are not
patentable, the decision appeared to rest more on the grounds that the invention was not novel.
In particular, the Court held that the physical means used to describe the invention (use of sheets
and slips of paper with headings to categorize various facts) presented no patentable
improvements over the prior art. The Court went on to hold that “the elaborations and
improvements in the patent belong to the evolution of the business of restaurant and hotel
keeping, and would . . . occur to any clever and ingenious person familiar with the needs of that
Until 1996, Hotel Security was cited in the Manual of Patent Examining Procedures
(“MPEP”) to support the guideline that “a method of doing business can be rejected as not being
within the statutory classes.”3
Gottschalk v. Benson, 409 U.S. 63 (1972)
Writing for the Supreme Court, Justice Douglas took a dim view of patents directed to a
data processing method. The patent in Benson claimed a method for converting binary-coded
decimal numbers into pure binary numerals. This opinion is significant in large part because
many business method patents today are implemented through computers. Benson is also
frequently cited because it explains many of the fundamental principles that guide courts on
computer-related business method patent issues.
In Benson, the method claims were not tied to any particular apparatus or end use, but
only for use in a general purpose digital computer. The Court recognized that a principle,
fundamental truth, phenomena of nature, or idea (like this algorithm) is not patentable and that
“‘[i]f there is to be invention from such a discovery, it must come from the application of the law
of nature to a new and useful end.’”4 Whether a process is “new and useful” could be
determined by looking at whether the process transformed an article to a different state or thing
or whether it was implemented in a machine.5 However, the Court was careful to point out that
its holding does not mean that “no process patent could ever qualify if it does not meet the
requirements of . . . prior precedents.”6
Of particular concern with the invention in Benson was the fact that the end use of the
code was too broad and could be performed through any machinery, including machines not yet
developed: “The mathematical formula involved . . . has no substantial practical application
except in connection with a digital computer.” To hold otherwise would allow “the patent to
wholly pre-empt the mathematical formula and in practical effect would be a patent on the
algorithm itself.”7
At the time Benson was decided, computers were relatively new. The Court recognized
that as a matter of policy, patent protection may eventually extend to cover programs, but as of
the date of the opinion, programs were being rejected as non-statutory subject matter.8 The
Court also warned that “[i]ndirect 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.”9
Copyright protection was deemed sufficient to cover computer programs.10 The Court cited
problems with classification and prior art searching at the Patent Office as primary reasons for
not allowing the patents to proceed. Finally, the Court invited Congress to manage the issue.11
Parker v. Flook, 437 U.S. 584 (1978)
Six years after Benson, the Supreme Court again considered the patentability of
applications of mathematical algorithms and formulas in Flook. At issue here was a patent
directed to a method for updating alarm limits during a catalytic conversion process. The
method is a three-step process, which differed from the prior art because it applied a
mathematical algorithm to calculate an updated alarm-limit, which is then applied to signal an
abnormal condition. The difference between this method an conventional alarm updating
methods was the use of the algorithm to perform the update. The updated alarm limit could be
calculated by the user once he/she knew a series of variables. Those variables are not explained
in the patent. The patent was also not limited to catalytic chemical conversion in any particular
In an opinion by Justice Stevens, the Court first limited its analysis to §101 and whether
the mathematical algorithm as used in the claimed method (an otherwise conventional process)
was patentable.13 As it did in Benson, the Court emphasized that process claims must be either
(i) tied to a particular apparatus or (ii) operate to transform materials to a different state or thing.
It also reaffirmed that abstract ideas are not themselves patentable and that a mental process
could be patentable only if tied to another form of statutory subject matter such as a machine,
manufacture or composition.
Despite the applicant’s argument that his patent was different from Benson because it was
limited to a particular end use and industry and it had a post-solution activity, the Court
nevertheless rejected the application. In particular, it focused on the post-solution activity,
noting that mathematical algorithms themselves are not patentable, and “[t]he notion that postsolution activity, no matter how conventional or obvious in itself, can transform an unpatentable
principle into a patentable process exalts form over substance. A competent draftsman could
attach some form of post-solution activity to almost any mathematical formula.”14 The Court
considered the applicant’s claims to cover merely a better method for calculating alarm limit
values, analogizing it to a claim using 2R to calculate the circumference of a wheel.15
In addition, the Court stated that an algorithm “is treated as though it is a familiar part of
the prior art.”16 This is not the first (or last) time that sections 101 and 103 appear to overlap in
the business method patent arena, but the discussion bears mentioning. The patentee argued that
by presuming the algorithm to be well known, the Court improperly imported into section 101
the considerations of inventiveness under sections 102 and 103.17 The Court responded that
determining whether an invention includes an “idea” is part of the 101 analysis and falls within
the obligation to first determine what type of discovery is to be patented.18 The Court further
responded that it was not, contrary to the patentee’s argument, considering the claims piecemeal.
On this point, the Court appears to have nevertheless incorporated principles from section 103
because it referred to the algorithm as in the prior art, noting that once that assumption was
made, the claim “as a whole” did not contain any patentable subject matter.19
The Court concluded with a caveat that its opinion is based on a complete lack of
precedent in the youthful computer industry and that the decision should not “be interpreted as
reflecting a judgment that patent protection of certain novel and useful computer programs will
not promote the progress of science and the useful arts” or that it “is undesirable as a matter of
policy.”20 “It is our duty to construe patent statutes as they now read.”21 The Court again
deferred to Congress.
Diamond v. Diehr, 450 U.S. 175 (1980)
Although Diehr concerned an industrial process, and not a business method patent, it is
often cited by courts addressing business method patents, and is frequently viewed as expanding
patentability for business method patents. The patent in Diehr was directed to a process for
curing rubber. The Arrhenius equation was repeatedly applied as part of that process to
determine the cure time, which was then used in connection with a compute to signal the press to
open and close. The patentee argued that the inventive aspect was the constant temperature
measurements. Relying on Benson, the examiner disagreed, arguing that the program was
simply carried out by a computer and all other steps were “conventional and necessary” and thus
not patentable.22
The Court of Customs and Patent Appeals, in an opinion by Judge Rich, reversed. The
Supreme Court, in an opinion by Justice Rehnquist, affirmed the CCPA. Although not reduced
to a bright-line test, the Supreme Court reiterated the following key points regarding process
claims in its analysis:
“Transformation or reduction to something else ‘to a different state or
thing’ is the clue to the patentability of a process claim that does not
require a machine” (here, the physical/chemical process for molding was
deemed sufficiently transformative).23
Laws of nature, natural phenomena and abstract ideas are excluded from
patent protection, and this includes mathematical equations24; but
application of an idea to a “new and useful” end may be patentable.25
Claims are considered as a whole.26
A court must not separate claims into old and new elements and ignore the
old elements.27
The question of novelty and nonobviousness do not affect the §101
analysis. The reference to “new and useful” in §101 refers to the subject
If a claim performs a function that patent laws were designed to protect
(e.g., transforming something), then it satisfies §101, regardless of
whether a computer implementing an algorithm is used.29
“Courts should not read into the patent laws limitations and conditions
which the legislature has not expressed.”30
The Diehr Court also commented that “[t]he machinery used to perform the process may
or may not be new or patentable; whilst the process itself may be altogether new, and produce an
entirely new result.”31 In other words, it is the steps of the process that matter, not the tools
used.32 Although directed to the context of patentable subject matter under §101, this statement
may have some bearing under the §103 analysis as well, particularly when courts look to new
methods included in older technology. 33
Although reaching a different result on patentability than its sister courts in Benson and
Flook, the Supreme Court’s analysis of these cases in Diehr is informative. The Court read both
cases as attempting to patent just a formula. The “sole practical application of the algorithm” in
Benson was in connection with the programming of a general purpose computer.34 The patent in
Flook was seeking protection only for an equation/formula that produced an alarm limit, a
number. The alarm limit could be calculated if several variables (numbers which were not
provided) were known. The application did not explain how these variables would work with the
claimed equation. In contrast, the applicants in Diehr sought protection for a specific use of a
known formula, which included every step in the claimed process as well as a practical
application beyond the formula.35
In re Schrader, 22 F.3d 290 (Fed. Cir. 1994).
The Federal Circuit in In re Schrader upheld the unpatentability of the business method
patent application at issue, but the case is most significant for Judge Newman’s powerful dissent
regarding business method patents’ place under §101.
The application in Schrader was directed to a method of competitively bidding on a
plurality of related items, such as tracts of land. Bids on various items are received and entered
into a record. A completion (the combination of bid that would complete the sale of all items at
their highest offered price) is determined from all entered bids. The application was rejected by
the Patent Office for lack of patentable subject matter. The Board of Patent Appeals sustained
the rejection. The Federal Circuit applied the now defunct Freeman-Walter-Abele test in
affirming the refusal.36 The court reconciled its decision that a process claim require some
transformation or reduction of subject matter with the Supreme Court’s holding in Diehr that
courts should not read limitations into the patent act that Congress did not intend, by noting that
when Congress approved the definition of “process” in the 1952 application, that term had
already been interpreted by the courts as requiring a transformative step.37
In her dissent, Judge Newman argued that the claims did meet the statutory subject matter
requirement of §101, leaving open for remand the question of whether the claims met the
requirements of §§ 102 and 103. In particular, Judge Newman noted that “[a]ll mathematical
algorithms transform data” and here, the claimed process produces a “useful result.”38 Judge
Newman also commented on the Board’s refusal on the grounds that the claimed process was a
business method. Judge Newman agreed that the concept is “fuzzy” and urged that it “merits
retirement from the glossary of section 101.”39 According to Judge Newman, “[t]he decisions
that have spoken of ‘methods of doing business’ have or could have, resolved the issue in each
case simply by relying on the statutory requirements of patentability such as novelty and
unobviousness.” 40
Judge Newman’s dissent is particularly important because it set the stage for an
amendment to the PTO examination guidelines for business method/process patents and the State
Street Bank decision, which has often been viewed as expanding the scope of business method
patent protection. This notion that there is no true business method patent exception, which the
Federal Circuit declared in State Street, was also incorporated into the 1996 revision to the
MPEP, replacing the earlier “business method patent” exception, which cited Hotel Checking,
discussed supra.
In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994).
Decided shortly after Schrader, the Alappat case highlights the rising significance of
mathematical algorithms in patents. The claims in Alappat, were directed to a rasterizer of an
oscilloscope. Relying primarily on Diehr, the Federal Circuit focused on the claim as a whole
and asked whether that claim is a “disembodied mathematical concept.”41 But unlike Schrader,
the court held that all mathematical calculations in the claims which combine to form a machine
that produce a “useful, concrete, and tangible result.”42 For example, one of the claims at issue
was “‘not so abstract and sweeping that it would ‘wholly preempt’ the use of any apparatus
employing the combination of mathematical calculations recited therein,” which was a concern
in Benson.43 In any event, the Federal Circuit noted that claims in Alappat dealt with computers
(an apparatus), not mathematics.44
Here again, Judge Newman noted that “[m]athematics is not a monster to be struck down
or out of the patent system, but simply another resource whereby technological advance is
State Street Bank & Trust Co. v. Signature Financial Group, Inc. 149 F.3d 1368 (Fed.
Cir. 1998).
Notwithstanding the Federal Circuit’s clear statement in State Street that it was taking the
opportunity to “lay the ill-conceived notion” of a “business method patent exception” to rest,46
the decision, authored by Judge Rich, is most often thought of as the case that did away with the
business method patent exception, expanding the potential patentability of business methods.
The patent in State Street claimed a computerized accounting system for managing a
mutual fund. Administering the system required a daily calculation of various expenses, losses,
and income. The patent claimed a data processing system that performed this calculation. The
Federal Circuit first noted that the claims were directed to a machine, although the court
acknowledged that whether the claim is directed to a process or machine should make no
difference to the § 101 analysis.47 Then, it recognized the three judicial limitations on statutory
subject matter set forth in Diehr and that algorithms could be patentable if applied in a useful
way. The court cited Alappat as an example of a useful algorithm because “it produced ‘a
useful, concrete and tangible result’—the smooth waveform.”48
The Federal Circuit concluded that, like Alappat, “the transformation of data,
representing discrete dollar amounts, by a machine through a series of mathematical calculations
into a final share price, constitutes a practical application of a mathematical algorithm, formula,
or calculation, because it produces a ‘useful, concrete and tangible’ result.’”49
In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007).
Comiskey ties together much of the earlier case law on business method patents.
Comiskey claimed a method and system for mandatory arbitration, which included steps ranging
from signing up for and conducting the arbitration to issuing a result. The application had two
types of claim, those directed to a method only and those directed to a module for conducting the
method. The claims were all rejected during prosecution as obvious under §103.
On appeal, the Federal Circuit did not directly consider the §103 rejections, but instead
focused on the first “door” to patentability—whether the claims are directed to patentable subject
matter under §101.50 Parsing through the precedent, the Federal Circuit first confirmed the
longstanding principles that patentable subject matter under §101 is broad, but also that abstract
principles and ideas are not alone patentable. As to the latter, the Federal Circuit cited the longstanding principles of Diehr, that an idea/abstract principle used in a process may be patentable if
it has a practical application. A practical application is either one that is used in, operates on or
transforms another statutory class (a machine, an article of manufacture or a composition of
matter). In other words, the process must either be (i) tied to a machine or (ii) change materials to
a different state or thing.51
The Federal Circuit further noted that business methods patents such as Comiskey’s may
also include mental steps. But “[m]ental processes—or processes of human thinking—standing
alone are not patentable even if they have practical application.”52 The court again cited Flook,
noting that in that case and other Federal Circuit precedent, mental processes that merely claim a
practical application but that were not tied to another statutory subject matter were not
patentable.53 There is no question but that the arbitration method claimed in the Comiskey patent
included mental steps. Because of this, the pure method claims were not patentable. The claims
that also included a module, however, met the requirements of §101.54
The more disturbing aspect of Comiskey is its invitation to reject business method patents
as obvious under §103. Although it did not reach the issue, the Federal Circuit in Comiskey
nevertheless commented on obviousness in such a way that has many wondering whether
business method patents can survive in the post-KSR world. See discussion Section B, infra.
Ex parte Lundgren, 76 USPQ2d 1385 (precedential)
In late 2005, the Patent Office released interim guidelines for examining process and
method patents, including business method patents. The guidelines were issued partially in
response to the Board’s decision in Ex parte Lundgren. Lundgren’s application involved a
method for compensating a manager and did not include any computer or apparatus. Until
Lundgren, under the “technological arts” exception, the Patent Office routinely rejected business
method patent applications that did not recite a specific technology implementation, such as a
computer. The Board in Lundgren did away with this exception, however. The result was an
expansion in the types of business method patents that would ultimately be allowed: the patents
no longer needed to be implemented in “technology.”
The Patent Office has since shifted to a new series of tests for business method patents,
looking to whether one of the judicial exceptions to patents has been invoked and whether there
is a “practical” application of that subject matter. The Patent Office also looks to whether the
process has a physical transformation or whether it otherwise produces a practical, useful or
tangible result. Now this practice is being challenged in the courts.
In re Bilski – argued before the Federal Circuit on 10/1/07
As of the time of this paper, Bilski is currently on appeal to the Federal Circuit. The
claims in the Bilski application were directed to a method for managing risks associated with a
commodity sold at a fixed price. The claims did not specifically include a computer or machine
limitation. The examiner and the Board rejected the application on the grounds that it did not
contain statutory subject matter under §101. The Board focused primarily on examination
guidelines that require a physical transformation, which it found nonexistent in the Bilski
A key question before the Federal Circuit in Bilski is whether this physical transformation
is simply relevant or required under Diehr. And, if it is not required, is it enough that the process
provide a new and useful result? The Board has been criticized for taking too narrow of a view
on statutory subject matter, requiring that there be a physical transformation in order for these
process claims to qualify.
In re Ferguson - argued before the Federal Circuit on 12/5/07
Also on appeal to the Federal Circuit is the Board’s rejection of claims directed to a
“paradigm for marketing software” that includes method claims for using the paradigm. The
Board rejected the application because it did not have a useful, concrete or tangible result and it
did not transform something. Like Bilski, the case also challenges the examination guidelines as
too strict and not intended to be an “exclusive test” for patentability.
Business Method Patents Post-KSR
The Supreme Court’s decision in KSR Int’l Co. v. Teleflex Inc.,55 has many concerned
about the scope of obviousness challenges under §103. Although KSR did not address business
method patents specifically, the breadth of the decision coupled with recent attitudes toward
business method patents may signal a potential shift in how these patents are examined and
enforced.56 For example, in Comiskey, although the Federal Circuit decided the case under §101,
it also commented on its recent decision in Leapfrog Enterprises v. Fisher Price,57 that the
routine addition of modern electronics to an otherwise nonpatentable invention typically creates
a prima facie case of obviousness.58 This is significant given how courts struggle with the
patentability of business method patents in the first place. Is a method that is applied through
software or modern electronics now more likely than not to be held obvious? The caselaw to
date is limited, but the answer to that question will likely be addressed on a case-by-case basis.
The importance of secondary considerations of non-obviousness may also be affected.
For example, in Leapfrog, the Federal Circuit noted that in the prior art, only a reader was
missing, but existing toys already had a reader. The patent holder provided no evidence that
including a reader in the patented device was uniquely challenging or difficult for persons of
ordinary skill in the art.59 The inventor also testified that he did not have a technical background
and could not have built the prototype himself.60 Similarly, in Comiskey, the Federal Circuit
observed that if the consideration of a “long-felt need” was directed to the mental process itself,
that is insufficient. The need must be toward the combination of the mental process and the
modern communication device or computer.61
Post-KSR obviousness directed to a business method patent has been addressed by at
least one district court, in AdvanceMe, Inc. v. Rapidpay, LLC, et. al., Case No. 6:05 CV 424
from the Eastern District of Texas. In that case, the court struck down a patent directed to a
method for merchant processing whereby a merchant processor would be responsible for
dividing revenue from credit card payments and splitting it between the merchant and lender.
Relying on Leapfrog, the court held that one of skill in the art could easily view the prior art and
make the “common sense leap” to the claims of the patent in suit.62 The court further held that
the secondary considerations, in particular the commercial success of the plaintiff’s product and
its long-felt need were more the product of the plaintiff’s marketing skills. The court concluded
that because the patent combined “familiar elements” (credit card processing) with known
methods to yield predicatable results, it could not be patentable.63
To summarize, looking only at §101, one could reasonably argue that business method
patents have come full circle, viewed strictly in the early cases, expanded in the Diehr and State
Street and Lundgren decisions, and returning to the strict application in Comiskey, Bilski and
Ferguson. That said, because the cases all share common threads, such as looking to claims as a
a whole, not patenting algorithms alone and requiring a “new and useful” result for process
patents, it could also be argued that while the perception of business method patents may have
changed, their treatment in the courts has not.
With respect to obviousness under §103, while the Supreme Court’s recent “suspicion” of
business method patents, coupled to its broad interpretation of obviousness in KSR may signal a
greater shift in this area, it is simply too early to tell and, in any event, courts are likely to take
the question on a case-by-case basis, looking at the scope of the patent, the available prior art, the
knowledge of one skilled in the art and secondary considerations.
To the extent any opinions are offered in this article, they are those of the author, not Morrison & Foerster, LLP.
Hotel Security Checking Co. v. Lorraine, 160 F. 467, 470 (2d Cir. 1908).
State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1377 (Fed. Cir. 1998).
Gottschalk v. Benson, 409 U.S. 63, 67 (1972) (emphasis added), quoting Funk Bros. Seed Co. v. Kalo Co., 333
U.S. 127, 130.
Id. at 70.
Id. at 71.
Id. at 71-72.
Id. at 72.
Id. at 73.
Parker v. Flook, 437 U.S. 584, 585-86 (1978).
Id. at 590.
Id. at 595.
Id. at 592.
Id. at 595 n.18.
Id. at 594-95.
Id. at 595.
Diamond v. Diehr, 450 U.S. 175, 180 (1980).
Id. at 183, citing Benson, 409 U.S. at 70.
Id. at 185.
Id. at 188.
Id. at 189.
Id. at 192.
Citing Diamond v. Chakrabarty, 447 U.S. 303 (1980). The Committee Reports accompanying the 1952 Patent
Act state that statutory subject matter is to include “everything under the sun that is made by man.” S. Rep.
No.1979, 82md Cong., 2d. Sess., 5 (1952). Id. at 182.
Id. at 183.
Id. at 184.
See discussion Section B, infra.
Id. at 185.
Id. at 192-93. The dissent, including Justice Stevens who wrote the majority opinion in Flook, observed that the
the process in Diehr was quite similar to the process in Flook in that both applied an equation as part of a process in
a computer to transform something as part of a result. Id. at 209-210.
The test essentially isolated the algorithm and then focused on whether it was sufficiently transformative in
connection with the rest of the claims. In re Schrader, 22 F.3d 290, 292 (Fed. Cir. 1994)
Id. at 295.
Id. at 296, J. Newman dissenting.
Id. at 298.
In re Alappat, 33 F.3d 1526, 1544 (Fed. Cir. 1994).
Id. at 1544.
Id. at 1545.
Id. at 1570. J. Newman concurring.
State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368, 1374 (Fed. Cir. 1998) (emphasis
Id. at 1372.
Id. at 1373.
Id. (emphasis added)
In re Comiskey, 499 F.3d 1365, 1373 (Fed. Cir. 2007).
Id. at 1376.
Id. at 177 (emphasis added).
Id. at 1377-78.
Id. at 1379-80.
127 S. Ct. 1727 (2007)
Justice Kennedy’s concurrence in ebay, Inc. v. MercExchange, L.L.C., 126 S.Ct. 1837, 1842 (2006) regarding the
“suspect validity” of some business method patents signals a potential Supreme Court attitude that favors limited
patentability for business methods.
485 F.3d 1157 (2007).
Comiskey, 499 F.3d at 1380.
Leapfrog, 485 F.3d at 1162.
Comiskey, 499 F.3d at 1380.
8/14/2007 Decision at 49.
Id. at 49-50.