By Scott J. Fields, Esq.& Joan M. Roediger, JD, LLM

Published September 2001

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So-called business method patents are the creation of a ruling by the United States Court of Appeals for the Federal Circuit in State Street Bank v. Signature Financial Group, which removed the perceived barrier to patenting pure methods of doing business. The State Street case involved a patent for a computer program for mutual fund administration.

Historically, both the U.S. Patent and Trademark Office (PTO) and the courts had held that methods of doing business were outside the scope of patent protection, although the State Street court emphasized that the legal basis for such patents always existed in the statute. Prior to State Street, patent attorneys were careful to draft software and financial-related patents to appear to cover a method of carrying out a technical process rather than a pure business process.

Since the State Street ruling and with the concurrent meteoric rise of the Internet and e-commerce, there has been an avalanche in business method patent filings, particularly related to the Internet. The number of U.S. business method patent filings has grown from 1300 in fiscal year 1998 to 2600 in fiscal year 1999, with 600 being issued in 1999. It is anticipated that 7500 business method applications will have been filed in 2001.

While in the public mind, these patents cover many of the most popular and well-known Internet and financial services technologies such as Next Card®, Priceline.com’s reverse auction method and HotMail. Medical care providers have also joined this trend. Cardiac Intelligence Corp. of Seattle, Washington holds several patents on its systems for automated collection and analysis of cardiac information and remote patient care. Health Hero Network of Mountainview, California recently patented a networked system for communicating information to a patient and for remote monitoring. A further patent was recently issued to a St. Petersburg, Florida company for automatically e-mailing pharmacy patients’ advisory information regarding drugs they may be taking. Finally, True Position, Inc. of Wayne, PA recently patented a wireless health monitoring system. These are but a few examples. All have a business method component.

The rise in the number of these filings has led to charges by critics that business method patents are overbroad and detrimental to the economy. These attacks have come from several portals. Recently, the so-called "Business Method Patent Improvement Act of 2000" was introduced in Congress by Representatives Howard L. Berman of California and Rick Boucher of Virginia. The bill is an attempt by opponents of business method patents to limit the PTO’s ability to issue them and includes a laundry list of prejudicial provisions. The legislation would apply to all business method applications pending as of enactment and to all patents issued thereafter.

If enacted, the law would establish a public protest proceeding and a new opposition process for any business method application. It would also compel applicants to disclose whether and to what extent a patentability search was performed. The bill further proposes to lower the burden of proof required to establish invalidity of a business method patent. This proposed act includes a definitional framework of "business method" which would cover virtually every computer-related device. The bill has been severely criticized, most notably because it singles out this one class of patents for special scrutiny. It is highly unlikely that the bill will be advanced by the incoming Bush administration, but it exemplifies the consternation caused by business method patents in certain quarters.

In the spring of 2000, the PTO itself entered the fray by adding an extra layer of review to applications for business method patents. This secondary review of business method patent applications is intended to insure that the examiner has complied with requirements to search the prior art and determine whether the scope of claims should be reconsidered. The PTO has further hired technology specialists to serve as a resource for examiners in the area of banking and finance, e-commerce, insurance and Internet infrastructure.

Because of the negative publicity, the PTO further unveiled changes to the ex parte and director ordered reexamination policy. These changes will impact certain administrative procedures within the PTO that will make it less likely that suspect business method patents are issued. Recently, a patent covering the Mercata.com group purchasing concept was withdrawn two months after issuance. Finally, a number of patent examiners, many career civil servants who shun the negative publicity caused by high-profile infringement cases, have taken a very hard line when issuing these patents.

Many say that the recent controversy surrounding business method patents is largely overblown and ignores the historic and positive role patents have played in our economic development. Since the enactment of the original patent statute in 1790, commentators have predicted dire economic consequences arising from the issuance of patents on technologies ranging from the cotton gin to the telephone. Such dire predictions have historically not come to pass because patents are frequently licensed at reasonable royalties and difficult patents can frequently be designed around by skilled engineers. The issuance of patents has always given innovators the time necessary to perfect and expand technologies, thereby leading to greater economic opportunity and competition.

Further, the present controversy will largely be resolved by the type of competent patent examination procedures recently put in place by the PTO, as noted above. Finally, the Federal Circuit, which has been blamed for creating this problem, has recently handed down several decisions which have tended to trim the enforceable scope of patents, particularly under the doctrine of equivalents, the judicially-created doctrine which recognizes a penumbral scope of patent protection.

The above threatened legislation, judicial and administrative action may ultimately be rendered moot by the fact that many of the business concepts that the recent flurry of business method patents purport to cover have been and may continue to be complete failures in the marketplace. With the recent economic downturn, it may be irrelevant whether large numbers of business method patents issue if the businesses that they protect are failures. However, for those companies which survive, patents covering business methods and models may in the end be the most valuable corporate asset.

Economic and business factors rather than legal ones will therefore ultimately resolve the dispute over business method patents. Nonetheless, business method patents will continue to be an important component in the intellectual property mix of many companies including those in the health care industry.

Scott J. Fields, Esq., a registered patent attorney, is the head of the Intellectual Property Group of Obermayer Rebmann Maxwell & Hippel LLP and specializes in Internet and e-commerce-related issues. Joan M. Roediger, JD, LLM, is Of Counsel to the law firm Obermayer Rebmann Maxwell & Hippel LLP and is a Member of Obermayer’s Health Law Department.