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Claiming Subject MatterClaiming Subject Matterin in

Business Method PatentsBusiness Method Patents

Bruce D. SunsteinBruce D. Sunstein

Bromberg & Sunstein LLPBromberg & Sunstein LLPBostonBoston

www.bromsun.comwww.bromsun.com

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Patent Applications and Issuances, Class 705

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Applications Filed

Patents Issued

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Foundational Issues for Foundational Issues for Business Method PatentsBusiness Method Patents

Is the application directed to Is the application directed to statutory subject matter? 35 U.S.C. statutory subject matter? 35 U.S.C. § 101§ 101

Is the subject matter:Is the subject matter:New? 35 U.S.C. § 102New? 35 U.S.C. § 102Nonobvious? 35 U.S.C. § 103Nonobvious? 35 U.S.C. § 103

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Foundational Issues for Foundational Issues for Patents GenerallyPatents Generally

Is the application directed to Is the application directed to statutory subject matter? 35 U.S.C. statutory subject matter? 35 U.S.C. § 101§ 101

Is the subject matter:Is the subject matter:New? 35 U.S.C. § 102New? 35 U.S.C. § 102Nonobvious? 35 U.S.C. § 103Nonobvious? 35 U.S.C. § 103

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So what’s different So what’s different about business method about business method

patents?patents?

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The claims!The claims!

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Claims affect the reception Claims affect the reception of an application and of a of an application and of a

patentpatentClaim drafting distinctions and Claim drafting distinctions and tensions are critical in business tensions are critical in business method patentsmethod patentsClaim breadth v. claim abstractionClaim breadth v. claim abstractionContext of the subject matterContext of the subject matter

But they are not newBut they are not new

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A seminal case:A seminal case:

O’Reilly v. MorseO’Reilly v. Morse, 56 U.S. 62 , 56 U.S. 62 (1854)(1854)

Yes, Samuel F.B. Morse.Yes, Samuel F.B. Morse.

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This claim valid, 1854:This claim valid, 1854: ““11stst. … making use of the motive power . … making use of the motive power

of magnetism … developed by the action of magnetism … developed by the action

of … current as a means of operating … of … current as a means of operating …

machinery … to imprint signals upon paper machinery … to imprint signals upon paper

… … or to produce sounds … for the purpose or to produce sounds … for the purpose

of telegraphic communication at any of telegraphic communication at any

distances.” 56 U.S. at 112, 128-129.distances.” 56 U.S. at 112, 128-129.

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This claim invalid, 1854:This claim invalid, 1854:

““Eighth. … the use of the motive power Eighth. … the use of the motive power

of the electric … current, which I call of the electric … current, which I call

electromagnetism, however developed, electromagnetism, however developed, for for

marking or printing … characters, signs, marking or printing … characters, signs, or or

letters, at any distances….” letters, at any distances….”

56 U.S. at 112-120.56 U.S. at 112-120.

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Operative principle:Operative principle:

Abstract principles won't be Abstract principles won't be protected.protected.

A patent claim must reflect A patent claim must reflect structure, structure, namely, the structure by which namely, the structure by which

principles are harnessed principles are harnessed

to practical effect.to practical effect.

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In re Alappat:In re Alappat: “ “Phenomena of nature and abstract scientific Phenomena of nature and abstract scientific

and mathematical principles have always been and mathematical principles have always been excluded from the patent system. Some have excluded from the patent system. Some have justified this exclusion simply on the ground of justified this exclusion simply on the ground of lack of ‘utility’; some on the ground of lack of lack of ‘utility’; some on the ground of lack of ‘novelty’; and some on the ground that laws ‘novelty’; and some on the ground that laws of nature, albeit newly discovered, are the of nature, albeit newly discovered, are the heritage of humankind. On whatever theory, heritage of humankind. On whatever theory, the unpatentability of the principle does not the unpatentability of the principle does not defeat patentability of its practical defeat patentability of its practical applications.”applications.”

33 F.3d 1526, 1569 (Fed. Cir. 1994)(J. Newman 33 F.3d 1526, 1569 (Fed. Cir. 1994)(J. Newman concurring), citing concurring), citing O'Reilly v. MorseO'Reilly v. Morse..

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What is the rule today?What is the rule today?Not different!Not different!Merely abstract ideas are not “useful”Merely abstract ideas are not “useful”

and not patentable. and not patentable. An algorithm applied in a useful way An algorithm applied in a useful way

isispatentable.patentable.

State Street Bank & Tr. Co. v. Signature Financial State Street Bank & Tr. Co. v. Signature Financial Group, Inc.Group, Inc., 149 F.3d 1368, 1373 (Fed Cir. 1998), 149 F.3d 1368, 1373 (Fed Cir. 1998)((AlappatAlappat followed). followed).

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What What State StreetState Street also also holdsholds

Patents can’t be invalidated just Patents can’t be invalidated just

because they claim “business methods”because they claim “business methods” (OK to patent a system for managing(OK to patent a system for managing

a mutual fund investment structure)a mutual fund investment structure)

149 F.3d at 1376-1377.149 F.3d at 1376-1377.

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What What State StreetState Street also holds also holds (cont’d)(cont’d)

But patents can be invalidated forBut patents can be invalidated forclaiming subject matter that is not claiming subject matter that is not new!new!After all, patents are supposed to After all, patents are supposed to

cover only new inventions. cover only new inventions. Many things we think are new are not;Many things we think are new are not;

(but some things we think are old are (but some things we think are old are not)!not)!

149 F.3d at 1377.149 F.3d at 1377.

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What What State StreetState Street meansmeans

““Anything under the sun that is Anything under the sun that is made by made by

man” can be patentedman” can be patented If new, non-obvious, andIf new, non-obvious, and If harnessed to practical effect as If harnessed to practical effect as

claimedclaimed

149 F.3d at 1373 and 1377.149 F.3d at 1373 and 1377.

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European v. US lawEuropean v. US law Invention must be “suceptible of Invention must be “suceptible of

industrial application” EPC Art. 52(1) industrial application” EPC Art. 52(1) (narrower than 35 USC § 101 utility).(narrower than 35 USC § 101 utility).

Business methods, software, Business methods, software, mathematical methods are not patentable mathematical methods are not patentable “as such”. EPC Art. 52(2) and (3).“as such”. EPC Art. 52(2) and (3).

But when a “technical effect” is present in But when a “technical effect” is present in the claimed invention, then it is not non-the claimed invention, then it is not non-patentable “as such”. patentable “as such”. VICOM/Computer VICOM/Computer related invention, related invention, T 0208/84, O.J. EPO T 0208/84, O.J. EPO 1987, 14 (narrower than 1987, 14 (narrower than State StreetState Street).).

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Example 1: It’s all how Example 1: It’s all how you askyou ask

Long before Long before State StreetState Street, Merrill , Merrill LynchLynch

obtained a patent for its cash obtained a patent for its cash

management account operationmanagement account operationU.S. patent 4,346,442 (issued in U.S. patent 4,346,442 (issued in

1982)1982)

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U.S. Patent 4,346,442 U.S. Patent 4,346,442 ““Securities Brokerage-Cash Securities Brokerage-Cash

Management System”, issued Management System”, issued 19821982

Assignee: Merrill Lynch, Pierce, Assignee: Merrill Lynch, Pierce, Fenner & Smith IncorporatedFenner & Smith Incorporated

2 independent claims2 independent claims

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Patent 4,346,442, claim 2, Patent 4,346,442, claim 2,

preamblepreamble ““2. In combination in a system for 2. In combination in a system for

processing and supervising a processing and supervising a plurality of composite subscriber plurality of composite subscriber accounts each comprising a accounts each comprising a margin margin brokerage accountbrokerage account, a , a charge cardcharge card and and checkschecks administered by a first administered by a first institution, and participation in at institution, and participation in at least one least one short term investmentshort term investment, , said system including …”said system including …”

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Patent 4,346,442, claim 2, Patent 4,346,442, claim 2, bodybody

“… “… said system further comprising means said system further comprising means for generating a stored record of each for generating a stored record of each subscriber deposit, charge card and check subscriber deposit, charge card and check transactions, and transactions, and anti-kiting meansanti-kiting means for for providing an output alert record providing an output alert record responsive to either of said deposits, or responsive to either of said deposits, or the check or charge card expenditures the check or charge card expenditures exceeding predetermined maximum exceeding predetermined maximum bounds in amount and frequency, bounds in amount and frequency, communicating means to communicate communicating means to communicate said updated credit limit for each account said updated credit limit for each account to said first institution.”to said first institution.”

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U.S. Patent 4,346,442U.S. Patent 4,346,442Enforced successfully in 1983Enforced successfully in 1983Paine, Webber, Jackson & Curtis, Paine, Webber, Jackson & Curtis,

Inc. v. Merrill Lynch, Pierce, Fenner Inc. v. Merrill Lynch, Pierce, Fenner and Smith, Inc.and Smith, Inc., 564 F. Supp. 1358 , 564 F. Supp. 1358 (D. Del. 1983)(D. Del. 1983)

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Example 2: Patent Example 2: Patent 5,960,411 (Amazon “One-5,960,411 (Amazon “One-

Click”) Click”) Preamble and first line of body:Preamble and first line of body:““A method of placing an order for A method of placing an order for

an item comprising: an item comprising: under control of a client system,”under control of a client system,”

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Amazon “One-Click”Amazon “One-Click” displaying information identifying the item; and displaying information identifying the item; and in response to only a single action being performed, in response to only a single action being performed,

sending a request to order the item along with an sending a request to order the item along with an identifier of a purchaser of the item to a server system; identifier of a purchaser of the item to a server system;

under control of a single-action ordering component of under control of a single-action ordering component of the server system, the server system,

receiving the request; receiving the request; retrieving additional information previously stored for the retrieving additional information previously stored for the

purchaser identified by the identifier in the received purchaser identified by the identifier in the received request; and request; and

generating an order to purchase the requested item for generating an order to purchase the requested item for the purchaser identified by the identifier in the received the purchaser identified by the identifier in the received request using the retrieved additional information; and request using the retrieved additional information; and

fulfilling the generated order to complete purchase of the fulfilling the generated order to complete purchase of the item item

whereby the item is ordered without using a shopping cart whereby the item is ordered without using a shopping cart ordering model. ordering model.

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Amazon one-click Amazon one-click litigationlitigation

amazon.com v. barnesandnoble.com, amazon.com v. barnesandnoble.com, 239 F.3d 1343 (Fed. Cir. 2001)239 F.3d 1343 (Fed. Cir. 2001)

Grant of preliminary injunction vacated, Grant of preliminary injunction vacated, since substantial questions raised as to since substantial questions raised as to patent validity, based on prior art. 239 patent validity, based on prior art. 239 F.3d at 1367 and passim.F.3d at 1367 and passim.

But: no question as to non-statutory But: no question as to non-statutory subject matter, and claims held likely subject matter, and claims held likely infringed. 239 F.3d at 1358.infringed. 239 F.3d at 1358.

Amazon settled with Amazon settled with barnesandnoble.com.barnesandnoble.com.

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Example 3: Example 3: Ex parteEx parte Lundgren (Lundgren (OligopolyOligopoly), ),

BPAI, 10/05BPAI, 10/05 Claim directed to a method of Claim directed to a method of compensating a manager of a firm in an compensating a manager of a firm in an industry, particularly applicable when industry, particularly applicable when the industry is an oligopolythe industry is an oligopolyOligopoly: “an industry structure with a Oligopoly: “an industry structure with a

relatively small number of competitors”. relatively small number of competitors”. ““In an oligopolistic industry structure, there In an oligopolistic industry structure, there

is an incentive for collusion … by managers is an incentive for collusion … by managers of the firms to restrict output and artificially of the firms to restrict output and artificially raise the price of their products”. raise the price of their products”.

Quotes from dissent, p. 16 of slip opinion. Quotes from dissent, p. 16 of slip opinion.

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Ex parteEx parte Lundgren Lundgren ((OligopolyOligopoly))

Invention: instead of paying the manager Invention: instead of paying the manager based on the firm’s absolute profits, based on the firm’s absolute profits, compensate the manager based on the compensate the manager based on the relative performance of the manager’s relative performance of the manager’s firm in relation to the other firms in the firm in relation to the other firms in the oligopoly, so as to reduce the incentive oligopoly, so as to reduce the incentive for collusion among firms in the industry.for collusion among firms in the industry.

Claim is directed to a method for Claim is directed to a method for implementing such a pay scheme.implementing such a pay scheme.

Slip opinion, p. 15.Slip opinion, p. 15.

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Ex parteEx parte Lundgren Lundgren ((OligopolyOligopoly), claim 1 ), claim 1

preamble:preamble: 1. A method of compensating a manager who 1. A method of compensating a manager who exercises administrative control over operations exercises administrative control over operations of a privately owned primary firm for the of a privately owned primary firm for the purpose of reducing the degree to which prices purpose of reducing the degree to which prices exceed marginal costs in an industry, reducing exceed marginal costs in an industry, reducing incentives for industry collusion between the incentives for industry collusion between the primary firm and a set of comparison firms in primary firm and a set of comparison firms in said industry, or reducing incentives for said industry, or reducing incentives for coordinated special interest industry lobbying, coordinated special interest industry lobbying, said set of comparison firms including at least said set of comparison firms including at least one firm, said primary firm having the manager one firm, said primary firm having the manager who exercises administrative control over said who exercises administrative control over said primary firm's operations during a sampling primary firm's operations during a sampling period, wherein [the] privately owned means period, wherein [the] privately owned means [is] not wholly government owned, the method [is] not wholly government owned, the method comprising the steps of:comprising the steps of:

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OligopolyOligopoly, claim 1 body, claim 1 body a) choosing an absolute performance standard from a) choosing an absolute performance standard from

a set of absolute performance standards;a set of absolute performance standards; b) measuring an absolute performance of said b) measuring an absolute performance of said

primary firm with respect to said chosen absolute primary firm with respect to said chosen absolute performance standard for said sampling period;performance standard for said sampling period;

c) measuring an absolute performance of each firm c) measuring an absolute performance of each firm of said set of comparison firms with respect to said of said set of comparison firms with respect to said chosen absolute performance standard for said chosen absolute performance standard for said sampling period, said measurement of performance sampling period, said measurement of performance for each firm of said set of comparison firms forming for each firm of said set of comparison firms forming a set of comparison firm absolute performance a set of comparison firm absolute performance measures;measures;

d) determining a performance comparison base d) determining a performance comparison base based on said set of comparison firm absolute based on said set of comparison firm absolute performance measures by calculating a weighted performance measures by calculating a weighted average of said set of comparison firm absolute average of said set of comparison firm absolute performance measures;performance measures;

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OligopolyOligopoly, claim 1 body , claim 1 body (cont’d)(cont’d)

e) comparing said measurement of absolute e) comparing said measurement of absolute performance of said primary firm with said performance of said primary firm with said performance comparison base;performance comparison base;

f) determining a relative performance measure f) determining a relative performance measure for said primary firm based on said comparison of for said primary firm based on said comparison of said primary firm measurement of absolute said primary firm measurement of absolute performance and said performance comparison performance and said performance comparison base;base;

g) determining the managerial compensation g) determining the managerial compensation amount derived from said relative performance amount derived from said relative performance measure according to a monotonic managerial measure according to a monotonic managerial compensation amount transaction; andcompensation amount transaction; and

h) transferring compensation to said manager, h) transferring compensation to said manager, said transferred compensation having a value said transferred compensation having a value related to said managerial compensation amount.related to said managerial compensation amount.

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Ex parteEx parte Lundgren Lundgren ((OligopolyOligopoly))

The claim is does not require that The claim is does not require that any steps of the method be carried any steps of the method be carried out in a machine (a computer)out in a machine (a computer)

Held, Held, that the examiner’s rejection that the examiner’s rejection based on failure of the claims to based on failure of the claims to limit subject matter “to the limit subject matter “to the technological arts, as required by technological arts, as required by 35 U.S.C. § 101” is reversed.35 U.S.C. § 101” is reversed.

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Ex parteEx parte Lundgren Lundgren ((OligopolyOligopoly), Observations), Observations

1. Although the claim does not require 1. Although the claim does not require use of a computing environment, with use of a computing environment, with proper support it, could have done so proper support it, could have done so without loss of generalitywithout loss of generalityThe determinations claimed require The determinations claimed require

serious number crunching that could not serious number crunching that could not be achieved in real life without a be achieved in real life without a computing environmentcomputing environment

Therefore limiting to a computing Therefore limiting to a computing environment would not really cause the environment would not really cause the claim to be narrowerclaim to be narrower

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Ex parteEx parte Lundgren Lundgren ((OligopolyOligopoly), Observations), Observations

2. Does the subject matter claimed really 2. Does the subject matter claimed really have utility under section 101?have utility under section 101?All companies in the oligopoly would have to All companies in the oligopoly would have to

practice the invention for it to work. “In this practice the invention for it to work. “In this model, if all managers of firms in the industry model, if all managers of firms in the industry are compensated based on the relative are compensated based on the relative profitability of their respective firms, there profitability of their respective firms, there will be no incentive for collusion.” Slip will be no incentive for collusion.” Slip opinion, p. 15.opinion, p. 15.

Because any given company will likely find Because any given company will likely find itself better off by avoiding the compensation itself better off by avoiding the compensation scheme claimed, the logical outcome is that scheme claimed, the logical outcome is that no company could competitively adopt the no company could competitively adopt the scheme. (Caveat: no access to the scheme. (Caveat: no access to the application.)application.)

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Ex parteEx parte Lundgren Lundgren ((OligopolyOligopoly), Observations), Observations

2. Does the subject matter claimed 2. Does the subject matter claimed really have utility under section really have utility under section 101?101?If no company can competitively adopt If no company can competitively adopt

the compensation scheme, then why the compensation scheme, then why should the invention be considered to should the invention be considered to work?work?

Arguably, the invention could be Arguably, the invention could be rejected for lack of utility under section rejected for lack of utility under section 101, because it does not work.101, because it does not work.

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Ex parteEx parte Lundgren Lundgren ((OligopolyOligopoly), Observations), Observations

3. How would one make money 3. How would one make money with this patent?with this patent?Go to all companies in an oligopoly Go to all companies in an oligopoly

and ask them to become licensees? and ask them to become licensees? Seems improbable, because no Seems improbable, because no company has incentive to practice the company has incentive to practice the invention.invention.

Have the government require the Have the government require the companies to adopt a patented companies to adopt a patented scheme? Seems more improbable. scheme? Seems more improbable.

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Ex parteEx parte Lundgren Lundgren ((OligopolyOligopoly), Observations), Observations

4. This decision changes the 4. This decision changes the landscape very little, because:landscape very little, because:It does not show where to draw the line It does not show where to draw the line

between abstract ideas and concrete between abstract ideas and concrete implementations implementations al laal la State Street—State Street—probably no simple test is possibleprobably no simple test is possible

Even if the “technological arts” are not Even if the “technological arts” are not required under law, they are still required under law, they are still required for good patent claim drafting!required for good patent claim drafting!

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Sunstein principle 1: Sunstein principle 1: claim breadth does not claim breadth does not

require abstractionrequire abstraction

Breadth relates to coverage of Breadth relates to coverage of varied schemes for varied schemes for implementationimplementation

Abstraction relates to removal of Abstraction relates to removal of context from the structure of the context from the structure of the claimclaim

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Sunstein principle 2: Sunstein principle 2: claim structure needs the claim structure needs the

context of the subject context of the subject mattermatter

The context anchors the subject The context anchors the subject matter of the claimmatter of the claimHelps illuminate the meaning of the claimHelps illuminate the meaning of the claim Clear claims are easier to enforce Clear claims are easier to enforce

The context makes the claim statutory The context makes the claim statutory by making the subject matter concreteby making the subject matter concrete

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Business method patent Business method patent questionsquestions

Can a patentable business method Can a patentable business method involve something other than involve something other than software?software?

Are business method patents Are business method patents inherently different from software inherently different from software patents?patents?

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Business method patent Business method patent answers: Ianswers: I

Can a patentable business method Can a patentable business method involve something other than involve something other than software?software?In theory yes, but because business has In theory yes, but because business has

been practiced for centuries, and even been practiced for centuries, and even millennia, there is an enormous amount millennia, there is an enormous amount of prior art! of prior art! Cf.Cf. Hotel Security Checking Hotel Security Checking Co. v. Lorraine Co.Co. v. Lorraine Co.,, 160 F. 467 (2d Cir. 160 F. 467 (2d Cir. 1908) (patent 500,071 for 1908) (patent 500,071 for cash-cash-registering and account-checking registering and account-checking designed to prevent frauds held not designed to prevent frauds held not inventive)inventive)..

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Business method patent Business method patent answers: IIanswers: II

Can a patentable business method Can a patentable business method involve something other than involve something other than software?software?Despite the theory, the abundance of Despite the theory, the abundance of

prior art makes non-software business prior art makes non-software business methods rare.methods rare.

Remember Remember State Street:State Street: sections sections 102, and 103 can pose big hurdles!102, and 103 can pose big hurdles!

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Business method patent Business method patent answers IIIanswers III

Are business method patents Are business method patents inherently different from software inherently different from software patents?patents?Because most business method patents Because most business method patents

are software patents, they pose are software patents, they pose problems to practitioners and the PTO problems to practitioners and the PTO that are similar, if not identical, to those that are similar, if not identical, to those of software patents.of software patents.

The big issues: statutory subject matter The big issues: statutory subject matter (we discussed it) and prior art(we discussed it) and prior art

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Why prior art is a big Why prior art is a big dealdeal

Software patents and business method Software patents and business method patents often use vocabulary that is not patents often use vocabulary that is not standardized, so finding prior art is standardized, so finding prior art is difficult, even when it existsdifficult, even when it exists

Failure to cite and to know relevant prior Failure to cite and to know relevant prior art undermines patent validityart undermines patent validity

Prior art, when known, can be used to Prior art, when known, can be used to provide a practical context in which to provide a practical context in which to claim subject matter—a help in making claim subject matter—a help in making subject matter statutorysubject matter statutory

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Practical LessonsPractical Lessons Work to identify extensive prior art and Work to identify extensive prior art and

use it to provide a practical context for use it to provide a practical context for the subject matter to be claimedthe subject matter to be claimed

Use language in the claims to tie the Use language in the claims to tie the subject matter to the practical context: subject matter to the practical context: “a useful, concrete and tangible result” “a useful, concrete and tangible result” ((State Street)State Street)

Make a record of the prior art to Make a record of the prior art to establish firmly both novelty and non-establish firmly both novelty and non-obviousnessobviousness