Software and Business Process Patents in the US: Not so Eligible - August 2009

The patenting of software and business methods, one of the more controversial strands of protection offered by intellectual property regimes in modern times, has traditionally been more accessible to inventors in the United States than to their European counterparts.

Persuasive arguments exist both against and in favour of protection. Apologists contend that software patents provide newcomers with a powerful tool with which to secure themselves a place in the market when faced with towering competition from established corporations, such as IBM and Microsoft. On the other hand critics suggest that patent stockpiles and cross-licensing agreements between these large companies make the market inaccessible to smaller innovative companies, who lack the corporate clout to secure such arrangements, and must tread carefully through a minefield of potential litigation. In a different vein, computer scientists demonstrate inconsistency in the law through semantic analyses of legislation, arguing that algorithms ought to be excluded from protection as abstract mathematical formulae.

Irrespective of the position taken, this class of protection is of immense importance to innovators operating in markets which rely on technology, where a firm grasp of this branch of the law is vital. Difficulty lies in the pace at which the law is developing to cope with emerging markets, and to accommodate the polarised views of influential players.

A gradual shift towards patent-eligibility

In the years leading up to 2008 the state of the law in the US was regarded as relatively receptive to this type of patent, however, the scene had initially been set by three cases decided by the Supreme Court: In Gottschalk v. Benson it was held that algorithms, by their nature abstract ideas, were not patentable by themselves; In Parker v. Flook it was explained that an invention which fails the test of novelty, but for a new algorithm, is not rendered patentable by that development; and in Diamond v. Diehr the court held that while software itself was not eligible for protection, the inclusion of a software element in an application would not disqualify it if the invention claimed was otherwise patentable.

The Court of Appeals for the Federal Circuit (CAFC), in the case of In Re Alappat, deemed software employed to improve the appearance of information shown on a display patentable, formulating the ‘useful, concrete, and tangible result' test, which would later be reaffirmed in State Street. While on a first reading this test may appear to restrict patentable software to that which produces real-world physical effects, separate from its own execution, it encompassed a far broader range of applications. For example, the court found, in the case of In Re Lowry,that data structures (means of arranging and accessing information in computer memory) achieved such results by affecting the state of electrical or magnetic structural elements in memory, and thereby providing increased efficiency in computer operation.

In State Street the court later held that mathematical algorithms were patentable in the context of applications meeting the test set out in Alappat, namely those yielding a ‘useful, concrete, and tangible result', and simultaneously stated that business methods were not prima facie excluded from protection, holding that they should be treated the same way as any other process. The ruling led to an influx of software and business method applications, classes within which the number of patents filed has grown rapidly.

The machine-or-transformation test

In light of the recent developments in the jurisprudence provided by the cases of In Re Bilski and DealerTrack v. Huber, the security of this investment in intellectual property is uncertain. Bilski revolved around a patent for a method of ‘managing the consumption risk costs associated with a commodity sold at a fixed price for a given period'. The CAFC held that the earlier ‘useful, concrete, and tangible' test was inappropriate, and instead distilled a new formulation from the jurisprudence of the Supreme Court. To meet the requisite criteria for patentability as a process under Bilski an invention must either:

(a)    be tied to a particular machine or apparatus, or

(b)   transform a particular article into a different state or thing

Two considerations were held to be important when applying the ‘machine-or-transformation' test. First, ‘the use of a specific machine or transformation of an article must impose meaningful limits on the claim's scope to impart patent-eligibility'. Second, "the involvement of the machine or transformation in the claimed process must not merely be insignificant extra-solution activity".

Each prong of the machine-or-transformation test has been applied in the courts, in Bilski itself the CAFC concerned itself only with the second issue, leaving to future cases the ‘elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine'. To understand the court's analysis a little background of the pertinent claims in Bilski is required.

Transformation of a particular article into a different state or thing: Bilski

The invention claimed relates to the provision to consumers of a fixed-price contract for ‘commodities' such as coal, oil or gas. It is clearly described in the applicant's petition to the Supreme Court for a writ of certiorari, which refers to the higher court the question of whether the machine-or-transformation test is appropriate to use when determining patent-eligibility for this type of invention. The claims relate to a system whereby an intermediary, operating between consumers and commodity suppliers such as a gas provider, may hedge the related risks. Simply put, a mathematical formula is employed, along with statistical analysis of the risks involved, in order to determine a fixed price payment plan for the consumer which aims to protect the supplier from a drop in demand due to unforeseen circumstances (such as a warmer winter leading to a reduced demand for gas), and simultaneously obviate the risk to the consumer from increased costs due to a surge in demand (for example a higher gas bill after a colder winter).

The CAFC held in Bilski (now Bilski v. Doll) that the legal obligations and business risks on which their invention operate do not satisfy the second prong of the test because "they are not physical objects or substances, and they are not representative of physical objects or substances". Bilski did not make a case to satisfy the first prong of the test, and so the subject matter was held patent-ineligible. A writ of certiorari has recently been granted, and the Supreme Court will weigh in with a final ruling on the matter, but the case has already been relied upon in subsequent decisions, which have elaborated on the first issue.

Tied to a particular machine or apparatus: DealerTrack

The Board of Patent Appeals and Interferences has held in a number of cases that claims which assert that their subjects are tied to general purpose machines will not meet the required threshold. Reference to some of these can be found in the case of DealerTrack v. Huber, in which the defendants successfully employed the machine-or-transformation test to obtain summary judgment of invalidity against the holders of a patent bringing a suit for infringement.

In DealerTrack the complainants argued that the claims of their patent satisfied the test by virtue of being tied to: "a specially programmed computer hardware and database"; a "remote application entry and display device"; and a "remote funding source terminal device". The court rejected these arguments, reducing the elaborately named devices to "any device", and noting that the patent did not specify how the computer hardware and database were "specially programmed". The second prong of the test was not at issue and the patent was held to be invalid.

Concluding remarks

In conclusion, while the US patent regime has traditionally been relatively permissive to software and business method inventions, it appears that the courts are regressing in their interpretation of the law as set out by 35 U.S.C. § 101 (governing patentable subject matter) towards the position taken by the Supreme Court in the Benson, Flook, and Diehr trio of cases. We eagerly await the opinion of the Supreme Court in the Bilski case, which will hopefully clarify things, and potentially deal a considerable blow to the value of countless patent portfolios. Until then prospective applicants would do well to exercise caution when deciding to file for a patent.