On 30 October 2008, the much-maligned ”business method” patent died at the hand of the U.S. Court of Appeals for the Federal Circuit, the very court that had given birth to it a decade earlier. The occasion was the case of In re Bilski , and although the U.S. Supreme Court has yet to utter the last word, the overwhelming likelihood is that you will no longer be able to patent the newest way of making a buck. If you want to protect new modes of shopping, delivering legal services, reserving a rest room on an airplane, or settling futures contracts, don’t ask the U.S. Patent and Trademark Office (PTO) for help.
To critics of the business-method craze, the end could not have come soon enough. They’d complained that the patent system, designed to protect technology, was now spreading like a weed into all areas of life. Patents were being issued for using a laser pointer to tease a cat and for a way of playing on a child’s swing. (No joke—the patents were actually issued, in 1995 and 2002.) By covering almost any conceivable activity, the patent system was threatening to crush the very innovation it was meant to foster.
The system’s sudden expansion was almost accidental. For nearly a century, in fact, business methods had been expressly excluded. Patents, as the U.S. Supreme Court put it in 1980, were meant for ”anything under the sun that is made by man.” Made, that is, of stuff—not ideas for doing things not involving stuff. That accorded with European patent guidelines, which provide that ”technical character is an essential requirement for patentability of an invention,” and with a similar Japanese restriction to technical subject matter.
The original exclusion of business methods from the patent system may have stemmed from a quaint view of technology as something you cooked or cranked. The exclusion was later justified by the notion that free competition was so effective in encouraging new ways to do business that there was no need to add further incentives through the patent system. For decades, business methods stood outside the patent system because no one had made a case for their inclusion.
The problem was that even as the courts perpetuated the ban on business methods, they never really articulated exactly what business methods were. This deficiency irked the Federal Circuit when it decided State Street Bank & Trust Co. v. Signature Financial Group in 1998. Faced with a request to invalidate Signature’s patent on a data-processing system for calculating the best way to allocate the assets of a mutual fund, the court ultimately decided to let the patent stand. The court’s primary concern was whether software and data-processing techniques should be patentable. Along the way—almost as an afterthought, as we’ll see—it threw out the ban on business methods.
The patentability of software was an old and thorny question. The operations of a computer program might be too mathematical, too close to basic laws of nature. Where do you draw the line between math and its application?
In fact, the U.S. Supreme Court had tried three times to draw that line, most recently in the 1981 case of Diamond v. Diehr , which involved a patented rubber-curing operation based on a mathematical formula known as the Arrhenius equation. The court upheld the patent, saying that although math can’t be patented, an otherwise patentable process doesn’t become ineligible simply because it involves math. The Arrhenius equation might be no more patentable than gravity, but everyone agrees you can patent new ways to cure rubber, and their reliance on math shouldn’t matter.
The problem is that all software ultimately reduces to mathematical operations, yet only some software controls actual stuff, like the baking of rubber. If the rest is merely math and therefore unpatentable, does that mean we must deny patents to all software that runs nothing but itself?
Back in the 1990s, courts were uncomfortable going that far. Computers were infiltrating more and more traditional bastions of patent protection—consumer products, telecommunications, medical devices, automobiles—and computer software itself had become a distinct technology industry. It seemed wrong to read Diamond v. Diehr so broadly as to deny patent protection to new enterprises, thus leaving the rising tide of software technology outside the system—along with the dreaded business method. So the lower courts found themselves caught between the Supreme Court’s antipathy toward excessively mathematical inventions and the proliferating reality of computer software. Searching for a single principle that would exclude equations from patentability without crippling innovation, the courts experimented unsuccessfully with one patentability test after another.
By the mid-1990s, the PTO, attempting to maintain consistent examination practices despite the shifting legal sands, reached an uneasy truce with the courts. The patent office paid lip service to the latest court decisions, but its practice boiled down to rejecting claims that didn’t involve technology and demanding more from data-processing applications than simple number juggling.