The Federal Circuit recently rendered an important decision relating to the patentability of software inventions. In State Street Bank & Trust Co. v. Signature Financial Group, Inc., 1998 U.S. App. LEXIS 16869 (Fed. Cir., July 23, 1998), the court held that a general purpose computer programmed to implement
a business-oriented process qualifies as patentable subject matter under 35 U.S.C. § 101.
Under the reasoning of the State Street decision, any type of software that runs on a general purpose computer is patentable if it provides "a useful, concrete and
tangible result" (and meets the other statutory requirements). There is no prohibition against patents on software that implement
business methods. There is no requirement that the software transforms or represents any physical object. Nor is there any
requirement for specialized computer hardware.
The State Street decision opens new frontiers to patent protection. For example, electronic commerce on the Internet is fertile ground for
patents on creative methods of doing business using networked general purpose computers. Financial instruments implemented
using computers are clearly eligible for patents. More generally, patents should play an increasingly important role in customer
service-oriented industries in which data processing using a general purpose computer is an intrinsic part of performing the
service (for example, investment and securities services, banking, real estate, and personal services).
Background of the Statutory Subject Matter Requirement
A threshold condition for patentability is that the claimed invention must fall within one of four subject matter categories:
process, machine, manufacture, or composition of matter. 35 U.S.C. § 101. An applicant cannot obtain a patent for abstract
ideas, laws of nature or natural phenomena -- all of which are judicially created categories of non-statutory subject matter.
The State Street decision considered two subcategories of non-statutory subject matter: mathematical algorithms and business methods.
The mathematical algorithm exception is intended to capture inventions that "are merely abstract ideas constituting disembodied
concepts or truths that are not 'useful.'" Id. at *14. Essentially, the mathematical algorithm exception is intended to identify non-practical application of an abstract
idea. U.S. PTO Examination Guidelines for Computer-Related Inventions, 61 Fed. Reg. 7478, 7481 (1996). Before State Street, the mathematical algorithm exception could serve as an obstacle to applicants who sought to patent software that ran on
a general purpose computer and consisted of computer code employing mathematical calculations or formulae.
For many computer programs, the advance lies in the processing steps the computer executes rather than in the computer hardware
itself. (Claims to improvements in computer hardware, for example, clearly fall within the "machine" category of statutory
subject matter.) Thus, a patent claim that only relies on a "general purpose computer" (and does not claim any particular
advance in the hardware) is, as a practical matter, a claim to the steps of the mathematical algorithm and thus, potentially
unpatentable. Under authority that predates State Street, computer software that executed processes (or algorithms) involving mathematical calculation also had to involve some "transformation
or conversion of subject matter representative of or constituting physical activity or objects" to effectively cross the statutory
subject threshold. In re Schrader, 22 F.3d 290, 294 (Fed. Cir. 1994). The "physicality" requirement was a way to determine whether the claimed invention was
attempting to claim abstract ideas, laws of nature or natural phenomena.
Similarly, courts and commentators have considered business methods such as marketing plans, accounting schemes, and promotional
strategies unpatentable. In Ex parte Murray, 9 USPQ 2d 1819, 1820 (Bd. Pat. App. & Int'f. 1988), for example, the board rejected a patent application for an accounting
method that involved a form for categorizing, calculating, and recording monetary expenditures:
Considering the claimed method as a whole, it becomes apparent that appellant is seeking patent protection on a method of
conducting business, or providing a banking service, between a financial institution and its customers. . . . While it may
in some situations be problematic to ascertain what falls within the penumbra of the judicially prescribed "method of doing
business", we find no such difficulty in the present case. We are convinced that the claimed accounting method . . . is, on
its very face, a vivid example of the type of "method of doing business" contemplated by our review court as outside the protection
of the patent statutes. Accordingly, we will affirm the examiner's rejection of the claims as drawn to nonstatutory subject
matter.
See also In re Grams, 888 F.2d 835, 837, 12 USPQ 2d 1824, 1826 (Fed. Cir. 1989) ("mathematical algorithms join the list of non-patentable subject
matter not within the scope of section 101, including methods of doing business").
The Subject Matter at Issue in State Street
The Signature Financial Group patent (U.S. Patent No. 5,193,056) at issue before the district court claims a general purpose
computer programmed to implement a "hub and spoke" investment structure. The system allows various mutual funds ("Spokes")
to pool their assets in an investment portfolio ("Hub") organized as a partnership. The computer program determines the percentage
share that each Spoke fund holds in the Hub portfolio, tracks any daily activity affecting the portfolio's assets, and allocates
gains, losses and expenses to each of the Spoke member funds. The computer program can accurately determine the true asset
value of each Spoke and calculate allocation ratios between or among the Spokes, and thus determine what dividends are owed
to each investor. Signature Financial Group, Inc. v. State Street Bank & Trust Co., 927 F. Supp. 502, 504-505 (D. Mass. 1996).
The District Court's Decision in State Street
The district court found the claimed invention unpatentable under both the mathematical algorithm and business method exceptions.
The court reasoned that the claimed invention was no more than a mathematical algorithm which did not represent a transformation
of anything physical. "Rather, like other accounting methods, it is designed to manipulate and record numbers." Id. at 514. Therefore, the court held that "[t]he invention does nothing other than present and solve a mathematical algorithm
and, therefore, is not patentable." Id. The district court also concluded that the "'056 Patent is claimed sufficiently broadly to foreclose virtually any computer-implemented
accounting method necessary to manage this type of financial structure. . . . In effect, the '056 Patent grants Signature
a monopoly on its idea of a multi-tiered partnership portfolio investment structure; patenting an accounting system necessary
to carry on a certain type of business is tantamount to a patent on the business itself. Because such abstract ideas are not
patentable, either as methods of doing business or as mathematical algorithms, the '056 Patent must fail." Id. at 516.
The Federal Circuit Decision in State Street
The Federal Circuit opinion rejected the district court's adherence to the physicality requirement and flatly rejected the
business method exception.
Statutory Subject Matter Inquiry Expansively Defined
The Federal Circuit described the §101 inquiry as one that "should not focus on which of the four categories of subject matter
a claim is directed to -- process, machine, manufacture, or composition of matter -- but rather on the essential characteristics
of the subject matter, in particular, its practical utility." State Street, 1998 U.S. App. LEXIS 16869 at *20 (emphasis added). Even assuming the district court correctly characterized the claimed
invention as doing nothing more than presenting and solving a mathematical algorithm, the Federal Circuit found patentable
subject matter because of the utility of the claimed invention. As the Federal Circuit explained:
Today we hold that 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" -- a final share price momentarily fixed for recording and reporting
purposes and even accepted and relied upon by regulatory authorities and in subsequent trades.
Id. at *14-15.
The court went on to say:
For purposes of our analysis, as noted above, claim 1 is directed to a machine programmed with the Hub and the Spoke software
and admittedly produces a "useful, concrete, and tangible result [citation omitted]." This renders it statutory subject matter,
even if the useful result is expressed in numbers, such as price, profit, percentage, cost, or loss.
Id. at *20.
Business Method Exception
The Federal Circuit made two significant contributions to the dialogue on this subject. First, the court stated, "[w]e take
this opportunity to lay this ill-conceived exception to rest." State Street, 1998 U.S. App. LEXIS 16869 at *21. The court went on to observe, "[t]he business method exception has never been invoked
by this court, or the CCPA [predecessor court to Federal Circuit], to deem an invention unpatentable." Id. at *22. Courts should analyze patent claims directed to business methods as if they were process claims for purposes of
§101 analysis.
Second, the court commented in dicta that the jurisprudential basis for the business method exception put forth by the district court -- the breadth of such claims
would encompass any computer implementation of the method -- is not relevant to §101 analysis. Instead, this argument is relevant
to analyses under §§102, 103, and 112, the statutory provisions that govern originality, novelty, and other requirements for
patent validity. Id. at *26. In other words, if the claims of a software patent directed to a business method are too broad, the claims may be
subject to a challenge based on prior art, for example, not statutory subject matter.
Conclusion
The State Street decision envisions broad patent protection for computer software-based technology. Electronic commerce on the Internet, computer-implemented
financial instruments and virtually any types of general purpose computer software are eligible for patent protection provided
they meet the other statutory requirements such as novelty and nonobviousness. Companies in any of these fields should exercise
increased vigilance to identify and patent their own inventions and to avoid infringing the valid patents of others.
