Chapter 8: Patent Protection of Software:
Statutory Subject Matter in the
Supreme Court and the Federal Circuit
D. Statutory Subject Matter in Computerized
Methods of Doing Business
Giles S. Rich, Principles of Patentability
28 Geo. WASH. L. REV. 393-94 (1960)
Section 101, entitled "Inventions patentable," enumerates the categories of inventions subject to patenting. Of course, not every kind of an invention can be patented. Invaluable though it may be to individuals, the public, and national defense, the invention of a more effective organization of the materials in, and the techniques of teaching a course in physics, chemistry, or Russian is not a patentable invention because it is outside of the enumerated categories of "process, machine, manufacture, or composition of matter, or any new and useful improvement thereof." Also outside that group is one of the greatest inventions of our times, the diaper service.
Joseph E. Seagram & Sons, Inc. v. Marzall
United States Court of Appeals for the District of Columbia Circuit
180 F.2d 26 (D.C. Cir. 1950)
Judges: Before CLARK, PRETTYMAN and WASHINGTON, Circuit Judges.
WASHINGTON, Circuit Judge
This case involves a claim for a patent which would cover a method of testing beverages and like products, in order to make advance determination of consumer reactions and preferences.
Joseph E. Seagram & Sons, Inc., the plaintiff below and the appellant here, filed this action in the District Court, alleging that it was entitled to receive a patent which the Commissioner of Patents had refused to grant. The District Court dismissed the complaint, holding the claims of invention unpatentable on the grounds that they constituted nonstatutory subject matter; that they were indefinite; and that the claims lacked the invention necessary to patentability, as the prior art disclosed methods substantially similar to those proposed by the claimant. Seagram brings this appeal.
Several claims of invention were filed. Claim 10 is representative, and is as follows:
In the art of testing samples of beverages and the like, having chemically-indefinable sense-perceptible qualitative properties, such as bite, body, odor and taste, a method of obtaining, through human sensory reactions, substantially reproducible indications of qualitative properties comprising:
(a) preparing blind test samples of predetermined temperatures, amounts and concentrations;
(b) submitting at least one sample to each observer of a group large enough to reduce observation errors to allowable experimental limits and under uniform illumination conditions;
(c) causing each observer
(i) to subject the sample to the same sensory test for one particular indefinable, sense-perceptible qualitative property and
(ii) to indicate, within a predetermined range of time following the beginning of such test, his sensory reaction to the qualitative property tested, the indications thus obtained from the group being correlatable in well-known ways to evaluate the property tested.
We believe the District Court's holding to be correct on all three grounds. While there is no case precisely in point, and while the tests of what constitutes a patentable process are necessarily vague because of the great variety of subject matters with which the Patent Office and the courts must deal, it seems clear that appellant's claims do not constitute a "new and useful art, machine, manufacture, composition of matter, or any new and useful improvements thereof," within the meaning of the statutes.
Industry has traditionally sought to determine consumer reaction in order to develop better products, and ones progressively more pleasing to the public. To give appellant a monopoly, through the issuance of a patent, upon so great an area in the field of marketing and determination of consumer preference would in our view impose without warrant of law a serious restraint upon the advance of science and industry.
Upon examination of the record, we find no ground for reversal. The judgment of the District Court therefore should be affirmed.
Before Newman, Mayer, and Plager, Circuit Judges.
Dissenting opinion of Newman, Circuit Judge.
The board also relied on the "method of doing business" ground for finding Schrader's subject matter non-statutory under § 101. In so doing the board remarked that the "method of doing business" is a "fuzzy" concept, observed the inconclusiveness of precedent, and sought guidance from this court. Indeed it is fuzzy; and since it is also an unwarranted encumbrance to the definition of statutory subject matter in § 101, my guidance is that it be discarded as error-prone, redundant, and obsolete. It merits retirement from the glossary of § 101.
The decisions that have spoken of "methods of doing business" have, or could have, resolved the issue in each case simply by relying on the statutory requirements of patentability such as novelty and unobviousness. An illustration is the CCPA's analysis in In re Howard, 394 F.2d 869 (CCPA 1968), wherein the court affirmed the Board of Appeals' rejection of the claims for lack of novelty, the court finding it unnecessary to reach the board's § 101 ground that a method of doing business is "inherently unpatentable."
Ex parte Murray, 9 U.S.P.Q.2d (BNA) 1819 (PTO Bd. Pat. App. & Interf. 1988), relied on herein by the board, can be viewed similarly, for the Murray holding that "the claimed accounting method [requires] no more than the entering, sorting, debiting and totaling of expenditures as necessary preliminary steps to issuing an expense analysis statement" states grounds of obviousness or lack of novelty, not of non-statutory subject matter. Indeed, in Dann v. Johnston, 425 U.S. 219 (1976), the Supreme Court declined to discuss the § 101 argument concerning the computerized financial record-keeping system, in view of the Court's holding of patent invalidity under § 103.
A case often cited as establishing the business methods “exception” to patentable subject matter is Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908); however, the court discussed the “obviousness” of the system of records kept to prevent embezzlement by waiters at considerably greater length than whether the subject matter was “statutory.” Although a clearer statement was made in In re Patton, 127 F.2d 324, 327 (CCPA 1942), that a system for transacting business, separate from the means for carrying out the system, is not patentable subject matter, the jurisprudence does not require the creation of a distinct business class of unpatentable subject matter.
The cases simply reaffirm that the patent system is directed to tangible things and procedures, not mere ideas. See Rubber-Tip Pencil Co. v. Howard, 87 U.S. 498, 507 (1874) (“An idea of itself is not patentable, but a new device by which it may be made practically useful is”). Any historical distinctions between a method of “doing” business and the means of carrying it out blur in the complexity of modern business systems. See Paine, Webber, Jackson and Curtis v. Merrill Lynch, 564 F.Supp. 1358 (D. Del. 1983), wherein a computerized system of cash management was held to be statutory subject matter.
I discern no purpose in perpetuating a poorly defined, redundant, and unnecessary “business methods” exception, indeed enlarging (and enhancing the fuzziness of) that exception by applying it in this case. All of the “doing business” cases could have been decided using the clearer concepts of Title 35. Patentability does not turn on whether the claimed method does “business” instead of something else, but on whether the method, viewed as a whole, meets the requirements of patentability as set forth in §§ 102, 103, and 112 of the Patent Act.
1. Consider the statement that “a system for transacting business, separate from the means for carrying out the system, is not patentable subject matter.” What does this mean?
One interpretation might be that, absent specification of more particularized machinery than a programmed general–purpose digital computer, a claim that effectively preempts a new method of doing business is an unpatentable idea. For example, the idea of conducting a self–service cafeteria is not patentable, “however novel, useful, or commercially successful” it may be, but a specific coin-operated, glass-fronted, food-dispensing mechanism, such as that used in the “Automat,” is potentially patentable. See Loew's Drive-In Theaters, Inc. v. Park–In Theaters, Inc., 174 F.2d 547, 552 (1st Cir.), cert. denied, 328 U.S. 822 (1949).
2. Why should this be so? Is it proper to conclude that patents on mere business ideas are as objectionable in principle as are patents on scientific ideas or principles of nature? Would such patents destroy legitimate business competition just as patents on scientific ideas would impede scientific progress? See Joseph E. Seagram & Sons. v. Marzall, 180 F.2d 26, 28 (D.C. Cir. 1950) (denying patent on idea of “blind testing” consumer beverage preferences as patent would be “a serious restraint upon the advance of science and industry”).
Might it instead be so that allowing such patents would create the incentive to entrepreneurs to provide a society thirsty for new ideas about computerizing business operations with a greatly needed draught of business method innovations?
3. The case that follows, the State Street Bank case, dominated the field for more than a decade, until the Supreme Court overruled it and swung the pendulum back toward the Flook case.
Before Rich, Plager, and Bryson, Circuit Judges.
Rich, Circuit Judge.
Signature Financial Group, Inc. (Signature) appeals from the decision of the United States District Court for the District of Massachusetts granting a motion for summary judgment in favor of State Street Bank & Trust Co. (State Street), finding U.S. Patent No. 5,193,056 (the ’056 patent) invalid on the ground that the claimed subject matter is not encompassed by 35 U.S.C. § 101. See State Street Bank & Trust Co. v. Signature Financial Group, Inc., 927 F. Supp. 502 (D. Mass. 1996). We reverse and remand because we conclude that the patent claims are directed to statutory subject matter.
Signature is the assignee of the ’056 patent which is entitled “Data Processing System for Hub and Spoke Financial Services Configuration.” The ’056 patent issued to Signature on 9 March 1993, naming R. Todd Boes as the inventor. The patent is generally directed to a data processing system (the system) for implementing an investment structure which was developed for use in Signature's business as an administrator and accounting agent for mutual funds. In essence, the system, identified by the proprietary name Hub and Spoke®, facilitates a structure whereby mutual funds (Spokes) pool their assets in an investment portfolio (Hub) organized as a partnership. This investment configuration provides the administrator of a mutual fund with the advantageous combination of economies of scale in administering investments coupled with the tax advantages of a partnership.
State Street and Signature are both in the business of acting as custodians and accounting agents for multi-tiered partnership fund financial services. State Street negotiated with Signature for a license to use its patented data processing system described and claimed in the ’056 patent. When negotiations broke down, State Street brought a declaratory judgment action asserting invalidity, unenforceability, and noninfringement in Massachusetts district court, and then filed a motion for partial summary judgment of patent invalidity for failure to claim statutory subject matter under § 101. The motion was granted and this appeal followed.
On appeal, we are not bound to give deference to the district court’s grant of summary judgment, but must make an independent determination that the standards for summary judgment have been met. Summary judgment is properly granted where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. The substantive issue at hand, whether the patent is invalid for failure to claim statutory subject matter under § 101, is a matter of both claim construction and statutory construction. We review claim construction de novo including any allegedly fact-based questions relating to claim construction. We also review statutory construction de novo. We hold that declaratory judgment plaintiff State Street was not entitled to the grant of summary judgment of invalidity of the ’056 patent under § 101 as a matter of law, because the patent claims are directed to statutory subject matter.
The following facts pertinent to the statutory subject matter issue are either undisputed or represent the version alleged by the nonmovant. The patented invention relates generally to a system that allows an administrator to monitor and record the financial information flow and make all calculations necessary for maintaining a partner fund financial services configuration. As previously mentioned, a partner fund financial services configuration essentially allows several mutual funds, or “Spokes,” to pool their investment funds into a single portfolio, or “Hub,” allowing for consolidation of, inter alia, the costs of administering the fund combined with the tax advantages of a partnership. In particular, this system provides means for a daily allocation of assets for two or more Spokes that are invested in the same Hub. The system determines the percentage share that each Spoke maintains in the Hub, while taking into consideration daily changes both in the value of the Hub's investment securities and in the concomitant amount of each Spoke’s assets.
In determining daily changes, the system also allows for the allocation among the Spokes of the Hub’s daily income, expenses, and net realized and unrealized gain or loss, calculating each day's total investments based on the concept of a book capital account. This enables the determination of a true asset value of each Spoke and accurate calculation of allocation ratios between or among the Spokes. The system additionally tracks all the relevant data determined on a daily basis for the Hub and each Spoke, so that aggregate year end income, expenses, and capital gain or loss can be determined for accounting and for tax purposes for the Hub and, as a result, for each publicly traded Spoke.
It is essential that these calculations are quickly and accurately performed. In large part this is required because each Spoke sells shares to the public and the price of those shares is substantially based on the Spoke’s percentage interest in the portfolio. In some instances, a mutual fund administrator is required to calculate the value of the shares to the nearest penny within as little as an hour and a half after the market closes. Given the complexity of the calculations, a computer or equivalent device is a virtual necessity to perform the task.
The patent application was filed in 1991. It initially contained six “machine” claims, which incorporated means-plus-function clauses, and six method claims. According to Signature, during prosecution the examiner contemplated a § 101 rejection for failure to claim statutory subject matter. However, upon cancellation of the six method claims, the examiner issued a notice of allowance for the remaining present six claims on appeal. Only claim 1 is an independent claim.
The district court began its analysis by construing the claims to be directed to a process, with each “means” clause merely representing a step in that process. However, “machine” claims having “means” clauses may only be reasonably viewed as process claims if there is no supporting structure in the written description that corresponds to the claimed “means” elements. This is not the case now before us.
When independent claim 1 is properly construed in accordance with § 112, ¶ 6, it is directed to a machine, as demonstrated below, where representative claim 1 is set forth, the subject matter in brackets stating the structure the written description discloses as corresponding to the respective “means” recited in the claims.
1. A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:
computer processor means [a personal computer including a CPU] for processing data;
storage means [a data disk] for storing data on a storage medium;
first means [an arithmetic logic circuit configured to prepare the data disk to magnetically store selected data] for initializing the storage medium;
second means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases or decreases based on specific input, allocate the results on a percentage basis, and store the output in a separate file] for processing data regarding assets in the portfolio;
third means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases and decreases based on specific input, allocate the results on a percentage basis and store the output in a separate file] for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;
fourth means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases and decreases based on specific input, allocate the results on a percentage basis and store the output in a separate file] for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and
fifth means [an arithmetic logic circuit configured to retrieve information from specific files, calculate that information on an aggregate basis and store the output in a separate file] for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds.
Each claim component, recited as a “means” plus its function, is to be read, of course, pursuant to §112, ¶ 6, as inclusive of the “equivalents” of the structures disclosed in the written description portion of the specification. Thus, claim 1, properly construed, claims a machine, namely, a data processing system for managing a financial services configuration of a portfolio established as a partnership, which machine is made up of, at the very least, the specific structures disclosed in the written description and corresponding to the means-plus-function elements recited in the claim. A “machine” is proper statutory subject matter under § 101. We note that, for the purposes of a § 101 analysis, it is of little relevance whether claim 1 is directed to a “machine” or a “process,” as long as it falls within at least one of the four enumerated categories of patentable subject matter, “machine” and “process” being such categories.
This does not end our analysis, however, because the court concluded that the claimed subject matter fell into one of two alternative judicially-created exceptions to statutory subject matter. The court refers to the first exception as the “mathematical algorithm” exception and the second exception as the “business method” exception. Section 101 reads:
Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.
The plain and unambiguous meaning of § 101 is that any invention falling within one of the four stated categories of statutory subject matter may be patented, provided it meets the other requirements for patentability set forth in Title 35, i.e., those found in §§ 102, 103, and 112, ¶ 2.
The repetitive use of the expansive term “any” in § 101 shows Congress’ intent not to place any restrictions on the subject matter for which a patent may be obtained beyond those specifically recited in § 101. Indeed, the Supreme Court has acknowledged that Congress intended § 101 to extend to “anything under the sun that is made by man.” Thus, it is improper to read limitations into § 101 on the subject matter that may be patented where the legislative history indicates that Congress clearly did not intend such limitations.
The “Mathematical Algorithm” Exception
The Supreme Court has identified three categories of subject matter that are unpatentable, namely “laws of nature, natural phenomena, and abstract ideas.” Of particular relevance to this case, the Court has held that mathematical algorithms are not patentable subject matter to the extent that they are merely abstract ideas. See Diehr, 450 U.S. 175, passim; Parker v. Flook, 437 U.S. 584 (1978); Gottschalk v. Benson, 409 U.S. 63 (1972). In Diehr, the Court explained that certain types of mathematical subject matter, standing alone, represent nothing more than abstract ideas until reduced to some type of practical application, i.e., “a useful, concrete and tangible result.” Alappat. (This has come to be known as the mathematical algorithm exception. This designation has led to some confusion, especially given the Freeman-Walter-Abele analysis. By keeping in mind that the mathematical algorithm is unpatentable only to the extent that it represents an abstract idea, this confusion may be ameliorated.)
Unpatentable mathematical algorithms are identifiable by showing they are merely abstract ideas constituting disembodied concepts or truths that are not “useful.” From a practical standpoint, this means that to be patentable an algorithm must be applied in a “useful” way. In Alappat, we held that data, transformed by a machine through a series of mathematical calculations to produce a smooth waveform display on a rasterizer monitor, constituted a practical application of an abstract idea (a mathematical algorithm, formula, or calculation), because it produced “a useful, concrete and tangible result’ — the smooth waveform.
Similarly, in Arrythmia Research Technology Inc. v. Corazonix Corp., 958 F.2d 1053 (Fed. Cir. 1992), we held that the transformation of electrocardiograph signals from a patient's heartbeat by a machine through a series of mathematical calculations constituted a practical application of an abstract idea (a mathematical algorithm, formula, or calculation), because it corresponded to a useful, concrete or tangible thing — the condition of a patient's heart.
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.
The district court erred by applying the Freeman-Walter-Abele test to determine whether the claimed subject matter was an unpatentable abstract idea. The Freeman-Walter-Abele test was designed by the Court of Customs and Patent Appeals, and subsequently adopted by this court, to extract and identify unpatentable mathematical algorithms in the aftermath of Benson and Flook. The test has been thus articulated:
First, the claim is analyzed to determine whether a mathematical algorithm is directly or indirectly recited. Next, if a mathematical algorithm is found, the claim as a whole is further analyzed to determine whether the algorithm is “applied in any manner to physical elements or process steps,” and, if it is, it “passes muster under § 101.”
After Diehr and Chakrabarty, the Freeman-Walter-Abele test has little, if any, applicability to determining the presence of statutory subject matter. As we pointed out in Alappat, application of the test could be misleading, because a process, machine, manufacture, or composition of matter employing a law of nature, natural phenomenon, or abstract idea is patentable subject matter even though a law of nature, natural phenomenon, or abstract idea would not, by itself, be entitled to such protection. The test determines the presence of, for example, an algorithm. Under Benson, this may have been a sufficient indicium of nonstatutory subject matter. However, after Diehr and Alappat, the mere fact that a claimed invention involves inputting numbers, calculating numbers, outputting numbers, and storing numbers, in and of itself, would not render it nonstatutory subject matter, unless, of course, its operation does not produce a “useful, concrete and tangible result.” Alappat. After all, as we have repeatedly stated (In re Iwahashi) —
every step-by-step process, be it electronic or chemical or mechanical, involves an algorithm in the broad sense of the term. Since § 101 expressly includes processes as a category of inventions which may be patented and § 100(b) further defines the word “process” as meaning “process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material,” it follows that it is no ground for holding a claim is directed to nonstatutory subject matter to say it includes or is directed to an algorithm. This is why the proscription against patenting has been limited to mathematical algorithms. . . .
The question of whether a claim encompasses statutory subject matter should not focus on which of the four categories of subject matter a claim is directed to (of course, the subject matter must fall into at least one category of statutory subject matter)
— process, machine, manufacture, or composition of matter — but rather on the essential characteristics of the subject matter, in particular, its practical utility. Section 101 specifies that statutory subject matter must also satisfy the other “conditions and requirements” of Title 35, including novelty, nonobviousness, and adequacy of disclosure and notice. See In re Warmerdam. For purpose of our analysis, as noted above, claim 1 is directed to a machine programmed with the Hub and Spoke software and admittedly produces a “useful, concrete, and tangible result.” Alappat. This renders it statutory subject matter, even if the useful result is expressed in numbers, such as price, profit, percentage, cost, or loss.
The Business Method Exception
As an alternative ground for invalidating the patent under § 101, the court relied on the judicially-created, so-called “business method” exception to statutory subject matter. We take this opportunity to lay this ill-conceived exception to rest. Since its inception, the “business method” exception has merely represented the application of some general, but no longer applicable legal principle, perhaps arising out of the “requirement for invention”
— which was eliminated by § 103. Since the 1952 Patent Act, business methods have been, and should have been, subject to the same legal requirements for patentability as applied to any other process or method.
The business method exception has never been invoked by this court, or the CCPA, to deem an invention unpatentable. Application of this particular exception has always been preceded by a ruling based on some clearer concept of Title 35 or, more commonly, application of the abstract idea exception based on finding a mathematical algorithm.*
* See also Dann v. Johnston, 425 U.S. 219 (1976) (the Supreme Court declined to discuss the section 101 argument concerning the computerized financial record-keeping system, in view of the Court's holding of patent invalidity under section 103).
Similarly, In re Schrader, while making reference to the business method exception, turned on the fact that the claims implicitly recited an abstract idea in the form of a mathematical algorithm and there was no “transformation or conversion of subject matter representative of or constituting physical activity or objects.”
State Street argues that we acknowledged the validity of the business method exception in Alappat when we discussed Maucorps and Meyer:
Maucorps dealt with a business methodology for deciding how salesmen should best handle respective customers and Meyer involved a “system” for aiding a neurologist in diagnosing patients. Clearly, neither of the alleged “inventions” in those cases falls within any § 101 category.
However, closer scrutiny of these cases reveals that the claimed inventions in both Maucorps and Meyer were rejected as abstract ideas under the mathematical algorithm exception, not the business method exception.
Even the case frequently cited as establishing the business method exception to statutory subject matter, Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908), did not rely on the exception to strike down the patent.** In that case, the patent was found invalid for lack of novelty and “invention,” not because it was improper subject matter for a patent. The court stated “the fundamental principle of the system is as old as the art of bookkeeping, i.e., charging the goods of the employer to the agent who takes them. . . . If at the time of [the patent] application, there had been no system of bookkeeping of any kind in restaurants, we would be confronted with the question whether a new and useful system of cash registering and account checking is such an art as is patentable under the statute.
** See also Loew's Drive-In Theatres v. Park-In Theatres, 174 F.2d 547, 552 (1st Cir. 1949) (holding that the means for carrying out the system of transacting business lacked “an exercise of the faculty of invention”); In re Patton, 127 F.2d 324, 327-38 (CCPA 1942) (finding claims invalid as failing to define patentable subject matter over the references of record.); Bernardini v. Tocci, 190 F 329, 332 (C.C.S.D.N.Y. 1911); In re Wait, 73 F.2d 982, 983 (CCPA 1934) (“[S]urely these are, and always have been, essential steps in all dealings of this nature, and even conceding, without holding, that some methods of doing business might present patentable novelty, we think such novelty is lacking here.”); In re Howard, 157 USPQ 615, 617 (CCPA 1968)(“[W]e therefore affirm the decision of the Board of Appeals on the ground that the claims do not define a novel process . . . [so we find it] unnecessary to consider the issue of whether a method of doing business is inherently unpatentable.”). Although a clearer statement was made in In re Patton, 127 F.2d 324, 327, 53 USPQ 376, 379 (CCPA 1942), that a system for transacting business, separate from the means for carrying out the system, is not patentable subject matter, the jurisprudence does not require the creation of a distinct business class of unpatentable subject matter.
This case is no exception. The district court announced the precepts of the business method exception as set forth in several treatises, but noted as its primary reason for finding the patent invalid under the business method exception as follows:
If Signature’s invention were patentable, any financial institution desirous of implementing a multi-tiered funding complex modelled (sic) on a Hub and Spoke configuration would be required to seek Signature's permission before embarking on such a project. This is so because the ’056 Patent is claimed [sic] sufficiently broadly to foreclose virtually any computer-implemented accounting method necessary to manage this type of financial structure. [Emphasis added.]
Whether the patent’s claims are too broad to be patentable is not to be judged under § 101, but rather under §§ 102, 103, and 112. Assuming the above statement to be correct, it has nothing to do with whether what is claimed is statutory subject matter.
In view of this background, it comes as no surprise that in the most recent edition of the Manual of Patent Examining Procedures (MPEP) (1996), a paragraph of § 706.03(a) was deleted. In past editions it read:
Though seemingly within the category of process or method, a method of doing business can be rejected as not being within the statutory classes. See Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908), and In re Wait, 24 USPQ 88, 22 CCPA 822 (1934).
This acknowledgment is buttressed by the U.S. Patent and Trademark 1996 Examination Guidelines for Computer Related Inventions which now read:
Office personnel have had difficulty in properly treating claims directed to methods of doing business. Claims should not be categorized as methods of doing business. Instead such claims should be treated like any other process claims. (61 Fed. Reg. 7478, 7479 (1996).)
We agree that this is precisely the manner in which this type of claim should be treated. Whether the claims are directed to subject matter within § 101 should not turn on whether the claimed subject matter does “business” instead of something else.
The appealed decision is reversed and the case is remanded to the district court for further proceedings consistent with this opinion.
1. In explaining the application of § 112 ¶ 6 to Boes’s claim 1, the Federal Circuit inserted brackets after the various means of the all means-plus-function claim to indicate what structure the specification had recited to correspond to the means. For example, the second means was:
an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases or decreases based on specific input, allocate the results on a percentage basis, and store the output in a separate file.
This refers to one or more computer program instructions to perform the recited functions. Why is or is not that “structure” within the meaning of § 112 ¶ 6?
2. It may not be clear from the Federal Circuit's opinion what the point of a Hub and Spokes system is. Under the IRC and implementing IRS regulations, a pool of stock is treated as an entity subject to taxation—first as an entity and then again at the pool member (taxpayer) level when earnings are distributed, unless the pool’s inputs and outputs are computed on a daily basis (between the closing of the market and midnight), so as to allocate all debits and credits in the manner described in claim 1 of the Boes patent. In the latter event, the pool entity’s taxable earnings are passed through (as in the case of a partnership, LLC, or subchapter S corporation) and tax is levied only once, at the pool member (taxpayer) level.
In oral argument of this case, Judge Rich asked counsel for the patentee whether the patent was not one directed to a “tax dodge.” Should a tax dodge be eligible for a patent?
3. The district court opinion in this case stated:
If Signature’s invention were patentable, any financial institution desirous of implementing a multi-tiered funding complex modelled on a Hub and Spoke configuration would be required to seek Signature’s permission before embarking on such a project. This is so because the ’056 Patent is claimed sufficiently broadly to foreclose virtually any computer-implemented accounting method necessary to manage this type of financial structure. Indeed, during licensing negotiations, Signature informed State Street that any data processing system designed to perform book accounting for a multi-tiered fund based on a partnership portfolio configuration would infringe the patent.
Assume that it would be possible to draw this chart: The left hand column shows the elements of the Boes patent’s claim 1. In the right hand column, next to each element on the left side is set out a portion of the IRS regulations on taxing partnerships in which interests change from time to time (see IRS Reg. § 1.704). Each left column entry is a “means for performing” whatever the right column entry states. See Richard H. Stern, Scope-of-Protection Problems With Patents and Copyrights on Methods of Doing Business, 10 Fordham Int. Prop., Media & Ent. L.J. 105, 156-58 (1999) (having such a tabulation) (copy of tabulation at link). See also Leo J. Raskind, The State Street Bank Decision: The Bad Business of Unlimited Patent Protection for Methods of Doing Business, 10 Fordham Int. Prop., Media & Ent. L.J. 61 (1999). What relevance, if any, would this have to the legal issues in this case? Do you see any policy issue that the Boes patent raises? How does this relate to the district court’s remark quoted above?
4. In its appeal brief before the Federal Circuit, State Street made a preemption argument in somewhat overstated terms. It said that the claims cover each and every means for performing the recited functions, including doing them by hand, slide-rule, or abacus. Signature in reply pointed out that its claims covered performing these functions only with a “data processing system,” which Signature defined as “a general-purpose digital computer capable of accepting data, processing data, and outputting the results.” Comment.
Suppose that IRS Regulations require a reconciliation of accounts of a stock pooling partnership each business day between the close of the market (4 p.m.) and midnight. (They do.) Do you suppose that the reconciliation of accounts can be carried out using an abacus, slide-rule, pencil and paper?
5. The district court drew the following conclusion
— what is your view? Does it have any bearing on the patentability of claim 1?
[P]atenting 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 [when regarded] as methods of doing business or as mathematical algorithms, the patent must fail.
6. None of the briefs before the Federal Circuit in the State Street case discussed in any detail the policy reasons (if any) why this or other methods of doing business should not be patentable. The brief of Visa and Mastercard as amicus curiae for affirmance was devoted exclusively to an argument reviewing precedents under the doctrine against patents on methods of doing business (and made no Benson-related arguments); but the brief did not address whether (or why) sound public policy considerations support the doctrine against business-method patents (the so-called business method doctrine).
7. Consider Joseph E. Seagram & Sons. v. Marzall, 180 F.2d 26 (D.C. Cir. 1950), above. The court reviewed a Patent Office denial of a patent to a beverage manufacturer on a system of determining consumer beverage preferences by “blind testing” a user panel (focus group) to see which blends the panelists liked best. The court thought that such a patent would be “a serious restraint upon the advance of science and industry.” Is that a sensible test? How would it apply to the Boes patent? Would a good legal test be to allow patents except where it is shown that allowing the patent would cause a substantial restraint upon the advance of science and industry? Do you see any administrative problems with the test?
8. In the Alappat opinion, the en banc Federal Circuit (speaking through the author of that court’s State Street opinion) distinguished the oscilloscope-technology, means-plus-function claims of Alappat from the means-plus-function claims involved in In re Maucorps, 609 F.2d 481 (CCPA 1979), and In re Meyer, 688 F.2d 789 (CCPA 1982), by stating:
We further note that Maucorps dealt with a business methodology for deciding how salesmen should best handle respective customers and Meyer involved a “system” for aiding a neurologist in diagnosing patients. Clearly, neither of the “inventions” in those cases falls within any § 101 category.
When appellee State Street argued that the en banc Federal Circuit had recognized the viability of the business method doctrine in this passage, the court responded:
However, closer scrutiny of these cases reveals that the claimed inventions in both Maucorps and Meyer were rejected as abstract ideas under the mathematical algorithm exception, not the business method exception.
As, by this time in this course, an informed reader of Alappat and State Street, do you agree? What's going on here? What is contributed to the soup by this statement from the Grams opinion:
Thus, mathematical algorithms join the list of non-patentable subject matter not within the scope of § 101, including methods of doing business, naturally occurring phenomenon, and laws of nature.
State Street is a panel opinion. The rule in the Federal Circuit is that one panel cannot overrule an earlier panel, but instead must follow it. Only the en banc Federal Circuit can overrule a prior panel or en banc opinion of the Federal Circuit. See Kimberly-Clark Corp. v. Fort Howard Paper Co., 772 F.2d 860, 863 (Fed. Cir. 1985) (“Counsel is apparently unaware that a panel of this court is bound by prior precedential decisions unless and until overturned in banc.”). In a dissenting opinion, Judge Rich termed failure to follow that rule an act of “mutiny”, as well as “heresy” and “illegal.” See Atlantic Thermoplastic v. Faytex, 974 F.2d 1279, 1281 (Fed. Cir. 1992) (dissenting opinion). The majority in the Atlantic Thermoplastic case, however, said the rule does not apply when the earlier panel decision is inconsistent with Supreme Court precedent. How do you reconcile the bound panel rule, Grams, and State Street?
9. Can the subject matter described in Boes’s claim 1 appropriately be characterized as a procedure for performing a particular arithmetic calculation, in the sense of the Benson and Flook cases? A patent cannot validly claim a procedure for doing a numerical calculation without any external “physical” referents. Although those cases involved process claims, the principle is not altered by a change to means-for format. Software means for doing a numerical calculation without any external “physical” referents are not patentable. See Schrader; see also Flook.
Here, State Street Bank might argue, the input to the claimed subject matter is numbers; the output from it is numbers; and the only thing between the input and output is a programmed general-purpose digital computer and the instructions with which it is programmed. There is no thermocouple (Diehr), X–ray CAT scanner (Abele), or oscilloscope (Alappat) at the input to provide input signals representative of physical parameters, such as temperature. There is no post-solution physical activity at the output, such as automatically opening a rubber mold (Diehr) or controlling the brightness of pixels on the screen of a cathode-ray tube (Alappat). In sum, there is only “numbers in and numbers out,” as in Schrader. The final conclusion that the bank might seek to draw is that this kind of “apparatus” or “system” is no more than the abstract idea that these numerical calculations are best done in a computer; it is not the expression (cf. Baker v. Selden) or embodiment (cf. Rubber-Tip Pencil) of an idea into the kind of subject matter on which federal intellectual property rights are granted.
But this argument would be vulnerable to a piano roll blues riposte. Thus, Signature stated in its reply brief before the Federal Circuit:
Any remaining doubt that a program operates to create a different machine was swept away by Alappat: “We have held that such programming creates a new machine, because a general-purpose digital computer in effect becomes a special-purpose computer once it is programmed to perform particular functions pursuant to instructions from program software.” . . . Alappat places the final piece to the puzzle neatly in place. An algorithm, in the form of an operating program as disclosed in the specification of the ’056 patent, interrelates with a general-purpose digital computer and data disk to create a different machine capable of performing the functions set forth in the algorithm. In other words, the algorithm is applied to . . . improve . . . a general-purpose digital computer into a special-purpose computer for managing a Hub and Spokes financial structure.
In other words, why are software means for calculating a given kind of number any less patentable than hardware means? And what difference does input or output hardware make? Is the answer that software calculation means have so sweeping a range of equivalents that a claim to a software means for doing a calculation is tantamount to a claim to doing the calculation with a computer
— and that there is no other way to do a useful calculation in a typical business context but with a computer?
10. The State Street case may present an extreme example of claims directed to number crunching where the supposed invention is difficult to categorize as anything more than number crunching. Earlier decisions have pointed to two critical inquiries as governing the analysis of determining whether a claim to a computer-implemented invention is too abstract to be patented under § 101. The decisions suggest that the patent claim must pass both tests that the inquiries pose. The first inquiry is: What invention did the applicant (or patentee) describe and teach? The second inquiry is: What did the applicant claim?
Different inventions and patents invoke different ones of these inquiries. Some patents (consider, for example, Morse’s claim 8) describe and teach a patentable apparatus (the telegraph system using “repeaters”) or method (sending messages by using that system) but, too abstractly and sweepingly, they claim more than that. These patents pass the first test but fail the second. The claims of such patents might be redrafted, however, to cover just statutory subject matter.
For example, Benson's system might have passed muster under § 101 if limited to the environment of a PBX telephone system using the algorithm to process the dialing of telephone calls (that which Bell Labs argued was the intended use but did not mention in the claims). The patent in the Flook case, if claimed as a method of operating a chemical plant in which reaction temperatures were monitored by a thermocouple at the front end and a shut-down mechanism actuated itself at the back end in accordance with the alarm limit calculations, might have become indistinguishable from the Diehr patent and thus held directed to statutory subject matter. The patent of the Schrader case might have passed muster if the bid display subsystem, remote communication linkages, and any other necessary special apparatus of the system had been included as claim limitations. (Do you think that would have pacified Justice Stevens in the Flook case? Would he have demanded more? What? What does the Alice case say?
Other patents, however, fail both tests and cannot be repaired by redrafting the claims to add limitations conferring patentability. Is Boes’s invention (if it is one) in this category? Can you think of some kind of apparatus limitation or signal representative of a physical object or thing that you could insert into Boes's claim 1 that would Diehr–ize it and de-Schrader-ize it?
Signature argued that the general-purpose digital computer and data disk “explicitly” provided “specific structure.” According to Signature, this made its claim 1 on a par with Iwahashi’s claim with a ROM. The Federal Circuit agreed. Do you?
11. The Federal Circuit considered it so clear that putting a new piano roll into the player piano converted the old player piano into a new player piano
— a new machine — that it said all focus on § 101 in computer program patent cases should be abandoned. Instead, the test should focus on utility: “The question of whether a claim encompasses statutory subject matter should not focus on . . . the four categories of subject matter . . . but rather on . . . its practical utility.” Boes’s claim 1 was directed to something with “practical utility,” in the Federal Circuit's view, because both plaintiff and defendant considered it valuable.
What is the effect of a legal test of patentability (or statutory subject matter) using as its measure whether the parties are willing to spend money to litigate about the matter? In what lawsuits will a verdict issue against patentability, under this measure? In what lawsuits won’t it?
12. Shortly after State Street, the Federal Circuit put a final nail in the coffin it built for the business method doctrine. AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), cert. denied, 120 S. Ct. 368 (1999). In Excel the Federal Circuit considered the patent eligibility of a system for determining whether to bill a customer on a given call at a higher or lower rate, the lower rate being one for calls between customers using the same long distance carrier (say, both use AT&T) and the higher rate one for calls between customers using different carriers (say, AT&T and MCI). Each call has a message record, used for billing purposes. The patent adds to the message record a data field A for identity of the caller's carrier and a data field B for the callee’s carrier identity. A 1 is entered in the field for, say AT&T, and a 0 for, say, anyone else. Call those values a and b, respectively, for fields A and B. You take the logical product (AND) of a and b, which is 1 if a=1 and b=1, and which is 0 otherwise. The rate charged is associated with the value of the product, 1 or 0. (This may seem like a silly patent, but the plaintiff and defendant considered it worth litigating.)
Claim 1, not a model of clarity, reads as follows:
A method for use in a telecommunications system in which interexchange calls initiated by each subscriber are automatically routed over the facilities of a particular one of a plurality of interexchange carriers associated with that subscriber, said method comprising the steps of:
generating a message record for an interexchange call between an originating subscriber and a terminating subscriber, and
including in said message record, a primary interexchange carrier (PIC) indicator having a value which is a function of whether or not the interexchange carrier associated with said terminating subscriber is a predetermined one of said interexchange carriers.
Other claims add further details, such as billing the customer in response to the data field values.
The district court held by summary judgment that the claim was implicitly directed to an algorithm (what amounts to the truth table for A and B) and therefore was not directed to statutory subject matter.
The Federal Circuit reversed, primarily on the authority of State Street. The court rejected the reasoning of In re Grams, In re Schrader, and other decisions based on the Freeman-Walter-Abele test, quoting and approving State Street's assertion
— “After Diehr and Chakrabarty, the Freeman-Walter-Abele test has little, if any, applicability to determining the presence of statutory subject matter.” (The court did not remark on the time relationship of Diehr and Chakrabarty, on the one hand, and the Grams, Abele, et al. cases that the court overruled, on the other hand, nor to the relationship, if any, of the Freeman-Walter-Abele test to Supreme Court precedents.)
On remand, the district court again granted summary judgment against the patent. This time the ground was that MCI had used a billing program that did the same thing, prior to AT&T. Apparently, that was the last word. With that, another great algorithm patent bit the dust. (But not the precedent that had been set in the Federal Circuit.)
13. Some language in the Federal Circuit’s State Street opinion provided a much-recited formula for patent-eligibility under § 101 in the following years (we’ll come to it shortly): any useful, concrete, and tangible subject matter is patent eligible. Justice Breyer commented on this supposed test of patentability in an opinion (joined by Justices Stevens and Souter), (and then again to the same effect in the unanimous Mayo opinion), to which we will come presently:
. . . Neither does the Federal Circuit’s decision in State Street Bank help respondents. That case does say that a process is patentable if it produces a “useful, concrete, and tangible result.” 149 F. 3d, at 1373. But this Court has never made such a statement and, if taken literally, the statement would cover instances where this Court has held the contrary. The Court, for example, has invalidated a claim to the use of electromagnetic current for transmitting messages over long distances even though it produces a result that seems “useful, concrete, and tangible.” Morse. Similarly the Court has invalidated a patent setting forth a system for triggering alarm limits in connection with catalytic conversion despite a similar utility, concreteness, and tangibility. Flook. And the Court has invalidated a patent setting forth a process that transforms, for computer-programming purposes, decimal figures into binary figures
— even though the result would seem useful, concrete, and at least arguably (within the computer’s wiring system) tangible. Gottschalk.
Three Justices agreed with this analysis then, and nine later did in Alice. What is the impact of that on the PTO § 101 guidelines and MPEP § 2106 (Patent Subject Matter Eligibility)?
14. Exercise. Draft and defend in terms of existing precedent after “State Street” patent claims to a system for a dentist to send e-mail reminders to clients (based on the dentist’s records for clients) that it is time for a check-up and tooth-cleaning, in which the client (upon reading the e-mail message) can interactively make and confirm an appointment to have these services performed. Start with a block diagram of the system.
15. Consider the graph at right. We’ll come back to it later. But just consider it now in relation to what you have just read.