Canada: Protection Of E-Commerce Based Inventions

By Robert J. Graham,

Published 4/1/00

The term "e-commerce" is probably most appropriately defined as commercial activity facilitated by electronic communications. As will be apparent from this simple definition, e-commerce is not a novel phenomenon. After all, consumers have been purchasing goods over the telephone with credit cards, and paying for long distance telephone calls for several decades. However, e-commerce is no longer simply an activity ancillary to a desired transaction, but has evolved to actually become the desired transaction. No doubt, this evolution has been strongly influenced by the increasing popularity and ease of accessibility of the Internet. However, recent developments in patent law, particularly in the United States, have also accelerated the process.

Traditional View on E-Commerce Patent Protection

Typically, an e-commerce-based business will be exploiting a business method implemented with computer software. Given that a patent provides a monopoly on an invention, an e-commerce-based business generally will be interested in both a computer software patent and a business method patent. However, one consistent theme of patent regimes throughout the world has been that patents are intended to promote the development of the useful arts and, therefore, cannot issue for any abstract theorem, scientific principle or phenomenon of nature. Consequently, most jurisdictions have adopted a policy of refusing to grant patents on computer software and mathematical algorithms, on the rationale that a patent directed to this subject matter would amount to a monopolization of the abstract theorem or scientific principle embodied therein.

For instance, in Schlumberger Canada Ltd. v. Commissioner of Patents, the Federal Court of Appeal of Canada considered the patentability of a gas and oil exploration process carried out with a computer. The process involved drilling boreholes in geological formations thought likely to contain hydrocarbons, taking measurements of the soil characteristics through the boreholes, and then converting the measurements via mathematical formulae into information produced in human readable form. The Court noted that the claimed invention was merely the discovery that useful information could be extracted from certain measurements by making certain calculations according to certain formulae. The Court reasoned that if the calculations were effected by men instead of a computer, the subject-matter of the application would simply be mathematical formulae, and that as a mathematical formula was thought to be akin to a mere scientific principle or abstract theorem, the process did not satisfy the statutory definition for an invention.

Another consistent theme of patent regimes has been that patents were intended to protect any new, useful and inventive machine or process, but were not intended to protect activities involving the application of professional skill. This prohibition is based on the notion that a process, to be useful, must provide some reproducible concrete advantage, and that an activity whose outcome depended upon the exercise of professional skill provided no such advantage. Consequently, most jurisdictions have also adopted a policy of refusing to grant patents for business methods, notwithstanding that the method may have satisfied the criteria for novelty and inventive step. For instance, in Lawson v. Commissioner of Patents, the Exchequer Court of Canada considered the patentability of a method for subdividing land with lot lines configured in the shape of a champagne glass. The Court noted that although a "manufacture" and a "method" were both statutory forms of inventions, a "manufacture" required some tangible change in the character or condition of a material object, while a "method" denoted an activity which was material, in the sense that it was a useful art as opposed to a fine art. Since a method of describing and laying out parcels of land in a plan of subdivision did not change the character of the land, and involved the exercise of professional skill, as opposed to manual skill, the claimed invention was not patentable.

Consequently, patent protection for e-commerce activities has traditionally been difficult to obtain. However, with its July 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group, and its April 1999 decision in AT & T v. Excel Communications, the United States Court of Appeals for the Federal Circuit has now made patent protection for e-commerce activities more accessible, by lowering the bar for the issuance of both computer software patents and business method patents in the United States.

E-commerce Patent Protection in The United States

State Street Bank & Trust v. Signature Financial Group

At issue before the Court in State Street was the validity of U.S. Patent No. 5,193,056 entitled "Data Processing System for Hub and Spoke Financial Services Configuration". The ‘056 patent was directed to a data processing system which allowed an administrator to monitor and record the financial information flow necessary to maintain a partnership-based investment structure. The patented investment structure (identified by the proprietary name "Hub and Spoke") allowed several mutual funds (Spokes) to pool their investment funds assets into a single investment portfolio (Hub). The system provided for the daily allocation of assets for two or more Spokes, based on the percentage share that each Spoke maintained in the Hub and the value of the Hub's investment securities.

Signature was the assignee of the ‘056 patent and was attempting to negotiate a licence under the patent to State Street. However, when negotiations failed, State Street obtained a summary judgment motion, in Massachusetts District Court, of patent invalidity for failing to claim statutory subject matter. On appeal, the Federal Court canvassed both the invalidity of the ‘056 patent under the "mathematical algorithm exception" and the " business method exception" to statutory subject matter.

The ‘056 patent contained six "machine" claims, directed to a data processing system for managing a financial services configuration of a portfolio. With respect to the "mathematical algorithm exception", the Court noted that previous interpretations of the exception had determined that mathematical algorithms were not patentable subject matter to the extent that they were merely abstract ideas, but could constitute patentable subject matter if the algorithm produced a useful, concrete and tangible result. Consequently, the Court held that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations, as recited in the claims of the patent, constituted patentable subject matter since the transformation produced a useful, concrete and tangible result - a final share price momentarily fixed for recording and reporting purposes and relied upon by regulatory authorities and in subsequent trades.

With respect to the "business method exception", the Court also noted that this latter exception had never been explicitly adopted in the United States. Further, in Hotel Security Checking Co. v. Lorraine Co., the case cited most often by the United States Patent Office to support the "business method exception", the Court noted that the patent therein (directed to a cash registering and account checking system) was found invalid not for reciting non-statutory subject matter, but instead for lack of novelty and inventiveness. The Court also noted that the most recent edition of the United States Manual of Patent Examining Procedures no longer referred to the "business method" category as a basis for rejecting an application for patent. Consequently, the Court concluded that whether claims were directed to patentable subject matter could not turn on simply whether the claimed subject matter did "business" as opposed to something else, and remanded the case back to the District Court for reconsideration.

AT & T v. Excel Communications

The only issue remaining after State Street was whether the judgment was limited to patents involving "machine" claims. This issue was subsequently resolved by the United States Court of Appeals for the Federal Circuit in AT & T v. Excel Communications.

At issue before the Court in AT & T was the validity of U.S. Patent No. 5,333,184 entitled "Call Message Recording for Telephone Systems". The ‘184 patent was directed to a long-distance telephone call message record enhanced by the addition of a primary long-distance service interexchange carrier indicator to assist long-distance carriers in providing differential billing treatment for subscribers.

The claimed invention was designed to operate in a telecommunications system having multiple long-distance interexchange service carriers, and multiple local exchange carriers. Typically, a local exchange carrier provides a customer with local telephone service and access to the customer’s primary long-distance interexchange service carrier. When a caller initiates a direct-dialled long-distance telephone call, a telephone switch generates a message record for the call. The message record includes information such as the originating and terminating telephone numbers, and the length of time of the call. These message records are then transmitted from the switch to a billing system for generation of a bill. According to the invention, a data field was added to the standard message record to indicate whether a call involved a particular primary long-distance interexchange service carrier. This data field enabled long-distance service carriers to provide differential billing for calls on the basis of the identified data field.

The Court noted that since patent laws were designed to protect both machines and processes, it was of little relevance to distinguish between patents directed to one or the other statutory forms of invention when considering whether a patent was directed to statutory subject matter. The Court observed that the data indicator of the primary long-distance interexchange service carrier was derived from a simple mathematical principle. However, the Court concluded that as the claimed invention did not preclude other uses of the mathematical principle, and as the data indicator represented information which facilitated differential billing of long-distance calls, the claimed process applied the mathematical principle to produce a useful, concrete, tangible result. Accordingly, the claimed process was directed to statutory subject matter.

E-commerce Patent Protection in Europe

The United States isn’t the only jurisdiction which has seen the Courts react favourably to the interests of e-commerce-based enterprises. Section 52(1) to 52(3) of the European Patent Convention (EPC) regulates the subject matter for which patents may issue in Europe. Whereas s. 52(1) of the EPC specifies that European patents shall issue for any "invention" which is new, inventive and is susceptible of industrial application, s. 52(2)(c) specifies that schemes, rules and methods for performing mental acts, playing games or doing business, and computer programs cannot be regarded as "inventions". Notwithstanding this prohibition however, the Boards of Appeal for the European Patent Office have found statutory subject matter for e-commerce activities if the claimed invention demonstrates a "technical effect".

For instance, in re Sohei, the Technical Appeal Board considered the patentability of a management system and method implemented with a computer. Although the claimed invention was restricted to the simultaneous management of financial activity and inventory activity, the patent application indicated that the invention could have personnel and construction applications. Consequently, the Board abstracted the invention to a management system and method which managed two different types of activities (ie. statutory subject matter), rather than merely a financial and inventory management system (ie. non-statutory subject matter). In view of the fact that the invention required a number of different files to be retained in the computer’s memory for implementing a number of different functions, and a processing unit for performing the functions, the Board concluded that the invention, as abstracted, required technical considerations for its implementation. Since the existence of a technical component could not be diminished by the inclusion in the claims of non-technical components (ie. financial and inventory activities), the Board held that the claimed system and method could not be excluded from patentability.

E-Commerce Patent Protection in Canada

The Canadian Courts have not moved significantly from the positions enunciated in Schlumberger and Lawson and, accordingly, have not been as sympathetic to e-commerce-based inventions as in the United States and Europe. However, the Canadian Patent Office Register lists several pending patent applications and several issued patents directed to these types of inventions. Representative patents include Canadian Patent No. 1,281,417 entitled "Interactive Market Management System"; Canadian Patent No. 2,069,955 entitled "Method and System for Remote Delivery of Retail Banking Services"; Canadian Patent No. 2,092,989 entitled "Transactional Processing System"; Canadian Patent No. 2,100,134 entitled "Secure Credit/Debit Card Authorization"; Canadian Patent No. 2,138,829 entitled "Secure Money Transfer Techniques Using Smart Cards"; and Canadian Patent No. 2,175,473 entitled "Electronic Bill Pay System".

The existence of these patents, in conjunction with the numerous Patent Appeal Board decisions rendered since Schlumberger and Lawson with respect to patents for business methods and inventions implemented with computer software, demonstrates that if an e-commerce invention, as claimed, interacts sufficiently with tangible objects so as to be distinguishable from a sequence of mental steps (cf Schlumberger), and does not rely upon the application of professional skill or judgment (cf Lawson), a patent may issue for the invention.


Given the exponential growth in the number of e-commerce enterprises carrying on business over the Internet, and the ease of exploitation of the technology utilized by such enterprises, the need for intellectual property security in the e-commerce industry has never been more important. Although patent protection has traditionally been unavailable for computer software and business activities, a more sophisticated approach by the courts and by patent practitioners to these forms of traditionally non-patentable subject matter has transformed patents into a realizable form of intellectual property security for e-commerce enterprises. In view of the fact that a patent provides a monopoly on an invention, an e-commerce patent is, in effect, a powerful new business tool which no e-commerce enterprise should do without.

Robert Graham, an Associate in the Toronto office, practises in the area of intellectual property law specializing in software and electronics patents. He can be reached by telephone at (416) 862-4425 and by e-mail at

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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