Canada: Patentability of Internet Business Methods

It has been more than a year since the U.S. Court of Appeals for the Federal Circuit struck down the "business method" exception to patentability, in State Street Bank & Trust Co. v. Signature Financial Group Inc., 47 USPQ (2d) 1596 (1998). Since then, Priceline commenced a lawsuit enforcing its reverse-auction e-commerce patent against Microsoft, and Amazon obtained a preliminary injunction preventing Barnes & Noble from using its patented "one click order" web site feature. News of these U.S. cases continues to ripple throughout the e-commerce and internet business communities. Here, we look at the State Street decision and the state of the law in Canada, including two Canadian cases decided since State Street, Re Motorola and Progressive Games v. Commissioner of Patents. We then consider the implications that these developments may have for companies conducting e-commerce and other internet business methods in Canada.

The State Street case involved a patent for a data processing system that manages a hub and spoke mutual fund. Hub and spoke mutual funds are multiple mutual funds with the same investment objectives that form a partnership. Each individual fund is a spoke investing all of its assets in a common portfolio, namely the hub. The data processing system calculates the daily value of the assets held in the common hub portfolio and allocates these assets to each individual spoke fund based upon the spoke's partnership interest at the end of each trading day. Once the assets are allocated among the various spokes, the partnership interest of each spoke can then be recalculated for the next day.

At issue in State Street was whether the patentee's system constituted patentable subject matter. Under U.S. law, the statutory categories of patentable subject matter are limited to a useful process, machine, manufacture, or composition of matter, or improvements thereof. Over the years, the U.S. courts have identified three categories of unpatentable subject matter: laws of nature, natural phenomenon, and abstract ideas. The courts have also developed a number of exceptions to the categories of patentable subject matter, including the "mathematical algorithm" and "business method" exceptions.

A system such as that of the patentee in State Street, i.e., a method of investing, is arguably nothing more than a way of doing business. Indeed, the patent in State Street had been invalidated by a lower court as falling within the so-called "business method" exception. However, the appeal court took the opportunity to "lay this ill conceived exception to rest." In particular, the appeal court noted that: "Application of this particular exception has always been preceded by a ruling based on some clearer concept [under the U.S. Patent Act] or, more commonly, application of the abstract idea exception based on finding a mathematical algorithm." Accordingly, there is no longer any "business method" exception to patentability, in the United States of America.

The U.S. court also re-defined the "mathematical algorithm" exception, in holding that mathematical algorithms constitute patentable subject matter, if they produce a useful, concrete, and tangible result. Applying this reasoning to the patent in suit, the court held 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 and produces a useful, concrete, and tangible result—a final share price momentarily fixed for recording and reporting purposes. Accordingly, under U.S. law, a mathematical algorithm is statutorily acceptable, even if its output is expressed in numbers, such as price, profits, percentage, cost, or loss. It can be noted that this is a remarkably broad interpretation of a "useful, concrete and tangible result."

It is important to note that the State Street court did not decide on whether the patent in suit met all of the requirements for patentability under U.S. law. Indeed, the case has been sent back to the district court to determine whether the subject matter of the patent is novel and unobvious. It nevertheless follows that e–commerce and other computer-implemented business methods are likely to qualify for patent protection in the United States, if they are novel and unobvious, and if they produce a useful, concrete and tangible result.

Patents are granted under the laws of each country. The Canadian definition of patentable subject matter is similar to the U.S. definition, except that it also includes "arts." In Shell Oil Company v. Commissioner of Patents [1982] 2 S.C.R. 536, the Supreme Court of Canada noted:

Canada also has a statutory prohibition against the patenting of a mere scientific principle or abstract theorem. While the Canadian application corresponding to the State Street patent has now been abandoned, Canadian applications corresponding to the Priceline and Amazon.com patents remain pending. This raises the issue of whether applications for these internet business methods and others like them are likely to issue to patent to Canada.

The official position of the Canadian Patent Office is that plans or schemes of doing business are not patentable. The most cited case in Canada in support of this position is Lawson v. The Commissioner of Patents (1970), 62 C.P.R. 101. In Lawson, it was held that a method of describing and laying out parcels of land in a plan of subdivision of a greater tract of land is the skill of a solicitor and conveyancer and that of a planning consultant and a surveyor, and hence an art which belongs to the professional field. It is clear from Lawson that professional skills such as those of a doctor are not proper subject matter for a patent since the point of a process, to fall

within the limits of patentability, must be one that offers some advantage which is material, in the sense that the process belongs to a useful art as distinct from a fine art. However, this decision leaves open as to what is the dividing line between a useful art as opposed to a fine art.

The case of Schlumberger Canada Ltd. v. Commissioner of Patents (1981), 56 C.P.R. (2d) 204 (F.C.A.) is often cited for the proposition that computer programs are not patentable subject matter in Canada. However, since Schlumberger, the Canadian Patent Office has developed the position that computer methods or systems which are directed to a useful end result, and not merely directed to making calculations nor to the presentation of an algorithm and its solution, are patentable subject matter. As a result, some patents directed to computer software inventions, including computer implemented business methods, have already been granted in Canada. For example, Canadian patent No. 1,276,301, entitled "Travel Management System," is directed to a computer program for accessing scheduling and fare databases to create and display alternative travel itineraries in accordance with a preselected travel policy, and Canadian patent No. 2,121,518, entitled "Method and Electronic Apparatus for Performing Bookkeeping," covers a method for electronically performing bookkeeping and a plurality of accounting journal entries.

Two Canadian cases decided since State Street seem to send mixed messages to the internet business community in Canada. The Canadian Patent Appeal Board (PAB) recently held in Re Motorola (1998), 86 C.P.R. (3d) 71, 76 that a computer system for converting an input value to a logarithmic value was patentable subject matter, because it included at least one piece of hardware (a ROM). While it is disappointing that the PAB did not take this opportunity to pronounce on the state of the law in Canada regarding the patentability of computer algorithms, this case is encouraging in that it demonstrates that patent protection for computer implemented methods is available in Canada, notwithstanding Schlumberger.

Less encouraging at first glance is a recent decision of the Federal Court of Canada, Progressive Games, Inc. v. Commissioner of Patents (Unreported Decision of Denault, J. dated 22 October, 1999). In this case, the court held that a method of playing a poker game did not constitute a "process", or an "art" as defined by the Supreme Court of Canada in Shell Oil v. Commissioner of Patents, even though a corresponding patent had already issued in the United States. However, in coming to this conclusion, the Judge found that the applicant's method was not merely a disembodied idea, in that it involved a practical application, with a commercially useful result. It is thus apparent that the Judge's decision to deny patentability was based on the finding that the applicant's method was not sufficiently innovative to qualify as an invention. It follows that had the applicant's method been more innovative, it would have been patentable. While the approach of the Court in Progressive Games arguably mixes the concepts of statutory subject matter and inventiveness, it should nonetheless give comfort to applicants seeking patent protection for innovative business methods in Canada.

It is clear from the above analysis that the state of the law in Canada provides no basis on which to exclude from patent protection business methods which lie in the field of a "useful art" as opposed to a "fine art," "abstract theorem," or "scientific principle." This is particularly true where the method is innovative, inherently beneficial to the public, reproducible, and controllable to produce the desired result whenever it is worked or used.

Despite the holding in Schlumberger, the trend in Canada has been and continues to be an expansion of the range of patentable subject matter and a more liberal interpretation of what amounts to be a "useful art". This trend will likely result in the Canadian Patent Office adopting the State Street or similar approach regarding the patentability of electronic commerce and other business methods, at some point in time. We therefore expect to see more patents for business methods like those of Priceline and Amazon.com to issue, not only in the United States of America, but also in Canada.

The trend towards increasing the availability of patent protection for business methods poses both opportunities and challenges for companies performing computer-implemented business methods in Canada. E-commerce companies now have a greater opportunity to increase the level of intellectual property protection for their innovative technology. Instead of relying solely on copyright protection, companies should consider filing patent applications for their new internet business methods in both Canada and the United States, before making them available to the public.

However, companies will also have to meet new challenges, including the risk of infringing the patent rights of their competitors. The Priceline and Amazon.com lawsuits indicate that internet companies are no longer using their business method patents merely for defensive purposes, but rather, they are now starting to enforce such patents against competitors. Canadian companies conducting e-commerce over the internet should appreciate that the internet has a world-wide reach. Even if an Internet business method is not yet covered by an issued Canadian patent, it could be protected by a U.S. patent. It is also possible an internet business method may be deemed to be performed in whole or in part in the United States of America, e.g. by U.S. customers using a browser to interact with a website, even if the web site server is located in Canada. If so, the operator of the website in Canada could be exposed to liability for direct or contributory infringement under U.S. patent law. Companies should therefore exercise due diligence, including the conducting of appropriate patent infringement searches in Canada and the United States of America, before adopting or acquiring technology in the field of electronic commerce or other internet business methods.