by Robert C. Scheinfeld and Parker H. Bagley

"Virtually anything is patentable." These are the words now echoing in court decisions (see Hughes Aircraft Company v. United States,(1) July 28, 1998), in courtrooms and in conference rooms across the country in the wake of the Federal Circuit's recent decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc.(2) There, the patent at issue was directed to a "Hub and Spoke" computerized business system allowing mutual funds (Spokes) to pool their assets into an investment portfolio (Hub) organized as a partnership to realize various administrative and tax advantages.

According to the court, the patent claimed patentable subject matter because of its "practical utility." The fact that the patented programmed machine produced a "useful, concrete, and tangible result" was enough -- "even if the useful result is expressed in numbers, such as price, profit, percentage, cost, or loss." The Federal Circuit thus made clear that no longer will a patent be denied on the grounds that it merely uses numbers or claims a method of doing business. The test is practical utility.

Patentable Subject Matter

 Article I, Section 8 of the U.S. Constitution authorizes patents to be granted to "promote the Progress of . . . useful Arts." To be patentable, an invention must be new, useful, nonobvious, and must fall into one of the following four statutory categories of patentable subject matter: process, machine, manufacture, or composition of matter.(3) The scope of patentable subject matter is extraordinarily wide, so much so that the Supreme Court has stated that it covers "anything under the sun that is made by man."(4) The judiciary has carved out a few narrow exceptions to this scope,(5) although two of these exceptions and their historical bases have come under increasing scrutiny due to the increasing prevalence of computers.

Historically, business methods such as bookkeeping procedures and investment management strategies were difficult to characterize as innovations in the technological or "useful" arts entitled to patent protection. Most of these methods were carried out by hand with pen and paper and did not appear to involve any technological art, whereas concrete physical innovations such as improved "oscilloscopes" for displaying electrical signals have always been readily identifiable as falling within a technological art. Now that business methods and physical devices are both being embodied in computers, it has become difficult to distinguish them from each other as technological or non-technological. Is an innovative computer program for processing financial data any less useful or technological than an innovative computer program for processing digital wave data? Where is the line to be drawn?

The line drawn by the Supreme Court in early cases arguably denied patent protection to any program not tied to a physical process. In Gottschalk v. Benson,(6) the Supreme Court held that the mental steps of mathematical algorithms are unpatentable. The subject matter in Benson was a computer program for converting binary-coded decimal numerals into pure binary numerals. The Court held that the program was not statutory subject matter, stating that physical transformation was the clue to patentability.

In Parker v. Flook,(7) the Court similarly held that a computerized method for updating alarm set points of a chemical process was not statutory subject matter. The Court explained that the computerized method only generated data that was applied "post-solution" to the chemical process.

However, in Diamond v. Diehr,(8) the Court held that a computerized method was statutory subject matter, where the method was tied directly into a process for curing synthetic rubber. The Court emphasized that the patent involved the transformation of an article of raw, uncured synthetic rubber into a different state or thing.

From the Supreme Court's trilogy of cases, lower courts gleaned that computerized methods must be applied in some manner to physical elements. Specifically, the United States Court of Customs and Patent Appeals (C.C.P.A.) developed a two-part test which inquired (1) whether the patent claim recites a mathematical algorithm and, if so, (2) whether the algorithm is "otherwise statutory," i.e., applied in any manner to physical elements or steps.(9) Patent practitioners seeking protection for computer programs subsequently attempted to satisfy this two-part inquiry by drafting software claims to recite physical computer "means" for performing the functions of the programs.(10) Leading up to State Street, the Federal Circuit was receptive to this approach in appeals arising from patent application rejections issued by the U.S. Patent and Trademark Office.

Most notable among these appeals was the in banc case of In re Alappat,(11) in which the Court found patentable subject matter in claims that recited a "means for" generating smooth digital waves on a display screen. Because the invention truly resided in the software, and because the "means" that were recited in the claims could have been satisfied by any general purpose computer, Alappat effectively relaxed the "physicality" requirements previously understood from Supreme Court and subsequent lower court precedent. However, reasonable arguments existed about whether the claims truly defined physical elements. Nevertheless, the physicality requirement still retained some measure of vitality when Alappat was decided in 1994.

This lingering vitality was demonstrated in In re Schrader,(12) which involved a patent applicant's claims to a competitive bidding system for which computers were "useful" but not necessary. Judge Jay S. Plager, writing for a panel majority consisting of himself and Judge Haldane R. Mayer, found the patent application to be directed to non-statutory subject matter, explaining that there was "no transformation or conversion of subject matter representative of or constituting physical activity or objects."(13) Accordingly, although true physical activity or objects were no longer required, the Court still required at least something "representative" of physical activity or objects. The Court in Schrader did not specifically address the business method exception.

Facts of State Street

 State Street was the first appeal since Alappat of a litigated dispute over the question of whether a business method constitutes statutory subject matter under 35 U.S.C. § 101, when the claims are drafted as a computer "means" for performing business functions. The case was an appeal from a summary judgment decision by the United States District Court for the District of Massachusetts, which held a patent for a computerized method of administering mutual funds to be invalid as directed to non-statutory subject matter.(14)

The patented investment structure was a "Hub-and-Spoke" arrangement wherein the assets of mutual funds ("Spokes") were pooled into an investment portfolio ("Hub") so that the funds could be treated as a partnership for federal income tax purposes. In addition, this arrangement provided administrative economies of scale. The patentees alleged that their innovation overcame difficulties in apportioning gains and losses during market fluctuations and variations in partnership interests.

Exemplary elements of the claims at issue included "(a) computer processor means for processing data; . . . [and] (d) second means for processing data regarding assets in the portfolio and each of the funds from a previous day . . . "(15) The district court applied the Supreme Court's trilogy of cases, as well as lower court precedent, to ascertain whether the claims fell within the mathematical algorithm exception to statutory subject matter. Detecting the presence of a mathematical algorithm, the court inquired into whether the claims defined any physical activities or objects. The court stated that "The claims do not recite any significant pre- or post-solution activity. Neither does the invention measure physical objects or phenomena . . . nor does it physically convert data into a different form as in Alappat."(16) Accordingly, the court held the claims to be invalid as directed to non-statutory subject matter under the mathematical algorithm exception.

Alternatively, the district court found the claims to be invalid under the business method exception. Upon reviewing historical and recent cases that anecdotally, if not directly, support the business method exception, the court stated that "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 [patent] must fail."(17)

The Federal Circuit Decision

 The Federal Circuit reversed the district court on both grounds. The Court first addressed the mathematical algorithm exception, stating that the district court erred by applying the two-part test, which the Court described as maintaining little, if any, applicability.

The Court emphasized that the statutory subject matter inquiry should focus not on the specific statutory category, but on the essential characteristics of the claimed invention, and specifically, its practical utility. Explaining that the patent claim was "directed to a machine programmed with the Hub and Spoke software and admittedly produces a ´useful, concrete, and tangible result,´"(18) the Court found the claim to define statutory subject matter, "even if the useful result is expressed in numbers, such as price, profit, percentage, cost, or loss."(19)

Turning to the business method exception, the panel decided to "take the opportunity to lay this ill-conceived exception to rest"(20) by definitively stating that business methods should be treated like any other process or method under the patent laws.(21) Quoting Judge Pauline Newman from a dissenting opinion in In re Schrader,(22) Judge Rich characterized the business method exception as "an unwarranted encumbrance to the definition of statutory subject matter in section 101, that [should] be discarded as error-prone, redundant, and obsolete."(23)

Addressing the precedent cited by the district court, Judge Rich attributed the origin of the business method exception to Hotel Security Checking v. Lorraine Co.,(24) a 1908 case involving a patent for a bookkeeping method. However, he explained that Hotel Security Checking did not specifically rely on a business method exception, and in fact neither the Federal Circuit nor its predecessor court, the C.C.P.A., have ever invoked the business method exception as the sole basis for holding an invention to be directed to non-statutory subject matter. Instead, the exception was always preceded by a clearer basis under 35 U.S.C. § 101. Moreover, Judge Rich stated that any historical distinctions between business methods and their means of implementation have been blurred by the complexity of modern business systems.

Conclusion

 On its face, State Street stands for the proposition that any method, including a business method (and even one accomplished without the aid of a computer), constitutes statutory subject matter if it has a practical utility in producing a "useful, concrete, and tangible result." According to State Street, such a method should be treated like any other statutory process or method.

The opinion suggests that following this guidance simplifies the mathematical algorithm exception, and renders the business method exception inapplicable.

The potential problem with this analysis, however, is that it essentially ignores the four categories of patentable subject matter - process, machine, manufacture, or composition of matter - explicitly set forth in § 101 and it effectively renders superfluous either these categories or the separate utility requirement of that section. Although State Street's effect remains to be seen and a petition for certiorari is likely, the patent practitioner should in the meantime be inclined to test the waters and urge the filings of patent applications directed to new or non- obvious business methods and related computerized systems.

ENDNOTES

 (1) 148 F.3d 1384, 47 U.S.P.Q. 2d 1542.

(2) No. 96-1327 (Fed. Cir. Jul. 23, 1998).

(3) 35 U.S.C. § 101 ("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.")

(4) Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980).

(5) State Street Bank & Trust Co., No. 96-1327, slip op. at 7 n.1. (noting exceptions against patenting abstract ideas and laws of nature).

(6) 409 U.S. 63 (1972).

(7) 437 U.S. 584 (1978).

(8) 450 U.S. 175 (1981).

(9) 684 F.2d 902 (C.C.P.A. 1982).

(10) This was often done by using a claim drafting tool provided by the statute to allow practitioners greater flexibility in defining inventions. See 35 U.S.C. § 112, sixth paragraph (permitting a combination of elements to be claimed as a "means for" performing a specified function).

(11) 33 F.3d 1526 (Fed. Cir. 1994).

(12) 22 F.3d 290 (Fed. Cir. 1994).

(13) Id. at 294.

(14) State Street Bank & Trust Co. v. Signature Financial Group, Inc., 927 F. Supp. 502 (D. Mass. 1996).

(15) Id. at 505.

(16) Id. at 515 (citations omitted).

(17) Id. at 516.

(18) State Street Bank & Trust Co., No. 96-1327, slip op. at 13.

(19) Id.

(20) Id.

(21) Specifically, as any other method or process under 35 U.S.C. § 101.

(22) 22 F.3d 290, 298 (Fed. Cir. 1994) (Newman, J., dissenting).

(23) State Street Bank & Trust Co., No. 96-1327, slip op. at 13-14 n.10.

(24) 160 F. 467 (2d Cir. 1908).

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