Business Method Patents (in historical and economic context) William Fisher July 4, 2002.

Business Method Patents(in historical and economic context)

William Fisher

July 4, 2002

Types of Patents

Utility -- §101 et seq.Plant -- §161-64Design -- §171-73

95%

5%

§ 101. Inventions patentable

“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.”

Abstract Ideas

Printed Matter

Naturally OccurringSubstances

Animals

Plants

Surgical Procedures

Business Methods

Atomic Weapons Parts (1954)

Man

ufac

ture

Compositions of Matter

Machines

Genes

Laws of Nature

Surgical Procedures

Business Methods

Genes

PPA (1930)

PVPA (1970)

Purified & exhibiting new qualities

ProcessesProcessesProductsProducts

PbP

Athleti

c Mov

es?

Chakrabarty

Pioneer Hi-Bred (2000)

Software

Business Method PatentsFor most of 20th century, BMPs assumed

unavailable because “abstract ideas” Hotel Security (1908) Sterling (1934) Wait (1934) Patton (1942) Loew’s Drive-In (1949) Murray (1988)

Business Method PatentsFor most of 20th century, BMPs assumed

unavailable because “abstract ideas”1990’s: PTO quietly begins granting BMPs1996: PTO guidelines directs patent

examiners to treat BMPs like other process patents

1998: State Street Bank (CAFC); SCt denies cert.

State Street Bank

Investment Portfolio

partn

ership

Mut

ual F

und

4Mutual Fund 5

Mutual Fund 1

Mut

ual F

und

2

Mutual Fund 3IndividualInvestor

11%

14%

20%

25%

30%

Data Processing System

State Street HoldingsTransformation of data by a machine into a

final share price constitutes a practical application of an algorithm and is therefore patentable subject matter

Repudiate the “business-methods” exception to patentability

Business-Method Patents: Rates

1998: 1300 applications 420 patents issued

2000 7500 applications 1000 patents issued

Examples of Business Methods PatentsMerrill Lynch “Cash Management Account”

(4,346,442 – 1982)Online Support System (5,806,043 – 1998)Priceline.com (5,794,207 – 1998)“Single click” ecommerce checkout (5,960,411 –

1999) Amazon v. Barnes & Noble (WD Wash., Dec. 1999) Reversed (CAFC Feb. 2001)

Behavioral Profiling (5,848,396 – 1998)Prepaid cellular calls (6,157,823)

Behavioral Profiling (5,848,396) Abstract: Computer network method and apparatus provides

targeting of appropriate audience based on psychographic or behavioral profiles of end users. The psychographic profile is formed by recording computer activity and viewing habits of the end user. Content of categories of interest and display format in each category are revealed by the psychographic profile, based on user viewing of agate information. Using the profile (with or without additional user demographics), advertisements are displayed to appropriately selected users. Based on regression analysis of recorded responses of a first set of users viewing the advertisements, the target user profile is refined. Viewing by and regression analysis of recorded responses of subsequent sets of users continually auto-targets and customizes ads for the optimal end user audience.

Behavioral Profiling (5,848,396)

Inventor: Gerace; Thomas A. (Cambridge, MA)

Assignee: Freedom of Information, Inc. (Cambridge, MA)

Filed: April 26, 1996Issued: 1998

Patent # 6,157,823 Issued 12/5/2000“A cellular telecommunications system having a security

feature which allows only pre-authorized users to complete cellular telephone calls. The system and method recognizes a cellular radiotelephone's pre-programmed a[nd] pre-selected telephone number and a automated number identification code (ANI). The pre-selected telephone number is reserved to the pre-paid cellular telecommunications system. The cellular radiotelephone transmits the ANI and a dialed number identification system code (DNIS) to a cellular switch, which contacts a host computer for call validation by the pre-paid service provider.”

Patent Requirements

Subject-Matter CoverageNoveltyNonobviousnessUtilityEnablement

Graham FactorsScope and content of the prior artDifferences between prior art and

claimsLevel of ordinary skill in the prior artSecondary (“Objective”) factors:

• commercial success• long-felt, unsolved needs• failure of others• industry acquiescence• suggestions in prior art• fact that defendant chose to copy

Graham FactorsScope and content of the prior artDifferences between prior art and

claimsLevel of ordinary skill in the prior artSecondary (“Objective”) factors:

• commercial success• long-felt, unsolved needs• failure of others• industry acquiescence• suggestions in prior art• fact that defendant chose to copy

Applied to Amazon

E-commerce limitedto shopping carts

Dramatic step forward

Very popular

Prior art taught againstIt

Barnes copies

Tightening the StandardsAIPA (1999):

Prior-use defense for BM patents Study of BM patents by GAO

2000 PTO guidelines for BM Patents: Hiring more specialized examiners Updating databases to include relevant “nonpatent literature” (NPL) Mandatory second exam

Proposed BM Patent Improvement Act: Formal post-grant opposition procedure Invalidity requires only “preponderance of the evidence” Presumption of obviousness for computer implementation of extant

BMs Public may submit prior art

European InitiativesEPC articles 52(2) and 52(3) prevent patenting of

“methods of doing business” “as such” Case law: BMs with a “technical aspect” or that solve a

“technical problem” are patentableFall 2000: Member countries decline to revise EPC as

applied to software or BMs Power of EuroLinux Alliance

Individual country “consultations” are ongoing March 2001: British government recommends no change

8/31/2001: EPO revises guidelines: BMs are patentable only if they are of a “technical nature” or implicate a “concrete apparatus”

Examples of European BMPs System for determing the queue sequence for serving customers at a

plurality of service points A system that determines which customers are to be served at which counter.

The system takes user preferences for particular counters into account. Solves the problem of how to provide an apparatus that can pool counters so that one common customer queue can be employed.

EP 086 199, filed 20.07.1981, granted 04.08.1987 Credit management for electronic brokerage system

An automated trading system for stocks and shares, which can correlate bids and offers from anonymized counterparties, and filter out undesirable ones.

EP 625 275, filed 03.02.1992, granted 16.04.1997. Factory network having a plurality of factories and method of coordinating

same A factory chain in which a factory tailors its production plan based on a

planning received from a factory further in the chain. Solves the problem of how to coordinate demand and supply part relationships in such a chain.

EP 752 134, filed 28.09.1994, granted 07.04.1999. Source: engelfriet2001

Japanese Initiatives

JPL 29(1) limits patents to “industrially applicable” inventions

JPL 32 prohibits patenting of inventions “liable to contravene public order, morality, or public health”

JPO Examination Guidelines (January 2001): To be patentable, an invention must use either

hardware or a “law of nature” Firm enforcement of “inventive step” requirement

Possible Responses to Public-Good Character of Innovation

1) Government engages in innovation e.g., NIH; NASA

2) Government subsidizes innovation in private sector e.g., basic scientific research; NEA

3) Government issues post-hoc rewards to innovators cf. Shavell & Ypersele on patents

4) Government facilitates concealment of innovation Trade-secret law

5) Government issues intellectual-property rights

Disadvantages of IPRs

1) Administrative Costs

2) Impediments to Cumulative Innovation

3) Deadweight Loss associated with loss of consumer surplus

$

Quantity

Demand

B

C

D

E

F

G

H

Marginal Cost

Profit-maximizing output

Pro

fit-

max

imiz

ing

pric

e

Monopoly Profits

O

A

I

1

2

3

Consumer Surplus

Deadweight Loss (foregoneconsumer surplus)

E

Figure 1: Economic Effects of Profit-Maximizing Pricing of an Intellectual-Property Right

Guideline

IPRs should be created only in circumstances in which their benefits (discounted present value of innovations

stimulated) exceed their costs

(administrative costs; impediments to cumulative innovation; deadweight losses)

Applied to Business-Method PatentsLittle evidence that patent protection is

necessary to stimulate innovation in BMsSerious disadvantages

High transaction costs (recent PTO reforms) Large deadweight losses Impediments to cumulative innovation

BM Patents should be repudiated

Patent #5,616,089A method of putting features the golfer's dominant hand so that the golfer can

improve control over putting speed and direction. The golfer's non-dominant hand stabilizes the dominant hand and the orientation of the putter blade, but does not otherwise substantially interfere with the putting stroke. In particular, a right-handed golfer grips the putter grip with their right hand in a conventional manner so that the thumb on the right hand is placed straight down the top surface of the putter grip. The golfer addresses the ball as if to stroke the putter using only the right hand. Then, the golfer takes the left hand and uses it to stabilize the right hand and the putter. To do this, the golfer places their left hand over the interior wrist portion of the right hand behind the thumb of the right hand with the middle finger of the left hand resting on the styloid process of the right hand. The golfer presses the ring finger and the little finger of their left hand against the back of the right hand. The golfer also presses the palm of the left hand against the putter grip and squeezes the right hand with the left hand. The golfer then takes a full putting stroke with the above described grip.

Patent #5,616,089

Abstract Ideas

Printed Matter

Naturally OccurringSubstances

Animals

Plants

Surgical Procedures

Business Methods

Atomic Weapons Parts (1954)

Man

ufac

ture

Compositions of Matter

Machines

Genes

Laws of Nature

Surgical Procedures

Business Methods

Genes

PPA (1930)

PVPA (1970)

Purified & exhibiting new qualities

ProcessesProcessesProductsProducts

PbP

Athleti

c Mov

es?

Chakrabarty

Pioneer Hi-Bred (2000)

Software