A presentation on current developments on patents for business methods mainly in the U.S. but also in the E.U. The aim of the presentation is to provoke thoughts on patentability of business methods and to highlight issues emerging from recent judicial decisions on the subject.

1. Why Business Method Patents
Cannot Be Too Quickly Dismissed
Moses N. Muchiri (LL.M. – IP, Munich)
October, 2012

2. Outline
1. What are Business Method Patents in the U.S?
2. Where it started & Stats
3. Legislative provisions on BMPs
3.1 US Legislation
3.2 European Regional Legislation
4. U.S. Judicial decisions on BMPs
5. Three main E.U. decisions on BMPs
6. Recent PTO administrative reform measures
7. Arguments
7.1 Arguments against BMPs
7.2 Against for BMPs
8. Moving forward what are we to glean from all
this?
9. Some recommended reading.

3. The Goal of this Presentation …
… is to simplify the debate on
Business Method Patents
(BMPs) SO THAT …
WHICH WAY TO GO !!!
For detailed information, feel free to
download my paper at:
http://papers.ssrn.com/sol3/papers.cf
m?abstract_id=2171724

4. 1. What are Business Method Patents
(BMPs) in the U.S.?
→ Bluntly, these are patents on methods of doing business.
Beyond this pithy statement, no precise legal definition is
provided as we shall see.
→ Some Characteristics:
 Are largely processes and represent cross-disciplinary
fields e.g. finance, insurance, banking, commerce, tax,
sports, manufacturing processes to name a few.
 Mainly classified under Class 705 of the U.S. Manual of
Patent Classification (MOPC).
 A substantial number of BMPs are computer executed
and/or through PC software although not necessarily.
 Many BMPs are hybrid i.e. claimed as computer
software or as processes.

5. 1. What are Business Method Patents
(BMPs) in the U.S.?
→ Class 705: Titled “Data Processing, Financial
Business Practice, Management or Cost/ Price
determination.
→ Notorious Examples: Amazon’s 1-Click Patent
U.S. Pat. No. 5,960,411
Subject of case: Amazon.com, Inc. v.
BarnesandNoble.com, Inc. 239 F. 3d
1343 (Fed. Cir. 2001).
Patent Infringement? + (YES)
Preliminary injunction? - (NO)
Interesting read on this Patent:
http://www.around.com/patent.html

6. 1. What are Business Method Patents
(BMPs) in the U.S.?
WALKER DIGITAL business method patents:
1. Reverse Auction patent 5,794,207
2. Airline Tickets patent 5,897,620,
→ About Priceline: A company in the business of developing new
business method technologies which it then patents. Has over 200
BMPs. Priceline very aggressively asserts its patents against 3rd parties.
→ Notable case: Priceline vs. Microsoft & Expedia (No. 99-CV-1991, D.
Conn. Oct. 13, 1999). Subsequently amicably settled out of court after
conclusion of confidential licensing agreement.
See: http://betabeat.com/2011/08/priceline-founder-jay-walker-sure-
has-filed-a-lot-of-lawsuits-for-someone-whos-not-a-patent-troll/
And also: http://gpatent.nfshost.com/stua12.html

7. 1. What are Business Method Patents
(BMPs) in the U.S.? • MercExchange’s Consignment
Nodes Patent No. 5,845,265
(for identifying, selling & creating
online market used goods through a
bidding/auction process).
• Sound familiar? eBAY v.
MercExchange (547 U.S. __ 2006).
Which ultimately became an issue of
whether and when an Injunction can
issue.
vs.

8. 2. Where it started & Stats
→ 1815: According to the USPTO Business
Methods White Paper (2000), the first recorded
financial BMP was issued to John Kneass for a
method of preventing counterfeiting.
→ 1998: State Street vs. Signature Financial
Group, 149 F.3d 1368 (Fed. Cir. 1998)
landmark decision issued where business
method exception (age old exclusion of
business methods from patentability) was
dismissed by Federal Court.
→ This is just an approximation …

9. 2. Where it started & Stats

10. 3. Legislative provisions on BMPs
3.1 United States Legislation
1. The U.S. Constitution: Art. 1, Sec. 8, Clause 8. ‘‘The Congress shall have power … To
promote the progress of science and useful arts, by securing for limited times to authors and
inventors the exclusive right to their respective writings and discoveries; …’’
→ Reflects 2 elements: (i) positive power to make patent & copyright laws (ii) limitation on the use
of that power to the extent that these laws promote PROGRESS of SCIENCE and USEFUL ARTS.
2. Patent Act, 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.’’
→ 100: defines Process as ‘‘process, art or method, and includes a new use of a known process,
machine, manufacture, composition of matter, or material.’’
→ 273: provides for the prior use defence (introduced by the America Inventors Protection Act,
1999) and defines business method as ‘‘the term ‘method’ means method of doing business.’’
3. America Invents Act, 2011 (Pub. L. No. 112-29):
→ Section 18: Transitional Program for Covered Business Method Patents defined as ‘‘… a patent
that claims a method or corresponding apparatus for performing data processing or other
operations used in the practice, administration, or management of a financial product or service,
except that the term does not include patents for technological inventions.’’
→ Section 14: Tax Strategy inventions within the prior art. (Tax Strategies constituted a big portion
of US BMPs.)
→ Section 5: Broadening the Prior Use defence.

11. 3. Legislative provisions on BMPs
3.2 E.U. Regional Legislation
• Art. 52 (2), EPC;
‘‘(1) European patents shall be granted for any inventions, in all fields of
technology, provided that they are new, involve an inventive step and are
susceptible of industrial application.
(2) The following in particular shall not be regarded as inventions within the
meaning of paragraph 1:
...
(c) Schemes, rules and methods for performing mental acts, playing games
or doing business, and programs for computers;
(3) Paragraph 2 shall exclude the patentability of subject-matter or activities
referred to therein only to the extent to which a European patent
application or European patent relates to such subject-matter or activities as
such.’’

12. 4. US Judicial decisions on BMPs
1. Hotel Checking v. Lorraine Co. 160 F. 467 (2d Cir. N.Y. 1908) – Held a method
for financial bookkeeping was unpatentable for being abstract.
2. Gottschalk v. Benson, 409 U.S. 63 (1972). Supreme Court held that a method
of converting binary code into pure binary numerals was unpatentable as it
was an abstract idea.
‘‘transformation and reduction of an article ‘to a different state or thing’ is
the clue to the patentability of a process claim that does not include
particular machines.’’‖
3. Parker v. Flook, 437 U.S. 584 (1978). An algorithm used to control an alarm in
a process claim was also held to be abstract thus unpatentable.
4. Diamond v. Chakrabarty, 447 U.S. 303 (1980): Supreme Court held a method
for producing bacteria was patentable, & that patent law should be broadly
read to encompass inventions not foreseeable when Congress enacted 101.
5. Diamond v. Diehr, 450 U.S. 175 (1981). A method of curing synthetic rubber
using a special computer operated molding press was held patentable.
6. In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) a method of improving display of
data on an oscilloscope using a computer software was held patentable
because it produced a ‘‘useful, concrete and tangible result.’’

13. 4. US Judicial decisions on BMPs
7. State Street v. Signature Financial Group. 149 F.3d 1368 (Fed. Cir. 1998)
→ The Inventor: Todd Boess. Assignee: Signature Financial Grp. Inc.
→ The Patent: US Pat. No. 5,193,056. (Class 705). Data processing system for
hub and spoke financial services configuration.
→ How it works: A financial data processing system for managing mutual
funds. Involves combining of financial assets known as mutual funds so as to
achieve a larger asset base and thereby reduce operation costs by achieving
economies of scale and increasing net investment performance.
• Mutual Fund= (Investopedia.com) defines as “an investment vehicle that
is made up of a pool of funds collected from many investors for the
purpose of investing in securities such as stocks, bonds, money
market instruments and similar assets. Mutual funds are operated by
money managers, who invest the fund's capital and attempt to produce
capital gains and income for the fund's investors.” (Read more:
http://www.investopedia.com/terms/m/mutualfund.asp#ixzz2BI87cn9B)
NOW LET US

14. Mutual
Fund 1
Mutual
Portfolio Mutual
Fund 4 Fund 2
(Hub)
Mutual Each Mutual
Several Mutual Fund Assets are combined to form the
Fund 3 Fund partner in
Portfolio which is run under a partnership (Partnership the Portfolio is
Portfolio). The Funds investing in the portfolio are called a SPOKE.
partners in the portfolio partnership. The Portfolio
achieves economies of scale reducing operation costs
particularly taxes on capital gains.
Gist of the Invention: Data processing system makes daily mathematical calculations
to allocate income, capital gains, and expenses or investment losses for each portfolio
partner. These daily allocations, are determined &managed by the data processing
system &method based on an "allocation ratio” (See http://patft.uspto.gov/netacgi/nph-
Parser?Sect1=PTO1&Sect2=HITOFF&d=PALL&p=1&u=%2Fnetahtml%2FPTO%2Fsrchnum.htm&r=1
&f=G&l=50&s1=5,193,056.PN.&OS=PN/5,193,056&RS=PN/5,193,056 )

15. • What do you think about this invention? Would you consider this Data Processing System that manages
investment portfolio through a series of mathematical calculations to be patentable?
→ PTO Examination: claims allowed. Patented.
→ The Case before District Ct.: State Street Bank sought to have the patent declared invalid &
unenforceable under § 101 for citing non-statutory subject matter. Held by Distr. Ct: Claimed subject matter
fell in non-patentable subject matter as either ‘mathematical algorithm’ or ‘business methods.’
→Appeal to Federal Cir.: Reversed & remanded. Found the Data Processing System achieved a USEFUL,
CONCRETE & TANGIBLE (UCT) result. Claims directed to methods of doing business should be treated as
ordinary process claims.
“… for the purposes of a Section 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… The plain and
unambiguous meaning of Section 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 Sections 102, 103, and 112, Para.2 … The
repetitive use of the expansive term “any” in Section 101 shows Congress’s intent not to place any
restrictions on the subject matter for which a patent may be obtained beyond those specifically
recited in Section 101. Indeed, the Supreme Court has acknowledged that Congress intended Section
101 to extend to “anything under the sun that is made by man.” Diamond v. Chakrabarty, 447 U.S. 303,
309 …”
→ But how could this have achieved a CONCRETE & TANGIBLE result? CAFC’s answer = “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 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 –
process, machine, manufacture, or composition of matter--but rather on the essential characteristics of the
subject matter, in particular, its practical utility. … This renders it statutory subject matter, even if the
useful result is expressed in numbers, such as price, profit, percentage, cost, or loss.”

16. 8. Bilski v. Kappos (561 U.S. __ 2010).
→ The Inventor: Bernard Bilski & Rand Warsaw.
→ The Claimed invention: Energy Risk Management method: A method of
hedging consumption risk costs in commodities trading in the energy markets.
→ How it works: method controls (hedges) consumption costs caused by
fluctuations in demand and supply by means of fixed prices between a supplier of
a commodity and consumer of it thus reducing volatility of earnings.
A Commodities Trading Co., LLC
Buys coal at 1st fixed price Sells coal at 2nd fixed price
(Intermediary)
Coal Mining Co. Electricity Producer

17. → PTO Examination: All 11 claims in the patent application
held unpatentable. Abstract.
→ Board of Patent Appeals & Interferences (BPAI): Agreed
& upheld PTO examination decision.
→ CAFC (En Banc) Decision: Held un-patentable because it
did NOT pass the machine or transformation test by not
transforming something into a useful-concrete-tangible test.
→ Supreme Court: Majority opinion held the machine-
transformation test is not the sole test on § 101 patentability
analysis, but only a USEFUL CLUE. Not patentable due to
abstract-ness.
→ Stevens’ Concurrence: Stevens, J. was of the view that
BMPs are not patentable subject matter. Stevens view was
that the Majority use of ordinary & contemporary
interpretation to §101 was contrary to noscitur a sociis canon
of interpretation.

18. “It is important to emphasize that the Court today is
not commenting on the patentability of any
particular invention, let alone holding that any of
the above-mentioned technologies from the
Information Age should or should not receive
patent protection. … patent law faces a great
challenge in striking the balance between
protecting inventors and not granting monopolies
over procedures that others would discover by
independent, creative application of general
principles. Nothing in this opinion should be read to
take a position on where that balance ought to be
struck.” (561 U.S. ___ 2010, at 10).

19. Discussion:
→ How different was the Hedging of Consumption
Costs method in Bilski different from the Data
Processing System/ Method in State Street?
→ What explanation can be proffered for separate
conclusions reached in State Street and Bilski?
→ Is judicial activism responsible for State Street?
Judicial activism not suitable explanation, WHY?
Principally 2 reasons:
(a) The claimed invention in State Street was already
patented.
(b) The State Street court was not the first to adopt the
UCT test. It was first adopted In re Alappat 1994
case.
→ Would State Street stand today? Unlikely.

20. → So what is the real world value of Bilski v Kappos?
(i) Bilski teaches that a § 101 analysis is only a threshold
inquiry. Patentability should also include tests for
novelty, utility, enablement and non-obviousness.
(ii) The Machine/ Transformation test is not the sole test for
patent eligibility but only a useful clue.
(iii) Bilski is not about whether business methods are
patentable or not.
(iv) In the end Bilski adds little substantial jurisprudential
value. It failed to live up to the hype (expectation). No
definitive test; no categorical exclusion, no discussion on
limits of patentability = back to square one. This is why
Stevens’ J. was differed in the method of treating BMPs.
(v) Who is the final authority in shaping patent policy and
standards if not the court? Legislature perhaps. One
reason why Supreme Court chose not answer the
question everyone was expecting to be answered.

21. 5. Three main EU decisions on business
methods
a) Pension Benefits System/ PBS Partnership (T-931/95 ); The EPO
Technical Board of Appeal (TBA) held inter alia that although
“practices of doing business are not inventions within the meaning
of Article 52(1) EPC,” the apparatus or physical entity through which
such methods are conducted are not excluded from patentability.
b) Estimation of Turnover/ DUNS LICENSING CASE (T-0154/04), held
that methods of business research claimed ‘as such’ did not fulfill the
technical contribution requirement.
c) Auction method/HITACHI (T 258/03), held that method steps
involving modifications to business scheme which circumvent
technical requirements are not patentable. →The Board held in
paragraph 4.7 “…in general, a method involving technical means is
an invention within the meaning of Article 52(1), EPC.” However a
caution was added in paragraph 4.6: “…this does not imply that all
methods involving the use of technical means are patentable. They
still have to be new, represent a non-obvious technical solution to a
technical problem, and be susceptible of industrial application.”

22. • Lessons from the EU and the mystique of Art. 52(2)(c),
EPC
→ Business methods CAN be patentable as long as the
overall requirement for TECHNICAL EFFECT is achieved.
→ EPO has been granting patents on business methods.
For examples of EPO BMPs see,
http://www.iusmentis.com/patents/businessmethods/ep
oexamples/
→ An exercise in CLAIM DRAFTING.
→ EPO is tough in law and practice but it is possible to
obtain BMPs on case by case basis. USA on the contrary is
more flexible in law by not imposing a categorical
exclusion, but rigid in practice. (Either way, good Patent
Attorneys are masters at navigating the murky seas of
patent laws to obtain BMPs).

23. 6. Recent PTO administrative reform
measures
→ In the wake of the America Invents Act, 2011 PTO has
implemented and is in the process of implementing several
more:
(a) Second Pair of Eyes Review- a novel procedure exclusive to
Class 705 BMPs where all allowed BMPs shall be subjected to
an additional review for obviousness.
(b) Increased capacity: More examiners in terms of numbers as
well as qualification and engagement of specialist examiners
i.e. experts to tackle Class 705 applications.
(c) Broadened prior art search areas for prior art analysis.
(d) Rigorous patent prosecution standards for novelty,
obviousness, utility and enablement.
(e) Broadened prior use defense
(f) opposition procedures.

24. 7. Arguments
7. 1- Arguments against BMPs 7.2- Arguments for BMPs
a) BMPs do not incentivize 1) BMPs have existed for many years.
innovation or promote Not a recent phenomena.
progress in the sciences and 2) Innovation: BMPs promote
the useful arts. innovation for alternative and
b) Economic harm: BMPs increase more innovative business
transaction costs, ability to methods.
prevent market entry by 3) Economic benefit: BMPs protect
competitors affecting customer markets with short business cycles,
choices and prices because of improves network effects and
“patent thickets.” attracts investments in such
c) Affect Open Source projects. business fields.
d) Business methods are not 4) Quality and obviousness: BMPs
patentable technology. are not of lesser quality. Nor are
e) Many BMPs are obvious & they obvious. Independent studies
poor in quality. Reinventing the prove this. Recent administrative
wheel. Transferring Brick and reforms by PTO are positioning to
Mortar techniques to the further strengthen patent
computer. prosecution for BMPs and conduct
post grant reviews.

25. 8. Moving forward what are we to glean from
all this?
• The debate as to whether business methods should be patentable or
not, is a foregone conclusion. BMPs ARE ALREADY EXISTING, even in
the EU!! (Nb: Class 705 is a very broad class)
• It is easy to say let us not patent business methods, but it is not easy
to justify concretely why such patents should not exist.
• On closer scrutiny, Bilski v. Kappos might not have been so bad after
all. They didn’t have all the information needed to impose a
categorical exclusion of BMPs. That was not the issue the majority had
before them.
• Bilski promises a renewed focus on:
(a) Legal interpretation especially of 101.
(b) Making it harder to receive a BMP through intense patent
prosecution procedures focusing on patent law doctrine i.e. Novelty,
Obviousness, Utility and Enablement inquiries.
(c) Patent policies focussing on individual patents rather than broad
sweeping statements: Expect to see courts asking “Is THIS claimed
invention patentable?” and not “Are business methods patentable?”

26. • Economic policies are essentially about
efficient distribution of resources to meet
human needs. The extent to which patents on
business methods fulfil this purpose has not
been fully studied.
• Property rights for business methods justified
to the extent they are required by society.
Justice Richard Posner vehemently opposes
BMPs on account of “over-propertization” of
intellectual property leading to BMPs acting as
“Veritable Patent Thickets.”

27. WHAT IS YOUR

28. 9. Some recommended reading
1. Andrew Kopelman, Addressing Questionable Business Method Patents Prior to Issuance: A Two Part
Proposal, 27 CARDOZO L. REV. 2391 (2006).
2. Bronwyn H. Hall, Business Method Patents, Innovation and Policy (NBER Working Paper Series Working
Paper No. 9717, 2003) available at http://papers.ssrn.com/- sol3/papers.cfm?abstract_id=463160.
3. David Orozco, Administrative Patent Levers, 117 PENN. ST. L. REV. 1 (2012).
4. Ebby Abraham, Bilski v. Kappos: Sideline Analysis from the First Inning of Play, 26 BERKELEY TECH. L.J.
15 (2011).
5. Eric E. Bensen, Supreme Court’s Decision Regarding the Patent- Eligibility of Process Claims Under 35
U.S.C. §101: Bilski v. Kappos, 2010 EMERGING ISSUES 5151 (2010).
6. JAFFE, A.B. & LERNER, J., INNOVATION AND ITS DISCONTENTS, 2 – 5 (Princeton University Press, 2004).
7. John Duffy, Why Business Method Patents? 63 STAN. L. REV. 1247 (2011).
8. John R. Allison & Starling D. Hunter, On the Feasibility of Improving Patent Quality One Technology at a
Time: The Case of Business Methods, 21 BERKELEY TECH. L.J. 729 (2006).
9. Richard A. Posner, Do We Have Too Many Intellectual Property Rights? 9 MARQ. INTELL. PROP. L. REV.
173 (2005).
10. Robert E. Thomas, Debugging Software Patents: Increasing Innovation and Reducing Uncertainty In The
Judicial Reform of Software Patent Law, 25 SANTA CLARA COMPUTER & HIGH. TECH. L.J. 191 (2008).
11. Robert M. Hunt, Business Method Patents and U.S. Financial Services, 15 – 17 (Federal Reserve Bank of
Philadelphia, Working Paper No. 08-10, 2009).
12. Stefan Wagner, Business Method Patents in Europe and Their Strategic Use: Evidence from Franking
Device Manufacturers, 3 (Fakultät für Betriebswirtschaft, Ludwig-Maxmilians-Universität München,
Discussion Paper 2006- 15, Nov. 2006).

29. THANK YOU VERY MUCH
FOR LISTENING
Moses Muchiri
LL.M, (Munich)
moses.muchiri@ip.mpg.de
© 2012.