Are Business Method and Software Patents Dead?

Not too long ago, getting patents on business methods and software was all the rage. And concern about their effects was profound. In fact, in 2003 I spoke at a Federal Reserve Bank conference devoted to the question of whether such patents were an existential threat to the financial industry. Now, after a series of Supreme Court cases that brought about a dramatic shift in the approach taken by the lower courts and the Patent Office, the question is whether those patents are still alive. The answer is that they are, but barely, and their prognosis is bad.

Stricter Patentable Subject Matter Rules

The threshold requirement for obtaining a patent is that the application must claim patentable (sometimes called statutory) subject matter as defined by § 101 of the Patent Act. There are then further, usually more demanding requirements, including that the invention must be novel and nonobvious, and described with great specificity. Section 101 defines eligible subject matter as including “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” Historically, the courts interpreted this language very broadly, to include, in one classic phrasing, “anything under the sun made by man.”

However, three recent Supreme Court cases have made it more difficult to satisfy the statutory subject matter requirement. They have done so by employing the three categories of subject matter that courts have traditionally excluded from eligibility: laws of nature, products of nature, and abstract ideas. The key cases are Mayo Collaborative Services v. Prometheus Laboratories, Inc. (2012), which rejected—for claiming a law of nature—a patent on a method of measuring the level of a drug in the body and then adjusting the dose; Association for Molecular Pathology v. Myriad Genetics, Inc. (2013), the highly publicized case that invalidated—for claiming a product of nature—patents on DNA that had merely been isolated from the body; and Alice Corp. v. CLS Bank Int’l (2014), which struck down—for claiming an abstract idea—a patent on a method of using a third-party intermediary in a financial transaction. Despite the differences in the inventions, the three cases take a similar approach to raising the subject-matter bar. Rather than changing the definitions of the forbidden categories, they require inventors to show more than they formerly had to in order to avoid ineligibility.

Business Methods and Software-based Inventions before 2010

Inventions that implicate the abstract idea exclusion often involve business methods or similar processes that are implemented on a computer. In State Street Bank and Trust Company v. Signature Financial Group, Inc. (1998), the Federal Circuit upheld the eligible subject matter status of a computer-implemented method for collectively managing a portfolio of mutual funds. The court held that a process satisfied § 101 if it yielded a useful, concrete, and tangible result—even if it involved nothing more than the manipulation of numbers, and the result was itself a number. The case also did away with the so-called business methods exception, under which some earlier cases had treated business methods as inherently unpatentable subject matter.

Immediately after State Street, there was a surge in business method and other software-based patents. Inventions that amounted to little more than using software to implement a conventional process could be successfully claimed as (1) a method for doing something, using a computer programmed to carry it out; (2) a computer programmed to carry out the method (this was treated as a conventional claim to a machine); or sometimes even (3) a computer storage medium carrying the code to implement the method (treated as a conventional claim to a physical apparatus).

A related development was the emergence of the machine or transformation test, which has its roots in a series of Supreme Court cases dating back to the 1970s. A process or method that involved an abstract idea could become eligible for patenting if the claim tied the process to a particular machine or transformed something in the real world. The idea was typically a mathematical formula (which is always treated as an abstract idea) and the machine was typically a general-purpose computer that was programmed to calculate the formula. Alternatively, the claimed invention could use the abstract idea to transform a particular article into a different state or thing. In either case, the only point of novelty was computerizing the calculation—the formula itself, the computer, and the pre-computer version of the process were all well-known. For instance, in Diamond v. Diehr (1981), the Supreme Court upheld a claim to a rubber-curing process that used a computer to calculate a long-known equation for determining when the curing was complete. The underlying process was the same as it had been in pre-computer days; what the computer added was the ability to make the calculations far more frequently, which made the determination of when the curing was complete more precise. As a result of these developments, during the pre-2010 period, patenting a business or other method implemented by computer software was relatively easy for skilled patent lawyers.

Business Method and Software Inventions Post-2010

Patenting business methods and software inventions changed when the Supreme Court decided Bilski v. Kappos (2010), which involved a method of entering into contracts to hedge risk in commodity prices. The Court characterized hedging as a well-known financial strategy—an “abstract idea.” The Federal Circuit had upheld the Patent Office’s rejection of the method as unpatentable subject matter, using the machine-or-transformation test. The claimed method neither tied the abstract idea to any particular machine nor transformed a physical article into a different state or thing. The Supreme Court agreed that the method was unpatentable, but its reasoning was unclear, as multiple opinions were divided on the rationale. The Court rejected the machine-or-transformation test as the sole standard but failed to produce a substitute. It also refused to hold that business methods are always patent-ineligible without providing specific guidance on when they are eligible.

Most recently, in Alice (2014), the Court rejected claims to methods and systems for using a computer as a third-party intermediary to ensure that both parties to a financial transaction meet their obligations. Purportedly following Bilski, the Court imposed a two-part test for method claims that involve abstract ideas (in this case, the well-known strategy of using a neutral third-party intermediary). First, ask whether the claim is “directed to” an abstract idea. The Court determined that the risk-mitigation strategy involved in Alice was an abstract idea. Second, if the claim is directed to an abstract idea, ask whether “the additional elements” supply an “inventive concept” in the physical realm of things, and ensure that the patent is on something “significantly more than” the abstract idea itself. Applying this standard to the facts of Alice, the Court found that using a computer as the third party to ensure that all parties have met their financial obligations before completing a transaction is not a sufficient inventive concept. The Court gave no clear guidance as to what might comprise a sufficient inventive concept, though it recognized that the process in Diehr sufficed because it solved an existing technological problem in curing rubber. The Court did make clear, however, that simply implementing the idea on a computer would not be enough.

Since Alice, the lower courts and the Patent Office have displayed a new-found hostility to patents on business methods and other conventional processes implemented on computers, regardless of how they are drafted. For example, in buySAFE, Inc. v. Google, Inc. (2014), the Federal Circuit rejected Alice-style claims to “methods and machine-readable media encoded to perform steps for guaranteeing a party’s performance of its online transaction.” And in Ultramercial v. Hulu (2014), the same court rejected claims to a method for distributing copyrighted media products over the Internet where the consumer receives a copyrighted media product at no cost in exchange for viewing an advertisement. In both of these cases, the court held that the claims were directed to abstract ideas and that the added technical elements were merely conventional and thus did not contribute a sufficiently inventive concept.

Although most of business method and software patents litigated since Alice have been struck down, processes implemented on computers are not automatically denied protection. For instance, in the Federal Circuit case of DDR Holdings, LLC v. Hotels.com, L.P. (2014), the patent applicant addressed the problem of a “host” website losing Internet shoppers if they were diverted by clicking on the ad for another merchant’s website. The claimed method involved software that generates a composite web page that displays product information from the third-party merchant while giving the shopper the impression that that she is still on the host website. The software essentially carries out the mathematical instructions necessary to produce the composite web page. The patent survived the Alice test, however, because the court could not identify a particular abstract idea known from the pre-Internet world, nor could it analogize this method to excluded claims that simply implemented existing ideas on a computer. The court distinguished Ultramercial, where the idea of exchanging media content for viewing ads was a well-known, pre-existing advertising strategy. In DDR, the court found that the claim offered an inventive concept, a new solution to a new problem that had arisen from a new technology.

Practical Implications

The critical legal point is that computerized versions of business methods and other well-known processes should not be patentable. Instead, the computerized process must be solving a technological or other tangible problem. This change could be bad news or good, depending on who you are. If your business model depends on having exclusive rights to a business method, the news is bad. As the cases just reviewed illustrate, new business method patents will be extremely hard to get, and existing patents may be invalidated if you sue someone for infringement. (An infringement defendant can defend itself by arguing that it is not actually infringing the patent, or by proving that the plaintiff’s patent was wrongly issued and is invalid.) But for those whose businesses may be threatened by others’ Alice-style patents, the news is all good. Holders of business method and other software-based patents will be less likely to sue for infringement, and those who do get sued will have a clear avenue of defense.