Patenting the New Business Model

PATENTING THE NEW BUSINESS MODEL

BUSINESS METHOD PATENTS: OLD OR NEW, GOOD OR BAD?

Roberta J. Morris

Program Title: Patenting the New Business Model Name: Roberta J. Morris Position or Title: Adjunct Professor Firm or Place of Business: University of Michigan Law School Address: Ann Arbor, MI 48109-1215 Phone: 734-764-1358 Fax: 734-764-8309 E-Mail: [email protected] Primary Areas of Practice: Patent Law Law School: Harvard Postgraduate: Columbia University (Ph.D. Physics) Work History: Pre-Ph.D.: White & Case; Mt. Sinai Medical Center Legal Department. Post-Ph.D.: Fish & Neave; Gifford Krass (Of Counsel); University of Michigan Law School

3 4 Table of Contents Did State Street Change Anything?...... 8 Patents On Business Methods Have Been "Business As Usual" For A Long Time...... 17 Subject Matter Invalidity and Novelty ...... 21 Method Patents Have Always Had Problems Business Method Patents: Good, Bad or Indifferent?...... 26 Some Data About Business Method Patents and Relative Litigation Rates ...... 28 What Isn't Patentable Any More, And Some Additional Remarks About 101 ...... 30 Selected References (This section has been included in lieu of footnotes.) A. Cases ...... 32 B. Patents ...... 34 C. Books and Articles ...... 35 RISC Architecture (a cartoon) ...... 38

5 6 Introduction

Is the patenting of business methods a new phenomenon or not? In its present guise, is it objectively good, bad or indifferent? 1. Did State Street change the law on patenting business methods, or just the lore? 2. Method patents have always been the stepchild, if not also the Cinderella, of the patent system. What is their sad history? 3. Every time there has been a new area for inventive activity, people have expressed discomfort (or worse) with the patent system. Is the case of business method patents different from that of, say, the steamboat, software, or the decoding of the human genome? Is there a better way to cure the problem than with time?

I wish to thank my students in 1999-2000, especially Marcus Sprow, Chris Liro and Chris McVety; Roberta Fels, Fish & Neave, and PTO personnel, for information concerning MPEP history; and University of Michigan Law School research librarians Barb Vaccaro Garavaglia, Nancy Vettorello and Kincaid Brown, and their student assistants. For a copy of the materials presented during the lecture on June 26, 2000, please contact me at the law school (734-764-1358) or [email protected].

7 Business Method Patents: Old or New, Good or Bad

NOTES: In lieu of footnotes, the complete citations to the cases, articles and patents mentioned in this outline are listed in the Selected References section (see p. 32 et seq). I occasionally refer to the now-withdrawn paragraph from the Manual of Patent Examining Procedure ("MPEP") that concerned the unpatentability of methods of doing business ("MDB") as "Old MPEP 706.03," although it was but one paragraph in the introductory part of § 706.03(a). "Now" and "today" mean 5/10/00, the date of submission of this manuscript.

DID STATE STREET CHANGE ANYTHING? The State Street decision is dated July 23, 1998. It is considered by many to have made a major change in the law concerning the patentability of methods of doing business ("MDB"). But did it?

WHAT IT MAY HAVE CHANGED The lore of what is patentable (as opposed to the law), and the public perception of what can be patented Strategies in patent litigation and licensing negotiations Lip service in the judiciary

WHAT IT DID NOT CHANGE: THE PTO'S PRACTICE OF ISSUING BUSINESS METHOD PATENTS If business methods were really unpatentable: - how did Boes get his patent (the patent in State Street)? - all the prior cases would be In re ____ or Ex Parte ______(suits against the Patent Office for refusing to grant a patent) and none would be infringement

8 litigation (suits entitled X v. Y). But there are business method infringement cases going way, way back. (My current favorite, Fowler v. City of New York (1903) is discussed in the references section.) It seems, then, that the rule that "Methods of doing business are unpatentable" was just a trap for the u n w a r y unimaginative? unpersevering? because the Patent Office did issue such patents before State Street. Proof: Famous MDB Patents Issued Before State Street Boes The State Street patent (5,193,056 to Boes and assigned to declaratory judgment defendant Signature) issued in 1993 on an application filed in 1991, obviously prior to the decision in State Street. It has no cited references, prior patents or otherwise, but it was cited on 5 patents that issued before State Street. So the Boes patent was not the only one ever to slip through. Other recent high-profile MDB patents Other high-profile MDB patents were filed well before State Street and many issued before it, or so soon after it that the claims must have been allowed before. For example: - 5,333,184, issued in 1994, the patent in suit in AT&T v. Excel (inventor Doherty et al.) - Sun Microsystem's Stateless Shopping Cart for the Web, 5,745,681, filed 1/11/96, issued 4/28/98 (inventor Levine et al) - 5,794,207, filed 9/4/96, issued 8/11/98, the patent in suit in Priceline.com v. Microsoft (inventor Walker et al), - 5,960,411, filed 9/12/97, issued 9/28/99,the patent in suit in amazon.com v. barnesandnoble.com (inventor Hartman et al)

9 - 5,966,440, the Sight/Sound patent, ancestor filed 6/13/88, last application filed 6/6/95 (which means that its term is issue-date+17 years, instead of first-filed-application+20 years), issued 10/12/99 (inventor Hair) Proof: The MPEP Had Already Changed The Patent Office, in its Manual of Patent Examining Procedure ("MPEP"), gave up its official stand against business methods in 1995, a few years before the 1998 State Street decision. This happened without fanfare: a single paragraph which had been in the MPEP for years was absent in the September 1995 revision pages. Details: The PTO publishes the MPEP as a set of looseleaf volumes, revised from time to time, with substitute pages sent to subscribers. (Since 1993, commercial publishers have also sold a paperback version, and since around 1998 the MPEP has been downloadable from the web, see http:\\www.uspto.gov\web\offices\- pac\mpep\index.html.) The introductory section to MPEP § 706.03(a), "Rejections Not Based on Prior Art; Non-Statutory Subject Matter" identifies several categories of non-statutory subject matter, classes of invention thought not be patentable under § 101 of the patent statute. [For non-patent lawyers, 35 USC § 101, entitled "Inventions Patentable," recites that a patent may be obtained on any "process, machine, manufacture or ... improvement thereof."] For many years, this part of the MPEP included four paragraphs describing non-statutory subject matter headed "PRINTED MATTER," "METHOD OF DOING BUSINESS" ("the MDB prohibition"), "NATURALLY OCCURRING ARTICLE" and "SCIENTIFIC PRINCIPLE," respectively.

10 The last time a page with the MDB prohibition was issued was in the 5th edition, Rev. 15, Aug. 1993. That page was not changed in Rev. 16 (March 1994) nor in the 6th edition in its initial form (Jan. 1995). However, in 6th ed., Rev. 1, Sept. 1995, the MDB prohibition had disappeared, although the other three paragraphs remained. And remain today, in the most recent revision, 7th ed., Rev. 1, dated Feb. 2000, and received by subscribers very recently. The Odd Language of the MPEP's (Deleted) MDB Prohibition The now-withdrawn paragraph in MPEP § 706.03 ("Old MPEP 706.03") was phrased in a tentative manner: Though seemingly within the category of process or method, a method of doing business can be rejected as not being within the statutory classes. See Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2nd Cir. 1908) and In re Wait, 24 U.S.P.Q. 88, 22 C.C.P.A. 822 (1934). [Emphasis mine - RJM] The weasel words reflect the realities of the prior case law: the cited cases, as well as other MDB decisions, actually found that the methods in question were not new. The MDB language was dicta every time. (See section II, p. 17.) State Street Acknowledged the MPEP Change The State Street opinion, paraphrasing Rinaldo Del Gallo's article in IDEA in 1998, referred to the MPEP change: "In view of this background [the lack of genuine precedent for the MDB prohibition], it comes as no surprise that in the most recent edition of the [MPEP] (1996), a paragraph of § 706.03 was deleted." (149 F.3d at 1377, emphasis mine). It was no surprise in the 1996 edition (whatever that means)

11 because the paragraph was deleted in September 1995. But what was the reason that the PTO suddenly took notice of the lack of genuine precedent, after all those years? Sideline 1: The 1996 Edition? (To determine the correct date, one must be careful of the perils of what I jokingly call "RISC Architecture" (not to be confused with "reduced instruction set computer"): research limited to sources on electronic databases and the web. RISC is my acronymn for Rear InSide Chair, or Restricted to Information you can find Sitting at your Computer. See cartoon on last page. When I showed my cartoon at the New York version of this conference in February, a participant suggested that the term was trademarked. However, using RISC Architecture (my meaning), it appears that neither "RISC Architecture" nor "RISC" is trademarked by itself, although the acronym RISC in its "instruction set" meaning, whether by itself or in conjunction with the word Architecture, is part of various companies' trademarks. If RISC Architecture has misled me, please let me know) The "1996 edition" of the MPEP is an odd way to date the MPEP, given its looseleaf/page-based form of revision. The 1996 edition could, of course, refer to the paperback version, or it could be the result of strict-construction "blue-booking." Or it could be based on a "RISC" search: When Del Gallo or the Federal Circuit did their research, (a) LEXIS probably just gave a copyright year for the MPEP, as it does now; (b) Westlaw now provides a "current through" date with month and year, but maybe it did not then; and (c) it appears that the first PTO website version of the MPEP was the 6th ed., Rev. 2, July 1996, so maybe that was the "1996 edition" to which reference was made. Whatever "1996 edition" may mean, however, the "most

12 recent edition" at the time the State Street decision was drafted was more likely the "1997 edition": Rev. 3, July 1997 probably was in subscribers' hands by early 1998. In any case, the change happened in 1995, but the perpetuation of the 1996 date in the literature (and cyberspace) continues. Sideline 2: The MDB Prohibition in Today's MPEP The 7th edition of the MPEP (July 1998) continued to make reference to the method of doing business prohibition, twice to give a sense of history (§§ 506 and 2106), twice for current use, in connection with the Patent Cooperation Treaty (PCT), which affects foreign counterpart patents. The same is likely to be true for Rev. 1 to the 7th edition, dated February 2000, which has just been received by subscribers but is not yet available electronically. What Caused The PTO to Change the MPEP? The MPEP is generally revised because of legislative or judicial action, but there was no specific event between January and September 1995 to explain the deletion of the MDB prohibition. In the preceding couple of years, there had certainly been opinions and articles that attacked it, for example, Judge Newman's 1994 dissent in In re Schrader, (which is cited in State Street, 149 F.3d at 1375) and a 1993 article by Yoches and Pollack in the Federal Circuit Bar Journal. Perhaps the main motivation came from the Federal Circuit's in banc decision in In re Alappat (7/29/94) (Judge Rich again writing for the court), which attacked the view that § 101 meant that "you can't patent `mathematical algorithms'." Alappat may have been the handwriting-on-the-wall that motivated the PTO to reconsider the MDB prohibition, even though Alappat makes only one tangential reference to "business methods." (In connection with a

13 discussion of the proper interpretation of inventor Alappat's means-plus-function claims under § 112 ¶ 6, Alappat distinguished the invalidity holding in In re Maucorps (a 1979 CCPA decision, opinion by Markey, Rich on the panel) on the grounds that the claims there were "business methodology" and thus not drawn to patentable subject matter under § 101. 33 F.3d at 1541. In State Street, Judge Rich revisited Maucorps and concluded that it was really a "mathematical algorithm" case. 149 F. 3d at 1376, text accompanying n. 14.) Another PTO announcement, the Guidelines for Computer-Related Inventions, was in the works at roughly the same time as the decision to delete the MDB prohibition. As Yoches pointed out in a previous PLI Handbook for a June 1999 conference, the PTO issued these Guidelines on February 28, 1996 (61 Fed. Reg. 7478), two and a half years before State Street. These Guidelines are still in force today. See PTO web site at http://www.uspto.gov/web/offices/com/- hearings/software/analysis/computer.html. It seems likely that the promulgation of the Guidelines and the deletion of the MDB prohibition were responses to the same stimulus. Was the real change at the PTO earlier than 1995? Co-speaker Gerald Greenberg presents the data concerning patents issued in class 705 for the years 1990-99. (See page 21 of the Greenberg chapter of this Handbook, or the Handbook for the New York sister conference.) The Manual of Classification defines this patent class as "Data Processing: Financial, Business Practice, Management, or Cost/Price Determination" and it is where many "method of doing business" patents can be found (including the State Street patent).

14 In 1990-92, patents issued in class 705 numbered 105, 83 and 96, respectively. Then in 1993 there was approximately a 50% increase from the previous three years' average, to 142. 1994 saw a further rise to 184. 1995 saw a drop to 124, perhaps due to the distraction caused by the huge number of applications filed immediately prior to June 8 of that year to take advantage of changes in § 154 (calculation of term of patent), as amended for GATT. For the years 1996-99, the numbers are 143, 205, 420 and 583, respectively. Of course, a better indicator of the date when the PTO changed course would be the number of § 101 rejections issued per year as a percentage of applications pending in class 705. Such data may, however, be unavailable, even uncollectable, now. It might be easier to determine the relative number of class 705 applications abandoned after final rejection, on a year-by-year basis, but nobody has yet published such statistics. Nevertheless, even without these data, it appears that increased examiner willingness to allow patents in class 705 pre-dates the MPEP change, which in turn pre-dates State Street. Public (patent lawyers') perception of the ease of obtaining patents in this class could have changed in response the the change in the the MPEP: data based on filing dates in class 705 might help demonstrate this. (These could be obtained via RISC, with a little additional massaging, so stay tuned.) On the other hand, the contemporaneous -- and enormous -- expansion of the web and of e-mail use by the population at large may be the reason for any increase in filings in the mid 1990s. In addition, practicing patent lawyers (and examiners, too, as their work was approved or criticized by their superiors) might have been responding to the anecdotal evidence of recent experience (fewer 101 rejections received, or

15 maintained after argument, rather than to specific changes in the MPEP. The number of issued patents in class 705 certainly has accelerated since State Street, no doubt for all these reasons. As of at least last December, patents are issuing at a rate of 100/month. A Last Curiousity: The Earliest Class 705 Patent on LEXIS The earliest patent in class 705 on LEXIS, whose utility patent database goes back to 1971, is 3,573,747, issued Apr. 6, 1971, to Adams et al., entitled: "Instinet Communication System For Effectuating The Sale Or Exchange Of Fungible Properties Between Subscribers" and assigned to Institutional Networks Corp. The Abstract recites: "This disclosure is directed to an apparatus and method of automatically, anonymously and equitably buying and selling fungible properties between subscribers. The specific embodiment described in the disclosure relates to the buying and selling of securities wherein a communication system pursuant to this invention is described which permits institutional investors to communicate anonymously with each other for the purpose of arranging block trades of listed and over-the- counter securities. Said system comprises a centralized data storage unit, a digital computer, a plurality of subscriber terminals and a plurality of communication links established therebetween. ..." Back in 1971 the MPEP included the MDB prohibition, so it is not surprising that this invention is described as a system including a computer, rather than a method of doing business. But it does not sound much different from the web patents highlighted in the press these days. This patent

16 issued in just over 2 years, and has 8 cited references, all patents from the years 1965-67. Assuming all the maintenance fees were paid, it expired ten years before State Street.) PATENTS ON BUSINESS METHODS HAVE BEEN "BUSINESS AS USUAL" FOR A LONG WHILE In this section, I consider the observation in State Street to the effect that all the judicial pronouncements concerning the MDB Prohibition in the case law were dicta (see above, p. 11). The same observation was made back in 1921 (in an article I never would have found using RISC architecture). The two cases cited in Old MPEP 706.03 support the observation, of course.

THE "DOING BUSINESS" PROHIBITION WAS NOT REAL State Street and Del Gallo Judge Rich in State Street pointed out that the precedents relied on for the "doing business" prohibition in fact did not support it. Instead, their holdings were based on either a lack of novelty (the older cases and some of the newer ones), or a different § 101 prohibition: the "mathematical algorithm" prohibition (some of the more recent ones). (See 149 F.3d at 1375-6, footnotes 11, 12 and 15, and text accompanying them.) In footnote 15, the court referenced the remark in the 1998 Del Gallo article that neither the Federal Circuit nor the CCPA had ever deemed an invention unpatentable on the grounds that it was a "business method."

17 If State Street Were a Patent, and Its Recognition of Lack of Precedent for the MDB Prohibition Were a Patent Claim, It Would Be Invalid as Anticipated, Several Times Over, Based on Some Quite Old "Prior Art" The observation that the cases cited for the proposition "you can't patent a method of doing business" were not actually decided on that basis, is correct, but not new. Commentators before Del Gallo had made the point repeatedly, and although the body of case law increased over the years, and cases continued to be decided in which the MDB prohibition was invoked, none ever held a patent invalid on the basis of the bare MDB prohibition alone. "Prior [Legal] Art" to State Street In 1921 Frank W. Dahn anticipated the Del Gallo/State Street observation in an article in the Journal of the Patent Office Society: [The] precept ... to the effect that methods of doing business are unpatentable ... is generally assumed to be supported by an imposing line of decisions, and rejections based thereon are believed to be very generally acquiesced in by the patent bar. [Dahn then reviews several cases, including Hotel Security.] *** [T]he decisions ... were not based on a holding that methods of doing business are not patentable but in each instance on a holding that the particular method was unpatentable because it was old or did not possess sufficient novelty to sustain a patent. "Methods of Doing Business," 4 JPOS 85, 91 (1921). Who was Dahn? Probably at the time he was an Examiner. Later on (per a RISC Aarchitecture search), we know he was in private practice in Washington. In the late 30s and early 40s, he appeared as counsel for patent applicants appealing from decisions of the Patent Office, and in one reported case - in the Supreme Court - he

18 appeared in an infringement case. How did I find this article? When I was preparing earlier this year to give the New York version of this talk, I became curious about whether the patent community had responded in "the literature" to the 1908 Hotel Security decision (the earlier case mentioned in Old MPEP 706.03). Of course, there was no "literature" then the way there is now. Even the JPOS did not come into existence until 1918. But since I knew that the early JPOS's are nicely indexed every 10 volumes, I decided to take a look at them. The earliest reference to "method of doing business" that I found was in volume 4 (1921-22). There were two articles, this one by Dahn and one by John F. MacNab, identified as "Principal Examiner, Division 5," which is discussed below (see below, p. 22). Whether Dahn was the first, he certainly was not the last to note the deficiency in the caselaw asserted to support the doing business prohibition. For example: 1934 Tew, 16 JPOS 607, 613 1968 Hansmann, 50 JPOS 503 1992 Knobbe, 343 PLI/Pat 9 do so, too, although each successive commentator has new cases to criticize. Tew, by the way, was counsel to applicant Wait, in the case of that name cited in Old MPEP 706.03. Wait (discussed on p. 21) was decided just a few months after Tew's article was published. RISC Note: The 1934 and 1968 JPOS articles are mentioned in Fuelling, 76 JPTOS 471 (1994), which in turn is cited by Del Gallo, which in turn is cited by State Street, and since the last 3 are available electronically, I did discover the first 2, both non-electronic, using "RISC architecture," in contrast to my discovery of Dahn.

THE CASES CITED IN OLD MPEP 706.03

19 Hotel Security (1908) Hotel Security pitted two issued business method patents against each other, one as the patent in suit, one as prior art: the Hicks patent (500,071, issued in 1893) and the prior art Smith patent (449,973, issued in 1891). Hicks's claim was for an "improved means for securing hotel or restaurant proprietors or others from losses by the peculations of waiters, cashiers or other employees ..." He disclosed a system of slips of paper, ruled ledger sheets and waiter badges so that the business owner could keep track of what food was served, and keep the staff honest (rather reminiscent of the Markman patent). What the Hotel Security court says about unpatentable subject matter (160 F. at 469) -- which helped perpetuate the myth that "ways of doing business" were unpatentable per se -- in fact introduces a discussion of invalidity over the prior art. In fact Hotel Security acknowledges that "If at the time of Hicks' application, there had been no system of bookkeeping of any kind in restaurants, we would be confronted with the question whether a new and useful system of cash-registering and account-checking is such an art as is patentable under the statute. This question seems never to have been decided by a controlling authority and its decision is not necessary now unless we find that Hicks has made a contribution to the art which is new and useful. We are decidedly of the opinion that he has not .... 160 F.467,472 (2 Cir. 1908) (emphasis mine - RJM). Digression: Remember Markman? The Hotel Security patent reminds me of the Markman patent. Its claims recite an "inventory control and reporting system" including a data input device and a data processor

20 (so they include physical objects) but they could be said to cover a"way of doing business." Imagine the parallel universe where Westview had successfully asserted a 101 or 102/103 defense before arguing non-infringement. (We would probably still have Markman hearings, but they would be called something else. This, among many other things, has led me to suggest an amendment to that favorite saying of law professors that "Bad cases make bad law;" maybe it should be "Most cases make bad law"?) Two interesting facts about this famous patent: 1. Somebody did file for reexamination and all claims were rejected. Markman then sued the PTO in the DC District Court and lost, and the Federal Circuit affirmed in an unpublished decision in 1998 (see Reference list for cites). 2. The Reissue patent was issued with the inventor's name printed as "Markham" not Markman. In re Wait (1934) At the conference on this topic in New York earlier this year, I placed before the audience the following claim: The process which comprises: - posting an offered figure for a commodity - causing the figure to be visible at a remote point - contacting the stations of a buyer and a seller through a central point - causing such contact to be indicated at the point of posting and - consummating a sale through such connection and - removing such posted figure. Everyone thought they recognized the Priceline.com invention. In fact, this is the claim struck down in In re Wait, 73 F.2d 982 (CCPA 1934). In finding the claim not novel,

21 the court said, "Surely these are, and have always been essential steps in all dealings of this nature." SUBJECT MATTER INVALIDITY AND NOVELTY Subject matter (§ 101) invalidity attacks have often run in pairs. Patents and applications that were the apparent victims of the MDB prohibition have simultaenously been the targets of other subject matter prohibitions: the "printed matter" prohibition in the 19th century, and, as State Street noted, the "mathematical algorithm" prohibition in the 20th. In the 19th century, the business methods in question were often related to bookkeeping. (MacNab's 1922 JPOS article, suggests that the rush to patent bookkeeping inventions was spurred on by the famous dicta in the 1879 copyright case of Baker v. Selden that if the accounting book's author wanted to protect the "art" he described in the book, he should try to get a patent.) In the late middle 20th century, the business methods were often related to computer software. Both times, there was an explosion of inventive activity, perhaps related to the advent of new office machines. Both times, the belief in the prohibition very likely cut down on patent applications and on aggressive assertions (licensing or lawsuits) of issued patents. And perhaps most importantly, both times, these "subject matter" prohibitions alleviated the need to locate invalidating prior art, on the part of anyone opposing the patent or application -- whether the PTO or other enterprises who might have to take a license or be sued. This occurred for two reasons: first, because the prohibition created a non-art way to defeat the patent; second, because courts created an apparently irrebuttable presumption that the underlying stuff of the invention -- the paper with ruled lines, the algorithm (mathematical equation) -- was in the prior art.

22 This struck me as particularly questionable in the case of my favorite mathematical algorithm case, In re Gulack. Gulack

23 had apparently discovered a property of prime numbers (an "algorithm") and sought a patent on a hat which a magician could wear and which would make use of this mathematical property. Happily, the court decided that Gulack should get his patent, and in fact he got two (see list of patents following this outline), but along the way it cited Parker v. Flook for the proposition that algorithms are "treated as though [they] were a familiar part of the prior art." When I first looked into the algorithm cases in the late 80's, I was curious about whether the prime number property in this patent was in fact in the prior art. I attempted to call the inventor, and instead reached his son, who told me that his father, who had recently passed away, had been a lawyer and amateur mathematician. The son believed that the mathematics in the patent was his father's own discovery. The problem with business method inventions -- for centuries, not just post-web -- is that people have a queasy feeling that they are not "new and non-obvious." But it has always been hard to find invalidating prior art, especially before a body of issued patents exists. The importance of prior art in the form of actual activities, rather than published words or concrete things like machines, has probably alway been greater for MDB patents than for other kinds of patents. That kind of prior art is certainly invalidating by statute: § 102(a) establishes as a category of prior art anything "known or used by others" before the invention date and § 102(b) establishes as prior art anything "in public use or on sale" before the US filing date. But such prior art is (1) hard to find, especially for the PTO, and (2) hard for litigants to prove. As to the second, there is a wonderful passage that Fish & Neave's Al Fey loved to quote that explains judicial

24 reluctance to rely on only oral testimony without "hard copy" to prove invalidity: "Witness whose memories are prodded by the eagerness of interested parties to elicit testimony favorable to themselves are not usually to be depended upon for accurate information." The Barbed Wire Patent, 143 US 275, 284 (1892). Needless to say, the Supreme Court upheld the validity of the Barbed Wire Patent over oral testimony about prior art fences. Thus the MDB prohibition, like the other 101-based prohibitions, served an unspoken need to overcome proof problems with the prior art in certain areas of human endeavor. METHOD PATENTS HAVE ALWAYS HAD PROBLEMS Method patents may be the neglected step-child, if not also the Cinderella, of the patent system.

ARE METHODS PATENTABLE AT ALL? In the eighteenth century, many people thought the answer to the question "Can you patent a method [any kind of method]?" was "No." A "method" was not considered to be a "manufacture," a term found in the first English language patent statute, the Statute of Monopolies, as well as in every US patent statute since 1790. James Watt's patent on "a new invented method of lessening the consumption of steam and fuel in steam- engines" encountered difficulties for this reason. (See, e.g., Willard Phillips, THE LAW OF PATENTS 89 (Boston: American Stationers' Co. 1837), or Edward C. Walterscheid's excellent articles on the history of patent law that appeared in JPTOS in 1994-96. Part III-2 in 77 JPTOS 847 at 853 et

25 seq., discusses the Watt cases, Boulton v. Bull, 2 H. Bl. 479 (1795) and Hornblower v. Boulton, 8 T.R. 102.(1799)). The reason courts balked at patenting methods are like the reasons they balked at patenting "algorithms" and "methods of doing business." They felt that the patent statutes required that the patent claim be related (and limited) to physical objects. If the objects used in a method were already known, it would be that much harder to establish novelty in the method. Hotel Security: "It cannot be maintained that the physical means described by Hicks, -- the sheet and the slips, -- apart from the manner of their use, present any new and useful feature. A blank sheet of paper ruled vertically and numbered at the top cannot be the subject of a patent, and, if used in carrying out a method, it can impart no more novelty thereto, than the pen and ink which are also used." 160 F. at 469.

WHO INFRINGES A METHOD PATENT? Methods may be patentable, but are they infringed by sellers of the products made by the method who do not themselves practice the method? Until the Process Patent Amendment Act of 1988 (effective Feb. 23, 1989), the answer was no. Now, under § 271(g) the answer, though complicated, can be yes. Method patents are also not directly infringed by sellers of equipment to practice the method. Thus, if the equipment takes so long to construct that the patent will expire before the construction is finished, then it may not be possible to enjoin that construction during the life of the patent. Joy v. Flakt (Fed. Cir. 1993). Similarly, there is no direct infringement of a method patent when equipment is sold in the United States to a foreign customer who will practice the method outside the country. Standard Havens (Fed. Cir.

26 1991).

METHODS AND PRIOR SECRET USES Methods may be patentable, but can you practice them, in a way that does not disclose them, for more than a year before filing? Can someone else's practicing them in secret invalidate them? The answers to both are thought to be "No." Learned Hand in Metallizing, and the Federal Circuit in DLAuld, are cited for the first, and WLGore for the second. This is curious, especially because the phrase "known or used by others" in § 102(a) (and predecessor statutes) does not say "publicly." (See, e.g., the historical discussion in Woodland Trust, and E. C. Walterscheid TO PROMOTE THE PROGRESS OF USEFUL ARTS.

Q. HOW DO YOU ENFORCE A METHOD PATENT? A.: VERY CAREFULLY. If the competitor of the patent owner is not the one practicing the method, the patent owner has to sue corporate customers or consumers, neither of which is a pleasant prospect. And if the patent owner forgets to prove direct infringement, the accused (contributorily) infringing competitors can have the case dismissed. To make matters possibly worse for patent owners in this area: HR 3194, just signed into law in November 1999 provides a "first inventor defense" against business method patents. (This is one of the topics of co-speaker James R. Batchelder.)

27 BUSINESS METHOD PATENTS: GOOD, BAD OR INDIFFERENT? Business method patents, to the extent they are considered something "new" for the Patent Office, evoke the same response as have other "new" categories of human ingenuity. People complain that the patent system is not very good or very fair, it stifles ingenuity, it harms competition that would benefit the public, etc. The biotech people said (say) so, the software people said (say) so, before that, Henry Ford said so, and so on back. Much of the problem is cured with time: once the patent office gathers more prior art (by issuing patents, but in today's internet age, examiners can find non-patent prior art without leaving the premises, as long as it is word-searchable electronically) and the examiners gain more expertise, the system works better. [And then, at some much later date, the subject matter becomes a legitimate educational credential for admission to the patent bar. Recall the years when a degree in biology was not sufficient. Computer science degrees still do not necessarily qualify, see http://www.uspto.gov/web/offices/dcom/olia/oed/grb9904.- htm.] The Patent Office is better at examining patents in "old" arts than "new" ones. In order to speed up the learning curve this time, the Patent Office has in fact responded to the problem with its "Business Methods Patent Initiative" (see http://www.uspto.cov/web/offices/com/sol/actionplan.html) announced on March 29, 2000. Co-speaker Gerald Goldberg will discuss this initiative. "Progress in science and useful arts" has always had to contend with the learning curve problem, yet it has managed to be promoted. Journal articles by Robert Merges, John Thomas, Rochelle Cooper Dreyfuss, Jared Earl Grusd,

28 among ohters, are considering whether the system needs changing for business method patents. But there are practical, definitional, and plain old time problems with any suggested "fix," as well as the age-old problem of trying for a cure that is not worse than the disease. Some Data About Business Method Patents and Relative Litigation Rates I did a quick LEXIS search to look at litigation rates for different classes of patents back in February (in preparation for my earlier talk at the New York conference) and I have updated it now. I considered class 705 and three other patent classifications for comparison. I looked at (1) the number of patents issued in each class (since 1971); and (2) the number of such patents involved in infringement litigation. As stated above, the MDB class is: 705 "Data Processing: Financial, Business Practice" -- the class of the patent to Boes in State Street I chose the other three to be in different areas of endeavor. based on famous recent patent cases. I figured that the class of the Alappat patent, and that of the Genentech v. Amgen patent, might well be more litigated than other less cutting- edge classes, and expected that the class of the Kearns patent, an "older" technology, would be less litigated. The classes are: 345 "Computer Graphics Processing" -- the class of the application in In re Alappat 318 "Electricity: Motive Power Systems" -- the class of the windshield wiper patents in the Kearns cases 435 "Chemistry: molecular biology and microbiology" -- the class of the patent on human growth hormone in Genentech v. Amgen To find out how many patents are involved in litigation, I

29 simply searched for lit-reex (notice). The resulting numbers are only as good as the combined efforts of the courts and the PTO, with regard to complying with 35 USC § 290, and LEXIS, with regard to inputting the information into the database, make them. While the data show that many such notices are known to the LEXIS database, none is recorded today for either the amazon.com patent or the priceline.com patent, both of which are known to be in litigation. Thus the absolute numbers must be taken with a good pinch of salt. Presumably, however, the rate of failure to record notices of litigation is the same for all classes. So the rates of litigation should all be suppressed equally, and the comparison between rates unaffected. Here are the results: CLASS # issued patents # litigated % 2/6/00 5/9/00 2/6 5/9 705 3,186 53 1.7 3,487 63 1.8

345 20,007 159 0.79 20,788 166 0.80

318 18,223 77 0.42 18,466 78 0.42

435 43,624 288 0.66 45,060 288 0.63

It looks like business method patents are litigated at about 3 times the rate of other patents: 1.8% v. an average of 0.6% for the other three classes. Why might that be? - small number statistics? The absolute numbers of patents in class 705 is only about one-sixth that of the next lowest class. - not enough "unimportant" patents issued in class 705 (PTO

30 overburdened?) or too many issued in the other classes (PTO more easygoing about old technology? inventors more used to filing applications in old technology? ) - too much litigation of method patents (courts overburdened?) or maybe not too much, and just an indication of the huge financial successes of e-commerce merchants? (more money to spend on litigation, more money at stake?) WHAT ISN'T PATENTABLE ANY MORE, AND SOME ADDITIONAL REMARKS ABOUT 101

NOT PATENTABLE, THEN AND NOW Back when I started in patent law (1986), "everyone knew" you couldn't patent: - perpetual motion machines - cures for the cold or cancer - arrangements of printed matter - methods of doing business - "life" - "algorithms" Only the first is a clear loser today. (But the printed matter prohibition may still have some teeth: Last September, the Federal Circuit affirmed a § 101-printed matter invalidity defense on a patent for morphing cinematic images to lip sync dubbed speech. Bloomstein v. Paramount.)

DISPOSABLE § 101? Before State Street, I never spent much time on the "subject matter" requirements of § 101 in the patent law course I taught. The case law was not amenable to teaching, among other reasons. Instead, in line with the Constitutional mandate to extend protection to "inventors" for their "discoveries" (the Constitution, Art. I, sec. 8, cl. 8), during the course we would assume that anything anyone wanted to patent could be patented, if it met the other statutory and

31 regulatory requirements (§§ 102, 103, 112, and Rule 56). What would be the consequences of amending § 101 as follows (using PTO conventions to show deletions and additions): Whoever [invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may] wants to obtain a patent [therefor,] on something useful may do so, subject to the conditions and requirements of this title. When I first read Arrhythmia (a 1992 mathematical algorithm case), the subtext to the accused infringer seemed to be: "If there is prior art to invalidate this patent, bring it forward; if not, stop whining." Which is how I had always felt when I read Parker/Benson/Flook and all the other 101 algorithm cases. And, to come almost full circle, that is how Hotel Security worked: because there was a close prior art patent in the art of overseeing waiters, the patent was held invalid. Similarly in the 101 case after State Street, AT&T v. Excel, after the Federal Circuit overturned the 101 invalidity judgment, the accused infringers prevailed in the District Court on the basis of invalidating prior art. But § 101 has provided a kind of safety valve, when people think that something should not be patented or should be difficult to patent. Perhaps that is, or may some day prove to be, a good thing.

32 SELECTED REFERENCES CASES In re Alappat, 33 F.3d 1526, 31 U.S.P.Q.2D 1545 (Fed. Cir. 1994) Arrhythmia Research Tech. v. Corazonix Corp., 958 F.2d 1053, 22 U.S.P.Q.2D 1033 (Fed. Cir. 1992) AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352, 50 U.S.P.Q.2D 1447 (Fed. Cir. 1999), cert. denied, 120 S. Ct. 368 (1999) (§ 101 decision) AT&T Corp. v. Excel Communications, Inc., 1999 U.S. Dist. LEXIS 17871 (D.Del. Oct. 25, 1999) (§§ 102/103 decision) Bloomstein v. Paramount Pictures Corp., No. 99-1051 and 1203 (Fed. Cir. Sept. 3, 1999) (unpublished); No. C-95-1864 MHP (NDCal. March 10, 1998) (unpublished) Diamond v. Chakrabarty, 447 U.S. 303, 206 U.S.P.Q. 193 (1980) Fowler v. City of New York, 121 F. 747 (2 Cir. 1903) This is my current favorite among the early cases cited (incorrectly) for the proposition that "you can't patent a method of doing business." Fowler's patent involved a method for handling rail passenger traffic. The inventor described a "bitransit system": a rail system having express and local trains. The problem he solved comes about at the "express" stations. His system included placing the local and express trains in each direction across an "island" platform, and putting stairways in appropriate places for passengers wishing to exit or switch directions. No 4-track prior art was found, but the "island" configuration for 2-track stations was

33 known, and the extrapolation to 4-tracks was held to be obvious. Thus the patent was declared invalid. Its utility can not, however, be questioned: Anyone familiar with the New York City subway system knows that changing between the local and the express at W. 34th Street on the IRT (the 1-2-3 and 9) is a nightmare precisely because Fowler's method is not used, and the 2- track version is. In re Gulack, 703 F.2d 1381 (Fed. Cir. 1983) Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2 Cir. 1908), affirming 155 F. 298 (SDNY 1907) Joy v. Flakt, 6 F.3d 770 (Fed. Cir. 1993) Lindsay v. Wrecked and Abandoned Vessel, 52 USPQ2d 1609 (SDNY 1999), also discussed in 58 PTCJ 847 and 855 (Oct. 28, 1999) Markman v. Lehman, 987 F. Supp. 25, 45 U.S.P.Q.2D 1385 (D.D.C. 1997), aff'd, 1998 U.S. App. LEXIS 27646 (Fed. Cir. 10/26/98) Metallizing Engineering Co. v. Kenyon Bearing & Auto Parts Co., 153 F.2d 516, 520 (2 Cir. 1946). Parker v. Flook, 437 U.S. 584 (1978) In re Schrader, 22 F.3d 390 (1994) Standard Havens Prods. v. Gencor Indus., 953 F.2d 1360, 21 U.S.P.Q.2d 1321 (Fed. Cir. 1991) State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368, 47 U.S.P.Q.2D 1596 (Fed. Cir. 1998), cert. denied, 119 S. Ct. 851 (1999) W.L. Gore & Assocs., Inc. v. Garlock, Inc., 721 F.2d 1540, 220 USPQ 303 (Fed. Cir. 1983), cert. denied, 469 U.S. 851 (1984)

34 Watt Steam Engine Cases: Boulton v. Bull, 2 H.Bl. 463 (1795) and Hornblower v. Boulton, 8 T.R. 95 (1799) Woodland Trust v. Flowertree Nursery Inc., 148 F.3d 1368, 47 U.S.P.Q.2D 1363 (Fed. Cir. 1998)

PATENTS (BY INVENTOR NAME) Adams et al., 3,573,747, Instinet Communication System For Effectuating The Sale Or Exchange Of Fungible Properties Between Subscribers (Apr. 6, 1971) [earliest patent on LEXIS database, which goes back to 1971, in class 705] Alappat, Kuriappan P., et al., 5,440,676, Raster scan waveform display rasterizer with pixel intensity gradation (Aug. 8, 1995) [In re Alappat patent] Boes, R. Todd, 5,193,056, Data processing system for hub and spoke financial services configuration (Mar. 9, 1993) [State St. v. Signature patent] Chakrabarty, Ananda M., 4,259,444, Microorganisms having multiple compatible degradative energy-generating plasmids and preparation thereof (Mar. 31, 1981) [Diamond v. Chakrabarty patent] Dickens, Bruce, 5,806,063, Date formatting and sorting for dates spanning the turn of the century (Sept. 8, 1998) [a Y2K bug patent mentioned in the news in November 1999] Doherty, Gerard P., et al, 5,333,184, Call Message Recording for Telephone Systems (Jul. 26, 1994) [AT&T v. Excel patent] Gulack, Max A., 4,260,385, Educational and recreational mathematical kit in the form of a set of square sticks (Apr. 7, 1981); 4,416,633, Educational and recreational mathematical device in the form of a band, ring or concentric rings (Nov. 22, 1983)[In re Gulack patents]

35 Hair, Arthur R., 5,966,440, System and method for transmitting desired digital video or digital audio signals [the Sight/Sound patent] Hartman, Peri et al., 5,960,411, Method and system for placing a purchase order via a communications network (Sep. 28, 1998) [amazon.com v. barnesandnoble.com] Hicks, 500,071 (1893) [Prior art patent in Hotel Security] Harrington, Juliette, 5,895,454, Integrated interface for vendor/product oriented internet websites (Apr. 20, 1999) [suit against Yahoo mentioned in the news in November 1999] Levine, Fredrick E., et al., 5,745,681, Stateless shopping cart for the web (Apr. 28, 1998) Markman, Herbert, RE 33,054 (reissue of 4,550,246) Inventory control and reporting system for drycleaning stores (Oct. 29, 1985; reissued Sept. 12, 1989) [Markman v. Westview patent.] Smith, G.D. 449,973 (1891) [Hotel Security patent in suit] Walker, Jay S., et al, 5,794,207, Method and Apparatus for cryptographically-assisted commercial network system designed to facilitate buyer-driven conditional purchase offers (Aug. 11, 1998) [The Priceline.com patent] BOOKS AND ARTICLES Becker, Stephen A., Drafting Patent Applications on Computer-Implemented Inventions, 4 HARV. J. LAW & TEC. 237 (1991). Brown, Christopher A., Recent Developments in Intellectual Property Law, 32 IND. L. REV. 909 (1999). Dahn, Frank W., Methods of Doing Business, 4 JPOS 85 (1921).

36 Del Gallo, III, Rinaldo, Are 'Methods of Doing Business' Finally Out of Business as a Statutory Rejection?, 38 IDEA 403 (1998) Dreyfuss, Rochelle Cooper, Are Business Method Patents Bad for Business?, 16 COMPUTER & HIGH TECH. L.J. _____ (1999-2000) [in press] Durham, Alan L., "Useful Arts" in the Information Age, 1999 B.Y.U. L.Rev. 1419 (1999) Ebert, Lawrence B, "Pfaff in View of State Street: Would You Have Known It If You Could Have Seen It?, 5 INTELLECTUAL PROPERTY TODAY 42 (1998) Fuelling, Michael L., Manufacturing, Selling and Accounting: Patenting Business Methods, 76 JPTOS 471 (1994) Grusd, Jared Earl, Internet Business Methods: What Role Does and Should Patent Law Play?, 4 Va. J.L. & Tech. 9 (1999) Hansmann, Arthur J., Method of Doing Business, 50 JPOS 503 (1968) Knobbe, Louis J., How to Decide Whether to Obtain a Patent: Legal Framework, 343 PLI/Pat 9 (1992) MacNab, John F., Invention and Patentability Under the Patent Statutes as applied to So[-]called Printed Matter and Methods or Systems of Doing Business, 4 JPOS 480 (1921) Merges, Robert, As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Concepts and Patent System Reform, 14 BERKELEY TECH. L.J. 577 (1999) Tew, Geo. E., Methods of Doing Business, 16 JPOS 607 (1934)

37 WALTERSCHEID, EDWARD C., TO PROMOTE THE PROGRESS OF USEFUL ARTS: AMERICAN PATENT LAW AND ADMINISTRATION (Littleton, Colorado: Fred B. Rothman & Co. 1998) Walterscheid, Edward C., The Early Evolution of the United States Patent Law: Antecedents, J. PAT. & TRADEMARK OFF. SOC'Y 1994-1996 - 76:697 (Part I), 76:849 (Part II), 77:771 (Part III-1), 77:847 (Part III-2), 78:77 (Part IV), 78:615 (Part V-1) and 78:665 (Part V-2). Yoches, E. Robert, Practising Law Institute, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series, Third Annual Internet Law Institute, New York City, June 14-15, 1999, Patent Protection for Electronic Commerce and Other Internet Applications, GO- 0051 PLI COURSE HANDBOOK SERIES 321 Yoches, E. Robert, and Pollack, Howard G., Is the "Method of Doing Business" Rejection Bankrupt? 3 FED. CIRCUIT BAR J. 73 (Spring 1993).

38 insert copy of cartoon

RISC* Architecture *Rear InSide Chair -or- Restricted to Information you can find Sitting at your Computer] by Roberta J. Morris