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Business method patents in danger?

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Can you really patent a crustless peanut butter and jelly sandwich? Or, more practically, can you really patent a tax strategy or method of arbitration? Only a year ago, the answer would have been maybe. However, recent decisions by both the Federal Circuit and the Supreme Court have significantly undermined the ability to obtain and enforce a patent on a method of doing business. After these decisions, a valid business method patent probably has to include new technology to carry out the method, such as a computer programmed with new software that implements the business method -- and even that may not be sufficient.

The definition of a "business method" is somewhat like Justice Potter Stewart's famous definition of pornography -- the courts know it when they see it. While neither the Federal Circuit nor the U.S. Patent and Trademark Office have formally defined the term, Internet businesses, financial arrangements and tax strategies are commonly recognized examples of business methods.

In its 1998 decision in State Street Bank v. Signature Financial Group, the Federal Circuit concluded that business methods, like any other "invention," were patentable subject to the general requirements of the Patent Act. In State Street's aftermath, people sought, sometimes successfully, to patent a wide variety of non-"technological" methods, from how to make a crustless sandwich to how to keep money away from the IRS.

But the Federal Circuit's September 2007 decision in In re Comiskey significantly curtailed the broad language of State Street. In finding an arbitration method unpatentable, the court held that a business method by itself, untied to any means for carrying it out, was not subject matter entitled to patent protection. The court also suggested that the addition of well-known technology -- such as computers and telephones -- to carry out the method would have been obvious, and therefore also unpatentable.

Aside from Comiskey, the current vulnerability of business method patents results from recent changes in general patent law unfavorable to patentees. Recent Supreme Court decisions in KSR v. Teleflex and MedImmune v. Genentech have made it easier to invalidate a patent as obvious, and easier for a company threatened by a patent to seek a declaratory judgment of that patent's invalidity in a friendly venue. These decisions present even more hurdles for successful enforcement of business method patents. The long-term impact of these changes on business method patents remains uncertain. Two cases recently argued before the Federal Circuit -- In re Bilski (hedging in commodities contracts) and In re Ferguson (contingent fee marketing arrangements) -- squarely raise the patentability of business methods untied to any means for realizing them. Decisions in these cases may help ultimately resolve the patentability of business methods. And Congress may also weigh in with the Patent Reform Act.

But the current uncertainty means that, with good lawyering, a company alleged to infringe a business method patent stands a better chance of invalidating the patent today than at any time in the past decade.

So much for the crustless PB&J sandwich.

Submitted by Eric Acker and Greg Reilly of Morrison & Foerster LLP

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