Paper for SAWR/IP Survey, Fall 2014
Ming Choy
SID #0259716
Reconciling Alice v. CLS Bank with Supreme Court’s § 101 Jurisprudence: are we on the right path?
1. Introduction
In Alice Corporation Pty. Ltd. v. CLS Bank International [1], the United States Supreme Court (hereafter, “the Supreme Court”) affirmed with the holding of the United States Federal Circuit Courts of Appeal (hereafter, “the Federal Circuit”) that a method and a system for providing intermediary service are not patent eligible. [2] The case ignites massive interest in the legal community and in the business community as well. In this note, we will first examine the debate about business method patents, and then examine the Federal Circuit and Supreme Court jurisprudence on patentable subject matter. Towards the end of the note, we will provide recommendations for analytical framework for patentable subject matter, as well as administrative measures addressed to the debate about business method patents.
2. Why business method should be patentable? Why not?
Critics of business method patent advocate that business method should never be patentable in the first place. The critics rely on several rationales.
First, critics argue that granting business method patent runs counter to the utilitarian theory behind the creation of intellectual property, i.e. to encourage people to create something useful for the society. Similarly, the US patent system is created “to promote the progress of science and useful arts.” [3] The patent system does so in two ways. By awarding an inventor a time-limited monopoly and right to exclude others from “free-riding” on the inventor’s effort, the inventor can be offered time to perfect and to commercialize his or her invention, to make profit out of the invention. Therefore, the inventor can be motivated to invest time and money into the inventive process. Besides, by requiring the inventor to disclose the invention to the public (while at the same time granting the monopoly), the public can be educated and spurred to find a better solution for the problem the invention seeks to solve.
But critics argue that neither the “free-riding” protection nor the disclosure rationale works for business method patents. For example, Professor Dreyfuss of NYU argued that the disclosure rationale is typically not needed, given that business method is typically practiced to serve the customers and has to be disclosed to the public to become effective (e.g. Amazon’s one-click encoding). [4] Professor Dreyfuss further argued that there is very little incentive to protect a business method from free-riding, given that a successful (and therefore is also useful) business method typically can be assured adequate return through mechanisms such as lock in, network effects, and customer loyalty, [5] while providing monopoly through business method patent runs the risk of protecting businesses from competition and preserving inefficiencies in the marketplace. [6] This is especially true as the success of a business should depend on execution of the business, such that the society can depend on market competition to determine the best use for a particular resource. [7] Applying Professor Dreyfuss’ theory, business method patent directly distorts the fundamental mechanism our economy operates, and the distortion to free market is far greater more so than granting patents on a technical, non-business-method-related innovation. In the latter case, we can still count on market mechanism to adjust to the monopoly granted for a product by the patent system – for example, spurred by market needs for a cheaper solution than the one offered by the patent, people can try to design around the patent, or to find another solution to the problem; but in the former case, such a market mechanism is simply distorted by the monopoly as a result of the granting of the business method patent, regardless of the merits of the product the business is trying to sell.
Second, critics also argue that business method patent increases cost of doing business to the extent that it far outweighs any benefit such patents can bring to the society. As a preliminary matter, Professor Hall of UC Berkeley, citing empirical data, questioned the effectiveness of patent system in spurring innovation except for a few specific industries such as pharmaceutical and biotechnology, where patent claims are typically based on molecular formulas and easy to enforce. [8] Professor Hall further argued that business method patents can exert prohibitive transaction cost to business.[9] Professor Hall observed that the banking and financial services industry depend heavily on secure communication and transactions exchange among banks and brokerage houses, and such communication depends on standards; but if such standards (or more generally, a particular way of performing a transaction) becomes patented, business entities that need to be operating within such standards will be forced to license (either by paying a fee, or acquiring other patents for cross-licensing), which will drive up the cost of operation of the business. [10] Professor Dreyfuss shares similar concern as Professor Hall, but less so for specification application of knowledge (whether or not business-related) than for much broader and fundamental “big ideas” that are on the top of “knowledge pyramid.” [11] Nonetheless, both Professor Dreyfuss and Professor Hall present one of the strongest argument against patenting business method claim – the pre-emption of fundamental business principle which everyone relies on to conduct business.
Third, critics also express concern about the quality of business method patents when, expectedly, more business method patents are produced as result of allowing business methods to be patentable. For example, Professor Hall expresses concern about patents that create uncertainty about the breadth of the patent claims, and about whether those patents can be invalidated. [12] Professor Hall argues that such uncertainty may cause business to underinvest in the technology, and may lead to more strategy use of existing patents, which can lead to more costly litigations.[13] Besides, Professor Dreyfuss also argues that the validity of business method patents, especially those patents which include subject matters that are well-known but rarely documented and more often reside in the practices and policies of the business entities that use the method.[14] Based on this observation, Professor Dreyfuss argues that such patents are difficult to be examined effectively, which leads to inevitable issuance of invalid patents.[15]
On the other hand, advocates of business method patent argue that business method and technologies have been so intertwined that, at the very least, business method should not be categorically excluded from patentability altogether. For example, Professor Duffy cited the explosive development of financial engineering, in terms of the “quant”-ification of Wall Street’s workforce and academia’s rising interest in research and developing academic programs for financial engineering, to show that the rise of business method patents is catalyzed mainly by the development of economics, business, finance, and similar fields into much more technological disciplines. [16]
Based on Professor Duffy’s observation about the explosive growth of financial engineering, it can be argued that at the very least, fairness principle demands inclusion of business method into patentable subject matter. Patent system should be neutral towards “anything under the sun made by human,” [17] and should not discriminate or be in favor of a particular field of technology. As Professor Merges and Professor Ginsberg put it succinctly – why should a programmer working for a steel manufacturing company be a potential patentee, while a programmer working on Wall Street is not? [18] The patenting of business methods (at least those that are technology-based) should be as legitimate as the patenting of other technologies, especially given the explosive growth of the financial engineering sector. Also, patent law should reflect and to be inclusive to the latest technology development, not to be confined within a perspective of industrial revolution era by, for example, allowing only technologies that produce tangible products as patent eligible.
Besides, unlike what Professor Dreyfuss suggests, there are many business methods that need patent protection to encourage disclosure, and the inventors of these business methods cannot simply rely on business success to protect their invention. For example, while Amazon may not need a business method patent to protect its “one-click” transaction method, because of customer loyalty and the fact that the output of such a method provides a very visual (and tangible) effect to customer experience (i.e. convenience in transaction), many inventors simply do not have the market power of Amazon, or that the business method they develop are for processing of data or information, such that the method is not even perceptible to the general public. For example, a startup company which is completely unknown to customers (hence there is no customer loyalty to speak of) develops a method of providing secure transaction, which includes dividing customer information among the parties involved in a transaction and a middle party, and that all the information exchanged is encrypted, such that no party can have all the information of the customer, but only the information needed to complete its part of transaction. Obviously, unlike Amazon’s “one-click” transaction, such a secure transaction method probably is invisible to the general public, and it is likely that the inventor will not be motivated to disclose this method without patent protection. To make matters worse, given that the user may not even associate the secure transaction method with a particular company, yet such secure transaction method is so crucial to our society, competitors can just “free-ride” the invention and implement exactly the same method (if the competitor finds a way to know about the method). The result is that the inventor will prefer to keep the secure transaction method a trade-secret, and the public lose the opportunity to learn about the secure transaction method, and the opportunity to further improve it.
From the discussion above, it can be seen that business method should not be categorically excluded from patenting. Rather, to address the uncertainty and economic cost brought about by bad business patents (especially those that seek to patent well-known business principles), and the preemption of fundamental business principles, the more urgent question should be: how to create a sensible legal framework to allow the patenting of business method? But to create such a legal framework, one may need to ask: how do we define business method patent?
3. What is business method patent?
Unfortunately, despite the furor around the patent eligiblity of business method, and that a layman can easily identify what a business method patent is (e.g. the patent for Amazon’s famous “one-click” transaction), there does not exist a legal definition of “business method patent.” Such a legal definition is needed, because it determines, from a legal and objective standpoint, whether an invention with some business application falls within the realm of patentable subject matter. We do not wish to leave it up to the subjective feeling of the Court – such that it becomes “we know it is business method when we see it” type of judgment.
According to Wikipedia, “business method patents” refer to “a class of patents which disclose and claim new methods of doing business. This includes new types of e-commerce, insurance, banking, tax compliance etc.” [19] On the other hand, the United States Patent Office (“USPTO”) provides a relatively narrow definition of business method patent when creating a US patent class 705. USPTO defines class 705 to encompass “machines and their corresponding methods for performing data processing or calculation operations, where the machine or method is utilized in the 1) practice, administration, or management of an enterprise, or 2) processing of financial data, or 3) determination of the charge for goods or services.“ [20] The “narrowness” of the USPTO’s definition comes from the requirement of “machine and their corresponding methods.” In essence, such definition requires the patent claim to specify a machine (e.g. a computer) or its corresponding method (e.g. a software program) to carry out at least part of the business method, not just something that can be carried out as a mental step. The USPTO’s appraoch is generally in line with that of the European Patent Office (“EPO”). The EPO, while excluding “schemes, rules, and methods for performing mental acts, playing games or doing business, and programs for computers,”[21] nevertheless treats an apparatus adapted to support an economic activity, or a method that recites processing of physical data, or affecting the way computer operates, as patentable subject matter. [22]
While both the USPTO and EPO include limitations which further delineate the boundary of “business method patent” by, for example, requiring the claims to be at least tied with machine implementation, neither office has provide the answer for the all-important question – that is, when does a business method qualify to be an “abstract idea”? The answer to this question determines, to a large extent (but not to a full extent, as we will see later), whether a patent claim for a particular business method covers a patentable subject matter, or is within one of the judicially created exceptions (the other two being laws of nature and physical phenomena) which can render the business method patent claim not patent eligible.