United States
Patenting of financial business methods gains momentum
Jeffrey E Young
Alston & Bird LLP
Under US patent law, business methods must be treated in the same way as any other method when determining their eligibility for patent protection. This rule was established by the Federal Circuit Court in 1998 in State Street Bank case. Until recently, the financial industry has been accustomed to competition without the benefits and burdens of exclusive patent rights for innovative business procedures. Now, however, financial companies ignore patent-related opportunities and threats at their peril as competitors begin to take advantage of the patent system. Patents have always stimulated innovation in other industries, and there is every reason to expect them to have the same effect in the financial industry.
This chapter examines the growth of business method patenting in the United States, the motivations that drive financial companies to patent their innovations, the state of efforts to enforce such patents, strategies for overcoming limitations on patentable subject matter applied by the US Patent and Trademark Office (USPTO) and other patent offices, and the future of business method patents in the United States.
The rate of patent filing and issuance
In 2006 the rate of filing of business method patent applications appears to have stabilised at about 6,500 per year. Technology Center 3600 of the USPTO reported that it took approximately 36 months for a first office action to be sent to an applicant whose invention is classified as a business method, and approximately 44 months to issue an action for a patentable business method. This time has been increased by the introduction of the USPTO’s second-level review process, which applies extra scrutiny to business method inventions. One commentator estimated that the backlog of such cases peaked at more than 19,000, 500 of which had been allowed by an examiner initially but were not yet patented because they were undergoing secondary review.
However, the USPTO has introduced new initiatives to reduce the backlog, including hiring 60 new examiners in the business method examining groups and streamlining the second-level review process. The number of business method patents issued is expected to increase from fewer than 300 in 2004 to about 700 in 2006.
What drives companies to seek business method patents?
There are three main motivations for filing a business method patent:
• protecting innovative approaches to satisfying customer needs;
• protecting more efficient ways to comply with government regulations; and
• protecting internal procedures that allow a company to be more efficient in controlling internal risks and costs.
Each of these motivators relates to innovation that makes a company more competitive – there is value in the ability to prevent competitors from using the same process. The following general descriptions of the content of actual patents and pending applications provide illustrative examples.
Customer needs
UPS has filed a patent application (US Patent Publication 20030040947) that seeks to patent its international exchange collect product. UPS recognised a need to prevent customer shipments being delayed by the need for purchasers to obtain a letter of credit before the goods can be shipped, which delays proof of delivery and payment to the seller. To enhance the delivery speed, UPS conceived a system that allows the goods to start moving immediately while protecting both the seller and the buyer through a unique double escrow process. The patent application is for a system and method under which the seller ships the goods via a carrier subject to a hold command until the buyer deposits payment in an escrow account with a bank associated with the system. Thus, the goods make progress towards the buyer while funds are being arranged. For example, the goods may be held at an import broker location until the funds are deposited. The bank sends a release command to the carrier when the funds arrive, allowing the goods to be delivered to the buyer. When the buyer signs for delivery, a proof of delivery message is sent to the bank, which releases the funds to the seller’s account. Thus, UPS is seeking to patent a novel system that speeds up commerce while protecting both parties against risk.
The financial industry has many participants seeking to protect products with business method patents. A new type of lottery insurance is the subject of US Patent 6,840,857. A hybrid credit card that automatically directs standard and closed loop transactions to different processing paths is described in US Patent Publication 20020138428. An electronic derivative trading system that automatically discovers the credit risk position of a trader for use in matching the trader with other traders that have offsetting credit risk positions is described in US Patent Publication 20040015431.
Other examples can be found at www.uspto.gov.
Regulatory compliance
An example of legislation inspiring a patentable approach to compliance is Richard Sowinski’s US Patent 6,601,033, which seeks to protect a pollution credit exchange (see Figure 1). Federal laws, Environmental Protection Agency regulations, building codes, insurance requirements and local building ordinances establish clean air standards and often require installation of specific measures in private homes. For example, when the individual consumer installs a gas filter within his or her gas pipes and produces cleaner gas than previously available, the reduced pollution has value. Sowinski noted that although regulators have encouraged the development of ‘pollution credit offsets’ for large industries and trading of such credit offsets on the Chicago Board of Trade, trading in pollution credit offsets was not available to individuals. The patent describes a computer system for validating individuals’ applications for pollution reduction credits, assigning a value to the activity associated with each application, and facilitating trading between individuals.
Argent Regulatory Services seeks to patent a regulatory compliance system and method in its patent application (US Patent Publication 20030217036). Argent’s inventors describe difficulty in gaining access to all rules, regulations and recommended procedures affecting a single operation, such as a plant, site or piece of equipment. These mandates emanate from a multitude of regulatory entities including state and federal agencies, industry associations and even a company’s own policies and procedures. By linking to a network of secured databases containing governmental regulations, industry standards and company policies requiring compliance by users, the system purports to identify operations subject to compliance, the applicable compliance standards and tasks necessary to achieve compliance. The system then notifies a responsible person at the user company and facilitates required reports.
Some inventions help authorities deal with huge volumes of data received from companies complying with reporting regulations. For example, a federal suspicious activity report must be filed by a bank whenever an unusual financial transaction or contact has occurred that may violate statutes or regulations such as the Bank Secrecy Act. US Patent 6,751,607 describes a method for identifying latent relationships among data elements in very large databases. The method applies a series of algorithmic steps to the textual data of the accumulated reports to find relationships such as groups of banking transactions associated with a single criminal or terrorist organisation.
Improving internal procedures
Good companies are always looking for ways to improve efficiency, quality and risk management, so it is no surprise that many business method patent applications claim such innovations. For example, a company’s need to obtain and understand the information required for its management and accounting functions presents a difficult challenge. WebSourceIT LLC focused on the tendency of companies, such as utilities, to maintain separate operational and accounting systems for regulatory reporting purposes on the one hand and for managerial functions on the other. This approach leads to multiple data entries for the same events and difficulty in extracting data in a form readily usable for multiple functions. US Patent Publication 20060038721 describes a set of integrated software systems that provide a single set of books for work management, materials management, accounting and regulatory reporting functions. Field personnel can enter data for all purposes without understanding details of an accounting theory or confusing account codes, and management personnel can use only the aspects of the data relevant to a task at hand. At the same time, the complex information needed for regulatory accounting is available when needed.
In the insurance field, Progressive Casualty describes, in US Patent 6,064,970, a method for setting car insurance prices based on monitored driver characteristics. Insurers previously based pricing on general statistics that provided little accuracy in predicting whether a particular driver was likely to have an accident. The system uses vehicle-mounted sensors to build a database of events and vehicle status, such as use of seat belts and turn signals, frequency of driving during rush hour or in high-accident areas and the frequency of sharp braking or acceleration events.
The system relates these driving characteristics to safety standards, enabling an insurer to place a specific driver and vehicle into an accurate actuarial class for setting the premium. Further, the insurer can adjust the premium frequently, giving a driver some control over the cost of insurance.
Enforcement of business method patents
Many lawsuits have been filed alleging the infringement of business method patents and many licences have been granted. The US courts have been able to deal with business method claims in the same way that they try patent cases on other subject matter. Judicial rulings interpreting business method claims in favour of the patent owners tend to lead to settlements. For example, Microsoft reportedly took a licence to settle a suit for infringement of a patent on a reverse auction scheme. Such results create an atmosphere in which companies in danger of infringing will respect business method patents to the same degree as other patents.
Strategies for overcoming limitations on patentable subject matter
Many patent applications originally filed in the United States are also filed internationally. Expertise and experience are required to present and claim business method inventions in the best configuration for favourable consideration by patent examiners, both in the USPTO and in other patent offices. Until recently, US patent examiners rejected claims not relating to the technological arts, but in late 2006 a USPTO administrative appeals board disapproved the technological arts rejection. Now business method applications will be considered eligible for examination if they meet the requirements stated in the Federal Circuit’s State Street Bank decision – namely, that the invention produces a useful, concrete and tangible result. No longer will the USPTO require that business methods be implemented by computer.
In proposed interim guidelines for examiners, the USPTO states that the United States, as a leader in IP protection, strongly supports patent protection for all subject matter regardless of whether there is a “technical aspect”. The USPTO will not bar any invention from eligibility for examination except laws of nature, natural phenomena and abstract ideas. On the other hand, practical applications of abstract ideas and laws of nature are eligible for patent protection. Some in the United States fear that these changes in USPTO practice will open a floodgate allowing patents on types of subject matter never intended by Congress. Certainly applications will be filed for a broad range of processes, including methods of doing business, that are not computer-implemented. While this should not harm the US economy, it does seem likely that detractors will ask Congress to put additional limits on patentable subject matter, and that such proposals will be the subject of lively debate.
Most other countries have laws prohibiting the patenting of business methods, but do grant patents on computer systems used in business if the claimed invention meets certain criteria. Of course, many solutions to business problems are implemented by computer systems and networks.
The European Patent Office will generally search and examine a computer-implemented business process, but requires that the aspect of the invention that distinguishes it from prior knowledge involve a “technical effect”. In other words, a claimed business method aspect, no matter how new and creative it may be, will be given no weight in deciding whether to grant a patent.
The Japanese Patent Office rejects claims where the methods described in the claims are methods of business including steps that are thought to be performed by a person or a company. Claims to a computer system must demonstrate realisation of information computing or processing in accordance with a purpose of use by specific means which consists of cooperating software and hardware resources – that is, they must describe specific technical features of the systems to show specific changes in the hardware.
The Canadian Patent Office makes rejections stating that for a method to be patentable it must produce an essentially economic result in relation to trade, industry or commerce. This has been interpreted in the Lawson decision to mean that the process belongs to a useful art as distinct from a fine art, and that its value to the country is in the field of an economic endeavour. As the art of business is arguably distinct from fine art and is useful, it seems premature to say with confidence what particular format of claims will be considered acceptable by the Canadian Patent Office.
The Chinese Patent Office is bound by Article 25 of its patent law, which states that “no patent right shall be granted...for rules and methods for mental activities”. Rejections under Article 25 usually state that the invention:
• does not change the hardware structure of a claimed computer;
• does not solve a technical problem;
• claims rules and methods for mental activities; or
• claims subject matter that pertains to methods of commercial implementation.
Once a Chinese examiner decides that the invention is a business method at its core, the applicant will find it difficult to overcome a rejection by creative amendment.
Strategically, patent attorneys are well advised to write patent applications with these country-by-country differences in mind. One should write a US application stressing the computer-implemented system aspect of an invention involving business processes. The application should show as much technical character as possible and describe an embodiment in which computer hardware and software cooperate to change a hardware configuration. Business method aspects can be described in connection with operation of the system and method claims placed following system claims. A pure business method invention that cannot be characterised as a computer system will be difficult to patent outside the United States.
However, patent attorneys in several countries believe the practice with respect to business method patents will evolve over time. Many countries allow an applicant to delay the start of examination of a patent application for several years. Given these circumstances it may be worthwhile filing applications for critical inventions and leaving them unexamined pending developments in the patentability of business methods.
A look ahead
Patent practice regarding business methods has developed quite differently in the United States from the rest of the world. In the recent debate over a proposal to harmonise criteria for patenting and enforcing software inventions in Europe, positions seemed to be polarised between anti-patent forces, who argued that an expansion of patent rights would harm small companies, and supporters of the proposal, who argued that many patents are obtained by small companies which need patents to gain a foothold for new products. The latter camp also argued that the ongoing outsourcing of manufacturing to developing countries without protection for key intellectual property would leave European companies with no control over the dissemination of their proprietary processes.
The anti-patent forces prevailed. US companies have a competitive advantage, at least in being able to prevent a competitor that learns of a business process from freely using the information to compete in the United States when the process has been patented.
In the past, patentable equipment and manufacturing processes formed the backbone of business assets. As intellectual capital grows to an increasingly larger proportion of the value of world economies, companies are investing in research and development to create and enhance the value of these tangible assets. Pressure is likely to increase to enhance patent protection for these key assets. Therefore, eventual changes in patent laws favouring protection for business methods should come as no surprise, in contrast to the result of the recent debate in Europe.
