Courts Are Drawing The Line On Business Method Patents

October 30, 2015

(as published in Forbes)

In the United States today, it’s generally agreed upon that if you invent a ground-breaking innovation, you should receive a patent for it. The personal computer. The microwave. The television. Less clear, though, is whether or not the way you perform your business merits a patent. Should you receive a patent for a method of generating sales leads online? What about for a system of selling digital music and video? The waters grow murkier as you try to draw the line between what merits patent protection and what doesn’t.

Business method patents are one of the most controversial aspects of our intellectual property system. The U.S. Code states that “any new and useful process, machine, manufacture, or composition of matter” is eligible for patenting. But in a capitalist country like the United States, how do you decide whether a process of doing business is new and useful? Our courts have been struggling with this issue for the better part of two decades.

Historically, methods of doing business were not patentable. But with the emergence of computers and the internet in the 1980s and 1990s, the line between a business method and a technological innovation began to blur. In 1998, the Court of Appeals for the Federal Circuit—the U.S. appellate court specializing in patent law—radically altered the rules of the game. In State Street Bank v. Signature Financial Group, the Federal Circuit allowed the patenting of business methods that “produce a useful, concrete and tangible result”—in that case, a process of transforming dollar amounts into a final share price. The floodgates opened.

In retrospect, the resulting avalanche of patent applications should have been foreseen. Businesses rushed to patent any business method that arguably fell within the new standard, and the Patent Office lacked the resources to keep up. As the number of applications exploded, each one was given less scrutiny, and dubious patents began to slip through. A few eyebrows were raised, for example, when Open Market, Inc., was awarded several patents covering fundamental aspects of conducting purchase transactions over the internet, including U.S. Patent No. 5,715,314 directed to, among other things, the placement of items in a virtual “shopping cart” prior to purchasing them, as well as the use of a rudimentary “payment computer” to authorize an online purchase.

The negative impact of this glut of business method patents soon became apparent. A patent is a transferrable property right, and participants in the patent ecosystem known as “non-practicing entities” or “NPEs”—often referred to derisively as “patent trolls”—make money by acquiring and asserting patents. Business method patents are typically fairly abstract, making it difficult to determine precisely what they cover, which means they are highly valuable to NPEs: Their relatively broad and ambiguous nature increases the likelihood that a given company is inadvertently infringing.

NPEs are at a distinct economic advantage when bringing a patent infringement action. Mounting even a bare-bones defense to an allegation of patent infringement can be incredibly expensive. Often, simply determining the scope of the patent via a claim construction hearing can cost hundreds of thousands of dollars. When an NPE offers an easy way out for a small, nuisance settlement, many companies are unable to resist. By bringing suit against a large number of companies, an NPE can extract a significant sum with minimal risk of actually going through a full litigation. Many companies understandably view this sort of behavior as a legalized shake down and have called for reform of the patent system.

Within the past five or so years, the environment surrounding the exploitation of business method patents has changed dramatically. The Supreme Court and Congress have both provided tools that—when combined—are very effective at fending off unmerited patent lawsuits.

In 2014, the Supreme Court decided Alice Corp. v. CLS Bank International, providing stricter rules for determining what inventions are eligible for patenting, particularly when it comes to inventions implemented by computers (like software). Broadly speaking, the Supreme Court held that inventions directed toward an “abstract idea” are patentable only if concretely grounded in an “inventive concept.” What abstract ideas and inventive concepts entail is still up for debate, and several court cases since have wrestled with these definitions.

Congress provided an additional powerful tactic to defeat questionable business method patents with the passage of the Leahy-Smith America Invents Act (the “AIA”). The AIA establishes a program to adjudicate the validity of business method patents after they have been granted, known as Covered Business Method Review, or CBMR. Patents that claim “a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service” are eligible for CBMR. Covered methods might involve online shopping, stock trading, financial card transactions, or medical recordkeeping and billing, as but a few examples. A defendant charged with infringing a covered business method patent can challenge the validity of the patent before the Patent Trial and Appeal Board, an adjudicatory body composed of administrative judges, and a decision will be made within one year—a significantly faster and cheaper process compared to typical district court litigation

Recently, Bank of America and PNC Bank successfully used a combination of CBMR and Alice to kill four business method patents. The owner of the patents, Intellectual Ventures—a well-known and highly active NPE—had asserted the four patents against the banks in Pennsylvania federal court. The patents all covered fairly basic financial transactions. For example, U.S. Patent No. 7,664,701 described a method of using a computer to protect a customer’s private credit card billing number by providing unique, temporary billing numbers to various businesses. These unique billing numbers are used in commercial transactions, and the credit card company correlates the temporary billing numbers with the customer’s private credit card number. The administrative judge held that the patent merely described an abstract idea implemented via a computer, and therefore invalidated the patent under Alice. By killing the patents at issue through CBMR, Bank of America and PNC short-circuited a potentially long and expensive litigation right at the outset.

There are several cases making their way through the courts, and additional legislation making its way through Congress, that may further determine the limits of business method patents. Owners of business method patents and those who wish to challenge those patents are following these developments closely to see where the line will be drawn, and how it will affect their businesses.