The Patentability of Business Methods - Research Paper Example

Business Methods Patents Name Course Lecture Date Introduction The patentability of business methods is one of the intellectual property rights issues that raise heated debate. However, business methods are not as easy to define as other patent matter. The definition is complicated by the fact that business methods are not confined within an individual industry. Business methods may be a series of steps within a business for carrying out a certain activity or it is limited to method of an entire enterprise. This paper justifies the exclusion of business methods from consideration as valid patent matter. The paper starts by discussing the definition of business methods and their increasing importance in global commerce. Secondly, it introduces the opposing sides of the debate on patenting of business methods. Thirdly, it discusses the approach to the legal issue in Australian jurisdictions with reference to the NRDC case. Furthermore, it presents a strong argument against accepting business methods as patentable business matter. Finally, it concludes that allowing businesses methods to be patented is inconsistent with principles and intention of patent law. What are business methods? A definition of what constitutes a business method is important in deciding their patent protection status. It would also establish a standard for examining applications for business methods. If business methods were more easily defined then it would be possible to prosecute their patents against the novelty and inventive step criteria. Some of the commonly recognized processes as business methods are included in this discussion. Marketing and Advertising methods are commonly patentable matter1. For example Google’s adsense scheme, method for online advertising like offering electronic coupons to customers, electronic methods of collecting market research among others are considered business methods2. Another category of business methods are customer service methods, some examples include methods to determine who will serve a customer and when. Other classes of business methods include managerial and organizational methods. Financial services methods and e-commerce trading and transaction methods are two types of business method that are the subject of recent patent litigations. In 1982, Merill Lynch were able to patent a method for a brokerage and cash management system3. Recent controversies over business methods patents are mostly in the technological industry. Amazon’s one-click system for purchasing items on the internet is part of a growing litigation involving business methods. The concept of business methods is broad and thus encompasses many processes. In this paper the definition of business methods as sequential steps used to conduct business transaction will be used. It is important to note that most patents for business methods involve machines or computer programs. Today, the race to patent business methods has picked up pace. Why are people today applying for patents for business methods than ever before? Business methods have been part of humanity since the early day, why the rush for patenting now? The answer lies in the belief that business methods were not patentable4. According to John Bagby there was a popular notion that business methods were generally not under patent protection5. However, this misconception was to change with the technological advancement in the 1990’s6. The rise of the internet and web commerce provided opportunities to implement business methods that could deliver competitive edge to businesses. Secondly, computer programs were finally accepted as patentable business matter7. This had the effect of creating the impression that patent law was more accommodating than previously thought. It confirmed that patents could extend beyond traditional product R&D and manufacturing processes. However, the most substantial contribution to increased application of patents for business methods was the decision in State Street Bank & Trust v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998)8. In the case, the United States Federal Court of Appeal agreed to the patenting of business methods. This decision allowed businesses in the United States to file for patenting of business methods. Every business was now interested in patenting what it considered a business method. In effect, the judgment started the global clamour for the patenting of business methods. Opposing Views of business methods patents Scholars on intellectual property rights continue to have contrasting opinions on the issue of patentability of business methods. Proponents describe patents for business methods as essential for the development of commerce and creativity. According to Jerry Sheehan business methods should be afforded the same level of protection as any other business methods9. On the opposing side, opponents of making business methods patentable reason strongly that business methods should be exempted from patent protection10. In their view business methods or schemes are not concerned with technology and therefore they should not be patentable. They also reason that patenting business methods amounts to patenting knowledge that is already in the public domain with little benefit to welfare. An example of to his patent is Amazon’s “one click shopping system”11. The knowledge to produce a one click shopping method has been at the hands of programmers and is a functionality of popular programming languages. Amazon purported ownership of the method amount to grabbing something that ought to be in the public domain for themselves. Amazon’s subsequent demand that other online businesses cease using the method makes the online shopping experience for consumers significantly more difficult. Amazon also demands for payment of loyalties for the technology that they obviously did not implement. The Australian Approach Australian approach on what is patentable subject matter is based on the NRDC principle. Based on the HRDC principle it may be argued that Australia courts take business methods to be patentable12. In NRDC it was decided that a new way of using a known substance was patentable business matter. The NRDC principle that are applicable to patenting of business methods are “ the production of an artificial state of affairs” and “ the commercial viability of the effect”13. In International Business Machines Corporation v Commissioner of Patents (1991) 33 FCR 218 ("IBM") the courts decided that IBM’s method of generating curves on computer monitors was patentable14. The production of improved curves on computer was “ an artificially created state of affairs under the NRDC principles” and the impact was also commercially useful15. This decision lowers the criteria for determining the patentability of business methods to their commercial utility. However, it is obvious the court was concerned with the artificial state of affairs created by IBM method to improve curves on computer monitors. In my opinion, IBM’s patent over the method is valid. The patent granted to IBM represents a technological advancement in the area of computer graphics. Furthermore, the technological advancement manifests itself physically and thus should be patentable subject matter. Furthermore, since IBM method is advancement in current computer technology is a useful art and thus should be afforded patent protection16. In CCOM Pty Ltd v Jiejing Pty Ltd (1994) 51 FCR 260 (CCOM) the Full Federal Court of Australia found a method for using a text editor to produce Chinese characters to be patentable17. The trial judge had argued that the method was not patentable as it involved the fine arts and not the useful arts. In his opinion, the method made use of existing computer hardware and was a question of human intellect as therefore a question of the fine arts. In contrast, the Full Federal court, in reference to the NRDC principle ruled the method to be patentable subject matter18. In their view the method was commercially useful and created an artificial state of affairs and was therefore a patentable subject matter. By use of the method a person could retrieve Chinese character from the text editor. The court’s decision can be faulted by being inconsistent with the NRDC principles and the spirit of patent law. The court failed to consider the technical contribution of the new method in determining whether it was patentable subject matter19. In Welcome Real-Time SA v Catuity Inc [2001] FCA 445 (Welcome) patents dealing with implementation of business methods by physical devices were discussed20. Welcome were the proprietors of a patent for a method of operating loyalty program smartcard for retailers. The Federal Court found that since the method produced an “artificial state of affairs”, it was patentable subject matter21. The alleged state of affairs was the issuance of physical card to customers. Furthermore, the method offered traders a chance to offer loyalty schemes to its customers therefore proving its commercial usefulness. Although the judgment in CCOM is founded in patent law as the method represents a technological advancement, surprisingly this was not a consideration in Welcome22. The new method allocates memory space on smartcards for use by retail loyalty program. This invention had not been previously made by anybody else. This failure to consider the technical contribution of a method in deciding its patentability is a departure from NRDC. Courts can now avoid the useful arts requirement in deciding the patentability of business methods thus lowering the criteria. In Grant v Commissioner of Patents (2006) (2006) 154 FCR 62 ('Grant'), the federal court found a business method for securing credit protection for clients not to be patentable. However, the courts approach was inconsistent with NRDC as it equated the useful art to the commercial utility of a method. Mr. Grant had come up with a method of protecting assets fro judgment creditors. Mr. Grant used a series of legal steps to that would result in assets used as security being protected from creditors. The Federal Court held that the method did not produce an artificial state of affairs and therefore was not patentable. The court ruled that the Grant method was a mere scheme or an abstract idea and thus was not patentable subject matter. Generally, courts consider schemes or abstract ideas no to be patentable. However, the Mr Grant’s method produces security, loan and trust documents a clear “physical effect”. Indeed, the end results in Welcome (Smart cards) and the Chinese character in CCOM are not much different. Re Invention Pathways Pty Ltd [2010] APO 10 tried to clarify the application of patents to business methods23. In Invention pathway, the Australian Patent Office (APO) distinguished between peripheral and integral “physical effects” of a claimed business methods. According to the APO business method is patentable if it the effect is central to “the purpose or operation of the claimed process or otherwise arises from the combination of steps of the method in a substantial way”24. Under this approach, a method is a manner of manufacture if the “artificially created state of affairs” is a concrete effect that flows from the method. In Grant, the legal document produced cannot be considered to be substantive effects of the Mr Grant’s method. The integral purpose of Mr. Grant’s method was to afford legal protection to the assets. On the other hand, the CCOM the issuance of smartcards was the central purpose of the method. Unfortunately, the court once again was inconsistent with the NRDC ruling25. The court considered the commercial utility of the method as automatically categorizing it in the useful arts. This is worrying as it lowers the requirement for the patentability of business methods. From an analysis of the Australian case three categories of business method clearly emerge26. The first category, are pure business methods as in the case of Mr. Grants method in Grant v Commissioner of Patents. The second category are Machine-implemented business methods as in the case of Wellcome and finally software implemented business methods as in the case of International Business Machines Corp v Commissioner of Patents (IBM). Pure business methods as patentable subject matter Generally, courts take a dim view of patents for pure business methods. Patent applications for pure business methods are viewed as mere schemes or abstract ideas27. The leading authority on this issue is the English case Re Cooper’s Application (1901) 19 RPC 53 (EWHC) at 54 where Sir Finlay remarked: “You cannot have a Patent for a mere scheme or plan – a plan for becoming rich; a plan for the better government of a State; a plan for the efficient conduct of business28”. If a business method is not tied to a computer program or a technological device it is general not patentable subject matter. In the views of Matelian such a method cannot fulfil the “manner of manufacture” requirement established by the NRDC29. This judgment of pure business methods is aligned to the spirit of patent law as it denies protection to business methods that represent no technological advancement. While some pure business methods have commercial utility it is not justifiable to give their owners the benefit of exclusive use or the right to collect loyalties from other users. However, courts quote the failure of pure business methods to create an artificial state of affairs as their main shortcoming30. The principle of NRDC requires that the patentable subject matter produce an observable physical effect. In contrast, the Machine-implemented business methods can easily produce an observable physical effect31. These types of business methods are able to fulfil the requirement set out under the NRDC principle. However, unlike in other jurisdictions, Australia does not require a these methods to make a technical contribution. On the other hand, software-implemented business methods must produce an artificial state of affairs and commercial utility to qualify for patent protection. Arguments against patenting of non-technical business methods In most jurisdictions pure business methods are exempted from patent protection. However, Australia’s position seems to lean towards granting of patents for pure business methods. This is unfortunate as granting a patent for pure business methods is unjustified based on three strong arguments. First, it can be argued that patents for pure business methods do not provide incentives for innovation which is the principal benefit of patent protection to society. Secondly, patenting of pure business methods further stifles innovation instead of facilitating it. Finally, pure business methods do not represent technical advances which patent law aims to protect. The justification for patent protection is to enable owners to recoup the cost of developing the invention32. Patent protection can only be explained when advantages to society outweigh the cost of monopolizing an invention. Traditionally, patent protection prevents competitors from copying and marketing an invention. In the limited patent protection period the owner of the patent has exclusive rights to recover the resources used in coming up with the invention. In effect, patent owners are able to benefit from their invention. However, in the case of pure business methods patent protection does not encourage innovation. Many thriving business methods invented in recent decades did not need patent protection to get started. According to Bronwyn Hall, there are enough incentives to produce business methods without the need for patent monopoly33. Since business methods link to better financial performance by businesses, they have no choice but to come up with new business methods. Therefore, businesses will not fail to produce business methods just because they cannot patent them. Furthermore, business methods can be protected using other strategies instead of monopolizing their usage. Internal business methods are adequately protected by confidentiality and trade secrecy protection clauses in employment contracts34. Pure business methods also cost lesser to produce than other technological innovations. Therefore, it takes a shorter time to recoup the cost of invention. It is unjustifiable to protect a business method for up to 20 years while invention cost can be recouped in just one year. Furthermore, pure business methods are easily applicable to the business where they produce useful effect Moreover, the granting of patents for business methods will lead to patenting neither new or inventive methods. Due to lack of prior art base, in the business methods area there is nothing to compare the results with35. Patent examiners are not aware of the numerous business methods developed over time. Businesses may also not be aware that they are infringing on patented business methods if they have been already using them. Furthermore, the cost of challenging patents in courts is prohibitive therefore ruling it out as an option for business. Dubious patents for business methods that are neither new nor innovative come at a high cost to society. Owners monopolize the usage of the patent therefore creating a costly artificial shortage without compensating society for the cost36. Instead of encouraging creativity and innovation these dubious patents block innovation. Regarding pure business methods as patentable increases the risk of obvious and existing business methods being patented. This peril is very real and should be pre-empted by blocking the patenting of pure business methods. Patents for pure business methods also stifle innovation by monopolizing upstream knowledge that is the base for innovation. According to Ricketson, business methods in unpatented form are similar to the fundamental principles that are excluded from patent protection. Business ideas can be equated to abstract ideas and natural phenomenon that form the basis of all knowledge37. As the building blocks of business, restricting access to business methods can only mean restricting access to ways of improving commerce. Business methods are the raw material for businesses just like laws of nature are to other types on inventions. By patenting business methods access to upstream knowledge that can be used in innovating downstream application is limited. Conclusion The patenting of business methods will remain a major intellectual property rights issue in the future. It would not be justifiable to grant patent to business methods as discussed above. First, patents for business methods do not act as a major incentive for the creation of new business methods. Organizations are likely to develop innovative solutions regardless of whether their can obtain patents for them or not. Patents would impose an unjustifiable monopoly cost to society without any compensatory effect. Furthermore, allowing patents for business methods opens loopholes for filling of invalid patents as there is no prior art base for business methods. Most essentially, pure business method are not advancement in technology and should not be regarded as patentable subject matter Bibliography A. Articles/Books/Reports Ben McEniery, ‘Patents for Intangible Inventions in Australia After Grant v Commissioner of Patents (Part 2)’ (2007) 13(3) Computer and Telecommunications Law Review 100. Gregory Stobbs Business Method Patents (Aspen Publishers, New York, 2002) Hall, Bronwyn H. "Business and financial method patents, innovation, and policy." Scottish Journal of Political Economy 56, no. 4 (2009): 443-473. John Bagby, ‘Business Method Patent Proliferation: Convergence of Transactional Analytics and Technical Scientifics’ (2000) 56 Bus Law 423. Matelan, Lois, ‘Continuing Controversy over Business Methods Patents,’ The Fordham Intell. Prop. Media & Ent. LJ 18 (2007): 189. Sam Ricketson ,‘Business Method Patents – A Matter of Convenience? (The Stephen Stewart Memorial Lecture 2002)” (2003) 2 IPQ 97 Sheehan, Jerry, ‘Understanding service sector innovation’ Communications of the ACM 49, no. 7 (2006): 42-47. van Caenegem, William, ‘The technicality requirement, patent scope and patentable subject matter in Australia’ Australian Intellectual Property Journal 13, no. 1 (2002): 309-327. B. Cases CCOM Pty Ltd v Jiejing Pty Ltd (1994) 51 FCR 260. International Business Machines Corporation v Commissioner of Patents (1991) 33 FCR 218 National Research Development Corporation v Commissioner of Patents (1959) 102 CLR 252 Re Cooper’s Application (1901) 19 RPC 53 (EWHC) Re Invention Pathways Pty Ltd [2010] APO 10 State Street Bank & Trust v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998). Welcome Real-Time SA v Catuity Inc [2001] FCA 445 Read More