E-commerce patents are the latest protection for innovative business methods delivered online. Many claim e-commerce models are not patentable because the subject matter they assert is not within the statutory definitions and because the United States Patent office, and most patent offices around the world, are not outfitted for this analysis. Yet, at least in the United States (U.S.) and alongside disapproval, e-commerce patents are a reality supported by strong data from the U.S. Patent Office and case law. For instance, the U.S. Patent Office July 2007 report showed that in 2006 patent requests for business methods (class 705) amounted to over 9,000 filings; just identical to those filings during the Internet bubble in 2001. According to the same report, business methods filings have steadily increased every year since 2002. Also, the U.S. Patent office is getting stricter or filings of filings for business methods are becoming meaningful; data show that the allowance rate for 2001 was 45%, 44% for 2002, and 19% for 2006. This article comments on two significant cases that laid the foundation for e-commerce patent precedents in the United States.
The U.S. Patent law requires that "[W]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title [35 USCS §§ 1 et seq.]." 35 U.S.C.S. § 101. Determining whether a specific e-business model qualifies for a U.S. patent requires a throughout analysis of this statutory requirement, known as the subject matter requirement.
The first meaningful case applicable to e-commerce patents was State St. Bank & Trust Co. v. Signature Fin. Group, 149 F.3d 1368 (Fed. Cir. 1998). Signature Group, respondent in this case, was the assignee of business model patent 056, titled: "Data Processing System for Hub and Spoke Financial Services Configuration." The patented system consisted on mathematical formulas to be used by administrators of mutual funds when calculating profits and tax advantages for investment capitals.
State Street, plaintiff, was a custodian and accounting agent for multi-tiered partnership financial services. Signature Group and State Street were negotiating the licensing of patent 056. When the negotiations broke, State Street brought a declaratory judgment action against Signature Group claiming invalidity and unenforceability of patent 056, and shortly after filed a partial summary judgment of patent invalidity for failure to claim statutory subject matter under § 101. The District court granted plaintiff's motion for summary judgment.
Signature Group appealed the District court decision. The Federal Circuit Court reversed holding that State Street was not entitled to a judgment as a matter of law for invalidity of patent 056 because the patent claims were directed to a statutory subject matter.
The Federal Circuit court held that "The court has identified three categories of subject matter that are unpatentable, namely laws of nature, natural phenomena, and abstract ideas. Mathematical algorithms are not patentable subject matter to the extent that they are merely abstract ideas. Certain types of mathematical subject matter, standing alone, represent nothing more than abstract ideas until reduced to some type of practical application, i.e., a useful, concrete and tangible result." Thus, "patentable an algorithm must be applied in a "useful" way." Applying this rule to the case at hand, the court ruled, "The transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces a useful, concrete and tangible result--a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades."
The Federal Circuit Court was clear in stating that business methods are subject to the same criteria for patentability as any other process or method. Thus, a statutory subject matter analysis should not be concentrated on whether the business model is a 'process," ‘machine,' ‘manufacture,' or ‘composition matter,' but rather on the essential characteristics of the subject matter; especially, its practical utility.
The Federal Circuit Court later narrowed its ‘mathematical algorithm exception' (as the above holding is commonly referred to) in AT&T v. Excel Communications, 172 F.3d 1352 (Fed. Cir. 1999) In Excel, the court held the exception applies regardless of how the claim is presented, as machine or process. Thus, ‘physical transformation' or whether the mathematical formula is an invention is not longer a requirement. Instead, the focus is understood to be not on whether there is a mathematical algorithm at work, but on whether the algorithm-containing invention, as a whole, produces a tangible, useful, result,"
State Street and Excel are relevant to the e-commerce patents in the sense that many e-commerce businesses are especially created software or part of. Most software contains mathematical formulas. Thus, the mathematical algorithm exception to business model patents is deemed to apply to e-commerce patents. Additionally, the subject matter discussion is the most common debate regarding e-commerce patents.