Snap, Crackle ... Patents

Article excerpt

Can you patent the business method of selling cereal? One company gave it a shot

BACK IN 2000, DAVID ROTH had one of those "eureka" moments that are the stuff of American entreprenurial legend. After spotting a box of Cocoa Puffs hidden behind the desk of a Wall Street executive, Roth dreamed up a retail business that would sell cereal all the time. He and a partner opened the first Cereality in Tempe, Arizona, on the campus of Arizona State University. College students flocked; Roth followed up with stores in Philadelphia and Chicago; and news outlets from Time to CNN fawned.

But as is so often the case with good ideas, Roth wasn't the only one to have it. Across the country, Rocco Monteleone was getting set to open Bowls, a cereal cafe in Gainesville, Florida, (near the University of Florida) when he found out that Cereality had beaten him to the punch. OK, he figured, no harm, no foul: It's America. Anyone can open a restaurant selling cereal. Right?

Well, kind of. In May, Monteleone received a letter from Cereality's attorney warning him that he may be in violation of a patent application the company had filed for its "methods and system" of selling cereal. These included: "displaying and mixing competitively branded food products" and adding "a third portion of liquid."

Cuckoo for patent law

Just 10 years ago, this kind of a patent would have been impossible even to consider. But a landmark shift in the law has made it possible to patent entire ways of doing business-a change that has prompted a rush on patent claims, opened a Pandoras Box of litigation and threatens to put large swaths of American innovation under the control of big business. Given the transition from an industrial to digital economy, changes in patent law were inevitable and necessary. But critics argue that when it comes to business methods the traditional rationales for granting patents-they incentivize expensive research and encourage inventors to share their knowledge-don't apply.

"You need incentives for people to innovate in technology," says Jason Schultz, an attorney with the Electronic Frontier Foundations Patent Busting project. "You've never needed that in businesses because if a business is successful you make money. It's its own incentive."

When the first U.S. patent board convened in 1790, with Thomas Jefferson serving as one of the members, it required inventors to submit a miniature model of their invention. The board expected to issue patents for machines and industrial processes, things like cotton gins or the proverbial "better mouse trap" that were the engine of American economic growth. And for the first 200 years of the country's history, that's pretty much what they did.

But over the last three decades the category of patentable subject matter has expanded significantly beyond the widgets of the industrial age: In 1980, the Supreme Court decided that life-forms such as bacteria were patentable; soon thereafter the United States Patent and Trade Office (USPTO) began issuing patents for isolated genes, and in 1998, in the landmark case State Street Bank v. Signature Financial Group, Inc., the Third Circuit Court of Appeals ruled business methods patentable as well.

Signature had secured a patent for software it had developed that managed its system of pooled mutual fund assets. State Street used a similar system and when Signature told them to knock it off, State Street challenged the patent. A lower court sided with State Street, striking down the patent. Because it was software, the court ruled it was, at base, a mathematical algorithm, which the courts had traditionally viewed as an unpatentable "abstract idea." Also, since Signature's entire business depended on the value of the mutual funds, the software qualified as a "business method," which, since 1908, courts had also viewed as unpatentable. But the Third Circuit disagreed and ruled that as long as a given business method or software produced a "useful, concrete, and tangible" result-in this case the numerical value of the pooled mutual funds-it was suitable for a patent. …