Ten Years After: What Are the Effects of Business Method Patents in Financial Services?

By Hunt, Robert M. | Business Review (Federal Reserve Bank of Philadelphia), Fall 2008 | Go to article overview

Ten Years After: What Are the Effects of Business Method Patents in Financial Services?


Hunt, Robert M., Business Review (Federal Reserve Bank of Philadelphia)


A decade has passed since American courts made clear that: methods of doing business could be patented. Since then, the U.S. Patent and Trademark Office (USPTO) has granted more than 12,000 of these patents, of which only a small share has been obtained by financial firms. A number of lawsuits have been filed, a number of financial settlements of money, have occurred.

[ILLUSTRATION OMITTED]

Has the availability of patents for business methods increased the rate of innovation in the U.S. financial sector? this is a difficult question to answer, in part because our official measures are not well suited for estimating research activity in financial services. Nevertheless, the available evidence suggests that there has been no significant change in the aggregate trend of R&D investments made by financial firms.

Business method patents are probably here to stay. But recent court decisions and proposed federal legislation are likely to change how firms enforce their patents. These changes should mitigate some of the concerns raised about business method patents: that the claimed inventions are not new, are not sufficiently novel to justify the award of a patent, and are being enforced in ways that increase business risk to financial firms. Nevertheless, significant challenges remain. In particular, the boundaries of the rights being granted in at least some business method patents are not sufficiently clear. Ambiguity over these boundaries creates uncertainty for both the owners of these patents and their competitors.

BACKGROUND

A patent is a grant of the legal right to exclude others from making, using, or selling the patented invention for a limited period of time. If the patent is infringed, the patent owner may sue the infringer to recover lost profits. Sometimes the patent owner is able to obtain an injunction--a court order that prevents the alleged infringer from continuing to make, use, or sell the patented invention. For reasons described below, an injunction is a very powerful legal weapon in patent litigation.

But not all inventions qualify for patent protection. To qualify, an invention must satisfy a number of statutory requirements, including what the law describes as nonobviousness. This prevents the grant of a patent for an invention that would have been obvious to a practitioner in the relevant field at the time the invention was made. In other words, a patentable invention must be more than a trivial extension of what is already known (the prior art).

As an example, consider one of the patents examined in the Supreme Court decision in Graham v. Deere. (1) The claimed invention was a combined sprayer and cap used on bottles of household chemicals. The essential elements of the sprayer had been developed by others, but they had never been assembled in this particular way, which made possible the use of automated bottling equipment. As a result, the product was highly successful. While the Supreme Court acknowledged that long-felt need and commercial success might suggest the invention was nonobvious, in the end it decided otherwise because the differences between the product's design and that of pre-existing products were minimal.

Patentable Subject Matter. In the U.S., assuming the criteria just described are also satisfied, any process, machine, manufacture, or composition of matter, or any improvement of those things can be patented. But the courts have also identified certain categories of subject matter that cannot be patented, for example, laws of nature and abstract ideas.

For at least 80 years, it was commonly believed that these limitations precluded patenting methods of doing business. This view was suddenly upended by the Federal Circuit's Stale Street decision in 1998. (2) That case involved a patent on a data processing system that made possible the pooling of assets in several mutual funds into a single portfolio, reducing overhead costs while maintaining the transaction information necessary for allocating gains, losses, and tax liabilities to the original funds. …

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