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The advent and rapid emergence of the Internet has brought along with it a number of legal issues never faced before. This presentation will discuss briefly the concept of patents, specifically "business method patents." Patents covering Internet technology, including e-commerce, have emerged as one of the fastest growing patent fields.


We've all heard of the term patents, but what exactly is it and should a company consider investing the time and money into obtaining such a creature?! A patent is a statutory creature with a Constitutional basis. Congress is vested with the power to "promote the progress of the useful arts and sciences." Article I, Section 8 of the United States Constitution. A patent grants to the patentee the right to exclude others from making, using, selling, or offering for sale the patented invention throughout the United States for a limited period of time. 35 U.S.C. §271. Their purpose is to encourage innovation in the useful arts by requiring early and complete disclosure of an invention in return for a monopoly that is limited in time and scope.

Types of Patents
There are three types of patents: utility, design, and plant patents.
  1. Utility patents are designed to protect inventions that have a practical or industrial use, including a "process, machine, manufacture, or composition of matter" or "useful improvements thereof." 35 U.S.C. § 101. Utility patents protect the function aspect of a product or process. "Business method patents" fall under the large umbrella of utility patents. Examples of fields of utility patents include:
    • Mechanical, such as U.S. Patent No. 6,017,578 entitled "Bead/Caulking Applicator with Frame Follower"
    • Electrical, such as U.S. Patent No. 5,977,660 entitled "Active Harmonic Filter and Power Factor Corrector"
    • Chemical, such as U.S. Patent No. 5,747,342 entitled "Methods and Apparatus for Monitoring and Controlling pH Phosphate and Sodium to Phosphate Ratio in Boiler Systems Operating with Captive Alkalinity"
    • Bio-Tech, such as U.S. Patent No. 5,695,754 entitled "Staphylokinase Derivatives"
    • Software such as U.S. Patent No. 5,003,596 entitled "Method of Cryptographically Transforming Electronic Digital Data from One Form to Another"
    • Robotic, such as U.S. Patent No. 5,457,367 entitled "Tool Center Point Calibration Apparatus and Method"

  2. Design patents are utilized to "protect any new, original, or ornamental design for an article of manufacture." 35 U.S.C. 171. They are used to primarily protect the nonfunctional ornamental aspects such as the outer configuration or appearance of a useful object. An example of a design patent includes U.S. Patent No. Des. 421,867 entitled "Corner Shelving Assembly".

  3. Plant patents are utilized to protect "distinct and new" variety of plants. These include "cultivated spores, mutants, hybrids, and newly found seedlings, other than a tuber propagated plant or a plant found in an uncultivated state", provided the plant was invented or discovered and asexually reproduced. 35 U.S .C. § 161. An example of a plant patent includes U.S. Patent No. Plant 10,443 entitled "Variety of Ivy Geranium Named 'Global Rich Red".
Patent Duration
  • Old Law
    Until June 8, 1995, a plant and a utility patent would expire 17 years from issue regardless of the length of time the patent application was pending before the United States Patent and Trademark Office (U.S.P.T.O.). A design patent expired 14 years from the issue date of the patent.

  • New Law
    Under new law, all plant and utility patents which issue from applications filed on or after June 8, 1995 will have a full statutory term of twenty years from the earliest United States filing date. 35 U.S.C § 154. A design patent term remains 14 years from the issue date of the patent. 35 U.S.C. § 173.

    Plant and utility patents in effect on or based upon applications filed before June 8, 1995 have a statutory term of the longer of 17 years from issue or 20 years from the earliest U.S. filing date. 35 U.S.C. § 154(c).

  • Adding to the Confusion
    Adjustments to the patent term due to Patent Office delays and regulatory agencies (e.g. FDA approval of drugs), are available in certain cases which will add to the given term. 35 U.S.C. §154(b), § 155(a), § 156.

    Terminal disclaimers will limit the statutory term at the applicant's discretion. 35 U.S.C. §253.

    In addition, maintenance fees are required for utility patents and have to be paid at 3˝ years, 7 ˝ years, and 11 ˝ years from issue to maintain the patent in force beyond the 4th, 8th, and l2th year respectively. 37 C.F.R. 1.362.

Obtaining A Patent
  • Filing a Patent Application
    All applications for United States patents must be filed with the United States Patent and Trademark Office, a government entity. 35 U.S.C. § 111. An inventor can choose to file an application and represent him or herself pro se before the United States Patent and Trademark Office. See 37 C.F.R. 33, 34. However, the most common practice of filing a patent application is utilizing registered patent attorneys. Registered patent attorneys must not only meet the state bar admission requirements but also must have passed the patent bar examination to be qualified to practice before the United States Patent and Trademark Office. 37 C.F.R. 10.5-10.10.

    Patents are not granted for all new and useful discoveries. Patentable subject matter is identified by 35 U.S.C. § 101 as "any new and useful process, manufacture, or composition of matter, or any new and useful improvements thereof." Certain categories of inventions and discoveries that are most often cited as not being patentable are scientific principles and mathematical discoveries (although methods of using such principles and devices embodying the principles generally are patentable subject matter), and laws of nature.

    Until recently, there was confusion and inconsistency both in the U.S.P.T.O. and the courts regarding whether "methods of doing business" were patentable subject matter. In the landmark decision in State Street Bank & Trust Co. v. Signature Financial Group Inc. the court struck down any per se prohibition against patenting "business methods." 149 F.3d 1368, (Fed. Cir. 1998). The Court stated that the examination of whether a method is patentable subject matter "should not turn on whether the claimed subject matter does 'business' instead of something else." The Court additionally, stated that while a bare mathematical algorithm is not patentable, a useful application of that algorithm is patentable subject matter.

  • Statutory Requirements of Patentability
    There are three statutory requirements for patentability, generally summarized as utility, novelty, and nonobviousness.
To be patentable, an invention must be "useful" under 35 U.S.C. § 101. This requirement has been summarized by the U.S. Supreme Court as being "anything under the sun made by man," with the exceptions of laws of nature, natural phenomena, and abstract ideas. The test for utility applied by the Patent Office is whether the invention has a well established utility or the applicant has made an assertion of utility which would be considered credible by a person of ordinary skill in the art. MPEP 706.03(a).

To be patentable, an invention must be "new". The rules for qualifying prior art and novelty are governed under 35 U.S.C. §102 and can be summarized as actions (i.e., prior developments) taken by others before the applicant's date of invention as well as actions taken by the inventor more than 1 year before the filing of the application (i.e., delay in filing).

To be patentable, an invention must also satisfy the "nonobvious" requirement. The invention is compared to the prior art for a determination of whether the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains. 35 U.S.C. § 103.


Until the landmark case of State Street Bank & Trust Co. v. Signature Financial Group Inc., methods that did not result in a physical transformation of an object to a different state or thing were sometimes categorized as a mere method of doing business. Such business methods were held to be unpatentable subject matter by the U.S.P.T.O. and the courts. However, with the advent of this case, patent law was clarified and the courts paved the way for stronger protection for e-commerce activities. Since then, companies have become aware of the ability to utilize "business method" patents as competitive weapons. Patents were generally new to companies in the financial and banking institutions. Thus companies have recognized that patents, including "business method patents", can be utilized as offensive tools for defending against competition. With respect to the Internet, patents protect innovation, increase company assets, and enable companies to open the door for licensing opportunities. Some examples of patents that may be considered "business method patents" include home shopping, credit card account technology, online financial systems, and home banking. See for example, U.S. Patent Numbers 5,745,681 entitled "Stateless Shopping Cart for Web"; 5,825,651 entitled "Method and Apparatus for Maintaining and Configuring Systems"; and 5,794,207 entitled "Method and Apparatus for a Cryptographically Assisted Commercial Network System Designed to Facilitate Buyer-Driven Purchase Offer."

As stated earlier, patents are granted to inventors with inventions that are any new, useful, and unobvious process, machine, manufacture, or composition of matter. Historically, "business method patents" were an exception to patentable subject matter. It was held by the U.S. Supreme Court that Congress had chosen the language of 35 U.S.C. § 101 so as to include "anything under the sun that is made by man." Diamond v. Chakrabarty 447 U.S. 303, 308-9 (1980), 206 U.S.P.Q. 193, 197. The Supreme Court however, identified three categories of subject matter that are not patentable - laws of nature, natural phenomena, and abstract ideas, since no one can claim an exclusive right the three categories because they are "manifestations of .. .nature, free to all men and reserved exclusively to none." Diamond v. Chakrabarty 447 U.S. 303, at 409. The historical "methods of doing business" fell generally under the prohibition of patenting abstract ideas.

However State Street Bank changed the status of business method patents. To truly understand the effect of the case, it is necessary to understand the subject matter of the case. In State Street Bank the invention was directed to a hub and spoke mutual fund system - the claims were directed to a data processing system comprising a series of means which performed various processing steps. The court interpreted the claims as being directed to a machine programmed with hub and spoke software to produce a useful, concrete, and tangible result. The court stated that business method patents were statutory subject matter that was patentable as long as they met the requirements of novelty, usefulness, and nonobviousness. Essentially the court held that a patent directed to the transformation of data representing discrete dollar amounts is a practical application of a mathematical algorithm, formula, or calculation, and therefore, qualifies as statutory subject matter under 35 U.S.C. § 101 since it met the "useful" process requirement.

AT&T Corp v. Excel Communications, Inc. 50 U.S.P.Q. 2d 1447 (Fed.Cir. 1999), came a year after the State Street Bank case later illustrating the effect of that case. AT&T owned a method for use in a telecommunications system, it was related to a method of adding an indicator to a message record used for long distance telephone call billing. For example, when a caller placed a long distance direct dial call, an automatic message account message record relating to that call would be generated by a phone switch containing data such as the originating and terminating telephone numbers and the length of the call. AT&T's indicator to a message record provided data about a particular carrier handling that long distance call. The Federal Circuit held that the claimed process applied a mathematical algorithm to the subscribers and recipients data to determine the value of the indicator. Since the indicator represented information about the recipient's carrier, the process produced a useful result that facilitated differential billing, therefore the subject matter was not a mere algorithm and was patentable subject matter.

While the issue of "business method patents" was not a disputed issue, the following case demonstrates the potential value of patents with respect to e-commerce. is one of the most familiar cases with respect to e-commerce. devised a method for expediting online orders known as the "1-Click" system. The method allows a repeat customer to bypass address and credit card data entry forms, because Amazon can access that information directly from the customer's computer. Amazon, which was granted a patent on this "business method" in September of 1999 (U.S. Pat. No. 5,960,411) promptly filed a widely reported lawsuit alleging that copied the "1-Click" process, renaming it "Express Lane." In December 1999 a court ordered to stop using the patented process until the lawsuit was resolved. The Federal Circuit stayed the injunction., Inc. v., Inc. 239 F.3d 1343, (Fed. Cir. 2001). In the meantime, Barnes & Noble has designed around the patent.

While the term "business method patent" remains an undefined entity with no limitations or boundaries, the court has held that business method patents are patentable. They stated that a method for doing business can be patented if it produces a useful, concrete and tangible result and that a method need not involve any physical transformation of subject matter in order to be patentable.


In response to the State Street Bank case, Congress granted a limited defense, entitled the First Inventor Defense, to prior users of "a method of doing or conducting a business." This defense became effective as of November 29, 1999 and does not apply to any action for infringement pending on that date. (Section 4303 of the American Inventor's Protection Act of 1999). The defense states that "It shall be a defense to an action of infringement under Section 271 of this title with respect to any subject matter that would otherwise infringe one or more claims for a method in the patent being asserted against a person, if such person had, acting in good faith, actually reduced the subject matter to practice at least 1 year before the effective filing date of such patent and commercially used the subject matter before the effective filing date of such patent." 35 U.S.C. §273(b)(1) and Section 4302 of the Act.

The limitations to this defense include the following:
  1. The defendant bears the burden of proof of defense by clear and confirming evidence. 35 U.S.C. §273(b)(4).
  2. Defense is personal to defendant and essentially nontransferable other than with the sale of a business or line of business. 35 U.S.C. §273(b)(6). Note that the licensee of a trade secret relevant to a defense under this section would develop its own personal defense if such use is early enough. The defense is not limited to the first inventor, or even any inventor, but rather the one who "actually reduced the subject matter to practice."
  3. Defense is limited to the method of doing or conducting business. 35 U.S.C. §273(a)(3) and (b)(3)(a). The legislative history is somewhat vague on what is a method of doing business. For example, the legislative history states "the defense will not be available if the subject matter itself is a useful end product or service that constitutes one or more claims in the patent." The legislative history also defines method as the "process as defined in § 100(b) of the Patent Act and includes inventions that were or could have been claimed in a patent in the form of a process."

While the above cases paved the way for "business method patents", such patents have been issued by the United States Patent and Trademark Office for many years (otherwise there would be no subject matter patent in the State Street Bank case or other associated cases). Patents have been issued on "business methods" even though they have not officially been classified as "business method" or software methods and thus have been classified under a variety of other classes and subclasses at the United State Patent and Trademark Office. While Class 705 in the U.S.P.T.O. classification system has now been designated as the "business method" class, it has been in existence for many years. It has been defined to include "machines and their corresponding methods for performing data processing or calculation operations, where the machine or method is utilized in the:
  1. practice, administration, or management of an enterprise, or
  2. processing of financial data, or
  3. determination of the charge for goods or services."
United States Patent and Trademark Office, White Paper on Business Methods, Version 1.43.

The U.S.P.T.O. also issued a Business Initiative Action Plan in March of 2000. It is composed of two categories: Industry Outreach and Quality.

Industry Outreach
  1. Customer Partnership: Establish formal Customer Partnership with the software, Internet and electronic commerce industry similar to that in place with the biotechnology industry. The Partnership will meet quarterly to discuss mutual concerns, share U.S.P.T.O. plans and operational efforts in this technology area, and discuss solutions to common problems.
  2. Roundtable Forum: The U.S.P.T.O. intended to convene Roundtable Forums to discuss issues and possible solutions surrounding business method patents.
  3. Industry Feedback: A greater effort will be made to obtain industry feedback on prior art resources used by the U.S.P.T.O., solicit input on other databases and information collections and sources, and expand prior art collections.
  1. Enhance Technical Training:
    • Enhance technical currency for examiners and continue current training efforts/partnerships with industry associations and various individual corporate sponsors.
    • Business practice specialists will be pursued to serve as a resource for examiners on alleged common or well known industry practices, terminology scope and meaning, and industry standards in four basic areas: banking/finance, general e-commerce, insurance, and Internet infrastructure.
    • The U.S.P.T.O. will publish the areas of training needs for comment and offers to provide such training.

  2. Revise Examination Guidelines: The Examination Guidelines for Computer- Related Inventions and the relevant training examples will be revised in light of the State Street Bank and AT&T v. Excel decisions.

  3. Expand Current Search Activities:
    • Mandatory Search: A mandatory search for all applications in Class 705 to include a classified U.S. patent document search, and a text search of U.S. patent documents, foreign patent documents, and non-patent literature (NPL), with NPL searches to include required search areas mapped/correlated to U.S. classification system for Class 705, which will provide a more fully developed prior art record;

    • Second Review: A new second-level review of all allowed applications in Class 705 will be required, with an eye toward ensuring compliance with search requirements, reasons for allowance, and a determination whether the scope of the claims should be reconsidered; and

    • Expand Sampling Size: The sampling size for quality review by the Office of Patent Quality Review will be substantially expanded, and a new in-process review of Office actions will be introduced with an emphasis on the field of search of the prior art and patentability determinations under 102/103.
As part of their Initiative, on June 5, 2001, the U.S.P.T.O. provided notification to the public of required and optional search criteria that could be utilized during the examination process of "business method patents." They are seeking comments regarding the documenting practices, procedures. and developments to identify additional information that could be utilized. Recommendations will be received in four phases until March 31, 2002, and will be evaluated by June 30, 2002. Federal Register, 66, 108,30167 (2001).

One of the criticisms received by the U.S.P.T.O. is that they issue too many undeserved business method patents. A reason for this is that the U.S.P.T.O. lacks the "prior art" or known information relating to this art. The issue is that for a method to be patentable, it must be "new" and "nonobvious", and the determination of something "new" or "nonobvious" can only be done through a comparison of known information. Thus, one of the challenges faced by the U.S.P.T.O. is to develop and build a reliable source of prior art information that can be used to determine if something truly is "new." As seen from the June 5, 2001 notice in the Federal Register, the U.S.P.T.O. is making an effort to resolve this issue. Additionally, one recent rule of the rule package entitled 'Patent Business Goals' was enacted in 37 C.F.R. 1.105. This new rule allows Examiners at the U.S.P.T.O. to formally inquire and obtain information from the inventor(s) regarding whether a search of the prior art was made, the existence of relevant databases, identification of the improvement, information used in the invention process, etc. This mechanism is another way that the U.S.P.T.O. is attempting to utilize new avenues to obtain the most relevant prior art.


Business method patents is only one embodiment of abstract ideas that were deemed to be nonpatenable subject matter. While there no longer is a "business method patent" exception to patentable subject matter, the algorithm exception to patentable subject matter still stands. The Court in State Street Bank only went as far as clarifying the algorithm exception to patentable subject matter. The Court stated that the determination of statutory patentable subject matter should focus on the essential characteristics of the subject matter in particular, on its practical utility. The invention must produce a useful, concrete, and tangible result. State Street Bank at 1375. This clarification of the algorithm exception was to be utilized in the determination of patentable subject matter.

The traditional Freeman-Walter-Abele test may be utilized to determine if the invention produces useful, concrete, and tangible results. The Freeman-Walter-Abele Test has been used with respect to computer software or software implemented business methods. It is defined in two steps:
  1. the claim is analyzed to determine whether a mathematical algorithm is directly or indirectly recited, and
  2. if a mathematical algorithm is found, the claim as a whole is further analyzed to determine whether the algorithm is applied in any manner to physical elements or process steps, and if it is, it passes muster under Section 101.

Another remaining embodiment of abstract ideas that is not patentable is laws of nature. For example, one would not be allowed to patent E=mc˛ nor could the law of gravity be patented. "Such discoveries are 'manifestations of….nature, free to all men and reserved exclusively to no one." MPEP §2105. However, it is important to remember that that the applications of the law are patentable as long as the statutory requirements are met.


Currently, "business method patents" is the hot buzzword not only in industry but at the United States Patent and Trademark Office. This can be attributed to the fact that courts have now paved the way for the filing of "business method patents" since they are no longer characterized as nonstatutory subject matter. Although their status has been changed to qualify as patentable subject matter, the other statutory patentablility requirements must also be met.

For years the U.S.P.T.O. has been granting so-called "business method patents" even if not by that name. The key in those situations was to retain a savvy patent attorney who could navigate the unduly complex rules in the application of 35 U.S.C. § 101. However, now the courts themselves have eliminated the possibility of a § 101 rejection for "business method patents," thus opening the field of patentable subject matter to all "business method patents". Congress responded with a very narrow, ill-defined defense. In turn, the court action has left the U.S.P.T.O. with a task of creating a new way of being able to confirm the validity of such patents. Even though the courts have allowed business method patents to be granted, they could still be rejected by the U.S.P.T.O. under 35 U.S.C. §102 and 35 U.S.C. §103. While the U.S.P.T.O. struggles to address this new issue they face, as well as attempt to keep up with the fast-paced tech industry, companies are finally recognizing the need and importance of obtaining patents.

With respect to e-commerce, people in the field are now just beginning to recognize that the world of patents is open to them through so-called "business method patents". The advantages of obtaining a patent may far outweigh the costs associated with obtaining a patent. In the technology sector, creating new inventions and funding new research developments absolutely must be done with the goal of protecting the final product through all aspects of intellectual property, including patents. Not only do patents allow for marketing and licensing opportunities, but they increase the protectable assets of a company and improve a company's portfolio. With respect to e-commerce start-up companies, patents can be critical to their success. Thus companies and individuals in this Internet technology market should consider obtaining a patent not only for protection from competition but also as a defense mechanism and/or business strategy. Furthermore, by becoming aware of other relevant patents in the field, a company can design around the existing patents or be made aware of licensing opportunities without wasting development costs, as well as not being left behind in the technology race!

Blynn L. Shideler, Esquire
Alka A. Patel, Esquire

3500 Brooktree Road, Suite 200     Wexford, PA 15090