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Patenting the Internet:
State Street Opens the Door to Internet-Based Business Method Patents

By: Steven A. Leahy (December 1999)


There is a long list of Internet businesses that have protected their business method innovations with a United States patent,[1] and many more Internet-based business methods (IBBM) are probably being prosecuted.[2]  Until recently, the validity of these patents was questionable.[3]  However, the Federal Circuit decided State Street Bank & Trust Co. v. Signature Financial Group, Inc. (State Street) on July 23, 1998.[4]  Since State Street, the patentability of an IBBM has been answered in the affirmative.[5]


This paper examines the impact of the State Street decision on patenting IBBM.  First, I will deliver an overview of the patent system in the United States.  Next, I will reveal how the State Street opinion impacts IBBMs.  Finally, I will examine the remaining obstacles to an IBBM patent.


The United States patent system is rooted in Article I, Section 8, clauses 8 and 18 of the Constitution, which authorizes Congress “[t]o promote the progress of . . . useful arts,[6] by securing for limited times to . . . inventors the exclusive right to their . . . discoveries,”[7] and “[t]o make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers.”[8] 


In 1790, the first Congress acted on the authority granted by the Constitution and passed the "Acts to Promote the Progress of Useful Arts".[9]  The United States has had a patent scheme in place ever since.[10]  The most recent revision of the Patent Act occurred in 1952 and is codified in Title 35 of the United States Code.[11]  An issued Patent grants to an inventor the exclusive rights to make, use, and sell the invention for a term of up to twenty years.[12]


The Three Doors of Patentability

Judge Giles Rich of the United States Federal Circuit (USFC) described the three primary requirements for patent protection as “separate keys” to the doors of patentability.[13]  Each “door” represents a different section of Title 35 and must be “opened” in succession.[14]  The first door represents §101, the second §102 and the third and final door represents §103.[15]  I will consider each section in turn.


Section 101

The first door that must be “opened on the difficult path to patentability” is represented by § 101;[16] section 101 identifies the kinds of inventions and discoveries that are patentable "subject to the conditions and requirements of [title 35]."[17]  The language of §101 is wide-ranging.  In order to “pass through” the first door, the inventor[18] must create “any . . . process, machine, manufacture, or composition of matter, or any . . . improvement thereof.”[19] 


The Supreme Court has been clear; this language covers “anything under the sun that is made by man."[20]  There are, however, three areas that the Supreme Court has declared per se unpatentable.  Specifically, the three areas are laws of nature, natural phenomena, and abstract ideas.[21]


Section 102

Once an invention passes through the first door, the invention may approach the second door of patentability.[22]  The second door represents §102.[23]  Section 102 is actually two requirements in one.[24]   The title of the section is: “Conditions for patentability; novelty and loss of right to patent.”[25]  I will examine each sub-requirement separately. 


(1)          Novelty

Under §102 subsections (a), (e) and (g) an invention must be novel in order to be patentable.[26]  These provisions are “triggered” by actions that take place “before the invention thereof by the applicant for patent.”[27]  For example, under §102(a) if someone other than the inventor knew or used the invention in this county, or if the invention was described in a printed publication anywhere in the world before the trigger date, the invention will not make it through the second door of patentability.[28]


Further, under §102(e), if, prior to the trigger date, the invention was described in a United States patent application that later issued, or, under certain circumstances, described in an international patent, the second door will not be opened.[29]


Finally, under §102(g) if another person made the same invention in the United States before the trigger date and the invention was not “abandoned, suppressed, or concealed” the invention will not be allowed to proceed to the final door.[30]


(2)          Loss of Right

Under §102 subsections (b), (c)  (d) and (f) an invention that is patentable subject matter under §101 and is “novel” under the first sub-requirement of §102, still may be barred from making it through the second door of patentability, therefore losing the right to a United States Patent.[31]


Section 102(b) is triggered if certain events occur “more than one year prior to the date of the application for patent in the United States.”[32]  An inventor will lose the right to a United States patent if “the invention was patented or described in a printed publication in this or a foreign country” before the trigger date.[33]  In addition, the right is lost if the public used the invention or if the invention was on sale in this country before the trigger date.[34]


An inventor also loses the right to a patent, under §102(c), if the inventor had previously abandoned the invention.[35]  Further, under §102(d), the invention may not have been patented in a foreign country “more than twelve months before the filing of the application in the United States.”[36]


Finally, § 102(f) repeats a §101 requirement.[37]  The inventor must be the “true” inventor.[38]  An inventor is not the true inventor if “he did not himself invent the subject matter sought to be patented.”[39]


Section 103

The third door is represented by §103.[40]  In order to open the final door to patentability the invention must be non-obvious.[41]  Prior to the 1952 revision of the Patent Act, there was a judicially created requirement for “invention.”[42]  In 1850 The United States Supreme Court gave life to the “invention” requirement in Hotchkiss v. Greenwood.[43] 


The invention in Hotchkiss involved attaching a clay doorknob to a metal shank in the same way that metal doorknobs were attached to shanks.[44]  Clay had never been used for doorknobs before.[45]  Therefore, the invention was novel.[46]  However, the court said that the new knob “was the work of the skillful mechanic, not that of the inventor.”[47] 


For more than one hundred years thereafter courts used the ambiguous “standard of invention.”[48]  The standard allowed judges and the United States Patent & Trademark Office (USPTO) to find a thing patentable or not, depending on their subjective understanding of what an “invention” was.[49]  The “standard of invention” was not a standard at all.[50]


The 1952 revision did away with the requirement of invention and replaced it with “§103 Conditions for patentability; non-obvious subject matter.”  However, the standard of invention was a staple of patent law and many judges used the same ambiguous standard under another name, “non-obviousness.”[51]


In 1966 the United States Supreme Court clarified the §103 standard in Graham v. John Deere Co.[52]  The court said:


Under §103 the scope and content of the prior art are to be determined; differences between the prior art and the claims at issue are to be ascertained; and the level of ordinary skill in the pertinent art resolved.  Against this background, the obviousness or non-obviousness of the subject matter is determined.[53]




In order to be patentable, an invention must not be obvious to a person of ordinary skill in the art involved.  The obviousness of the invention is determined at the time the invention was made.[54]


Patenting Internet-Based Business Methods

Historically, Internet-based business methods (IBBM) could not get beyond the first door of patentability.  IBBM could not be patentable subject matter for two separate reasons. 


First, IBBM are implemented by computer-based software, and most software applications were not patentable subject matter under the mathematical algorithm exception.[55]  Courts considered mathematical algorithms nothing more than “laws of nature.”[56]


Second, many courts recognized a business method exception to patentable subject matter.[57]  Methods of doing business were said to be “abstract ideas,” and were therefore unpatentable subject matter.[58]


Then, in 1998, in State Street Bank & Trust Co. v. Signature Financial Group, Inc., the USFC overruled both established exceptions.[59]  First, in this section, I will review the patent and the surrounding facts involved in State Street.  After that, I will analyze the District Court’s opinion in which the court declared the patent at issue invalid.  Next, I will examine the USFC opinion that opened the door for patenting IBBM.  Finally, I will explore how the USFC has expanded the State Street holding in AT&T v. Excel.



Signature Financial Group, Inc. (Signature) administers mutual funds.[60]  They are assignees of a “Hub and Spoke” software package devised to manage multiple funds (Spokes) by pooling the assets of each fund (Hub).[61]  The pooled funds are owned, for Federal Income tax purposes and other economies of scale benefits, by a partnership entity created for just that purpose.[62] 


Each Spoke is a partner in the partnership and share profits and costs on a pro rata basis.[63]  The computer software “determines the percentage share (allocation ratio)  -that each fund has in the portfolio, while taking into consideration daily changes both in the value of the portfolio's investment securities and in the amount of each fund's assets.”[64]


Specifically, the invention calculates and stores data representing: the percentage share that each Spoke fund holds in the Hub portfolio; any daily activity affecting the portfolio's assets; allocations of gains, losses and expenses to each of the Spoke member funds; and tracking and updating data that are used to determine aggregate year-end income, gains, losses, and expenses for accounting and tax purposes.[65]



In March 1991 the inventor, R. Todd Boes, applied for patent protection for the “Data processing system for hub and spoke financial services configuration.”[66]  The Boes patent claimed a machine, rather than a method, with one independent claim and five dependent claims.[67]  The claims were structured in a means-plus-function format pursuant to §112 6 of title 35.[68]  The patent issued two years later, in March 1993, as patent number 5,193,056 ('056 Patent).[69]


State Street Bank & Trust Company (State Street) also manages mutual funds.[70]  State Street entered into negotiations with Signature to license the Hub and Spoke data processing apparatus.[71]  When negotiations broke down, State Street brought a declaratory judgment action asserting invalidity, unenforceability, and noninfringement in Massachusetts district court, and then filed a motion for partial summary judgment of patent invalidity for failure to claim statutory subject matter under § 101.”[72]


Massachusetts District Court

The Massachusetts District Court (District Court) granted State Street’s motion for Summary Judgment, declaring the ‘056 patent invalid because the patent was not directed to statutory subject matter under 35 U.S.C. 101.[73]   The court relied on the mathematical algorithm[74] and the business method exception.[75]  I will review each exception individually.


Mathematical Algorithms

The nucleus of all software inventions is a mathematical algorithm.[76]  For years, courts and the USPTO routinely denied patents to software inventions based on the prohibition of patenting laws of nature.[77]  In determining the patentability of the ‘056 patent regarding mathematical algorithms the District Court reviewed three different sources.[78]


First, the court examined “The Supreme Court Trilogy” to elucidate the correct rule of law for evaluating software inventions.[79]  Next, the court looked at the two-part “Freeman-Walter-Abele” (Freeman) test, as developed by the USFC and the Court of Customs and Patent Appeals (CCPA).[80]  The Freeman test is used to determine if a software invention is purely a mathematical algorithm.[81]  Finally, the court examined the USPTO Guidelines to decide if the Guidelines permit such a patent to issue.[82]  I will examine each analysis one by one.


(1)          The Supreme Court Trilogy


Gottschalk v. Benson

The United States Supreme Court addressed the patentability of software for the first time in Gottschalk v. Benson.[83]  In Gottschalk, the inventor sought to patent a software application that converted “signals from binary-coded decimal form into pure binary form.”[84]  The court said  “[a] digital computer . . . operates on data expressed in digits, solving a problem by doing arithmetic as a person would do it by head and hand.”[85] 


While the court held that this particular software application was not patentable, the court did not preclude all software applications from patentability, though the door of patentability was so narrow as to be almost impassable.[86]  The court held that in order to patent a software application for a digital computer the software “must either be tied to a particular machine or apparatus or must operate to change articles or materials to a ‘different state or thing.’”[87]


Parker v. Flook

The second Supreme Court decision in the trilogy is Parker v. Flook.[88]  In Flook, the inventor sought to patent a method of updating alarm limits during catalytic conversion processes using a mathematical formula.[89]  An alarm limit was used to determine when an alarm ought to sound, given a set of variables.[90]  The formula was applied to known variables to determine the correct alarm limit.[91]  Then the limit was updated to reflect the calculated number.[92]


The Flook court held the software unpatentable subject matter.[93]  The court said “[t]he notion that post-solution activity, no matter how conventional or obvious in itself, can transform an unpatentable principle into a patentable process exalts form over substance.[94]  A competent draftsman could attach some form of post-solution activity to almost any mathematical formula.[95]  Therefore, transforming one number to another “useful” number by applying a mathematical formula was not enough to make the software a patentable process under §101 of title 35.[96]


Diamond v. Diehr

The third case in the Supreme Court Trilogy is Diamond v. Diehr.[97]  Diehr involved a process for curing synthetic rubber.[98]  The process used computer software to continuously measure the temperature and pressure inside a mold.[99]  Then, using a familiar time, temperature and pressure mathematical formula, the computer software calculated the precise time to open the mold.[100]


The Diehr court held the software invention patentable subject matter.[101]  The court said that the inventor’s “claims involve the transformation of an article . . . into a different state or thing . . .” and “ [i]ndustrial processes such as this are the types which have historically been eligible to receive the protection of our patent laws.”


The State Street District Court concluded that, under the rule developed in the Supreme Court Trilogy, in order for a software invention to be patentable subject matter, the invention may not preempt the use of the formula by other than digital computer and the invention must “transform[] or reduc[e] an article to a different state or thing.”[102] 


(2)          The two-part Freeman-Walter-Abele Test

Next, the District Court laid out the Freeman[103] test as developed by the CCPA, and respected by the USFC.[104]  The test has two parts.[105]  First, the court should “determin[e] whether a mathematical algorithm is recited directly or indirectly in the claim.”  Next, the court should determine “whether the claim is directed to a mathematical algorithm that is not applied to or limited by physical elements or process steps.”[106]


Signature claimed that the Freeman test was inappropriate in this case, because the software ran on a general-purpose computer.[107]  Therefore, maintained Signature, the patent claimed a “machine” rather than a “process,” and machines are specifically listed in §101 as statutory subject matter.[108] 


The District Court said, “the mathematical algorithm / physical transformation test for statutory subject matter under § 101 applies even to ‘true apparatus’ claims” and the claim involved here was a process disguised as an apparatus.[109] 


(3)          USPTO Guidelines

Finally, the District Court reviewed the USPTO Guidelines to determine the agency’s criteria for issuing software patents.[110]  Although the Guidelines do not have the power of law, they “maybe persuasive authority.”[111]  The court found the following language from the Guidelines on point:


If the "acts" of a claimed process manipulate only numbers, abstract concepts or ideas, or signals representing any of the foregoing, the acts are not being applied to appropriate subject matter.  Thus, a process consisting solely of mathematical operations.  i.e. converting one set of numbers into another set of numbers, does not manipulate appropriate subject matter and thus cannot constitute a statutory process.[112]



(4)          Applying the Principles

After revealing the two-part test from the foregoing sources, the District Court applied the test to patent ‘056.[113]  First, the District Court decided if patent ‘056 was "a procedure for solving a given type of mathematical problem."[114]  The court said the invention at issue was a system “that inputs, processes, and outputs numbers” and was, therefore, a mathematical problem.[115]


Next, the District Court looked to see if the invention “transform[ed] or reduce[d] subject matter to a different state or thing.”[116]  The court held that Signature’s software invention merely transformed one number to another and did not physically transform an entity.[117]  Because patent ‘056 did not pass the two-part test, the court held that the software application at issue was not patentable under the mathematical algorithm exception.[118]


Business Methods

The State Street District Court also relied on the business methods exception to invalidate the ‘056 patent.[119]  The business methods exception for patentable subject matter may be traced to Hotel Security Checking Co. v. Lorraine Co.[120]


Hotel Security involved a system to prevent fraud by cashiers and waiters in restaurants and hotels.[121]  The system was designed to compare the food ordered from the kitchen to the food actually paid for at the register.[122]  The Hotel Security court said:


A system of transacting business disconnected from the means for carrying out the system is not, with the most liberal interpretation of the term, an art.  Advice is not patentable. . . . No mere abstraction, no idea, however brilliant, can be the subject of a patent irrespective of the means designed to give it effect.[123]



The District Court also cited Loew's Drive-In Theatres Inc. v Park-In Theatres Inc. to support the proposition that methods of doing business were per se unpatentable.[124]  The invention in Loew’s claimed to patent a system “for parking automobiles in an open lot in such a way that persons sitting therein . . . can see a screen or stage without obstruction from automobiles parked nearer the screen or stage or from automobiles moving in or out of the lot.”[125]


After comparing Loew’s and Hotel Security to the ‘056 patent, the District Court concluded that Signature’s patent “grants Signature a monopoly on its idea of a multi-tiered partnership portfolio investment structure”, and was therefore not directed to statutory subject matter under §101.[126]  Signature appealed from the District Court’s judgment of invalidity.


The United States Federal Circuit

The USFC made three significant declarations in overturning the State Street District Court decision.[127]  First, the court cleared up any ambiguities regarding the propriety of structuring computer program claims as “machines.”[128]  Next, the court clarified the mathematical algorithm exception.[129]  Finally, the court extinguished the business method exception.[130]  This section will discuss each declaration. 


Software as Machines

The Supreme Court Trilogy spelled out the requirements for patenting software applications.  As the District Court explained, the software must “be tied to a particular machine or apparatus” or “transform[] or reduce[] subject matter to a different state or thing.”[131]  Requiring software to change or alter a tangible “thing”, as the rule required, would prevent most software applications from winning a patent.  Tying the software to a particular machine, however, only requires a creative draftsman. 


For some time, inventors routinely drafted software claims in a means-plus-function format, so as to adhere to the letter of the requirements.  The ‘056 patent, for example, “claims a machine, namely, a data processing system for managing a financial services configuration of a portfolio established as a partnership.”[132]


After concluding that the ‘056 patent properly claimed a machine, the court said the distinction between a machine and a process was irrelevant "as long as it falls within at least one of the four enumerated categories of patentable subject matter, ‘machine’ and ‘process’ being such categories.”[133]  


Mathematical Algorithms

Next, the court addressed the District Court’s holding that the ‘056 patent was an unpatentable mathematical algorithm.[134]  The USFC, however, elucidated a different rule from the Supreme Court Trilogy than did the District Court.  The USFC held that the cases stood for the rule that “mathematical subject matter, standing alone, represent nothing more than abstract ideas until reduced to some type of practical application.[135] 


Then, relying on two USFC cases, the court said that software applications that produce a "a useful, concrete and tangible result" are within statutory subject matter.[136]  The court reviewed In re Alappat and Arrythmia Research Technology Inc. v. Corazonix Corp.[137] 


The invention claimed in Alappat was directed at a machine that performed a series of mathematical calculations to produce a smooth waveform on a rasterizer monitor.[138]  The court held that the waveform was a “useful, concrete and tangible result” and therefore was patentable subject matter under 35 U.S.C. 101.[139]


Arrythmia involved a machine claim that transformed electrocardiograph signals from a patient’s heartbeat, via a series of mathematical calculations, into a readable waveform on a monitor or printed graph.[140]  Again, the court held that the waveform had practical utility, and was therefore directed to patentable subject matter pursuant to §101.[141]


The State Street court asked whether a software application that transformed one set of numbers into another set of numbers (including final share price) was “useful, concrete and tangible.”[142]  The court held “that 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.”[143]


In reaching their conclusion the court said the District Court’s application of the Freeman test was inappropriate.[144]  In fact, the court said that the test “has little, if any, applicability to determining the presence of statutory subject matter.”[145]  The USFC devised a new affirmative test to identify patentable mathematical algorithms: For an invention employing a mathematical algorithm “to be patentable [the] algorithm must be applied in a ‘useful’ way.”[146]


Business Methods

The final matter the court addressed was the Business method exception to patentable subject matter.[147]  The USFC took the occasion “to lay this ill-conceived [business method] exception to rest.”[148]  The court said:


Since its inception, the “business method” exception has merely represented the application of some general, but no longer applicable legal principle, perhaps arising out of the "requirement for invention"—which was eliminated by § 103.  Since the 1952 Patent Act, business methods have been, and should have been, subject to the same legal requirements for patentability as applied to any other process or method.”[149]



The court said that neither the USFC nor the CCPA ever evoked the business method exception to find a patent invalid.[150]  In addition, the cases cited by the District Court to support their position (Hotel Security and Loews) did not even rely on the exception to strike down the inventions in those cases.[151]


The court also looked to the USPTO Guidelines to support their position that methods of doing business are proper subject matter under §101.[152]



Office personnel have had difficulty in properly treating claims directed to methods of doing business.  Claims should not be categorized as methods of doing business.  Instead such claims should be treated like any other process claims.[153]



After all, process, as defined in 35 U.S.C. 100 (b) includes a “method.”[154]  The court said that claims directed at a business method should not be treated any differently than any other process claim.[155]


Widening the Door to Patentability

Earlier this year, in AT&T v. Excel, the USFC widened the §101 door to patentability.[156]  AT&T was the assignee of patent 5,333,184 (‘184) entitled "Call Message Recording for Telephone Systems," issued on July 26, 1994.[157]  Unlike the patent involved in State Street, however, the ‘184 patent claims were structured as a process.[158] AT&T brought an infringement suit against Excel in the district court for the District of Delaware (DCD).[159]


The invention added a primary interexchange carrier (PIC) indicator field to a phone record.[160]  Inserting a customer’s PIC enabled the long distance carrier to differentiate the long distance rate depending on the long distance carrier of the receiver of the call.[161]  If subscribers phoned a party who also subscribed to the same long-distance provider they were charged a lower rate.[162] 


The DCD granted Excel’s motion for summary judgment, holding the ‘184 patent invalid based on the mathematical algorithm exception.[163]  The court said the patent was not directed to statutory subject matter under §101.[164]  The USFC, however, disagreed with the DCD and reversed the DCD’s summary judgment of invalidity.[165]


Applying the principles developed in State Street, the USFC held that the process claims at issue “fall comfortably within the broad scope of patentable subject matter under §101” because the ‘184 patent produced a “tangible, useful” result.[166]   The State Street principle makes “the scope of §101 responsive to the needs of the modern world.”[167]


The Remaining Doors

State Street opened the first door of patentability wide for IBBM.  There are, however, two additional doors an invention must open before completing the “difficult path to patentability.”  The second and third doors of patentability (§§ 102 & 103) require the USPTO to search the prior art to determine if an invention is novel and non-obvious.[168]


Generally, "prior art" is the body of knowledge or technical information that are available to a person of ordinary skill in the art at the time of application or invention.[169]  Detecting prior art is meant to prevent technology that is already in the public domain from being protected by an issued patent.[170]  “Thus assuming it has perfect information, USPTO will not issue a patent for an invention whose purported advancements are already found in, or are obvious from, the prior art.”[171]  Identifying relevant IBBM prior art has turned out to be quite a problem for the USPTO resulting in an increase of “bad”[172] patents issuing.[173]


There are four primary reasons IBBM prior art is difficult to discover: 1) an increase in the number of applications; 2) inexperienced patent examiners; 3) applicant’s unwillingness or inability to reference prior art; and, 4) prior inventors dependence on trade secret protection.  I will summarize each reason. 


Increase in Applications

The USPTO has experienced a drastic increase in the number of patent applications in recent years; especially Internet related applications.[174]  “[T]he number of [Internet related] applications filed has grown more than 20 percent per year since 1996, and the rate is expected to increase in 1999.”[175]  An estimated 40,000 software-related patents will issue in the two-year period of 1998 – 1999.[176]  Some commentators have described the situation at the USPTO as a “crisis” because the office is unable to cope with the type and number of patent applications.[177]  The increase has resulted in less scrutiny to individual applications by examiners, therefore the chance of bad patents issuing have increased.[178]


Inexperienced Examiners

While the number of applications has increased, so too has the number of examiners.[179]  However, because the applications have changed in kind, an increase in the number of examiners is not enough.  The USPTO has not had adequate time to prepare for examining the newly patentable subject matter.[180]  Internet related applications require specially trained examiners in order to prevent bad patents from issuing.[181] 


Prior Art References

The increase in the number of patent applications and the inexperience of examiners is complicated by the lack of prior art references included by the applicant.[182]  The patent applicant is not obligated to perform a search.[183]  They are, however, obligated to include any prior art they know about.[184]  The average IBBM patent application includes less than three prior art references.[185] 


Given that methods of doing business have historically been denied patent protection, one would expect a large number of prior art references to be found in “actual businesses, business plans, the financial services industry literature, and the like,” references that are not found in the USPTO database.[186]


Trade Secrets

Before State Street, many inventors relied on the judicially created software and business methods exceptions to patentability and sought state trade secret protection for their inventions.[187]  One of the requirements for trade secret protection is to maintain the invention’s secrecy.[188]  Therefore, a search for prior art will not reveal the invention. 


The United States Congress has recognized the problem of changing the rules in the middle of the game.[189]  Because an issued patent gives the patentee the right to exclude all others from using the invention, even prior independent inventors that maintained their invention in secret under the previous rules, the House of Representatives recently passed H.R. 1907 the “American Inventors Protection Act.”  In short, the Act will allow earlier inventors of a business method “prior use rights” of a patented invention.[190]




[I]t must be remembered that the primary responsibility for sifting out unpatentable material lies in the PTO.  To await litigation is – for all practical purposes – to debilitate the patent system.”[191]

--U.S.S.C. Graham v. John Deere



With this quotation in mind, the USPTO has taken steps to alleviate the “prior art” problem.  The agency has committed to hiring additional examiners with specialized skills in order to prevent bad patents from issuing.[192]  It will take some time before the USPTO can put these additional examiners in place, and longer still to train them.[193] 


In the mean time, the USPTO should allow competitors to participate in reexamination procedures.[194]  Competitors have the greatest access to prior art and they have the most to lose should bad patents issue.[195]  Recent cases demonstrate that competitors and potential defendants can reveal prior art that would otherwise go undiscovered.[196]


In addition, private organizations have started “prior art databases.”[197]  These databases are intended to provide the USPTO examiners with access to prior art that they would otherwise not have, in order to scrutinize patent applications to prevent bad patents from issuing. 


Even with all the additional steps to catch bad patents before they issue, we should expect to see a significant number get through the net.  Given the high cost of challenging patents, the State Street decision may have a negative effect on the developing Internet in the short term.  However, in the long run, the patent system should protect and encourage innovations that may not otherwise be implemented.  Overall, the changes to §101 brought on by State Street are welcomed.  Changing technologies requires laws to change along with them. 


[1] e.g.,, and were among the first Internet business to receive a U.S. patent. See, Jeffrey A. Berkowitz, Patenting The Com In ".Com," Prac. L. Inst. (1999).  See also, Francisc Marius Keeley-Domokos, Intellectual Property: B. Patent: 2. Patentability: b) Business models: State Street Bank & Trust Co. v. Signature Financial Group, Inc., 14 Berkeley Tech. L.J. 153(1999).

[2] Patent prosecutions are conducted in secret.  So the actual number is not known.  See, Robert P. Merges, As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Concepts and Patent System Reform, 14 Berkeley Tech. L.J. 577, 579 (1999).


[3] Id.

[4] See, State Street Bank & Trust Co., Inc. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed Cir. 1998) (holding  "methods of doing business" patentable).

[5] Id.

[6] The modern equivalent of “useful arts” is "technological arts."  See, In re Musgrave, 431 F.2d 882, 893 (1970).

[7] U.S. Constitution Art. I, Sec. 8 Cl. 8.

[8] U.S. Constitution Art. I, Sec. 8 Cl.  18.

[9] Patent Act of 1790, Ch. 7, 1 Stat. 109-12 (Apr. 10, 1790).  See also, Robert P. Merges, Patent Law and Policy, 9 (1997).

[10] Id.

[11] 35 U.S.C. (1998).

[12] 35 U.S.C.  154  (1998).

[13] In re Bergy, 596 F.2d 952, 960 (1979).

[14] Id.

[15] Id.

[16] Id.

[17] 35 U.S.C.  101  (1998).

[18] The term “inventor” includes an inventor, discoverer or patent applicant.

[19] 35 U.S.C.  101  (1998).

[20] Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980).  In re Alappat, 33 F.3d 1526, 1542, (1994).

[21] Diamond v. Diehr, 450 U.S. 175, 182 (1981) (quoting S. Rep. No. 1979, 82d Cong., 2d Sess., 5 (1952); H. R. Rep. No. 1923, 82d Cong., 2d Sess., 6 (1952)).

[22] supra. note 10.

[23] Id.

[24] See, Janice M. Mueller, Understanding Section 102, Sidebar (1998).

[25] 35 U.S.C.  102 (1998).

[26] See, 35 U.S.C.  102 (1998).  See also, supra note 21.

[27] 35 U.S.C.  102(a) (1998).

[28] Id.

[29] 35 U.S.C.  102(e) (1998).

[30] 35 U.S.C.  102(g) (1998).

[31] See, 35 U.S.C. 102 (1998).  See also, supra note 21.

[32] 35 U.S.C.  102(b) (1998).

[33] Id.

[34] Id.

[35] 35 U.S.C.  102(c) (1998).

[36] 35 U.S.C.  102(d) (1998).

[37] “Whoever invents or discovers . . . may obtain a patent . . .” 35 U.S.C. 101 (1998).

[38] 35 U.S.C.  102(f) (1998).

[39] Id.

[40] See, supra note 10.

[41] 35 U.S.C.  103 (1998).

[42] See, Honorable Giles S. Rich, The Vague Concept of “Invention” As Replaced by Section 103 of The 1952 Patent Act Patent Office Society, Vol. 46 No. 12 1:406(Dec. 1964).  

[43] Hotchkiss v. Greenwood, 52 U.S. 248 (1850).

[44] Id.

[45] Id.

[46] Id.

[47] Id.

[48] See, Rich, supra note 27.

[49] Id.

[50] Id. at 1:408.

[51] Id.

[52] See, Graham v. John Deere Co. 383 U.S. 1 (1966).

[53] Id. at 17.

[54] 35 U.S.C.  103 (1998).   See also, Rich, supra. note 25 at 1:408.

[55] See, Parker v. Flook, 437 U.S. 584 at 589 (1978).

[56] Id.

[57] See, Hotel Security Checking Co. v. Lorraine Co., 160 F. 467, 469 (2d Cir. 1908) (the court equated business methods with abstract ideas).

[58] Id.

[59] See, supra. note 4.

[60] State Street Bank & Trust Co., Inc. v. Signature Financial Group, Inc., 927 F. Supp. 502, 504 (D. Mass 1996).

[61] Id.

[62] Id. at 505.

[63] Id.

[64] US5,193,056 Patent abstract.

[65] supra. note 60, at 505.

[66] Id.

[67] Id. at 506. (The method claims were dropped in favor of the apparatus claims during prosecution).

[68] “A claim in multiple dependent form shall contain a reference, in the alternative only, to more than one claim previously set forth and then specify a further limitation of the subject matter claimed. A multiple dependent claim shall not serve as a basis for any other multiple dependent claim. A multiple claim shall be construed to incorporate by reference all the limitations of the particular claim in relation to which it is being considered.

An element in a claim for a combination may be expressed as a means or step for performing a specified function without the recital of structure, material, or acts in support thereof, and such claim shall be construed to cover the corresponding structure, material, or acts described in the specification and equivalents thereof.”  35 U.S.C.  112 6 (1998).

[69] supra. note 60, at 504.

[70] Id. at 505.

[71] Id.

[72] Id. at 506.

[73] Id. at 508.

[74] Mathematical algorithms are “laws of nature.”  See, Diamond v. Diehr, 450 U.S. 175 (1981).

[75] The USPTO incorporated the to the methods of business exception into the Manual of Patent Examining Procedures.  The Manual instructed examiners that a "method of doing business can be rejected as not being within the statutory classes."  M.P.E.P. § 706.03(a) (1994).

[76] Algorithm :  a procedure for solving a mathematical problem (as of finding the greatest common divisor) in a finite number of steps that frequently involves repetition of an operation; broadly : a step-by-step procedure for solving a problem or accomplishing some end especially by a computer.  Marriam-Webster Dictionary

[77] Claus D. Melarti, State Street Bank & Trust Co. V. Signature Financial Group, Inc.: Ought The Mathematical Algorithm And Business Method Exceptions Return To Business As Usual?, 6 J. Intell. Prop. L. 359 (1999).

[78] See, Id.

[79] Id. at 510.

[80] Id.

[81] Id.

[82] Id. at 512.

[83] Gottschalk V. Benson, 409 U.S. 63 (1972).

[84] Id. at 65.

[85] Id.

[86] Id. at 71.( “It is said that the decision precludes a patent for any program servicing a computer.  We do not so hold.”).

[87] Id.

[88] Parker v. Flook,  437 U.S. 584 (1978).

[89] Id. at 586.

[90] Id. at 585.

[91] Id. at 586.

[92] Id.

[93] Id. at 595.

[94] Id. at 590.

[95] Id.

[96] Id. (The court said “The Pythagorean theorem would not have been patentable, or partially patentable, because a patent application contained a final step indicating that the formula, when solved, could be usefully applied to existing surveying techniques.” ).

[97] Diamond v. Diehr, 450 U.S. 175 (1981)

[98] Id. at 177.

[99] Id.

[100] Id.

[101] Id. at 190.

[102] See, supra. note 60, at 509.

[103] See, In re Abele, 684 F.2d 902 (C.C.P.A. 1982); In re Walter, 618 F.2d 758 (C.C.P.A. 1980); In re Freeman, 573 F.2d 1237 (C.C.P.A. 1978).

[104] See, supra. note 60, at 510.

[105] Id.

[106] Id.

[107] Id.

[108] Id.

[109] Id. 511.

[110] Id. at 512.

[111] Id.

[112] Id. (quoting Guidelines, 61 Fed. Reg. 7478, 7484 (1996)).

[113] Id. at 513.

[114] Id. (quoting Gottschalk 409 U.S. at 65.)

[115] Id.

[116] Id.

[117] Id. at 514.

[118] Id. at 515.

[119] Id.

[120] Hotel Security Checking Co. v. Lorraine Co 160 F. 467 (2nd Cir. 1908).  See also, Rinaldo Del Gallo, III, Are "Methods of Doing Business" Finally Out of Business as a Statutory Rejection?, The Journal of Law and Technology (1998).

[121] Hotel Security, 160 F. at 467.

[122] Id. at 468

[123] Id. at 469.

[124] supra. note 60 at 515;  See also, Loew's Drive-InTheatres. Inc. v Park-In Theatres. Inc., 174 F.2d 547, 552 (1st Cir.)

[125] Loew's 174 F.2d at 550.

[126] Id. at 516.

[127] See, State Street, 149 F.3d at 1368.

[128] Id. at 1372.

[129] Id. at 1373.

[130] Id. at 1375.

[131] See, supra. note 60.

[132] A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:

a)   computer processor means [a personal computer including a CPU] for processing data;

       b)   storage means [a data disk] for storing data on a storage medium;

       c)   first means [an arithmetic logic circuit configured to prepare the data disk to magnetically store selected data] for initializing the storage medium;

       d)   second means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases or decreases based on specific input, allocate the results on a percentage basis, and store the output in a separate file] for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds, [sic, funds'] assets and for allocating the percentage share that each fund holds in the portfolio;

       e)   third means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases and decreases based on specific input, allocate the results on a percentage basis and store the output in a separate file] for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;

       f)   fourth means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases and decreases based on specific input, allocate the results on a percentage basis and store the output in a separate file] for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and

       g)   fifth means [an arithmetic logic circuit configured to retrieve information from

[133] supra. note 4 at 1372.

[134] Id. at 1373.

[135] Id.

[136] Id.

[137] Id.

[138] Alappat, 33 F.3d at 1564.

[139] Id. at 1544.

[140] Arrhythmia Research Technology, Inc. v. Corazonix Corp., 958 F.2d 1053, 1054 (Fed. Cir. 1992).

[141] Id. at 1061

[142] See, supra note 4.

[143] Id. at 1373.

[144] Id.

[145] Id. at 1374.

[146] Id. at 1373.

[147] Id. at 1375

[148] Id.

[149] Id.

[150] Id. 1376.  See also, Gary J. Rinkerman and Kenneth J. Sheehan, Patenting E-Commerce Technology in the Wake of State Street Bank v. Signature Financial, 3 Cyber. Law. 2 (1998).,  See also, Rinaldo Del Gallo, III, Are "Methods of Doing Business" Finally Out of Business as a Statutory Rejection?, The Journal of Law and Technology (1998).

[151] Id.

[152] Id. 1377.

[153] Examination Guidelines, 61 Fed. Reg. 7478, 7479 (1996).

[154] 35 U.S.C. 100(b) (1998).

[155] supra note 4 at 1377.

[156] AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999).

[157] Id. at 1353.

[158] See, Michael Joel Schallop, Federal Circuit Clarifies that Useful Software-Related Inventions Are Patentable Processes, Cyberspace Lawyer, May 1999.

[159] AT&T 172 F.3d at 1353.

[160] Id.

[161] Id.

[162] Id.

[163] Id.

[164] Id.

[165] Id. at 1361.

[166] Id. at 1361.

[167] Id at 1356.

[168] See, 35 U.S.C. 102, 103 (1998).

[169] See, David R. Syrowik and Roland J. Cole, A Primer on Software-Related Patents and the Software Patent Institute, (Revised Jan 8, 1997) <>

[170] Id.

[171] Id.

[172]  A “bad” patent is a patent that would not have been issued had the prior art been revealed for either not being novel or as being obvious in light of the prior art.

[173] See, Greg Aharonian, 17,500 software patents to issue in 1998, Internet Patent News Service (Oct. 18, 1998) <>.

[174] E. Robert Yoches, Patent Protection For Electronic Commerce And Other Internet Applications, Internet Law Institute (1999).

[175] Id.


[176] See, Greg Aharonian, 17,500 software patents to issue in 1998, Internet Patent News Service (Oct. 18, 1998) <>.

[177] See, Robert P. Merges, As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Concepts and Patent System Reform, 14 Berkeley Tech. L.J. 577, 591 (1999).

[178] Id.

[179] Id.

[180] Id.

[181] supra. note 176.

[182] supra. note 174.

[183] See, Robert P. Merges, Patent Law and Policy, 751 (1997).

[184] If a patent applicant does not bring a known piece of relevant prior art to the attention of the examiner, Rule 56 of the PTO practices results in the invalidation of the patent. See, 37 C.F.R. 1.56 (1999).  But see, supra. note 174 (claiming rule 56 is “impotent”).

[185] supra. note 174.

[186] Id. at 589 – 590.

[187] See, Glen B. Choi, Patents Offer Real Value to Businesses in Cyberspace, 3 Cyber. Law. 5 (1998)

[188] “Trade Secret” means information, including a formula, pattern, compilation, program, devise, method, technique, or process, that:

(i)       Derives independent economic value, actual or potential from

(a)     not being generally known [to persons who can use and obtain economic value from its disclosure or use], AND

(b)     not being readily ascertainable by proper means by other persons who can use and obtain ecomonic value from its disclosure or use, AND

(ii)     is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

UTSA §1(4), 14 U.L.A. 537 (1980).

[189] Michael J. Mehrman, HR1907 Update -- The Saga Continues, Intellectual Property Today (1999).

[190] “It shall be a defense to an action for infringement under section 271 of this title with respect to any subject matter that would otherwise infringe one or more claims asserting a method in the patent being asserted against a person, if such person had, action in good faith, actually reduced the subject matter to practice at least one year before the effective filing date of such patent, and commercially used the subject matter before the effective filing date of such patent.”  §273(b)(1).

[191] Graham v. John.

[192] See, supra. note 172.

[193] Id.

[194] Currently, competitors may request reexamination.  However, once the request is made they do not participate in the process.

[195] supra. note 174.

[196] See, Jennifer Sullivan, Volunteer Army to Fight Patent, May 3, 1999<,1283,19452,00.html>  See also, Wired News Report, Wang's Netscape Suit Tossed, May 7, 1999 <,1283,12161,00.html>

[197] See, Software Patent Institute, (visited Nov. 27, 1999) <>

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