In the era where ideas drive the economy and intangible assets represent almost 75% of the total market value of S&P 500 companies, it is no surprise that intellectual property rights are of paramount importance to businesses in the United States and abroad.

Software and business method patents, in particular, have become increasingly important in an age where technological advancements have seen an increased reliance on information and e-commerce.

Source of Controversy, Debate

Software and business method patents, however, have been the source of recent controversy and debate in both the USA and India. In the United States, the debate ranges from opinions arguing that exclusion of such patents is contrary to the patent statutes and ignores the constitutional mandate to promote useful arts and science to opinions arguing that affording patent protection to business methods lacks statutory support and retards innovation.

The U.S. Supreme Court is set to review the issue of what types of processes can be patented for the first time in nearly 30 years. While patent owners and practitioners await the Court's ruling in Bilski v. Kappos, expected in the spring of 2010, the U.S. Patent Office and the courts struggle to determine the proper scope of software and business method patenting.

Indian Patent Act, 1970

In India, the Indian Patent Act of 1970 defines an invention as a new product or process involving an inventive step and capable of industrial applicability, and did not statutorily prohibit the patenting of business methods. In 2002, however, section 3 of the Indian Patent Act of 1970 was expanded and a clause (k) was added, which rendered a mathematical or business method or a computer program per se or algorithms as nonpatentable. In 2008, the publication of a Draft Manual on Patent Practice Procedure, which is intended to be a guideline for Indian patent examiners, blurred the line between patentable and nonpatentable software.

This area of Indian patent law remains in its infancy and is still evolving. Because there are very few cases interpreting the provisions of section 3(k) of the Indian Patent Act, litigants in India frequently look to the case law of European and U.S. courts. Thus, a major development in the patent eligibility of business methods, may have a direct impact on the on-going debate over patenting software and business methods in India. The U.S. Supreme Court's review of business method patents and its ruling in Bilski may afford precisely such a major development.

The Evolving Interpretation

The U.S. patent statute provides patent protection for "any new and useful process, machine, manufacture, or composition of matter . . . " 35 U.S.C. § 101. Software and business methods are typically protected using process or manufacture claims. Over time, U.S. courts have identified three categories of subject matter that are excluded from patent protection, namely, abstract ideas, natural phenomena, and laws of nature. Although an abstract idea, such as a mathematical algorithm, cannot be patented on its own, patent protection has long been available for its practical application.

For example, the Federal Circuit, which is viewed by many as a patent specialty court, has affirmed the patentability of a data processing system that uses an algorithm to determine a fixed share price and a method for generating a message record for long-distance telephone calls, in a 1998 decision in State Street Bank. Thus, ten years ago, the Federal Circuit expressly stated that there is no prohibition on patenting business methods under section 101. Rather, the court held that an abstract idea is applied in a patentable manner if it produces "a useful, concrete and tangible result."

More Applications, Lengthy Backlogs

After the State Street Bank case, the U.S. Patent Office was inundated with business method patent applications, which increased from under 2,000 in 1998 to nearly 14,000 in 2008. This caused lengthy backlogs and the quality of patent examination suffered. The public and press blamed "business method" patents for several trivial patents issued by the U.S. Patent Office, such as U.S. Patent No. 5,443,036 for a method of exercising a cat using a laser pointer and U.S. Patent No. 5,851,117 for a method for training a janitor. Several Supreme Court justices expressed concern over the "potential vagueness and suspect validity" of business method patents. The justices also questioned the "useful, concrete and tangible result" standard.

Restricting of Patenting

The Federal Circuit seemed to take note of these concerns and issued several opinions restricting patenting of business methods and software. For instance, in a 2007 decision (In re Nuijten), the court held that a transitory, propagating signal is not eligible for patenting. The court explained that a signal "is not a 'process, machine, manufacture, or composition of matter.'" The U.S. Supreme Court was asked to review the decision, but declined.

The Federal Circuit also dealt a blow to Internet-based method patents in a 2008 case, Muniauction, Inc. v. Thomson Corp., by holding that "adapting existing electronic processes to incorporate modern internet and web browser technology" is obvious as a matter of law. This decision gives district courts and the U.S. Patent Office another tool for challenging the validity of e-commerce and software patents.

Court Ready to Step In

On June 1, 2009, the Supreme Court granted certiorari to review the Federal Circuit's decision in In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc). In that decision, the Federal Circuit ruled that to be patentable under 35 U.S.C. § 101, a process must (1) be tied to a particular machine or apparatus; or (2) transform a particular article into a different state or thing. The court ruled that this "machine-or-transformation" test is the only test for processes and, therefore, the State Street Bank "useful, concrete, and tangible result" test is inadequate.

To satisfy the "transformation" prong of the test, a process must transform a physical object or substance. The court explained that this would not include processes that transform signals, data, or "abstract constructs such as legal obligations, organizational relationships, and business risks." Regarding the "machine implementation" prong, the court left for another day whether and when the recitation of a computer alone would suffice to tie a process to a particular machine.

With the stage set before the Supreme Court, the Bilski case has been called the most important patent case in a generation. More than 40 amicus curiae briefs were filed, and a decision from the Supreme Court is expected in the spring of 2010.

As we await this decision, practitioners and patent owners are left to prosecute and interpret software and business method patents amid an uncertain legal landscape. Although the U. S. Patent Office treats software per se as unpatentable, software recorded on a disc may be patentable as a product. Additionally, software and business methods may be patentable if they transform data representing physical objects, such as the x-ray data.

Even though it is likely that the issue of patentable subject matter in the U.S. under 35 U.S.C. § 101 will continue to evolve over the coming months and years, businesses around the world hope that the Supreme Court will provide clarity to the inventing public and guidance to the fate of thousands of issued business method patents.

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