Patenting of Business Methods – US perspective

Patenting of Business Methods – US perspective


The issue of patentability and patent infringement are among the most contentious areas of intellectual property law. Business method differs from more traditional patentable subject areas, but decisions of the Court of Appeals for the Federal Circuit  and the Supreme Court have granted patent protection to business method patent. Business method patent was once considered patent ineligible but now the number of such patents granted have increased tremendously.  In 1998, the Federal Circuit delivered the landmark judgment in State Street Bank & Trust Co. V. Signature Financial Group, Inc.[1]  which allowed the United States Patent and Trademark Office to award patents for ‘business methods’. But the position dramatically changed after the Federal Circuit issued its opinion in re Bilski. But the recent decision of the Supreme Court in Bilski v Kappos have held that there is no bar in the patentability of business methods, provided it satisfies the requirement of the patent act.

Business method patents are a class of patents which claim new methods of doing business. Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) does not specifically address business method patents. There is no universal rule regarding the patentability of business methods. Different jurisdictions deal with it as per their laws and regulations and this has resulted in the prevailing confusion and debate over the patentability issues of ‘business methods’.

The courts have stated that ‘business methods’, if eligible for patent protection, will have to satisfy the requirements of the patent act.

Section 101 of 35 USC defines what are patentable. The section reads as:Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent there for, subject to the conditions and requirements of this title.


Gottschalk, Commissioner of Patents v. Benson et al.[2]

United States Supreme Court

Respondents filed in the Patent Office an application for an invention which was described as being related “to the processing of data by program and more particularly to the programmed conversion of numerical information” in general purpose digital computers. They claimed a method for converting binary-coded-decimal (BCD) numerals into pure binary numerals. The claims were not limited to any particular art or technology, to any particular apparatus or machinery, or to any particular end use. They purported to cover any use of the claimed method in a general purpose digital computer of any type. Claims 8 and 13 were rejected by the Patent Office but sustained by the Court of Customs and Patent Appeals, 441 F.2d 682. The question before the Supreme Court was whether the method described and claimed was a “process” within the meaning of the Patent Act


The Supreme Court observed that the patent sought was on a method of programming a general purpose digital computer to convert signals from binary coded decimal form into pure binary form. A procedure for solving a given type of mathematical problem is known as an “algorithm.” The procedures set forth in the claims were of that kind; they were a generalized formulation for programs to solve mathematical problems of converting one form of numerical representation to another. From the generic formulation, programs may be developed as specific applications.


It was conceded that one may not patent an idea, but the Court held that in practical effect that would be the result if the formula for converting binary code to pure binary were patented in this case. The mathematical formula involved here had no substantial practical application except in connection with a digital computer, which meant that if the patent was allowed, the patent would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself. The Supreme Court thus held that the algorithm in question was not patentable.


Parker, Acting Commissioner of Patents and Trademarks v. Flook [3]

U.S. Supreme Court


Respondent applied for a patent on a “Method For Updating Alarm Limits.” The only novel feature of the method was a mathematical formula. The question in the case was whether the identification of a limited category of useful, though conventional, post-solution applications of such a formula made respondent’s method eligible for patent protection.

The Supreme Court held that respondent’s application contained no claim of patentable invention. The chemical processes involved in catalytic conversion of hydrocarbons were well known; as were the practice of monitoring the chemical process variables, the use of alarm limits to trigger alarms, the notion that alarm limit values must be recomputed and readjusted, and the use of computers for “automatic process monitoring-alarming.”17 Respondent’s application simply provided a new and presumably better method for calculating alarm limit values. Thus the respondent’s claim was, in effect, comparable to a claim that the formula 2πr can be usefully applied in determining the circumference of a wheel. It agreed with the Court of Customs and Patent Appeals which had held “if a claim is directed essentially to a method of calculating, using a mathematical formula, even if the solution is for a specific purpose, the claimed method is non statutory.”[4]

Diamond, Commissioner of Patents and Trademarks v. Diehr and Lutton[5]

United States Supreme Court

The question before the Supreme Court was whether a process for curing synthetic rubber which includes in several of its steps the use of a mathematical formula and a programmed digital computer was patentable subject matter under 35 U.S.C. §101. The claimed invention was a process for molding raw, uncured synthetic rubber into cured precision products. The process used a mold for precisely shaping the uncured material under heat and pressure and then curing the synthetic rubber in the mold so that the product will retain its shape and be functionally operative after the molding was completed.

Respondents claimed that their process ensured the production of molded articles which were properly cured. Achieving the perfect cure depend upon several factors including the thickness of the article to be molded, the temperature of the molding process, and the amount of time that the article is allowed to remain in the press. It was possible using well-known time, temperature, and cure relationships to calculate by means of the Arrhenius equation when to open the press and remove the cured product. Nonetheless, according to the respondents, the industry had not been able to obtain uniformly accurate cures because the temperature of the molding press could not be precisely measured thus making it difficult to do the necessary computations to determine cure time. Because the temperature inside the press had been viewed as an uncontrollable variable, the conventional industry practice had been to calculate the cure time as the shortest time in which all parts of the product will definitely be cured, assuming a reasonable amount of mold opening time during loading and unloading. But the shortcoming of this practice was that operating with an uncontrollable variable inevitably led in some instances to overestimating the mold-opening time and overcuring the rubber, and in other instances to underestimating that time and undercuring the product.

The patent examiner rejected the respondents’ claims on the sole ground that they were drawn to nonstatutory subject matter under 35 U.S.C. §101. He determined that those steps in respondents’ claims that were carried out by a computer under control of a stored program constituted nonstatutory subject matter under the Supreme Court’s decision in Gottschalk v. Benson[6] . The remaining steps — installing rubber in the press and the subsequent closing of the press — were “conventional in nature and could not  be the basis of patentability.” The examiner concluded that respondents’ claims defined and sought protection of a computer program for operating a rubber molding press.

The Patent and Trademark Office Board of Appeals agreed with the examiner, but the Court of Customs and Patent Appeals reversed. The court noted that a claim drawn to subject matter otherwise statutory did not become non statutory because a computer was involved. The respondents claimed were not directed to a mathematical algorithm or an improved method of calculation but rather recited an improved process for molding rubber articles by solving a practical problem which had arisen in the molding of rubber products.

Analyzing respondents’ claims according to the above statements from the Court’s precedents, the Supreme Court held that a physical and chemical process for molding precision synthetic rubber products fall within the §101 categories of possibly patentable subject matter. That respondents’ claims involve the transformation of an article, in this case raw uncured synthetic rubber, into a different state or thing could not be disputed. The respondents’ claims described in detail a step-by-step method for accomplishing such beginning with the loading of a mold with raw uncured rubber and ending with the eventual opening of the press at the conclusion of the cure. Industrial processes such as the case in hand were the type which had historically been eligible to receive the protection of the patent laws.

The respondents did not seek to patent a mathematical formula. Instead, they sought patent protection for a process of curing synthetic rubber. Their process admittedly employed a well-known mathematical equation, but they did not seek to pre-empt the use of that equation. Rather, they sought only to foreclose from others the use of that equation in conjunction with all of the other steps in their claimed process. Those included installing rubber in a press, closing the mold, constantly determining the temperature of the mold, constantly recalculating the appropriate cure time through the use of the formula and a digital computer, and automatically opening the press at the proper time. Though  a “computer” is not required to cure natural or synthetic rubber, but if the computer use incorporated in the process patent significantly lessens the possibility of “overcuring” or “undercuring,” the process as a whole did not thereby become unpatentable subject matter. As the Supreme Court did not view respondents’ claims as an attempt to patent a mathematical formula, but rather to be drawn to an industrial process for the molding of rubber products, it affirmed the judgment of the Court of Customs and Patent Appeals in allowing the patent application.

State Street Bank & Trust Co. V. Signature Financial Group, Inc.[7]

Signature was the assignee of the ‘056 patent which was entitled “Data Processing System for Hub and Spoke Financial Services Configuration.” The ‘056 patent issued to Signature on 9 March 1993, naming R. Todd Boes as the inventor. The ‘056 patent was generally directed to a data processing system (the system) for implementing an investment structure which was developed for use in Signature’s business as an administrator and accounting agent for mutual funds. In essence, the system, identified by the proprietary name Hub and Spoke®, facilitates a structure whereby mutual funds (Spokes) pool their assets in an investment portfolio (Hub) organized as a partnership. This investment configuration provides the administrator of a mutual fund with the advantageous combination of economies of scale in administering investments coupled with the tax advantages of a partnership.

State Street and Signature were both in the business of acting as custodians and accounting agents for multi-tiered partnership fund financial services. State Street negotiated with Signature for a license to use its patented data processing system described and claimed in the ‘056 patent. 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. The motion was granted and appeal followed

In Alappat, CAFC held that data, transformed by a machine through a series of mathematical calculations to produce a smooth waveform display on a rasterizer monitor, constituted a practical application of an abstract idea (a mathematical algorithm, formula, or calculation), because it produced “a useful, concrete and tangible result” — the smooth waveform.

Similarly, in Arrhythmia Research Technology Inc. v. Corazonix Corp [8] , CAFC held that the transformation of electrocardiograph signals from a patient’s heartbeat by a machine through a series of mathematical calculations constituted a practical application of an abstract idea (a mathematical algorithm, formula, or calculation), because it corresponded to a useful, concrete or tangible thing — the condition of a patient’s heart.

Federal Circuit after discussing the previous case law in detail held that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constituted a practical application of a mathematical algorithm, formula, or calculation, because it produced “a useful, concrete and tangible result” — a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades.

Federal Circuit held that the district court had erred by applying the Freeman-Walter-Abele test to determine whether the claimed subject matter was an unpatentable abstract idea. The Freeman-Walter-Abele test was designed by the Court of Customs and Patent Appeals, and subsequently adopted by CAFC to extract and identify unpatentable mathematical algorithms in the aftermath of Benson and Flook. In re Freeman [9] as modified by In re Walter[10] . The test was:

“First, the claim is analyzed to determine whether a mathematical algorithm is directly or indirectly recited. Next, 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 § 101.””

After Diehr and Chakrabarty, the Freeman-Walter-Abele test had little, if any, applicability to determining the presence of statutory subject matter. However, after Diehr and Alappat, the mere fact that a claimed invention involve inputting numbers, calculating numbers, outputting numbers, and storing numbers, in and of itself, would not render it nonstatutory subject matter, unless, of course, its operation did not produce a “useful, concrete and tangible result.

Commenting on the  “business method” exception, it observed that this exception 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 had been subject to the same legal requirements for patentability as applied to any other process or method.

It further clarified that the business method exception had never been invoked by this court, or the CCPA, to deem an invention unpatentable. Application of this particular exception has always been preceded by a ruling based on some clearer concept of Title 35 or, more commonly, application of the abstract idea exception based on finding a mathematical algorithm. Like In re Schrader[11] , while making reference to the business method exception, turned on the fact that the claims implicitly recited an abstract idea in the form of a mathematical algorithm and there was no “transformation or conversion of subject matter representative of or constituting physical activity or objects.”

Bilski v. Kappos [12]

United States Supreme Court


The question in the case turned on whether a patent could be issued for a claimed invention designed for the business world.  Petitioners’ patent application sought protection for a claimed invention that explain how commodities buyers and sellers in the energy market could protect, or hedge, against the risk of price changes. The key claims were claim 1, which described a series of steps instructing how to hedge risk, and claim 4, which placed the claim 1 concept into a simple mathematical formula. The remaining claims explained how claims 1 and 4 could be applied to allow energy suppliers and consumers to minimize the risks resulting from fluctuations in market demand.


The patent examiner rejected the application on the grounds that the invention was not implemented on a specific apparatus, merely manipulates an abstract idea, and solves a purely mathematical problem. The Board of Patent Appeals and Interferences agreed and affirmed. The Federal Circuit, in turn, affirmed. The en banc court rejected its prior test for determining whether a claimed invention was a patentable “process” under Patent Act, 35 U. S. C. §101 holding instead that a claimed process is patent eligible if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. It held that “machine-or-transformation test” was the sole test for determining patent eligibility of a “process” under §101, and held that the application was thus not patent eligible.


The Supreme Court observed that section 101 specified four independent categories of inventions or discoveries that are eligible for protection: processes, machines, manufactures, and compositions of matter. “In choosing such expansive terms modified by the comprehensive ‘any,’ Congress plainly contemplated that the patent laws would be given wide scope.” Diamond v. Chakrabarty[13] .


The Court’s precedents provide three specific exceptions to §101’s broad patent-eligibility principles: “laws of nature, physical phenomena, and abstract ideas.” Chakrabarty. While these exceptions were not required by the statutory text, they were consistent with the notion that a patentable process must be “new and useful.”And, in any case, these exceptions defined the reach of the statute as a matter of statutory stare decisis going back 150 years.


The Court observed that §101 patent-eligibility inquiry was only a threshold test. Even if an invention qualified as a process, machine, manufacture, or composition of matter, in order to receive the Patent Act’s protection the claimed invention must also satisfy “the conditions and requirements of this title.”§101. Those requirements include that the invention be novel, §102, non obvious, §103, and fully and particularly described, §112.


Coming to the facts of the present case, it held that the case involved an invention that was claimed to be a “process” under §101. Under the Court of Appeals’ formulation, an invention was a “process” only if: (1) it was tied to a particular machine or apparatus, or (2) it transformed a particular article into a different state or thing. The Supreme  Court had more than once cautioned that courts should not read into the patent laws limitations and conditions which the legislature has not expressed. In patent law, as in all statutory construction unless otherwise defined, words should be interpreted as taking their ordinary, contemporary, common meaning. The Court had read the §101 term “manufacture” in accordance with dictionary definitions and approved a construction of the term “composition of matter” consistent with common usage.


Adopting the machine-or-transformation test as the sole test for what constitutes a “process” (as opposed to just an important and useful clue) violate these statutory interpretation principles. Section 100(b) provide that the term ‘process’ means process, art or method, and include a new use of a known process, machine, manufacture, composition of matter, or material. The Court held that it was unaware of any ordinary, contemporary, common meaning, of the definitional terms “process, art or method” that would require those terms to be tied to a machine or to transform an article.


The Supreme Court concluded that the Court of Appeals had incorrectly concluded that the Supreme Court had endorsed the machine-or-transformation test as the exclusive test. In Gottschalk v. Benson[14],  the Court noted that transformation and reduction of an article ‘to a different state or thing’ was the clue to the patentability of a process claim that does not include particular machines. At the same time, it explicitly declined to “hold that no process patent could ever qualify if it did not meet machine or transformation requirements.” Supreme Court’s precedents established that the machine-or transformation test was a useful and important clue, an investigative tool, for determining whether some claimed inventions were processes under §101. The machine-or transformation test was not the sole test for deciding whether an invention was a patent-eligible “process.” Section 101 preclude the broad contention that the term “process” categorically exclude business methods.


The argument that business methods were categorically outside of §101’s scope was further undermined by the fact that federal law explicitly contemplate the existence of at least some business method patents. Under 35 U. S. C. §273(b)(1), if a patent-holder claim infringement based on “a method in a patent,” the alleged infringer can assert a defense of prior use. For purposes of the defense alone, “method” is defined as “a method of doing or conducting business.” §273(a)(3).


Though  petitioners’ application was held not categorically outside of §101, yet it did not made it a “process” under §101 automatically. Petitioners in the case had sought to patent both the concept of hedging risk and the application of that concept to energy markets. Under Benson, Flook, and Diehr  these were held not patentable processes but attempts to patent abstract ideas. Claims 1 and 4 explained the basic concept of hedging and reduce that concept to a mathematical formula. This was held to be an unpatentable abstract idea, just like the algorithms at issue in Benson and Flook. Petitioners’ remaining claims, broad examples of how hedging could be used in commodities and energy markets, attempted to patent the use of the abstract hedging idea, then instruct the use of well known random analysis techniques to help establish some of the inputs into the equation and were also held un patentable.




The United States Patent and Trademark Office came out with a Federal Register notice entitled Interim Guidance for Determining Subject fitter Eligibility far Process Claims in view of Bilski v. Kappos for use by USPTO personnel in determining subject matter eligibility under 35 U.S.C..§ 101.

Under the Interim Bilski Guidance, factors that weigh in favor af patent-eligibility satisfy the criteria  of the machine-or-transformation test or provide evidence that the abstract idea has been practically applied, and factors that weigh against patent-eligibility neither satisfy the criteria of the machine-or-transformation test nor provide evidence that the abstract idea has been practically applied



Factors Weighing Toward Eligibility:

  • Recitation of a machine or transformation (either express or inherent).

o Machine or transformation is particular.

o Machine or transformation meaningfully limits the execution of the steps.

o Machine implements the claimed steps.

o The article being transformed is particular.

o The article undergoes a change in state or thing (e.g., objectively different function or use).

o The article being transformed is an object or substance.

  • The claim is directed toward applying a law of nature.

o Law of nature is practically applied.

o The application of the law of nature meaningfully limits the execution of the steps.

  • The claim is more than a mere statement of a concept.

o The claim describes a particular solution to a problem to be solved.

o The claim implements a concept in some tangible way.

o The performance of the steps is observable and verifiable.


Factors Weighing Against Eligibility:

  • No recitation of a machine or transformation (either express or inherent).
  • Insufficient recitation of a machine or transformation.

o Involvement of machine, or transformation, with the steps is merely nominally, insignificantly, or tangentially related to the performance of the steps, e.g., data gathering, or merely recites a field in which the method is intended to be applied.

o Machine is generically recited such that it covers any machine capable of performing the claimed step(s).

o Machine is merely an object on which the method operates.

o Transformation involves only a change in position or location of article.

o “Article” is merely a general concept (see notes below).

  • The claim is not directed to an application of a law of nature.

o The claim would monopolize a natural force or patent a scientific fact; e.g., by claiming every mode of producing an effect of that law of nature.

o Law of nature is applied in a merely subjective determination.

o Law of nature is merely nominally, insignificantly, or tangentially related to the performance of the steps.

  • The claim is a mere statement of a general concept (see notes below for examples).

o Use of the concept, as expressed in the method, would effectively grant a monopoly over the concept.

o Both known and unknown uses of the concept are covered, and can be performed through any existing or future-devised machinery, or even without any apparatus.

o The claim only states a problem to be solved.

o The general concept is disembodied.

o The mechanism(s) by which the steps are implemented is subjective or imperceptible


[1] 149 F.3d 1368 (1998) United States Court of Appeals, Federal Circuit.

[2] 409 U.S. 63

[3] 437 U.S. 584

[4] Application of Richman, 563 F.2d 1026, 1030 (1977).

[5] 450 U.S. 175

[6] 409 U.S. 63 (1972)

[7] 149 F.3d 1368 (1998) United States Court of Appeals, Federal Circuit.

[8] 958 F.2d 1053, 22 USPQ2d 1033 (Fed.Cir.1992)

[9] 573 F.2d 1237, 197 USPQ 464 (CCPA 1978)

[10] 618 F.2d 758, 205 USPQ 397 (CCPA 1980)

[11] 22 F.3d 290, 30 USPQ2d 1455 (Fed.Cir.1994)

[12] 561 U.S. ___ (2010)

[13] 447 U. S. 303, 308 (1980)

[14] 409 U. S. 63, 70 (1972)