Broox Peterson, formerly responsible (2000-2005) for Visa's patent program, writes in his blog about the October 30th decision by the US Court of Appeals for the Federal Circuit on patents in the payments and financial industry:

Payments Industry Regulatory Compliance: Payments Industry "Business Process" Patents - A Dent in the Holy Grail?

On October 30, 2008 the United States Court of Appeals for the Federal Circuit decided In re: Bilski, __F.3rd__ (Fed. Cir. 2008) (in banc), a decision that will likely reverberate widely in the payments and financial industry. With this decision the Federal Circuit, the federal court of appeals with jurisdiction for patent matters, snugged up the standards for patent eligibility of business processes and methods that had been loosened by its 1998 decision in State Street Bank & Trust vs. Signature Financial Corp.

Not all original inventions, discoveries or bright ideas are eligible for patent protection. In particular, abstract ideas, mental processes or fundamental principles of nature standing alone cannot be patented, as these are the foundations of civilization and progress, and belong to no one. An invention that utilizes one of these abstract ideas or principles to create a useful application in the world we live in can be patented, though, assuming it is novel and non-obvious. The maintenance and application of this distinction has bedeviled the Patent and Trademark Office, the courts and patent attorneys (not to mention us civilians) in recent years.

In the State Street case, the Federal Circuit upheld a patent on a software-implemented method of pooling, processing and accounting centrally for the assets of multiple mutual funds (a so-called "hub and spoke" configuration). It overturned a lower court decision finding the patent invalid on the then-prevalent view of software as a math-like algorithm tantamount to abstract ideas. The lower court had found that the mere processing of numbers into another form involved no physical transformation and was thus not a patentable process. The Federal Circuit in State Street created a new standard for the patent eligibility of software, from causing a physical transformation to producing "useful, tangible and concrete results". The Federal Circuit also made it clear that there was no per se exclusion from patent eligibility of business processes.

The State Street decision is viewed by some as having opened the door to a flood of business process and software patent applications and granted patents in the last decade , although to some degree the decision merely reflected and justified what had already been occurring at the Patent Office. State Street was decided during the dotcom boom in the late 1990's, and many patent applications during that period were for Internet-based processes, many, but not all, of them marketing-related. A particularly infamous patent was issued in 1999 to Amazon for a "one-click" on-line ordering and payment process. This is not the place to catalog the variety of types of business processes for which patent protection has been sought and granted, but the point is that seeking patent protection for business process and method became a key focus of many start-up and established businesses in and after the late 1990's. At the same time critics worried that the liberal standards for obtaining business process patents were stifling creativity and innovation, and requiring allocation of attention and resources to patent matters (offensive and defensive) that were better spent by businesses on developing and marketing products and services.

In the ten years since State Street was decided the Patent Office has struggled to find the limits of patent eligibility of business processes and software. Many of the patents that have been granted contained a technological component and thus could satisfy even pre-State Street standards, but the line was murky for many others. During the time I was responsible for the Visa patent program (2000-2005) I do not recall any instances where patent counsel felt an "invention", usually business process-based, could not be patented. Obviously this was a good time for the patent bar.

The Federal Circuit apparently was having second thoughts itself about the effects of its decision in State Street when it decided to rehear en banc an appeal from the decision of the Patent Board of Appeals and Interferences rejecting as patent ineligible the claims of one Bernie Bilski (Ex Parte Bilski (BPAI 2006)). Bilski involved patent claims for a system of hedging against bad weather for a distributor of commodities like grains, essentially consisting of contracting in advance a fixed price from its suppliers and a fixed price to its buyers. There was no technological component to the process, which could be performed entirely in the mind. Although these claims probably failed even the State Street test requiring a "tangible and concrete result", the Federal Circuit took the case as a vehicle to re-examine the standard of patent eligibility created in State Street, and ultimately rejected that standard in favor of the more restrictive standard State Street had replaced:

"A claimed process is surely patent-eligible under § 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing."

In other words, there must be a central physical component to a business method or software claim for it to qualify for patent protection. The meaning of this in the context of the transformative test in (2) above is that for software or process to be eligible for patent protection it must transform physical objects or representations of them into something else. It is hard to imagine an invention in the financial or payments industries being able to meet that test, and the key to patent eligibility after In re: Bilski will likely have to be meeting the "particular machine or apparatus" test in (1) above. Unfortunately, In re: Bilski provides no guidance in that area, with the Federal Circuit expressly deferring any guidance as to how that test can be satisfied to a future, more appropriate case. As one bit of clarification, though, the Patent Board of Appeals and Interferences has already held that "[a] general purpose computer is not a particular machine, and thus innovative software processes are unpatentable if they are tied only to a general purpose computer." See, for instance, Ex parte Langemyr (May 28, 2008) and Ex parte Wasynczuk (June 2, 2008).

The ultimate impact of In re: Bilski on the future of patents in the financial and payments industries is not clear yet, but it is important that the decision did not reject the patentability of business processes or software altogether. Although the decision is likely to slow the filing of new applications in these industries, there will likely still be many patent applications filed seeking to test the limits of the "particular machine or apparatus" test. Another consequence of the decision is to call into question the validity of those patents already granted under the rejected State Street test, requiring holders of these patents to review the claims under the In re: Bilski test and perhaps seek to correct any problems by adding claims more likely to survive a Bilski review through continuation or reissue proceedings.

In the long run, if patents cease to be the Holy Grail in the financial and payment industries, that may not be a bad thing. A patent is no substitute for being first to market with a well-executed, profitable business model. A strong patent can buttress a business position, but if seeking and waiting for one hinders being first to market it can hurt more than help.