State Street or Easy Street: Is Patenting Business Methods Good For Business?

State Street or Easy Street: Is Patenting Business Methods Good For Business?

Description

American patent law has changed significantly in this half-century. Interestingly, many of these changes have something to do with Judge Giles S. Rich. He was the principal drafter of the Patent Act of 19521 and he was one of the first judges to sit on the Court of Appeals for the Federal Circuit, which was established in 1982 to consolidate adjudication of patent appeals. Possibly the longest-sitting federal judge, Rich died in June 1999, not long after he made yet another profound mark on the law of invention: the decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc. State Street is important for two reasons. It simplifies the law on patenting software and it reads patent law to encompass protection for business methods. Because of the contemporary significance of the computer industry, there will surely be much technical discussion of the first aspect of the opinion, the protection accorded to mathematical algorithms. This paper will, however, mainly examine the second half of the decision, for it has the potential to affect not only a single (albeit important) industry, but also the efficient operation of the marketplace as a whole. Imagine, for example, how the airline industry might now be structured if the first company to offer frequent flyer miles had enjoyed the sole right to award them; how differently mergers and acquisitions would be financed (and how rich Michael Milken might have become) if the use of junk bonds had been protected by a patent. State Street’s position on business method patenting bears considerable scrutiny indeed. To be sure, exclusive rights are important devices for encouraging creativity, for they provide innovators with a mechanism for earning returns on their activities. But at the same time, they impose many of the social costs that are standardly associated with monopolies, such as high prices, deadweight losses and misallocation of resources. In general, these effects are balanced by the narrowness of the protection afforded. Patent law draws a dichotomy between ideas and applications, and only the latter are protected. Moreover, the ambit of protection is circumscribed in that patents focus on particular end products or specific processes for producing such products. Despite the range of equivalents also encompassed, it has been rare for an intellectual property right to adhere to an advance so unique that the rights holder dominates the marketplace. In most cases, the availability of near substitutes keeps the practices of the patentee under such tight control that the right of exclusivity falls far short of an economic monopoly. And even if some monopolization does occur, it is short-lived: after the patent term expires, the product or process protected becomes subject to normal market forces. In contrast, business methods exist on something of a meta level, one step abstracted from products and their manufacture. Because they deal with the way that transactions in their fields are accomplished, they affect not just products in competition, but also the competitive process itself. By exerting potentially distortive constraints on that process, exclusive rights in business methods undermine the very basis for assuming that patents are not monopolies. Indeed, there are some business methods—frequent flyer programs are one example—that have an especially disruptive effect. They establish relationships (between suppliers and customers, or among customers and products) that are difficult for outsiders to break. In those situations, the impact of the patent could extend well beyond the time when the right expires or is invalidated. To be sure, Judge Rich understood that business method patents pose special dangers. He believed, however, that other patent prerequisites, such as novelty and nonobviousness (inventiveness), had blocked business method patenting in the past; he also thought that these requirements would prevent the patenting of most business methods in the future. Given that frequent flyer miles are not too different from the trading stamps that were ubiquitous to the supermarkets of the 1960s, and that there were junk bonds long before Michael Milken convinced the financial community that they were legitimate investment vehicles, there is intuitive appeal to his argument. Nonetheless, there are significant reasons to discount its force. First, a judge’s inability to imagine new business methods does not tell us very much because the developments that meet the requirements of patent law are precisely those that cannot be foreseen easily. Second, this sort of analysis merely changes the time frame in which the problem arises. Thus, supermarket trading stamps probably do anticipate frequent flyer miles, but so what? Had a patent on a method of procuring consumer loyalty through coupon awards been patented in its time, it too would have disrupted an industry. Third, the Patent and Trademark Office (PTO) has a notoriously difficult time examining in areas where the birth of the field is not coextensive with the advent of patenting, for in those cases there is a great deal of prior art and practice beyond the reach of the examiner corps. Thus, courts need to tread carefully when bringing new subject matter into the ambit of protection. Indeed, the business method patents that have issued to date demonstrate the problem, for many arguably encompass well-known methods. Finally, and most important, by focusing the discussion on questions like novelty, the court managed to obscure the real issue, which is whether there is a good justification for extending patents to business methods. In fact, the failure to offer such a rationale is consistent with other contemporary developments in intellectual property law, such as the increased protection now afforded to celebrities’ enterprises through expanding rights of publicity and to trademark owners through federal adoption of anti-dilution law. However, the absence of a justification is problematic. It raises a question about whether there is a real need to impose the costs of exclusivity on the public. Without a theory of harm, determining the scope of infringement is impossible. And if the only reason for creating exclusivity is to provide a way for someone to make more money, then protection becomes a one-way ratchet—once it adheres, it can only expand. This paper takes the position that patenting business methods is different enough from other forms of patenting to warrant careful consideration of its value. After describing State Street and the limitations suggested by Judge Rich and others, I examine the possible rationales for recognizing business method patents. I conclude that none of the standard theories support exclusive rights in this area, and that the benefits of protection are far outweighed by the costs. I end with a look at how business method patenting could be controlled, and at whether taking steps to deny protection to business methods would violate the United States’ obligations under the TRIPS Agreement.

Source Publication

U.S. Intellectual Property Law and Policy

Source Editors/Authors

Hugh Hansen

Publication Date

2006

State Street or Easy Street: Is Patenting Business Methods Good For Business?

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