Business method patents can be used to assert intellectual property rights in innovative methods of doing business. In 1998, the U.S. Court of Appeals for the Federal Circuit, which decides patent-related appeals from district courts all over the country, substantially liberalized the standard for granting business method patents. See State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F. 3d 1368 (Fed. Cir. 1998). In response, the number of business method patent applications skyrocketed, particularly in fields such as accounting, finance and even law. The franchise community also became involved, albeit somewhat slowly, as patents were granted for inventions such as a system for "upselling" at fast-food restaurants (U.S. Patent No. 6,119,099 issued September 12, 2000). Some practitioners even suggested that patent protection would supplant trademark and trade secret protection as the core of franchise-related intellectual property.

Perhaps in reaction to recent Supreme Court criticism, the Federal Circuit has now reversed course and limited the types of business methods that can qualify for patent protection. In re Bilski, 543 F. 3d 943 (Fed. Cir. 2008) (en banc). Assuming that it is not overturned by the Supreme Court, this recent decision by the Federal Circuit will most likely put an end to the most expansive concepts of patent-protected franchise systems. However, in appropriate circumstances, patent protection may still be available and, where it is, it may prove more robust than previously anticipated.

Because patents confer a statutory right to exclude, regardless of the presence or absence of customer confusion, patent rights are in many respects the strongest form of intellectual property protection. However, the patent application process is lengthy, rigorous and expensive. In order to satisfy the basic statutory criteria, the applicant must show that the alleged invention is useful, novel (in other words, has not been done before) and nonobvious. If this showing is made, in the detailed form prescribed by the United States Patent and Trademark Office (PTO), the patentee receives a twenty-year right to exclude others from making, using or selling the patented invention, on the condition that the invention is fully disclosed and thereafter is in the public domain. Needless to say, the ability to exclude a competitor from using a particular method of doing business for twenty years (less the length of the application process) could confer a powerful commercial advantage.

Not everything that a franchisor might consider to be an "invention" is patentable. Among other constraints, patents cannot be granted for mere ideas (whether concerning business methods or otherwise). However, in its 1998 decision in State Street, the Federal Circuit held that business methods could be considered to be patentable subject matter, and not merely unpatentable ideas, if they led to a "useful, concrete, and tangible result." This broad test opened the floodgates for filing of business method patent applications, many of which—including the patent for a particular method of fast-food upselling—were granted by the PTO. The ability to obtain a patent for virtually any business method drew criticism from members of the Supreme Court, even in cases in which patentability was not directly at issue. See eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 397 (2006) (Justice Kennedy, joined by Justices Stevens, Souter and Breyer, concurring) (noting the "potential vagueness and suspect validity" of "the burgeoning number of patents over business methods").

In re Bilski fundamentally narrows the scope of what is patentable. The majority opinion relies heavily on the Supreme Court's decisions in Diamond v. Diehr, 450 U.S. 175 (1981), and Gottschalk v. Benson, 409 U.S. 63 (1972), noting that the Supreme Court "drew a distinction between those claims that seek to pre-empt the use of a fundamental principle, on the one hand, and claims that seek only to foreclose others from using a particular application of that fundamental principle, on the other." 543 F. 3d at 953. Accordingly, the court reasoned that "[a] claimed process involving a fundamental principle that uses a particular machine or apparatus would not pre-empt uses of the principle that do not also use the specified machine or apparatus in the manner claimed" and "a claimed process that transforms a particular article to a specified different state or thing by applying a fundamental principle would not pre-empt the use of the principle to transform any other article, to transform the same article but in a manner not covered by the claim, or to do anything other than transform the specified article." Id. at 955. Thus, under the new In re Bilski test, for an innovative business method to be patent-eligible, it now must either be "tied to a particular machine or apparatus" or "transform a particular article into a different state or thing." Id. at 955.

The impact of In re Bilski will not be fully understood until it has been implemented by the PTO, the district courts and subsequent panels of the Federal Circuit. For franchisors, In re Bilski is likely to limit both the opportunities and risks attendant to patent protection. At least as to pure business methods unattached to any machine or article, companies will be unable to protect their own inventions with a patent. On the other hand, they need not fear that their competitors (or so-called "patent trolls") will be able to foreclose a particular area through assertion of a business method patent. To the extent that a business innovation is tied to a machine or the transformation of an article, however, a patent not only may be obtained, but it also may be considered stronger and less subject to invalidation if infringement litigation is commenced. Thus, franchisors still need to be aware of the opportunities and risks that the patent system provides.