The Federal Circuit’s 1998 State Street Bank decision was a sweeping departure from precedent and opened the floodgates to so-called business method patents, leading to a significant outcry against “bad patents.” Also, out-of-control patent troll litigation gave birth to the anti-troll movement, which further fueled the fires of an anti-patent backlash, resulting in judicial and legislative action amounting to arguably the most significant pendulum swing against patent rights in US history. Many of the resulting changes were necessary to address these problems, but how far have we gone, and when will it end?
From the first Patent Act of 1790 until the revised Patent Act of 1952, courts consistently rejected patents on methods of doing business. In the following decades, a judicially created business method exception was established, and the evolution of computer-implemented methods was generally considered to be outside the scope of traditionally patentable subject matter. This all changed with State Street Bank (State Street Bank and Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998)), when the court struck down the judicially created business method exception, and declared that business methods were patentable as long as they yielded a useful, concrete, and tangible result.
An Unprecedented Ruling Opens The Floodgates
In State Street Bank, the Federal Circuit held that a claim was eligible for patent protection in the United States if it involved some practical application and it produced a useful, concrete, and tangible result. The patent was related to a data processing system for implementing an investment strategy. Specifically, mutual funds pooled their assets into an investment portfolio organized as a partnership, providing the administrator of the mutual fund with the combination of economies of scale and the tax advantages of a partnership. This fit squarely within the prior definition of a “business method” invention, and the Federal Circuit held it to be patentable. This was big news!
Some believed that this newly-created patent-specialist Federal Circuit (established in 1982) enabled activist, pro-patent judges to overturn long-settled case law, and Judge Mayer in In re Bilski later colorfully labeled State Street Bank as a “decision to jettison the prohibition against patenting methods of doing business [that] contravenes congressional intent” which “launched a legal tsunami, inundating the patent office with applications seeking protection for common business practices,” leading to issued patents ranging from “the somewhat ridiculous to the truly absurd” and generating “a thundering chorus of criticism.” In Re Bilski, 545 F.3d 943, 1000, 1004.
The bold findings of State Street Bank invited a dramatic increase in business method and software patents. Software patent numbers exploded from around 30,000 per year to over 100,000 per year in the 10 years following the 1998 decision, and the torrent of business method patents included e-commerce, insurance, banking, tax compliance, financial services technology, cell phone apps, and many other areas. The USPTO was ill-equipped to properly examine the rush of filings, and excessive, overly broad claims were granted.
The USPTO issued many punchline-worthy patents, such as a method of painting using the posterior of an infant (Patent No. 6,213,778), a method of putting a golf ball (Patent No. 7,261,652), a system for making toilet reservations (Patent No. 7,261,652), along with many thousands of computerized methods of doing business. The resulting avalanche of patent litigation and bad press that followed created an anti-patent culture in the judiciary, legislature, and in the general public to a large degree. The patent war was on, and the anti-troll narrative added significant fuel to the fire.
The Consequences of Increased Scrutiny
It took about 8 years of pervasive litigation and bad press before the judiciary took action. From 2006 to 2016 the courts and the legislature ravaged the broad rights of patent holders, dramatically changing the patent landscape. A chronology follows:
- 2006 – In eBay v MercExchange, the Supreme Court made it far more difficult to get an injunction on a holding of infringement. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). Injunctions had previously been broadly issued upon a finding of patent infringement, but the Supreme Court held that patent owners must demonstrate entitlement to an injunction under a four-factor test.
- 2007 – The Supreme Court in KSR v Teleflex held that the teaching, suggestion or motivation test wasn’t the only test for obviousness. KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007). Previously, some teaching, suggestion or motivation was required in order to combine references for an obviousness rejection. Therefore, this case made it much easier to invalidate or reject claims for obviousness. Only a rational underpinning for the logic of the claim rejection was now required.
- 2008-2010 – In a splintered opinion, without expressly overturning State Street Bank, the Supreme Court in Bilski v. Kappos struck down its underpinnings by overturning the useful, concrete tangible result test of State Street Bank. Bilski v. Kappos, 561 U.S. 593 (2010). In the crosscurrents of the majority and dissenting opinions of these cases, it was apparent that business method patents were under extreme attack after State Street had reigned for 10 years.
- 2012 – In Mayo v. Prometheus, the Supreme Court held that a method of administering a drug to a patient was not patentable. Mayo v. Prometheus, 132 S. Ct. 1289 (2012). IP Watchdog blogger Gene Quinn (no relation!) stated: “The sky is falling! Those in the biotech, medical diagnostics, and pharmaceutical industries have just been taken out behind the woodshed and summarily executed by the Supreme Court this morning. An enormous number of patents will now have no enforceable claims. Hundreds of billions of dollars in corporate value has been erased.”
- 2012 – The Leahy-Smith America Invents Act (AIA) came into effect, broadening the scope of prior art, and adding new procedures to invalidate issued patents in the Patent Office, including inter partes review (IPR), post-grant review (PGR) and covered business method (CBM) review. The percentage of patents invalidated in the PTAB by these procedures has been alarming. Most recently, in December 2016, the PTAB cancelled 83.1% of claims subject to IPR or CBM review. These numbers are staggering!
- 2014 – In Alice vs. CLS Bank, the Supreme Court held that an abstract idea implemented on a computer is not patent eligible. Alice Corp. v. CLS Bank International, 573 U.S. __, 134 S. Ct. 2347 (2014). The claim must present “significantly more” than the abstract idea itself to be patentable. Since Alice, software patents and business method patents have been invalidated at an unprecedented rate.
- 2016 – Just when you thought the narrative couldn’t get any worse for software patents, Judge Mayer’s concurring opinion in Intellectual Ventures I LLC v. Symantec Corp. injected the First Amendment into the patent landscape, stating that “patents constricting the essential channels of online communication run afoul of the First Amendment.” Judge Mayer further stated: “Most of the First Amendment concerns associated with patent protection could be avoided if this court were willing to acknowledge that Alice sounded the death knell for software patents….. [A]ll software implemented on a standard computer should be deemed categorically outside the bounds of section 101.”
The one-two punch of Alice and AIA post-grant proceedings have been devastating to patent holders, particularly in the area of business methods and software patents. Many believe that the AIA implemented necessary changes to eliminate bad patents and combat trolls, and this is probably true, but there’s no question that the playing field has changed dramatically as a result.
All of the above has amounted to an unprecedented assault on patents by the judiciary and legislature.
Is There Still Hope for Patents? Yes! Always!
For example, the tide is ever-so-slightly shifting in the Alice arena:
- 2016 – Software patents regained some footing in Enfish v Microsoft (software patent claims presenting a specific improvement to the way computers operate was held patentable); Bascom v ATT (a method and system for content filtering information retrieved from an Internet computer network is held patentable); McRo v Bandai (software for automatically animating lip synchronization and facial expression of animated characters is held patentable); and Amdocs v Openet (computer program for enhancing network usage records, which are generated and used by network service providers to bill customers, is held patentable).
- 2017 – In Trading Technologies v CQG the Federal Circuit issued a nonprecedential opinion finding claims to a graphical user interface (GUI) for a commodities trading platform to be patent eligible.
- 2017 – The Intellectual Property Owners Association has recently proposed a statutory amendment to 35 USC 101 which would effectively overturn Alice, Mayo and Bilski.
So, has the pendulum finally stopped swinging against patent holders? Maybe. As always, the only certainty in patent law is uncertainty…. so the important thing is to watch the Federal Circuit, Supreme Court, and Congress closely for clues regarding the next wave of patentable subject matter.