Five to ten years ago, most patent attorneys would have told their business clients that patent protection was not available for methods of doing business, or for software developed for these business methods.  Instead, most clients who wanted protection for this type of software used copyright or trade secret protection.  However, a recent case has completely changed the landscape of legal protection available for software.

In State Street Bank & Trust v. Signature Financial Group, Inc., the Court of Appeals for the Federal Circuit upheld a patent for a computer with a software program used in mutual fund calculations.  In this remarkable case, the Federal Circuit established bold precedent as to what can be patented.  The Court abolished the business method exception and imposed further limitations on the mathematical algorithm exception.  Both of these exceptions had been used in the past to preclude the patentability of software in general, and financial and accounting software in particular.

The case involved two financial service companies dueling over use of an innovative software program.  Signature Financial Group ("Signature") was the owner of this program, which was used for pooling several mutual fund assets.  Some of program's functions included daily allocation of assets, percentage share based on daily market changes, and allocation of income and expenses.  Signature had obtained a patent on a computer which included the program.  Signature sued State Bank & Trust ("State Street") for patent infringement.  In defense, State Street claimed that the patent was invalid because it was (1) a patent for a business method, and (2) a patent for a mathematical algorithm or formula.

The Court first discussed the subject matter of the patent in general by examining the claims.  The claims are the part of the patent which actually define the invention.  Here the patent claims disclosed a machine (a computer) which was programmed to run a financial software program, not a process. Having classified the invention as a machine, the Court then considered the two judicial exceptions used by the trial court to erroneously invalidate the patent.

Mathematical Algorithm Exception

The mathematical algorithm exception developed from a broader U.S. Supreme Court rule that "laws of nature, natural phenomena, and abstract ideas" are unpatentable.  Mathematical algorithms are unpatentable when they represent abstract ideas disembodied from useful results.  For example, under this exception one could not patent the Pythagorean theorem.  The Federal Circuit had formerly developed a test, known as the Freeman-Walter- Abele test, to evaluate whether a patent contained unpatentable algorithms.  However, recent Supreme Court decisions had taken a more expansive view of what was patentable, citing congressional record testimony that the patent statute was meant to allow patentability of "anything under the sun that is made by man."
The Federal Circuit has followed the Supreme Court's lead, upholding patents for software programs on a machine that converted data to a waveform and on a machine that operated on electrocardiograph signals so as to determine a heart condition.  Now, in State Street, the Federal Circuit upheld Signature's patent on a machine which used a program to transform data from discrete dollar amounts to arrive at a final share price.  In each case, the Federal Circuit found it important that although the programmed machines used mathematical algorithms, the machines produced "useful, concrete and tangible" results.  The Federal Circuit further weakened the Freeman-Walter-Abele test, classifying the test as too limited and misleading for a reliable indication of whether an invention which includes a mathematical algorithm is patentable.

Business Method Exception

The Federal Circuit mandated that business method patents are statutorily subject to the same legal requirements for patentability as any other invention, and their patentability is not automatically barred simply because such patents are directed to methods used in a business context.  The Federal Circuit laid the "ill-conceived (business method) exception to rest," noting that the Federal Circuit itself had never invoked the exception to invalidate a patent.  Rather, in prior cases in which the business method exception had been mentioned, the Federal Circuit had always used some other ground to invalidate the patent at issue.

Conclusion

The State Street case provides businesses who develop software, or who pay others to develop software for them, with an opportunity for additional revenue.  This opportunity can be realized by patenting software you develop and licensing that software to others.  Conversely, those who are not careful to protect their own software may find themselves on the wrong end of a cease and desist letter from a business which was aggressive in patenting its new software.
The bottom line of the State Street case is that so-called software patents are here to stay.  The Patent Office has already hired more examiners to handle the additional patent applications which are now being submitted.  Smart business owners should take advantage of this increased flexibility in the patenting of software.

By: Russel O. Primeaux, a registered patent attorney practicing in the intellectual property area, and Nancy Lambert, a law clerk at Kean, Miller.  Ms. Lambert will join the firm as an associate attorney this fall.  Phone:(225)382-3454;  E-Mail: russel@kmlaw.com