The rise of e-commerce brought with it new terminology, new practices, and new business models, methods, and processes. Along with the advent of these business models came a seemingly new idea: business method patents.
In fact, Internet and software companies in Japan were the first to patent business models, but the idea arrived in the U.S. and gained prominence in the late 1990s. In 1998, a Federal Court ruling assigned the U.S. Patent and Trademark Office (USPTO) with the responsibility of issuing patents for unique automated technologies that process data or generate revenue (i.e. business models, methods, processes—including computer software).
Suddenly, e-commerce features such as subscription-based access, targeted advertising networks, portal sites, online auctions, virtual malls, and even forums were now considered business models, methods, and processes that could be patented.
Why are business method patents important?
Companies often believe that their business methods are a form of "intellectual property," and as such should be protected under patent law. Successful patent applications for business methods in the late 1990s and early 2000s included a client-server system for delivering online information, an access control and monitoring system for network servers, electronic mail systems that display advertisements to remote users, and Amazon's 1-Click system.
Business method patents, like all other utility patents, are valid for a period of 17 years and prevent others from using covered business methods without permission from the patent holder.
The importance and value in patenting a business method can be illustrated by the case of Netflix, a leading internet subscription services company that was awarded a patent for its computer-implemented approach for renting movies and TV shows to customers in 2003. In 2006, Netflix filed a patent infringement suit against their primary competitor, Blockbuster. The case was later settled out of court.
Can every business method be patented?
The USPTO maintains strict classifications for patentable business methods. The most common class for business model applications is financial data processing (705). Under this class, only computer-related processes involving finance, business practices, management, or price determination are eligible. However, there are other eligible classifications for business model patent applications, including education (434), gaming (273), and agriculture (47).
As even more software and Internet businesses began lining up at the doors of the patent office, the number of patents issued for business methods increased from 1,000 in 1997 to 11,000 in 2007. Due in part to this exponential rise, the USTPO issued the Interim Guidelines for Examination of Patent Applications for Patent Subject Matter Eligibility. The new guidelines specified that a business method claim must either transform physical matter (such as smelting ores or vulcanizing rubber) or be tied to a specific machine in order to be patent-eligible. Methods not satisfying these requirements were often deemed ineligible as “mere abstract ideas.” Commentators began debating the demise of the method patent and even the patentability of computer software.
Soon after, the Federal Circuit of the U.S. Court of Appeals in In re Bilski (2008) ruled that the machine-or-transformation test was the sole test to determine patent eligibility for business methods or processes and that only business methods that meet the following criteria are patent-eligible:
1) it is tied to a particular machine or apparatus; or
2) it transforms a particular article into a different state or thing
Based on the 2008 Bilski ruling, many of the business method patents issued by the USPTO up until 2008 would probably be deemed patent-ineligible. Even methods that were accomplished by a computer (in other words, software) were often found ineligible. Tension in the technology industry rose measurably. (Perhaps the Federal Circuit should have tried to patent its ruling as “a means of creating significant concern in Silicon Valley.”)
Just as things were looking grim for method and software patents, the Supreme Court weighed in: in 2010, the Court unanimously ruled in Bilski v. Kappos that the machine-or-transformation test is not to be the sole test for method patent eligibility. Instead, the Court held that the test is one “useful and important clue or investigative tool,” but not the only test available to determine patentability. The court did not, however, offer any further guidance—leaving the latest Bilski opinion somewhat opaque, to say the least. So, for now, it's up to the Federal Circuit to develop new criteria related to patents for business models, and see how those play in any appeals that make it to the Supremes. Recent cases, such as Research Corp. v. Microsoft and Prometheus v. Mayo provide some initial insight into the Federal Circuit's process and progress, but as far as a final word on what will be found patentable subject matter and what will be deemed mere “abstract ideas,” the world will have to wait. Call it “a means for creating confusion in the legal community.” On second thought, don't.
This article was originally published November 2008 and updated August 2011.
LegalZoom can help you get your business methods, processes, and other inventions patented. To get started, answer questions about your invention, and we’ll help you prepare and file an application with the government.