III. Business Methods and State Street Bank

On July 23, 1998, the Federal Circuit made one of its clearest statements on the patentability of software-based inventions in its State Street Bank {FN50: State Street Bank & Trust v. Signature Financial Group, 149 F.3d 1368, 47 USPQ2d 1596 (Fed. Cir. 1998)} decision. This was truly a long-awaited decision, since it wasn’t released until about 16 months after oral arguments were heard in the case.

Signature Financial had received a patent on “a data processing system for implementing an investment structure which was developed for use in Signature’s business as an administrator and accounting agent for mutual funds.” State Street Bank used a similar system, and after negotiations for a license to practice Signature’s patent broke down, State Street Bank asked the district court to declare the patent invalid. The district court found the patent invalid because it did not claim statutory subject matter.

The original patent application had 12 claims – six method claims and six corresponding machine claims. When the examiner contemplated a statutory subject matter rejection of the method claims, Signature dropped them. The examiner then allowed the patent for the remaining machine claims. Claim 1 is representative of the machine claims, with the bracketed language indicating what the written description discloses as structure for the “mean for” limitations.

1. A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:

(a) computer processor means [a personal computer including a CPU] for processing data;

(b) storage means [a data disk] for storing data on a storage medium;

(c) first means [an arithmetic logic circuit configured to prepare the data disk to magnetically store selected data] for initializing the storage medium;

(d) second means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases or decreases based on specific input, allocate the results on a percentage basis, and store the output in a separate file] for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds, [sic, funds’] assets and for allocating the percentage share that each fund holds in the portfolio;

(e) third means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases and decreases based on specific input, allocate the results on a percentage basis and store the output in a separate file] for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;

(f) fourth means [an arithmetic logic circuit configured to retrieve information from a specific file, calculate incremental increases and decreases based on specific input, allocate the results on a percentage basis and store the output in a separate file] for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and

(g) fifth means [an arithmetic logic circuit configured to retrieve information from specific files, calculate that information on an aggregate basis and store the output in a separate file] for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds.

Clearly, the claim is to a specific machine, albeit one implemented using a conventional digital computer. But following Alappat,the programming of a general-purpose machine produces a special-purpose machine that performs the desired function. That does not end the analysis, though, because the district court found that the machine fell into either the “mathematical algorithm” or “business method” exceptions to statutory subject matter.

The court first addressed the mathematical algorithm exception:

Unpatentable mathematical algorithms are identifiable by showing they are merely abstract ideas constituting disembodied concepts or truths that are not “useful.” From a practical standpoint, this means that to be patentable an algorithm must be applied in a “useful” way. In Alappat,we held that data, transformed by a machine through a series of mathematical calculations to produce a smooth waveform display on a rasterizer monitor, constituted a practical application of an abstract idea (a mathematical algorithm, formula, or calculation), because it produced “a useful, concrete and tangible result”—the smooth waveform.

Similarly, in Arrythmia Research, we held that the transformation of electrocardiograph signals from a patient’s heartbeat by a machine through a series of mathematical calculations constituted a practical application of an abstract idea (a mathematical algorithm, formula, or calculation), because it corresponded to a useful, concrete or tangible thing—the condition of a patient’s heart.

Today, we hold that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces “a useful, concrete and tangible result” – a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades. {FN51: 149 F.3d at 1373, 47 USPQ2d at 1601 (citations omitted)}

This reinforces the Guidelines’ theme of utility as the way to determine whether a claim is to statutory subject matter. Clearly, as long as the numbers being crunched have some meaning in the real world, the claimed invention is useful and statutory subject matter.

The court then addressed the viability of the Freeman-Walter-Abele test:

After Diehr and Chakrabarty, the Freeman-Walter-Abele test has little, if any, applicability to determining the presence of statutory subject matter. As we pointed out in Alappat, application of the test could be misleading, because a process, machine, manufacture, or composition of matter employing a law of nature, natural phenomenon, or abstract idea is patentable subject matter even though a law of nature, natural phenomenon, or abstract idea would not, by itself, be entitled to such protection. The test determines the presence of, for example, an algorithm. Under Benson,this may have been a sufficient indicium of nonstatutory subject matter. However, after Diehr and Alappat, the mere fact that a claimed invention involves inputting numbers, calculating numbers, outputting numbers, and storing numbers, in and of itself, would not render it nonstatutory subject matter, unless, of course, its operation does not produce a “useful, concrete and tangible result.” {FN52: 149 F.3d at 1374, 47 USPQ2d at 1601-1602 (citations omitted)}

The court then discussed the business method exception, taking “this opportunity to lay this ill-conceived exception to rest.” The decision of the district court was reversed and the case remanded to that court for further proceedings. In doing this, the court adopted the arguments first put forward by Judge Newman in her dissent in In re Schrader. {FN53: 22 F.3d 290, 298, 30 USPQ2d 1455, 1462 (Fed. Cir. 1994) (Newman, J., dissenting)}

When the State Street Bank decision was announced, many people (and the press) reported it as permitting a new type of patent – the business method patent. But the Patent Office had been granting patents of business techniques for many years. Some were for business machines, like Herman Hollerith’s punch-card handling machines (which formed the basis for IBM) and cash registers, but others were business methods like Signature’s. In 1982, patent 4,346,442 was issued to the brokerage firm Merrill Lynch, covering a “Securities Brokerage—Cash Management System.” Although another brokerage sued to have the patent declared invalid because it was for a business method, the district court {FN54: Paine, Webber v. Merrill Lynch, 564 F.Supp. 1358, 218 USPQ 212 (D. Del. 1983)} held that it was statutory subject matter. So not only were business method patents possible before State Street Bank, but one had been granted so long before State Street Bank that it was near its expiration at the time of that decision.

Next section: Other Ways of Claiming