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19 February 2007

State Street Bank & Trust Co. v. Signature Financial Group, Inc., 1998

This case opened the door for business method patents, at least where the business method was implemented in software in a system that included some hardware, like a processor and storage means.

Signature Financial Group, Inc. appealed from a decision of the United States District Court for the District of Massachusetts granting a motion for summary judgment in favor of State Street Bank & Trust Co., finding U.S. Patent No. 5,193,056 invalid on the ground that the claimed subject matter was not encompassed by 35 U.S.C. Section 101.

Signature was the assignee of the '056 patent entitled "Data Processing System for Hub and Spoke Financial Services Configuration." The '056 patent is generally directed to a data processing system (the system) for implementing an investment structure which was developed for use in Signature's business as an administrator and accounting agent for mutual funds. The system facilitates a structure whereby mutual funds (Spokes) pool their assets in an investment portfolio (Hub) organized as a partnership. This investment configuration provides the administrator of a mutual fund with the advantageous combination of economies of scale in administering investments coupled with the tax advantages of a partnership.

The Federal Circuit stated that when independent claim 1 is properly construed in accordance with section 112, paragraph 6, it is directed to a machine, as demonstrated below, where representative claim 1 is set forth, the subject matter in brackets stating the structure the written description discloses as corresponding to the respective "means" recited in the claims.

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.

The Federal Circuit stated that claim 1 was directed to a machine programmed with the Hub and Spoke software and admittedly produces a "useful, concrete, and tangible result" as required by Alappat, 33 F.3d at 1544, 31 USPQ2d at 1557. This rendered it statutory subject matter, even if the useful result is expressed in numbers, such as price, profit, percentage, cost, or loss.

As an alternative ground for invalidating the '056 patent under section 101, the lower district court had relied on the judicially-created, so-called "business method" exception to statutory subject matter. The Federal Circuit took this opportunity to lay this ill-conceived exception to rest. Since its inception, the "business method" exception has merely represented the application of some general, but no longer applicable legal principle, perhaps arising out of the "requirement for invention"--which was eliminated by section 103. Since the 1952 Patent Act, business methods have been, and should have been, subject to the same legal requirements for patentability as applied to any other process or method.

The business method exception was never invoked by the Federal Circuit, or the CCPA, to deem an invention unpatentable. Application of this particular exception has always been preceded by a ruling based on some clearer concept of Title 35 or, more commonly, application of the abstract idea exception based on finding a mathematical algorithm. Illustrative is the CCPA's analysis in In re Howard, 394 F.2d 869, 157 USPQ 615 (CCPA 1968), wherein the court affirmed the Board of Appeals' rejection of the claims for lack of novelty and found it unnecessary to reach the Board's section 101 ground that a method of doing business is "inherently unpatentable." Id. at 872, 157 USPQ at 617.(12)

Similarly, In re Schrader, 22 F.3d 290, 30 USPQ2d 1455 (Fed. Cir. 1994), while making reference to the business method exception, turned on the fact that the claims implicitly recited an abstract idea in the form of a mathematical algorithm and there was no "transformation or conversion of subject matter representative of or constituting physical activity or objects."

The Federal Circuit stated that even the case frequently cited as establishing the business method exception to statutory subject matter, Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908), did not rely on the exception to strike the patent. In that case, the patent was found invalid for lack of novelty and "invention," not because it was improper subject matter for a patent. The court stated "the fundamental principle of the system is as old as the art of bookkeeping, i.e., charging the goods of the employer to the agent who takes them." "If at the time of [the patent] application, there had been no system of bookkeeping of any kind in restaurants, we would be confronted with the question whether a new and useful system of cash registering and account checking is such an art as is patentable under the statute."

The Federal Circuit stated that this case was no exception. The district court had announced the precepts of the business method exception as set forth in several treatises, but noted as its primary reason for finding the patent invalid under the business method exception as follows:

If Signature's invention were patentable, any financial institution desirous of implementing a multi-tiered funding complex modelled (sic) on a Hub and Spoke configuration would be required to seek Signature's permission before embarking on such a project. This is so because the '056 Patent is claimed [sic] sufficiently broadly to foreclose virtually any computer-implemented accounting method necessary to manage this type of financial structure.

Whether the patent's claims are too broad to be patentable is not to be judged under section 101, but rather under sections 102, 103 and 112. Assuming the above statement to be correct, it has nothing to do with whether what is claimed is statutory subject matter.

In view of this background, it comes as no surprise that in the most recent edition of the Manual of Patent Examining Procedures (MPEP) (1996), a paragraph of section 706.03(a) was deleted. In past editions it read:

Though seemingly within the category of process or method, a method of doing business can be rejected as not being within the statutory classes. See Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2nd Cir. 1908) and In re Wait, 24 USPQ 88, 22 CCPA 822 (1934).

MPEP section 706.03(a) (1994). This acknowledgment is buttressed by the U.S. Patent and Trademark 1996 Examination Guidelines for Computer Related Inventions which now read:

Office personnel have had difficulty in properly treating claims directed to methods of doing business. Claims should not be categorized as methods of doing business. Instead such claims should be treated like any other process claims.

The Federal Circuit agreed that this was precisely the manner in which this type of claim should be treated. Whether the claims are directed to subject matter within section 101 should not turn on whether the claimed subject matter does "business" instead of something else.