MODULE 5: BUSINESS METHODS, INTELLECTUAL PROPERTY AND THE INTERNET
Inventions are characteristically protected by patents.1 The patent system provides a
framework for innovation and technological development by, on the one hand, granting an
exclusive right to the owner of a patent to exploit an invention for a limited period2 and, on
the other hand, balancing this right with a corresponding duty to disclose the information
concerning the patented invention to the public. This information, which is classified and
stored in the patent documentation, is available to anyone and, increasingly, is accessible
through online, Internet-based systems.3 The mandatory disclosure of the invention thus
enriches the available pool of technological knowledge, facilitates technology transfer, and
enhances the opportunities for creativity and innovation by others.4
The patent system has played a vital role in promoting the development of the underlying
technical infrastructure for electronic commerce. Electronic commerce relies in a critical
way on the various computer and network technologies, both hardware and software. The
market exclusivity established through effective patent protection has provided a reward for
investment and has justified the expenditures on research and development to achieve
further technological progress. However, the new technologies pose challenges to the
conventional legal scheme for the patent system. This section addresses several of the new
issues associated with digital media and electronic commerce in the context of patent
5.2 PATENTABLE SUBJECT MATTER
In order to be eligible for patent protection, an invention must fall within the scope of
patentable subject matter. Article 27.1 of the TRIPS Agreement provides that, subject to
certain exceptions or conditions under that Agreement, patents shall be available for any
inventions, whether products or processes, in all fields of technology, provided that they are
new, involve an inventive step and are capable of industrial application. While limited
1 Virtually every country that accords legal protection to inventions – and there are more than
155 such countries – gives such protection through the patent system. In addition, inventions may
also be protected by other types of rights, such as utility models or trade secrets. The international
protection conferred by a patent is recognized in two multilateral treaties: the Paris Convention for the
Protection of Industrial Property (the Paris Convention), to which 156 States are party, and the
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), by which
135 States are bound.
2 The exclusive right to exploit an invention is generally granted for a period of 15 to 20 years
from the date of filing a patent application. See Article 33 of the TRIPS Agreement.
3 A number of offices provide patent information on Internet: for example, the United States
Patents and Trademarks Office (http://www.uspto.gov), Japanese Patent Office (http://www.jpo-
miti.go.jp), European Patent Office (http://www.european-patent-office.org), Canadian Intellectual
Property Office (http://cipo.gc.ca) and Industrial Property Information Center in Thailand
(http://www.ipic.moc.go.th). For a discussion of WIPO’s plans to make public international patent data
available online, see Chapter V (WIPOnet). See also the list of national intellectual property offices
(with corresponding Internet addresses) in Annex III.
4 The patent system thus encourages the dissemination and transfer of technological
knowledge by granting a fixed-term, market exclusivity to an inventor in return for the clear and
complete disclosure of the invention. See TRIPS Agreement, Article 29.
exceptions are possible under the TRIPS Agreement – and provided for in some national
laws – the general rule is that patent protection for an invention will not be refused simply
because of its field of technology.
Patents have recently been granted to certain inventions concerning financial services,
electronic sales and advertising methods, business methods, including business methods
consisting of processes to be performed on the Internet, and telephone exchange and billing
methods.5 It is expected that the number of these eCommerce-type patents may increase
significantly, bearing in mind the significant potential of electronic commerce to individuals,
companies and national economies, as well as to the global economy. Such patents are
viewed as important for creating incentives and spurring investment in new technologies.
On the other hand, this trend has been criticized by those who would stress that a number
of such patents concerning business practices and methods reflect familiar ways of doing
business which are not new or novel: the only aspect that is different is that they occur in
cyberspace.6 In Europe there is a view that the subject matter of a patentable “invention”
shall have a “technical character” or involve “technical teaching,” i.e., an instruction
addressed to a person skilled in the art as to how to solve a particular technical problem
using particular technical means.7
A similar discussion concerning patentable subject matter has occurred in respect of
software patents, as the significance of software itself extends well beyond the software
5 A recent decision in the United States, for example, found a business method to be
patentable subject matter. State Street Bank & Trust v. Signature Financial Group, 47 USPQ 2d 1596
(CAFC 1998) (the decision upheld a patent for a particular business model for managing an
investment portfolio). See also AT&T Corp. v. Excel Communications, Inc., No. 98-1338, 1999, WL
216234, __ F.3d __ (Fed. Cir. Apr. 14, 1999) (“[the focus in determining whether an invention
containing a computer algorithm recites patentable subject matter is] not on whether there is a
mathematical algorithm at work, but on whether the algorithm-containing invention, as a whole,
produces a tangible, useful, result”).
6 See, e.g., “Are Patents Good or Bad for Business On-Line,” The New York Times,
Technology Law Journal (August 28, 1998). Because the phenomena of cyberspace and electronic
commerce are so new and still emerging, it is argued that gauging the novelty of a business model in
this area and whether it meets the requirements of patentability is not easy. It is also contended that
competition may be harmed in the digital market place if companies are able to obtain patents for
basic business methods that already exist in non-cyberspace. On the other hand, others indicate that
patent protection is merited given the technological innovation reflected in such new business models
and that this protection is needed in order to provide incentive for further investment in new on-line
businesses. A lawsuit filed in October 1999, in which Amazon.com, the Internet book seller, has sued
its rival, Barnesandnoble.com, illustrates the stakes involved. Amazon.com, in September 1997,
started using a “one-click” technology to enable its online customers to make repeated purchases
from its web site without having to repeatedly fill out credit card and billing address information. It
received a patent for its one-click technology in September 1999 (United States Patent no.
5,960,411), and alleged that Barnesandnoble.com’s one-click checkout system, known as “Express
Lane,” infringes its patent. See “Barnesandnoble.com faces suit by Amazon Over Patent,” New York
Times: Technology (October 23, 1999), at
http://www.nytimes.com/library/tech99/10/biztecharticles/23amazon.html. Recently, in what some
have considered to be a public relations move, Jeff Bezos, the Chairman of Amazon, has urged
reform in the patent system to reduce the term of patent protection. “Chairman of Amazon Urges
Reduction of Patent Terms,” New York Times Technology section (March 11, 2000). The United
States Patent and Trademark Office has developed an action plan to respond to the new issues
concern business method patents. See http://www.uspto.gov/web/offices/com/sol/actionplan.html.
7 See, e.g., Guidelines for Examination in the European Patent Office, Part C, Chapter IV, 1.
industry. The TRIPS Agreement does not allow the exclusion of software in general from
patentability.8 In a recent Communication from the European Commission, it was stated
that the law on patentability of computer programs in the United States of America has had
a positive impact on the development of the software industry there.9 In this context, the
Commission proposed a draft Directive to harmonize the conditions for the patentability of
inventions related to computer programs. Although some patent offices have established
examination guidelines for computer related inventions, including software related
inventions, very little international harmonization has been achieved in this area.10
5.3 BUSINESS METHOD PATENT
Business method patents represent a new and important area in patent law. There currently
is no formal definition for what a business method patent is but, in general, it is a patent
relating to a method of doing business. Although such patents can be obtained for any kind
of business method, the applications often relate to automated business and e-commerce
methods. This includes new types of e-commerce, insurance, banking, tax compliance etc.
Whether a business method is regarded as patentable subject matter depends on the
legal jurisdiction. The World Trade Organization’s Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) does not specifically address business method patents.
5.3.2 THE HISTORY AND EVOLUTION OF BUSINESS METHOD PATENTS
Traditionally, one could not patent a business method because “business method” was
accepted from the scope of patentability. In addition, the courts did not extend patent
protection to computer software, a key component to many business method patents. In
Gottschalk v. Benson 11 and Parker v. Flook 12, the Supreme Court ruled that software was
too similar to mathematical algorithm and hence, entitled to patent protection.
8 Article 27(1) of the TRIPS Agreement requires that patents be available “in all fields of
technology, provided that they are new, involve an inventive step and are capable of industrial
application.” This broad requirement of patentability has prompted a discussion on the subject of
where to draw the line between copyright and patent law protection for computer programs. See e.g.,
“The Relative Roles of Patent and Copyright in the Protection of Computer Programs,” 17 J. Marshall
J. Computer & Info. L. 41 (Fall 1998).
9 Communication of the European Commission to the European Council, the European
Parliament and the Economic and Social Committee, February 5, 1999 COM (1999) 42.
10 In 1996, the United States Patent and Trademark Office issued its Examination Guidelines for
Computer-Related Inventions, 61 Fed. Reg. 7478 (1996), which indicate that if the practical use of an
abstract idea is patentable, subject to the denial of protection for scientific principle, then its
disembodied instruction (expressed on a tangible media) is patentable, because patents provide
control over the making of an invention and functionally descriptive computer instruction serves that
purpose. The Japanese Patent Office published, in 1997, the Implementing Guidelines for Inventions
in Specific Fields, Chapter 1 of which contains examination guidelines for computer software related
11 409 U.S. 63 (1972)
12 437 U.S. 584 (1978)
The Supreme Court changed its direction in 1981 when it ruled in Diamond v. Diehr 13 and
held that a physical machine or process which makes use of a mathematical algorithm is
different from an invention which claims the algorithm, as such, in the abstract. Thus, if an
invention as a whole meets the requirements of patentability—that is, it involves
"transforming or reducing an article to a different state or thing"—it is patent-eligible, even
if it includes a software component.
It is believed widely that in 1998, the Federal Circuit finally rejected the “business method”
exception and extended patent protection to business methods in its decision in State Street
Bank v. Signature Financial Group14. That decision upheld a patent on a “Data Processing
System for Hub and Spoke Financial Services Configuration” automated data processing
system that used a series of calculations to transfer assets among a pool of mutual funds.
The court stated that it would be inappropriate to prevent an otherwise patentable
invention from being issued a patent simply because it is implemented using a computer.
This landmark decision resulted in the court extending patent protection to business
methods that used computers.
Most recently, in 2005, it was ruled in Ex Parte Lundgren that a business method is not
required to apply, use, involve, or advance the “technological arts” in order to be patented.
Thus, a business method can now be patented regardless of whether or not it must be
carried out on a computer.
5.3.3 THE IMPORTANCE OF BUSINESS METHOD PATENTS
Business method patents are extremely important to the companies that use those
methods. The patents serve as a form of legal protection for the investments companies
make to develop new and original business models.
It allows companies to-
Prevent competitors from copying ideas without permission and compensation.
Allow the patent holder to sue infringers for damages and obtain injunctions to stop
Amazon prevailed against Barnes & Noble for infringing on its “1-Click shopping” patent,
while EBay lost a lawsuit to MercExchange, who claimed that EBay's “Buy It Now” system
infringed on patents held by MercExchange. These cases serve as an important lesson
showing that businesses must be aware of existing business method patents before putting
innovations to use in the marketplace.
The current case law (In re Bilski15) requires that a method for doing business must be tied
to a particular machine (e.g. computer) or transform matter. The court refused to adopt a
test that barred business methods, under that rubric, from patent-eligibility. Also, while the
court stated that the machine-or-transformation test was the applicable test, the Supreme
Court in Benson had stated that there could be cases where a claim that fails the
13 450 U.S. 175
14 149 F.3d 1368
15 545 F.3d 943, 88 U.S.P.Q.2d 1385
"requirements of [its] prior precedents" may still nonetheless be patent-eligible subject
matter. Benson, 409 U.S. at 71. Similarly, software could not categorically be excluded. The
court also stated that future developments may alter the standing or the application of the
5.3.4 BUSINESS METHODS UNDER VARIOUS JURISDICTIONS
There is no general prohibition on the patentability of business methods in Australia. Their
patentability is determined by applying the tests used to determine the patentability of any
type of invention.
In a recent decision, Grant v Commissioner of Patents  FCAFC 120, , the Full Court
of the Federal Court of Australia held that a business method will only be patentable if it has
a physical aspect, being a concrete, tangible, physical, or observable effect or phenomenon.
Accordingly, 'pure' business methods, being those that do not have a physical aspect, are
not patentable in Australia.
However, it has been suggested that Grant v Commissioner of Patents was wrongly decided
because the court failed to properly apply the existing law as set out in the decision of the
High Court of Australia in National Research Development Corporation v Commissioner of
Patents (1959) 102 CLR 252 and that the court should not have imposed a physical aspect
A business method must be more than an abstract idea or theorem, otherwise it is not
patentable in Canada. In order to be patentable, the business method must have a practical
However, a business method that is an abstract idea does not become patentable merely
because it has a practical application. For example, a particular business method that is an
abstract idea does not become patentable merely because it is programmed into a
computer as an algorithm. For a business method to be patentable, the algorithm cannot be
the whole invention, but only one aspect of a novel combination. See Amazon.com, Inc. v
The Attorney General of Canada, 2011 FCA 328, November 24, 2011
126.96.36.199 EUROPEAN PATENT CONVENTION
Under the European Patent Convention, "Schemes, rules and methods for (...) doing
business" are not regarded as being inventions and are not patentable, "to the extent that a
European patent application or European patent relates to such subject-matter or activities
But if a new method solves a technical, rather than a purely administrative, problem then it
may indeed be patentable. (For example, an improved design of letter-franking machine).
In Japan, business methods are well recognized and accepted as patentable subject matter.
The legal standard used to assess whether a business method is patentable requires that
inventions be "a highly advanced creation of technical ideas by which a law of nature is
Patents are not issued solely for business methods. The business method must contain a
technical aspect that is both tangible and real.
However this requirement may be satisfied simply by specifying that the method is
implemented using a computer.
188.8.131.52 UNITED STATES
There is no exclusion for methods of doing business under US patent law. Patent
applications for methods of doing business are examined using the same standards as any
5.3.5 WHAT IS A PATENTABLE BUSINESS METHOD?
A patent is generally a new invention protected by a grant given by the government. For
business methods, patents can be granted where the method directly involves a physical
form or device to bring about a ‘useful product’. That is, the application of technology for
automation of a business method (e.g. computerised accounting, monitoring, reporting or
analysis systems) must be directly involved with the creation of the ‘useful product’ in a
substantial, rather than incidental, way.16A business method patent can be generally
construed to be a patent whose claims cover a method or system for performing a sequence
of steps which involve some aspect of automation.17
The case of State Street Bank & Trust Co v. Signature Financial Group Inc Case (1998)18 is a
pioneering case that gave business method patents a place of its own under the “Utility
Patent” Category. Here, the State Street Bank had devised a new type of financial
instrument, namely a method of calculating the net asset value of mutual funds. In addition,
the case of Eolas Technologies Corp and the Regents of the University of California v
Microsoft19 is a classic example of business method patent. In 2005 the case came before
the Federal Circuit in the USA, it involved a method for automatically invoking external
applications, providing interaction and display of embedded objects within a hypermedia
document. The Court addressed the main question of patentability under the United States
Code20, and explained that an invention includes ‘any new and useful process, machine,
16 Patents for Business Methods, IP Australia, available at: <http://www.ipaustralia.gov.au/get-the-
right-ip/patents/about-patents/what-can-be-patented/patents-for-business-methods/ >(Last visited 25
17 Albert L Jacobs Jr., Business Method Patents in The United States, 2 Convergence 86 2006
18 State Street Bank & Trust Co v. Signature Financial Group Inc 47 USPQ2d 1596 (Fed. Cir. 1998)
19 Eolas Technologies Corp and the Regents of the University of California v Microsoft 399 F3d 1325
20United States Code, 35 U.S.C. §101
manufacture or composition of matter’, stating that, without question, software code alone
qualifies as an invention eligible for patenting, at least as processes.
In a more familiar case i.e. the ‘Blackberry Case’ or the NTP, Inc v Research In Motion, Ltd21,
in which the Federal Circuit held that even though one of the process steps was in fact
conducted outside the United States rim, it was still guilty of infringement of the NTP
patents in suit.
5.3.6 LATEST DEVELOPMENTS OF BUSINESS PATENTS IN AMERICA
The Federal Circuit in America states that business methods as patentable as it is evident
from the case of CLS Bank Int’l v. Alice Corp. Pty., Ltd. The appeal court resolved that claim
for patenting a method, system and computer-readable medium to exchange obligations
between first and second parties via an adjustment of respective electronic account records
qualify for patent protection.22The main issue at present is the challenge of patenting,
enforcement and validity business methods which comes in the form of a Post-Grant Review
(PGR). President Obama instituted widespread changes in the U.S. patent law on September
16, 2011 by signing the America Invents Act (AIA). One set of provisions for Post Grant
Review (PGR) went into effect on Sept. 16. However, the true effective date of PGR is March
16, 2013 based on “first-to-file” requirements in AIA.23
5.3.7 BUSINESS METHOD PATENT IN INDIA
Section 3 of the Indian Patent Act states what are not inventions, subsection (k) states “a
mathematical or business method or a computer programme business methods per say and
algorithms” , thus business methods are not patentable per se but they are patentable if a
new method solves certain ‘technical’ problems or when and a system is involved.
Furthermore, in the case of Yahoo v. Controller, and Rediff24, Yahoo wanted to patent “A
method of operating a computer network search apparatus” however, the Intellectual
Property Appellate Board (IPAB) differentiated between “Indian patent laws” and “foreign
patent laws” it was re-emphasized that pure business methods are not patentable in India.
The IPAB rejected Yahoo’s application due to lack of novelty in accordance with section 2(1)
(j) and failing to comply with section 3(k).
5.4 AMAZON ONE-CLICK PATENT
One-click is an innovation made by Amazon where customers could purchase products
online with just once single click. In September 1999 the United States Patent and
Trademark Office (USPTO) issued US 596041125 for this technique to Amazon.com. Apple
21 NTP, Inc v Research In Motion, Ltd 418 F3d 1282
22 Susan Perng Pan, Business Method at the Dawn of Patent Reform: How the American Invents Act
will Impact Financial Services Patents, Bloomberg Law, available at:
financial-services-patents/> (Last visited 25, February, 2013)
24 Intellectual Property Appellate Board, Judgment available at: <http://www.ipab.tn.nic.in/222-
2011.htm>(Last visited 25, February, 2013)
25EspaceNet: Patent Search, available at:
Computer now Apple Inc in 2000 got the licence from Amazon.com for use on its online
store and subsequently added it to its iTunes store and iPhoto.26 Which is only available to
the U.S due to legal issues abroad with respect to Amazon’s 1-click patent which is purely a
business method patent.
The patent office at Europe27 however, never granted the patent to Amazon. The EPO
Appeal Board rejected Amazon patent application (EP01113935.9) claiming that its famous
“1-click” ordering method lacks an inventive step.28
5.5 PRICELINE REVERSE AUCTION PATENT
Priceline is a demand collection system which was later termed as reverse auction patent by
the reporter of the New York Times to which Jay Walker the inventor of Priceline never
forgave the reporter for naming it that way as he claimed the invention had noting to do
with auctions.29 The issue of Priceline.com Incorporated v. Microsoft Corporation and
Expedia, Inc30 came before the Federal Circuit Court where by Expedia had copied the
business method of Priceline.com.
Priceline.com has since August 1998 held a patent for its reverse auction business method
which allows visitors to its site to an internet service called “Name Your Own Price” when
buying airline tickets, hotel rooms and other services.
Expedia.com, owned mainly by Microsoft, offers a similar price-matching service. There was
a public debate about whether business software patents can be patented or not.
Thus, Priceline filed a suit against Microsoft’s company Expedia for using its patent
The court looked at 35 U.S.C. § 101 which sets out four main categories of technical subject
matter for which utility patents can be granted, these are “process, machine, [article of]
manufacture, or composition of matter,” usually termed "the statutory classes.” This means
that the claims must define the “invention” and a method for using a computer to facilitate
a transaction between a buyer and sellers.
26 Terms of Sale, available at:
27 EPO revokes Amazon’s “Gift Ordering” Patent after opposition hearing , available at:
28 A copy of the Amazon patent application rejection by the EPO is available at:
29 Stephen Kensella, Jay Walker on Patents, 6 August 2009, available at,
30 Priceline.com Incorporated v. Microsoft Corporation and Expedia, Inc., Case No. 399CV1991
The court also examined Priceline’s technological aspects of inputting into the computer a
conditional purchase offer which includes an offer price; and the apparatus for facilitating a
transaction between a buyer and at least one of a plurality of sellers which comprises of a
Section under 35 U.S.C. § 207 stating the domestic and foreign protection of federally
owned inventions set out one of the tests for Priceline to which patent 207 was granted to
Furthermore, it is stated that “Priceline.com invested years of time and money to develop a
successful business model and build a patent portfolio around it”. Microsoft’s Hotel Price
Matcher is a copycat service to that of Priceline. However the case ended in a settlement
where Expedia agreed to pat priceline.com royalties for using its invention.
This case proves that business method can be patented in the USA provided that it fulfils the
conditions under 35 U.S.C. § 101 and 35 U.S.C. § 207 and It needs to be proved to be an
invention in order to qualify for a patent
5.6 PATENT LITIGATION – THE STATE STREET CASE TO BILSKI
On April 10th, 1997 the applicant Bilski filed a patent application for a business method
of hedging risks in commodities trading which were sold at a fixed price. As per the case files
it is disclosed that energy consumers face two kinds of risk: price risk and consumption risk
(specification, p.1). The proliferation of price risk management tools over the last 5 years
before the filing date allows easy management of price risk.
However the patent examiner rejected the claims with the reason that “the invention is not
implemented on a specific apparatus and merely manipulates [an] abstract idea and solves a
purely mathematical problem without any limitation to a practical application, therefore,
the invention is not directed to the technological arts.”
The applicants then appealed to the Board of Patent Appeals and Interferences (BPAI),
which affirmed the rejection.31 The applicants finally appealed the rejection to the Supreme
In the summer of 2010 the Supreme Court in its decision the case of Bilski v. Kappos32 four
of nine Justices suggested that business methods should never be patentable thus opening
31 Board of Patent Appeals and Inferences, Rejection of Bilski’s Patent claim, available at:
<http://www.uspto.gov/web/offices/dcom/bpai/its/fd022257.pdf> (last visited 25 February, 2013)
the issue of patenting business method for future debate. The test before the court was
based under 35 USC 101 which offers patent protection for “any new and useful process,
machine, manufacture, or composition of matter.” In this case, the focal point what kind of
“process” is patentable.
The Supreme Court affirmed that Bilski’s risk-management method is an abstract innovation
similar to that of mathematical algorithms the kind of invention that may not be patented.
The court simply relied on prior precedent to find the claimed method un-patentable
abstract rather than using the Federal Circuit's “machine-or-transformation test”
The full bench of Supreme Court however agreed upon one thing and stated that: “Today,
the Court once again declines to impose limitations on the Patent Act that are inconsistent
with the Act’s text. The patent application here can be rejected under our precedents on the
unpatentability of abstract ideas.”
Although Bilski’s patent application were rejected and held un-patentable abstract, the
Supreme Court has affirmed that patent eligibility should remain broad and open for future
developments on inventions.
Current case law (In re Bilski) requires that a method for doing business must be tied to a
particular machine (e.g. computer) or transform matter. This case law, however, is under
review by the US Supreme Court. In oral arguments presented in November 2009, the
justices of the Supreme Court seemed sceptical of the plaintiff's arguments that a business
method did not have to be tied to a machine. The Supreme Court decision in Bilski v.
Kappos on June 28, 2010 ruled that Bilski's patent was not valid. However, the decision was
widely criticized for resolving the immediate problem with Bilski's business method patent
while offering little guidance on the actual issue of business method patentability.
Ultimately, the court rejected the more 'bright-line' test proposed by the federal circuit as
too rigid and resolved the question by restating the statute's broad goals. Therefore,
business methods continue to be patentable subject matter; however, the question remains
as to how exactly to decide that patentability.
On average, the USPTO will issue 20 rejections for every allowance. Patent applications in
more conventional technologies, such as electrical connectors will only get 2 rejections for
32 Bernard L. BILSKI and Rand A. Warsaw v. David J. KAPPOS, Under Secretary of Commerce for
Intellectual Property and Director, Patent and Trademark Office, 130 S. Ct. 3218 (2010)