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The U.S. Court of Appeals for the Federal Circuit effectively opened the door to business method patents in State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368 (Fed. Cir. 1998). Since that decision was issued in 1998, the number of patent application filings for business methods has increased exponentially: from substantially fewer than 1,000 annually before 1998, to 2,821 in 1999 and 7,800 in 2000 (2.6 percent of all applications filed that year). To date, the number of applications filed in fiscal year 2001 is 18 to 20 percent higher than in 2000. The U.S. Patent and Trademark Office (PTO) has been endeavoring to effectively examine the wave of new patent applications for business methods. In fiscal year 2000, the PTO granted 899 such patents, which is only 0.5 percent of the approximately 165,000 patents granted that year. Nevertheless, certain commentators, businesses and members of Congress have called for steps to ensure that these patents meet the inventiveness requirements of the patent laws. SeeBrenda Sandburg, “Patent Office Approves Fewer Business-Method Applications,” N.Y.L.J., Dec. 21, 2000, at 5; Nicholas Groombridge and Christopher Loh, “Congress Takes Aim at Business Method Patents,” N.Y.L.J., March 6, 2001, at 1. BUSINESS METHOD PATENT IMPROVEMENT ACT PROPOSED On April 3, representatives Howard Berman, D-Calif., and Rick Boucher, D-Va., introduced a bill titled “The Business Method Patent Improvement Act,” H.R. 1332, to improve the PTO’s handling of business method patent applications. The bill seeks to impose new substantive and procedural hurdles specific to business methods. Meanwhile, the PTO has been working to improve the quality of examination of business method patent applications by implementing the “Director Initiatives” that it announced in March 2000. Seewww.uspto.gov/web/offices/ com/sol/actionplan.html. The initiatives included a new second-level review of business method patent applications. See“PTO to Add Additional Layer to Reviews of Electronic-Commerce Business Methods,” 59 Pat. Trademark & Copyright J. (BNA) 710 (2000). Under this “second look” procedure, the PTO has issued significantly fewer business method patents. This article briefly reviews the status of the law regarding business method patents, summarizes the bill recently introduced in Congress and examines the PTO’s progress in handling business method patent applications. In the landmark State Streetcase, the district court had observed that the claims to managing a mutual fund did not meet patentability requirements of then-existing precedent because they defined no physical transformation or “physicality.” State Street Bank & Trust Co. v. Signature Financial Group Inc., 927 F. Supp. 502 (D. Mass. 1996) (quoting Lawrence Kass, “Computer Software Patentability and the Role of Means-Plus-Function Format in Computer Software Claims,” 15 Pace L. Rev. 787 (1995)). On appeal, the Federal Circuit broke new ground, holding that business methods are patentable. Although State Streettechnically did not involve methods, but, rather, apparatus claims that are presumably “physical,” the Federal Circuit extended its rationale to process/method claims the next year in AT&T Corp. v. Excel Communications Inc., 172 F.3d 1352 (Fed. Cir. 1999), and expressly held that “physical transformation” is not an invariable requirement. Since then, only a few cases have addressed business method patents. In Interactive Gift Express Inc. v. Compuserve Inc., 56 U.S.P.Q.2d 1647 (Fed. Cir. 2000), the Federal Circuit construed claims for making purchases over the Internet. In Amazon.com Inc. v. Barnesandnoble. com Inc., 239 F.3d 1343 (Fed. Cir. 2001), the Federal Circuit reversed a preliminary injunction upon finding substantial questions about the validity of Amazon.com’s patent for one-click ordering. See also“Technology Briefing: E-Commerce: Microsoft-Priceline Dispute Settled,” N.Y. Times, Jan. 10, 2001, at C7 (dispute over travel services Internet patent). PROVISIONS OF THE BUSINESS METHOD PATENT BILL Congress made news last term when Messrs. Berman and Boucher introduced in October 2000 their Business Method Patent Improvement Act, H.R. 5364. On April 3, the two representatives reintroduced a substantially similar bill with the same name. H.R. 1332. They offered the proposed legislation to address concerns of a growing number of major U.S. technology companies, many of which initially advocated business method patents but now decry some of the broad ones that have issued. For example, the British Telecommunications patent for hyperlinking and the Amazon.com one-click patent have been criticized. See Sandburg, supra; Groombridgeand Loh, supra. The bill proposes, solely for business method patent applications, post-grant oppositions; publication of applications after 18 months; a requirement that applicants disclose their prior art searches; a reduced burden to prove invalidity, from “clear and convincing evidence” to “preponderance of the evidence”; and a presumption of obviousness for computer-implemented business methods that combine or modify prior art references. The first two provisions may receive some support in Congress, which last year incrementally moved toward European-style post-grant oppositions by instituting inter partes PTO re-examinations ( see“Scholars, Government Representatives Explore Business Method Patents,” 61 Pat. Trademark & Copyright J. (BNA) 11 (2000)), and required that all patent applications that are being filed in foreign countries be published after 18 months. The third provision may also receive some support, because the PTO has already asserted authority under 37 C.F.R. 105 to request applicants to disclose their prior art searches, as described below. The last two provisions may meet greater resistance because they propose radical, subject-matter-specific changes to how patentability and validity are substantively reviewed. At the very least, there is concern that these two provisions could be evaded by clever drafting. All of the provisions may receive some criticism due to their singling out of specific subject matter for special treatment. To address at least some of this criticism, the two representatives have introduced a companion bill to establish an opposition procedure for challenging not only business method patents, but also any other granted patent. H.R. 1333 (April 3, 2001); see also“Bill Introduced to Tighten Procedures for Issuing Business Method Patents,” 61 Pat. Trademark & Copyright J. (BNA) 539 (2001). PTO’S DIRECTOR INITIATIVES INCLUDE SECOND-LEVEL REVIEW In March 2000, the PTO issued Director Initiatives to ensure that business method patent applications meet statutory requirements. Seewww.uspto.gov/web/offices/ com/sol/actionplan.html. For all such applications, the initiatives required searching issued patents, electronic patent databases, foreign patent documents and nonpatent literature (NPL) databases. The initiatives also established a search-strategy advisory panel consisting of senior examiners and search experts with whom examiners may consult. Perhaps most significant is the second-level review. This review is to ensure that search requirements are met for each allowed application; that reasons for allowance are identified; and that the claim scope is appropriate. The PTO held its Inaugural Business Methods Partnership Meeting on March 1. It discussed the March 2000 initiatives and reported that it had formed Technology Center 2100 (TC 2100) on Oct. 1, 2000, as a home for the groups that examine business method patent applications — classified under PTO Class 705. Class 705 is divided into seven “art units” focusing on different industries. In total, 75 patent examiners are now devoted to Class 705. Many of the TC 2100 examiners have advanced or multiple degrees, including law degrees, Ph.D.s, masters’ degrees and MBAs. The center also has new special program examiners to handle special cases and two additional quality-assurance examiners to implement the second-level review. In addition, the PTO has received industry feedback and has formed partnerships with more than 20 organizations to promote objectives such as examiner training, internships and formulating search strategies. TC 2100 has instituted a template that mandates a search of U.S. patent documents in the class/subclass of the invention, a database search of U.S. and foreign patent documents and a search of NPL in identified areas. Examiners may also search U.S. patents in other classes, reference texts and manuals, other published documents, other NPL collections and Internet sites. Examiners must record search queries to ensure that, if a patent issues, the public will know what was searched and considered. Examiners must identify the best art, why the reference was identified and any other sources relied on. As the PTO stated at the partnership meeting, examiners must also identify the “precise” reason(s) for allowing any application “without unwarranted interpretations,” and at least one major difference from the closest prior art. For each independent claim having different scope and features, examiners must identify separate reasons for allowance. The group director for TC 2100 has indicated that the group shall also begin using PTO Rule 105, which allows examiners to request information from applicants. In particular, the rule authorizes examiners to ask for information that may be reasonably necessary to properly examine an application. Although the rule is generally applicable, the PTO expects it to be particularly helpful in examining business method patent applications. Requests for information under Rule 105 will be directed to individuals identified under Rule 1.56(c), e.g., any individual involved in preparing or providing information for an application (37 C.F.R. 1.56 (2000)) or any assignee. The potential scope of inquiry is broad. 37 C.F.R. 105 (a)(1) (2001). Examiners may inquire about commercial databases known to the applicant, searches by the applicant, public references used in drafting the application, improvements and any known uses at the time of filing. Examiners are instructed to define narrowly the scope of a request to minimize its burden because, as the PTO stated at the partnership meeting, Rule 105 “does not authorize a fishing expedition.” Moreover, examiners must obtain prior supervisory review and approval before making a request. A request should be made only after a thorough search and not routinely. It should generally accompany a first rejection on the merits. But it may also issue separately — for example, when the examiner is having difficulty locating relevant prior art. In any event, the request should state why it is reasonably necessary. An examiner may not use a Rule 105 response to make the next action a final rejection, unless the rejection is necessitated by an applicant’s amendment. If an applicant believes that the examiner is misusing Rule 105, it may petition for relief under 37 C.F.R. 1.81. THERE IS AVID INTEREST FROM SEVERAL QUARTERS Congress and the PTO are both working to determine how best to handle business method patent applications. Consumers, industry and the Federal Circuit all have a strong interest in their success. As foreign patent offices begin confronting the same issues, they may also look to the PTO, Congress and the Federal Circuit. SeeTamara Loomis, “Business-Method Patents; While Increasingly Common in U.S., Not So in Europe,” N.Y.L.J., Jan. 4, 2001, at 5. The PTO’s approach promises to improve the examination process and, it is hoped, will address industry and public concerns without creating new ones. Christopher E. Chalsen is head partner, and Lawrence T. Kass is an associate, in the intellectual property group at New York’s Milbank, Tweed, Hadley & McCloy. Chalsen can be reached at [email protected]. Kass can be reached at [email protected]. While at another firm, Kass represented MasterCard International Inc. as amicus curiae in the State Streetappeal to the Federal Circuit. The U.S. Patent and Trademark Office, and particularly Wynn Coggins, industry outreach coordinator for Technology Center 2100, provided comments and materials used, with permission, in this article.

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