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Business Methods Patents: A Key Part of American Patents from 1790 to Today

The omnibus FY2021 appropriations bill omits language that special interests wanted badly. A concerted lobbying effort has sought to convert the Transitional Covered Business Method program at the Patent Trial & Appeal Board into a longer, if not permanent, regulatory tribunal at the U.S. Patent & Trademark Office for canceling issued patents.

Also, today is the anniversary of a business method patent issuing in 1891 to Levy Maybaum for his invention of a new method for businesses to be secured against financial losses caused by defaults on debts (see picture below).

The Transitional CBM program has long been a poster child for the “death squad” label earned by the PTAB. The Transitional CBM program instituted administrative hearings almost 85% of the time, and its patent cancellation rates averaged around 98%. This particular administrative tribunal sunset on September 16, and despite last-minute efforts to keep it going, it was right to let it cease operations—with the PTAB continuing to decide thousands of petitions in its several other administrative review programs.

The Transitional CBM program was the only PTAB review program created in the America Invents Act of 2011 with a sunset provision. This was no accident. As USPTO Director Andrei Iancu has recognized, the Transitional CBM program contradicted the fundamental technology-neutrality principle of the U.S. patent system. This principle has been key to the success of our patent system in securing reliable and effective property rights in all new inventions that have driven growth and jobs in the U.S. innovation economy for two centuries—including business methods.

Lobbyists used a rhetorical ploy in their continuing efforts at reviving the Transitional CBM program—seeking to raise it from the grave like a zombie to eat the fruits of the intellectual labors of innovators—claiming business method patents are a recent judicial creation. Many point to the Federal Circuit’s 1998 decision in State State Bank & Trust Co. v. Signature Financial Group, Inc. as having created these patents out of whole cloth. This is deeply mistaken, as scholars have repeatedly shown.

Importantly, Maybaum’s 1891 patent was neither an outlier nor a mistaken issuance by the Patent Office (as the USPTO was called back then). Professor Michael Risch laid to rest this policy canard in his extensive historical survey of the first U.S. patents that issued to inventors between 1790 and 1839. His findings are truly significant.

To set the necessary background context, it is important to remember that business methods are secured under patent law as “processes.” Inventions of new processes have been secured under the U.S. patent system since the first Patent Act of 1790 (identified legally as an “art” at the time). The first U.S. patent was issued to Samuel Hopkins for his invention of a new process for making potash.

This protection of processes was but one example of many of how the U.S. patent system diverged from the English patent system. England did not secure processes to inventors at that time. The United States instead adopted a private property rights system in which it secured to all inventors the fruits of their productive labors. (England changed its patent law in 1840 to permit the patenting of processes.)

In his first-hand study of the U.S. patents that issued between 1790 and 1839, Professor Risch found that 12.58% of total U.S. patents were for invented processes. The highest ratio of process patents was between 1790 and 1793, which was under the original examination review panel of Henry Knox, Edmund Randolph and Thomas Jefferson. (This is significant if only because Jefferson is known today as a patent skeptic.) Of the 12.58% of patents on processes that issued between 1790 and 1839, Professor Risch found that 7.16% were for what we would now classify as business methods. Patents on business methods continued to issue after 1839, such as Maybaum’s patent in 1891.

Thus, patents on new and useful business methods were not a novel creation by the Federal Circuit in 1998 with its State Street decision. The patenting of business methods is deeply rooted in the birth in 1790 of the unique American patent system that secured property rights in the fruits of inventive labors of all innovators. In the famous words of economist Zorina Khan, the U.S. patent system “democratized invention.” The rest is history: an explosion in effective and reliable property rang in innovations that became the drivers of the Industrial Revolution in the 19th century, the computer and pharmaceutical revolutions of the 20th century, and the biotech and mobile revolutions of the 21st century.

The attack today on business method patents is one battle in a larger campaign by Big Tech and patent skeptics in attacking patents on computer software programs. Of course computer software programs are inventions equally deserving of patent protection in today’s digital revolution as much as the analog machines of the Industrial Revolution. The now-defunct Transitional CBM program confirmed this policy agenda.

The Transitional CBM program improperly broadened its statutory mandate to include within its regulatory reviews patents on computer software programs, even when it was clear these were not so-called “pure” business method inventions. In one notorious case, the Transitional CBM program canceled patents on novel inventions of graphical-user-interface computer software programs used by brokers in commodities markets.

The sunsetting of the Transitional CBM program has brought a modicum of the rule of law back to the U.S. patent system at the PTAB. This program rightly came to an end in September—it should never have been created in the first place. Congress should reject any future efforts to raise it from the dead.

Adam Mossoff is a patent law expert at the Antonin Scalia Law School at George Mason University, a Senior Scholar at the Hudson Institute, and a Visiting Intellectual Property Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation.

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