INTRODUCTION

As the airplane’s utility spread to the public sector, the 1940’s witnessed the sky’s transformation into the new highway. Like any new frontier and innovation, there was a need for regulation and legal guidance. Fortunately, property law had covered the topic since the 18^th century. Cuius est solum, eius est usque ad coelum et ad inferos, whoever owns the soil, it is theirs up to Heaven and down to Hell.[1]The Supreme Court however did not agree with such dated application.[2]The court reasoned that categorizing air travel with ground travel under current property law would be naive. The two categories possessed different interest and policy consideration. Unification of the two, under traditional property laws, would essentially defeat air travel’s value and purpose. Such application had “no place in the modern world”[3].  The court made it clear that new innovation required new regulation and new legal guidance. Instead of fitting innovation into the law, new laws are created to fit innovation.

To promote, and protect innovation, for years American inventors have relied on the system of intellectual property and the patent system. The patent system, a once humble and optimistic institution, has evolved far beyond its beginnings. When the last patent act was passed over a half a century ago, aspirations were high. The 1950’s saw an innovation boom that inspired some of the most integral foundations for modern technology.[4]  Proponents of the patent system promoted exposure and accessibility for innovation, while discouraging concealment and private use.[5] Assuming the excitement of the era, congress eagerly looked to protect “anything under the sun that is made by man”.[6] However with the eruption of financial and software innovation in recent years, one would be hard-pressed to find the 1950’s anything-and-everything sentiment in today’s patent office.  

In the eyes of the patent office, financial and software innovation is commonly referred to as a business method.  Subject to 35 U.S.C §101 and classified under Class 705, a business method patent is “the generic class for apparatus and corresponding methods for performing data processing operations.”[7] Software is a set of logical instructions, intended for a computer, made to perform computations, comparisons and sequential steps in order to process and produce a desired output.[8]Financial innovation, centuries older than software, began as basic mathematical principles.[9] Contemporary financial innovation however, has grown to enormous complexities. Fashioned from a set of multifaceted mathematical algorithms, the innovations have become so advanced that it is near impossible to solve without the aid of a computer.[10] Essentially, in the law’s view, today’s financial innovation is software.[11]

The business method has conflated financial and software innovation under the association of complex algorithms. While under a legal lens software and financial algorithms are near inseparable, the makings and interests of their respective innovations are however quite different. For instance, a large internet corporation may attempt to patent an online shopping method for common consumers;[12] while a large financial firm may attempt to patent a system of asset pooling for large mutual funds.[13] From the components that build the algorithm, to the industries effected by the patents, it is difficult not to acknowledge the distinctions between the two scenarios. The current patent system however does not recognize such distinctions. In both scenarios the algorithms are to be evaluated as business method patents.

Because of the realistic distinctions between financial and software innovation, formulating a cohesive judicial policy for the business method would seem destitute. Patent litigation over the past forty years has been frustrated with judicial attempts to reconcile both financial and software innovations under the business method patent. The most recent efforts in the ongoing business method saga produced the Abstract test for patentability assessment. The Abstract test was created by the Supreme Court’s ruling Bilski v. Kappos.[14] While the test is still in its early stages of development, lower courts have been hard pressed to reconcile financial and software innovation under the business method using the Abstract test.[15]

History has produced an ambiguous interpretation of financial and software innovation that fails to fit the enthusiastic “anything under the sun” patent system of the 1950’s. It is clear that the development of financial and software innovation has outgrown the traditional business method classification. The business method has “no place in the modern world”[16] and needs categorical disaggregation among financial and software innovation. Disaggregation would not only better serve the time and principles that each innovation represents, but simplify the Abstract test while preserving its purpose.

This article will examine the necessity for the disaggregation of the business method.  The first section will evaluate the judicial history and evolution of the business method leading up to the Bilski decision. The second section will discuss the Bilski decision and the Abstract test. The third section will contemplate the current future of the Abstract tests. The last section of the article will discuss how the business method and the Abstract test can be clarified in disaggregating the business method into financial and software innovation.

I.  HISTORY: THE GUIDEPOSTS: 1972-2008

The history of contemporary algorithmic innovation began in the 1970’s when the Supreme Court twice considered business method patents. Both decisions held the innovations unpatenable.  The first decision, Gottschalk v. Benson, was decided in 1972.[17]The Supreme Court considered whether algorithmic based software for converting binary code was  patentable. In a six justice majority, the court held the method unpatenable, unless “in connection with a digital computer”, because it “would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself”.[18]The decision confirmed that algorithms, made akin to software by the court, standing alone, were unpatenable subject matter.  [19]

While algorithms alone were unpatenable, the question existed of whether bringing a physical component into the application would preclude a patentability.  Six years after Benson, the Supreme Court returned to the business method issue and addressed such question. InParker v. Flook, the Supreme Court considered whether an algorithmic based method for triggering an alarm system, used to signal irregular conditions in a catalytic conversion process, was patentable.[20]In a seven justice majority, the Court held the innovation unpatenable. Although the alarms inclusion meant the innovation wasn’t wholly algorithmically based, the majority realized the only novel element in Flook's innovation was the algorithm itself.[21]  It would have appeared that the patent system’s hole had been filled. The courts would not be fooled by crafty lawyering and mirrors attempting to hide an algorithm amongst physical components. After Benson and Flook, it appeared software and algorithms, were to be treated like any other mathematical formula, unpatenable.

Hopes of patenting an algorithm under the business method reemerged only four years later in the Supreme Court case Diamond v. Diehr.[22]Once again an application was presented, part physical, part algorithm. The invention used the Arrhenius Equation to calculate the operation timing on a physical rubber press. As the rubber curing process stood well known in the industry, clearly the only new innovation in the patent application was the algorithm itself.[23]However, in a five justice majority, the application was deemed acceptable. Arguably marking the first time an application containing software was considered statutorily patentable. Although the rulings in Benson and Flook were not overruled by the Diehr decision, it appeared that the physical component ambiguities after Benson had not truly been resolved.

After Diehr, the patent system became a virtual wild west. Floods of “ridiculous and truly absurd” business method applicants were submitted to the patent office.[24]The era was epitomized with a 1994 application from the software titan IBM.[25]The invention set out a group algorithms loaded onto a physical readable storage device. The physical component that was able to pass muster under Benson and Flook, a floppy disk. The application’s approval gained such recognition that it was even endowed its own business method idiom, a Beauregard claim.[26]After dilution of the Flook’s unpatenable ruling, the despondent future of the business method patent herald through the financial and software communities.[27]

 The circular timeline of judicial clarification surfaced once again in 1998 with the case of State Street v. Signature Financial Group.[28]The court found Signature Financial’s financial purposed algorithm, one that moved assets into mutual funds to take advantage of tax benefits, to be patentable.   The State Street holding marked two significant chapters in business method history. The first was the court’s explicit recognition of the business method patent.[29]The court found that such a category was no less patentable than any other subject matter under Section 101. State Street’s judicial endorsement of the business method patent, once again, propagated a flood of financial and software patent applications.[30]The second major significance of the State Street decision was in the court’s clarification of business method eligibility. The court held that the new test for eligibility was to be the Useful, Concrete and Tangible Result test.  Although the test could hardly be awarded a bright line denomination, it marked the first judicial canon to reconcile Benson, Flook and Diehr. However, despite the court’s best efforts, the test still granted several questionable patents approval, many lacking any hint of a physical component.[31]

II. CREATION OF THE ABSTRACT TEST: IN RE BILSKI & BILSKI V. KAPPOS

Ten years after the State Street decision, judicial clarification poignantly returned to the Federal Court of Appeals. Finding an opportunity to reevaluate its holding in State Street and its significances over the past ten years, the court, sitting en banc, adjudicated In Re Bilski.[32]The court’s holding not only rejected State Street’s Useful, Concrete and Tangible Result test that had reigned supreme for ten years, but went as far to replace it with a new test for business method eligibility. The new test, the Machine-or-Transformation test, held that a business method patent was patentable subject matter if it 1) was applied by use of a machine, or else 2) transforms an article from one thing or state to another. Was the court’s new test a judicial endorsement of the Beauregard claim, or was it carefully worded to avoid the question of patentability with an additional physical component?  It would have appeared that, once again, the courts had clarified one complication, while subsequently creating another.

The thematic clarification of business method decisions past came to one of its most pivotal moments in 2009 when the Supreme Court granted writ of certiorari for Bilski’s appeal.[33]From Silicon Valley to Wall Street, software and financial innovators alike held their breath awaiting the decision. Mounting rumors held that the court would possibly eliminate the business method patent altogether.[34]While some justices of the dissent agreed with the business method’s eradication, the majority felt otherwise.[35]Delivered by Justice Kennedy, the majority opined, that business methods are indeed patentable; Bilski’s application however was not.

Bilski had developed a hedging algorithm to eliminate volatility in consumer energy costs. Using the Monte Carlo method and historical weather data, energy prices would be hedged with weather futures to lock in a more stable and predictable energy bill. The algorithm’s complexities went far beyond any pen and paper, and the necessity for a computer was evident. Although there was an implied necessity for a physical component (a computer), the majority still found the algorithm unpatenable. The majority reasoned that Bilski’s innovation was an abstract idea. Reiterating established ‘precedent’, as if such a rule were ostensibly written and obvious already, the court reasoned that business method patents are limited by “laws of nature, physical phenomena, and abstract ideas”.[36]The Machine-or-Transformation test developed in In Re Bilski was no longer to be a determinative test in patentability, but rather a “useful and important clue” to the inclusive Abstract test.[37]  The court continued to disregard the continuance of  other tests that have marked business method history through the years, declaring that “nothing in today's opinion should be read as endorsing the Federal Circuit's past interpretations of § 101. See, e.g., State Street.”[38]And in one sentence ten years of State Street and its progeny were erased.  

The Bilski Supreme Court failed to clarify a definition of their Abstract test, both in its criteria’s inclusions and omissions. The court rather left such task of interpretation to the lower courts in coming years, advising them on a case by case basis to return to the legal “guideposts”[39]of Benson, Flook, and Diehr. Justice Potter’s illustrious commentary rang ever present, “I can’t define it, but I know it when I see it”.[40] The business method was, once again, afflicted with yet another ambiguous interpretation.

III.  THE  CURRENT FUTURE OF THE BUSINESS METHOD

In patent applications to come, federal courts are left with the assignment of interpretation mandated by the powers above. Courts now sit in a post-Bilski era with the future of the business method patent in their discretion. While courts have taken time to acknowledge the inconclusiveness of the Bilski decision[41], others have used the opportunity to expand its meaning. In a recent decision by the Federal Court of Appeals, the eligibility of algorithms specifically was discussed.[42]Not surprisingly opting to use the ‘guidepost’ of Diehr, the court held that “algorithms and formulas, even though admittedly a significant part of the claimed combination, do not bring this invention even close to abstractness that would override the statutory categories and context”.[43]Even the most confident and charitable views of the Bilski decision and its progeny echo a notice of future complications, some which have already begun to surface. [44]

Verified by a circular history blemished with flaws, mistakes, and corrections, the current business method system’s stability is noticeably far from safe.  While financial and software innovation has slowly, over the years, conjoined in the eyes of the court under the business method, the culture and society of their respective subscribers is quickly diverging. Such policy considerations, which have all but been neglected in past business method decisions, must be recognized before history reprises itself.

In efforts of slowing the arbitrary attachment of physical components (Beauregard claims), the Supreme Court in Bilski retained the possibility that a purely intangible may gain patentability.[45]However, in a digital age, it is almost inherent that financial and software innovation will rely on a physical element, likely a computer. Even under the court’s pragmatic recognition of the times, Bilski’s Abstract test is still extremely comprehensive. Susceptible to a wide array of differing interpretations, in coming years the Abstract test is capable of rooting itself into case law far beyond its intended purpose, possibly precluding any software or financial innovation entirely. To better limit the scope to which the Abstract test reaches, its application should be tested to separate confines, software and financial innovation. The question ‘what is an abstract business method’ is extremely different than ‘what is abstract financial innovation’ and ‘what is abstract software innovation’. Because software and financial innovations are inherently different, from their components to the industries they affect, the Abstract test will take on different considerations when applied to each individually.

IV.  DISAGGREGATION: A SOLUTION

A.  FINANCIAL ABSTRACT TEST

The assertion that all mathematical formulas are made of components in existence, workings of nature that have yet to be discovered, is a naive assertion in light of contemporary financial innovation.[46]The quintessential example for the unpatentability of mathematical formulas is Einstein’s relativity formula.[47]Einstein did not invent the formula; he simply codified and arranged components of nature in an assignable formula. Mass, energy, and the speed of light all existed in nature eons before Einstein was even born. Although contemporary financial innovations are based in principles of mathematics, the components and interactions of the numbers in the algorithm can hardly be described as derivatives of nature.

Far from nature, financial innovations operate solely on man-made financial markets. The extent of financial innovation is limited to the markets and can only exclusively function on this man-made medium.[48]For example, Bilski’s use of weather futures in his algorithm would not have even been possible during the time of Diehr, Benson or Flook because weather futures existence has only been recognized on the market since 1996.[49]If the market or weather futures ceased to exist tomorrow, Einstein’s relativity formula would certainly still be comprehensible, Bilski’s algorithm would not.

Because market components and financial algorithms are not of nature, does not mean they cannot be natural relative to the market and its culture. Maintaining the ability to freely use the public utilities and its components has always been an essential consideration in patentability.[50]  This is where the Abstract test in financial innovation can differentiate itself from the Abstract test in software innovation. If a patent were to impede and dominate a natural market component from its intended purpose and use, then such patent would likely fail the Abstract test. The Supreme Court toiled with such reasoning but ultimately carried it in an unusual direction.

Bound to traditional business method policy considerations of both financial and software innovation, and unable to reflect financial market specifics, the Bilski court was forced to reason broadly. The court stated that Bilski sought to patent “the concept of hedging risk…hedging is a fundamental economic practice…allowing petitioners to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea”.[51]  Application of the court’s wide comprehensive view on any patent will ultimately render it an abstract idea. Can a machine for bending metal be unpatenable because bending is fundamental physical practice?[52]Instead of looking to whether patenting Bilski’s algorithm would have created a monopoly over a natural market strategy, the court should have looked to whether patenting Bilski’s algorithm would have created a monopoly over a natural market component. If Bilski’s algorithm positioned itself to inhibit the public use of weather futures, then the Abstract test would have denied patentability. If Bilski’s algorithm used weather futures in such a way that was useful, novel and non-obvious, while still allowing for its natural use in the market, then the Abstract test would have allowed patentability. Reducing any algorithm to its most basic functions will appear as attempts at privatization of a public utility and fail the Abstract test. Only when the court is given range to apply the Abstract test to the specifics at hand (i.e. financial innovation specifically) can it properly operate.

With such ambiguous decisions as Bilski, financial innovation in private industry has been strained. Over the past years financial innovation has given rise to high frequency, black box and the white box trading.[53]All three concepts revolve around the use of an algorithms operating millisecond market transactions, consistently adjusting to market reactions. While the extent of high frequency trading is generally unknown, the same cannot be said for its presence.[54]Uncertainties in the patent system’s protection have driven financial innovators into hiding. For fear of competitor plagiarism, private firms using algorithms are seldom to share their innovations with the world.[55]Because of a lack of protection, the utility and public benefit of some of these innovations may never be known. Consider the Black-Scholes model, the base for many contemporary algorithms, and arguably one of the most provocative financial innovations of the past century.[56]Once used as a secret investing tool, the algorithm’s utility now goes far beyond the financial sector (ironically one alternative use is in patent valuation[57]). Failing to provide a stronger outline to patentable criteria will only push innovators further into hiding, inhibiting any progress in financial innovation. 

The Abstract test applied separately to financial innovation would help facilitate reassurance in the patent system. The Abstract test for financial innovation would be tried against the interests of the market and private industry. Like any public domain, the market invites innovation as long as it does not inhibit the public’s use.[58]A patent application attempting to corner off a common public utility would be abstract. In the private industry’s interest, any application that would potentially destroy the opportunity for progress would be abstract. Evaluating abstractness in financial innovation separately would suit the patent system and innovation in a way the traditional business method system could not.

B.  SOFTWARE ABSTRACT TEST

The struggle between anti-software patent movements and patent proponents has grown significantly as more and more innovations stem from the digital age.[59]While the Bilski decision has almost solidified software as patentable, the Abstract test may serve as an elementary compromise when applied to software innovation separately. 

Unlike its financial counterpart, software algorithms do not operate on a public medium such as the market. Software is bound to the rules and procedures of a given programming language. Languages are constantly being created, evolving and improving. The Java language, currently the most popular programming language, was only released in 1995 with its most recent release February 15^th 2011.[60]Because the medium on which software innovation operates is moving at an enormously high rate (significantly more so than financial innovation) the innovation itself must move just as fast.

Like its financial counterpart, software also has its own natural components. The Abstract test applied to software would evaluate a patent and its implications under the software culture. If the patent would preclude a natural software component, the Abstract test would reject patentability. However, because of the speed of software evolution, what is regarded as innovation today may easily be common industry practice tomorrow. As patents protection lasts for twenty years, the test for abstractness must possess a sense of foresight. An overly lenient application of the Abstract test in software innovation would inhibit further innovation in later years rather than facilitate it. Consider a software’s spell checker component. The spell checker is only forty years old, but an almost natural component in any contemporary software algorithm.[61]Patenting such component would certainly be abstract and inhibit further innovation. Only when the use of the natural component in software innovation is useful, novel and non-obvious, with a tremendous amount of creativity, can the Abstract test allow patentability.[62]Because of the fluid environment that software innovation operates in, the threshold for abstractness would be significantly lower than financial innovation. This consideration only further proves the need for disaggregation.

Unlike financial innovation, software innovation is not as easily kept secret. The public market acts as a blanket for financial innovations used by traders, with a petty possibility of reverse engineering. The private software industry however, serves no protection to software innovation as it is much more readily reversed engineered and plagiarized. [63] This puts software innovators at a disadvantage, as hiding their innovation is not even an option. Without secrecy as an alternative, the patent system must work more readily to incentivize innovation without slowing it down. On the same token because software innovations are plainly exposed, it pushes innovators to persistently improve so that they may claim the alpha position amongst competitors.

CONCLUSION

                While Bilski’s Abstract test is far from definitive criteria, it is th  e hand that has been dealt. Application of the Abstract test to software and financial innovations separately alleviates a large amount of ambiguity. Disaggregating the business method and applying the Abstract test separately allows for different considerations and thresholds for each innovation.  Attention to the components and the industry of the individual innovations restores the patent system to its intended purpose, which the traditional business method has failed to do. With such differences, aggregating software and financial innovation under the business method is impractical. The traditional business method truly has “no place in the modern world”.[64]