Statement of

NICHOLAS P. GODICI

Acting UNDER SECRETARY OF COMMERCE

FOR INTELLECTUAL PROPERTY

&

Acting DIRECTOR OF THE

U.S. Patent & Trademark Office

before the

SUBCOMMITTEE ON COURTS, THE INTERNET

AND INTELLECTUAL PROPERTY

COMMITTEE ON THE JUDICIARY

U.S. HOUSE OF REPRESENTATIVES

April 4, 2001

Mr. Chairman and Members of the Subcommittee:

Thank you very much for inviting me to testify today on the patenting of business method inventions. As you know, patents in this emerging area of innovation are a topic of considerable interest and debate in many circles. As has often been the case in the past with other emerging technologies, legitimate concerns have been raised about which business methods should be patentable and whether business method patents will inhibit innovation and commerce. Given the importance of these issues, particularly in light of our increasingly knowledge- and information-based economy, I commend the Subcommittee for holding this hearing.

U.S. Patent System

In order to understand the patentability of business method inventions, I believe it is necessary to first review the underpinnings of the U.S. patent system itself and the role of the United States Patent and Trademark Office (USPTO) in administering this system. The basis for our patent system is found in Article 1, Section 8, Clause 8 of the Constitution, which provides that Congress shall have the power:

To promote the progress of science and useful arts by securing for limited

times to . . .inventors the exclusive right to their . . . discoveries.

In order to implement this Constitutional directive, our Founding Fathers designed an extremely flexible patent system based on principles that have proven remarkably suitable to 210 years of technological advancement. The uniformity and flexibility of the patenting standards of novelty, non-obviousness, adequacy of disclosure, and utility -- coupled with the incentives patents provide to invent, invest in, and disclose new technology -- have allowed millions of new inventions to be developed and commercialized. This has enhanced the quality of life for all Americans and helped fuel our country's transformation from a small, struggling nation to the most powerful economy in the world. Equally as impressive, the patent system has withstood the test of time. This is powerful evidence of the system's effectiveness in simultaneously promoting the innovation and dissemination of new technologies and the creation of new industries and jobs.

Patentability Criteria

In administering the U.S. patent laws, the USPTO takes its direction on what subject matter is patentable from Congress and our reviewing courts. The current Act that details the standards of patentability, the Patent Act of 1952, specifies four basic statutory requirements that must be met to obtain a patent: (1) the claimed invention must define eligible subject matter and have utility; (2) it must be novel; (3) it must not have been obvious to a person having ordinary skill in the art at the time the invention was made; and (4) it must be fully and unambiguously disclosed in the text of the patent application, so that the skilled practitioner would be able to practice the claimed invention without undue experimentation.

Prior to granting a patent, the USPTO examines each patent application to determine whether it meets these four criteria, as set forth in Title 35 of the U.S. Code. With respect to the first statutory requirement, 35 U.S.C. § 101 states that any person who "invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent…" subject to the conditions and requirements of the law. Thus, the threshold inquiry as to whether subject matter is eligible to receive patent protection is whether an invention is "new and useful" and whether it fits into one of the enumerated categories.

The courts have recognized the breadth of this statute. In the landmark case of Diamond v. Chakrabarty, 447 U.S. 303 (1980), the U.S. Supreme Court acknowledged that Congress intended the statutory subject matter under 35 U.S.C. 101 to include "anything under the sun that is made by man." The Supreme Court also noted that there are limits to patentability. Indeed, in Diamond v. Diehr, 450 U.S. 175 (1981), the Court explicitly identified three specific areas of subject matter that are excluded from patent protection. These three areas are: (1) laws of nature; (2) natural phenomena; and (3) abstract ideas. Thus, an invention directed toward a pure algorithm or manipulation of abstract ideas with no practical application is not patentable.

The growth and importance of computers and the Internet have led to a significant increase in investment and development in computer-related processes, particularly with regard to electronic commerce. This has inevitably led to more individuals seeking patent protection in these areas. In response to this increased patent activity, a number of cases arose in the 1990's involving issues of defining the boundaries of patent eligibility. Accordingly, the Court of Appeals for the Federal Circuit (CAFC) rendered a series of decisions following the Supreme Court in Diehr and Chakrabarty that further defined what subject matter can and cannot be patented. I would like to discuss two of these cases, which very clearly set forth the standards for patentability according to our patent law.

In the case of In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994), the CAFC, sitting en banc, found that inventions that include mathematical formulas or algorithms are not unpatentable if they are practically applied. Thus, the mere presence of an algorithm within an invention does not exclude the entire invention from patentability. The key question to be answered is whether the claimed invention, when looked at "as a whole," is an abstract idea, such as a disembodied mathematical concept, or whether the invention produces a practical application that achieves a "useful, concrete and tangible result."

Four years after In re Alappat came the most well known case with regard to business methods: State Street Bank and Trust Co. v. Signature Financial, Inc., 149 F.3d 1368 (Fed. Cir. 1998). The State Street case involved a patented data processing system that transformed data representing discrete dollar amounts into a final share price momentarily fixed for recording and reporting purposes. The Federal Circuit found that the financial management system in question constituted a patentable invention because it produced a "useful, concrete and tangible result."

It is important to note that the significance of State Street goes beyond its immediate holding. The Federal Circuit in State Street explicitly rejected the notion that a "business method" exception exists in United States patent law, thereby ending any notion that inventions deemed to be business methods, by whatever criteria, would be excluded from patentability on that basis alone. Thus, the State Street decision clarifies that an invention deemed to be a "business method" will be treated in the same manner as any other method or process invention. In other words, there shall be no disparate treatment for different categories of inventions.

While State Street did not change United States law and practice, it did create a new awareness that business method claims could be patented. For example, in fiscal year 1998 there were about 1,300 filings in the U.S. classification area 705, which includes much of what is commonly known as computer-implemented "business method" inventions. By contrast, there were 2,820 filings in fiscal year 1999 and 7,800 filings in fiscal year 2000. It should be noted, however, that despite these increases, Class 705 filings represented only a small fraction (2.6%) of our total patent filings in fiscal year 2000. Moreover, the 899 patents that were granted in Class 705 last year constituted a mere one-half of one percent of all patent grants for the year.

Responding to Concerns

While the courts have made it clear that inventions directed to business method inventions are patentable subject matter, some have suggested that an increase in the issuance of business method patents may stifle innovation and investment generally. Others are concerned that patents that have been awarded in these areas, while generally appropriate, may in certain cases be overly broad or not truly novel. These fears raise legitimate issues, and the USPTO has taken a number of steps to address these concerns.

In March of last year, the USPTO announced a new Business Methods Patent Initiative. This program established a solid framework that provides the techniques necessary to cope with the challenges presented by the emerging area of business method patents. Accordingly, we have established enhanced partnerships with affected industries in order to have them educate our examiners so that we can take advantage of their knowledge and expertise in their fields. As part of this partnership, we hosted a Business Method Patents Roundtable on July 27, 2000, with members of industry and other interested parties, during which myriad issues regarding these patents were discussed. In addition, we recently convened our first meeting of the Business Methods Partnership on March 1, 2001. This partnership meeting involved a fruitful exchange of ideas, and it is just the first of many to come. I am also pleased to report that the USPTO is working to facilitate industry feedback on our examiners' prior art resources.

The USPTO's Business Methods Patent Initiative also includes specific features to bolster the quality of our patent searches. For example, we have defined a mandatory search for all applications in the computer-implemented business methods area, including a classified U.S. patent document search and a full text search of U.S. patent documents, foreign patent documents with English language abstracts, and non-patent literature. To assist our examiners in finding pertinent prior art, we also have established "Electronic Information Centers" which provide examiners with access to over 900 databases, over one-third of which contain business and financial information. As 18-month publication of patent applications takes effect and as we identify with our industry partners more databases to search, the amount of published prior art available to examiners will also increase.

With respect to prior art, the USPTO implemented a new Rule 105 (37 C.F.R. §1.105), effective November 27, 2000, which confirms that examiners and other office employees have explicit authority to ask for information that may be reasonably necessary to properly examine an application or treat a matter with regard to the examination of a patent application filed under 35 U.S.C. §111 and 35 U.S.C. §371. We are hopeful that Rule 105 will further enable our examiners to perform the best examination possible, with applicants' assistance. In addition,

37 CFR 1.99 permits third parties to submit for examiners' benefit prior art in published applications without an attribution of how that art affects patentability.

As part of our Business Methods Patent Initiative, we also instituted a second-level review of all allowed applications in Class 705 by an additional experienced examiner beyond the examiner who would normally review the application before it could be granted. We also are continually enhancing the technical training for our examiners. For example, we revised our Examination Guidelines for Computer-Related Inventions and training examples for these inventions. These revisions were made in order to update patentability standards in light of the State Street and AT&T cases, which clarify that business methods should be treated like any other process claims. Our examination guidelines and training materials specifically address the fact that merely automating a known human transaction process using well-known automation techniques is not patentable. Lastly, to handle the growing number of Class 705 filings, we also increased the number of examiners in this area from 17 in late 1997 to 77 today.

We believe that our Business Methods Patent Initiative and other concerted efforts in this regard will ensure the issuance of high quality business method and software patents. In fact, we are now beginning to see significant results in this regard. For example, our allowance rate in the affected areas of business method inventions has decreased since the time our Initiative was launched a year ago. It is worth noting from recent press reports that some of our customers believe we are being too restrictive in our examination, as evidenced by this reduced allowance rate.

Before closing, I would also like to point out that the USPTO has been issuing method patents for over a century and a half. We have been issuing patents on methods of teaching since the mid-1800's, including a patent issued in 1864 for a method of teaching penmanship. Moreover, there have been a number of patents regarding innovations in the business and financial fields throughout the history of the USPTO. For example, in 1799, only nine years after the first U.S. patent, the first financial patent was issued regarding "Detecting Counterfeit Notes." Unfortunately, the details of this invention were forever lost in the great Patent Office fire of 1836. In addition, in 1889, Herman Hollerith received a patent on a method for tabulating and compiling statistical information for a business. The patent he received helped his fledgling company to survive. Later, the company's name was changed to International Business Machine Corporation (IBM). Mr. Hollerith's patented method was probably the first patent issued regarding the automation of business or financial data, and it and the related punch cards were used until the birth of the personal computer.

Conclusion

Mr. Chairman, the USPTO is very pleased with the results thus far of our Business Methods Patent Initiative, and we will continue to closely monitor the situation in order to ensure the issuance of high quality business method patents. In addition, if further administrative action is needed or warranted by modifications by the Courts, the USPTO will take appropriate action.

Let me assure the Members of the Subcommittee that we are committed to ensuring that our practices and policies promote the innovation and dissemination of new technologies. We are confident that the patenting of business method inventions is consistent with our law and with our practice, and we believe that any arbitrary restriction of patentability in this or other technologies may cause deserving innovations to go unprotected and deserving investments to go unrewarded.

The overwhelming preponderance of evidence throughout the history of the U.S. patent system suggests that robust intellectual property protection supports, rather than impedes, innovation. Indeed, for over two hundred years our patent system has enabled American industry to flourish, creating countless jobs for our citizens. Advanced technologies have been -- and continue to be -- nurtured and developed in our nation to a degree that is unmatched in the rest of the world. In many instances, the availability of patent protection has been integral to these advancements. In this regard, the USPTO and the Administration look forward to continuing to work with you and the members of the Subcommittee to ensure that U.S. patent system remains the envy of the world.

Thank you, Mr. Chairman.