Shedding Some Light on Business Methods


In my post of 29 May 2006, I discussed how Australia has become comfortable with software patents. This post builds on that by setting out how we deal with "Business Methods" in Australia and has particular implication for patents covering e-commerce products.

In that post, I discussed how our law developed to deal with the term "manner of manufacture". In this post, I have a look at one of our most significant cases in connection with e-commerce. I then carry out our tests on a patent claim considered in the well-known United States case of Ex Parte Lundgren, that was heard by the United States Board of Patent Appeals and Interferences on 20 April 2004. I also consider a granted claim and explain why it was granted.

A Significant Case

In Welcome Real-Time SA v Catuity Inc [2001] FCA 445, Heerey, J. had the opportunity to consider a process for generating a reward system or buyer's loyalty scheme. This case is worth reading, especially the section dealing with "Manner of Manufacture" which has a discussion of the NRDC case mentioned in my previous post.

The relevant claim reads as follows:

1. Method of processing coded information during a purchase or payment operation by a customer, holder of a card with a chip, at a trader's, in which the contents of the memory of the chip card are read and a coupon is or is not printed on the basis of the information arising from the contents of said memory, characterized in that, with the memory of the chip card including a first identification file, termed the Member file, identifying the card-holding customer, a second accounting file, termed the Points file, and a third file, termed the Behaviour file, relating to the behaviour of the card holder towards the user trader or traders,

a specified algorithmic processing is performed dependent, on the one hand, on the date of the operation and, on the other hand, on the information contained in said files, including the Behaviour file, the algorithmic processing including a step of incrementing or decrementing the Point [sic] file by a predetermined number of points depending on the frequency and/or the nature of first, second or xth visit by the card holder over a time period of specified duration, the coupon is printed only if the number of points contained in the Points file is greater than a specified value then data is written to the Points file, new information is written to the Behaviour file, and said coupon is or is not printed on the basis of the result of said algorithmic processing.

Justice Heerey found the United States matter, State Street Bank & Trust Co v Signature Financial Group 149 F 3d 1368 (1998) persuasive. Those familiar with this matter will recall that it concerned a patent for a data processing system for implementing an investment structure. Mutual funds ("Spokes") pooled their assets in an investment portfolio ("Hub") organised as a partnership. This system allowed for consolidation of costs of administering the funds combined with the tax advantages of a partnership.

Previous decisions of the United States Supreme Court had held that mathematical algorithms are not patentable subject matter because they are merely abstract ideas. However, in State Street, it was held that the transformation of data representing discrete dollar amounts by a machine through a series of mathematical calculations into a final share price constituted a practical application of a mathematical algorithm because it produced "a useful, concrete and tangible result" in the form of a final share price momentarily fixed for recording and reporting purposes.

His honour held that the reward system was not a “business method” in the strict sense. Rather, he held that it produced an artificial state of affairs in that cards could be issued for different loyalty programs of different traders as well as different programs offered by the same trader. All this could be done instantaneously at each retail outlet. The result was beneficial in a field of economic endeavour - namely retail trading - because it enabled many traders (including small traders) to use loyalty programs and thereby compete more effectively for business. Such competition was beneficial to consumers, both in the general sense and in the sense that they could obtain benefits in the form of discounts and free goods and services.

His honour gave an interesting example of what would not be patentable. That crackpot genius, Henry Ford, had the bright idea of stipulating that suppliers of components for the Model T Ford supply the components in crates fabricated with planks of suitable dimensions for use as floorboard planks for the Model T. According to his honour that business practice would not constitute patentable subject matter as it did not result in an artificially created state of affairs.

A Granted Claim

Set out below is a claim from Australian patent no. 732272 for "An Advertising System" that was granted on 12 April 2001:

A method of attracting traffic to a network site, including:
publishing a network site for a plurality of radio advertisers, the site having an index to the advertisers; and
advertising the address of the site on radio cooperatively with respective advertisements of the advertisers.

Clearly, by carrying out the steps of that method, we end up with "an artificially created state of affairs" in the network site with an index.

The Ex Parte Lundgren Claim

In the United States, the Board of Patent Appeals and Interferences dealt with a claim that had the following steps (I have removed large portions for the sake of clarity):

1. A method of compensating a manager.

2. Choosing an absolute performance standard from a set of absolute performance standards.

3. Measuring an absolute performance of each firm.

4. Determining a performance comparison base.

5. Comparing said measurement.

6. Determining a relative performance measure.

7. Determining the managerial compensation amount.

8. Transferring compensation to said manager.

If we apply the NRDC test to the above steps, all we end up with is a well-compensated manager. I don't think that could be regarded as an "artificially created state of affairs".

A Last Word

In order to assess a claim for patentable subject matter, one has to consider the result of the claim. I am tempted to refer to some form of “transformation” of hardware. However, it is important to stick to the terminology of the courts. There has to be a change in the state of affairs and that change has to be artificially created. It follows that if the specification makes no reference to hardware of any sort, there cannot be an “artificially” created state of affairs and the relevant claim would not be suitable for Australia.


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