THE PHYSICAL EFFECT OF BUSINESS METHODS
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By Ross McFarlane and Stephen O’Brien
The Federal Court of Australia has found that business methods, like other inventions, require the presence of a “physical effect” in order to be patentable. The Court however did not introduce a technical character type requirement, and rejected a proposed requirement by the Australian Patent Office that an alleged invention must be within the area of science or technology.
On 18 July 2006 the Full Court of the Federal Court of Australia handed down a significant decision that clarifies the Australian position on the patentability of business methods. In addition to providing guidance in relation to the patentability of business methods, the Court also made some interesting observations that will have a bearing on the patentability of software-related inventions, irrespective of whether or not they apply to business methods.
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THE BACKGROUND
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In Grant v Commissioner of Patents [2006] FCAFC 120 (Grant), the Court considered whether a method of asset protection fell within the ambit of the “manner of manufacture” requirement for patentable subject matter. Up until Grant, the application of the manner of manufacture requirement to business method patents had remained unsettled despite recent Patent Office and Federal Court decisions.
The Australian Patent Office had originally rejected the patent since the claimed asset protection method did not involve the “application of science or technology”. This test had overtones of a European type requirement for patentable inventions to possess a technical character.
At appeal, a single judge of the Federal Court of Australia rejected the “application of science or technology” test, but appeared to open up new grounds for striking down business method and other patents. Justice Branson stated that “an invention should only enjoy the protection of a patent if the social cost of the resulting restrictions upon the use of the invention is counterbalanced by resulting social benefits”. Her Honour found that the particular asset protection method lacked the appropriate “value to the country … in the field of economic endeavour”. Patent practitioners were concerned about the limits of such a requirement and how such a requirement could practically be examined.
Grant now clarifies the position on the patentability of new business methods and software-related inventions in Australia.
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THE CLAIMED INVENTION
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The claim of the patentee's innovation patent defined a method of asset protection comprising the steps of:
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- establishing a trust having a trustee;
- the owner making a gift of a sum of money to the trust;
- the trustee making a loan of said sum of money from the trust to the owner; and
- the trustee securing the loan by taking a charge for said sum of money over the asset.
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The Full Court found that the claim was unpatentable because the invention did not satisfy the “manner of manufacture” requirements. Whether an alleged invention is a manner of manufacture is determined by applying principles developed by the courts since the passing of the Statute of Monopolies (Imp) in 1623.
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THE PATENTEE'S ARGUMENTS
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The patentee argued that the claimed asset protection method was a manner of manufacture in accordance with principles enunciated in National Research Development Corporation v Commission of Patents (1959) 102 CLR 252 (NRDC), and as developed for the application of the Statute of Monopolies (Imp) in 1623. According to NRDC there is a manner manufacture whenever a process produces ‘an artificially created state of affairs’. The patentee argued that claimed asset protection method satisfied the requirements laid down in NRDC because the method resulted in an artificial state of affairs in that financial rights and obligations were changed. In addition, the patentee asserted that there was no need for the method to provide a ‘device’ or the ‘application of technology’ as enunciated in cases since NRDC.
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MERE INTELLECTUAL INFORMATION NOT PATENTABLE – A “PHYSICAL EFFECT” IS NEEDED
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The Full Court rejected the patentee’s assertions. Instead, the Court concluded that the patentee’s method resulted in what was at best an abstract, intangible situation and that the alleged invention represented, amongst other things, mere intellectual information. Consequently, the patentee’s method did not provide a concrete effect or phenomenon or manifestation of the type required to satisfy NRDC. The Court referred to these effects generally as ‘physical effects’ and stated that the alleged invention failed to provide any physical consequence at all.
In view of Grant, to be considered patentable, a new business method must result in a ‘physical effect’. Whilst the Court did not provide a detailed definition of that term, it did provide some guidance which suggests that new business methods and software related inventions that have a physical consequence will continue to be patentable in Australia.
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IMPACT ON SOFTWARE-RELATED INVENTIONS
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Interestingly, the Full Court compared the asset protection method with software based inventions. In relation to the later, the Court stated that a physical effect will exist where a component was physically affected or a change in state of information in a part of a machine resulted. The Court also observed that the physical effect need not always be a physically observable end result in the sense of a tangible product. These observations are especially pertinent to software based inventions which typically involve a set of computer program instructions that are executable by a computer processor to achieve a desired function. The execution of the program instructions will typically result in a change of state of information in a computer memory - an effect that is generally not physically observable.
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NO TECHNICAL CHARACTER STYLE REQUIREMENT
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Whilst “programs for computers” are included in the list of items excluded from patentability in the European Patent Convention, a valid European patent can still be obtained for a computer program that has a “technical character”. The Guidelines for Examination in the European Patent Office indicate that the execution of a computer program always involves physical effects, eg electric currents. However, such normal physical effects are not in themselves sufficient to lend a computer program technical character. A further technical effect going beyond these normal physical effects is required for patentability in Europe.
Grant appears to signal a shift away from a European style policy of rejecting business methods and software-related inventions without a technical character to a more liberal US style approach by considering only whether a physical effect is created by the invention.
The “physical effect” requirement would also seem to exclude from patentability in Australia many business methods such as the training method the subject of US Patent No. 5,851,117 entitled "Building Block Training Systems and Training Methods". That patent is controversial as it merely describes how an experienced person can teach a novice by using an illustrated publication, such as a training manual. No physical consequence would appear to be created by such a training method and would therefore be unpatentable in Australia.
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“SCIENCE” OR “TECHNOLOGY” REQUIREMENT IS IMPROPER
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In Grant, the Full Court also suggested that it is improper to constrain patentable subject matter as only that which falls within the realms of 'science' or 'technology', but that it was appropriate to exclude certain realms of human endeavour such as legal discoveries (such as advises, schemes, arguments and the like as manner) and the fine arts. As a result, although new business methods that provide a requisite physical effect will be considered patentable in Australia (irrespective of whether they reside in the realms of ‘science’ or ‘technology’), certain other realms of human endeavour will remain unpatentable, irrespective of whether they provide a physical effect.
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PATENTABLE INVENTIONS NEED NOT BE OF ECONOMIC VALUE TO THE COUNTRY
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The Full Court decided that it was not in a position to determine whether the granting of a patent for an invention would result in the social cost of the resulting restrictions upon the use of the invention outweighing the resulting social benefits, and noted that the Australian Parliament had already made that judgement by rewarding innovation with a time-limited monopoly in the form of a patent. The Court also decided that whether an invention is of a requisite economic benefit or utility should not form part of the patentability assessment.
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PRACTICAL CONSEQUENCES
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Grant demonstrates that the 17th century concept of “manner of manufacture” is surprisingly flexible and able to adapt to cover new technologies and patentable subject matter. In Australia, patents can be granted for business methods and software related inventions provided the working of the invention results in the necessary physicality.
Those seeking business methods patents should ensure that the claims of an Australian patent specification include features or steps that enable such a physical effect to be created.
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MORE READING
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The judgement of the Full Court of the Federal Court is here
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The judgement of the single judge of the Federal Court is here
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The decision of a Deputy Commissioner of Patents is here
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Ross McFarlane is a Partner of Phillips Ormonde & Fitzpatrick, and Head of the Electronics, Physics and IT team.
Stephen O’Brien is an Associate of the firm and a member of the Electronics, Physics and IT team.
For further information, please contact:
Melbourne: Ross McFarlane – ross.mcfarlane@pof.com.au
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Adelaide: Stephen O’Brien – stephen.obrien@pof.com.au
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Sydney: Mark Williams – markjameswilliams@pof.com.au
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