What Is The Process Of Contributing Stock To An S-Corp Intellectual Property – Ground Breaking Decision – Patents – Business Methods – Computer Programs

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Intellectual Property – Ground Breaking Decision – Patents – Business Methods – Computer Programs

Court of Appeal delivers ground-breaking decision in Aerotel Ltd v Telco Holdings Ltd (and others) [2006] and the Macrossan supplement [2006] October 27, 2006 This landmark decision means there is now a new method by which patent examiners will assess whether an invention is patentable. The decision is particularly relevant for those seeking to patent “business methods” or “computer programs.”

A patent is effectively a legal monopoly on a process or product. Once a patent is granted, the patent owner will be exclusively permitted to use the patented product or process for the duration of the patent. When filing a patent application, patent examiners must ensure that the product or process that is the subject of the patent application meets the patentability test. Prior to this ground-breaking ruling, this test was extremely difficult to apply in practice due to the large body of case law involved in interpreting the relevant legislation. Now the test has been succinctly summed up by this decision.

Legislation: There are two main pieces of legislation that must be interpreted by the courts to provide a basis for patentability review. This is section 1(2) of the Patents Act 1977 and its European law equivalent, namely Article 52(2) of the European Patent Convention (“EPC”). Both pieces of legislation define what is excluded from patentability.

The wording used in the Patents Act 1977 differs from that used in the EPC. So far as relevant, Section 1 states:

(2) It is hereby declared that the following (among other things) shall not be an invention for the purposes of this Act, that is, anything consisting of:

(a) a discovery, scientific theory or mathematical method;

(b) a literary, dramatic, musical or artistic work or any other aesthetic work;

(c) a scheme, rule or method for performing a mental act, game or business, or computer program;

(d) providing information;

but the above provision does not allow anything to be treated as an invention for the purposes of this Act only so far as the patent or application for a patent relates to that thing as such. Whereas Article 52 EPC, in so far as it is relevant, states:

(1) European patents are granted for any invention suitable for industrial application, which is new and has an inventive step.

(2) The following, in particular, shall not be considered as inventions within the meaning of paragraph 1:

(a) discoveries, scientific theories and mathematical methods;

(b) aesthetic works;

(c) schemes, rules and methods for performing mental operations, games or conducting business, as well as computer programs;

(d) presentation of information.

Although no one has yet explicitly suggested that the difference in wording will lead to a difference in practice, to ensure absolute consistency with other EPC contracting countries, the court has primarily focused on examining how the European legislation. The reason for this was stated as follows:

“The difference in wording could at least lead to a misinterpretation of a provision which should have the same meaning as the EPC… Working with the EPC text avoids this risk”

Reference: The issue arising in Aerotel Ltd v Telco Holdings Ltd [2006] refers to a business method patent. Aerotel has received a British patent for a telephone system that allows a user to make calls from any available telephone and charge the cost of that call to the credit associated with that account. Once this credit runs out, the call will be disconnected. Aerotel believed the Telco had infringed their patent and sued them. The telco countersued to invalidate Aerotel’s patent. On May 3, 2006, Aerotel’s patent was revoked by summary judgment. They are now appealing to have it reinstated.

In the Macrossan application [2006], they applied for a UK patent for a computer program. The software allows users to obtain all the necessary legal documentation for company registration. Users answer questions posed by a remote server, and their answers are automatically compiled and filled in the appropriate forms. Documents are then sent to users. In the original application, the UK Patent Office found the subject matter of the patent to be unpatentable. Mr. Macrosson asked for consideration of the application.

New 4-step test: The decision introduced a new 4-step test for determining whether an invention is patentable. The UK Patent Office believes that this decision should be regarded as the definitive way in which patentable invention law is applied in the UK. This greatly reduces the need to revert to prior case law. The new 4-step test to be used by patent examiners is consistent with previous UK decisions and is as follows:

Step one: Explain the claim properly. This new first step is intended to force experts to determine what kind of monopoly would be created if a patent were to be granted. Once a monopoly has been identified, examiners will ask whether the monopoly falls into an excluded class of monopolies:

o If the monopoly is in an excluded class, then the first step will fail.

o If the monopoly is not included in any of the excluded classes, then the first step will be passed.

Step Two: Determine the actual contribution. The purpose of this step is to allow patent examiners to definitively determine that the inventor has contributed to the stock of human knowledge through the creation of his invention. The essence of the invention requires consideration. The invention is considered as a whole. As long as the general substance of the invention, when considered in its entirety, makes an adequate contribution to the stock of human knowledge, the second step will be passed. Ultimately the test should be what contribution was actually made, not what the inventor says he made.

Step Three: Ask if it falls exclusively within an excluded item. This third step is designed to determine whether the invention is exclusively unpatentable subject matter. There is a list of matters that will not be subject to patent protection under Article 52(2) EPC. They are described above. If the invention in question falls:-

o completely within the excluded matte object, it will not pass the third stage

o only partially within the excluded subject, it will pass

o outside of all categories of excluded subject, then this will also pass.

Step Four: Check if the actual or intended contribution is actually technical. The last step is relatively easy compared to the previous three. Examiners will simply consider whether the contribution to the stock of human knowledge is technical in nature:-

o If the patent examiners claim that it is not technical in nature, then the fourth step will be failed.

o If the patent examiners believe that it is technical in nature, the fourth stage will be passed.

Application of the new test in the cases: Aerotel Appeal: The patent application consisted of two halves. The first half was devoted to the method of conducting telephone conversations. The other half was for the actual system that was to be used to make the phone calls. The court ruled that the system as a whole was novel, even though it was partly composed of existing components, and therefore the patent application was for something more than just a business method. The way the telephone conversation was carried out would not have been possible without the use of the new system.

The monopoly that was planned to be created was the way of making telephone calls using the new system. Therefore, the claim was found to be correctly construed. The actual contribution to the stock of human knowledge was a new system that included part of the new hardware. The claim fell in one of the excluded categories (namely the business method category) in part because the claim concerned both a new system and a method of making telephone calls. And finally it is clear that the contribution is of a technical nature. For these reasons the appeal was upheld.

Macrossan Appeal: The court ruled that the patent application covered both a business method and a computer program. The monopoly that was to be created was for a system consisting of a method of selling documents to users using a computer program. Although no new hardware was created, the court ruled that the common contribution was the system itself. This is the third step at which Macrossan’s appeal falls. The contribution relates exclusively to the excluded topic. This is for both the business method and the computer program. Nothing more. Therefore, there was no need for the court to consider the fourth step, even though; the contribution was clearly technical in nature.

Position outside Europe: Both business methods and computer programs are patentable in the US. These decisions came in State Street Bank v Signature Financial Group (1998) and Re Alappat (1994) respectively. The main reason is that there is no equivalent to Article 52(2) in US law. This means that excluded categories in Europe and the UK are not represented across the Atlantic.

The fact that patents can be issued in the US for excluded categories in the UK has led to an increase in such patent applications in the US. The commercial necessity is that if patents are filed and issued in the US, then they must apply everywhere. However, it is interesting to note that there is no significant evidence of increased innovation or investment in excluded categories, particularly business methods and computer programs, in the US following the 1998 and 1994 decisions.

Conclusion: If all four parts of the test are passed, the relevant invention is likely to receive patent protection. The patent office insists that this new test does not change the boundaries between what is and is not patentable. The aim is to improve the way decisions are made and to provide evidence of better decision reasoning when a patent application is rejected. However, he acknowledges that there are likely to be odd cases at the border that will be handled differently under this new method. At this early stage, we will have to wait and see whether this decision will lead to an increase in the number of patent applications for business methods, games or computer programs and the number of patents issued for such items.

If you require assistance in patenting your business method or computer programs, please contact us at enquiries@rtcoopers.com.

© RT COOPERS, 2006. This handbook does not contain an exhaustive or complete statement of the law relating to the matters discussed and does not constitute legal advice. It is intended to cover general matters only. Due to the specific circumstances, you should always seek professional legal advice.

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