New York Times, August 3, 1998
by Teresa Riordan
An appeals court says a mathematical formula can be patented, if it is a moneymaker.
Imagine that Albert Einstein were alive today and that he were just now formulating his theory of relativity. Could he get a patent on E=mc2?
Some patent experts contend Mr. Einstein just might be able to, thanks to a recent ruling by the United States Court of Appeals for the Federal Circuit in Washington.
The case in question-State Street Bank and Trust Company v. Signature Financial Group- had nothing to do with physics. Rather, at issue was a patent for a data-processing system for a so-called hub-and-spoke mutual fund partnership in which mutual funds pool their assets in an investment portfolio.
The appeals court's ruling has been long awaited by financial services companies, which have resisted the idea that innovative approaches in their industry should be patented. Indeed, Visa and Mastercard filed an amicus brief in the case saying that they were doing just fine without patents, thank you.
But to no avail. The appeals court ruled on July 23 in favor of Signature Financial, upholding its patent.
In its ruling, the court said, "We hold the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces 'a useful, concrete, and tangible result.'"
Translation: If your mathematical formula has a practical end, you can probably patent it.
"I believe this is going to cause a surge in patents relating to financial instruments," said Peter A. Roberts, chief executive of College Savings Bank of Princeton, N.J., who in 1988 received a pioneering patent for a computerized prepaid tuition program.
Some patent experts suggested that such an interpretation might have allowed Michael R. Milken, for example, to have patented the idea of junk bonds back in the 1980's.
But the ruling may have even wider implications.
E. Robert Yoches, a partner with the law firm of Finnegan, Henderson, Farabow, Garrett & Dunner in Washington, said he thought the appeals court had made the right decision in the case. But he said the court had gone further than expected in its ruling.
"This is very broad, very sweeping," Mr. Yoches said. "You can probably get a patent on anything as long as it's not purely mathematical-as long as it produces a concrete, tangible result."
The ruling seems to bolster software patenting guidelines issues three years ago by the Patent and Trademark Office, which expanded the definition of what kinds of software are patentable.
The last time the Supreme Court ruled in this area was in 1981, in the case of Diamond v. Diehr. Then the court held that three categories of matter are unpatentable: laws of nature, natural phenomena and abstract ideas.
Since then, the appeals court, which is the highest patent court in the land short of the Supreme Court, has deviated from this interpretation in a series of rulings.
"The direction the Federal Circuit has been moving is to say you can patent anything as long as it's economically valuable." said Richard H. Stern, who teaches computer patent law at George Washington University.
Stanley Amberg, a patent attorney in New York, said the appeals court had gone too far with the State Street ruling. "The Federal Circuit has crossed over a critical line, and now holds eligible for patent protection any computer-implemented math equation in which the input are numbers and the output are numbers." he said.
"Thus, if Einstein were alive and now uncovered the E-mc2 law of nature, he could effectively monopolize its use in the design of atomic reactors, bombs, et cetera," Mr. Amberg said. "Because, for all practical purposes, a computer must be used to perform the calculation of the amount of energy released."
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