State Street Bank & Trust Co. v. Signature Financial Group, Inc.

State Street Bank and Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), also referred to as State Street or State Street Bank, was a 1998 decision of the United States Court of Appeals for the Federal Circuit concerning the patentability of business methods. State Street for a time established the principle that a claimed invention was eligible for protection by a patent in the United States if it involved some practical application and, in the words of the State Street opinion, "it produces a useful, concrete and tangible result."

With the 2008 Federal Circuit decision In re Bilski,545 F.3d 943 (Fed. Cir. 2008). however, the useful-concrete-tangible test was jettisoned. According to the Federal Circuit's Bilski opinion, the "'useful, concrete and tangible result inquiry' is inadequate," and the portions of the State Street decision relying on this inquiry are no longer of any effect under US patent law. The Supreme Court affirmed the judgment of the Federal Circuit in Bilski v. Kappos.561 U.S. 593 (2010).

Background

On March 9, 1993, Signature Financial Group, Inc. was granted U.S. Patent 5,193,056 Named inventor Todd Boes did not originate the hub-and-spokes technique. It had been devised earlier, but Boes developed it for computerized use at Signature Financial Group. The actual programming, apparently, was performed by others under his direction. entitled "Data Processing System for Hub and Spoke Financial Services Configuration". The "spokes" were mutual funds that allocate their assets to a central ‘hub’ investment vehicle. When this is done in connection with certain daily accounting procedures in accordance with Internal Revenue Service (IRS) regulations, the profits are passed through to the shareholders for tax purposes, without being first subject to corporate income tax, as they otherwise would be.When the regulations are satisfied, IRS treats the mutual fund as if it were a partnership rather than a corporation or trust. The procedures are so complex that they could not be performed, in the time interval IRS regulations allow, without using a programmed digital computer.The IRS regulations require a daily allocation of gains and losses to "partners" in the fund within the eight hours from 4 p.m. when the New York Stock Exchange closes and 12 midnight.

It has been pointed out that the patent claim comprises means for performing steps that are the requirements specified in an Internal Revenue Service regulation for avoiding taxesIn oral argument, Judge Rich asked counsel for the patentee whether the patent was not one directed to a "tax dodge." on a partnership.Scope-of-Protection Problems with Patents and Copyrights on Methods of Doing Business, 10 L.J. 105, 121 and Appendix A (1999). The foregoing Appendix is a table showing the elements of the claim and the corresponding parts of the regulations, side by side. The following chart is based on that table. This chart illustrates how the wording of the patent claim corresponds to the US tax statute and regulations. The patent is thus, in effect, one on compliance with US tax law. +How the claim elements of the patent correspond to the provisions of US tax law applicable to Hub & Spokes tax systemsPatentTax Law1. A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:

(a) computer processor means for processing data;

(b) storage means for storing data on a storage medium;

(c) first means for initializing the storage medium;[This part of claim 1 is directed to setting up a computer system for processing data and having access to a source of storage data to be processed in the computer.][These IRC provisions establish a framework for treatment of partnership income qualifying it for flowthrough treatment. The terms in italics are relevant to subsequent provisions and to corresponding claim language.]26 U.S.C. § 706(d)(2)(A): [I]f during and taxable year of the partnership there is a change in any partners's interest in the partnership, ... each partner's distributive share of any allocable cash basis shall be determined—(i) by assigning the appropriate portion of such item to each day in the period to which it is attributable, and (ii) by allocating the portion assigned to any such day among the partners in proportion to their interests in the partnership at the close of such day.

I

Reg. 1,704-1(b)(2)(iv): (a): Except as otherwise provided in paragraph (b)(2)(ii)(i) of this section, and allocation of income, gain, loss, or deduction will not have economic effect under paragraph (b)(2)(ii)(i) of this section and will not be deemed to be in accordance with a partner's interest in the partnership under paragraph (b)(4) of this section [i.e., qualify for partnership flow-through treatment], unless the capital accounts of the partners are determined and maintained throughout the full term of the partnership [i.e., daily] in accordance with the capital accounting rules of this paragraph (b)(2)(iv).(d) second means for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds, assets and for allocating the percentage share that each fund holds in the portfolio;...(b)(2)(iv): [T]he partners' capital accounts will be considered to be determined and maintained in accordance with the rules of this paragraph (b)(2)(iv) if, and only if, each partner's capital account: ... is increased by (1) the amount of money contributed by him to the partnership...and is decrease by (4) the amount of money distributed to him by the partnership(e) third means for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;is increased by (3) allocations to hum partnership income and gain...and is decreased by (6) allocations to him of expenditures of the partnership...and (7) allocations of partnership loss(f) fourth means for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; andIRS Reg. 1.704-1(f): A partnership agreement may, upon the occurrence of certain events, increase or decrease the capital accounts of the partners to reflect a revaluation of partnership property... Capital accounts so adjusted will not be considered to be determined and maintained in accordance with the rules if this paragraph (b)(2)(iv) unless—...

(2) The adjustments reflect the manner in which the unrealized income, gain, loss, deduction inherent in such property (that has not been reflected in the capital accounts previously) would be allocated among the partners if there were a taxable disposition of such property for such fair market value on that date.(g) fifth means for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds.26 U.S.C § 706(d)(1): [I]f during any taxable year of the partners there is a change in any partner's interest in the partnership, each partner's distributive share of any item of income, gain, loss, deduction, or credit of the partnership for such taxable year shall be determined by the use of any method prescribed by the Secretary by regulations which takes into account the varying interests of the partners in the partnership during such taxable year.

Federal Circuit opinion

The district court held the patent invalid as directed to nonstatutory subject matter. The Federal Circuit reversed, however, in an opinion that was followed by a large increase in the issuance of business-method and software patents. The Federal Circuit stated:

At the time and during the following decade, this ruling was considered by many to be significant because previously "methods of doing business" had been widely thought not to be eligible for patent grants.See § 1.03 (1990 ed.) (stating that business methods are not patentable). See also § 2:17 (3d ed. 1984) ("[A] 'system' or method of transacting business is not an 'art,' nor does it come within any other designation of patentable subject matter apart from the physical means of conducting the system."); § 6.02 (2d ed. 1995) ("Whereas an apparatus or system capable of performing a business function may comprise patentable subject matter, the law remains that a method of doing business whether or not generated by an apparatus or system does not constitute patentable subject matter."). For example, in Hotel Security Checking Co. v. Lorraine Co., the Second Circuit held that a bookkeeping system to prevent waiters from stealing customer payments for meals could not be patented.160 F. 467 (2d Cir. 1908). In Joseph E. Seagram & Sons v. Marzell,180 F.2d 26 (D.C. Cir. 1950). the D.C. Circuit held that a patent on "blind testing" whiskey blends for consumer preferences would be "a serious restraint upon the advance of science and industry" and therefore should be refused.See generally Business method patent#United States.

The Federal Circuit rejected this view in its State Street Bank opinion:

The Federal Circuit found it inappropriate to carve out a further exceptionIn addition to those for laws of nature, abstract ideas, and the like. See Gottschalk v. Benson. to the principle that "anything under the sun made by man is patentable."The phrase is a quotation from the U.S. Supreme Court ruling in the Chakrabarty decision, based in turn on a phrase in a 1952 report from the Congress, attributed to Pat Federico, and eventually derived from the Book of Ecclesiastes, in which the phrase "under the sun" appears thirty times. Ecclesiastes#Themes. Accordingly, the Federal Circuit applied that principle to all business methods that "produce a useful, concrete and tangible result."

Aftermath

The State Street Bank opinion led to a great increase in business method and software patents. In 1991, software related patents represented about 20 percent of the yearly total; by 2011 they accounted for about 50 percent. The absolute number of software patents rose from about 25,000 per year to 125,000 per year in this period. An accompanying graph shows a GAO analysis of such data.

Judicial criticism

In May 2006, Justice Kennedy of the US Supreme Court commented in a concurring opinion in the eBay caseeBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). that a "burgeoning number" of business-method patents were of "potential vagueness and suspect validity." He was joined by Justices Stevens, Souter, and Breyer.

In June 2006, the Court dismissed certiorari in LabCorp v. Metabolite, Inc... The Federal Circuit had decided the case on the basis of the State Street precedent. Three Justices (Breyer, J., joined by Stevens and Souter, JJ.) dissented from the dismissal, arguing that the Federal Circuit had decided the LabCorp case on the erroneous "useful, concrete, and tangible result" legal test enunciated in the State Street case. This was a legal test, the dissent argued, under which patents that the Supreme Court had held patent ineligible would be held patent eligible, citing as examples O'Reilly v. Morse, Gottschalk v. Benson, and Parker v. Flook. The Court should therefore decide the case, the dissenting Justices maintained, in order to "diminish legal uncertainty in the area, affecting a substantial number of patent claims."

Bilski