Dan Whalen is a JD candidate at Osgoode Hall Law School and is enrolled in Professor Mgbeoji’s Patents class in Fall 2011. As part of the course requirements, students are asked to write a blog on a topic of their choice. This blog was written before the Federal Court of Appeal decision in Amazon.com was released.

The patentability of business methods in Canada will soon come one step closer to final resolution, following the impending Federal Court of Appeal decision in the matter of Amazon.com’s “one-click checkout” patent application. Although I believe that Phelan J of the Federal Court was correct to allow for such patents, he was perhaps overly dismissive of policy concerns in his reasons.¹ The higher court(s) may not similarly restrict themselves. Indeed, the participation of interveners in the appeal will almost undoubtedly broaden the scope of the court’s decision.² It is thus timely to discuss several reasons why, as a matter of public policy, I believe that business methods should not be excluded from patentability.

From a policy standpoint, it may be argued that a given category of inventions ought to be eligible for patentability if it would further the purposes of the patent system. This inquiry is best approached as a cost-benefit analysis. The benefit analysis concerns whether such patentability is necessary to achieve the ends of the system. The cost analysis relates to whether such patentability hinders them. Consideration by this framework reveals that business method patents do not limit the patent system but in fact meaningfully further its goals.

Per the Supreme Court of Canada in Free World Trust v Électro Sante, the dual function of the patent system is “to advance research and development and to encourage broader economic activity”.³ While the first half of this formulation seems to have garnered most attention in subsequent literature and jurisprudence, it is perhaps the second half that is the system’s more realistic effect. Following an extensive empirical survey on the effects of patent law, professor Bronwyn Hall concluded that there is no broad evidence that it encourages innovation “always and everywhere”.⁴ Rather, her study’s “most interesting and not immediately obvious conclusion” is that a strong patent system tends to positively affect industry.⁵ It is thought to accomplish this by facilitating the market entry and growth of enterprises possessing intangible assets by offering security to potential investors and business partners.⁶ The merits of business method patents should thus be considered within this framing of the patent system.

Beginning with the cost analysis, it is often directly argued that business method patents limit innovation and restrict economic activity. Professor Rochelle Dreyfuss premises this argument, as it must be, on the view that business method patents are inherently “big ideas” as opposed to “specific applications”.⁷ Such big ideas, she argues, must remain in the public domain because they form a significant basis for further inventiveness. A monopoly of such ideas thus restricts innovation and traps other businesses in inefficient methods of resource allocation in order to avoid infringement, thereby also limiting competition and trade.

There are two serious faults with this argument. The first is the assumption that business methods are inherently “big ideas”. Phrased in the language of Canadian law, this is to say that business methods are naturally incapable of having “practical application” per Shell Oil Co v Canada (Commissioner of Patents).⁸ One need only consider the patent application at issue to realize that this assumption is untenable. Amazon.com’s claimed invention was for a process whereby a client identifier is stored in a customer’s computer and later recognized by company servers. While this may properly be called a business method, it cannot seriously be called an idea.

The argument’s second, broader flaw lies in its assessment of market forces. Patent monopolies are considered to foster business innovation and competition by driving businesses to develop new innovations outside the scope of competitors’ protected inventions. These improvements can then be patented and deployed, thus stimulating economic activity. Many are skeptical that properly granted business method patents should operate differently than other types of patents.⁹

Critics’ other primary argument in the cost analysis of business method patents is that they are of inherently low quality and thus undermine the integrity of the system. Note that “good” patents may generally be distinguished from “bad” by their extent of novelty, non-obviousness and utility.¹⁰ Concerns on these grounds are exaggerated. Regarding novelty, it must be acknowledged that there is a relative scarcity of prior art available, as even common methods of doing business are often not documented in materials available to patent examiners.¹¹ This is a self-correcting problem, however: as business method patents are granted and gain attention, the related prior art will naturally expand. This concern is further offset by the absolute novelty requirement in Canadian patent law, which does not limit anticipation to disclosure in prior art.¹² Other concerns regarding obviousness and utility are more indictments of the patent system in general than business methods in particular. Given the panoply of patentable inventions, it is difficult to see how methods of doing business would perplex our authorities more than any other technical subject matter or lead them to suddenly depart from these standards.

With the cost analysis thus dispensed with, it remains to be established that patent protection of business methods is necessary to further the goals of the patent system. Dreyfuss contends that business methods provide several inherent rewards to innovators that are both sufficient for their purposes and independent of patent protection.¹³ In particular, she argues that business methods naturally yield customer loyalty, which then becomes self-perpetuating such that copying of the business method is no longer a serious threat. The fatal error here is assuming that businesses would be able to become established and even gain some competitive advantage all without the assistance of patent protection.

A related argument that critics raise is that innovation in the business sector does not draw from the promise of patent protection. Indeed, this is the primary justification for barring business method patents in the U.K.¹⁴ Several U.S. and Canadian scholars have also adopted this view. For instance, Greg Fine suggests that it is not private, de novo research and development that drives business method innovations, but rather open, interactive emulation among competitors.¹⁵ Although there is some merit to this observation, it is neither surprising nor fatal given the proper phrasing of the patent system’s purpose, above. Thus to simply claim that business method patents are unnecessary because they do not drive innovation is to seize upon a misstatement of the true purpose of the patent system.

In light of the foregoing cost-benefit analysis, it thus seems warranted to hold that reasons of public policy should not keep business methods from patentability. Now we wait with bated breath for the Federal Court of Appeal’s decision to see if the honourable justices agree.

¹ Amazon.com v Canada (Attorney General), 2010 FC 1011, 86 CPR (4th) 321, Phelan J.
² Amazon.com v Canada (Attorney General), 2011 FCA 127, [2011] FCJ No 555, Trudel JA.
³ World Trust v Électro Sante, 2000 SCC 66 at para 42, 9 CPR (4th) 168, Binnie J.
⁴ Bronwyn H Hall, “Business and Financial Method Patents, Innovation, and Policy” (2009) 56 Scottish Journal of Political Economy 443 at 18.
⁵ Ibid at 14.
⁶ Ibid.
⁷ Rochelle C Dreyfuss, “Are Business Method Patents Bad for Business?” (2000) 16 Santa Clara Computer & High Tech LJ 263 [Dreyfuss] at 276.
⁸ Shell Oil Co v Canada (Commissioner of Patents), [1982] 2 SCR 536, 67 CPR (2d) 1, Wilson J (“A disembodied idea is not per se patentable. But it will be patentable if it has a method of practical application.” at 14).
⁹ See e.g. Stephen J Ferance, “Debunking Canada’s Business Method Exclusion from Patentability” (2000) 17 CIPR 493 at 36.
¹⁰ See Patent Act, RSC 1985, c P-4 [Patent Act] ss 2, 28.3.
¹¹ See Greg S Fine, “To Issue or Not to Issue: Analysis of the Business Method Patent Controversy on the Internet” (2001) 42 BCL Rev 1195 [Fine] at 1205.
¹² Patent Act, supra note 10, s 28.2(1).
¹³ Dreyfuss, supra note 7, at 276.
¹⁴ CFPH LLC’s Patent Application, [2005] EWHC 1589 (Pat), Prescott QC.
¹⁵ Fine, supra note 11, at 1206.