Although the United States Patent and Trademark Office (“PTO”) had issued business method patents (“BMPs”) prior to 1999, the decisions of the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) in State Street Bank & Trust Co. v. Signature Financial Group, Inc. in 1998 and AT&T Corp. v. Excel Communications, Inc. in 1999 led to a significant increase in the number of BMP applications filed with and granted by the PTO. Although grants of such patents have considerably stabilized in recent years, many policy issues raised by financial, electronic commerce and software companies in response to the State Street Bank and AT&T Corp. decisions regarding the patentability of business methods remain unanswered. Several legal and economic scholars, as well as the press, have examined this issue and have raised concerns about the quantity, quality and patentability of BMPs. There is some consensus in their point of views.

Many of these scholarly works provide fairly detailed and systematic studies of individual cases and their implications. Comparatively, there is little literature on the effect of BMPs on innovation, which is grounded in a more comprehensive theoretical perspective and empirical approach. This paper endeavors to fill this gap by reviewing the extant literature on patents in general and attempting to draw inferences about the implications of this literature for BMPs. The paper primarily focuses on the role of patents in driving innovation and the effect of poor patent quality on innovation.

The remainder of the paper is divided into seven sections. Section I briefly outlines the history and economic rationale of the patent system. Section II discusses the history of BMPs in the United States. Section III sheds light on the provisions of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement regarding BMPs. Section IV briefly illustrates how different Member States of the World Trade Organization (“WTO”) have used the TRIPS agreement’s flexibility regarding BMPs in their national laws. Section V presents theoretical and empirical evidence about the general relationship between patent system and innovations, with analysis to understand the probable impact of BMPs on innovation. Section VI briefly presents the issues concerning BMPs and their consequences. Section VII presents a summary of the policy recommendations made by various scholars who have followed BMP’s evolution to becoming acceptable subject matter. The paper concludes with a brief discussion about some key policy recommendations for improving BMPs.

Rajnish Kumar Rai & Srinath Jagannathan