During the day Carl Lundgren may seem like just another economist working for the federal government. But in his free time–when he's not toiling for the Department of Labor's mine safety and health administration–Lundgren has another line of work. He turns economic theories into inventions.

Perhaps his most important invention so far is his method for compensating top executives in oligopolistic industries. Devised in the 1980s, this method would encourage competition, rather than collusion, among oligopoly firms.

Lundgren first tried to patent the invention Nov. 29, 1988. He's been fighting the PTO ever since.

Patent examiners initially rejected Lundgren's application, reasoning that pure concepts, such as mathematical algorithms or business methods, aren't patentable. A three-judge panel of the Board of Patent Appeals and Interferences (BPAI), however, tossed out that rejection in November 1998.

The examiners went back to work and found a new reason to reject Lundgren's application. They argued the invention lacked a sufficient technical component, such as the use of a computer, to satisfy the “technological arts” test of the patentability of a business method.

Lundgren contested the decision, and won a major victory for any inventor who wants to patent a business method. On Sept. 28, 2005, a five-judge panel of BPAI administrative judges struck down the technological arts test, ruling that it had no basis in statute or case law.

Some experts believe the BPAI's ruling will produce a broader wave of business-method patents for ideas that can be implemented without the use of computers or other machines.

“The Patent Office will have to hold its nose and let these applications go through,” says Michael Dunnam, a patent attorney in the Philadelphia office of Woodcock Washburn. Banks, insurance companies and financial institutions will benefit from the decision immediately because they will be able to obtain exclusive rights to new ways of doing business. It is uncertain, however, whether these new patents will help or hinder companies' ability to do business.

A Failed Test

In some ways BPAI's decision in Ex Parte Lundgren isn't surprising. Section 101 of the Patent Act states that almost anything “new and useful” can be patented. When Congress recodified the statute in 1952 it said “anything under the sun that is made by man” was patentable.

However, courts have set some limits on that decree, ruling “laws of nature, physical phenomena and abstract ideas” are unpatentable under Section 101. The Supreme Court further clarified the point in 1980 in Diamond v. Chakrabarty, explaining that “a new mineral discovered in the earth or a new plant found in the wild isn't patentable subject matter. Likewise, Einstein could not patent his celebrated law that E = mc2; nor could Newton have patented the law of gravity.”

Unfortunately, it hasn't been easy for the courts–or the PTO–to draw the line between an abstract idea and a patentable method for carrying out some activity. For instance it took until July 1998 for the Federal Circuit to decide that methods for doing business were patentable.

That decision, State Street Bank v. Signature Financial Group, ignited an explosion of applications for business-method patents. The PTO did its best to process these applications, but the agency was understaffed and its examiners weren't fully trained to analyze this new type of invention. As a result, the agency issued a significant number of dubious business-method patents–and was roundly criticized for doing so.

That's why the agency turned to the technological arts test, using it to block or restrict a significant number of applications.

“The Patent Office was looking for ways to tighten itself up, to make sure it did not issue as many bad patents,” says Michael Sandonato, who heads the electronic and computer technologies practice group at Fitzpatrick, Cella, Harper & Scinto.

The agency's action may have been understandable, but it was legally indefensible because the courts had never found there was a technological-arts requirement for patentability.

“There was no such thing [as a technological arts test], never has been,” Dunnam says. “The Patent Office had it wrong all these years.”

A Rude Awakening

Ex Parte Lundgren enables companies to patent business methods that don't involve a technological element. Many such applications are pending.

“There will be a wave of allowances for method patent applications that have been backed up,” Dunnam predicts.

Moreover, because the ruling effectively expands the scope of patentable inventions, it will likely fuel an increase in patent applications. It also may give patent applicants license to draft their claims more broadly.

“We'll see applicants more aggressively push claims that are not limited to computers,” Sandonato says. “Patent applications that six months ago would only have computer-implemented claims, now will include both those claims and noncomputer-implemented claims.”

Experts anticipate that financial institutions will be among the biggest filers for the new process patents. This may significantly alter the way these companies compete with one another.

“Traditionally, when [a company such as American Express or Citigroup] comes out with something new, its competitors quickly copy this innovation,” Dunnam says. “Now, the innovation can be patented. Whether or not you think this is a good thing depends on how you view market competition.”

Companies in many other industries also are expected to obtain these new patents, including companies that traditionally didn't own patents. For instance, some experts expect to see companies apply for patents on teaching methods.

As a result, many companies in nontechnological industries, which were largely unconcerned with patent law, may now unexpectedly find themselves hit with patent infringement suits.

“A lot of people may feel that if they're not using any technology to perform a process, they couldn't possibly be infringing,” says Eric Moran, a patent attorney in Chicago-based McDonnell Boehnen Hulbert & Berghoff. Such companies will be in for a rude awakening.

The BPAI ruling also will give leverage to companies that specialize in acquiring patents and licensing them for revenue–derisively called “patent trolls.” The Lundgren ruling will allow these companies to acquire broad new rights in many fields, including business methods (which has been one of the trolls' favorite areas of activity).

“[The decision] is a boon to patent trolls,” Moran says.

As for Lundgren, he's still waiting for his patent. His application has been sent back to the same group of examiners that have already rejected it twice. So his fight with the PTO may not yet be over.?