In its dealings with patent-related cases over the years, the Supreme Court has established a record for excluding three categories from receiving patents. The first is laws of nature, such as gravity. Natural phenomena are also unpatentable. Patents aren't granted for the discovery of phenomena such as electricity or fire. However, patents can and have been awarded for ways to make electricity or fire.
The third unpatentable category is abstract ideas. A mathematical algorithm (a step-by-step problem-solving method), for example, was not patentable. Such an algorithm was considered an abstract idea because it's not substantive; it's just a theoretical concept or truth. It's this third area that's recently been challenged in court and in the U.S. Patent and Trademark Office (PTO), because computers and software make extensive use of mathematical algorithms and their use of such processes has become very valuable in the business world.
In addition to these three unpatentable areas determined by the Supreme Court, the PTO has been of the opinion for many years that a fourth area of unpatentability exists: methods for doing business. In its view, business methods aren't tangible and don't fall within any category of patentable ideas. For example, one business method involves lowering prices to increase sales. If you had been the first person to do this and could have filed a patent on it, no one else would be able to lower prices to increase sales without paying you a royalty. Since there's nothing tangible about a business method--it's just a way of doing something--the PTO has historically state that business methods can't be patented.
This bias of the PTO dates back to at least 1908, according to Joel S. Goldman, an intellectual property attorney at Troutman Sanders LLP in Atlanta. In the case of Hotel Security Checking Co. v. Loran Co., the court held that the patent in dispute, which covered a bookkeeping system, was invalid because it didn't fall within a patentable category.
It wasn't until 1983 that this beachhead opinion began to crack. Brokerage firm Merrill Lynch owned a patent for a system of combining a brokerage security account, a money market fund and a charge/checking account. In a patent dispute, the courts found Merrill Lynch's system did indeed contain patentable subject matter. In fact, the court's opinion went further and gave great weight to the fact that a computer carried out the method described in the patent. This established the precedent that the use of a computer to perform a business function was indeed patentable. Thus, a mathematical algorithm and a method for doing business were, for the first time, awarded patents.
Then in 1996, Federal Circuit Court Judge Pauline Newman made a ruling that patentability should not be determined based on whether the patent can be pigeonholed into a "business method" niche. Rather, consideration should be placed on the idea's technological usefulness as well as its newness and nonobviousness.