Patentability of Software and Business Methods - Where are we now?

By Katharine Stephens, Peter Ward, Mark Heaney


  • The Court of Appeal considers patentability in ‘Macrossan’ and ‘Aerotel

  • Tests recently developed by the EPO Boards of Appeal are rejected

  • A practical four step test is adopted

  • A recommendation is made for a referral to the EPO Enlarged Board of Appeal


On Friday 27 October, the English Court of Appeal handed down a judgment[1] in which is considered the test for what is to be properly regarded as patentable subject matter for computer programs and business methods. The judgment is not in line with recent decisions of the European Patent Office (‘EPO’) Boards of Appeal, which the Court of Appeal found to be flawed and contradictory. The heart of the issue involves questions relating to the patentability of software and computer-implemented inventions and the patentability of business methods. Such things are exempted from what can be patented if the patent or application relates to that thing “as such”. The exemptions, whether in the European Patents Convention (‘EPC’) or the equivalent provisions in the English statute, have not been easy to interpret in a consistent way and, for a number of years, have been the subject of considerable legal debate both in the UK and Europe.


The first case involved Aerotel, an Israeli company, and the defendant, Telco. Aerotel was seeking the restoration of its patent for a telephone system whereby the caller had a prepaid account with the telephone company. To place a call, the caller dialled the telephone company’s exchange, input an account code and then dialled the callee’s number. The patent was rejected for being a method of doing business. The second case involved a patent application from an Australian inventor, Mr Macrossan, for an automated method of acquiring the documents necessary to incorporate a limited company. The method worked by asking the user a series of questions with subsequent questions taken from a database depending on the answers to previous questions. The application had been rejected by the UK Patent Office as being for a method of performing a mental act and for being for a computer program. On appeal, Mr Justice Mann sitting in the Patents Court restored the application.

The Judgment

The Court of Appeal chose to work from the wording of the EPC rather than the Patents Act 1977 with the clear intention of producing a judgment that would contribute to the debate over achieving a unified position on patentable subject matter across Europe. For many years English patent law has suffered from the potential uncertainty created by the wording used in s.1(2), which is different from the text of Arts.52(2) and 52(3) (both s.1(2) and Art. 52 are reproduced at the end of this note). There is no clear reason for this difference in wording since the clear intention of the Patents Act 1977 was to implement Art. 52 into English law. This difference, together with subsequent decisions in the English courts, has raised questions over whether English law is in harmony with the decisions of the EPO, a situation that is further complicated by the EPO decisions being contradictory on certain points. Accordingly, the Court of Appeal took the position that applying the text of the EPC obviated the risk of an erroneous construction arising from the wording of s.1(2). Further, although it is usual to construe “exceptions” narrowly, the Court of Appeal made clear that, in relation to the Article 52 exclusions, a neutral construction should be used, as the exclusions were not true exceptions but were instead provided as a “positive” list.

The Court of Appeal carried out a thorough review of the existing law together with other considerations such as TRIPS and approaches adopted in countries outside the European Union including the United States. The review of the case law forms an extensive Appendix to the Court’s judgment and covers decisions of the EPO Boards of Appeal plus judgments handed down in the United Kingdom, Germany and France.

The Court of Appeal summarised the various approaches employed to date as follows:

(1) The contribution approach

The question to ask when using this approach was whether the inventive step resided only in the contribution of excluded matter. If yes, Art.52(2) applied and the invention was not patentable.

(2) The technical effect approach

Under this approach, the question was whether the invention as defined in the claim made a technical contribution to the known art. If no, Art.52(2) applied.

The Court of Appeal considered that a possible clarification of this approach would be to add the rider that novel or inventive purely excluded matter would not count as a “technical contribution”.

(3) The “any hardware” approach

The question under this approach was whether the claim involved the use of or to a piece of physical hardware, however mundane (whether a computer or a pencil and paper). If yes, Art.52(2) did not apply.

The Court of Appeal identified three variants of the “any hardware” approach:

(3)(i) Where a claim was to a method which consisted of an excluded category, it was excluded by Art.52(2) even if hardware was used to carry out the method. A claim to the apparatus itself, being “concrete” would not be excluded on this basis but would nonetheless be invalid, as the notional skilled man would be taken to know about the improved, excluded method.

(3)(ii) A claim to hardware necessarily was not excluded by Art.52(2) and a claim to a method of using that hardware was likewise not excluded even if that method as such was excluded matter. However, either type of claim would be invalid for being obvious for the reasons given above.

(3)(iii) Was there a claim to something “concrete”, e.g. an apparatus? If yes, Art.52(2) did not apply and the invention was patentable on this ground. Thereafter the application would be examined for patentability on conventional grounds. The notional skilled man would not be treated as necessarily knowing about any improved excluded method.

The “Any Hardware” Approach

The Court of Appeal rejected the “any hardware” approach. Quite apart from holding it to be the wrong approach, the Court found the three variants could lead to contradictory results. For instance, a claim to a standard CD player loaded with a new piece of music required the artificial step of treating the new music as part of the prior art (paragraphs 3(i) and 3(ii) above summarising the EPO Boards of Appeal decisions in Pensions Benefit[2] and Hitachi[3]) whereas the approach in paragraph 3(iii) (summarising the decision in Microsoft[4])would actually lead to patentability! The Court of Appeal was mindful of the weight that should be given to the decisions of the EPO Board of Appeal, but pointed out that the German court[5] had also declined to follow their approach. This reinforced the Court’s view that the “any hardware” approach was wrong and that refusing to follow it would not create inconsistency across Europe beyond what already existed.

The"Contribution" Approach

The Court of Appeal had to reject this approach because it had already been rejected in previous cases by the Court of Appeal. Had it been otherwise, however, the Court might have adopted this approach. Certainly, it considered that the approach “had a lot going for it” and thought that the objections to it to be unconvincing.

The Correct Approach - "Technical Effect (With Rider)"

In the event, the Court of Appeal found itself bound by its own precedent and therefore was constrained to adopt the “technical effect” approach with the rider that any “technical contribution” could not reside in novel or inventive purely excluded matter.

In doing so, the Court of Appeal followed its decision in Merrill Lynch[6]. In Merrill Lynch, the Court of Appeal had to consider whether an application directed at a data processing system for making a market in securities was patentable. It held that the application had to demonstrate a new technical result which was not excluded by s.1(2). In so holding, the Court of Appeal followed the decision of the EPO Board of Appeal in Viacom[7], but added the rider referred to above. Applying this test, the Court of Appeal held that the new technical result in Merrill Lynch was simply a method of doing business and was excluded subject matter. Thus, the application failed.

The Court of Appeal subsequently followed its decision in Merrill Lynch in Gale[8] and Fujitsu[9]. It should be noted that, in doing so in Gale, the Court of Appeal specifically rejected the “any hardware” approach.

A Practical Four Step Test

The Court of Appeal approved the approach currently adopted by the UK Patent Office as a re-formulation of the questions which had previously been used by the Court of Appeal in Fujitsu:

  1. to construe the claim properly;

  2. to identify the actual contribution;

  3. to ask whether it falls solely within the excluded subject matter;

  4. to check whether the actual or alleged contribution is actually technical in nature.

The Court of Appeal acknowledged that, in particular, the second step could in some circumstances be difficult and would require an investigation into what the invention involved, how it worked and the problems that it solved. Thus the requirement was to look at the substance of the claim, not its form. But nevertheless, it was possible to complete such an investigation and, as can be seen from the discussion of Aerotel and Macrossan below, the Court of Appeal did not encounter any difficulty in identifying the contribution in those cases.

Applying the Four Step Test


In applying the test in Aerotel the system as a whole was found to be new in itself, not merely because it was to be used in the business of making telephone calls. The contribution of step 2 was therefore a new system. While it was possible to implement it using conventional computers it was a new combination of hardware and therefore did fall at the third step because it amounted to more than just a method of doing business as such. The system was clearly technical in nature and therefore did not fail step 4. The equivalent reasoning applied to the method claims. Aerotel’s patent was therefore upheld and the finding at first instance reversed.


In the Macrossan case, the assessment of the inventor’s contribution under step 2 was that he had thought of an interactive system that did a job that might otherwise have been done by a solicitor or company formation agent. Before the Examiner this was found to fall within the excluded subject matter – a scheme or rule for doing business. The “potentially” issue arose because of question 4 and that it would be necessary to decide whether or not there was anything technical in character about the claim. The Examiner found there was none and rejected the claim. On appeal the Patents Court restored the claim citing EPO authorities and taking the view that the Macrossan system was a tool used within a business. The judge also thought that it was implicit that some form of transaction must take place for there to be a business method. The Court of Appeal had no difficulty with step 1. Step 2 was also straightforward. It was to provide a computer program that could be used to carry out the method. Step 3 was also found to be easy in that the contribution was simply the running program. The contribution was not technical (step 4) so the exclusion applied and the Court of Appeal rejected the application.

Collision with the EPO?

In following Merrill Lynch,the Court of Appeal anticipated a potential clash with the EPO. It thought that a reference to the EPO Enlarged Board of Appeal was inevitable at some point because of the contradictory findings in two of the EPO Board of Appeals decisions, in Pensions Benefit and Hitachi.

Importantly, the Court of Appeal seems to have set its sights on encouraging the EPO’s Enlarged Board of Appeal to decide on the issue of patentable subject matter and the Court’s review of the law ought to be seen as a contribution to any future discussion. Just as decisions of the EPO Boards of Appeal are persuasive in the English courts, decisions of important national patents courts have been persuasive authority within the EPO Boards of Appeal itself. The Court of Appeal pointed to the contradictory decisions on patentable subject matter by the EPO Boards of Appeal and suggested that it was time for the President of the EPO to use powers granted under EPC Art.112(b) to refer points of law to an Enlarged Board of Appeal. The Court of Appeal stated that it had no power itself to make a referral to an Enlarged Board but instead formulated four questions that might be asked of an Enlarged Board in the hope of encouraging a reference. The Court had the support of the UK Patent Office in adopting this approach.

The questions the Court of Appeal suggested the EPO Enlarged Board of Appeal ought to consider are as follows:

  1. What is the correct approach to adopt in determining whether an invention relates to subject matter that is excluded under Article 52?

  2. How should those elements of a claim that relate to excluded subject matter be treated when assessing whether an invention is novel and inventive under Articles 54 and 56?

  3. And specifically:

(a) Is an operative computer program loaded onto a medium such as a chip or hard drive of a computer excluded by Art.52(2) unless it produces a technical effect, if so what is meant by ‘technical effect’?

(b) What are the key characteristics of the method of doing business exclusion?


The judgment settles the position under English law for the time being and resolves some of the contradictions that have bedevilled this field. However, it is clear that this will not be the last word on the subject because of the diverging opinions of the Court of Appeal and the EPO.

The UK Patent Office will very likely understand the judgment as vindicating the strict line it has been taking recently in relation to applications for patents in technologies such as source code compilers[10], “geo-coded databases”[11] and security features for internet transactions[12].

What is highlighted by the judgment is that patentees must consider carefully the wording of their applications to the UK Patent Office and ensure that the contribution to the art and why that contribution is “technical” are clearly spelt out. It is no longer appropriate, at least without careful consideration, to file the same text as that filed for example in the United States.

How the EPO will respond may depend on political questions relating to computer implemented inventions currently being raised in the European Parliament in the course of discussions over the implementation of the European Patent Litigation Agreement. Whether the matter will be appealed to the House of Lords in any event remains to be seen.

The full text of the judgment can be found at

Section 1(2) of the Patents Act 1977

It is hereby declared that the following (among other things) are not inventions for the purposes of this Act, that is to say, anything which consists of -

(a) a discovery, scientific theory or mathematical method;
(b) a literary, dramatic, musical or artistic work or any other aesthetic creation whatsoever;
(c) a scheme, rule or method for performing a mental act, playing a game or doing business, or a program for a computer;
(d) the presentation of information;

but the foregoing provision shall prevent anything from being treated as an invention for the purposes of this Act only to the extent that a patent or application for a patent relates to that thing as such.

Article 52 Of The European Patents Convention

  1. European patents shall be granted for any inventions which are susceptible of industrial application, which are new and which involve an inventive step.

  2. The following in particular shall not be regarded as inventions within the meaning of paragraph 1:

    1. discoveries, scientific theories and mathematical methods;

    2. aesthetic creations;

    3. schemes, rules and methods for performing mental acts, playing games or doing business, and programs for computers;

    4. presentations of information.

  3. The provisions of paragraph 2 shall exclude patentability of the subject-matter or activities referred to in that provision only to the extent to which a European patent application or European patent relates to such subject-matter or activities as such.

[1]Aerotel Ltd v. Telco Holdings and others [2006] EWCA Civ 1371

[2](2000) T-931/95

[3](2004) T-258/03

[4](2006) T-424/03

[5]The Bundesgerichthof in Jesco Scwarzer28 September 2004 17 W (at) 31/03

[6]Merrill Lynch’s Appn. [1989] RPC 561

[7] (1986) T 208/84, [1987] OJ 14

[8] Gale’s Appn. [1991] RPC 191

[9] Fujitsu [1997] RPC 608

[10]Intel Corporation BL 0/187/06, 6 July 2006

[11]Overture Services Inc BL 0/331/05, 21 December 2005

[12] Fair, Isaac and Company Inc BL 0/329/05, 20 December 2005