The U.S. Supreme Court had stated that while a scientific truth, or the mathematical expression of it, is not patentable, a novel and useful structure created with the aid of scientific truth may be patentable. Mathematical formula in the abstract are not patentable. Conversely, when a claim "containing a mathematical formula implements or applies that formula in a structure or process which, when considered as a whole, is performing a function which the patent laws were designed to protect (e.g., transforming or reducing an article to a different state or thing), then the claim" defines patentable subject matter, according to the Supreme Court. Diamond v. Diehr, 450 U.S. 175, 188-192 (1981).

When considering inventions implemented with a computer and software, the Court of Appeals for the Federal Circuit (CAFC) had focused on whether a patent claim related to something physical. For example, in a case involving a computer programmed with software for analyzing electrocardiograph signals, the patent claim had steps of 'converting', 'applying', 'determining', and 'comparing' the resulting output to a predetermined level. The comparing step indicated whether the patient was at high risk for heart failure. The CAFC held that the claim defined patentable subject matter, stating that these steps are physical process steps that transform one physical, electrical signal into another; and that the resultant output is not an abstract number, but is a signal related to the patient's heart activity. Arrhythmia Research Technology v. Corazonix Corp., 958 F.2d 1053, 1059 (Fed.Cir.1992).

Conversely, in a case involving a computer with software for bidding on multiple items, the CAFC held that the patent claim did not define patentable subject matter, stating, "the grouping or regrouping of bids cannot constitute a physical change, effect, or result." In re Schrader, 22 F.3d 290, 294 (Fed.Cir.1994).

The invention in State Street relates generally to a computer and software that allows an administrator to make calculations for a financial services configuration that allows several mutual funds to pool their investment funds into a single portfolio. This pooling provides consolidation of the costs of administering the fund combined with the tax advantages of a partnership. The software determines the percentage share that each fund maintains in the portfolio, while taking into consideration daily changes both in the value of the portfolio's investment securities and in the concomitant amount of each fund's assets.

The software also allows for the allocation among the funds of the portfolio's daily income, expenses, and net realized and unrealized gain or loss, calculating each day's total investments based on the concept of a book capital account.

The invention may be implemented with a software application program running on a personal computer. The patent claim recites a "computer processor means" covering the CPU of a personal computer, a "storage means" covering a data disk, and first through fifth means each covering a subprogram in a software application program. Portions of the claim, generically defining the invention are set forth below:

During a patent infringement dispute, the trial judge was asked to decide whether the claim above defines patentable subject matter. The trial judge reviewed prior cases and decided that this claim does not define patentable subject matter, stating, "the invention is an accounting system for a certain type of financial investment vehicle claimed as means for performing a series of mathematical functions. Quite simply, it involves no further physical transformation or reduction than inputting numbers, calculating numbers, outputting numbers, and storing numbers." State Street Bank v. Signature Financial Group, 927 F. Supp. 502, 515 (D. Mass 1996).

On appeal, CAFC reversed, holding that this patent claim does define patentable subject matter. Instead of focusing on physicality, the CAFC stated that the relevant inquiry is whether a patent claim produces "a useful, concrete and tangible result." The CAFC stated, "we hold that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces a ‘useful, concrete and tangible result'-a final share price momentarily fixed for recording and reporting purposes." State Street Bank v. Signature Financial Group, 149 F.3d 1368, 1373.