Recent congressional discussion of patent system reform has included consideration of provisions that would restrict the sorts of inventions for which patents may be obtained. Legislation introduced in the 111 th Congress would have prevented the patenting of tax planning methods, while one hearing regarding patent reform focused in part upon the propriety of patenting business methods. Legislation introduced in previous sessions of Congress would have banned patents relating to genetic materials as well. None of this legislation has been enacted. Under current law, one of the requirements to obtain a patent is that the invention must consist of a "process, machine, manufacture, or composition of matter." The courts and the U.S. Patent and Trademark Office (USPTO) have understood this language to allow an expansive range of patentable subject matter. Patents have therefore been obtained upon diverse inventions, including living organisms, genetic materials, tax avoidance strategies, insurance methods, and marketing techniques. Some observers believe that recent judicial opinions have narrowed the extent of patentable subject matter, however. The proper scope of patentable subject matter has been the subject of an often impassioned debate. Among other concerns, critics believe that business method patents are unnecessary to promote innovation, that tax strategy patents conflict with public policy, and that patents on generic materials raise ethical concerns. However, other observers believe that the patent system has served as a fair and effective mechanism for promoting advances in a broad range of disciplines. In their view, arbitrary restrictions upon the patent incentive are inappropriate. This report introduces the current debate concerning the appropriate range of patentable subject matter. It begins by providing an introduction to the patent system. It then reviews the ongoing discussion concerning the merits of business method and tax planning method patents. The current controversy concerning patents on genetic materials is then reviewed. The report then provides a broader discussion of innovation policy concerns that arise as policy makers consider the appropriate range of patentable subject matter. A summary of congressional issues and options concludes the report. The U.S. Constitution confers upon Congress the power "To promote the Progress of ... useful Arts, by securing for limited Times to ... Inventors the exclusive Right to their ... Discoveries." In accordance with the Patent Act of 1952, an inventor may seek the grant of a patent by preparing and submitting an application to the USPTO. USPTO officials known as examiners then determine whether the invention disclosed in the application merits the award of a patent. USPTO procedures require examiners to determine whether the invention fulfills certain substantive standards set by the patent statute. To be patentable, the invention must be novel, or different, from subject matter disclosed by an earlier patent, publication, or other state-of-the-art knowledge. In addition, an invention is not patentable if "the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains." This requirement of "nonobviousness" prevents the issuance of patents claiming subject matter that a skilled artisan would have been able to implement in view of the knowledge of the state of the art. The invention must also be useful, a requirement that is satisfied if the invention is operable and provides a tangible benefit. Even if these requirements of novelty, nonobviousness, and utility are met, an invention is not patentable unless it falls within at least one category of patentable subject matter. According to section 101 of the Patent Act of 1952, an invention which is a "process, machine, manufacture, or composition of matter" may be patented. The range of patentable subject matter under this statute has been characterized as "extremely broad." The courts and USPTO have nonetheless concluded that certain subject matter, including abstract ideas and laws of nature, is not patentable under section 101. This report further discusses this legal standard below. In addition to these substantive requirements, the USPTO examiner will consider whether the submitted application fully discloses and distinctly claims the invention. In particular, the application must enable persons skilled in the art to make and use the invention without undue experimentation. In addition, the application must disclose the "best mode," or preferred way, that the applicant knows to practice the invention. If the USPTO allows the patent to issue, its owner obtains the right to exclude others from making, using, selling, offering to sell, or importing into the United States the patented invention. Those who engage in those acts without the permission of the patentee during the term of the patent can be held liable for infringement. Adjudicated infringers may be enjoined from further infringing acts. The patent statute also provides for an award of damages "adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer." The maximum term of patent protection is ordinarily set at 20 years from the date the application is filed. At the end of that period, others may employ that invention without regard to the expired patent. Patent rights do not enforce themselves. Patent owners who wish to compel others to respect their rights must commence enforcement proceedings, which most commonly consist of litigation in the federal courts. Although issued patents enjoy a presumption of validity, accused infringers may assert that a patent is invalid or unenforceable on a number of grounds. The Court of Appeals for the Federal Circuit (Federal Circuit) possesses nationwide jurisdiction over most patent appeals from the district courts. The Supreme Court enjoys discretionary authority to review cases decided by the Federal Circuit. The Patent Act of 1952 allows a patent to issue upon a "process," which the statute defines to mean a "process, art, or method." Process patents claim a series of steps that may be performed to achieve a specific result. Process patents typically relate to methods of manufacture or use. A process patent may claim a method of making a product, for example, or a method of using a chemical compound to treat a disease. Although the statutory term "process" is broad, courts and the USPTO have nonetheless established certain limits upon the sorts of processes that may be patented. In particular, abstract ideas, mathematical algorithms, mental processes, and scientific principles have been judged not to be patentable. The Supreme Court has described these sorts of inventions as the "basic tools of scientific and technological work" that should be "free to all men and reserved exclusively to none." As explained by Supreme Court Justice Stephen Breyer, this rule "reflects a basic judgment that protection in such cases, despite its potentially positive incentive effects, would too severely interfere with, or discourage, development and the further spread of future knowledge itself." In recent years, two controversial categories of process patents have been identified. The first of these, business method patents, have been defined to include "a method of administering, managing, or otherwise operating a business or organization, including a technique used in doing or conducting business." The second, tax strategy patents, have been defined as "a plan, strategy, technique, or scheme that is designed to reduce, minimize, or defer, or has, when implemented, the effect of reducing, minimizing, or deferring, a taxpayer's tax liability." This report discusses these two sorts of process patents in turn. Prior to 1998, some courts had held that methods of doing business were not patentable subject matter under § 101 of the Patent Act. For example, the Court of Appeals for the First Circuit held that: [A] system for the transaction of business, such, for example, as the cafeteria system for transacting the restaurant business, or similarly the open-air drive-in system for conducting the motion picture theatre business, however, novel, useful, or commercially successful is not patentable apart from the means for making the system practically useful, or carrying it out. The Federal Circuit revisited the issue in 1998, however, and in its well-known decision in State Street Bank & Trust Co. v. Signature Financial Group held that no business method exclusion from patentability existed. The patent at issue in that case concerned a data-processing system for implementing an investment structure known as a "Hub and Spoke" system. This system allowed individual mutual funds ("Spokes") to pool their assets in an investment portfolio ("Hub") organized as a partnership. According to the patent, this investment regime provided the advantageous combination of economies of scale in administering investments coupled with the tax advantages of a partnership. The patented system purported to allow administrators to monitor financial information and complete the accounting necessary to maintain this particular investment structure. In addition, it tracked "all the relevant data determined on a daily basis for the Hub and each Spoke, so that aggregate year end income, expenses, and capital gain or loss can be determined for accounting and tax purposes for the Hub and, as a result, for each publicly traded Spoke." Litigation arose between Signature, the patent owner, and State Street Bank over the latter firm's alleged use of the patented invention. Among the defenses offered by State Street Bank was that the asserted patent claimed subject matter that was not within one of the four categories of statutory subject matter, and hence was invalid. The district court sided with State Street Bank. The trial judge explained: At bottom, the invention is an accounting system for a certain type of financial investment vehicle claimed as [a] 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. The same functions could be performed, albeit less efficiently, by an accountant armed with pencil, paper, calculator, and a filing system. The trial court further relied upon "the long-established principle that business 'plans' and 'systems' are not patentable." The court judged that "patenting an accounting system necessary to carry on a certain type of business is tantamount to a patent on the business itself."