Download Software and Business Methods

Software and Business
Methods
Patent Law: Prof. Robert
Merges
8.19.2010
Course webpage
• http://www.law.berkeley.e
du/9236.htm
Subject Matter: Overview
§ 101 Categories
• Process
• Machine
• Manufacture
• Composition of Matter
• Improvements
In re Bilski
545 F.3d 943 (Fed. Cir. Oct. 30, 2008) (en
banc),
cert. granted __ U.S. __ (June 1, 2009)
• Messrs. Bilski and Barnard filed their patent
application on April 10, 1997.
• Claims were rejected by examiner and appealed
to Board of Patent Appeals and Interferences
(“BPAI”).
• BPAI issued decision sustaining the rejection of
all the claims in an order Sept. 26, 2006.
• An appeal from the BPAI was made to the Court
of Appeals for the Federal Circuit (CAFC).
• Prior to disposition by the regular three-judge
panel, the CAFC sua sponte ordered en banc
review.
A method for managing the consumption
risk costs of a commodity sold by a
commodity provider at a fixed price
comprising the steps of:
(a) initiating a series of transactions between
said commodity provider and consumers
of said commodity wherein said consumers
purchase said commodity at a fixed rate
based upon historical averages, said fixed
rate corresponding to a risk position of
said consumer;
Bilski claim 1 cont’d
(b) identifying market participants for said
commodity having a counter-risk position to
said consumers; and
(c) initiating a series of transactions between said
commodity provider and said market
participants at a second fixed rate such that said
series of market participant transactions
balances the risk position of said series of
consumer transactions.
What is this claim about?
• Fixed price contract: creates a risk that
prices will fall; protects against the risk
that prices will rise
• What if you wanted to reduce the risk
without losing the protection?
Hedging
• Simple examples: travel insurance;
spending money on a “backup plan”
• More formally: Hedging risk from a
major purchase by making an offsetting
investment
WeatherWise USA, located in Pittsburgh, PA, is
the premier provider of customized consumer
energy products including SetYourBillSM,
WeatherProof Bill®: fixed bills, capped bills,
EnerCheck® energy efficiency . . . Our unique
use of computerized models based on
engineering, rather than econometric
principles enables the development of
products and services that reduce financial
risk for energy providers and their residential
and commercial consumers.
Can you patent something
like this?
• The section 101 question
• NOTE: Distinct from other requirements
of patentability
– NOT asking whether claim 1 in Bilski is
new, nonobvious, etc.
Bilski v. Kappos
• Holding
• “Roads not taken”
• History, context – and future?
BILSKI v. KAPPOS
__ U.S. ___, 130 S.Ct. 3218,
2010 U.S. LEXIS 5521 (June
28, 2010)
The Court's precedents provide three specific
exceptions to § 101's broad patent-eligibility
principles: “laws of nature, physical
phenomena, and abstract ideas.”
Chakrabarty, supra, at 309. While these
exceptions are not required by the statutory
text, they are consistent with the notion that
a patentable process must be “new and
useful.” And, in any case, these exceptions
have defined the reach of the statute as a
matter of statutory stare decisis going back
150 years.
Under the Court of Appeals' formulation, an
invention is a “process” only if: “(1) it is tied
to a particular machine or apparatus, or (2)
it transforms a particular article into a
different state or thing.” 545 F.3d, at 954.
This Court has “more than once cautioned
that courts ‘should not read into the patent
laws limitations and conditions which the
legislature has not expressed.’ ” Diamond v.
Diehr . . . .
Ordinary meaning:
Adopting the machine-ortransformation test as the sole
test for what constitutes a
“process” (as opposed to just an
important and useful clue)
violates these statutory
interpretation principles.
The Holding
Rather than adopting categorical rules that
might have wide-ranging and unforeseen
impacts, the Court resolves this case narrowly
on the basis of this Court's decisions in Benson,
Flook, and Diehr, which show that petitioners'
claims are not patentable processes because
they are attempts to patent abstract ideas.
Indeed, all members of the Court agree that
the patent application at issue here falls outside
of § 101 because it claims an abstract idea.
Holding (cont’d)
The concept of hedging, described in claim
1 and reduced to a mathematical formula
in claim 4, is an unpatentable abstract
idea, just like the algorithms at issue in
Benson and Flook. Allowing petitioners
to patent risk hedging would pre-empt
use of this approach in all fields, and
would effectively grant a monopoly over
an abstract idea.
One rejected view
Respondent urges the Court to look to the other
patentable categories in § 101-machines,
manufactures, and compositions of matter-to
confine the meaning of “process” to a machine
or transformation, under the doctrine of
noscitur a sociis. Under this canon, “an
ambiguous term may be given more precise
content by the neighboring words with which
it is associated. [But] § 100(b) already
explicitly defines the term “process.”
What lies behind this rejected
view?
• “Patents are about technology” –
machines, manufactures, compositions of
matter . . .
• “Technological arts” concept in Europe
and some earlier US cases: rejected
The plurality portions of the
majority opinion
The machine-or-transformation test may well
provide a sufficient basis for evaluating
processes similar to those in the Industrial
Age-for example, inventions grounded in a
physical or other tangible form. But there are
reasons to doubt whether the test should be
the sole criterion for determining the
patentability of inventions in the Information
Age.
Dissent
The wiser course would have been to hold that
petitioners' method is not a “process” because
it describes only a general method of engaging
in business transactions-and business methods
are not patentable. More precisely, although a
process is not patent-ineligible simply because
it is useful for conducting business, a claim
that merely describes a method of doing
business does not qualify as a “process” under
§ 101.
Dissent (cont’d)
“[p]erhaps this was in part a function of an
understanding – shared widely among legislators,
courts, patent office officials, and inventors –
about what patents were meant to protect.
Everyone knew that manufactures and machines
were at the core of the patent system.” Merges,
Property Rights for Business Concepts and
Patent System Reform, 14 Berkeley Tech. L.J.
577, 585 (1999) (hereinafter Merges)
Judge Giles S. Rich (1904-1999)
State Street Bank
• Two parts:
– Software patents
– Business method patents
State Street Bank
MF
MF
MF
HUB
(Pooled fund)
MF
MF
MF
MF
MF
Computer software: method of doing
business
Complex regulatory/technological
system
• Partner fund financial services structure
• Pooling assets while maintaining
detailed records about the source
and performance of each dollar
invested in central fund
Conclusion
• “[C]laim 1 . . . claims a
machine, namely a data
processing system . . . .”
“Exceptions”
• Software
• Business methods
Which might apply?
• “Abstract ideas” . . .
• = “disembodied
concepts”
Disembodied concepts vs.
“practical application”
• NEW TEST:
• “correspond[] to a useful,
concrete or tangible thing”
Categorical prohibition vs.
patent-by-patent analysis
• “Business methods”
• Versus: “does this claim cover
a useful/concrete/tangible
result?
Software Patents Issued
16000
6000
Approx.
600
1982
3000
1500
1986
1990
1994
1998
Application data
• USPTO saw 425,967 patent
application filings in 2006, a 9.0
percent increase over 2005 levels.
Huge Growth in PTO Budget,
Examiner Hiring
• Now a $2 billion agency
• Hired thousands of new examiners in the
past few years
– Turnover problems …
Reactions to the “Patent Flood”
• Revisit patentable subject
matter
• Process reforms
• Radically alter the system
AS MANY AS SIX IMPOSSIBLE PATENTS
BEFORE BREAKFAST: PROPERTY RIGHTS
FOR BUSINESS CONCEPTS AND PATENT
SYSTEM REFORM, 14 BTLJ 577 (1999)
By Robert P. Merges
“Patent Failure”, Bessen and
Meurer
What’s patentable under State
Street?
5,905,975 Computer implemented
system & method of
executing an auction
5,897,620 Method & Apparatus for
the sale of airlinespecified flight tickets
Assignee: onsale.com
Assignee: priceline.com
5,982,303 Method for entering alphanumerical data
5,980,447 System for implementing
dependency recovery
process
An interactive multi-media
computer system for providing
support and guide to an individual
undergoing recovery from a
substance or emotional dependency.
More!
• 6,029,141: Amazon Affiliate Program
• 6,681,985: System for Providing Enhanced
Systems Management, Such as in Branch
Banking
– Washington Mutual
United States Patent 7,249,083 Noraev , et al.
July 24, 2007 Securities, supporting systems and
methods thereof: Lehman Brothers
Abstract A financial instrument, equity dilution
inhibitor and security upgrade account are disclosed
based on an enhanced call-spread option.
Implementation of the investment vehicle and/or
upgrade account are managed via program
controlled data processor governing system
operation in accordance with investment
parameters. Enhanced flexibility for this investment
vehicle increases its usefulness to a broad spectrum
of potential investors
1. A computer implemented method for creating
an investment vehicle, comprising: creating via
software stored on a computer a debt security
providing a fixed income return to a purchaser
for a pre-set period of time that further provides
to said purchaser an equity conversion
arrangement for a select underlying equity
security based on future contingent events; and
creating … a derivative instrument coupled to,
but separate from, said debt security by
providing an option to an issuer of said debt
security to purchase shares of said equity
security at a select price …
Computer Software
Diamond v. Diehr
Calculation + postsolution activity
patentable
Gottschalk v. Benson
S Ct rejects patent
that would wholly
preempt an algorithm
PTO rejects
software patents:
mental steps
doctrine
1960s
1972
Federal Circuit
Cases 
PTO Guidelines
Gradual Liberalization
of patent standards
1981
1996
1997
• Merges, Software and Patent
Scope: A Report from the Middle
Innings, 85 Tex. L. Rev. 1528
(2007)
Section 101 Reform
• “Technological arts” test
– Refine categories of patentable subject matter;
look to history in a general way . . .
• Test each claimed invention more rigorously
– Create a test that weeds out the “clearly flaky”
from the “clearly inventive”
Emanations from THE Court
• Oral Argument in Microsoft v. AT&T – 271(f)
infrginement case
• Dissent from LabCorp case
Breyer et al. dissent
• “laws of nature, natural phenomena, and
abstract ideas” excluded from § 101
• “[S]ometimes too much patent protection
can impede rather than “promote”. . . .
• [T]his Court has never made such a
statement [as State Street] and, if taken
literally, thestatement would cover instances
where this Court has held the contrary.
Bilski: “call the question”
• Application/Board decision
• Federal Circuit Opinion
• Supreme Court preview
Board in Bilski
• Claim “wholly preempts” process; a
complaint about effective breadth
• Claim does not “transform” anything
– Complaint about lack of tangibility; abstractness;
lack of physicality
In re Bilski
545 F.3d 943 (Fed. Cir. Oct. 30, 2008) (en
banc),
cert. granted __ U.S. __ (June 1, 2009)
Main points
• Rejection of claims to commodity price
hedging technique – AFFIRMED
• Announces a new/old “machine or
transformation” test for patentable
subject matter
• Overrules “Useful, concrete and
tangible” test of State of Street Bank
Examiner Rejection
Claim 1 merely “manipulates
[an] abstract idea and solves a
purely mathematical problem
without any limitation to a
practical application, therefore,
the invention is not directed to
the technological arts.”
Examiner’s rejection: “[T]he invention
is not implemented on a specific
apparatus and merely manipulates
[an] abstract idea and solves a purely
mathematical problem without any
limitation to a practical application,
therefore, the invention is not
directed to the technological arts.”
The Applicants admitted that claims
were not limited to operation on a
computer.
Bilski, p. 3
[T]he Supreme Court has
held that the meaning of
“process” as used in § 101
is narrower than its
ordinary meaning.
Reliance on Supreme Court
Cases
Gottschalk v. Benson, 409 U.S.
63 (1972).
Parker v. Flook, 437 U.S. 584
(1978).
Diamond v. Diehr, 450 U.S. 175
(1981).
• Gottschalk v. Benson (1972) involved the
conversion of binary-coded decimal (BCD) data
to a pure binary format, found merely an effort
to patent an algorithm.
• No machine; involved transformation of
unspecified data.
• Diamond v. Diehr (1981) involved a computercontrolled process of making tires, definitely a
physical transformation that was also tied to a
machine.
• These cases are, for now, the primary guides for
determining patentable subject matter.
The true issue before us then is whether
Applicants are seeking to claim a fundamental
principle (such as an abstract idea) or a mental
process. And the underlying legal question
thus presented is what test or set of criteria
governs the determination by the Patent and
Trademark Office (“PTO”) or courts as to
whether a claim to a process is patentable
under § 101 or, conversely, is drawn to
unpatentable subject matter because it claims
only a fundamental principle. -- p. 3
The Court in Diehr thus drew a distinction
between those claims that “seek to preempt the use of” a fundamental principle,
on the one hand, and claims that seek
only to foreclose others from using a
particular “application ” of that
fundamental principle, on the other. 450
U.S. at 187.
Bilski at 4
A claimed process is surely patenteligible under § 101 if: (1) it is
tied to a particular machine or
apparatus, or (2) it transforms a
particular article into a different
state or thing. See Benson, 409
U.S. at 70 . . . .
[W]e agree that future developments in
technology and the sciences may present
difficult challenges to the machine-ortransformation test, just as the widespread
use of computers and the advent of the
Internet has begun to challenge it in the past
decade. Thus, we recognize that the Supreme
Court may ultimately decide to alter or
perhaps even set aside this test to
accommodate emerging technologies. And we
certainly do not rule out the possibility that
this court may in the future refine or augment
the test or how it is applied. -- p. 5
Rejected tests
• Freeman-Walter-Abele test – p. 6
• State Street Bank
• Technological Arts
Machine or Transformation
Test
• What is an “article” – p. 8
• Example from In re Abele p. 9
Claim patentable when “said data is X-ray
attenuation data produced in a two
dimensional field by a computed tomography
scanner.” Abele, 684 F.2d at 908-09. This data
clearly represented physical and tangible
objects, namely the structure of bones, organs,
and other body tissues. Thus, the
transformation of that raw data into a
particular visual depiction of a physical object
on a display was sufficient to render that more
narrowly-claimed process patent-eligible.
P. 9
So long as the claimed process is limited to
a practical application of a fundamental
principle to transform specific data, and
the claim is limited to a visual depiction
that represents specific physical objects
or substances, there is no danger that the
scope of the claim would wholly pre-empt
all uses of the principle.
We hold that the Applicants' process as
claimed does not transform any article to
a different state or thing. Purported
transformations or manipulations simply
of public or private legal obligations or
relationships, business risks, or other
such abstractions cannot meet the test
because they are not physical objects or
substances, and they are not
representative of physical objects or
substances.
Why? Federal Circuit Tired of
Being Reversed?
• KSR (nonobviousness) – 2008
• Microsoft/AT&T (infringement) – 2007
• Festo (infringement) – 2002
• Warner-Jenkinson (infringement) - 1997
“When a claim containing a
mathematical formula implements or
applies the 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 satisfies 101's
requirements.” -- Gottschalk v. Benson,
409 U.S. 63 (1972).
“We leave to future cases the elaboration
of the precise contours of machine
implementation, as well as … whether
or when recitation of a computer
suffices to tie a process claim to a
particular machine.” – p. 8
• What kind of “hardware limitations” must
now appear in a patent claim?
• Is a programmed computer “particular”
enough? (Important question)
• Is transformation of data patentable subject
matter?
• Certain types of data transformations might still
be patentable, especially if the transformation
involves data that represents physical things.
• In re Abele case involved X-ray data that clearly
represented physical and tangible objects such as
the structure of bones, organs, and other body
tissues –found patentable.
• Still uncertainty in this area.
Comiskey and the Linn
concurrence
• “The [relevant] question [is] what
processes were considered to be
patentable in England at the time of the
1793 Act. Examination of the relevant
sources leads to the conclusion that the
method Bilski seeks to claim would not
have been considered patentable subject
matter as a process under the English
statute.” -- p. 11
In re Comiskey, 499 F.3d 1365
(Fed. Cir. 2007)
• Comiskey’s patent application No.
09/461,742 claims a method and
system for mandatory
arbitration involving legal
documents, such as wills or
contracts.
[W]e conclude that Comiskey's
independent claims 1 and 32 and
most of their dependent claims
are unpatentable subject matter
under 35 U.S.C. § 101.
Patent “Originalism”
• Very timely in light of District
of Columbia v. Heller, 128
S.Ct. 2783 (2008), the recent
Supreme Court case on the
2nd Amendment
Newman Dissent
• Is patent law keeping up with new
technologies?
• The “knowledge economy” and patents . .
.
Mayer dissent
“The majority's proposed “machine-ortransformation test” for patentability will
do little to stem the growth of patents on
non-technological methods and ideas.
Quite simply, in the context of business
method patent applications, the
majority's proposed standard can be too
easily circumvented.” – p. 14
Rader dissent
Chooses “to say what could have been said
in a single sentence: ‘Because Bilski
claims merely an abstract idea, this court
affirms the Board's rejection.’”
Period!
Post-Bilski Trends to Watch
• Supreme Court developments:
continuing supervision of patent
system or “back to the sidelines”?
• Software patents