2. Software and Business Methods Intro to IP: Prof. Robert Merges 1.13.10

3. Subject Matter: Overview § 101 Categories Process Machine Manufacture Composition of Matter Improvements

4. Chakrabarty “Products of nature and abstract ideas” are NOT patentable

5. Computer Software 1972 Gottschalk v. Benson S Ct rejects patent that would wholly preempt an algorithm Diamond v. Diehr Calculation + post- solution activity patentable Gradual Liberalization of patent standards PTO Guidelines 198119961997 Federal Circuit Cases  BCLT/FJC - 1999 © 1999 Menell/Merges 1960s PTO rejects software patents: mental steps doctrine

6. State Street Bank Two parts: –Software patents –Business method patents

7. Judge Giles S. Rich (1904-1999)

8. State Street Bank HUB (Pooled fund) MF

9. Computer software: method of doing business

10. 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

11. Claims Element b? D-G: “means... For processing data...”

12. Conclusion “[C]laim 1... claims a machine, namely a data processing system....”

13. “Exceptions” Software Business methods

14. Which might apply? “Abstract ideas”... = “disembodied concepts”

15. Disembodied concepts vs. “practical application” NEW TEST: “correspond[] to a useful, concrete or tangible thing”

16. Categorical prohibition vs. patent-by-patent analysis “Business methods” Versus: “does this claim cover a useful/concrete/tangible result?

17. Software Patents Issued 19821986199019941998 1500 3000 Approx. 600 6000 16000

22. “Patent Failure”, Bessen and Meurer

23. What was patentable under State Street? System for implementing dependency recovery process 5,980,447 An interactive multi-media computer system for providing support and guide to an individual undergoing recovery from a substance or emotional dependency. 5,905,975 Computer implemented system & method of executing an auction Assignee: onsale.com 5,897,620Method & Apparatus for the sale of airline- specified flight tickets Assignee: priceline.com 5,982,303Method for entering alpha- numerical data

24. More! 6,029,141: Amazon Affiliate Program 6,681,985: System for Providing Enhanced Systems Management, Such as in Branch Banking –Washington Mutual

26. 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

27. 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 …

28. The Uninvited Guest: Patents on Wall Street by Robert P. Merges Federal Reserve Bank of Atlanta Economic Review Fourth Quarter 2003, Volume 88, Number 4

29. Although patents may increase the costs of interchanging innovative ideas, they may bring some unintended benefits as well – by fostering spin-offs and facilitating entry by startups, for example.

30. Business Method Patent Boom Two sets of problems – –Conceptual: What is not patentable anymore? Are there any limits? –Practical: (Part of) massive growth in patent applications – the system is being overwhelmed!

31. 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

32. Application data USPTO saw 425,967 patent application filings in 2006, a 9.0 percent increase over 2005 levels.

34. Reactions to the “Patent Flood” Revisit patentable subject matter Process reforms Radically alter the system

35. “Patent Failure”, Bessen and Meurer

36. Yale U Press 2006

37. 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”

38. Metabolite v. Lab Corp. Am. 13. A method for detecting a deficiency of cobalamin or folate in warmblooded animals comprising the steps of: assaying a body fluid for an elevated level of total homocysteine; and correlating an elevated level of total homocysteine in said body fluid with a deficiency of cobalamin or folate. ’658 patent, col. 11, ll. 58-65.

39. Official disposition Writ of certiorari dismissed as improvidently granted.

40. 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.

41. All background to Bilski State Street Floodgates Reform proposals...

42. 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

43. 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.

44. A method for mandatory arbitration resolution regarding one or more unilateral documents comprising the steps of: enabling a person to enroll or register himself or herself and his or her one or more unilateral documents in a mandatory arbitration system;

45. providing arbitration language for insertion in the unilateral document wherein the arbitration language provides that any challenge to the unilateral document is to be presented to the mandatory arbitration system for binding arbitration;

46. [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.

47. The very constitutional provision that authorized Congress to create a patent system, Article I, § 8, also limited the subject matter eligible for patent protection to the “useful arts.” According to the Supreme Court, this constitutional limitation on patentability “was written against the backdrop of the [English] practices-eventually curtailed by the Statute of Monopolies-of the Crown in granting monopolies to court favorites in goods or businesses which had long before been enjoyed by the public.” -- 499 F.3d 1365, 1374

48. Comiskey, 499 F.3d at 1377 [M]ental processes - or processes of human thinking - standing alone are not patentable even if they have practical application.

49. It is thus clear that the present statute does not allow patents to be issued on particular business systems-such as a particular type of arbitration-that depend entirely on the use of mental processes. In other words, the patent statute does not allow patents on particular systems that depend for their operation on human intelligence alone, a field of endeavor that both the framers and Congress intended to be beyond the reach of patentable subject matter.

50. Patent “Originalism” Very timely in light of District of Columbia v. Heller, 128 S.Ct. 2783 (2008), the recent Supreme Court case on the 2 nd Amendment

51. United States Court of Appeals for the Federal Circuit 2007-1130 (Serial No. 08/833,892) IN RE BERNARD L. BILSKI and RAND A. WARSAW

52. 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

53. 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.

54. 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.”

55. 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;

56. 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.

57. 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.

58. The process involved abstract intangible entities: transactions, legal relationship, market participants having a “counter-risk position,” and more “transactions” to balance risk positions. The process was of the type that could readily be carried out by a human being – without using any kind of machine.

59. Nothing physical (not even data) appeared to be transformed.

60. “[T]he applicable test to determine whether a claim is drawn to a patent- eligible process under § 101 is the machine-or-transformation test set forth by the Supreme Court and clarified herein.”

61. A claimed process involving a fundamental principle that uses a particular machine or apparatus would not pre-empt uses of the principle that do not also use the specified machine or apparatus in the manner claimed. And a claimed process that transforms a particular article to a specified different state or thing by applying a fundamental principle would not pre-empt the use of the principle to transform any other article, to transform the same article but in a manner not covered by the claim, or to do anything other than transform the specified article. - p. 11

62. Gottschalk v. Benson, 409 U.S. 63 (1972). Parker v. Flook, 437 U.S. 584 (1978). Diamond v. Diehr, 450 U.S. 175 (1981). Reliance on Supreme Court Cases

63. 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 computer- controlled 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.

64. “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, XX (1972).

65. Reaffirmed the “machine-or- transformation” test for patent-eligibility of a process under 35 U.S.C. §101: p. 153 In order to be a patentable process, a process must either (or both): Transform an article to a different state or thing, and/or Be “tied to a particular machine.”

66. “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.” – Book p. 154 What kind of “hardware limitations” must now appear in a patent claim? Is a programmed computer “particular” enough? (Important question)

67. 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.

68. Merges, Software and Patent Scope: A Report from the Middle Innings, 85 Tex. L. Rev. 1528 (2007)