2. Software and Business Methods Patent Law: Prof. Robert Merges 8.19.2010

3. Course webpage http://www.law.berkeley.e du/9236.htm

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

5. In re Bilski 545 F.3d 943 (Fed. Cir. Oct. 30, 2008) (en banc), cert. granted __ U.S. __ (June 1, 2009)

6. 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.

7. 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;

8. 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.

9. 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?

10. Hedging Simple examples: travel insurance; spending money on a “backup plan” More formally: Hedging risk from a major purchase by making an offsetting investment

13. WeatherWise USA, located in Pittsburgh, PA, is the premier provider of customized consumer energy products including SetYourBill SM, 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.

14. 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.

15. Bilski v. Kappos Holding “Roads not taken” History, context – and future?

16. BILSKI v. KAPPOS __ U.S. ___, 130 S.Ct. 3218, 2010 U.S. LEXIS 5521 (June 28, 2010)

17. 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.

18. 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....

19. Ordinary meaning: Adopting the machine-or- transformation test as the sole test for what constitutes a “process” (as opposed to just an important and useful clue) violates these statutory interpretation principles.

20. 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.

21. 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.

22. 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.”

23. 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

24. 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.

25. 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.

26. 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)

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

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

29. State Street Bank HUB (Pooled fund) MF

30. Computer software: method of doing business

31. 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

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

33. “Exceptions” Software Business methods

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

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

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

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

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

42. Huge Growth in PTO Budget, Examiner Hiring Now a $2 billion agency Hired thousands of new examiners in the past few years –Turnover problems …

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

44. 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

46. “Patent Failure”, Bessen and Meurer

47. What’s 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

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

51. 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

52. 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 …

54. 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  1960s PTO rejects software patents: mental steps doctrine

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

56. 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”

57. Emanations from THE Court Oral Argument in Microsoft v. AT&T – 271(f) infrginement case Dissent from LabCorp case

58. 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.

59. Bilski: “call the question” Application/Board decision Federal Circuit Opinion Supreme Court preview

60. 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

61. In re Bilski 545 F.3d 943 (Fed. Cir. Oct. 30, 2008) (en banc), cert. granted __ U.S. __ (June 1, 2009)

62. 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

63. 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.”

64. 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.

65. Bilski, p. 3 [T]he Supreme Court has held that the meaning of “process” as used in § 101 is narrower than its ordinary meaning.

66. 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

67. 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.

68. 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

70. The Court in Diehr thus drew a distinction between those claims that “seek to pre- empt 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.

71. Bilski at 4 A claimed process is surely patent- eligible 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....

72. [W]e agree that future developments in technology and the sciences may present difficult challenges to the machine-or- transformation 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

73. Rejected tests Freeman-Walter-Abele test – p. 6 State Street Bank Technological Arts

74. Machine or Transformation Test What is an “article” – p. 8 Example from In re Abele p. 9

75. 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.

76. 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.

77. 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.

78. Why? Federal Circuit Tired of Being Reversed? KSR (nonobviousness) – 2008 Microsoft/AT&T (infringement) – 2007 Festo (infringement) – 2002 Warner-Jenkinson (infringement) - 1997

79. “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).

80. “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)

81. 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.

82. 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

83. 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.

84. [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.

85. 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

86. Newman Dissent Is patent law keeping up with new technologies? The “knowledge economy” and patents...

87. Mayer dissent “The majority's proposed “machine-or- transformation 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

88. 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!

89. Post-Bilski Trends to Watch Supreme Court developments: continuing supervision of patent system or “back to the sidelines”? Software patents