SAP America, Inc. v. Versata Development Group, Inc., slip op. CBM2012-00001 (PTAB Jan. 9, 2013) (Software Patents)

The America Invents Act (AIA) created a new special transitional procedure for challenging business method patents, which are apparently considered to be more suspect than other patents. The procedure is called the Covered Business Method review procedure.

An issued business method patent, that has gone through a complete review by the U.S. Patent and Trademark Office and that has been allowed by an examiner, and litigated in court, can be reviewed again by the Patent Trial and Appeal Board (Board) of the U.S. Patent and Trademark Office under this procedure if it is a covered business method patent.

Only a person who is sued or charged with infringement of a covered business method patent may petition for a covered business method review of the patent.

Such a person can petition for review of a covered business method patent. A covered business patent is a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions. The AIA does not specify what a patent for a technological invention covers.

According to the U.S. Patent and Trademark Office, the Office will consider the legislative intent and history behind the public law definition and the transitional program itself to interpret whether a business method patent covers a “financial product or service.” For example, the legislative history explains that the definition of covered business method patent was drafted to encompass patents “claiming activities that are financial in nature, incidental to a financial activity or complementary to a financial activity.” This remark tends to support the notion that “financial product or service” should be interpreted broadly.

In this case, the business method patent owner argued that the broadest reasonable definition of financial services or products would exclude its claimed invention.

The business method patent number is 6,553,350. The business method patent relates to a system that organizes various pricing tables and price adjustment tables and various products and purchasing organizations based on “who” (i.e. which purchasing organization) is purchasing “what” (i.e. which product)The system and method organizes various purchasing organizations and products into hierarchical tables. These hierarchical tables are called organizational groups and product groups. Various price adjustments may be specified for each level of the organizational groups and product groups hierarchies.

The Board disagreed with the position that this was not a financial service or product and made clear that the definition of covered business method was to be broadly interpreted.

The business method patent owner also argue that the Petitioner had failed to establish that the patent claims did not recite a technological invention. The patent owner argued that its patent was sufficiently technological, and thus not a covered business method, because the patent discloses and claims a software invention. The Board disagreed and held that the claimed subject matter as a whole neither recited a technological feature nor solved a technical problem using a technical solution, because “no specific, unconventional software, computer equipment, tools or processing capabilities are required.” The Board noted that, instead, the patent “states that its invention may be implemented in any type of computer system or programming or processing environment.”

There is legal precedent for the position that a general purpose computer, when programmed, becomes a specialized machine. That precedent does not seem to persuade this board.

Post-Bilski case on Beauregard claims, CyberSource v. Retail Decisions, Federal Circuit 2011 (Software Patents)

The Federal Circuit reviewed an appeal by CyberSource Corporation from a decision of the District Court for the Northern District of California. The district court had granted summary judgment of invalidity of claims 2 and 3 of U.S. Patent No. 6,029,154 (“’154 patent”) under 35 U.S.C. § 101 for failure to recite patent-eligible subject matter. The patent relates to a method and system for detecting fraud in a credit card transaction between a consumer and a merchant over the Internet.

The Federal Circuit refused to hold that all Beauregard claims are necessarily statutory. Instead, they treated a Beauregard claims as a process claim and then applied the machine-or-transformation test.

Claim 3, after reexamination, reads:

3. A method for verifying the validity of a credit card transaction over the Internet comprising the steps of:

a) obtaining information about other transactions that have utilized an Internet address that is identified with the credit card transaction;

b) constructing a map of credit card numbers based upon the other transactions and;

c) utilizing the map of credit card numbers to determine if the credit card transaction is valid.

Claim 2, after reexamination, is a Beauregard claim and reads:

2. A computer readable medium containing program instructions for detecting fraud in a credit card transaction between a consumer and a merchant over the Internet, wherein execution of the program instructions by one or more processors of a computer system causes the one or more processors to carry out the steps of:

a) obtaining credit card information relating to the transactions from the consumer; and

b) verifying the credit card information based upon values of plurality of parameters, in combination with information that identifies the consumer, and that may provide an indication whether the credit card transaction is fraudulent,

wherein each value among the plurality of parameters is weighted in the verifying step according to an importance, as determined by the merchant, of that value to the credit card transaction, so as to provide the merchant with a quantifiable indication of whether the credit card transaction is fraudulent,

wherein execution of the program instructions by one or more processors of a computer system causes that one or more processors to carry out the further steps of;

[a] obtaining information about other transactions that have utilized an

Internet address that is identified with the credit card transaction;

[b] constructing a map of credit card numbers based upon the other transactions; and

[c] utilizing the map of credit card numbers to determine if the credit card transaction is valid.

The Federal Circuit first considered claim 3. The Federal circuit noted that CyberSource acknowledged that the “Internet address” recited in step (a) of claim 3 “may be, for example, an Internet protocol (IP) address or an e-mail address for the particular credit card transaction.” The Federal Circuit noted that CyberSource further concedes that the “map of credit card numbers” recited in step (b) can be as simple as a list of credit card transactions relating to a particular IP address. Finally, the Federal Circuit noted that step (c) does not limit claim 3 to any specific fraud detection formula or mathematical algorithm, but rather broadly purports to encompass any means of “utilizing the map of credit card numbers to determine if the credit card transaction is valid.”

The district court found that claim 3 fails to meet either prong of the machine-or-transformation test. The Federal Circuit agreed and agreed with the district court that the method of claim 3 simply requires one to “obtain and compare intangible data pertinent to business risks.” The mere collection and organization of data regarding credit card numbers and Internet addresses is insufficient to meet the transformation prong of the test, and the plain language of claim 3 does not require the method to be performed by a particular machine, or even a machine at all.

The Supreme Court affirmed the invalidity of Bilski’s claims. The Supreme Court declined to generally invalidate software patents and instead held that the Federal Circuit’s Machine-or-Transformation test is not the exclusive test to determining if a method is statutory.

The Federal Circuit then went on to claim 2, the Beauregard claim. A Beauregard claim, named after In re Beauregard, 53 F.3d 1583 (Fed. Cir. 1995), is a claim to a computer readable medium (e.g., a disk, hard drive, or other data storage device) containing program instructions for a computer to perform a particular process.

The Federal Circuit stated that regardless of what statutory category a claim’s language is crafted to literally invoke, we look to the underlying invention for patent-eligibility purposes. Here, it is clear that the invention underlying both claims 2 and 3 is a method for detecting credit card fraud, not a manufacture for storing computer-readable information. This case is thus similar to In re Abele, 684 F.2d 902 (CCPA 1982).

The Federal Circuit went on to say that in the present case, CyberSource had not met its burden to demonstrate that claim 2 is “truly drawn to a specific” computer readable medium, rather than to the underlying method of credit card fraud detection.

The Federal Circuit acknowledged that, after Abele, they have held that, as a general matter, programming a general purpose computer to perform an algorithm “creates a new machine, because a general purpose computer in effect becomes a special purpose computer once it is programmed to perform particular functions pursuant to instructions from program software.” In re Alappat, 33 F.3d 1526, 1545 (Fed. Cir. 1994). But stated that they have never suggested that simply reciting the use of a computer to execute an algorithm that can be performed entirely in the human mind falls within the Alappat rule. Thus, despite its Beauregard claim format, under Abele, we treat claim 2 as a process claim for patent-eligibility purposes.

The Federal Circuit stated that one could mentally perform the fraud detection method that underlies both claims 2 and 3 of the ’154 patent, as the method consists of only the general approach of obtaining information about credit card transactions utilizing an Internet address and then using that information in some undefined manner to determine if the credit card transaction is valid. Because claims 2 and 3 attempt to capture unpatentable mental processes (i.e., abstract ideas), they are invalid under § 101.

The Federal Circuit affirmed the district court holding.

The Federal Circuit decision can be found here:

www.cafc.uscourts.gov/images/stories/opinions-orders/09-1358.pdf

Microsoft Corp. v. i4i Limited Partnership et al., U.S. Supreme Court 2011 (Software Patents)

i4i sued Microsoft Corp. for willful infringement of a software patent. The Patent Act provides patentees with a presumption of validity under 35 U.S.C. 282. Since 1984, the Federal Circuit has read §282 to require a defendant seeking to overcome the presumption to persuade the fact finder of its invalidity defense by clear and convincing evidence.

Microsoft sought to change the presumption of validity. Instead of a “clear and convincing” standard, Microsoft proposed instead using a “preponderance of the evidence” standard. This would have, in effect, weakened or reduced the value of all issued U.S. patents.

More particularly, more than a year before filing its patent application, i4i had sold a software program known as S4 in the United States, but they disagreed over whether that software embodied the invention claimed in i4i’s software patent and therefore invalidated the patent. Relying on the undisputed fact that the S4 software was never presented to the Patent and Trademark Office (PTO) during its examination of the software patent application, Microsoft objected to i4i’s proposed jury instruction that the invalidity defense must be proved by clear and convincing evidence. The District Court nevertheless gave that instruction and rejected Microsoft’s alternative instruction proposing a preponderance of the evidence standard. The jury found that Microsoft willfully infringed the i4i software patent and had failed to prove the patent’s invalidity. The Federal Circuit affirmed, relying on its settled interpretation of §282.

The Supreme Court rejected Microsoft’s contention that a defendant need only persuade the jury of a patent invalidity defense by a preponderance of the evidence. The Supreme Court stated that where Congress has prescribed the governing standard of proof, its choice generally controls. They went on to reason that while §282 includes no express articulation of the standard of proof, where Congress uses a common-law term in a statute, the Court assumes the “term . . . comes with a common law meaning.” Safeco Ins. Co. of America v. Burr, 551 U. S. 47, 58. Here, by stating that a patent is “presumed valid,” §282, Congress used a term with a settled common-law meaning.

The Supreme Court also rejected Microsoft’s argument that a preponderance standard must at least apply where the evidence before the factfinder was not before the PTO during the examination process. The Court stated that it is true enough that, in these circumstances, “the rationale underlying the presumption—that the PTO, in its expertise, has approved the claim—seems much diminished,” KSR Int’l Co. v. Teleflex Inc., 550 U. S. 398, 426, though other rationales may still animate the presumption. But the question remains whether Congress has specified the applicable standard of proof. As established, Congress did just that by codifying the common-law presumption of patent validity and, implicitly, the heightened standard of proof attached to it.

There is a good reason for the strong presumption of validity that the “clear and convincing” standard provides. When an inventor files a software patent application, they give up trade secret rights before ever knowing if they will obtain patent rights. This is a good result for patent holders and a bad result for infringers and alleged infringers.

Post-Bilski Case, RCT v. Microsoft Corp.(Software Patents)

This case is significant because the Federal Circuit took a broad view of patent eligible subject matter in a post-Bilski case. This case involved patents related to digital image. Some of the claims didn’t outright specify hardware items.

In this case, Research Corporation Technologies, Inc. (“RCT”) initiated an action against Microsoft Corporation (“Microsoft”), alleging infringement of six related patents: U.S. Patent Nos. 5,111,310; 5,341,228; 5,477,305; 5,543,941; 5,708,518 (“’518 patent”); and 5,726,772. The United States District Court for the District of Arizona held that certain claims of the ’310 and ’228 patents were invalid under 35 U.S.C. § 101.

RCT’s six patents relate to digital image halftoning. Digital images are, in fact, thousands of pixels arranged in arrays of rows and columns. Each pixel in a black-and- white image contains information about the gray level of the image at that particular position. A black-and-white image can have 256 shades of gray. A gray level 1 repre- sents black and a gray level 256 represents white, with intervening numbers representing various shades of gray. For color images, a computer creates separate color- specific arrays of pixels, one array for each primary color. A color-specific array has pixels containing information about the shade level of that color at that particular position.

Digital images often show shades of gray and even a spectrum of colors. Nonetheless, computer displays and printers can only use a limited number of primary colors to display these digital images. Halftoning bridges this gap by simulating a continuous tone image through the use of dots. Halftoning techniques allow computers to present many shades and color tones with a limited number of pixel colors. These techniques place the dots of primary colors in a formation that gives the viewer the illusion of many more shades of gray or varying colors.

Asserted claims 1 and 2 of the ‘310 patent recited:
1. A method for the halftoning of gray scale images by utilizing a pixel-by-pixel comparison of the image against a blue noise mask in which the blue noise mask is comprised of a random non-deterministic, non-white noise single valued function which is designed to produce visually pleasing dot profiles when thresholded at any level of said gray scale images.

2. The method of claim 1, wherein said blue noise mask is used to halftone a color image.

Note that no computer or computer hardware was specified in these claims.

The Federal Circuit noted that the Patent Act of 1952 sets forth the categories of subject matter eligible for patent protection:

Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title.
35 U.S.C. § 101. The Federal Circuit noted that section 101 emphasizes that “any” subject matter in the four independent categories and “any” improvement in that subject matter qualify for protection. The Supreme Court recently reemphasized the significance of these broad statutory categories with the broadening double “any” exhortation as well. Bilski v. Kappos, 130 S. Ct. 3218, 3225 (2010).

The Federal Circuit also noted that the section 101 patent-eligibility inquiry is only a threshold test. The Supreme Court recently emphasized this statutory framework and faulted the Federal Circuit’s “machine or transformation” test for eligibility as nonstatutory. In refocusing the eligibility inquiry on the statute, the Supreme Court advised that section 101 eligibility should not become a substitute for a patentability analysis related to prior art, adequate disclosure, or the other conditions and requirements of Title 35. In other words, section 101 does not permit a court to reject subject matter categorically because it finds that a claim is not worthy of a patent.

The Federal Circuit went on to state that, with that guidance, the court also will not presume to define “abstract” beyond the recognition that this disqualifying characteristic should exhibit itself so manifestly as to override the broad statutory categories of eligible subject matter and the statutory context that directs primary attention on the patentability criteria of the rest of the Patent Act. In that context, the Federal Circuit perceived nothing abstract in the subject matter of the processes claimed in the ’310 and ’228 patents. The ’310 and ’228 patents claim methods (statutory “processes”) for rendering a halftone image of a digital image by comparing, pixel by pixel, the digital image against a blue noise mask.

The invention presents functional and palpable applications in the field of computer technology. These inventions address “a need in the art for a method of and apparatus for the halftone rendering of gray scale images in which a digital data processor is utilized in a simple and precise manner to accomplish the halftone rendering.” The fact that some claims in the ’310 and ’228 patents require a “high contrast film,” “a film printer,” “a memory,” and “printer and display devices” also confirm this court’s holding that the invention is not abstract. Indeed, this court notes that inventions with specific applications or improvements to technologies in the marketplace are not likely to be so abstract that they override the statutory language and framework of the Patent Act.

The Federal Circuit also observed that the claimed methods incorporate algorithms and formulas that control the masks and halftoning. These algorithms and formulas, even though admittedly a significant part of the claimed combination, did not bring this invention even close to abstractness that would override the statutory categories and context.

In view of this decision, it seems that few software-based inventions will be considered to be too abstract for the Federal Circuit, even if some claims do not specifically recite hardware.

Bilski et al. v. Kappos Under Secretary of Commerce for Intellectual Property, Supreme Court, 2010 (Software Patents)

In October 2008, the Federal Circuit reviewed the decision of the Board of Patent Appeals and Interferences that sustained a rejection of all eleven of Bilski’s patent claims under 35 U.S.C. 101 as not directed to patent-eligible subject matter. Bilski sought patent protection for a method of hedging against risk in commodity trading. The Federal Circuit affirmed, holding that Bilski’s claims were not statutory under 35 U.S.C. 101. The Federal Circuit revived the Benson test, that a claimed process is patent-eligible under Section 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. The Federal Circuit rejected its prior test of State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1373 (1998) and AT&T Corp. v. Excel Communications Inc., 172 F.3d 1352, 1357 (1999) for determining whether a claimed invention was a patentable “process” under section 101–whether it produces a “useful, concrete, and tangible result.”

Bilski’s claims recited a series steps but not any machine or computer. Claim 1 is representative and recites:
1. 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;
(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.

The remaining claims explain how claims 1 and 4 can be applied to allow energy suppliers and consumers to minimize the risks resulting from fluctuations in market demand for energy.

The Supreme Court affirmed the invalidity of Bilski’s claims. The Supreme Court declined to generally invalidate software patents and instead held that the Federal Circuit’s Machine-or-Transformation test is not the exclusive test to determining if a method is statutory.

The Supreme Court noted that Section 101 specifies four independent categories of inventions or discoveries that are patent eligible: “process[es],” “machine[es],” “manufactur[es],” and “composition[s] of matter.” The Supreme Court noted that they had stated in their earlier decision of Diamond v. Chakrabarty, 447 U.S. 303 that in choosing such expansive terms, Congress plainly contemplated that the patent laws would be given wide scope in order to ensure that ingenuity should receive a liberal encouragement. The Court’s precedents provide three specific exceptions to section 101’s broad principles: “laws of nature, physical phenomena, and abstract ideas.” While not required by the statutory text, these exceptions are consistent with the notion that a patentable process must be “new and useful.” The exceptions have defined the statute’s reach going back 150 years.

The Bilski case involved an invention that is claimed to be a “process” under section 101. 35 USC 100(b) defines “process” as: “process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.”

The Supreme Court considered two proposed categorical limitations on “process” patents under section 101 that would have, if adopted, barred Bilski’s application: the machine-or-transformation test and the categorical exclusion of business method patents.

The Supreme Court noted that it had more than once cautioned that courts should not read into the patent laws limitations and conditions which the legislature has not expressed. In patent law, as in all statutory construction, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning. Adopting the machine-or-transformation test as the sole test for what constitutes a “process” violates these statutory interpretation principles. The Court stated that it was unaware of any “ordinary, contemporary, common meaning” of the definitional terms “process, art or method” of section 100(b) that would require these terms to be tied to a machine or to transform an article.

The Supreme Court’s previous decision Gottschalk v. Benson, 409 U.S. 63, 70 (1972) noted that transformation and reduction of an article to a different state or thing is the clue to the patentability of a process claim that does not include particular machines. At the same time, however, it explicitly declined to hold that no process patent could ever qualify if it did not meet machine or transformation requirements.

According to the Supreme Court, the machine-or-transformation test is a useful and important clue for determining whether some claimed inventions are processes under section 101. But the machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible “process.” It is true that patents for inventions that did not satisfy the machine-or-transformation test were rarely granted in earlier eras, especially in the Industrial Age, but times change. The machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and manipulation of digital signals.

The Supreme Court stated that it was not commenting on the patentability of any particular invention, let alone holding that any of the above-mentioned technologies from the Information Age should or should not receive patent protection.

Section 101 similarly precludes the broad contention that the term “process” categorically excludes business methods. Federal law explicitly contemplates the existence of at least some business method patents. See 35 U.S.C. 273(b)(1).

Even though the Bilski application is not categorically outside of section 101, that does not mean that it is a process under section 101. Rather than adopting categorical rules, the Court resolved this case narrowly on the basis of its decisions in Benson, Flook, and Diehr, which show that Bilski’s claims are not patentable processes because they are attempts to patent abstract ideas. The concept of hedging, described in claim 1 and reduced to a mathematical formula in claim 4, is an unpatentable abstract idea, like the algorithms at issue in Benson and Flook. Allowing Bilski to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.

The Court went on to say that Bilski’s remaining claims are broad examples of how hedging can be used in commodities and energy markets. Flook established that limiting an abstract idea to one field of use or adding token postsolution components did not make the concept patentable. That is exactly what the remaining claims in petitioners’ application do.

The Supreme Court concluded by stating that it once again declined to impose limitations on the Patent Act that were inconsistent with the Act’s text. Bilski’s patent application can be rejected under precedents on the unpatentability of abstract ideas. The Court, therefore, did not need to define further what constitutes a patentable “process,” beyond pointing to the definition of that term provided in section 100(b) and looking to the guideposts in Benson, Flook, and Diehr.

The Supreme Court also cautioned that nothing in the opinion should be read as endorsing interpretations of section 101 that the Court of Appeals for the Federal Circuit has used in the past, e.g. State Street, 149 F.3d at 1373; AT&T Corp. 172 F.3d, at 1357. The Supreme Court finished by stating that in disapproving an exclusive machine-or-transformation test, the Supreme Court by no means foreclosed the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.

In summary, this decision did nothing much to harm software patents. It even stated that business method patents are sometimes acceptable, and are contemplated by the patent laws. However, no clear test was given as to what the test is for statutory subject matter. The machine or transformation test, though not the exclusive test, provides a useful and important clue as to whether a patent claim is statutory.

The Supreme Court decision can be found here:
http://www.supremecourt.gov/opinions/09pdf/08-964.pdf

A memo was released to examiners regarding this decision:
http://ipwatchdog.com/blog/USPTO_bilski_memo_6-28-2010.PDF

The memo says, in part,
“Significantly, the Supreme Court also indicated that a business method is, at least in some circumstances, eligible for patenting under section 101.”

“Examiners should continue to examine patent applications for compliance with section 101 using the existing guidance concerning the machine-or-transformation test as a tool for determining whether the claimed invention is a process under section 101. If a claimed method meets the machine-or-transformation test, the method is likely patent-eligible under section 101 unless there is a clear indication that the method is directed to an abstract idea.”

Thus, there is no significant change in U.S. Patent and Trademark Office practice at this point due to the Supreme Court Bilski decision.

On July 27, 2010, the U.S. Patent and Trademark Office issued a memorandum giving additional guidance related to the Bilski decision:

http://www.uspto.gov/patents/law/exam/bilski_guidance_27jul2010.pdf

June 1, 2009, Supreme Court grants cert. for Bilski

The Supreme Court of the U.S. has agreed to review the Bilski case discussed below. The Bilski case disavowed the controversial State Street Bank decision and severely limited the possibility of obtaining business method patents and put the validity of many into question. It also affects software patents that do not describe a lot of hardware, and, in fact, is relevant to all method patents.

The Bilski decision set forth a requirement that any process claim in a software patent must be tied to a particular machine or apparatus, or transform a particular article into a different
state or thing (“machine-or-transformation” test), to be eligible for patenting under 35 U.S.C.
§ 101.

The requirements for patentability of software has been in flux for 20 years. This History of Software Patents shows how attitudes towards software patents shift like a pendulum.

In re Bernard L. Bilski and Rand A. Warsaw, 2008 (Software Patents)

In October 2008, the Federal Circuit reviewed the decision of the Board of Patent Appeals and Interferences that discussed below in a 132 page decision. The Board had sustained a rejection of all eleven claims under 35 U.S.C. 101 as not directed to patent-eligible subject matter. The Federal Circuit affirmed, holding that Bilski’s claims were not statutory under 35 U.S.C. 101.

In this case, the Federal Circuit revived the Benson test, that claimed process is surely patent-eligible under Section 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. The Federal Circuit also stated that the State Street test is no longer valid. The Federal Circuit was reacting to Supreme Court criticism during oral arguments in Laboratory Corp. of America Holdings v. Metabolite Laboratories against the State Street test. This case will make it much harder to procure business method patents. Many business method patents may now be invalid. Only business method patents that survive the machine or transformation test, discussed below, are statutory after Bilski. My definition of a “business method patent” is one where there is no software or hardware involved. Others may have different definitions. For a business method to survive this test will be difficult.

With the Bilski case, the Federal Circuit has changed, and is leaving open the possibility of substantially further changing, the tests for statutory subject matter in the field of software patents and possibly with respect to method claims in all technology areas.

Bilski’s patent application is Serial No. 08/833,892 and relates to commodity trading. Claim 1 is representative and recites:
1. 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;
(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.

The claim is for a method of hedging risk in commodities trading.

During examination, the Examiner rejected claims 1-11 under 35 U.S.C. 101 stating that the 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. The Examiner decided, therefore, that the invention is not directed to the technological arts.

On appeal, the Board held that the examiner erred to the extent that he relied on a technological arts test because the case law does not support such a test. The Board held that the requirement of a specific apparatus was also erroneous because a claim that does not recite a specific apparatus may still be directed to patent-eligible subject matter “if there is a transformation of physical subject matter from one state to another.” The Board stated that mixing two elements or compounds to produce a chemical substance or mixture is clearly a statutory transformation although no apparatus is claimed to perform the step and although the step could be performed manually. However, the Board concluded that Applicants’ claims did not involve any patent-eligible transformation and held that transformation of non-physical financial risks and legal liabilities of the commodity provider, the consumer, and the market participants is not patent-eligible subject matter. The Board also held that Applicants’ claims preempted any and every possible way of performing the steps of the claimed process, by human or by any kind of machine or by any combination thereof, and they only claimed an abstract idea ineligible for patent protection.

The Federal Circuit started by quoting section 101:
Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.

The statute thus recites four categories of patent-eligible subject matter: processes, machines, manufactures, and compositions of matter. It is undisputed that Applicants’ claims are not directed to a machine, manufacture, or composition of matter. Thus, the Federal Circuit stated that the issue before them involves what the term “process” means, and how to determine whether a given claim is a new and useful process.

The Federal Circuit noted that the Supreme Court has held that the meaning of “process” as used in Section 101 is narrower than its ordinary meaning. The Supreme Court has held that a claim is not a patent-eligible process if it claims laws of nature, natural phenomena, or abstract ideas in Diamond v. Dier, 450 U.S. 175, 185 (1981).

The Federal Circuit then looked at the Supreme Court’s Benson decision (see my separate post on Benson)where the Supreme Court held that because an algorithm had no uses other than those that would be covered by the claims (any conversion of BCD to pure binary on a digital computer), the claims pre-empted all uses of the algorithm and thus were effectively drawn to the algorithm itself. This Benson case was a very old case decided at a time when most people believed that software was not patentable. I wonder if the Federal Circuit is trying to go back in time.

The Federal Circuit then stated that the question before us is whether Applicants’ claim recites a fundamental principle and, if so, whether if would pre-empt substantially all uses of that fundamental principle if allowed. The Federal Circuit noted that this inquiry is hardly straightforward. Analogizing to the facts of Diehr or Benson is of limited usefulness because the more challenging process claims of the twenty-first century are seldom so clearly limited in scope as the highly specific, plainly corporeal industrial manufacturing process of Diehr; nor are they typically as broadly claimed or purely abstract and mathematical as the algorithm of Benson.

Continuing its focus on Benson, the Federal Circuit stated that the Supreme Court in that case enunciated a definitive test to determine whether a process claim is tailored narrowly enough to encompass only a particular application rather than to pre-empt the principle itself. A claimed process is surely patent-eligible under Section 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.

The Federal Circuit stated that, Benson presents a difficult case under its own test in that the claimed process operated on a machine, a digital computer, but was still held to be ineligible subject matter. However, in Benson, the limitations tying the process to a computer were not actually limiting because the fundamental principle at issue, a particular algorithm, had no utility other than operating on a digital computer. Thus, the claim’s tie to a digital computer did not reduce the pre-emptive footprint of the claim since all uses of the algorithm were still covered by the claim.

The Federal Circuit noted that the Supreme Court explicitly stated in Benson that transformation and reduction of an article to a different state or thing is the clue to the patentability of a process claim that does not include particular machines.

The Federal Circuit recognized that the Benson court was equivocal in first putting forward this test and stated that “We do not hold that no process patent could ever qualify if it did not meet the requirements of our prior precedents.” The Federal Circuit then noted that this point was noted in Flook but that this caveat was not repeated in Diehr when the Diehr court reaffirmed the machine-or-transformation test. The Federal Circuit then stated that they believe their reliance on the Supreme Court’s machine-or-transformation test is sound. The Federal Circuit then stated that they recognize that the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies. And the Federal Circuit did not rule out the possibility that they may in the future refine or augment the test or how it is applied.

The Federal Circuit then noted that the Diehr court held that field-of-use limitations are generally insufficient to render an otherwise ineligible process claim patent-eligible, and that the Diehr court stated that insignificant postsolution activity will not transform an unpatentable principle into a patentable process.

The Federal Circuit then noted that the Supreme Court held (in Diehr) that whether a claimed process is novel or non-obvious is irrelevant to the Section 101 analysis, and that it is inappropriate to dissect claims into old and new elements and then to ignore the presence of the old elements in the analysis.

The Federal Circuit then stated that the Freeman-Walter-Abele test is inadequate.

The Federal Circuit then reviewed the much more recent test of “useful, concrete, and tangible result” associated with State Street and stated that this inquiry is insufficient to determine whether a claim is patent eligible under Section 101.

The Federal Circuit then rejected the “technological arts test” because the meanings of the terms technological arts and technology are both ambiguous and ever-changing.

The Federal Circuit then addressed a possible misunderstanding of the decision in Comiskey, noting that some may suggest that Comiskey implicitly applied a new Section 101 test that bars any claim reciting a mental process that lacks significant physical steps. The Federal Circuit stated that they did not so hold and did not announce any new test at all in Comiskey. Rather, they recognized that the Supreme Court held that mental processes, like fundamental principles, are excluded by 101.

The Federal Circuit then stated that the machine-or-transformation test is a two-branched inquiry and certain considerations are applicable to analysis under either branch. First, as illustrated by Benson, the use of a specific machine or transformation of an article must impose meaningful limits on the claim’s scope to impart patent-eligibility. Second, the involvement of the machine or transformation in the claimed process much not merely be insignificant extra-solution activity.

In this case, Applicants themselves admit that the language of claim 1 does not limit any process step to any specific machine or apparatus. The Federal Circuit stated that issues specific to the machine implementation part of the test were not before them, and they left to future cases the elaboration of the precise contours of machine implementation as well as answers to particular questions such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.

The Federal Circuit then held that Applicants’ process as claimed does not transform any article to a different state or thing. The claims were therefore non-statutory.

Keep in mind that Bilski and Benson only considered method claims. An open question is how much of a machine is required? A general purpose computer may not be sufficient. The Federal Circuit indicates that the machine must be intimately tied to the claimed steps. The USPTO Board of Appeals has recently held that Beauregard claims are statutory but that doesn’t mean that the Federal Circuit will agree as a general proposition. From the tone of Bilski, I doubt that they will agree as a general proposition that all Beauregard claims are statutory. Examiners at the U.S. Patent and Trademark Office, after State Street, took the position that Beauregard claims were only statutory if they also met the State Street test. Now they will probably use Bilski as the primary test. Also, the U.S. Patent and Trademark Office and the Federal Circuit tend to apply method tests to apparatus claims with respect to 35 U.S.C. 101 when it comes to software. We will have to see how the Federal Circuit treats apparatus claims after Bilski. Also keep in mind that Diamond v. Diehr (which held that which held that the execution of a method, controlled by running a computer program, was statutory–see the summary of this case below) is good Supreme Court law and is more recent than Benson. There are many open questions.

In re Stephen W. Comiskey, 2007 (Software Patents)

In this case, the Federal Circuit held that methods that employ only human intelligence without involving machines, manufactures, or compositions of matter do not qualify as statutory suject matter under 35 U.S.C. Section 101 because they are directed to abstract ideas.

According to the Comiskey court, mental processes (or processes of human thinking) standing alone are not patentable even if they have a practical application.

The Court concluded that:

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. Thus, it is established that the application of human intelligence to the solution of practical problems is not in and of itself patentable.

The case can be found here: http://www.fedcir.gov/opinions/06-1286.pdf

In re Petrus A.C.M. Nuijten, 2007 (Software Patents)

This case has been decided by the Court of Appeals for the Federal Circuit.

The decision marks the death of signal claims.The issue on appeal was whether the Board of Appeals erred when it affirmed the Patent Examiner’s final rejection of Claims 14 and 22-24 of Mr. Nuijten’s patent application under 35 U.S.C. 101 as being directed to non-statutory subject matter. More specifically, the Court was to decide whether the invention of a signal, which is otherwise patentable when stored in a physical storage medium, is in and of itself patentable subject matter. The case relates to U.S. Patent Application Serial No. 09/211,928 for an invention “Embedding Supplemental Data in an Encoded Signal” which relates to signal watermarking. The apparatus claims were found to be statutory and allowable over the prior art.

Independent Claim 14, which is the subject of the appeal, recites:

14. A signal with embedded supplemental data, the signal being encoded in accordance with a given encoding process and selected samples of the signal representing the supplemental data, and at least one of the samples preceding the selected samples is different from the sample corresponding to the given encoding process.

The court could not fit a ‘signal’ into any of the four categories (process, machine, manufacture, or composition of matter).

Because a signal does not fit within a predefined category, the Federal Circuit concluded that a signal is not statutory subject matter.

The decision can be found here: http://www.fedcir.gov/opinions/06-1371.pdf

p.s., The applicant filed a petition for certiorari in June 2008 to overturn the Federal Circuit’s decision.

Lucent Technologies, Inc. v. Gateway Inc. and Microsoft Corp., S.D. Calif., 2007

This is not a Federal Circuit software patents decision, but a lower court decision. In an appeal, the Federal Circuit could completely reverse the lower court.

This case involved two Lucent software patents, Nos. 5,341,457 and Re. 39,080, relating to reducing the size of computer audio files.

In this case, a jury awarded a 1.5 billion dollar verdict against Microsoft.

Expect to see Microsoft make further efforts to reform the patent system. Microsoft has been actively trying to weaken the patent system even though they are one of the U.S. Patent and Trademark Office’s largest customers. For example, in 2004 alone, they filed more than 3,000 patent applications.

If you would like to see some of Microsoft’s patents, go here: http://patft.uspto.gov/netahtml/PTO/search-bool.html
and put Microsoft in Field 1, and pull down Assignee Name for Field 1.

Recently, Microsoft and many others commented on proposed rule changes to make it more difficult to file continuations. Please click here, and compare the views of various bar associations with that of Microsoft:
http://www.uspto.gov/web/offices/pac/dapp/opla/comments/fpp_continuation/continuation_comments.html

Contrary to Microsoft’s position that the ability to file Continuation applications should be restricted, many patent attorneys feel that continuations are often necessary because Examiners do not have sufficient time to properly examine applications, and routinely issue “Final” rejections before fully understanding the invention. A continuation becomes necessary just to keep the discussion going long enough to make sure the Examiner understands the invention described in a patent application and understands the prior art.

This verdict will likely make Microsoft want to continue to press for patent reforms that weaken the patent system. Microsoft and others are part of a lobbying group called the “Coalition for Patent Fairness”:
http://www.investors.com/editorial/IBDArticles.asp?artsec=17&artnum=2&issue=20070227