Why Business Method Patents Cannot Be Too Quickly DismissedMoses N. Muchiri (LL.M. – IP, Munich)October, 2012

Outline1. What are Business Method Patents in the U.S?2. Where it started & Stats3. Legislative provisions on BMPs

3.1 US Legislation3.2 European Regional Legislation

4. U.S. Judicial decisions on BMPs5. Three main E.U. decisions on BMPs6. Recent PTO administrative reform measures7. Arguments

7.1 Arguments against BMPs7.2 Against for BMPs

8. Moving forward what are we to glean from all this?9. Some recommended reading.

WHICH WAY TO GO !!!

… is to simplify the debate on Business Method Patents (BMPs) SO THAT …

The Goal of this Presentation …

For detailed information, feel free to download my paper at:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2171724

→ Bluntly, these are patents on methods of doing business. Beyond this pithy statement, no precise legal definition is provided as we shall see.

→ Some Characteristics: Are largely processes and represent cross-disciplinary

fields e.g. finance, insurance, banking, commerce, tax, sports, manufacturing processes to name a few.

Mainly classified under Class 705 of the U.S. Manual of Patent Classification (MOPC).

A substantial number of BMPs are computer executed and/or through PC software although not necessarily.

Many BMPs are hybrid i.e. claimed as computer software or as processes.

1. What are Business Method Patents (BMPs) in the U.S.?

→ Class 705: Titled “Data Processing, Financial Business Practice, Management or Cost/ Price determination.→ Notorious Examples: Amazon’s 1-Click Patent U.S. Pat. No. 5,960,411

1. What are Business Method Patents (BMPs) in the U.S.?

Interesting read on this Patent:http://www.around.com/patent.html

Subject of case: Amazon.com, Inc. v. BarnesandNoble.com, Inc. 239 F. 3d 1343 (Fed. Cir. 2001). Patent Infringement? + (YES) Preliminary injunction? - (NO)

WALKER DIGITAL business method patents:

1. Reverse Auction patent 5,794,2072. Airline Tickets patent 5,897,620,

→ About Priceline: A company in the business of developing new business method technologies which it then patents. Has over 200 BMPs. Priceline very aggressively asserts its patents against 3rd parties.

→ Notable case: Priceline vs. Microsoft & Expedia (No. 99-CV-1991, D. Conn. Oct. 13, 1999). Subsequently amicably settled out of court after conclusion of confidential licensing agreement.

See: http://betabeat.com/2011/08/priceline-founder-jay-walker-sure-has-filed-a-lot-of-lawsuits-for-someone-whos-not-a-patent-troll/And also: http://gpatent.nfshost.com/stua12.html

1. What are Business Method Patents (BMPs) in the U.S.?

•MercExchange’s Consignment Nodes Patent No. 5,845,265 (for identifying, selling & creating online market used goods through a bidding/auction process).• Sound familiar? eBAY v.

MercExchange (547 U.S. __ 2006). Which ultimately became an issue of whether and when an Injunction can issue.

vs.

1. What are Business Method Patents (BMPs) in the U.S.?

2. Where it started & Stats→ 1815: According to the USPTO Business Methods White Paper (2000), the first recorded financial BMP was issued to John Kneass for a method of preventing counterfeiting.→ 1998: State Street vs. Signature Financial

Group, 149 F.3d 1368 (Fed. Cir. 1998) landmark decision issued where business method exception (age old exclusion of business methods from patentability) was dismissed by Federal Court.

→ This is just an approximation …

2. Where it started & Stats

3. Legislative provisions on BMPs3.1 United States Legislation

1. The U.S. Constitution: Art. 1, Sec. 8, Clause 8. ‘‘The Congress shall have power … To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries; …’’

→ Reflects 2 elements: (i) positive power to make patent & copyright laws (ii) limitation on the use of that power to the extent that these laws promote PROGRESS of SCIENCE and USEFUL ARTS.

2. Patent Act, 35 U.S.C.: → § 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.’’

→ § 100: defines Process as ‘‘process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.’’

→ § 273: provides for the prior use defence (introduced by the America Inventors Protection Act, 1999) and defines business method as ‘‘the term ‘method’ means method of doing business.’’

3. America Invents Act, 2011 (Pub. L. No. 112-29):→ Section 18: Transitional Program for Covered Business Method Patents defined as ‘‘… 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.’’

→ Section 14: Tax Strategy inventions within the prior art. (Tax Strategies constituted a big portion of US BMPs.)→ Section 5: Broadening the Prior Use defence.

• Art. 52 (2), EPC;

‘‘(1) European patents shall be granted for any inventions, in all fields of technology, provided that they are new, involve an inventive step and are susceptible of industrial application.

(2) The following in particular shall not be regarded as inventions within the meaning of paragraph 1: ...

(c) Schemes, rules and methods for performing mental acts, playing games or doing business, and programs for computers;

(3) Paragraph 2 shall exclude the patentability of subject-matter or activities referred to therein only to the extent to which a European patent application or European patent relates to such subject-matter or activities as such.’’

3. Legislative provisions on BMPs3.2 E.U. Regional Legislation

1. Hotel Checking v. Lorraine Co. 160 F. 467 (2d Cir. N.Y. 1908) – Held a method for financial bookkeeping was unpatentable for being abstract.

2. Gottschalk v. Benson, 409 U.S. 63 (1972). Supreme Court held that a method of converting binary code into pure binary numerals was unpatentable as it was an abstract idea.‘‘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.’’‖

3. Parker v. Flook, 437 U.S. 584 (1978). An algorithm used to control an alarm in a process claim was also held to be abstract thus unpatentable.

4. Diamond v. Chakrabarty, 447 U.S. 303 (1980): Supreme Court held a method for producing bacteria was patentable, & that patent law should be broadly read to encompass inventions not foreseeable when Congress enacted § 101.

5. Diamond v. Diehr, 450 U.S. 175 (1981). A method of curing synthetic rubber using a special computer operated molding press was held patentable.

6. In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) a method of improving display of data on an oscilloscope using a computer software was held patentable because it produced a ‘‘useful, concrete and tangible result.’’

4. US Judicial decisions on BMPs

7. State Street v. Signature Financial Group. 149 F.3d 1368 (Fed. Cir. 1998)→ The Inventor: Todd Boess. Assignee: Signature Financial Grp. Inc.→ The Patent: US Pat. No. 5,193,056. (Class 705). Data processing system for hub and spoke financial services configuration.→ How it works: A financial data processing system for managing mutual funds. Involves combining of financial assets known as mutual funds so as to achieve a larger asset base and thereby reduce operation costs by achieving economies of scale and increasing net investment performance.• Mutual Fund= (Investopedia.com) defines as “an investment vehicle that is made

up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors.” (Read more: http://www.investopedia.com/terms/m/mutualfund.asp#ixzz2BI87cn9B)

NOW LET US

4. US Judicial decisions on BMPs

Portfolio(Hub)

Mutual Fund 1

Mutual Fund 2

Mutual Fund 3

Mutual Fund 4

Several Mutual Fund Assets are combined to form the Portfolio which is run under a partnership (Partnership Portfolio). The Funds investing in the portfolio are partners in the portfolio partnership. The Portfolio achieves economies of scale reducing operation costs particularly taxes on capital gains.

Each Mutual Fund partner in the Portfolio is called a SPOKE.

Gist of the Invention: Data processing system makes daily mathematical calculations to allocate income, capital gains, and expenses or investment losses for each portfolio partner. These daily allocations, are determined &managed by the data processing system &method based on an "allocation ratio” (See http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO1&Sect2=HITOFF&d=PALL&p=1&u=%2Fnetahtml%2FPTO%2Fsrchnum.htm&r=1&f=G&l=50&s1=5,193,056.PN.&OS=PN/5,193,056&RS=PN/5,193,056 )

• What do you think about this invention? Would you consider this Data Processing System that manages investment portfolio through a series of mathematical calculations to be patentable?

→ PTO Examination: claims allowed. Patented.→ The Case before District Ct.: State Street Bank sought to have the patent declared invalid & unenforceable under § 101 for citing non-statutory subject matter. Held by Distr. Ct: Claimed subject matter fell in non-patentable subject matter as either ‘mathematical algorithm’ or ‘business methods.’→Appeal to Federal Cir.: Reversed & remanded. Found the Data Processing System achieved a USEFUL, CONCRETE & TANGIBLE (UCT) result. Claims directed to methods of doing business should be treated as ordinary process claims.

“… for the purposes of a Section 101 analysis, it is of little relevance whether claim 1 is directed to a “machine” or a “process,” as long as it falls within at least one of the four enumerated categories of patentable subject matter, “machine” and “process” being such categories… The plain and unambiguous meaning of Section 101 is that any invention falling within one of the four stated categories of statutory subject matter may be patented, provided it meets the other requirements for patentability set forth in Title 35, i.e., those found in Sections 102, 103, and 112, Para.2 … The repetitive use of the expansive term “any” in Section 101 shows Congress’s intent not to place any restrictions on the subject matter for which a patent may be obtained beyond those specifically recited in Section 101. Indeed, the Supreme Court has acknowledged that Congress intended Section 101 to extend to “anything under the sun that is made by man.” Diamond v. Chakrabarty, 447 U.S. 303, 309 …”

→ But how could this have achieved a CONCRETE & TANGIBLE result? CAFC’s answer = “Today, we hold that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces “a useful, concrete and tangible result”--a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades … The question of whether a claim encompasses statutory subject matter should not focus on which of the four categories of subject matter a claim is directed to – process, machine, manufacture, or composition of matter--but rather on the essential characteristics of the subject matter, in particular, its practical utility. … This renders it statutory subject matter, even if the useful result is expressed in numbers, such as price, profit, percentage, cost, or loss.”

8. Bilski v. Kappos (561 U.S. __ 2010). → The Inventor: Bernard Bilski & Rand Warsaw. → The Claimed invention: Energy Risk Management method: A method of hedging consumption risk costs in commodities trading in the energy markets.→ How it works: method controls (hedges) consumption costs caused by fluctuations in demand and supply by means of fixed prices between a supplier of a commodity and consumer of it thus reducing volatility of earnings.

A Commodities Trading Co., LLC

Buys coal at 1st fixed price Sells coal at 2nd fixed price

(Intermediary)

Coal Mining Co. Electricity Producer

→ PTO Examination: All 11 claims in the patent application held unpatentable. Abstract.→ Board of Patent Appeals & Interferences (BPAI): Agreed & upheld PTO examination decision.→ CAFC (En Banc) Decision: Held un-patentable because it did NOT pass the machine or transformation test by not transforming something into a useful-concrete-tangible test.→ Supreme Court: Majority opinion held the machine-transformation test is not the sole test on § 101 patentability analysis, but only a USEFUL CLUE. Not patentable due to abstract-ness.→ Stevens’ Concurrence: Stevens, J. was of the view that BMPs are not patentable subject matter. Stevens view was that the Majority use of ordinary & contemporary interpretation to §101 was contrary to noscitur a sociis canon of interpretation.

“It is important to emphasize that the Court today is 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. … patent law faces a great challenge in striking the balance between protecting inventors and not granting monopolies over procedures that others would discover by independent, creative application of general principles. Nothing in this opinion should be read to take a position on where that balance ought to be struck.” (561 U.S. ___ 2010, at 10).

Discussion:→ How different was the Hedging of Consumption Costs method in Bilski different from the Data Processing System/ Method in State Street?→ What explanation can be proffered for separate conclusions reached in State Street and Bilski?→ Is judicial activism responsible for State Street? Judicial activism not suitable explanation, WHY? Principally 2 reasons:(a) The claimed invention in State Street was already

patented.(b) The State Street court was not the first to adopt the

UCT test. It was first adopted In re Alappat 1994 case. → Would State Street stand today? Unlikely.

→ So what is the real world value of Bilski v Kappos?(i) Bilski teaches that a § 101 analysis is only a threshold inquiry.

Patentability should also include tests for novelty, utility, enablement and non-obviousness.

(ii) The Machine/ Transformation test is not the sole test for patent eligibility but only a useful clue.

(iii) Bilski is not about whether business methods are patentable or not.

(iv) In the end Bilski adds little substantial jurisprudential value. It failed to live up to the hype (expectation). No definitive test; no categorical exclusion, no discussion on limits of patentability = back to square one. This is why Stevens’ J. was differed in the method of treating BMPs.

(v) Who is the final authority in shaping patent policy and standards if not the court? Legislature perhaps. One reason why Supreme Court chose not answer the question everyone was expecting to be answered.

a) Pension Benefits System/ PBS Partnership (T-931/95 ); The EPO Technical Board of Appeal (TBA) held inter alia that although “practices of doing business are not inventions within the meaning of Article 52(1) EPC,” the apparatus or physical entity through which such methods are conducted are not excluded from patentability.

b) Estimation of Turnover/ DUNS LICENSING CASE (T-0154/04), held that methods of business research claimed ‘as such’ did not fulfill the technical contribution requirement.

c) Auction method/HITACHI (T 258/03), held that method steps involving modifications to business scheme which circumvent technical requirements are not patentable. →The Board held in paragraph 4.7 “…in general, a method involving technical means is an invention within the meaning of Article 52(1), EPC.” However a caution was added in paragraph 4.6: “…this does not imply that all methods involving the use of technical means are patentable. They still have to be new, represent a non-obvious technical solution to a technical problem, and be susceptible of industrial application.”

5. Three main EU decisions on business methods

• Lessons from the EU and the mystique of Art. 52(2)(c), EPC

→ Business methods CAN be patentable as long as the overall requirement for TECHNICAL EFFECT is achieved.→ EPO has been granting patents on business methods. For examples of EPO BMPs see, http://www.iusmentis.com/patents/businessmethods/epoexamples/→ An exercise in CLAIM DRAFTING.→ EPO is tough in law and practice but it is possible to obtain BMPs on case by case basis. USA on the contrary is more flexible in law by not imposing a categorical exclusion, but rigid in practice. (Either way, good Patent Attorneys are masters at navigating the murky seas of patent laws to obtain BMPs).

6. Recent PTO administrative reform measures

→ In the wake of the America Invents Act, 2011 PTO has implemented and is in the process of implementing several more:(a) Second Pair of Eyes Review- a novel procedure exclusive to

Class 705 BMPs where all allowed BMPs shall be subjected to an additional review for obviousness.

(b) Increased capacity: More examiners in terms of numbers as well as qualification and engagement of specialist examiners i.e. experts to tackle Class 705 applications.

(c) Broadened prior art search areas for prior art analysis.(d) Rigorous patent prosecution standards for novelty,

obviousness, utility and enablement.(e) Broadened prior use defense (f) opposition procedures.

7. 1- Arguments against BMPs

a) BMPs do not incentivize innovation or promote progress in the sciences and the useful arts.

b) Economic harm: BMPs increase transaction costs, ability to prevent market entry by competitors affecting customer choices and prices because of “patent thickets.”

c) Affect Open Source projects.d) Business methods are not

patentable technology.e) Many BMPs are obvious & poor in

quality. Reinventing the wheel. Transferring Brick and Mortar techniques to the computer.

7.2- Arguments for BMPs

1) BMPs have existed for many years. Not a recent phenomena.

2) Innovation: BMPs promote innovation for alternative and more innovative business methods.

3) Economic benefit: BMPs protect markets with short business cycles, improves network effects and attracts investments in such business fields.

4) Quality and obviousness: BMPs are not of lesser quality. Nor are they obvious. Independent studies prove this. Recent administrative reforms by PTO are positioning to further strengthen patent prosecution for BMPs and conduct post grant reviews.

7. Arguments

• The debate as to whether business methods should be patentable or not, is a foregone conclusion. BMPs ARE ALREADY EXISTING, even in the EU!! (Nb: Class 705 is a very broad class)

• It is easy to say let us not patent business methods, but it is not easy to justify concretely why such patents should not exist.

• On closer scrutiny, Bilski v. Kappos might not have been so bad after all. They didn’t have all the information needed to impose a categorical exclusion of BMPs. That was not the issue the majority had before them.

• Bilski promises a renewed focus on:(a) Legal interpretation especially of § 101.(b) Making it harder to receive a BMP through intense patent prosecution procedures focusing on patent law doctrine i.e. Novelty, Obviousness, Utility and Enablement inquiries.(c) Patent policies focussing on individual patents rather than broad sweeping statements: Expect to see courts asking “Is THIS claimed invention patentable?” and not “Are business methods patentable?”

8. Moving forward what are we to glean from all this?

• Economic policies are essentially about efficient distribution of resources to meet human needs. The extent to which patents on business methods fulfil this purpose has not been fully studied.

• Property rights for business methods justified to the extent they are required by society. Justice Richard Posner vehemently opposes BMPs on account of “over-propertization” of intellectual property leading to BMPs acting as “Veritable Patent Thickets.”

WHAT IS YOUR

VERDICT?

1. Andrew Kopelman, Addressing Questionable Business Method Patents Prior to Issuance: A Two Part Proposal, 27 CARDOZO L. REV. 2391 (2006).

2. Bronwyn H. Hall, Business Method Patents, Innovation and Policy (NBER Working Paper Series Working Paper No. 9717, 2003) available at http://papers.ssrn.com/- sol3/papers.cfm?abstract_id=463160.

3. David Orozco, Administrative Patent Levers, 117 PENN. ST. L. REV. 1 (2012).4. Ebby Abraham, Bilski v. Kappos: Sideline Analysis from the First Inning of Play, 26 BERKELEY TECH. L.J.

15 (2011). 5. Eric E. Bensen, Supreme Court’s Decision Regarding the Patent- Eligibility of Process Claims Under 35

U.S.C. §101: Bilski v. Kappos, 2010 EMERGING ISSUES 5151 (2010). 6. JAFFE, A.B. & LERNER, J., INNOVATION AND ITS DISCONTENTS, 2 – 5 (Princeton University Press, 2004). 7. John Duffy, Why Business Method Patents? 63 STAN. L. REV. 1247 (2011). 8. John R. Allison & Starling D. Hunter, On the Feasibility of Improving Patent Quality One Technology at a

Time: The Case of Business Methods, 21 BERKELEY TECH. L.J. 729 (2006). 9. Richard A. Posner, Do We Have Too Many Intellectual Property Rights? 9 MARQ. INTELL. PROP. L. REV.

173 (2005). 10. Robert E. Thomas, Debugging Software Patents: Increasing Innovation and Reducing Uncertainty In The

Judicial Reform of Software Patent Law, 25 SANTA CLARA COMPUTER & HIGH. TECH. L.J. 191 (2008). 11. Robert M. Hunt, Business Method Patents and U.S. Financial Services, 15 – 17 (Federal Reserve Bank of

Philadelphia, Working Paper No. 08-10, 2009). 12. Stefan Wagner, Business Method Patents in Europe and Their Strategic Use: Evidence from Franking

Device Manufacturers, 3 (Fakultät für Betriebswirtschaft, Ludwig-Maxmilians-Universität München, Discussion Paper 2006- 15, Nov. 2006).

9. Some recommended reading

THANK YOU VERY MUCH FOR LISTENING

Moses MuchiriLL.M, (Munich)moses.muchiri@ip.mpg.de© 2012.