Software and Business
Methods
Patent Law: Prof. Robert
Merges
8.30.2011
Subject Matter: Overview
§ 101 Categories
• Process
• Machine
• Manufacture
• Composition of Matter
• Improvements
In re Bilski
130 S Ct 3218 (2010)
• Messrs. Bilski and Barnard filed their patent
application on April 10, 1997.
• Claims were rejected by examiner and appealed
to Board of Patent Appeals and Interferences
(“BPAI”).
• BPAI issued decision sustaining the rejection of
all the claims in an order Sept. 26, 2006.
• An appeal from the BPAI was made to the Court
of Appeals for the Federal Circuit (CAFC).
• Prior to disposition by the regular three-judge
panel, the CAFC sua sponte ordered en banc
review.
A method for managing the consumption
risk costs of a commodity sold by a
commodity provider at a fixed price
comprising the steps of:
(a) initiating a series of transactions between
said commodity provider and consumers
of said commodity wherein said consumers
purchase said commodity at a fixed rate
based upon historical averages, said fixed
rate corresponding to a risk position of
said consumer;
Bilski claim 1 cont‟d
(b) identifying market participants for said
commodity having a counter-risk position to
said consumers; and
(c) initiating a series of transactions between said
commodity provider and said market
participants at a second fixed rate such that said
series of market participant transactions
balances the risk position of said series of
consumer transactions.
What is this claim about?
• Fixed price contract: creates a risk that
prices will fall; protects against the risk
that prices will rise
• What if you wanted to reduce the risk
without losing the protection?
Hedging
• Simple examples: travel insurance;
spending money on a “backup plan”
• More formally: Hedging risk from a
major purchase by making an offsetting
investment
WeatherWise USA, located in Pittsburgh, PA, is
the premier provider of customized consumer
energy products including SetYourBillSM,
WeatherProof Bill®: fixed bills, capped bills,
EnerCheck® energy efficiency . . . Our unique
use of computerized models based on
engineering, rather than econometric
principles enables the development of
products and services that reduce financial
risk for energy providers and their residential
and commercial consumers.
Can you patent something
like this?
• The section 101 question
• NOTE: Distinct from other requirements
of patentability
– NOT asking whether claim 1 in Bilski is
new, nonobvious, etc.
Bilski v. Kappos
• Holding
• “Roads not taken”
• History, context – and future?
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. -- Casebook, p.81
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.
Two “Roads Not Taken”
1.Federal Circuit “machine or
transformation” test
2.“Categorical prohibition” on business
methods
Under the Court of Appeals' formulation, an
invention is a “process” only if: “(1) it is tied
to a particular machine or apparatus, or (2)
it transforms a particular article into a
different state or thing.” 545 F.3d, at 954.
This Court has “more than once cautioned
that courts „should not read into the patent
laws limitations and conditions which the
legislature has not expressed.‟ ” Diamond v.
Diehr . . . .
Ordinary meaning:
Adopting the machine-or-
transformation test as the sole
test for what constitutes a
“process” (as opposed to just an
important and useful clue)
violates [several] statutory
interpretation principles.
Categorical exclusion
• Again, plain meaning; dictionary
definition of “process” does not exclude
business methods/processes
• Section 273(b)(1) of the Patent Act –
prior user defense for business methods
The Holding (again)
Rather than adopting categorical rules that
might have wide-ranging and unforeseen
impacts, the Court resolves this case narrowly
on the basis of this Court's decisions in Benson,
Flook, and Diehr, which show that petitioners'
claims are not patentable processes because
they are attempts to patent abstract ideas.
Indeed, all members of the Court agree that
the patent application at issue here falls outside
of § 101 because it claims an abstract idea.
Holding (cont‟d)
The concept of hedging, described in claim
1 and reduced to a mathematical formula
in claim 4, is an unpatentable abstract
idea, just like the algorithms at issue in
Benson and Flook. Allowing petitioners
to patent risk hedging would pre-empt
use of this approach in all fields, and
would effectively grant a monopoly over
an abstract idea.
One rejected view
Respondent urges the Court to look to the other
patentable categories in § 101-machines,
manufactures, and compositions of matter-to
confine the meaning of “process” to a machine
or transformation, under the doctrine of
noscitur a sociis. Under this canon, “an
ambiguous term may be given more precise
content by the neighboring words with which
it is associated. [But] § 100(b) already
explicitly defines the term “process.”
What lies behind this rejected
view?
• “Patents are about technology” –
machines, manufactures, compositions of
matter . . .
• “Technological arts” concept in Europe
and some earlier US cases: rejected
The plurality portions of the
majority opinion – Justice
Kennedy
The machine-or-transformation test may well
provide a sufficient basis for evaluating
processes similar to those in the Industrial
Age-for example, inventions grounded in a
physical or other tangible form. But there are
reasons to doubt whether the test should be
the sole criterion for determining the
patentability of inventions in the Information
Age.
Dissent: Justice Stevens
The wiser course would have been to hold that
petitioners' method is not a “process” because
it describes only a general method of engaging
in business transactions-and business methods
are not patentable. More precisely, although a
process is not patent-ineligible simply because
it is useful for conducting business, a claim
that merely describes a method of doing
business does not qualify as a “process” under
§ 101.
Dissent (cont‟d)
“[p]erhaps this was in part a function of an
understanding – shared widely among legislators,
courts, patent office officials, and inventors –
about what patents were meant to protect.
Everyone knew that manufactures and machines
were at the core of the patent system.” Merges,
Property Rights for Business Concepts and
Patent System Reform, 14 Berkeley Tech. L.J.
577, 585 (1999) (hereinafter Merges)
State Street Bank
• Two parts:
– Software patents
– Business method patents
Software Patents Issued
16000
6000
Approx.
3000
600
1500
1982 1986 1990 1994 1998
Application data
• USPTO saw 425,967 patent
application filings in 2006, a 9.0
percent increase over 2005 levels.
Huge Growth in PTO Budget,
Examiner Hiring
• Now a $2 billion agency
• Hired thousands of new examiners in the
past few years
– Turnover problems …
Reactions to the “Patent Flood”
• Revisit patentable subject
matter
• Process reforms
• Radically alter the system
AS MANY AS SIX IMPOSSIBLE PATENTS
BEFORE BREAKFAST: PROPERTY RIGHTS
FOR BUSINESS CONCEPTS AND PATENT
SYSTEM REFORM, 14 BTLJ 577 (1999)
By Robert P. Merges
State Street Bank
MF
MF MF
HUB MF
MF (Pooled fund)
MF
MF MF
Computer software: method of doing
business
“Patent Failure”, Bessen and
Meurer
United States Patent 7,249,083 Noraev , et al.
July 24, 2007 Securities, supporting systems and
methods thereof: Lehman Brothers
Abstract A financial instrument, equity dilution
inhibitor and security upgrade account are disclosed
based on an enhanced call-spread option.
Implementation of the investment vehicle and/or
upgrade account are managed via program
controlled data processor governing system
operation in accordance with investment
parameters. Enhanced flexibility for this investment
vehicle increases its usefulness to a broad spectrum
of potential investors
1. A computer implemented method for creating
an investment vehicle, comprising: creating via
software stored on a computer a debt security
providing a fixed income return to a purchaser
for a pre-set period of time that further provides
to said purchaser an equity conversion
arrangement for a select underlying equity
security based on future contingent events; and
creating … a derivative instrument coupled to,
but separate from, said debt security by
providing an option to an issuer of said debt
security to purchase shares of said equity
security at a select price …
• Merges, Software and Patent
Scope: A Report from the Middle
Innings, 85 Tex. L. Rev. 1528
(2007)
Section 101 Reform
• “Technological arts” test
– Refine categories of patentable subject matter;
look to history in a general way . . .
• Test each claimed invention more rigorously
– Create a test that weeds out the “clearly flaky”
from the “clearly inventive”
In re Comiskey, 499 F.3d 1365
(Fed. Cir. 2007)
• Comiskey‟s patent application No.
09/461,742 claims a method and
system for mandatory
arbitration involving legal
documents, such as wills or
contracts.
[W]e conclude that Comiskey's
independent claims 1 and 32 and
most of their dependent claims
are unpatentable subject matter
under 35 U.S.C. § 101.
Post-Bilski Trends to Watch
• Supreme Court developments:
continuing supervision of patent
system or “back to the sidelines”?
• Software patents
The latest twist . . .
• CyberSource Corp. v. Retail Decisions,
Inc., 99 U.S.P.Q.2d 1690 (Fed. Cir. Aug.
16, 2011)
• “Beauregard claims” – “article of
manufacture” being software embodied
on a diskette or in hard drive
Opinion by Judge Dyk
• Claim to fraud prevention program on
disk is not patentable