Patents & the Financial Services Industry

Introduction

Much has already been written about this long-awaited decision.  The important holding was simply that (1) the Federal Circuit’s machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible process,  and (2) Bilski’s claim^* covering hedging risks in commodities trading was too abstract to be patent eligible.  To some, who were expecting a new test for patent-eligible subject matter, this decision may have been disappointing or at very least anticlimactic.

Justice Kennedy wrote for the majority, and two concurring opinions were offered, by Justice Stevens and Justice Breyer.  The Majority opinion was rather short, while Justice Stevens’ concurrence was much lengthier, and some have speculated that the Stevens concurrence was written as though it were drafted to be the majority opinion but which failed to garner a fifth vote (namely Scalia, who appeared to be the swing vote in this case), while Kennedy’s shorter majority opinion may have been written as a compromise after it was clear that Stevens was not going to get five votes.  In any event, the Stevens opinion is very informative to read.

Some points to know about the decision:

• All nine Justices agreed that Bilski’s proposed patent covered an abstract idea, which (along with laws of nature and physical phenomena) is not patentable
• Only 4 Justices voted to categorically find “business methods” not patentable; the majority did not agree, and therefore business methods are not per se unpatenable (e.g., Breyer concurrence: “This Court has never before held that so-called ‘business methods’ are patentable, and, in my view, the text, history, and purposes of the Patent Act make clear that they are not.”)
• The majority probably barred any categorical exclusion of software patents, but not explicitly.  Indeed, the majority opinion did not even explicitly mention software much less expressly rule on the patentability of software, but it clearly expressed a desire to avoid categorical bars beyond abstract ideas, laws of nature, and physical phenomena.  (Kennedy discusses software briefly in his decision, but in a section not joined by Scalia and therefore this was merely a Kennedy concurrence and not signed by the majority)
• The majority did not explicitly reject the “Useful, Concrete, and Tangible result” test of State Street, but both concurring opinions (5 Justices) explicitly rejected the UCT test.  Therefore, five Justices expressed the view that the State Street test is inconsistent with Supreme Court precedent
• Absent a new or complementary test, the Benson-Flook-Diehr (BFD) cases are the “guideposts” to look towards when determining whether a claimed invention is “abstract.”
• Insofar as most observers did not expect the S.Ct. to find Bilski’s claim patent-eligible, the decision can largely be seen as a victory for Bilski – as well as proponents of broad patent protection for financial services inventions – because the Court agreed with petitioners that (1) business methods are not excluded from patentability, (2) the Federal Circuit’s machine-or-transformation test is not the exclusive test for patent eligibility, thereby expanding the category of eligible subject matter beyond only that subject matter which passes the machine-or-transformation test, and (3) the ruling allows for the possibility that software and other business methods can be patented.

Now that we are back in a BFD world again, the focus going forward for financial services patents and applications will be these three S.Ct. cases and, particularly, what is and is not an “abstract idea.”

Abstract Ideas

Because the S.Ct., probably quite correctly, did not provide a new test for determining §101 patent eligibility, we are left with a §101 framework that affirms the MOT test as a useful clue – and any claims that satisfy this test are most certainly patentable based on S.Ct. precedents unless and until we find a claim that passes MOT but is nonetheless directed towards an abstract idea – while allowing that some claimed inventions may fail the MOT test but be patent-eligible if they are not abstract ideas.

The upshot of this framework is two-fold: (1) the S.Ct. in its decision did nothing to develop the MOT test further than it already has in the past, and (2) the S.Ct. did not do much more for explaining when an invention is an abstract idea.  It was already established that an invention that satisfies the MOT test is patent-eligible, but for inventions that fail MOT, the Court did not provide much guidance for distinguishing between those inventions that are simply abstract ideas and those that are not.  This aspect of the Bilski v. Kappos decision frustrated many practitioners because it is precisely in this realm of further defining what is or is not an abstract idea that would have provided more certainty with respect to §101.

It is not the case, however, that the S.Ct. provided no guidance whatsoever on what constitutes an abstract invention.  In its cursory discussion of why the Bilski claim was directed towards an abstract idea, the explained:

Claims 1 and 4 in petitioners’ application explain the basic concept of hedging, or protecting against risk: “Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.” . . . 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 preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.

                (a)  What is a Fundamental Principle?

First, the Court in essence assessed Bilski’s claims as merely explaining hedging and then noted that hedging is a fundamental economic practice.  While the latter part of that finding is not particularly controversial, I thought the former part – that Bilski’s claims merely explained the basic concept hedging in a way that would preempt use of hedging “in all fields” if granted a patent – was quite a remarkable statement and important to appreciate in order to understand what is and is not patentable.

Before reading the decision, I would have said quite the opposite: though hedging is a fundamental economic practice, Bilski’s claims (at least some of the dependent claims) actually described a particular application of hedging in a specific field, namely commodity-providers fixed price transactions for a plurality of market participants (claim 1) in the field of weather-related price risk energy markets (claims 3-8).  While the Court could reasonably say “Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class,” it is not quite as obvious to me that the court could likewise say “Hedging as applied in the specific field of weather-related price risk energy markets is a fundamental economic practice taught in any introductory finance class.”

What is important to understand about this language from the Court is that whether an invention is an abstract idea, which can be determined in one manner by assessing whether the invention preempts a fundamental principle (Diehr), depends in large part on how that fundamental principle is defined.  Here, the Court decided to define the fundamental principle as “hedging” with at least some application in specific fields, namely weather-related price risk energy markets.  That is, the Court deemed claims 3 and 4, which explicitly recite “weather-related price risk,” as merely describing “hedging.”  Of course, once a “fundamental principle” has been so broadly defined, it naturally follows that claims directed towards that fundamental principle preempt it and are abstract.  In contrast, had the Court decided to more narrowly define the fundamental principle – say, as just hedging but not applied in any field – the Court could have come to a completely different conclusion and found that claims 3-8 were patent eligible under Diehr as a specific application of hedging.  This merely shows the importance of how “principles” are defined and, in the case of Bilski’s claims, why his dependent claims should have been given more emphasis earlier in the case.

To its credit, the Court briefly sought to address the dependent claims by asserting: “Petitioners’ 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.”  However, this assertion that the claims describe hedging applied in a particular use — commodities and energy markets – would be more satisfying if the Court had not said in the immediately-preceding sentence that the patent should be not granted because it would preempt the use of hedging “in all fields.”  One is left to wonder how a claim for hedging specifically in the energy market preempts hedging “in all fields.”  Moreover, my sense was that applying hedging in the weather-related commodities and energy markets, as Bilski did, was not so much a “postsolution” use of hedging – at least not in the same sense the term “postsolution” as used in Parker v. Flook – as it was an application of hedging, interwoven from the beginning to the end and permeating throughout the claim, for weather-related commodities and energy markets.

In any event, the lesson of the decision with respect to “abstract ideas” is two-fold: (1) whether an invention is an abstract idea can depend in large part on how a fundamental principle is defined, and (2) the S.Ct. is inclined to define fundamental principles with broad scope in order to prevent preemption.

                (b)  “Relatively” Abstract?

Second, remember that the Court’s application of “abstract ideas” to Bilski’s claim was in part comparative: “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” and the Bilski claims “add even less to the underlying abstract principle than the invention in Flook did.”  This is significant insofar as the claims at issue in Benson recited a method of converting signals particularly on a “reentrant shift register.”  Thus, setting aside the question of precisely how “abstract” this Benson claim was, because the Court in Bilski finds Bilski’s claims abstract in part based on its comparison to the Benson claims, which recite a very specific piece of hardware, we should be prepared that courts and the BPAI may opt to find any claim that is as abstract as, or more abstract than, Benson’s “reentrant shift register” claim (which is to say, not that abstract) may be found too abstract to be patentable.

                (c)  Still Don’t Know Much About the Definition of “Abstract”

Finally, I suspect practitioners and the Federal Circuit will grapple with the issue of what is an “abstract idea.”  Because the S.Ct. offered little, and in some ways puzzling, guidance on this matter it may take many test cases to more fully develop this area of patent law.  In his post about the decision, Donald Chisum found the Court’s holding with respect to “abstract ideas” puzzling as well, but for his own reasons:

The Court’s characterization of the claims as “abstract ideas” is palpably unsatisfying. The claims were to a series of specified steps a human can take (e.g, “identifying market participants” and “initiating a series of transactions.”). The claimed subject matter may have been very obvious in view of the state of the art or possibly unduly vague, but to characterize it  as an ”abstract idea” stretches the meaning of “abstract” and “idea” beyond recognition.

Impact On Financial Services Patents and Applications

There are a few observations we can make about the Bilski v. Kappos decision with respect to financial services patents and applications.  First, of the thousands of issued patents that can reasonably be called “financial services patents,” the majority will likely be unimpacted by the decision.  The decision clearly weighed against any categorical bars for patentability, and no new test was introduced that would be detrimental to the patentability of financial services patents or single them out.  This is fortunate, at least for owners and proponents of such patents, especially given that four Justices voted to declare all business method patents invalid.  Of course not all financial services patents protect business methods but many do, and had these four Justices garnered one more vote, it could have meant disaster for the portfolios of many in the financial services industry.

As I mentioned earlier, the decision was in some ways a victory for Bilski because the ruling allows for the possibility that software and other business methods can be patented and it found that the machine-or-transformation test is not the exclusive test for patent eligibility.  For these same reasons, the ruling may also be considered a victory for proponents of financial services patents (at least the subset of financial services patents that relate to software and methods; those that deal with hardware, networking, etc. are unlikely to be impacted by the decision).

However, as noted above, the decision also left a wide opening to find inventions abstract.  Even less satisfying is the fact that what little direction the Court offered with respect to determining “abstract ideas” was not only sparse but also somewhat confusing, unintuitive, and likely difficult to apply to other inventions.  The hints from the decision suggest that courts may broadly define “fundamental principles,” thereby increasing the likelihood that claims preempt those fundamental principles, thereby more readily finding claims abstract.

Prosecution of Financial Services Patent Applications

(aka, business as usual . . . at least for now)

Because no new test was introduced in Bilski v. Kappos and because the MOT test is still a good indicator – at least for determining whether a claim is patentable as opposed to conclusively deciding that a claim is not patentable – individuals drafting claims that cover financial services innovations will still want those claims to satisfy the MOT test at a minimum.

On the same day the Bilski v. Kappos decision was handed down, the USPTO distributed a memo to the Patent Examining Corps authored by Robert W. Bahr, Acting Associate Commissioner for Patent Examination Policy.  The memo essentially indicated that Examiners shall continue to review applications for §101 issues by first application the MOT test.  Specifically, Bahr told Examiners that if a claim passes MOT it is probably patentable unless it is clearly directed to an abstract idea, and conversely, if a claim doesn’t satisfy the MOT, it should be rejected and the applicant has the burden of demonstrating that the claim is nonetheless not drawn to an abstract idea:

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. If a claimed method does not meet the machine-or-transformation test, the examiner should reject the claim under section 101 unless there is a clear indication that the method is not directed to an abstract idea. If a claim is rejected under section 101 on the basis that it is drawn to an abstract idea, the applicant then has the opportunity to explain why the claimed method is not drawn to an abstract idea.

Because MOT is still the Patent Office’s first criterion for patent eligibility, applicants will of course want to at least ensure that any claims submitted for examination after Bilski v. Kappos satisfy this test.  Applicants will also want to ensure that, regardless of whether a claim satisfied the MOT test, claims are also not drawn to an abstract idea.  Of course this latter point about abstract ideas was also the case before Bilski v. Kappos and should not create any significant changes to drafting practices.

Conclusion

Although the S.Ct. invited (sort of) the Federal Circuit to develop “other limiting criteria that further the purposes of the Patent Act that are not inconsistent with its text” in addition to the machine-or-transformation test, it did so just two sentences after explicitly clarifying that the Court in no way endorsed any of the Federal Circuit’s previous interpretations of §101.  This reminder would hardly invite the Federal Circuit to jump at opportunities to create new §101-related tests.

Regardless, the Federal Circuit undoubtedly will have to address §101 issues as they arise, and the BFD trilogy will provide some guidance to do so.  Where we can reasonably expect additional clarification from the Federal Circuit is (1) further define when specific claim sets do or do not satisfy the MOT test, which would be a welcome source of certainty for some types of subject matter, and (2) for inventions that fail MOT, guidance for distinguishing between those that are simply abstract ideas and those that are not.

^*  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.