1 Claiming Subject Matter in Business Method Patents Bruce D. Sunstein Bromberg & Sunstein LLP Bostonwww.bromsun.com

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3 Foundational Issues for Business Method Patents Is the application directed to statutory subject matter? 35 U.S.C. § 101 Is the application directed to statutory subject matter? 35 U.S.C. § 101 Is the subject matter: Is the subject matter:  New? 35 U.S.C. § 102  Nonobvious? 35 U.S.C. § 103

4 Foundational Issues for Patents Generally Is the application directed to statutory subject matter? 35 U.S.C. § 101 Is the application directed to statutory subject matter? 35 U.S.C. § 101 Is the subject matter: Is the subject matter:  New? 35 U.S.C. § 102  Nonobvious? 35 U.S.C. § 103

5 So what’s different about business method patents?

6 The claims!

7 Claims affect the reception of an application and of a patent Claim drafting distinctions and tensions are critical in business method patents Claim drafting distinctions and tensions are critical in business method patents  Claim breadth v. claim abstraction  Context of the subject matter But they are not new But they are not new

8 A seminal case: O’Reilly v. Morse, 56 U.S. 62 (1854) O’Reilly v. Morse, 56 U.S. 62 (1854) Yes, Samuel F.B. Morse. Yes, Samuel F.B. Morse.

9 This claim valid, 1854: “1 st. … making use of the motive power “1 st. … making use of the motive power of magnetism … developed by the action of … current as a means of operating … machinery … to imprint signals upon paper … or to produce sounds … for the purpose of telegraphic communication at any distances.” 56 U.S. at 112,

10 This claim invalid, 1854: “Eighth. … the use of the motive power “Eighth. … the use of the motive power of the electric … current, which I call electromagnetism, however developed, for marking or printing … characters, signs, or letters, at any distances….” 56 U.S. at

11 Operative principle: Abstract principles won't be protected. Abstract principles won't be protected. A patent claim must reflect structure, A patent claim must reflect structure,  namely, the structure by which principles are harnessed to practical effect.

12 In re Alappat: “Phenomena of nature and abstract scientific and mathematical principles have always been excluded from the patent system. Some have justified this exclusion simply on the ground of lack of ‘utility’; some on the ground of lack of ‘novelty’; and some on the ground that laws of nature, albeit newly discovered, are the heritage of humankind. On whatever theory, the unpatentability of the principle does not defeat patentability of its practical applications.” “Phenomena of nature and abstract scientific and mathematical principles have always been excluded from the patent system. Some have justified this exclusion simply on the ground of lack of ‘utility’; some on the ground of lack of ‘novelty’; and some on the ground that laws of nature, albeit newly discovered, are the heritage of humankind. On whatever theory, the unpatentability of the principle does not defeat patentability of its practical applications.” 33 F.3d 1526, 1569 (Fed. Cir. 1994)(J. Newman concurring), citing O'Reilly v. Morse.

13 What is the rule today? Not different! Not different! Merely abstract ideas are not “useful” Merely abstract ideas are not “useful” and not patentable. An algorithm applied in a useful way is An algorithm applied in a useful way ispatentable. State Street Bank & Tr. Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1373 (Fed Cir. 1998) (Alappat followed).

14 What State Street also holds Patents can’t be invalidated just Patents can’t be invalidated just because they claim “business methods” (OK to patent a system for managing (OK to patent a system for managing a mutual fund investment structure) 149 F.3d at

15 What State Street also holds (cont’d) But patents can be invalidated for But patents can be invalidated for claiming subject matter that is not new!  After all, patents are supposed to cover only new inventions.  Many things we think are new are not; (but some things we think are old are not)! 149 F.3d at 1377.

16 What State Street means “Anything under the sun that is made by “Anything under the sun that is made by man” can be patented If new, non-obvious, and If new, non-obvious, and If harnessed to practical effect as If harnessed to practical effect asclaimed 149 F.3d at 1373 and 1377.

17 European v. US law Invention must be “suceptible of industrial application” EPC Art. 52(1) (narrower than 35 USC § 101 utility). Invention must be “suceptible of industrial application” EPC Art. 52(1) (narrower than 35 USC § 101 utility). Business methods, software, mathematical methods are not patentable “as such”. EPC Art. 52(2) and (3). Business methods, software, mathematical methods are not patentable “as such”. EPC Art. 52(2) and (3). But when a “technical effect” is present in the claimed invention, then it is not non- patentable “as such”. VICOM/Computer related invention, T 0208/84, O.J. EPO 1987, 14 (narrower than State Street). But when a “technical effect” is present in the claimed invention, then it is not non- patentable “as such”. VICOM/Computer related invention, T 0208/84, O.J. EPO 1987, 14 (narrower than State Street).

18 Example 1: It’s all how you ask Long before State Street, Merrill Lynch Long before State Street, Merrill Lynch obtained a patent for its cash management account operation U.S. patent 4,346,442 (issued in 1982) U.S. patent 4,346,442 (issued in 1982)

19 U.S. Patent 4,346,442 “Securities Brokerage-Cash Management System”, issued 1982 “Securities Brokerage-Cash Management System”, issued 1982 Assignee: Merrill Lynch, Pierce, Fenner & Smith Incorporated Assignee: Merrill Lynch, Pierce, Fenner & Smith Incorporated 2 independent claims 2 independent claims

20 Patent 4,346,442, claim 2, preamble “2. In combination in a system for processing and supervising a plurality of composite subscriber accounts each comprising a margin brokerage account, a charge card and checks administered by a first institution, and participation in at least one short term investment, said system including …” “2. In combination in a system for processing and supervising a plurality of composite subscriber accounts each comprising a margin brokerage account, a charge card and checks administered by a first institution, and participation in at least one short term investment, said system including …”

21 Patent 4,346,442, claim 2, body “… said system further comprising means for generating a stored record of each subscriber deposit, charge card and check transactions, and anti-kiting means for providing an output alert record responsive to either of said deposits, or the check or charge card expenditures exceeding predetermined maximum bounds in amount and frequency, communicating means to communicate said updated credit limit for each account to said first institution.” “… said system further comprising means for generating a stored record of each subscriber deposit, charge card and check transactions, and anti-kiting means for providing an output alert record responsive to either of said deposits, or the check or charge card expenditures exceeding predetermined maximum bounds in amount and frequency, communicating means to communicate said updated credit limit for each account to said first institution.”

22 U.S. Patent 4,346,442 Enforced successfully in 1983 Enforced successfully in 1983 Paine, Webber, Jackson & Curtis, Inc. v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 564 F. Supp (D. Del. 1983) Paine, Webber, Jackson & Curtis, Inc. v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 564 F. Supp (D. Del. 1983)

23 Example 2: Patent 5,960,411 (Amazon “One-Click”) Preamble and first line of body: Preamble and first line of body: “A method of placing an order for an item comprising: “A method of placing an order for an item comprising: under control of a client system,” under control of a client system,”

24 Amazon “One-Click” displaying information identifying the item; and displaying information identifying the item; and in response to only a single action being performed, sending a request to order the item along with an identifier of a purchaser of the item to a server system; in response to only a single action being performed, sending a request to order the item along with an identifier of a purchaser of the item to a server system; under control of a single-action ordering component of the server system, under control of a single-action ordering component of the server system, receiving the request; receiving the request; retrieving additional information previously stored for the purchaser identified by the identifier in the received request; and retrieving additional information previously stored for the purchaser identified by the identifier in the received request; and generating an order to purchase the requested item for the purchaser identified by the identifier in the received request using the retrieved additional information; and generating an order to purchase the requested item for the purchaser identified by the identifier in the received request using the retrieved additional information; and fulfilling the generated order to complete purchase of the item fulfilling the generated order to complete purchase of the item whereby the item is ordered without using a shopping cart ordering model. whereby the item is ordered without using a shopping cart ordering model.

25 Amazon one-click litigation amazon.com v. barnesandnoble.com, 239 F.3d 1343 (Fed. Cir. 2001) amazon.com v. barnesandnoble.com, 239 F.3d 1343 (Fed. Cir. 2001) Grant of preliminary injunction vacated, since substantial questions raised as to patent validity, based on prior art. 239 F.3d at 1367 and passim. Grant of preliminary injunction vacated, since substantial questions raised as to patent validity, based on prior art. 239 F.3d at 1367 and passim. But: no question as to non-statutory subject matter, and claims held likely infringed. 239 F.3d at But: no question as to non-statutory subject matter, and claims held likely infringed. 239 F.3d at Amazon settled with barnesandnoble.com. Amazon settled with barnesandnoble.com.

26 Example 3: Ex parte Lundgren (Oligopoly), BPAI, 10/05 Claim directed to a method of compensating a manager of a firm in an industry, particularly applicable when the industry is an oligopoly Claim directed to a method of compensating a manager of a firm in an industry, particularly applicable when the industry is an oligopoly  Oligopoly: “an industry structure with a relatively small number of competitors”.  “In an oligopolistic industry structure, there is an incentive for collusion … by managers of the firms to restrict output and artificially raise the price of their products”.  Quotes from dissent, p. 16 of slip opinion.

27 Ex parte Lundgren (Oligopoly) Invention: instead of paying the manager based on the firm’s absolute profits, compensate the manager based on the relative performance of the manager’s firm in relation to the other firms in the oligopoly, so as to reduce the incentive for collusion among firms in the industry. Invention: instead of paying the manager based on the firm’s absolute profits, compensate the manager based on the relative performance of the manager’s firm in relation to the other firms in the oligopoly, so as to reduce the incentive for collusion among firms in the industry. Claim is directed to a method for implementing such a pay scheme. Claim is directed to a method for implementing such a pay scheme. Slip opinion, p. 15.

28 Ex parte Lundgren (Oligopoly), claim 1 preamble: 1. A method of compensating a manager who exercises administrative control over operations of a privately owned primary firm for the purpose of reducing the degree to which prices exceed marginal costs in an industry, reducing incentives for industry collusion between the primary firm and a set of comparison firms in said industry, or reducing incentives for coordinated special interest industry lobbying, said set of comparison firms including at least one firm, said primary firm having the manager who exercises administrative control over said primary firm's operations during a sampling period, wherein [the] privately owned means [is] not wholly government owned, the method comprising the steps of: 1. A method of compensating a manager who exercises administrative control over operations of a privately owned primary firm for the purpose of reducing the degree to which prices exceed marginal costs in an industry, reducing incentives for industry collusion between the primary firm and a set of comparison firms in said industry, or reducing incentives for coordinated special interest industry lobbying, said set of comparison firms including at least one firm, said primary firm having the manager who exercises administrative control over said primary firm's operations during a sampling period, wherein [the] privately owned means [is] not wholly government owned, the method comprising the steps of:

29 Oligopoly, claim 1 body a) choosing an absolute performance standard from a set of absolute performance standards; a) choosing an absolute performance standard from a set of absolute performance standards; b) measuring an absolute performance of said primary firm with respect to said chosen absolute performance standard for said sampling period; b) measuring an absolute performance of said primary firm with respect to said chosen absolute performance standard for said sampling period; c) measuring an absolute performance of each firm of said set of comparison firms with respect to said chosen absolute performance standard for said sampling period, said measurement of performance for each firm of said set of comparison firms forming a set of comparison firm absolute performance measures; c) measuring an absolute performance of each firm of said set of comparison firms with respect to said chosen absolute performance standard for said sampling period, said measurement of performance for each firm of said set of comparison firms forming a set of comparison firm absolute performance measures; d) determining a performance comparison base based on said set of comparison firm absolute performance measures by calculating a weighted average of said set of comparison firm absolute performance measures; d) determining a performance comparison base based on said set of comparison firm absolute performance measures by calculating a weighted average of said set of comparison firm absolute performance measures;

30 Oligopoly, claim 1 body (cont’d) e) comparing said measurement of absolute performance of said primary firm with said performance comparison base; e) comparing said measurement of absolute performance of said primary firm with said performance comparison base; f) determining a relative performance measure for said primary firm based on said comparison of said primary firm measurement of absolute performance and said performance comparison base; f) determining a relative performance measure for said primary firm based on said comparison of said primary firm measurement of absolute performance and said performance comparison base; g) determining the managerial compensation amount derived from said relative performance measure according to a monotonic managerial compensation amount transaction; and g) determining the managerial compensation amount derived from said relative performance measure according to a monotonic managerial compensation amount transaction; and h) transferring compensation to said manager, said transferred compensation having a value related to said managerial compensation amount. h) transferring compensation to said manager, said transferred compensation having a value related to said managerial compensation amount.

31 Ex parte Lundgren (Oligopoly) The claim is does not require that any steps of the method be carried out in a machine (a computer) The claim is does not require that any steps of the method be carried out in a machine (a computer) Held, that the examiner’s rejection based on failure of the claims to limit subject matter “to the technological arts, as required by 35 U.S.C. § 101” is reversed. Held, that the examiner’s rejection based on failure of the claims to limit subject matter “to the technological arts, as required by 35 U.S.C. § 101” is reversed.

32 Ex parte Lundgren (Oligopoly), Observations 1. Although the claim does not require use of a computing environment, with proper support it, could have done so without loss of generality 1. Although the claim does not require use of a computing environment, with proper support it, could have done so without loss of generality  The determinations claimed require serious number crunching that could not be achieved in real life without a computing environment  Therefore limiting to a computing environment would not really cause the claim to be narrower

33 Ex parte Lundgren (Oligopoly), Observations 2. Does the subject matter claimed really have utility under section 101? 2. Does the subject matter claimed really have utility under section 101?  All companies in the oligopoly would have to practice the invention for it to work. “In this model, if all managers of firms in the industry are compensated based on the relative profitability of their respective firms, there will be no incentive for collusion.” Slip opinion, p. 15.  Because any given company will likely find itself better off by avoiding the compensation scheme claimed, the logical outcome is that no company could competitively adopt the scheme. (Caveat: no access to the application.)

34 Ex parte Lundgren (Oligopoly), Observations 2. Does the subject matter claimed really have utility under section 101? 2. Does the subject matter claimed really have utility under section 101?  If no company can competitively adopt the compensation scheme, then why should the invention be considered to work?  Arguably, the invention could be rejected for lack of utility under section 101, because it does not work.

35 Ex parte Lundgren (Oligopoly), Observations 3. How would one make money with this patent? 3. How would one make money with this patent?  Go to all companies in an oligopoly and ask them to become licensees? Seems improbable, because no company has incentive to practice the invention.  Have the government require the companies to adopt a patented scheme? Seems more improbable.

36 Ex parte Lundgren (Oligopoly), Observations 4. This decision changes the landscape very little, because: 4. This decision changes the landscape very little, because:  It does not show where to draw the line between abstract ideas and concrete implementations al la State Street— probably no simple test is possible  Even if the “technological arts” are not required under law, they are still required for good patent claim drafting!

37 Sunstein principle 1: claim breadth does not require abstraction Breadth relates to coverage of varied schemes for implementation Breadth relates to coverage of varied schemes for implementation Abstraction relates to removal of context from the structure of the claim Abstraction relates to removal of context from the structure of the claim

38 Sunstein principle 2: claim structure needs the context of the subject matter The context anchors the subject matter of the claim The context anchors the subject matter of the claim  Helps illuminate the meaning of the claim  Clear claims are easier to enforce The context makes the claim statutory by making the subject matter concrete The context makes the claim statutory by making the subject matter concrete

39 Business method patent questions Can a patentable business method involve something other than software? Can a patentable business method involve something other than software? Are business method patents inherently different from software patents? Are business method patents inherently different from software patents?

40 Business method patent answers: I Can a patentable business method involve something other than software? Can a patentable business method involve something other than software?  In theory yes, but because business has been practiced for centuries, and even millennia, there is an enormous amount of prior art! Cf. Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908) (patent 500,071 for cash-registering and account-checking designed to prevent frauds held not inventive).

41 Business method patent answers: II Can a patentable business method involve something other than software? Can a patentable business method involve something other than software?  Despite the theory, the abundance of prior art makes non-software business methods rare.  Remember State Street: sections 102, and 103 can pose big hurdles!

42 Business method patent answers III Are business method patents inherently different from software patents? Are business method patents inherently different from software patents?  Because most business method patents are software patents, they pose problems to practitioners and the PTO that are similar, if not identical, to those of software patents.  The big issues: statutory subject matter (we discussed it) and prior art

43 Why prior art is a big deal Software patents and business method patents often use vocabulary that is not standardized, so finding prior art is difficult, even when it exists Software patents and business method patents often use vocabulary that is not standardized, so finding prior art is difficult, even when it exists Failure to cite and to know relevant prior art undermines patent validity Failure to cite and to know relevant prior art undermines patent validity Prior art, when known, can be used to provide a practical context in which to claim subject matter—a help in making subject matter statutory Prior art, when known, can be used to provide a practical context in which to claim subject matter—a help in making subject matter statutory

44 Practical Lessons Work to identify extensive prior art and use it to provide a practical context for the subject matter to be claimed Work to identify extensive prior art and use it to provide a practical context for the subject matter to be claimed Use language in the claims to tie the subject matter to the practical context: “a useful, concrete and tangible result” (State Street) Use language in the claims to tie the subject matter to the practical context: “a useful, concrete and tangible result” (State Street) Make a record of the prior art to establish firmly both novelty and non-obviousness Make a record of the prior art to establish firmly both novelty and non-obviousness