1. Orlando, Florida | www.lowndes-law.com 215 North Eola Drive Orlando, Florida 407-843-4600 www.lowndes-law.com Lowndes Drosdick Doster Kantor & Reed Bagels and Bilski August 24, 2010

2. Orlando, Florida | www.lowndes-law.com OVERVIEW OF PRESENTATION Orlando, Florida | www.lowndes-law.com History of Business Method and Software Patents Bilski Case Patentability Including Patentable Subject Matter How the Bilski Decision Affects Business

3. Orlando, Florida | www.lowndes-law.com History of Business Method and Software Patents Orlando, Florida | www.lowndes-law.com Patents protect inventions of statutory subject matter including: – New, useful, nonobvious (35 U.S.C. 103) processes, machines, (articles of) manufacture, or compositions of matter and useful improvements thereof (Utility Patent) (35 U.S.C. 101) – Original ornamental designs for articles of manufacture (Design Patent) Patents do not protect: – Abstract ideas, laws of nature, and natural phenomena

4. Orlando, Florida | www.lowndes-law.com History of Business Method and Software Patents Orlando, Florida | www.lowndes-law.com

5. History of Business Method and Software Patents Orlando, Florida | www.lowndes-law.com

6. Overview of Bilski Case – Patent Application filed with USPTO Orlando, Florida | www.lowndes-law.com Application filed on April 10, 1997 Claims directed to a method of hedging risks in commodities trading* Rejected Claims Under Section 101 – Claims “not implemented on a specific apparatus and merely manipulates [an] abstract idea and solves a purely mathematical problem without limited to a practical application, therefore, the invention is not directed to the technological arts” *see handouts for claims

7. Orlando, Florida | www.lowndes-law.com Overview of Bilski Case – USPTO Board of Patent Appeals and Interferences Orlando, Florida | www.lowndes-law.com Affirmed Examiner’s Decision – Claims “do not recite any specific way of implementing the steps, do not expressly or impliedly recite any physical transformation of physical subject matter, tangible or intangible, from one state into another, do not recite any electrical, chemical, or mechanical acts or results;…and do not involve making or using a machine, manufacture, or composition of matter.”

8. Orlando, Florida | www.lowndes-law.com Overview of Bilski Case – Bilski Appeals to the Federal Circuit Orlando, Florida | www.lowndes-law.com Federal Circuit Affirms Board’s Decision – concluding that a claimed process qualifies for patent protection if: It is tied to a particular machine or apparatus; or It transforms a particular article into a different state or thing Federal Circuit relies on Gottschalk v. Benson, Parker v. Flook, and Diamond v. Diehr

9. Orlando, Florida | www.lowndes-law.com Overview of Bilski Case – Bilski Appeals to the Supreme Court Orlando, Florida | www.lowndes-law.com Supreme Court grants cert on June 1, 2009 Amicus briefs filed by 72 different entities Oral argument held on November 9, 2009 Supreme Court renders decision on June 28, 2010

10. Orlando, Florida | www.lowndes-law.com Overview of Bilski Case – Issues Presented Before Supreme Court Orlando, Florida | www.lowndes-law.com Is the Machine-or-Transformation Test the sole test? Does the Machine-or-Transformation Test contradict Congressional intent?

11. Orlando, Florida | www.lowndes-law.com Overview of Bilski Case – Supreme Court Says: Orlando, Florida | www.lowndes-law.com Federal Circuit is Wrong: Machine-or- transformation test is not the sole test for constituting a “process” Federal Circuit is Right: Machine-or- transformation test does not contradict the clear Congressional intent that patents protect methods of doing or conducting business

12. Orlando, Florida | www.lowndes-law.com Overview of Bilski Case – Supreme Court Decision Orlando, Florida | www.lowndes-law.com All Justices unanimous in rejecting claims But, 5-4 Decision: – Kennedy Majority Opinion (16 pages) – Stevens Concurring Opinion (47 pages) Would have held business methods are not patentable – Breyer Concurring Opinion (4 pages)

13. Orlando, Florida | www.lowndes-law.com Overview of Bilski Case – Supreme Court Decision Orlando, Florida | www.lowndes-law.com Kennedy Majority Opinion – Reject machine-or-transformation test as sole test – But, plurality opine that 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 the manipulation of digital signals”

14. Orlando, Florida | www.lowndes-law.com Overview of Bilski Case – Supreme Court Decision Orlando, Florida | www.lowndes-law.com Conclusions – Which business methods are patentable? “Business methods” are not categorically precluded from patent protection – Which tests are approved to use in determining if a business method is patentable? Machine-or-transformation is a test, but not the sole test – Do any other types of tests exist? Will be up to future decisions by the Federal Circuit

15. Orlando, Florida | www.lowndes-law.com Patent Prosecution in Light of Bilski Orlando, Florida | www.lowndes-law.com “Venturing near the metaphysical quicksand of uncertain patentable subject matter creates risks regarding the ability to obtain or to enforce patent rights.” Stephen A Bent and Robert Silverman, Foley & Lardner, LLP, Lexology, Aug 2, 2010

16. Orlando, Florida | www.lowndes-law.com What Did Not Change Orlando, Florida | www.lowndes-law.com Bilski notable for what it did not change regarding what is and is not patent-eligible subject matter Bilski does not categorically preclude: – Software – Algorithms – Diagnostic tests – “Business methods”

17. Orlando, Florida | www.lowndes-law.com Bilski’s Claim 1, abbreviated Orlando, Florida | www.lowndes-law.com 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 provider and consumers...; (b)identifying market participants for said commodity having counter-risk position; and (c)initiating a series of transactions between provider and market participants...

18. Orlando, Florida | www.lowndes-law.com PTO Interim Guidance, 27 July 10 Orlando, Florida | www.lowndes-law.com Set of factors given to patent examiners for determining if a process is patent-eligible: – “Machine or transformation” test still plays prominent role Still not patent-eligible: – Natural phenomena – Abstract ideas – Scientific facts – General concepts

19. Orlando, Florida | www.lowndes-law.com Factors Weighing Towards Eligibility Orlando, Florida | www.lowndes-law.com 1.Recitation of particular machine or transformation. 2.Machine implements the method steps. 3.Article undergoes a change in state or thing (e.g., an objectively different function or use). 4.Article being transformed is an object or substance. 5.If the claim is directed to applying a law of nature, must meaningfully limit the execution of the steps. 6.The claim is more than a mere statement of a concept and either describes a particular solution to a problem or implements the concept in some tangible way.

20. Orlando, Florida | www.lowndes-law.com Factors Weighing Against Eligibility Orlando, Florida | www.lowndes-law.com 1.No, or insufficient, recitation of machine or transformation. 2.Machine or transformation nominally, insignificantly, or tangentially related to performance of method steps. 3.Machine only generically recited or merely an object on which method operates. 4.Transformation involves only a change in position or location of an article. 5.Claim would monopolize a natural force, patent a scientific fact, or effectively grant a monopoly over a concept (“pre- emption”).

21. Orlando, Florida | www.lowndes-law.com Industry Sectors Potentially Impacted by Bilski Orlando, Florida | www.lowndes-law.com Medical/biotechnology Financial/securities industries Telecommunications Software Internet commerce

22. Orlando, Florida | www.lowndes-law.com Medical/Biotechnology - Assays Orlando, Florida | www.lowndes-law.com Important area of medical treatment – “molecular diagnostics” – Predict likely development or course of disease – Suggest likely effective drug therapies Composition of matter claims broadly patentable-eligible here & abroad (kits, reagents) Is the following exemplary claim patent-eligible? A method of assessing the risk of developing disease x comprising detecting the presence or absence of allele y in a patient sample, wherein allele y is indicative of an increased risk of developing disease x.

23. Orlando, Florida | www.lowndes-law.com Prometheus Laboratories, Inc. v. Mayo Collaborative Services Orlando, Florida | www.lowndes-law.com Invention involving assaying drug levels in body - Supreme Court returned to Fed. Circuit to “rethink” in light of Bilski Claim steps: (1) administering 6-thioguanine to a patient and then (2) determining a blood level of that drug in the patient against a fixed concentration, thereby to inform a decision on raising or lowering subsequent dosages. [no step (3) recited, to alter subsequent dosage as a result of (2)]

24. Orlando, Florida | www.lowndes-law.com Isolated Genes Are Unpatentable Products of Nature Orlando, Florida | www.lowndes-law.com Claims directed to isolated human genes associated with increased risk of breast cancer (the BRCA1 and BRCA2 genes) Exclusive licensor Myriad Genetics is sole entity that provides full sequencing of the BRCA1 and BRCA2 genes on a commercial basis in the U.S. Held not patent-eligible because the isolated DNA is not “markedly different” from the native DNA Assoc. for Molecular Pathology et al. v. United States Patent and Trademark Office et al., 09 Civ 4515 (S.D.N.Y. 2010)

25. Orlando, Florida | www.lowndes-law.com Potential Effect of Holding in Myriad Case Orlando, Florida | www.lowndes-law.com If upheld on appeal, will likely have profound effect on biotechnology industry, which has been obtaining and enforcing patents claiming purified and isolated genes for over 30 years Will be difficult to secure patent claim covering a gene sequence that can be used for diagnostic or treatment purposes because would have to be shown that sequence is “markedly different” from native form

26. Orlando, Florida | www.lowndes-law.com Recommendations Orlando, Florida | www.lowndes-law.com Ground patent strategies in claims that recite: – Tangible assay formats – Diagnostic platforms Recite hardware and real-world biological, chemical, or physical interactions and operation of invention

27. Orlando, Florida | www.lowndes-law.com Data-Driven Medical Process Orlando, Florida | www.lowndes-law.com Transform data via computer-implemented algorithm from one form (e.g., signal encoding x- ray results) to another form accessible (e.g., through visualization) to instruct particular diagnostic or treatment procedure Add claims directed to treatment steps to be taken in light of diagnostic information: – Provide a warning – Alter a therapy

28. Orlando, Florida | www.lowndes-law.com Financial/Securities Industries Orlando, Florida | www.lowndes-law.com Bilski did not categorically abolish business method patents Split decision on question of business method subject-matter eligibility leaves question somewhat open for future cases to be taken up

29. Orlando, Florida | www.lowndes-law.com Recommendations Orlando, Florida | www.lowndes-law.com Implement invention in some tangible way Include computerized implementation Algorithm that could be performed entirely in the human mind would not be patent-eligible (e.g., algorithm to predict whether a stock price will increase) Include post-solution steps having more “structure”: Transmit an electronic signal to another computer system to execute a stock trade based upon output of algorithm

30. Orlando, Florida | www.lowndes-law.com Chainbridge Software Patent Orlando, Florida | www.lowndes-law.com PTO issued on May 1, 2010, for a computer-implemented method to conduct contingent fee state tax audits Invention claimed as a computer-implemented method for identifying entities that have avoided a state corporate income tax, with the following steps: identify and perform transfer pricing analysis on a state taxpayer based on publicly available information; use state corporate income tax data to identify taxpayers who have transactions with related companies (controlled transactions); perform transfer pricing analysis on the taxpayer by determining a ratio of operating profit to sales; compare ratio to ratios for a plurality of companies in the taxpayer’s industry; determine if taxpayer avoided state corporate income taxes. Why was this considered patent-eligible subject matter?

31. Orlando, Florida | www.lowndes-law.com Recommendations Orlando, Florida | www.lowndes-law.com Continue to seek patent protection for inventions that represent important innovations for company and are core to corporate success, particularly if can be reverse-engineered and are not amenable to trade secret protection Add as much “structure” or “transformation” as possible – computer, output, post- solution effect of calculation

32. Orlando, Florida | www.lowndes-law.com Telecommunications Industry Orlando, Florida | www.lowndes-law.com Patent-eligibility could be vulnerable in areas such as methods of processing and transferring information (e.g., data compression, manipulation of digital signals) Recite “structure” – effect of signal manipulation, hardware performing the signal transmission

33. Orlando, Florida | www.lowndes-law.com Software Industry Orlando, Florida | www.lowndes-law.com If “machine or transformation” test rigorously applied, will need to tie claims to a particular machine (processor) and/or recite a tangible outcome based upon calculations performed by software Not sufficient merely to install software on a processor

34. Orlando, Florida | www.lowndes-law.com What About Europe? Orlando, Florida | www.lowndes-law.com Generally the U.S. is more lenient than Europe in subject-matter eligibility May 2010 – judicial authority of the European Patent Office issued opinion on patentability of software – Inventions that provide a technical solution to a technical problem are eligible; those that do not are not – In computer-implemented business method, if inventive features limited to the business method itself, not eligible – If invention lies in how business method is implemented (e.g., in a computer), eligible

35. Orlando, Florida | www.lowndes-law.com Unity? Orlando, Florida | www.lowndes-law.com UK law different from European – computer- implemented inventions not subject-matter eligible Thus still no trans-Atlantic unity after Bilski, nor yet trans-Channel unity

36. Orlando, Florida | www.lowndes-law.com Recommendations for Patent Prosecution in the Wake of Bilski Orlando, Florida | www.lowndes-law.com Prepare disclosure that supports claims under at least one approved test (for now, “machine or transformation” only approved test) Draft claims directed to different classes of statutory subject matter – System – Method – Composition of matter – Machine or apparatus

37. Orlando, Florida | www.lowndes-law.com HOW DOES THIS IMPACT YOUR BUSINESS? Orlando, Florida | www.lowndes-law.com Firm value, licensing and M & A Portfolio review Litigation

38. Orlando, Florida | www.lowndes-law.com Firm Value, Licensing and M&A – The Good! Under Bilski, business method patents (BMPs) live – This is critical for: Start-up companies Existing industries (i.e., banking, insurance, biotech, life sciences, medical research, securities, accounting, online shopping, etc.) – Firm’s market value is a combination of: Tangible assets Intangible assets (patents, brands, trade secrets) – For example, Amazon places 93% of its firm value on intangible assets such as intellectual property and brands

39. Orlando, Florida | www.lowndes-law.com Firm Value, Licensing and M&A For many businesses, BMPs represent a significant and growing portion of firm value – Licensing revenue – Preclusion of competition – Revenues derived from BMPs that increase consumer demand

40. Orlando, Florida | www.lowndes-law.com Bilski Effect on Software Patent $1B+ Public Companies Screening SEC filings for “software patent” and selecting publicly traded companies with market capitalization greater than $1B results in the following chart:

41. Orlando, Florida | www.lowndes-law.com Bilski Effect on Software Patent $1B+ Public Companies Screening SEC filings for “business method patent” and selecting publicly traded companies with market capitalization greater than $1B results in the following chart:

42. Orlando, Florida | www.lowndes-law.com Bilski Effect on Amicus Brief Public Companies Sampling some of the publicly traded companies whose names were included in the amicus briefs for Bilski results in the following chart:

43. Orlando, Florida | www.lowndes-law.com Firm Value, Licensing and M&A – The Bad! While Bilski does not preclude BMPs, it is uncertain as to which BMPs are still patentable and their scope Lower courts may begin to narrow the scope of BMPs – This can have a negative impact on earnings and market cap Lower licensing revenues Inability to prevent competition Decreased consumer demand Possible write-down of intangible assets Possible impairment expenses

44. Orlando, Florida | www.lowndes-law.com What Do We Do Now? Increase due diligence in M&A activity Portfolio reviews Reassess litigation strategies

45. Orlando, Florida | www.lowndes-law.com Due Diligence When companies acquire BMPs through acquisitions, they are required to record the value of the patents as assets on their balance sheets – Must carefully review the existing patent portfolio Periodic impairment testing requires write- down of these assets if their values decline – Has the company being acquired performed these tests?

46. Orlando, Florida | www.lowndes-law.com Portfolio Review post-Bilski Issuance Orlando, Florida | www.lowndes-law.com Patent owners and investors should review existing portfolios – Some existing patent claims may be considered invalid May be able to proactively address this issue – The US patent system provides three tools to change the claims of an issued patent Reissue Reexamination Certificates of correction

47. Orlando, Florida | www.lowndes-law.com Portfolio Review post-Bilski Issuance Orlando, Florida | www.lowndes-law.com Certificates of correction – Will not apply to correcting Bilski issues Correct clerical transcription type errors in the printing of the issued patent Reexaminations – Allows the Patent Office to reconsider the granted claims in light of prior patents and publications (“prior art”) overlooked during the initial examination – Thus Bilski issues may not be used as a basis to request a reexamination; but If a reexamination is granted on other grounds, all invalidity defenses become fair game – Including issues under 35 USC 101, for any amended reexamined claims, or if any new claims are added during the reexamination process

48. Orlando, Florida | www.lowndes-law.com Portfolio Review post-Bilski Issuance Orlando, Florida | www.lowndes-law.com Reissue – Can correct “defects” in issued patents Claims that are too broad to be valid may be narrowed, and claims that are narrower than necessary under the new ruling may be broadened – Strict two-year time limit to broaden any claim – No time limit to narrow any claim Requires patent owner to cite at least one error that causes the issued patent to be “wholly or partially inoperative or invalid” The cited errors should have material impact on issued patent

49. Orlando, Florida | www.lowndes-law.com Portfolio Review post-Bilski Issuance Orlando, Florida | www.lowndes-law.com WARNING – Improper or insufficient errors may lead a court to invalidate claims – Reissue process may not “recapture” previously surrendered subject matter – Possible “intervening rights” – Infringement litigation and license deals may be held up pending reissue process

50. Orlando, Florida | www.lowndes-law.com Litigation post-Bilski Orlando, Florida | www.lowndes-law.com Bilski provides more uncertainty than clarity in regard to how an “abstract idea” should be defined for patent eligibility purposes – Supreme Court basically stated that lower courts should handle these issues on a case-by-case basis – Uncertainty breeds litigation! Since 2008 several District Courts invalidated claims under 35 USC 101 by relying solely on the MOT test – Some of these cases may now be appealable All eyes back to Federal Circuit to see how it applies Bilski – Numerous cases pending

51. Orlando, Florida | www.lowndes-law.com Litigation post-Bilski Orlando, Florida | www.lowndes-law.com Plaintiffs may seek to – Assert only those non-process claims of a patent Effect would be to deprive the defendant from asserting a Bilski-type invalidity defense – Emphasize that method/process claims are Concrete, specific and limited in scope, and That they do not preempt any abstract ideas or fundamental principles – Request reissue prior to filing litigation Must consider “intervening rights”

52. Orlando, Florida | www.lowndes-law.com Litigation post-Bilski Orlando, Florida | www.lowndes-law.com “Patent trolls” – The uncertainty present in Bilski appears to open to door for more cases now that there is some clarity that business methods are in fact patentable NTP, Inc. v. Apple, Google et al. filed July 9, 2010 – Patents concerning wireless e-mail delivery – Seeking billions in damages – NTP never made commercial products or produced services

53. Orlando, Florida | www.lowndes-law.com Litigation post-Bilski Orlando, Florida | www.lowndes-law.com Defendants in infringement cases may challenge the validity of claims under 35 USC 101 in view of the Bilski ruling – Will have to prove that a method/process claim Fails the MOT test, and Falls within one of the exclusions to patent eligibility Non-patentees may file Declaratory Judgment actions requesting that a patent be held invalid under the same theory

54. Orlando, Florida | www.lowndes-law.com Contact Information Orlando, Florida | www.lowndes-law.com Teddy Shih theodore.shih@lowndes-law.com Angela Miller angela.miller@lowndes-law.com Jacki Hartt jacki.hartt@lowndes-law.com Jason Miller jason.miller@lowndes-law.com www.lowndes-law.com

55. Orlando, Florida | www.lowndes-law.com PCE Valuations Victor E. Jarosiewicz, CFA, ASA Victor E. Jarosiewicz has performed hundreds of valuation and valuation consulting engagements, written about the topic for leading industry publications, taught business valuation continuing education courses and testified as a business valuation expert in U.S. Bankruptcy and Florida Civil Circuit courts. Victor currently is responsible for PCE’s valuation analyses and reports and is involved in all aspects of its business valuation and consulting services. Formerly an analyst with one of Central Florida’s largest public accounting firms, his background also includes transactional financial analysis and due diligence and fairness opinions. He earned a Bachelor’s degree in mechanical engineering from the University of Florida and a Master’s degree in Business Administration from the Rollins College Crummer Graduate School of Business. Victor holds the Chartered Financial Analyst designation and serves on the CFA Society of Orlando’s board of directors. Victor is a member of the Strategic Planning Task Force of the ASA Business Valuation Committee, the governing body for the Business Valuation discipline of the American Society of Appraisers.