2. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Business Method Patents Michael I. Shamos, Ph.D., J.D. Institute for Software Research School of Computer Science Carnegie Mellon University

3. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Methods of Doing Business Historically, “methods of doing business” were not patentable because they did not fall into any of the four categories of invention: process, machine, manufacture or composition of matter Example: –“A method conducting retail sale of items comprising: charging either 5 cents or 10 cents for each item” –(Invented by Frank Woolworth in 1879, but no patent since not patentable) A “process” involved ONLY physical transformation of tangible materials, as in a chemical process

4. Cochrane v. Deener, 94 U.S. 780 (1876) Cochrane patented a method of making flour. He sued Deener for infringement. Patents were then allowed for “any new and useful art, machine, manufacture or composition of matter [and improvements].” Deener argued: Cochrane’s method was not tied to any particular machine. Supreme Court: “Neither courts nor ordinary juries are perfectly adapted to the investigation of mechanical and scientific questions.” “A process is a mode of treatment of certain materials to produce a given result. It is an act, or a series of acts, performed upon the subject-matter to be transformed and reduced to a different state or thing. … In the language of the patent law, it is an art.”

5. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Methods of Doing Business Business methods were not patentable (no “transformation”) until State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998) (re patent no. 5,193,056)149 F.3d 13685,193,056 Signature Financial obtained a patent on a computerized method of allocating investment funds State Street Bank infringed and Signature sued The District Court found the patent invalid as merely a business method Signature appealed

6. Signature’s Invention Investment Portfolio Mutual Fund 4 Mutual Fund 5 Mutual Fund 1 Mutual Fund 2 Mutual Fund 3 11% 14% 20% 25% 30% A Portfolio of Mutual Funds Each day, compute the gain or loss of each fund Redistribute the assets (change the percentages) based on which funds have gained the most value

7. State Street Bank Claim 1

8. State Street Appeal “As an alternative ground for invalidating the '056 patent under §101, the court relied on the judicially-created, so-called ‘business method’ exception to statutory subject matter. We take this opportunity to lay this ill- conceived exception to rest.” “The business method exception has never been invoked by this court … to deem an invention unpatentable.” “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. (This is the “machine or transformation test”)

9. In re Bilski In re Bilski (Fed. Cir. 2008) 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 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

10. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS In re Bilski, Bilski v. Kappos The Patent Office rejected all claims of Bilski’s application since they did not claim a “process.” Bilski appealed to the Board of Patent Appeals and Interferences. The Board upheld the rejection Bilski appealed to the Court of Appeals for the federal Circuit. In 2008, the Federal Circuit upheld the rejection In 2010, the Supreme Court, in Bilski v. Kappos, upheld the rejection but disclaimed the Federal Circuit’s standard of “machine or transformation” as the sole test

11. In re Bilski, Bilski v. Kappos The Federal Circuit looked to language in earlier Supreme Court decisions and formulated a rule called the “machine or transformation test:” “A claimed process is surely patent-eligible if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” Bilski failed the test, but there is a debate about the meaning of “particular machine” The Supreme Court in Bilski v. Kappos said that “machine or transformation” is an important clue, but not the sole test It focused on the concept of an “abstract idea,” which would be infringed by any implementation at all, and held that abstract ideas are not patentable

12. Alice Corp. v. CLS Bank (Sup. Ct., June 19, 2014) Alice owned patents on mitigating settlement risk in financial transactions. “Settlement risk” is the risk that only one party to a transaction will pay It sued CLS Bank The District Court in the District of D.C. ruled that the claims were not patentable subject matter The Federal Circuit affirmed. Alice appealed to the Supreme Court LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

13. Claim 33 of U.S. Patent 5,970,479 33. A method of exchanging obligations as between parties, each party holding a credit record and a debit record with an exchange institution, the credit records and debit records for exchange of predetermined obligations, the method comprising the steps of: (a)creating a shadow credit record and a shadow debit record for each stakeholder party to be held independently by a supervisory institution from the exchange institutions; (b)obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record; (c)for every transaction resulting in an exchange obligation, the supervisory institution adjusting each respective party’s shadow credit record or shadow debit record, allowing only these transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order, and (d)at the end-of-day, the supervisory institution instructing on[e] of the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

14. Alice Corp. v. CLS Bank (Sup. Ct., June 19, 2014) “Laws of nature, natural phenomena, and abstract ideas are not patentable.” Granting a patent “would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.” “Laws of nature, natural phenomena, and abstract ideas are the basic tools of scientific and technological work.” “We must distinguish between patents that claim the ‘buildin[g] block[s]’ of human ingenuity and those that integrate the building blocks into something more” LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

15. Alice Corp. v. CLS Bank (Sup. Ct., June 19, 2014) “The claims before us are drawn to the concept of the use of a third party to mitigate settlement risk. … the concept of intermediated settlement is a fundamental economic practice long prevalent in our system of commerce.” “The method claims, which merely require generic computer implementation, fail to transform that abstract idea into a patent-eligible invention.” “If a patent’s recitation of a computer amounts to a mere instruction to “implemen[t]” an abstract idea on a computer, that addition cannot impart patent eligibility. Affirmed. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

16. Post-Alice Cases DDR Holdings v. Hotels.com (Fed. Cir., Dec. 4, 2014) –A claim is patentable (not abstract) if it is “necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.” Allvoice v. Microsoft (Fed. Cir., May 22, 2015) –Pure software, not tied to a machine is NOT PATENTABLE unless claimed as a process

17. Allvoice v. Microsoft Claim 60 of U.S. Patent 5,799,273: Problem: Allvoice asserted that the “means” were software interfaces. The Court held that a “software interface”is not a process, machine, manufacture or composition of matter.

18. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Patent Reform Act of 2011 (“America Invents Act”) Signed by President Obama on Sept. 16, 2011 Major revision to U.S. patent law: First-to-file takes precedence over first-to-invent Simplified challenge for financial business method patents (“covered business methods”) Prior art can be submitted by the public No patents on tax-avoidance methods

19. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Major Ideas Business methods can be patentable if they are not “abstract ideas” Business methods tied to a “particular machine or device” are likely to be patentable No one knows what “particular machine or device” means Implementing a known process on a computer does not result in a patent Just because a patent has been issued does not mean it will survive court challenge

20. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Q A &

21. Johnson U.S. Patent 6,941,2816,941,281 A payment method for repaying a merchant’s financial obligation Merchant owes money to a party (usually resulting from a loan or cash advance) Merchant will use part of the proceeds from card sales to reduce the obligation BUT: we don’t want to depend on the merchant to pay the party. He might not. We don’t want to depend on the party to pay the merchant. He might not. INVENTION: have the processor split the payment: some to the merchant, some to the party. The processor is an intermediary LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

22. Invention: Processor Splits Funds Between Merchant and Party PAYMENT RECEIVER MERCHANT’S BANK PROCESSOR PROCESSOR GETS CARD RECEIPTS PROCESSOR SENDS A PORTION TO MERCHANT’S BANK PROCESSOR SENDS A PORTION TO PAYMENT RECEIVER TO REDUCE THE OBLIGATION

23. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Processor Splits Funds Between Merchant and Party “Typically, a percentage of a consumer's payment to the merchant (e.g., by credit card) is used to pay down the merchant's outstanding loan.” (1:66-2:2) “The invention involves a merchant processor 300 designed to pay a portion of what would normally go to the merchant 20 to the lender 60 as repayment of at least a portion of the merchant's outstanding loan amount …” (5:21-25) “The lender 60 then receives that portion of the payment forwarded by the merchant processor 300 and applies it to the merchant's outstanding loan amount to reduce that outstanding loan amount. The merchant processor 300 thus pays the merchant 20 some amount less than what the merchant 20 would receive in the arrangement of FIG. 1B, as indicated by an arrow 27 in FIG. 2.” (5:25-32)

24. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Prior Art Credit Card Payment 12. Cardholder pays with credit card 26. Merchant sends transaction to processor 36. Processor sends transaction to issuer 48. Issuer sends money to processor 38. Processor receives money 27. Processor pays merchant 52. Issuer bills cardholder 54. Cardholder pays issuer

25. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Dividing the Payment in the Patent CAPITAL GIVING RISE TO THE OBLIGATION REST OF MERCHANT PAYMENT PORTION OF MERCHANT PAYMENT PAID INSTEAD TO LENDER 12. Cardholder pays with credit card 26. Merchant sends transaction to processor 36. Processor sends transaction to issuer 48. Issuer sends money to processor 38. Processor receives money 27. Processor pays merchant 52. Issuer bills cardholder 54. Cardholder pays issuer

26. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Claim 1 1. A method for automated payment, comprising: at a merchant, [a1]accepting a customer identifier as payment from the customer and [a2]electronically forwarding information related to the payment to a computerized merchant processor; at the computerized merchant processor, [b1]acquiring the information related to the payment from the merchant, [b2]authorizing and settling the payment, and [b3]forwarding at least a portion of the payment to a computerized payment receiver as payment of at least a portion of an obligation made by the merchant; and at the computerized payment receiver, [c1]receiving the portion of the payment forwarded by the computerized merchant processor and [c2]applying that portion to the outstanding obligation made by the merchant to reduce such obligation.

27. LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS Johnson U.S. Patent 6,941,2816,941,281 In 2007, the patent was found invalid as obvious by a federal judge in Texas, sitting without a jury. AdvanceMe v. RapidPay.

28. Cybersource v. Retail Decisions Claim 3. A method for verifying the validity of a credit card transaction over the Internet comprising the steps of: [a] obtaining information about other transactions that have utilized an Internet address that is identified with the credit card transaction; [b] constructing a map of credit card numbers based upon the other transactions and; [c] utilizing the map of credit card numbers to determine if the credit card transaction is valid. Invalid because it claims all possible ways of using a credit card map to determine fraud. Invalid because it is an unpatentable “mental process.” The steps are not performed BY the Internet LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

29. Ultramercial v. Hulu This claim was found valid under Bilski. It states a specific algorithm for protecting media AND is not an abstract method LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS