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Supreme Court Hits Reset Button

The Supreme Court Bilski decision finally came down today.  It threw out the rigid machine or transformation test, but did not really provide much guidance for what analysis should take its place.  Basically the Supreme Court hit the reset button to before 1998 and told the Federal Circuit to start over with its Section 101 analysis paying more attention to the three 1970s Supreme Court cases of Benson, Flook, and Diehr (“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. . . . Nothing in today’s opinion should be read as endorsing interpretations of § 101 that the Court of Appeals for the Federal Circuit has used in the past.  See, e.g., State Street. . . . In disapproving an exclusive machine-or-transformation test, we by no means foreclose the Federal Circuit’s development of other limiting criteria that further the purpose of the Patent Act and are not inconsistent with its text.”).

Business Methods Still Eligible for Patent Protection

The Supreme Court ruled that methods of doing business may be patented, if they meet the appropriate standards of the Patent Act.  The Court struck down the rigid “machine or transformation” test as the exclusive test for patent eligible subject matter.  Instead, the Supreme Court relied on its own earlier rulings that found processes to be eligible for patent consideration as long as they are not directed to a law of nature, mathematical formula, or an abstract idea.  The Court noted that the machine or transformation test can be helpful in determining whether subject matter is eligible for patent protection, but it should not be relied upon as the exclusive test.

The Supreme Court did not provide significant guidance in how to determine whether a claimed process is a law of nature, mathematical formula, or abstract idea.  Therefore, the case is likely to create some short-term uncertainty about the scope of patentable subject matter.  However, it is a more patent-friendly standard than the rigid machine or transformation test it overturned.

Supreme Court Analysis

In its opinion, the Court first determined that the machine or transformation test should not be the exclusive test for whether claims are directed to a “process” within the meaning of Section 101, which limits patents to “any new and useful process, machine, manufacture, or composition of matter.”  In particular, the Court found such a limited test to be inconsistent with Section 100(b) of the Patent Act that defines “process” to mean “process, art or method.”  The Court did note that the machine or transformation test is a “useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under Section 101.”

The Court next determined that business method patents are permitted under the Patent Act.  The plain language of the Patent Act does not include any limitations that would exclude methods of doing business as appropriate subject matter for patenting.  The Court further found that not permitting any business method patents would render section 273 of the Patent Act (which limits damages in certain cases where the claimed invention is a method of doing or conducting business)  superfluous.

Finally, the Court applied the holdings of its earlier cases and determined that the claims at issue in this particular patent application are directed to an abstract idea, stating “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.”  Therefore, all of the claims in question were found to be not eligible for patent protection.

Justice Stevens’s Concurrence

Justice Stevens, joined by three other justices, wrote a concurrence in the result that disagreed with the analysis.  Most importantly, Justice Stevens would have adopted a rule that business methods are not appropriate subject matter based on the history of the Patent Act.  Justice Stevens was also critical of the lack of guidance provided by the Court’s opinion stating:  “The Court never provides a satisfying account of what constitutes an unpatentable abstract idea. . . . The Court essentially asserts its conclusion that petitioners’ application claims an abstract idea.  This mode of analysis (or lack thereof) may have led to the correct outcome in this case, but it also means that the Court’s musing on this issue stand for very little.”

What Now?

It is clear that the machine or transformation test is not the exclusive test for patent eligible subject matter.  The touchstone for patent eligible subject matter appears to be whether the claims are directed to an abstract idea, law of nature, or mathematical formula.  However, all of the Justices acknowledged that the machine or transformation test is still a valuable tool for making this determination.  A key factor for determining that an invention is directed to an abstract idea appears to be whether the claims would preempt use of an approach in all fields.  The lower courts and the Patent Office will be left to figure out what other tests might be appropriate.

Therefore, for issued patents that fail the machine or transformation test, all is not necessarily lost.  The patent owners still have a chance to show that the claimed invention is not directed to an abstract idea, law of nature, or mathematical formula.  How that can be accomplished is a little unclear at this point.  It will bear watching the courts and the Patent Office to see what other tests might be used to establish appropriate patent eligible subject matter.  For new applications, it would be best to try to include claims that satisfy the machine or transformation test, if possible.

Transamerica Prevails in GMWB Variable Annuity Case

The Federal Circuit reversed a district court verdict finding that Transamerica had infringed a patent owned by Lincoln National.  The product in question is a variable annuity that includes a guaranteed minimum withdrawal benefit (GMWB).

The Federal Circuit found that Lincoln failed to show that payments would be made by computer even after the account value was exhausted, as required by the patent claims.  The court declined to rule on whether the district court committed error by refusing to allow Transamerica to amend its complaint to alleged that the patent was invalid under 35 USC § 101, finding the issue moot in light of the determination of noninfringement.

This is an important victory for Transamerica, and numerous other insurance companies who offer similar products.  However, the rational for the decision may not be completely fatal to Lincoln.  To fall within the safe harbor created by the decision, insurance companies will need to make arrangements to administer the exhausted accounts without the use of computers–which may be difficult.  A ruling based on Section 101 could have been fatal to Lincoln.

My New Retirement Plan

United States Patent No. 7,736,226, issued to Bally Gaming, Inc. on Tuesday, relates to providing an annuity to a progressive jackpot winner in lieu of an immediate payout.   A progressive jackpot is often provided in association with slot machines.  In these progressive jackpot systems, a portion of the money collected by a number of machines is pooled to provide a mega-jackpot that can be won on any of the machines.  The benefit of the invention appears to be that it allows the casino to display the entire value of annuity payments as the jackpot, rather than just the value of the pooled portion of the collected money.  For example, see claim 7:

7.  A method for providing a progressive jackpot, the method comprising:

funding the progressive jackpot with one or more contributions from a progressive jackpot provider;

determining a current value of the progressive jackpot using a data processing device of a progressive controller by calculating an annuitized value from the one or more contributions, the annuitized value being a total payout value of the progressive jackpot when invested in an annuity and paid over a period of time ending at a future date, wherein the annuitized value is larger than a total amount of the one or more contributions, and wherein the current value of the progressive jackpot is defined as the annuitized value, and wherein the annuitized value is based on the current sum of the predetermined portion of wagers;

displaying the current value of the progressive jackpot on a progressive display for viewing by one or more players;

recalculating and displaying the current value of the progressive jackpot; and

in response to a progressive jackpot triggering event, providing the player with an option to receive an annuity that is equal to the current value of the progressive jackpot, wherein the annuity is funded by the total contributions or a lump sum payment that is equal to a total of all contributions from the progressive jackpot provider.

No word on what riders will be available with the annuity.

In other news, the Supreme Court issued several decisions today, but still no Bilski.  Bilski is now the only case argued in November that has not yet been decided.

Hedge Fund Patents

Patents that include the term “hedge fund” in at least one claim were extremely rare until last year.  From 2001-2008, there were a total of only four such patents issued.  However, in 2009, there were nine patents issued that included the term “hedge fund” in at least one claim.  In 2010, the Patent Office is on pace to issue twenty-six such patents.

Why the increase in granting these patents?  One answer is that applicants were not filing patents that used that phrase with any regularity prior to the mid-2000s.  From 2001-2005, there were an average of about five published applications per year that used the term “hedge fund” in the claims.  The rate spiked up dramatically in 2006-2008, to a high of twenty such published applications in 2008.  However, the rate has gone back down, such that only nine were published in 2009.   2010 is on pace to have only seven published applications that use the term “hedge fund” in a claim.  It is unclear to me why there was a sharp rise in hedge fund filings followed by a rather sharp drop.  However, assuming the issued patents rate follows the published applications rate, there should be at least one more year of elevated hedge fund patents, followed by a slow down.

Issued Hedge Fund Patents by Year

List of Hedge Fund Patents Since 2001

Listed of Published Hedge Fund Applications Since 2001

Are Electronic Files Products Under the Patent Act?

The Patent Act (35 USC §271(g)) prohibits importing “products” made by a patented process.  Many financial services patents have claims directed to processes that are performed on a computer.  One strategy for avoiding these patents is to perform some or all of the steps of the method on a computer located outside the United States.  However, generally this involves some interface and communication of data from the computers outside the United States to computers in the United States.  In that instance, the patent owner may assert that the purported infringer is importing a patented product in violation of section 271(g).

While the Court of Appeals for the Federal Circuit has generally read “products” to mean a tangible product, it has not necessarily categorically excluded digital products from being included within the purview of section 271(g).  Therefore, a few district courts have left open the possibility that claims directed to methods for creating digital content might be infringed by importing digital files.  For example in CNET Networks v. Etilize, Inc., 528 F. Supp. 2d 985 (N.D. Cal. 2007), the court found that a digital catalog could be a product within the meaning of the statute.  Similarly in Ormco v. Align Technology, 609 F. Supp. 2d 1057 (C.D. Cal. 2009), three-dimensional digital representations of patients’ teeth were found to be products.

A recent case adds some nuance to the analysis.  In Yangaroo, Inc. v. Destiny Media Technologies, (E.D. Wis. June 7, 2010) the court determined that digital music and video files could not be considered a product made by the patented process.  This determination was based at least in part on the fact that the claims of the patent in question were directed to a method of distributing digital content, not a method of creating digital content.

There are a couple take-aways from these cases.  First, when trying to avoid a third-party patent by moving activity outside the United States, the issue of whether importing digital files runs into section 271(g) should be considered.  Second, when drafting patents directed to computer implemented financial services methods, it may be desirable to include some claims directed to creating digital “products” to increase the possibility of covering would be infringers who move some of their activity outside the United States.

Financial Services Patents on the Upswing

The grant rate for patents in the financial services classes has significantly increased so far in 2010 as compared to the last several years.  For example, in Class 705/4 related to insurance, about 100 patents have been issued through May 31–about 20 per month.  That compares with about 6.5 per month last year, 7.4 per month in 2008, and 3.5 per month in 2007 and 2006.  Therefore, the grant rate in this class has tripled over the last year, and gone up about six-fold over the last five years.

Class 705/35 related to banking, finance, and investments has also seen a significant increase in grant rate.  So far in 2010, patents have been issuing at a rate of about 70 per month in subclass 35.  In 2009 that rate was about 42 per month.  In 2008 is was about 30 per month.  In 2006 and 2007 that rate was about 20 per month.  The grant rate in this class has increased about 70% over last year and has more than tripled over the last five years.

The Patent Office as a whole has increased its output of granted patents in 2010 by about 40% over last year, and the financial services sector has significantly exceeded that rate of increase.  It will be interesting to see if this is an upward trend that will continue, a one-time step-up in grant rate, or an anomaly.  It also bears watching to see if the forthcoming Bilski decision affects the rate one way or the other.

What is Bilski?

“Bilski” is short for Bilski v. Kappos, a case pending before the United States Supreme Court.  It is an appeal by a patent applicant named Bernard Bilski relating to a patent application that has been rejected by the Patent and Trademark Office.  The patent application at issue in Bilski claims a method of hedging risk.  The specific steps recited in the claimed method involve initiating options contracts.  The claims were rejected by the Examiner as not being directed to patentable subject matter under § 101 of the Patent Act.  The rejection was upheld on appeals to the Board of Patent Appeals and Interferences and then to the Court of Appeals for the Federal Circuit.

For many years the United States Patent and Trademark Office refused to allow patent claims that were directed to methods of doing business. That changed in 1998 when the Court of Appeals for the Federal Circuit struck down that rule in a case called State Street Bank v. Signature Financial.  The Patent Office and courts have struggled since State Street to determine what the limits on patentable methods should be.  In 2008, in In re Bilski, the Federal Circuit created a new test for patent eligibility–the “machine or transformation” test.  According to this new test, a method is eligible for patent protection only if it is tied to a particular machine or it causes an article to be transformed to a different state or thing.  This is a more rigid and restrictive test than was generally applied before, and it calls into doubt the validity of many patents issued since 1998.  The Supreme Court agreed to hear the Bilski case in order to determine whether the new machine or transformation test is the appropriate test.

The Supreme Court heard oral arguments in Bilski in November, 2009.  A final decision on the case is expected before the end of the present term–late June or early July.  While it is always dangerous to predict how the Supreme Court will decide a case, the betting  seems to be that the machine or transformation test will be discarded, at least as the sole test for patentable subject matter.   Any new test is likely to have a significant impact on existing business method and software patents, pending applications, and new applications filed after the decision.

Waiting for Bilski, Day 210

No Bilski decision today. Next likely date for a decision is Monday, June 14.  There are just three weeks left in the current Supreme Court term.  This has a chance to be Justice Stevens’s final opinion.  Justice Stevens was the majority author of the 1978 Parker v. Flook case, which held that a novel mathematical algorithm applied in a known manner is not patentable.