Knobbe Martens Olson & Bear LLP - Intellectual Property Law

Is The Invention Patentable?

Bruce Itchakawitz
bruce.itchkawitz@kmob.com

As published in The Orange County Lawyer, a publication of the Orange County Bar Association August 2008.

During the first meeting between a client and his patent attorney to discuss the client's new invention, the client invariably raises the question "Is it patentable?". In most instances, the client is looking for the attorney's thoughts regarding the probability of success in obtaining a U.S. patent by convincing the U.S. Patent and Trademark Office (USPTO) of the novelty and non-obviousness of the invention in view of any antedating references (so-called "prior art"). However, even before considering these issues, the USPTO will first evaluate whether the claimed invention is eligible for patent protection. This threshold question is of particular importance in the fields of software and business methods, and is the subject of on-going jurisprudence.

35 U.S.C. § 101 defines the scope of eligible or statutory subject matter to be "any new and useful process, machine, manufacture, or composition of matter." The wide breadth of statutory subject matter falling within § 101 has been characterized as including "anything under the sun made by man."[1] While the scope of eligibility is broad, it is not without limitations. For example, laws of nature or natural phenomena are not eligible for patent protection, nor are abstract ideas (e.g., mathematical algorithms, literary works, musical compositions, legal documents, or data compilations), since such subject matter is not considered to qualify as a "process, machine, manufacture, or composition of matter." In addition, devices which are purported to operate contrary to established physical laws (e.g., perpetual-motion machines) are not patentable since such devices are considered to be inoperative and thus do not satisfy the "useful" requirement of 35 U.S.C. § 101.

Software Patents
Software or computer programs per se are outside the scope of patentable subject matter, being considered to be a type of mathematical algorithm, and thus excluded from § 101 as abstract ideas. So what explains the patent portfolios of companies such as Microsoft, Adobe Systems, and other software companies? Case law has developed such that there are various ways to effectively patent the useful aspects of software without patenting the software itself. In Diamond v. Diehr, 450 U.S. 175 (1981), the Supreme Court ruled that a claimed invention is eligible for patenting if it uses a computer program to perform a method which would otherwise be statutory subject matter. In Diehr, the claimed invention was a method of using a computer to operate a rubber-molding press by continually monitoring the temperature and computing the total required cure time using the Arrhenius equation. The Court held that while mathematical algorithms are not eligible for patenting, the physical transformation of an article to a different state or thing, as in the invention at issue in Diehr, was the clue to the patentability of a process claim. The Court found that the applicant had not claimed the algorithm itself, but was merely claiming a specific use of the algorithm in conjunction with other elements to perform a process of manufacturing, so the claimed invention was eligible for patenting.

The physical transformation does not have to be as stark as the transformation of uncured rubber into cured rubber, as in Diehr. Transformation of data within a computer can provide the physical transformation which serves as the basis for patent eligibility, as long as the claimed invention produces "a useful, concrete, and tangible result." [2] Requiring that patentable computer-implemented inventions provide a useful, concrete, and tangible result serves to prevent a patent from, in practical effect, being a patent on the algorithm itself.

Thus, one way to effectively patent a computer program is to claim a method which uses the computer program to perform a patentable process resulting in a useful, concrete, and tangible result. Subsequent cases opened up other possible ways to effectively patent the various forms in which software is used without patenting the software itself. A computer whose actions are directed by software to provide a useful, concrete, and tangible result is considered to be a "machine" within the bounds of § 101 since programming a general-purpose computer to perform particular functions effectively changes it into a special-purpose computer which is physically distinct from a machine without the program. [3] In addition, a computer-readable memory (e.g., a compact disc) that can be used to direct a computer to function in a particular manner is considered to be a statutory "article of manufacture." [4] These three general types of claims are the principle components for all software patents.

Business Method Patents
"Business method patents" are directed to activities in areas such as e-commerce, insurance, banking, and financial planning. Patents on financial apparatus and methods date back to the beginning of the U.S. Patent Office, but until fairly recently they have been rare, in part due to a judicially-created "business method" exception. [5]

However, during the last ten years or so, there has been a boom of business method patents, generally attributed to a pair of Federal Circuit cases, State Street Bank & Trust Co. v. Signature Financial Group, Inc. [6] and AT&T Corp. v. Excel Communications, Inc. [7], which eliminated the "business method" exception to statutory subject matter under § 101 and held that business methods should be treated as any other methods. After these two cases, the number of business method patents has greatly increased. [8] In State Street, the patent at issue covered a data processing system for implementing an investment structure in which mutual funds could pool their assets in an investment portfolio organized as a partnership. The claims were directed to a computer system which received various financial inputs and calculated various quantities for managing the financial portfolio. The question before the Federal Circuit was whether such a computer programmed to perform specific financial calculations was eligible for patenting under § 101. The court held that the "the transformation of data, representing discrete dollar amounts" performed by the claimed invention constituted a practical application of a mathematical algorithm which produced a "useful, concrete and tangible result" indicative of statutory patentable subject matter. The court further stated that "the mere fact that a claimed invention involves inputting numbers, calculating numbers, outputting numbers, and storing numbers, in and of itself, would not render it nonstatutory subject matter, unless, of course, its operation does not produce a 'useful, concrete and tangible result.'" In addition, the court addressed the "business method" exception to statutory subject matter, and stated that "[w]e take the opportunity to lay this ill-conceived exception to rest." In AT&T, the patent at issue covered a method for use in a telecommunications system having multiple long-distance providers or primary interexchange carriers (PICs). The claims were directed to a method of recordkeeping which used a PIC indicator associated with each long-distance call to note whether a call involved a particular PIC, thereby allowing Boolean principles to be applied to the PIC indicator for differential billing based on the identified PIC. The court reaffirmed that a mathematical algorithm may be an integral part of patentable subject matter if the claimed invention as a whole produces a useful, concrete and tangible result. The court also noted that a physical transformation, such as was cited in Diehr, is not an invariable requirement, but merely one example of how a mathematical algorithm may bring about a useful application. Because the claimed process applied Boolean principles to produce a useful, concrete, tangible result without pre-empting other uses of the mathematical principles, the court ruled that the claimed process comfortably fell within the scope of § 101.

Following State Street and AT&T, the analysis of the patentability of claims directed to methods of doing business applied the same legal requirements as were applied to any other methods. In particular, after these two cases, patents can be obtained for business methods utilizing computers similarly to software patents, but what about business methods which are not explicitly tied to a computer or machine? This question was recently considered by a three-judge panel of the Federal Circuit in In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007). The patent application at issue in Comiskey covered a method and system for mandatory arbitration involving legal documents, such as wills or contracts. The steps of the claimed method did not require the use of a mechanical device, such as a computer. The court held that while "a claim that involves both a mental process and one of the other categories of statutory subject matter (i.e., a machine, manufacture, or composition) may be patentable under § 101," "mental processes - or processes of human thinking - standing alone are not patentable even if they have practical application." Therefore, since the claims of Comiskey's patent application directed to an arbitration method were so broad as to include the use of mental processes alone, these claims were not eligible for patenting. However, other claims of Comiskey's patent application were eligible for patenting since they were directed to an arbitration system having various modules and means for performing the method, so the application was remanded back to the USPTO to determine whether these claims satisfied the novelty and non-obviousness requirements for allowability.

Despite the constraints discussed above, the scope of patentable subject matter regarding business methods is quite expansive. This broad interpretation of § 101 has not been particularly welcome by some in the business community. Entities such as banks and other financial institutions which previously operated blissfully ignorant of patent law now have to concern themselves with questions of infringement. However, some companies, such as American Express and Accenture, tout the benefits of using business method patents to protect new and useful financial methods. The USPTO is concerned as well; they anticipate that the number of business method patent applications per year will continue to increase. Because a broad scope of § 101 reduces its effectiveness as a threshold question limiting access to the patent system, the USPTO is concerned that they will have to expend more resources to substantively examine these applications in view of the prior art. In addition, others are concerned that the broad reading of § 101 that finds business methods to be patentable will also be applied to permit patents for other non-machine-implemented methods (e.g., methods of throwing a ball, methods of dance) which have previously been outside the scope of patentable processes.

In Re Bilski
In a business method patent case currently being considered by the Federal Circuit, In re Bilski (Fed. Cir. 2008)(en banc), the scope of patentable subject matter is center stage.

The patent application at issue in Bilski covers a method for commodities trading by managing the consumption risk costs of a commodity sold at a fixed price. Similarly to the method claims of Comiskey, the claimed invention of Bilski is directed to a business method in which a computer or machine is not explicitly required.

All the claims of Bilski's patent application were initially rejected by the patent examiner under § 101 for being directed to non-statutory subject matter. Bilski appealed this decision to the Board of Patent Interferences and Appeals, which affirmed the rejection, and Bilski then appealed to the Federal Circuit. A hearing of the case was held by a three-judge panel of the Federal Circuit in October 2007. However, instead of issuing an opinion, the Federal Circuit sua sponte granted an en banc hearing and requested supplemental briefs by the parties and any amici to address, inter alia, the following five questions:

Whether claim 1 of the [Bilski] patent application claims patent-eligible subject matter under 35 U.S.C. § 101?
What standard should govern in determining whether a process is patent-eligible subject matter under section 101?
Whether the claimed subject matter is not patent-eligible because it constitutes an abstract idea or mental process; when does a claim that contains both mental and physical steps create patent-eligible subject matter?
Whether a method or process must result in a physical transformation of an article or be tied to a machine to be patent-eligible subject matter under section 101?
Whether it is appropriate to reconsider [State Street] and [AT&T], in this case and, if so, whether those cases should be overruled in any respect?

By these questions, the court appears to be looking to Bilski as an opportunity to rule as a full court on the scope of patentable subject matter in the context of business methods. In addition, the court may have identified Bilski as a good case for the Supreme Court to address these issues as well.

The court received thirty amici briefs across the whole spectrum of the issue, from arguing for more expansive scope (e.g., business methods should be patentable regardless of any physical transformation, overturning Comiskey) to arguing for more restrictive scope (e.g., by overturning State Street and AT&T). Oral arguments were held May 8, 2008, and two amici, Regulatory DataCorp Int'l, LLC (arguing for an expansive scope) and Bank of America Corp. et al. (arguing for a narrowed scope) were heard in addition to the parties.

The en banc Federal Circuit will likely focus on the degree of transformation indicative of patentable subject matter, perhaps by providing a reliable definition of "a useful, concrete, and tangible result." The rulings in the earlier cases of Diehr, Alappat, and Arrhythmia will likely be upheld, leaving the scope of patentable software patents relatively unchanged. However, for business method patents, there is a definite possibility that the Federal Circuit will narrow the standard from that used in State Street and AT&T. Conversely, although unlikely, the Federal Circuit may broaden the scope of statutory subject matter to include mental processes with little or no physical transformation. The most likely result is that the Federal Circuit will leave its prior rulings relatively unchanged, and will work at the margins to recite a test which omits purely non-machine-based inventions from the scope of § 101. Regardless of whether the Federal Circuit narrows, expands, or leaves relatively unchanged the scope of 35 U.S.C. § 101, the ruling in In re Bilski will be crucial to the analysis of business method patents and software patents, and will likely result in a redefinition of the distinction between patentable subject matter and abstract ideas, hopefully one that can be reliably applied by the USPTO and the courts.

Endnotes
[1] Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980)(quoting S. Rep. No. 82-1979, at 5 (1952); H.R. Rep. No. 82-1923, at 6 (1952)).
[2] In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994)(computer programmed to transform data through a series of mathematical calculations to display a smooth waveform on a digital monitor was patentable); Arrhythmia Research Tech., Inc. v. Corazonix Corp., 958 F.2d 1053 (Fed. Cir. 1992)(method of mathematically manipulating electrocardiograph signals to detect a specific heart condition amounted to a physical process and was patentable).
[3] In re Alappat.
[4] In re Beauregard, 53 F.3d 1583 (Fed. Cir. 1995).
[5] See, e.g., Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908) (bookkeeping system to prevent embezzlement by waiters was unpatentable).
[6] 149 F.3d 1368 (Fed. Cir. 1998), cert. denied, 525 U.S. 1093 (1999).
[7] 172 F.3d 1352 (Fed. Cir. 1999), cert. denied, 528 U.S. 946 (1999).
[8] According to USPTO statistics, the total number of patent applications filed per year in Class 705 covering apparatus and methods for financial data processing increased from 974 in 1997 to 11,378 in 2007. The total number of patents which issued per year in Class 705 increased from 120 in 1997 to 1,330 in 2007.