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Overview of Comments on the USPTO's July 2015 Update to the Interim Examination Guidance

The following guest post from Robert R. Sachs, Partner at Fenwick & West LLP, first appeared on the Bilski Blog, and it is reposted here with permission.

By Robert R. Sachs

In late July, the USPTO issued its July 2015 Update to the 2014 Interim Section 101 Patent Eligibility Guidance (IEG). The July 2015 Update addresses a number of the issues and concerns raised in the public comments to the IEG and is supposed to assist examiners in applying the 2014 IEG during the patent examination process. The July 2015 Update also includes a new set of examples of claims involving abstract ideas and sample analysis under the Mayo framework. The USPTO is seeking public comments on the July 2015 Update, and comments are due on October 28, 2015, via email at 2014_interim_guidance@uspto.gov.

Here is an overview of what I think are the key issues and concerns with the July 2015 Update. Feel free to use any of my analysis in your comments to the USPTO.

1. Requirements of Prima Facie Case and the Role of Evidence

A significant number of the public comments on the 2014 IEG noted that examiners have the burden to make the prima facie case that a patent claim is ineligible, and that the Administrative Procedures Act (APA) and Federal Circuit case law requires that this determination be made based on “substantial evidence,” and not examiner opinion. In particular, all of the public comments that addressed this issue stated that examiners should have to provide documentary evidence to support a conclusion that a claim is directed to a judicial exception or that claim limitations are well understood, routine, and conventional.

In the July 2015 Update, the USPTO responded by stating that whether a claim is ineligible is a question of law and courts do not rely on evidence to establish that a claim is directed to a judicial exception, and therefore examiners likewise do not need to rely on any evidence that a particular concept is abstract, or a fundamental economic concept, or even a law of nature. The USPTO’s reliance on the judicial model is legally incorrect. First, examiners are bound by the APA and judges are not. Second, that eligibility is a question of law does not mean that there are not factual issues, as well—it merely determines whether the court or a jury is to make the finding. Obviousness is likewise a question of law, but there are clearly factual issues involved. Third, when judges take judicial notice, they are making a finding of fact, and they must do so under the requirements of Federal Rules of Evidence, Rule 201, which states that “The court may judicially notice a fact that is not subject to reasonable dispute because it: … can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” This requirement is similar to the requirements of Official Notice set forth in MPEP 2144.03: “Official notice unsupported by documentary evidence should only be taken by the examiner where the facts asserted to be well-known, or to be common knowledge in the art are capable of instant and unquestionable demonstration as being well-known.” Thus, by its own logic, examiners should comply with the requirements of MPEP 2144.03.

As to the role of evidence, again the public comments that discussed this issue all took the position that examiners must cite authoritative documentary evidence, such as textbooks or similar publications to support a conclusion that a claim recites a judicial exception or that certain practices are well known, conventional or routine. The public comments on this issue all made the same argument: that the Supreme Court in Bilski and Alice cited references in support of their conclusions that the claims were ineligible.

In response to this uniform opinion, the USPTO maintained its position that citations of references was not necessary because the references in Bilski and Alice were technically not “evidence” since the Court is an appellate court, and further that the references were not necessarily prior art. This argument misses the point. Regardless of whether the references were evidence under the Federal Rules of Evidence, the Court felt it necessary and proper to cite them. Further, the Court did not cite references as prior art or suggest that they need to be prior art—rather, the Court cited the references as an authoritative basis to show that the claims were directed to longstanding, well-known concepts. That the Court did this not once, but twice, is strong guidance that the USPTO should follow suit.

Similarly, examiners should be instructed to accept and give substantial weight to documentary evidence submitted by applicants rebutting the examiner’s conclusions under either Step 2A or 2B of the Mayo framework. This includes declarations from the inventor or others showing that particular limitations are not considered judicial exceptions by a person of ordinary skill in the relevant technical or scientific community, or that claims limitations would be considered “significantly more” by such person, or that the claim limitations provide improvements to the art.

2. The Role of Preemption in the Mayo Framework

The majority of public comments stated that preemption is the core concern underlying the judicial exceptions to Section 101, and that the examiner should be required to establish that a claim preempts a judicial exception in order to find the claim ineligible. The USPTO again took an opposing view to this consensus interpretation, asserting that questions of preemption are inherently addressed in the two-part Mayo test. The USPTO also stated that “while a preemptive claim may be ineligible, the absence of complete preemption does not guarantee that a claim is eligible.” This has effectively eliminated arguments made by applicants that their claims were patent eligible because they did not preempt other practical applications of the judicial exception. Neither the Supreme Court nor the Federal Circuit has endorsed the concept that preemption does not matter given the Mayo framework. Instead, the courts continue to evaluate patent claims with respect to preemption even after the Mayo framework has been applied.

More significantly, the USPTO’s argument fails to address the more likely situation: that a claim blocks (preempts) only a narrow range of applications or implementations of the identified judicial exception. This is not merely a case of an absence of complete preemption; it is the absence of any significant degree of preemption at all. The Supreme Court recognized that preemption is a matter of degree and held that a claim is ineligible where there is a disproportionate risk that the judicial exception is fully preempted. In Alice, the Court stated:

The former [claims on fundamental building blocks] “would risk disproportionately tying up the use of the underlying” ideas, and are therefore ineligible for patent protection. The latter [claims with limitations that provide practical applications] pose no comparable risk of pre-emption, and therefore remain eligible for the monopoly granted under our patent laws.” 134 S.Ct. at 2354 (emphasis added).

Since by definition a claim must preempt something, it is only where the scope of the claim covers the full scope of the judicial exception that the claim is rendered ineligible. Judge Lourie, whose explanation of the Mayo framework in CLS v. Alice was directly adopted by the Supreme Court, put it this way:

Rather, the animating concern is that claims should not be coextensive with a natural law, natural phenomenon, or abstract idea; a patent-eligible claim must include one or more substantive limitations that, in the words of the Supreme Court, add “significantly more” to the basic principle, with the result that the claim covers significantly less. See Mayo 132 S. Ct. at 1294. Thus, broad claims do not necessarily raise § 101 preemption concerns, and seemingly narrower claims are not necessarily exempt. What matters is whether a claim threatens to subsume the full scope of a fundamental concept, and when those concerns arise, we must look for meaningful limitations that prevent the claim as a whole from covering the concept’s every practical application.

Thus, both the Supreme Court and the Federal Circuit use preemption as the mechanism to evaluate whether a claim is eligible or not by applying it on both sides of the question: ineligible if preemptive, eligible if not preemptive. In addition, over 100 district court decisions since Alice have expressly considered whether the claims preempt, even after applying the Mayo framework. If the Mayo framework inherently addressed the preemption issue as the USPTO asserts, there would be no reason for the courts to address it. Finally, by removing preemption from the Mayo framework, the USPTO has turned the framework into the sole test for patent eligibility—directly contrary to the Supreme Court’s holding in Bilski that there is no one sole test for eligibility.

Lourie’s statement that a claim is patent eligible when it includes “substantive limitations…with the result that the claim covers significantly less” than the judicial exception provides a simple and expedient basis for using preemption as part of the streamlined analysis–something the USPTO has resisted in the July 2015 Update. Examiners are well trained to evaluate the scope of a claim based on its express limitations. Accordingly, they can typically determine for the majority of claims that, whatever the claim covers, it has limitations that prevent it from covering the full scope of some judicial exception. If the point of the streamlined analysis is to avoid the unnecessary burden of the Mayo framework, then a preemption analysis provides the best way to achieve that goal.

Finally, to suggest that the Mayo framework is precise enough to be a definitive test is to ignore the obvious: both steps of the framework are undefined. See McRO, Inc. v. Sega of America,, Inc., No. 2:12-cv-10327, 2014 WL 4749601,at *5 (C.D. Cal. Sept. 22, 2014) (Wu, J.) (“[T]he two-step test may be more like a one step test evocative of Justice Stewart’s most famous phrase [‘I know it when I see it’].”). The Court refused to define the scope of abstract ideas in Alice (Step 2A), and Step 2B entails evaluating the subjective requirement of “significantly more” or “enough.” What is left, then, is analysis by analogy and example—and both common sense and life experience tell us that these approaches very often lead to mistakes. Analogies can be good or bad, and most examples can be argued either way. Preemption serves as a way of evaluating whether the outcome from such analysis is consistent with the underlying rationale for the judicial exceptions in the first place.

3. Abstract Ideas Must be Prevalent and Longstanding in the Relevant Community

The majority of public comments on the IEG argued that to establish that an idea is abstract, an examiner must show that the idea is “fundamental” in the sense of being “long-standing” and “prevalent,” following the statements of the Supreme Court. Various commentators suggested specific rules for examiners, such as evidence that the idea has been known and used in practice for a period of 25 or more years. Even those who supported a restrictive view of patent eligibility suggested that examiner should look to “basic textbooks” to identify abstract ideas.

The USPTO responded in the July 2015 Update by asserting that abstract ideas need not be prevalent and longstanding to be fundamental, arguing that even novel abstract ideas are ineligible: “examiners should keep in mind that judicial exceptions need not be old or long‐prevalent, and that even newly discovered judicial exceptions are still exceptions.” The USPTO stated that ”The term ’fundamental‘ is used in the sense of being foundational or basic.” This analysis begs the question. An idea is foundational or basic because it is widely accepted and adopted in the relevant community—it is fundamental to the practices of the community. Indeed, any textbook on the “foundations” of a particular scientific field would explain the principles and concepts that are long-standing and widely-accepted by scientists in that field. It would not be a significant burden on the examiner to cite to such publications to support a finding under Step 2A. Indeed, the inability of an examiner to do so would be strong evidence that a claim is not directed to a foundational or basic practice.

4. USPTO Reliance on Non-Precedential Federal Circuit Decisions

Public comments noted that the 2014 IEG included citations and discussions of non-precedential Federal Circuit cases, such as Planet Bingo, LLC v VKGS LLC, and SmartGene, Inc. v Advanced Biological Labs, and indicated that because the cases are non-precedential, they should not be cited and relied upon by the USPTO as the basis of its guidance to examiners. Further, it was pointed out that the 2014 IEG mischaracterizes the abstract ideas at issue in these cases.

For example, the USPTO characterizes SmartGene as holding that “comparing new and stored information and using rules to identify options” is an abstract idea. The Federal Circuit’s actual holding was much more specific: that “the claim at issue here involves a mental process excluded from section 101: the mental steps of comparing new and stored information and using rules to identify medical options.” The court itself unambiguously limited the scope of its decision: “[o]ur ruling is limited to the circumstances presented here, in which every step is a familiar part of the conscious process that doctors can and do perform in their heads.” Thus, the USPTO’s characterization removed key aspects of the court’s expressly-limited holding: that the comparing steps were inherently mental steps (not computer steps) performed by a doctor considering medical rules (not any type of rules) to evaluate medical options (not other types of options). The court’s ruling cannot be generalized to all types of comparisons on all types of information using all types of rules. The improper generalization of the court’s holding has resulting in examiners applying SmartGene to find many claims for computer-implemented inventions ineligible. This is because many, if not most, computer processes can be characterized as comparing stored and new information and applying a decision rule to produce a useful result. For example, most automobiles use computers and embedded software to monitor vehicle sensors and take actions. A typical fuel management computer compares a current measure of fuel (new value) with a predefined minimum amount of fuel (stored information) and determines whether to turn on a low fuel light (using rules to identify option). Under the USPTO’s characterization of SmartGene, a claim to such a process would be deemed an abstract idea, an obviously incorrect outcome.

The USPTO did not address any of the problems identified by the public comments regarding non-precedential cases. Instead, the July 2015 Update simply states that the “2014 IEG instructs examiners to refer to the body of case law precedent in order to identify abstract ideas by way of comparison to concepts already found to be abstract,” and makes multiple other references to precedent. Even so, the July 2015 Update relies repeatedly on non-precedential Federal Circuit decisions, such as Dietgoal Innovations LLC v. Bravo Media LLC, Fuzzysharp Technologies Inc. v. Intel Corporation, Federal Home Loan Mortgage Corp. aka Freddie Mac v. Graff/Ross Holdings LLP, Gametek LLC v. Zynga, Inc., Perkinelmer, Inc. v. Intema Limited, and Cyberfone Systems, LLC v. CNN Interactive Group, Inc.

The USPTO should eliminate any discussion of or reliance upon non-precedential decisions. In the alternative, the USPTO should at minimum explain to examiners that such decisions are limited to their specific facts and are not to be generalized into controlling examples or rules.

5. There is No Separate Category for Methods of Organizing Human Activity

Public comments to the 2014 IEG pointed out various issues with the category of “methods of organizing human activities” as a basis of abstract ideas, and in particular requested clarification as to which types of method would fall within the category. Here too there was a broad agreement among the commentators that the proper interpretation of Bilski and Alice: The Court found that the claims in Alice and Bilski were abstract ideas because they were directed to a fundamental economic practice, not because the claims were methods of organizing human activity. The Court noted that Bilski’s claims were methods of organizing human activity only to rebut Alice’s arguments that abstract idea must always be “fundamental truths.” The Court’s analysis does not logically imply that methods of organizing human activity are inherently abstract ideas.

The USPTO responded by broadly interpreting the scope of the category, stating that many different kinds methods of organizing human activity can also be abstract ideas, but providing no explanation (other than examples) to determine when this is the case and when is it not. The USPTO then mapped various Federal Circuit case into this category, even where the court itself did not expressly rely upon such categorization. For example, the USPTO listed buySAFE, DealerTrack, Bancorp, PlanetBingo, Gametex, and Accenture as examples of cases dealing with methods of organizing human activity. However, none of these cases actually held that the methods in suit were methods of organizing human activity. Instead, every single one of these cases held that the claims were abstract as either mental steps or fundamental economic practices. Attempting to map Federal Circuit cases into this category is both confusing to examiners and the public and unnecessary.

The USPTO should remove this category from the Guidance until such time as the Federal Circuit or the Supreme Court provides a clear definition of its bounds.

6. There is No Separate Category for “An Idea of Itself”

Public comments noted that this is catch-all category that the courts have mentioned in passing but have never provided any definition of its contours, and further suggested that the USPTO clarify that this is not a distinct category of abstract ideas.

In response, once again the USPTO broadly described the category and linked various Federal Circuit cases to it as examples, where the court itself never so characterized the invention. The USPTO lists in this category cases the court held to be ineligible in other categories, such as mental steps (Cybersource, Smartgene*, Classen*, Perkinelmer*, Ambry, Myriad CAFC*, Content Extraction); mathematical algorithms (In re Grams, Digitech); and economic activities (Ultramercial) (*indicates non-precedential decision). In fact, there is no precedential Federal Circuit or Supreme Court case that has defined “an idea of itself” as a distinct category. It is only mentioned in dicta, never in a holding.

The result of the USPTO’s categorization of cases into multiple, different undefined categories is to make it more difficult, not less, for examiners to properly determine which types of claims are within which category. Further, where an examiner asserts that a claim falls into multiple categories (which is a simple assertion to make, since most inventions deal with multiple different concepts), the applicant is forced to rebut each categorization.

7. “Mathematical Algorithms” Are Limited to Solutions to Problem in Pure Mathematics

This category, more than any other, reflects the USPTO’s failure to substantively and meaningfully analyze the issues and provide clear guidance. Public comments to the 2014 IEG provided extensive analysis of the case law and the problems arising from mathematical algorithms being considered abstract ideas. The USPTO did not respond to the substantive analysis at all. Instead, the July 2015 Update merely lists cases that have held claims invalid as mathematical algorithms, without explanation. This is inadequate for several reasons.

First, the USPTO must clarify that the presence of a mathematical algorithm in the specification or claims is not a per se indication that the claims are directed to an abstract idea. In Alice, the Court expressly stated that “[o]ne of the claims in Bilski reduced hedging to a mathematical formula, but the Court did not assign any special significance to that fact, much less the sort of talismanic significance petitioner claims.” Equally so, examiners must not assign any special significance to the presence of a mathematical formula either in the disclosure or in the claim. What matters is the underlying concept, not how it is expressed (e.g. “no special significance”), whether in words or mathematical symbols.

Second, the presence of a mathematical formula or equation does not make an invention abstract for a very simple reason: mathematics is a language that allows for the very precise and formal description of certain types of ideas. All modern engineering, including, civil, mechanical, electrical, chemical, computer, etc., as well as all of the physical sciences, relies on mathematical analysis for design and formulation. Using a mathematical equation is simply one—albeit highly precise—way of expressing concepts, which may be either patent-eligible or not. Thus, the presence of a mathematical equation does not by itself imply or suggest anything about the underlying concept, and should not be relied upon by examiners as an automatic evidence of an ineligible abstract idea. While mathematics may be used to describe abstract ideas like the laws of mathematics, it can equally be used to describe entirely mundane and non-abstract ideas like fuel-efficient aircraft approach procedures (U.S. Patent No. 8,442,707), compressing video for transmission on cell phones (U.S. Patent No 8,494,051), efficiently allocating farming resources (U.S. Patent No. 6,990,459), or calculating golf handicaps and the difficulty of golf courses (U.S. Patent No. 8,282,455).

The correct interpretation of “mathematical algorithms” as used by the Supreme Court are algorithms that are solutions to inherently mathematical problems. This was the specific definition used by the Supreme Court in Benson, and confirmed in Diehr. In Benson, the Court stated:

A procedure for solving a given type of mathematical problem is known as an “algorithm.” The procedures set forth in the present claims are of that kind; that is to say, they are a generalized formulation for programs to solve mathematical problems of converting one form of numerical representation to another.

Later, in Diehr, the Court stated that in Benson “we defined ‘algorithm’ as a ‘procedure for solving a given type of mathematical problem,” noting that “our previous decisions regarding the patentability of ’algorithms‘ are necessarily limited to the more narrow definition employed by the Court.” The Court expressly rejected a broader definition that covered any “sequence of formulas and/or algebraic/logical steps to calculate or determine a given task; processing rules.”

The USPTO should clarify that this more limited definition of mathematical algorithms is to be used. This approach beneficially distinguishes between inventions in pure mathematics—which as the Court stated are precisely those that have the disproportionate risk of preemption because they can be used in an unlimited number of different fields—from inventions in applied mathematics, the mathematics used in the engineering and physical sciences. Examiners are well-accustomed by their formal scientific and technical training to distinguish between claims to these two types of inventions making use of mathematical formulas and equations.

8. Identifying Whether a Claim Limitation Recites a Conventional, Routine, and Well-Understood Function of a Computer

The public comments to the 2014 IEG discussed the problems resulting from considering the normal operations of a computer to be merely “generic” functions that are conventional, well-understood, and routine, and therefore by definition insufficient to support eligibility of a patent claim.

In response, the USPTO again ignored the substantive arguments, instead simply stating that examiners may rely on what the courts have recognized as “well understood, routine, and conventional functions” of computers, including “performing repetitive calculations,” “receiving, processing, and storing data,” “receiving or transmitting data over a network”. The July 2015 Update goes on to state that “This listing is not meant to imply that all computer functions are well‐understood, routine and conventional.”

This caveat is hardly sufficient, since the list essentially wipes out all computing operations as they are typically claimed. Just as claims for mechanical processes use verbs and gerunds that describe well-known mechanical operations, so too do claims for computer-based inventions necessarily describe the operations of a computer: receive, transmit, store, retrieve, determine, compare, process, and so forth. There is no other way to claim the operations of a computer except to use such terminology.

Accordingly, since the Supreme Court did not hold that all software and computer-implemented inventions are per se ineligible, the proper interpretation of the Court’s discussion of the generic functions of a computer is more narrowly-focused. Specifically, it is necessary to consider the entirety of each claim limitation, not merely the gerund or verb that introduces a method step. The claim limitation as a whole must recite nothing more than generic functions. When considering computer processing steps on computer data, limitations as to the source of data, the types of data, the operations performed on the data, how the outputs is generated, where the data is stored or transmitted, must all be considered. This is because it is these limitations that distinguish between the merely generic operations (“receiving a data input and determining an output”) and the particular applications.

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Patent Law Uncategorized

#AliceStorm: July is Smoking Hot, Hot, Hot…and Versata is Not, Not, Not

The following guest post from Robert R. Sachs, Partner at Fenwick & West LLP, first appeared on the Bilski Blog, and it is reposted here with permission.

By Robert R. Sachs

July invokes images of hot days, cool nights, and fireworks. When it comes to #Alicestorm, the fireworks are happening in the courts, with the Federal Circuit lighting up the sky.

Table1

In just the first ten days of July, there have been twelve decisions on patent eligibility—more decisions in the first ten days of any month since the dawn of time. At this pace, we could see some twenty to thirty decisions this month. #AliceStorm is accelerating.

Here are the numbers by motion type:

Motions

Here are the numbers for all the courts, by tribunal:

Courts

Finally, here’s a summary of the number of Section 101 decisions by the various judges on the Federal Circuit since Alice:

Fed cir

I leave the interpretation of this graph as an exercise for the reader.

Versata: The Federal Circuit is Large and In Charge

While the indices are steady, the recent decisions are very interesting. Most importantly, there have been two Federal Circuit decisions in July, Versata Development Group v. SAP Am., Inc. and Intellectual Ventures I LLC v. Capital One Bank (USA), both of which found the patents in suit ineligible. Today, I’ll focus on Versata.

Versata was a closely watched appeal since it was the first appeal to the Federal Circuit of a Covered Business Methods review. The Court covered a lot of ground including 1) whether it could review PTAB’s determination that Versata’s patent was eligible for CBM review, 2) what is the meaning of “covered business method patent,” including whether USPTO’s definitions of a “financial product or service” and “technological invention” were correct, 3) what is the appropriate standard for claim construction, broadest reasonable interpretation or one correct construction, and 4) an evaluation of the merits. Briefly, the court decided:

  • The Court can review PTAB final decisions, even when they touch upon the same legal issues that lead to the institution decision (which the Federal Circuit does not have authority to review), including whether a patent qualifies as a covered business method patent;
  • The USPTO’s definitions of covered business method patent (which simply copies the statutory language without any definition at all) are just fine.
  • PTAB can use broadest reasonable construction; and
  • Versata’s patent is for a financial service, not a technological invention and is an ineligible abstract idea.

I’m not going to do an extensive analysis of the Federal Circuit’s handling of all these issues. Essentially, the Federal Circuit is saying: PTAB, keep up the good work of invalidating patents, but just remember, we’re still in charge. Instead, I’m going just to highlight some of the issues in the Court’s reasoning regarding the definitions of a covered business method patent.

As background, Versata’s patent is a way of determining prices where you have a very complex collection of products types and business groups, all overlapping and intersecting. Consider a company like General Motors with dozens of divisions and subsidiaries, hundreds of cars, and millions of parts. The problem is that conventional systems use multiple database tables to track and compute prices, requiring significant storage and reducing run-time performance. In a nutshell, Versata used hierarchical data structures representing product and business organizational hierarchies to store and compute product prices. By using hierarchical data structures, Versata’s invention saved memory and resulted in faster run-time performance than existing approaches.

What Is a Financial Product or Service?

Section 18(d)(1) of the statute that authorizes the CBM review states that a covered business method patent is:

a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions

The question is what is a financial product or service. The Court adopted the USPTO’s parsing of the phrase into financial and product or service. In doing so, the Court adopted PTAB’s incorrect grammatical parsing of the statute, which looked at the definition of financial apart from products and services. According to PTAB, “The term financial is an adjective that simply means relating to monetary matters.”

Running with this analysis the court concludes:

We agree with the USPTO that, as a matter of statutory construction, the definition of “covered business method patent” is not limited to products and services of only the financial industry, or to patents owned by or directly affecting the activities of financial institutions such as banks and brokerage houses. The plain text of the statutory definition contained in § 18(d)(1)— “performing . . . operations used in the practice, administration, or management of a financial product or service”— on its face covers a wide range of finance-related activities. The statutory definition makes no reference to financial institutions as such, and does not limit itself only to those institutions.

To limit the definition as Versata argues would require reading limitations into the statute that are not there.

This analysis is incorrect. The phrase financial product or service is not just the adjective financial modifying the nouns products and services—it’s not like sweet pastries and pies or funny songs and videos or complex issues and problems. Rather, financial product and financial service are open compound nouns, like high school, cell phone, and half sister. The meaning of these nouns is not determined by looking at the meaning of the individual words; the entire noun has its own meaning. When you attended high school, you did not go to a school that was “of great vertical extent”; when you speak on your cell phone you’re not talking on a telephone made of “the smallest structural and functional unit of an organism.” And when you offer to introduce me to your half sister, I don’t ask “Left or right?”

The term financial product means something specific and different from the simple combination of financial and product. It’s important to remember that the Covered Business Method program was pushed by three of the largest financial lobbying groups: the Financial Services Roundtable, the Independent Community of Banks of America, and the Securities Industry and Financial Markets Association. In the financial industry, financial products and services has a specific meaning.

Consider the following definitions of financial product:

a product that is connected with the way in which you manage and use your money, such as a bank account, a credit card, insurance, etc.
Cambridge Dictionary of Business English

Financial products refer to instruments that help you save, invest, get insurance or get a mortgage. These are issued by various banks, financial institutions, stock brokerages, insurance providers, credit card agencies and government sponsored entities. Financial products are categorised in terms of their type or underlying asset class, volatility, risk and return.
EconomyWatch

Better yet, look at the U.S. Treasury’s definition:

The overarching definition of financial product will focus on the key attributes of, and functions performed by, financial products. A financial product will be defined as:

A facility or arrangement through which a person does one or more of the following:

— Makes a financial investment;
— Manages a financial risk;
— Obtains credit; or
— Obtains or receives a means of payment.

The facility or arrangement may be provided by means of a contract or agreement or a number of contracts or agreements.

The term financial services is equally specific

Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit card companies, insurance companies, accountancy companies, consumer finance companies, stock brokerages, investment funds, real estate funds and some government sponsored enterprises.
Wikipedia, “Financial services”

Financial Services is a term used to refer to the services provided by the finance market. Financial Services is also the term used to describe organizations that deal with the management of money. Examples are the Banks, investment banks, insurance companies, credit card companies and stock brokerages.
Streetdictionary.com, “What exactly does financial services mean?”

The USPTO and the Federal Circuit ignored these definitions of financial products and services as used by the very industries that sought protection from abusive business methods patents. The Court even notes that “It is often said, whether accurate or not, that Congress is presumed to know the background against which it is legislating.” Indeed, it did here, but the Court simply chooses to discount both that background and correct English language usage.

The Court further argues that the statutory definition makes no reference to financial institutions as such, implying that Congress did not intend to limit financial products and services to the financial services industries. To riff off the logical fallacy—evidence of an absence is not the absence of evidence. There was no need to mention explicitly the financial industry in the statute because the industry context is built into the terms themselves. Contrary to the Court’s final statement, the limitations are already in “the plain text of the statute.”

In short, looking up the Random House definition of the adjective financial apart from financial products and services is like extracting greasy from spoon and concluding that a greasy spoon is an oily small, shallow oval or round bowl on a long handle.

Spoons

Whether you are talking business or busing tables, you must interpret words according to the relevant context, the relevant grammar, and the relevant dictionary.

Deference to the USPTO’s Expertise: Only Sometimes

In concluding its analysis of the meaning of a covered business method patent, the Court relies on a deference argument. In its final paragraph regarding the propriety of USPTO’s definition of financial product and services, the Court says:

Furthermore, the expertise of the USPTO entitles the agency to substantial deference in how it defines its mission.

The overall mission of the USPTO is to issue patents for inventions. The Ninth Circuit made a similar observation about the Copyright Office. In Garcia v. Google, the Copyright Office refused to register Garcia’s five-second appearance in a film. The Ninth Circuit noted “We credit this expert opinion of the Copyright Office—the office charged with administration and enforcement of the copyright laws and registration.” And thus the Ninth Circuit found it appropriate to defer to the office’s expertise in deciding copyrightable subject matter. The parallel could not be more perfect: the USPTO is the office charged with the administration and enforcement of the patent laws and registration. Likewise, the courts should defer to its expertise as well.

Here, when the USPTO comes up with a definition of technology in its interpretation of Section 18(d)(1) of the patent statute–a very small part of its mission–the Federal Circuit says that the Office is due substantial deference. Yet, when the Office comes up with a definition of Section 101–the section of the statute most fundamental to its mission–and when an examiner implements that definition and determines that a particular claim satisfies Section 101, that definition and that decision is given no deference at all.

Thus, I find it rather inconsistent of the Court to be deferential the USPTO’s definition of technology in a very narrow context, but entirely dismissive of the USPTO’s historical expertise in identifying patent eligible subject matter. When it comes to patents, the USPTO is like Rodney Dangerfield: it gets no respect.

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Uncategorized

#AliceStorm In June: A Deeper Dive into Court Trends, and New Data On Alice inside the USPTO

The following guest post from Robert R. Sachs, Partner at Fenwick & West LLP, first appeared on the Bilski Blog, and it is reposted here with permission.

By Robert R. Sachs

The most important thing that happened in June was not the invalidation of yet another pile of patents, but the rather more consequential decision of the Supreme Court to recognize the right of same-sex couples to marry. Unlike patent law issues, when it comes to constitutional law, the Court can recognize the complexity and depth of the issue and, not surprisingly, the Court is deeply divided. That the Court is unanimous on equally complex and divisive issues in patent law—such as eligibility—speaks to me that they do not have the same deep understanding of the domain.

Now, let’s do the #AliceStorm numbers. First, the federal courts:

Table1

Since my May 28 update, there have been 19 § 101 decisions including two Federal Circuit decisions, Internet Patents Corp. v. Active Network, Inc. and Ariosa Diagnostics, Inc. v. Sequenom, Inc., both holding the challenged patents ineligible. Overall, the Federal Court index is up 3.1% in decisions and an (un?)healthy 6.2% in patents. The Motions on Pleading index is holding steady; the last five decisions on § 101 motions to dismiss have found the patents in suit invalid.

We can look more specifically at the invalidity rate by type of motion and tribunal:

Table2

For example, the 73.1% invalidity rate in the federal courts breaks down into 70.2% (66 of 96) in the district courts and a stunning 92.9% in the Federal Circuit (13 for 14). Motions on the pleadings and motions to dismiss are running equally, at a 69% defense win rate.

The 73.7% summary judgment success rate is consistent with the high rate on motions to dismiss. Since the courts have taken the position that there are no relevant facts to patent eligibility and there is no actual presumption of validity in practice, there is now little difference between the underlying showings required for the two types of motions. That’s odd since on the motions to dismiss the court is to look only at the pleadings, while on summary judgment they have the full file history, expert testimony, the inventor’s testimony and other evidence before them. Why such evidence is not helping—and indeed appears to be hurting—patentees is because the court is evaluating it from their lay perspective. In my opinion, the correct perspective is that of a person of ordinary skill in the art (POSITA). What a court may consider merely abstract may be easily recognized as a real-world technology by an engineer; a claim term that appears trivial to a court (“lookup table”, “isolated”) or may be significant to the expert.

We can also evaluate how individual the various district courts are doing.

Table3

(The (-1) values in the bottom five rows indicate that the court held that patent was not invalid).

Of the 66 district court decisions since Alice that have invalidated patents on § 101, Delaware, the Central and Northern Districts of California account for 58% of the decisions. The most prolific judges are shown here:

Table4

Yet, when it comes to finding abstract ideas, the USPTO remains the champ. The best avenue to attack a patent under § 101 is through the Covered Business Method (CBM) review program. A challenger files an institution petition before the Patent Trial and Appeal Board (PTAB) arguing that the challenged patent is directed to a financial product or service, and setting forth their ineligibility arguments. PTAB then issues an institution decision as to whether to grant the petition or not. The standard at this stage is whether it is more likely than not that the claims are ineligible. Once instituted, there is a full proceeding leading up to a final decision as to whether or not the patent is invalid.

At PTAB, CBM institution decisions are up (19 since May 28), and PTAB leads the race with the courts with an 88.6% invalidity rate on CBM institutions, and an unbeatable 100% rate (unchanged) on CBM final decisions.

Table5

If only the SF Giants could play their game this well.

Alice and the Patent Prosecutor

In my previous post, I drilled down in the impact of Alice on prosecution in terms of office action rejections and abandonments. My dataset was some 300,000 applications for the pre- and post-Alice period prepared for me by the team at Patent Advisor. Since then, I’ve received an additional 190,000 samples, comprising all office actions issued by the USPTO in September and October 2014. Together, the data set has over 490,000 office actions and notices of allowances:

Table6

The additional data from September and October fill in the trends in § 101 rejections that I showed before. As I explained, Tech Center 3600 includes more than just business methods, including literally down-to-earth technologies like earth moving and well boring. The § 101 rejections are concentrated in three E-commerce work groups:

Table7

There is some good news for software. The computer-related art units, TC 2100 and TC 2400, show considerably lower and steady § 101 rejection rates pre- and post-Alice.

Table8

After Alice, I think most software prosecutors expected to get non-final § 101 rejections, and consistent with past practice, expected to overcome them by amendment and argument. That would lead to final rejection based on prior art or an allowance. And that’s generally been true—except in a number of areas. In this following table, I compare the percentage of final office actions with § 101 rejections before and after Alice, in various Tech Centers and within TC 3600.

Table9

It’s important to remember the obvious: that you don’t get to a final rejection on § 101 without a first having a non-final rejection. Thus, this comparison shows how successful prosecutors were in overcoming non-final § 101 rejections before and after Alice—or equally how aggressive examiners were in maintaining these rejections. For example, before Alice 8.1% of final rejections in TC 1600 included a § 101 rejection, doubling to 16.7% after Alice—thus indicating that examiners were much more likely to maintain the rejection after Alice, but still a relatively low rate overall. By comparison in TC 2600, the rate of final rejections on § 101 declined after Alice, from 10% to 7.7%. This could be because it’s easier to explain why an invention in more traditional fields is an improvement in technology, one of the Alice safe harbors.

But when it comes to business methods, we see the killer statistics: prior to Alice, prosecutors overcame the non-final § 101 rejections generally about 62% of the time, leading to final rejection rates in the 23-46% range; thus prosecutors had more or less even odds of getting over the rejection. What is shocking is that after Alice, the final rejection rate soared into the 90% range. If you felt frustrated that your crafted (or crafty) arguments failed to impress the Examiner, get in line.

Now I’ve reviewed several hundred post-Alice rejections, and I’ve talked to a large number of prosecutors. What I’ve found is that majority of the non-final § 101 rejections were relatively formalistic, with little actual substantive analysis. Likewise, in a review of 87 office actions issued in November 2014 with § 101 rejections, Scott Alter and Richard Marsh found that 63 percent of those actions were “boilerplate” rejections. In my view, most prosecutors put forward at least a decent argument to show that the claims are not abstract, have at least one significant limitation, and do not preempt the abstract idea. Response arguments to § 101 rejections tend to run longer than response to prior art rejections, and I’ve seen many that resemble appeal briefs if not legal treatises, all to overcome a one paragraph rejection. They all presented at least enough of an argument to overcome the prima facie case for the rejection. And yet the final rejections keep coming—and often with little or no substantive rebuttal of the prosecutor’s arguments.

Outside of business methods, I found only two technology areas that had post-Alice rejection rates in excess of 30%: Amusement and Education devices in Tech Center 3700 (bottom row above) and molecular biology/bioinformatics/genetics in TC 1600 (not shown). This is a peculiar side effect of Alice. Historically, games and educational devices are classic fields of invention. There are thousands of patents on games, such as card games, board games, physical games, and the like. What is now hurting these applications are two aberrations in the law of patent eligibility: mental steps and methods of organizing human activity. The majority of § 101 rejections for games argue that the rules that define a game are simply ways of organizing human activity and can be performed by mental steps. Examiners typically cite the Federal Circuit’s Planet Bingo v. VKGS decision for the proposition that a game is an abstract idea and can be performed mentally. Only a small problem here: Planet Bingo is non-precedential and thus limited to its facts. In particular, the court did not hold that the game of bingo was an abstract idea. Instead, the alleged abstract idea was of “solving a tampering problem and also minimizing other security risks during bingo ticket purchases.” Thus, the case cannot be extended by examiners to argue that all games are abstract ideas.

As to methods of organizing human activity, it cannot be the case that all such methods are ineligible, since a vast array of such methods are in fact patented in fields such as farming, metalworking, sewing, manufacturing, tooling, conveying, and the like. This is just another example how simplistic rules of patent eligibility, taken out of context from one court opinion and repurposed generally, are at complete odds with the reality of invention.

Here is another view of the final rejection data on § 101, this time organized by the technology groups most negatively impacted by Alice (left side) and most positively impacted (right side).

Table10

The data here is organized by the percentage change in § 101 final rejection rates post-Alice. The group on the left is all of the technology areas that have had more than a 10% increase in final § 101 since Alice. Every other technology work group in the USPTO had less than 10% change in final rejection rates. On the right, we find the groups that seemed to benefit from Alice, in that the final rejection rates on § 101 declined. Most of these groups are in the computer area—and I’m sure that many of their applications have claims for purely software operations that could just as easily be argued to be mere data gathering, mental steps, or fundamental practices. And yet the examiners in these groups do not on average impose such blanket formulations on the claims, but appear overall to treat these inventions for what they are: real technology solving real world problems with real commercial applications.

To me, the data points to a clear conclusion. Contrary to what the USPTO’s Interim Guidance states as policy–that there is no per se exception for business methods–the behavior of examiners suggests that precisely such an exception is being applied in fact.

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Administrative Agency Biotech High Tech Industry Innovation Intellectual Property Theory Inventors Legislation Patent Law Patent Litigation Patent Theory Software Patent Statistics Supreme Court Uncategorized

The One Year Anniversary: The Aftermath of #AliceStorm

The following post, by Robert R. Sachs, first appeared on the Bilski Blog, and it is reposted here with permission.

It’s been one year since the Supreme Court’s decision in Alice Corp. v. CLS Bank. On its face the opinion was relatively conservative, cautioning courts to “tread carefully” before invalidating patents, and emphasizing that the primary concern was to avoid preemption of “fundamental building blocks” of human ingenuity. The Court specifically avoided any suggestion that software or business methods were presumptively invalid. But those concerns seem to have gone unheeded. The Court’s attempt to side step the tricky problem of defining the boundary of an exception to patent eligibility—”we need not labor to delimit the precise contours of the ‘abstract ideas category in this case'”—has turned into the very mechanism that is quickly “swallow[ing] all of patent law.” The federal courts, the Patent Trial and Appeal Board, and the USPTO are using the very lack of a definition to liberally expand the contours of abstract ideas to cover everything from computer animation to database architecture to digital photograph management and even to safety systems for automobiles.

Let’s look at the numbers to present an accurate picture of the implications of the Supreme Court’s decision. My analysis is a data-driven attempt to assess the implications of Alice one year out. It is with an understanding of how the Supreme Court’s decision is actually playing out in the theater of innovation that we can better project and position ourselves for what the future holds.

Alice at Court

Table 0 Fed Courts

As of June 19, 2015 there have been 106 Federal Circuit and district court decisions on § 101 grounds, with 76 decisions invalidating the patents at issue in whole or in part. In terms of patents and claims, 65% of challenged patents have been found invalid, along with 76.2% of the challenged claims.

The success rate of motions on the pleadings (including motions to dismiss and judgments on the pleadings) is extremely impressive: 67% of defense motions granted, invalidating 54% of asserted patents. There has never been a Supreme Court ruling that the presumption of validity does not apply to § 101—only the Court’s use of the originally metaphorical notion that eligibility is a “threshold” condition. Given that, and the general rule that to survive a motion to dismiss the patentee (historically) need only show that there was a plausible basis that the complaint states a cause of action— there is a plausible basis that the patent claim is not directed to an abstract idea, law of nature, or natural phenomena. One would be forgiven for thinking, as did former Chief Judge Rader in Ultramercial, LLC v. Hulu, LLC that a “Rule 12(b)(6) dismissal for lack of eligible subject matter will be the exception, not the rule.” Apparently the rules change in the middle of the game.

Turning specifically to the Federal Circuit, the numbers are stark:

Table 00Fed Circuit

Of the 13 decisions, 11 are in software or e-commerce and only two are in biotech. The one case where the court held in favor of the patentee, DDR Holdings, LLC v. Hotels.com, L.P. appeared to offer a narrow avenue for patentees to avoid invalidation. However, only nine district court opinions have relied upon DDR to find patent eligibility, with over 30 court opinions distinguishing DDR as inapplicable. Even more interesting is the fact that in DDR the Federal Circuit essentially held that creating a website that copies the look and feel of another website is patent eligible. In the Silicon Valley, that’s called phishing, and it’s not a technology in which most reputable companies invest.

Alice at the Office

The impact of Alice is similarly impacting practitioners before the USPTO. In December, 2014 the Office issued its Interim Guidance on Patent Subject Matter Eligibility, providing guidance to patent examiners as to how to apply the Alice, Mayo, and Myriad decisions along with various Federal Circuit decisions, to claims during prosecution. Importantly, the Guidance noted that “the Supreme Court did not create a per se excluded category of subject matter, such as software or business methods, nor did it impose any special requirements for eligibility of software or business methods,” and it reminded examiners that “Courts tread carefully in scrutinizing such claims because at some level all inventions embody, use, reflect, rest upon, or apply a law of nature, natural phenomenon, or abstract idea.” Alas, most patent examiners are acting as if the patent applications before them are the exceptions to these cautionary instructions.

With the assistance of Patent Advisor, I compiled a dataset of almost 300,000 office actions and notice of allowances sampled in two week periods during 2013, 2013, 2014 and early 2015, and all actions during March, April and May 2015, across all technology centers:

Table0 Number of Apps

About 100,000 actions were notices of allowances, leaving about 200,000 office actions. Each office action was coded as to whether it included rejections under §§ 101, 102 and 103. For each office action the art unit and examiner was identified as well, and the status of the application (abandoned, pending or patented) as of the date that the data was obtained. I then analyzed the data for office actions rejections based on § 101, allowance rates, and examiner rejection rates. Here’s what I found.

Percent of all Actions with § 101 Rejections

Table2

Here, we have the percentage of all actions in each period that received a § 101 rejection, considering both rejections issued and notices of allowances. The black line separates pre-Alice from post-Alice data. For example, in TC 1600, the biotech area, in January, 2012 6.81% of all actions issued (counting both office actions and notices of allowances) were office actions with § 101 rejections; by May 2015 that percentage almost doubled to 11.86% of actions.

Overall, data shows that in 2012 subject matter rejections were mainly in the computer related Tech Centers (2100, 2400) and began declining thereafter, while escalating in biotechnology (1600) and so-called “business methods” Tech Center, TC 3600, following Mayo and Alice. Other technology centers such as semiconductors and mechanical engineering had essentially low and constant rejection rates. But that’s not because there are no software patents in these technology centers: you find plenty of software patents in these groups. Rather, my view is that it is because examiners in these groups treat software patents as they do any other technology.

The rejection rates in Tech Center 3600 in the 30-40% range are higher than any other group, but they also mask what’s really going on, since TC 3600 covers more than business methods. Tech Center 3600 has nine work groups:

Percent of all Actions with § 101 Rejections in TC 3600 Work Groups

Table3 Ecomm Rej

In TC 3600 most of the work groups handle good old-fashioned machines and processes, such as transportation (3610), structures like chairs and ladders (3630), airplanes, agriculture, and weapons (3640), wells and earth moving equipment (3670), etc. Three work groups handle e-commerce applications: specifically, 3620, 3680 and 3690. Here we see that these groups have significantly higher § 101 rejections than the rest of TC 3600. But let’s drill down further.

Each of work groups 3620, 3680 and 3690 have between five and 10 individual art units that handle specific types of e-commerce technologies, but they are not all under the same work group. For example business related cryptography is handed by both art units 3621 and 3685; healthcare and insurance is handled by art units 3626 and 3686; operations research is handled in 3623, 3624, 3682 and 3684. If we consolidate the data according to technology type and then look at rates of § 101 rejections we get the following:

Percent of all Actions with § 101 Rejections in E-Commerce Art Units by Technology Type

Table3 Ecomm Rej

What’s going on? After Bilski in 2010, the § 101 rejections were running between 17% and 50%. Not great but tolerable since these were mostly formal and were overcome with amendments adding hardware elements (“processor,” “memory”) to method claims or inserting “non-transitory” into Beauregard claims.

But after Alice, everything changed and § 101 rejections started issuing like paper money in a hyperinflation economy. If your perception as a patent prosecutor was that the every application was getting rejected under § 101, this explains your pain. Here’s another view of this data, in terms of actual number of § 101 rejections per sample period:

Number of Office Actions with § 101 Rejections in E-Commerce Art Units by Technology Type

Table4 Ecomm Rej Nos

Notice here that the number of office actions in March, 2015 fell dramatically, and then in April the flood gates opened and hundreds of actions issued with § 101 rejections. This is consistent with the Office’s statements in January 2015 that it was training examiners in view of the 2014 Interim Guidance, so office actions were being held until the training was completed. Apparently, the training skipped the part about no per se exclusions of business methods.

Now let’s consider notice of allowance rates. First with respect to all Tech Centers.

Percent of Actions that Are Notices of Allowance

Table5 All TCs NOA

This data reflects, of all the actions that were issued in a given period, the percentage that were notices of allowances. (Note here that contrary to the preceding tables, red cells are low percentage, and green cells are high since notices of allowance are good things, not bad things). The numbers look good, with a general increasing trend over time.

Now consider what’s happening in TC 3600’s business methods art units.

Percent of Actions that Are Notices of Allowance in Business Methods

Table6 NOAs in Ecomm

Now the picture is quite different. The rate of NOAs drops dramatically after Alice, especially in finance and banking and operations research. If it seemed that you were no longer getting a NOAs, this is why. The zero percent rate in March, 2015 is a result of the Office holding up actions and NOAs in view of the Interim Guidance training, as mentioned above.

Patents issued in the business methods art units typically are classified in Class 705 for “Data Processing.” I identified all patents with a primary classification in Class 705 since January, 2011, on a month by month basis, to identify year over year trends. Again the black line separates pre-Alice from post-Alice data.

Table7 Class 705 Patents

This table shows a precipitous decline in the number of business method patents issued following Alice, especially year over year. The lag between the June, 2014 Alice decision and the drop off in October 2014 is an artifact of the delay between allowance and issuance, as well as the USPTO’s unprecedented decision to withdraw an unknown number of applications for which the issue fee had already been paid, and issue § 101 rejections. It’s an interesting artifact, as well, that the number of Class 705 patents issued peaked in the month after Alice: you have to remember that these patents were allowed at least three months, and as much as a year, before the Alice decision; it just took a long time to actually get printed as a patent.

Next, we’ll consider abandonment rates, on a comparative basis, looking at the percentages of applications that were ultimately abandoned in relationship to whether or not they received a § 101 rejection. We’ll compare the data from January 2012 to July 2014. Again, consider the entire patent corps:

Percent of Abandoned Applications with Prior § 101 Rejection

Table8 Abandon all TCs

Here we see that of the applications that were abandoned during the respective sample periods, the vast majority did not have a prior § 101 rejection. Only in TC 3600 did the majority shift after Alice with 51.83% applications that received § 101 rejections in July 2014 being subsequently abandoned by May 31, 2015. Again, let’s drill down into the business method art units in TC 3600:

Percent of Abandoned Applications with Prior § 101 Rejection

Table9 Ecomm Abandon

First, prior to Alice, abandonments in the business method units appeared to result more frequently from other than § 101 rejections, typically prior art rejections. This is shown by the fact that the Jan. 2012 “No” column (no prior 101 rejection) is greater than the Jan. 2012 “Yes” column. Then after Alice, there is a huge shift with the vast majority of applications that were abandoned having § 101 rejections, as shown by the July, 2014 “Yes” column. The vast majority of abandonments, upwards of 90%, followed a 101 rejection. That’s applicants essentially giving up over what only a few years ago was a relatively minor hurdle. That’s what happens when you change the rules in the middle of the game. Second, there is also significant differential behavior in the business method areas as compared to the rest of the technology centers after Alice.

Here’s my personal favorite.

Rates of Examiner § 101 Rejections in TC 3600

Table12 Examiner Rates

This table shows the numbers of examiners in the business method art units with respect to the percentage of applications in which they issued § 101 rejections after Alice. The first row shows that during the sampled periods since Alice, 58 business methods examiners issued § 101 rejections in 100% of their applications, for a total of 443 applications. Twenty examiners issued § 101 rejections for between 90% and 99% of their cases, covering 370 applications. In short, 199 examiners issued § 101 rejections more than 70% of the time, covering 3,304 applications or about 70.6% of all applications. This is not “treading carefully.”

We find similar, though less dramatic, trends and variations in TC 1600 which handles biotechnology, pharma, and chemistry.

Percent of all Actions with § 101 Rejections in TC 1600 Work Groups

Table10 1600 101 Rej Rate

The red line separate pre-Mayo/Myriad data from post-Mayo/Myriad, and the increase in the post-period is significant. Here too, the various work groups mask the more significant rejection rates in specific technology areas, with the rejection rate in microbiology first jumping up to 34.6% post-Mayo and steadily climbing to the current 53.2%.

Percent of all Actions with § 101 Rejections in TC 1600 by Technology

Table11 1600 Tech Type Rej

This table breaks down the work groups into technology types, and then these are sorting average rejection rate over the past four months. Following Alice, we see a significant increase in eligibility rejections in bioinformatics related applications–inventions that rely on analysis and identification of biological and genetic information, and which are frequently used in diagnostics and drug discovery. This is especially disconcerting because bioinformatics is critical to the development of new diagnostics, therapies and drugs.

Note as well the enormous spike in rejections for plant related applications from 0% between July 2015 and April 2015, to 50% in May 2015. This is likely a result again of the USPTO’s Interim Guidance which essentially instructed examiners to reject any claim that included any form of a natural product.

At least pesticides and herbicides are safe from Alice, since we definitely need more of those. The irony is that the more pesticides and herbicides that come to market, the more we need bioinformatics inventions to identify and treat conditions potentially resulting from these products.

Alice at the Board

The Patent Trial and Appeal Board has been even more hostile to software and business methods patents under the Covered Business Method review program:

Total Petitions

Petitions Granted

Percent Invalid

PTAB CBM Institution on § 101

72

64

89%

PTAB Final Decisions on § 101

27

27

100%

Covered Business Method review is available for patents that claim “a method, apparatus, or operation used in the practice, administration, or management of a financial product or service.” The Board takes a very broad view of what constitutes a financial product or service: if the patent specification happens to mention that the invention may be used in a financial context such as banking, finance, shopping or the like, then that’s sufficient. The Board has found CBM standing in 91% of petitions, and instituted trial in 89% of petitions asserting § 101 invalidity. Once a CBM trial has been instituted, the odds are heavily in the petitioner’s favor: of the 27 final CBM decisions addressing § 101, the Board has found for the petitioner 100% of the time.

Finally, we look at the Board’s activity in handling ex parte appeals from § 101 rejections for the period of March 1, 2015 to May 30, 2015:

  • 32 Ex Parte Decisions on § 101, with 15 in TC 3600.
  • 28 Affirmances overall, 13 in TC 3600
  • Two Reversals on § 101, both in TC 3600
  • Four New Grounds of Rejection for § 101

Following suit with how the Board is handling CBMs, they are also heavily supporting examiners in affirming § 101 rejections. More disconcerting is the trend of new grounds of rejection under § 101. While only four were issued in this period, there have been several dozen since Alice. In this situation, the applicant has appealed, for example, a § 103 rejection. The Board can reverse the examiner on that rejection, but then sua sponte reject all of the claims under § 101. What are the odds that the examiner will ever allow the case? Close to zero. What are the odds that an appeal back to the Board on the examiner’s next § 101 rejection will be reversed? If the Board’s 100% rate of affirming its CBM institution decisions on § 101 is any indication, then you know the answer.

Conclusions

Looking at the overall context of the Alice decision, it’s my view that Supreme Court did not intend this landslide effect. While they were certainly aware of the concerns over patent trolls and bad patents, they framed their decision not as a broadside against these perceived evils, but as simple extension of Bilski and the question of whether computer implementation of an abstract idea imparts eligibility. At oral argument, the members of the Court specifically asked if they needed to rule on the eligibility of software and they were told by CLS and the Solicitor General that they did not. To the extent that there is broad language in that opinion, it is the cautionary instructions to the courts to avoid disemboweling the patent law from the inside, and the emphasis on preemption of fundamental ideas—not just any ideas—as the core concern of the exclusionary rule. The evidence above shows that these guideposts have been rushed past quite quickly on the way to some goal other than the preservation of intellectual property rights.

If the present trends hold, and I see no reason to suggest that they will not, we will continue to see the zone of patent eligibility curtailed in software (not to mention bio-technology after Mayo and Myriad). Indeed, the more advanced the software technology—the more it takes over the cognitive work once done exclusively by humans, the more seamless it becomes in the fabric of our daily lives—the less patent eligible it is deemed to be by the courts and the USPTO. What technologies will not be funded, what discoveries will not be made, what products will never come to market we do not know. What we do know is this: there is only one law that governs human affairs and that is the law of unintended consequences.

Categories
Copyright Copyright Theory History of Intellectual Property Innovation Intellectual Property Theory Law and Economics Patent Law Patent Litigation Patent Theory Statistics Uncategorized

Intellectual Property, Innovation and Economic Growth: Mercatus Gets it Wrong

By Mark Schultz & Adam Mossoff

A handful of increasingly noisy critics of intellectual property (IP) have emerged within free market organizations. Both the emergence and vehemence of this group has surprised most observers, since free market advocates generally support property rights. It’s true that there has long been a strain of IP skepticism among some libertarian intellectuals. However, the surprised observer would be correct to think that the latest critique is something new. In our experience, most free market advocates see the benefit and importance of protecting the property rights of all who perform productive labor – whether the results are tangible or intangible.

How do the claims of this emerging critique stand up? We have had occasion to examine the arguments of free market IP skeptics before. (For example, see here, here, here.) So far, we have largely found their claims wanting.

We have yet another occasion to examine their arguments, and once again we are underwhelmed and disappointed. We recently posted an essay at AEI’s Tech Policy Daily prompted by an odd report recently released by the Mercatus Center, a free-market think tank. The Mercatus report attacks recent research that supposedly asserts, in the words of the authors of the Mercatus report, that “the existence of intellectual property in an industry creates the jobs in that industry.” They contend that this research “provide[s] no theoretical or empirical evidence to support” its claims of the importance of intellectual property to the U.S. economy.

Our AEI essay responds to these claims by explaining how these IP skeptics both mischaracterize the studies that they are attacking and fail to acknowledge the actual historical and economic evidence on the connections between IP, innovation, and economic prosperity. We recommend that anyone who may be confused by the assertions of any IP skeptics waving the banner of property rights and the free market read our essay at AEI, as well as our previous essays in which we have called out similarly odd statements from Mercatus about IP rights.

The Mercatus report, though, exemplifies many of the concerns we raise about these IP skeptics, and so it deserves to be considered at greater length.

For instance, something we touched on briefly in our AEI essay is the fact that the authors of this Mercatus report offer no empirical evidence of their own within their lengthy critique of several empirical studies, and at best they invoke thin theoretical support for their contentions.

This is odd if only because they are critiquing several empirical studies that develop careful, balanced and rigorous models for testing one of the biggest economic questions in innovation policy: What is the relationship between intellectual property and jobs and economic growth?

Apparently, the authors of the Mercatus report presume that the burden of proof is entirely on the proponents of IP, and that a bit of hand waving using abstract economic concepts and generalized theory is enough to defeat arguments supported by empirical data and plausible methodology.

This move raises a foundational question that frames all debates about IP rights today: On whom should the burden rest? On those who claim that IP has beneficial economic effects? Or on those who claim otherwise, such as the authors of the Mercatus report?

The burden of proof here is an important issue. Too often, recent debates about IP rights have started from an assumption that the entire burden of proof rests on those investigating or defending IP rights. Quite often, IP skeptics appear to believe that their criticism of IP rights needs little empirical or theoretical validation, beyond talismanic invocations of “monopoly” and anachronistic assertions that the Framers of the US Constitution were utilitarians.

As we detail in our AEI essay, though, the problem with arguments like those made in the Mercatus report is that they contradict history and empirics. For the evidence that supports this claim, including citations to the many studies that are ignored by the IP skeptics at Mercatus and elsewhere, check out the essay.

Despite these historical and economic facts, one may still believe that the US would enjoy even greater prosperity without IP. But IP skeptics who believe in this counterfactual world face a challenge. As a preliminary matter, they ought to acknowledge that they are the ones swimming against the tide of history and prevailing belief. More important, the burden of proof is on them – the IP skeptics – to explain why the U.S. has long prospered under an IP system they find so odious and destructive of property rights and economic progress, while countries that largely eschew IP have languished. This obligation is especially heavy for one who seeks to undermine empirical work such as the USPTO Report and other studies.

In sum, you can’t beat something with nothing. For IP skeptics to contest this evidence, they should offer more than polemical and theoretical broadsides. They ought to stop making faux originalist arguments that misstate basic legal facts about property and IP, and instead offer their own empirical evidence. The Mercatus report, however, is content to confine its empirics to critiques of others’ methodology – including claims their targets did not make.

For example, in addition to the several strawman attacks identified in our AEI essay, the Mercatus report constructs another strawman in its discussion of studies of copyright piracy done by Stephen Siwek for the Institute for Policy Innovation (IPI). Mercatus inaccurately and unfairly implies that Siwek’s studies on the impact of piracy in film and music assumed that every copy pirated was a sale lost – this is known as “the substitution rate problem.” In fact, Siwek’s methodology tackled that exact problem.

IPI and Siwek never seem to get credit for this, but Siwek was careful to avoid the one-to-one substitution rate estimate that Mercatus and others foist on him and then critique as empirically unsound. If one actually reads his report, it is clear that Siwek assumes that bootleg physical copies resulted in a 65.7% substitution rate, while illegal downloads resulted in a 20% substitution rate. Siwek’s methodology anticipates and renders moot the critique that Mercatus makes anyway.

After mischaracterizing these studies and their claims, the Mercatus report goes further in attacking them as supporting advocacy on behalf of IP rights. Yes, the empirical results have been used by think tanks, trade associations and others to support advocacy on behalf of IP rights. But does that advocacy make the questions asked and resulting research invalid? IP skeptics would have trumpeted results showing that IP-intensive industries had a minimal economic impact, just as Mercatus policy analysts have done with alleged empirical claims about IP in other contexts. In fact, IP skeptics at free-market institutions repeatedly invoke studies in policy advocacy that allegedly show harm from patent litigation, despite these studies suffering from far worse problems than anything alleged in their critiques of the USPTO and other studies.

Finally, we noted in our AEI essay how it was odd to hear a well-known libertarian think tank like Mercatus advocate for more government-funded programs, such as direct grants or prizes, as viable alternatives to individual property rights secured to inventors and creators. There is even more economic work being done beyond the empirical studies we cited in our AEI essay on the critical role that property rights in innovation serve in a flourishing free market, as well as work on the economic benefits of IP rights over other governmental programs like prizes.

Today, we are in the midst of a full-blown moral panic about the alleged evils of IP. It’s alarming that libertarians – the very people who should be defending all property rights – have jumped on this populist bandwagon. Imagine if free market advocates at the turn of the Twentieth Century had asserted that there was no evidence that property rights had contributed to the Industrial Revolution. Imagine them joining in common cause with the populist Progressives to suppress the enforcement of private rights and the enjoyment of economic liberty. It’s a bizarre image, but we are seeing its modern-day equivalent, as these libertarians join the chorus of voices arguing against property and private ordering in markets for innovation and creativity.

It’s also disconcerting that Mercatus appears to abandon its exceptionally high standards for scholarly work-product when it comes to IP rights. Its economic analyses and policy briefs on such subjects as telecommunications regulation, financial and healthcare markets, and the regulatory state have rightly made Mercatus a respected free-market institution. It’s unfortunate that it has lent this justly earned prestige and legitimacy to stale and derivative arguments against property and private ordering in the innovation and creative industries. It’s time to embrace the sound evidence and back off the rhetoric.