USPTO Decision and Interim Examination Guidelines on Patentable Subject Matter and Business Methods

Two recent developments in the USPTO could mean that the range and quantity of “business method” patents being issued will increase, or at least remain the same, to the chagrin of some and the delight of others. The first is a decision of the Board of Patent Appeals and Interferences entitled Ex parte Lundgren; the second is a set of guidelines for examiners on determining whether applications contain subject matter eligible for patent protection.

Ex parte Lundgren

A panel of administrative patent judges, in a 3-2 decision, has ruled that it is improper to reject as nonpatentable subject matter claims to a business method — on the ground that the claimed invention is outside the “technological arts” —; even when nothing in the application describes implementing the method in a computer or other machine. Ex parte Lundgren, Appeal No. 2003-2088 (Bd. Pat. App. & Int. Sept. 28, 2005).

Carl Lundgren’s patent application claims a particular executive compensation scheme that addresses some of the anticompetitive aspects of an oligopoly. Because an oligopoly provides incentives for companies to collude to limit output, thus artificially raising prices above pure-competition levels, Lundgren proposes a method that purportedly reduces the likelihood of collusion by pegging a manager’s compensation to the company's relative, rather than absolute, profitability.

Typically, if one company’s manager tries increasing his compensation by increasing profits relative to competitors, the relative profits of one or more other companies in the oligopoly will fall. In Lundgren’s scheme, if all company managers in the oligopoly are compensated based on the relative profitability of their respective firms, there will be no incentive to collude. At least that seems to be his theory.

Lundgren’s application recites the following in claim 1:

A method of compensating a manager who exercises administrative control over operations of a privately owned primary firm for the purpose of reducing the degree to which prices exceed marginal costs in an industry, reducing incentives for industry collusion between the primary firm and a set of comparison firms in said industry, or reducing incentives for coordinated special interest industry lobbying, said set of comparison firms including at least one firm, said primary firm having the manager who exercises administrative control over said primary firm's operations during a sampling period, wherein privately owned means not wholly government owned, the method comprising the steps of:

1. choosing an absolute performance standard from a set of absolute performance standards;

2. measuring an absolute performance of said primary firm with respect to said chosen absolute performance standard for said sampling period;

3. measuring an absolute performance of each firm of said set of comparison firms with respect to said chosen absolute performance standard for said sampling period, said measurement of performance for each firm of said set of comparison firms forming a set of comparison firm absolute performance measures;

4. determining a performance comparison base based on said set of comparison firm absolute performance measures by calculating a weighted average of said set of comparison firm absolute performance measures;

5. comparing said measurement of absolute performance of said primary firm with said performance comparison base;

6. determining a relative performance measure for said primary firm based on said comparison of said primary firm measurement of absolute performance and said performance comparison base;

7. determining the managerial compensation amount derived from said relative performance measure according to a monotonic managerial compensation amount transformation; and

8. transferring compensation to said manager, said transferred compensation having a value related to said managerial compensation amount.

Following lengthy proceedings in the Patent Office,[1] the USPTO Examiner rejected Lundgren’s application as ineligible for patent proctection — nonstatutory subject matter under 35 U.S.C. § 101 — on the ground that the claimed invention was outside the ’technological arts.’ Because the Board’s majority found that U.S. law specifies no separate ’technological arts test,’ the Examiner’s decision was reversed.

As an initial matter, two prominent Federal Circuit appeals-court decisions — AT&T v. Excel and State Street Bank v. Signature Financial — were not dispositive in the Board’s decision. In AT&T v. Excel,[2] the Federal Circuit extended to method claims that court’s decision on machine claims in State Street,[3] which held that an application presents patentable subject matter when claims recite a “practical application, i.e., ‘a useful, concrete and tangible result,’ ”[4] For the Lundgren application, the Examiner refrained from arguing that the claims failed to produce a useful, concrete, and tangible result, thus acknowledging that these cases did not preclude patentability.

Instead, the Examiner’s rejection was based on the language in the U.S. Constitution that authorizes Congress to enact laws regarding patents:

The Congress shall have power . . . To promote the Progress of . . . useful Arts, by securing for limited Times to . . . Inventors the exclusive Right to their . . . Discoveries.

[U.S. Const. art. I 8, cl. 8 (emphasis added).]

The Examiner reasoned that, because the laws that Congress enacts cannot exceed the Constitutional authorization, patentable subject matter must be within the “useful arts” — or, to use the modern phrase, the “technological arts.”

The Board’s majority — in an unsigned “per curiam” decision — rejected that reasoning, finding that U.S. courts have never articulated a “technological arts test” separate from other doctrines used in determining whether an application claims patentable subject matter.

Considering the Supreme Court’s 1981 decision in Diamond v. Diehr,[5] the Board’s majority opined that the Court recognized only three categories of inventions excluded from patent protection: laws of nature, physical phenomena, and abstract ideas. The Board’s majority also maintained that the Supreme Court was aware of a technological arts test and refused to adopt it in a 1972 decision, Gottschalk v. Benson.[6]

The majority then rejected the Examiner’s contentions that two decisions by the Court of Customs and Patent Appeals (CCPA) — the Federal Circuit’s predecessor — and a prior Board decision set forth a separate technological arts test. There is language in the 1970 and 1978 CCPA decisions — In re Musgrave[7] and In re Toma[8] — that addresses the “technological arts,” and the 2001 Board decision in Ex parte Bowman[9] — which was designated as “non-precedential” — explicitly rejected an application because “the invention . . . does not promote the progress of . . . the useful arts, and does not fall within the definition of technological arts.”[10]

The Board’s majority concluded that none of the cases supported a separate technological arts test. Although the majority provided some analysis to discount Musgrave and Toma, the majority simply dismissed Bowman as nonprecedential and thus nonbinding. Nevertheless, this should end the practice of rejecting claims as nonstatutory under Bowman, which Examiners had been doing since about May 2003, when the practice was announced at a USPTO Business Methods Partnership meeting.

As a result of the majority’s decision, Lundgren’s application returns to the Examiner for further proceedings, and no further 35 U.S.C. §101 rejections are likely.

The two dissenting administrative patent judges provided spirited and — in one case — extensive arguments urging that Lundgren’s application should have been rejected.

One dissenting Board member argued that a separate technological arts test is appropriate. He first asserted that no court has expressly decided the question:

[O]ne can scrutinize as many court decisions as one may like, but there is no decision out there which unequivocally holds that the claimed invention on appeal before us must be granted a patent. Likewise, there is no decision out there that unequivocally holds that the claimed invention on appeal must be denied a patent. Thus, in my view, the issue before us raised by the examiner is one of first impression.

[Slip op. at 10.]

This dissenter then addressed the majority’s discussion of the three categories of nonstatuory subject matter listed by the Supreme Court in Diamond v. Diehr and by other courts, asserting that the list was not exhaustive:

The majority is of the view that every invention is patentable unless it is nothing more than an abstract idea, a law of nature or a natural phenomenon, each of which has been held to be unpatentable by court decisions. These categories of nonstatutory subject matter did not come to us by Scripture, however, but instead, resulted from some enlightened individual raising the question of whether such subject matter should be patented. Inventions within these categories certainly can be claimed in a manner which technically comply with 35 U.S.C. § 101. The point is that there is no absolute law that says that every category of nonstatutory subject matter has been decided for all time.

[Slip op. at 11-12.]

This dissenting administrative patent judge concludes that the Examiner’s technological arts test should have been affirmed “because the process as claimed is not tied to any known science or technology.” (Slip op. at 12.) He then offers an interesting speculation about what America’s Founders would have concluded:

It is interesting to note that the claimed invention could have been performed by the writers of the Constitution using only the knowledge available at that time. I find it ludicrous, however, to think that the writers of the Constitution would have found the idea of providing compensation to an executive, as claimed, to be something that would qualify for a patent.

[Id.]

The second dissenting Board member in Lundgren agrees with the majority that there is no separate technological arts test, but urges another ground for rejecting Lundgren’s application for nonstatutory subject matter. His decision examines the definitions of such terms as “technology,” “science,” and “engineering”; reviews the case law extensively;[1] and identifies three possible tests for determining whether process claims recite patentable material:

1. a transformation test;

2. an exceptions-to-patentability test; and

3. a useful-concrete-and-tangible result test.

The transformation test derives from Cochrane v. Deener,[12] a 19th-century Supreme Court case, which held that “[a] process is . . . an act, or series of acts, performed upon the subject matter to be transformed and reduced to a different state or thing.” [13] This dissenting Board member finds Cochrine still applicable today:

The 1877 Cochrane v. Deener definition of a statutory “process” requires a transformation of physical subject matter to a different state or thing . . . . [T]he subject matter transformed can be tangible or intangible, which I interpret to be matter or some form of energy to be consistent with the definition of “technology.” This Supreme Court test has a good pedigree and I think defines the essential nature of a statutory “process” and “technology.” I believe that all cases where statutory subject matter was found can be explained with this test.

[Slip op. at 87.]

Applying this test, this dissenting Board member opines that “[t]he claimed steps do not require transformation of any physical subject matter, such as an electrical signal, into a different state or thing,” thus rendering the invention unpatentable. (Slip op. at 89.)

The exceptions test refers to the categories of nonpatentable subject matter that the Supreme Court identified in Diamond v. Diehr:

The exceptions for “laws of nature, physical phenomena and abstract ideas,” are, logically, a second test, i.e., “but for” the exceptional condition, the claimed process would be patentable subject matter . . . .It is difficult to determine whether a process is merely a “law of nature,” “physical phenomena,” or “abstract idea,” because the claims are usually drafted to recite minor physical limitations such as data-gathering steps, field of use limitations, and post-solution activity. The question is whether the claim “as a whole” is directed to the kind of subject matter that was intended to be protected.

[Slip op. at 87.]

Applying this test, the dissenter states that “[t]he subject matter of claim 1 is also directed to an ‘abstract idea’ or, at least, it is nonstatutory because it broadly covers both the nonstatutory ‘abstract idea’ and any physical implementation of it that might possibly be statutory.” (Slip op. at 90.)

Testing whether the claimed invention produced a useful, concrete, and tangible result was prescribed in the Federal Circuit’s 1998 decision in State Street. The dissenting member believes that the claimed invention fails this test:

“I concluded in [applying the transformation test] that the claimed subject matter on appeal does not fall within the definition of a ‘process’ under § 101 because it does not transform physical subject matter into a different state or thing, and concluded in [the exceptions test] that it is an ‘abstract idea.’ Thus, because a ‘concrete and tangible result’ is the opposite of an ‘abstract idea’ and requires some sort of physical instantiation, I conclude that claim 1 does not recite a ‘concrete and tangible result’ or a ‘practical application’ of the plan for reducing incentives for industry collusion under the State Street test . . . .”

[Slip op. at 91.]

The Board majority in Lundgren notes the rationale in the second dissenting opinion, but declines “at this stage of the proceedings to enter a new ground for rejection.” It is therefore conceivable that Lundgren’s application — now remanded to the Examiner for further proceedings — will later be rejected under one or more of the transformation, exceptions, and State Street tests.

Interim Examination Guidelines

On October 26, 2005, the Commissioner for Patents signed the Interim Guidelines for Examination of Patent Applications for Patent Subject Matter Eligibility. These are apparently intended to substitute for a current section of the Manual for Patent Examining Procedure, “Examination Guidelines for Computer-Related Inventions” (M.P.E.P. § 2106). That the Guidelines’ title omits the reference to computer-related inventions is perhaps a signal that business-method applications that contain no disclosure of computer or other machine implementations will no longer be rejected as unpatentable subject matter for that reason alone.

Much can be gleaned from considering the annexes to Interim Guidelines before considering the Guidelines themselves. Annex I — a flowchart of the process Examiners should follow — is discussed below.

Annex II summarizes the USPTO’s view of the case law that separates eligible and ineligible subject matter. (10/26/05 Interim Guidelines at 32-41.)

Annex III lists improper tests — which Examiners are prohibited from using — for determining subject matter eligibility:

(A) ’not in the technological arts’ test [which was rejected in Ex parte Lundgren, discussed above]

(B) Freeman-Walter-Abele test

(C) mental step or human step tests

(D) the machine implemented test

(E) the per se data transformation test.

[10/26/05 Interim Guidelines at 42; tests discussed id. at 42-49.]

Annex IV discusses computer-related nonstatutory subject matter, such as data structures representing descriptive material, computer listings, and electromagnetic signals. (10/26/05 Interim Guidelines at 50-57.) In this section, for example, is the USPTO’s position, based on case law, that ’[m]erely claiming nonfunctional descriptive material, i.e., abstract ideas, stored in a computer-readable medium, in a computer, on an electromagnetic carrier signal does not make it statutory.’ (Id. at 51.)

Annex V addresses mathematical algorithms. (10/26/05 Interim Guidelines at 58-59.)

Annex I in the new Guidelines is a flowchart depicting the steps that an Examiner should follow when determining whether an application is directed to patentable subject matter. Comparing this flowchart with the flowchart provided in the Appendix to the old Guidelines provides some hints about how the USPTO’s examination of business-method applications may change.

Turning finally to the text of the new Interim Guidelines, Examiners are told in some detail what they should do when reviewing applications. The new Guidelines thus suggest what applicants should do when preparing applications. Some key excerpts follow.

I. Introduction

These Examination Guidelines (’Guidelines’) are based on the USPTO’s current understanding of the law and are believed to be fully consistent with binding precedent of the Supreme Court, the Federal Circuit and the Federal Circuit’s predecessor courts.

These Guidelines do not constitute substantive rulemaking and hence do not have the force and effect of law. These Guidelines have been designed to assist USPTO personnel in analyzing claimed subject matter for compliance with substantive law . . .

[10/26/05 Interim Guidelines at 2.]

II. Determine What Applicant Has Invented and Is Seeking to Patent

. . . .

A. Identify and Understand Any Utility and/or Practical Application Asserted for the Invention

The applicant is in the best position to explain why an invention is believed useful. Accordingly, a complete disclosure should contain some indication of the practical application for the claimed invention, i.e., why the applicant believes the claimed invention is useful. Such a statement will usually explain the purpose of the invention or how the invention may be used (e.g., a compound is believed to be useful in the treatment of a particular disorder) . . .

[10/26/05 Interim Guidelines at 3-5.]

B. Review the Detailed Disclosure and Specific Embodiments to Understand What the Applicant Has Invented

The written description will provide the clearest explanation of the applicant’s invention, by exemplifying the invention, explaining how it relates to the prior art and explaining the relative significance of various features of the invention. Accordingly, USPTO personnel should continue their evaluation by:

(1) determining the function of the invention, that is what the invention does when used as disclosed (e.g., the functionality of the programmed computer); and

(2) determining the features necessary to accomplish at least one asserted practical application.

Patent applicants can assist the USPTO by preparing applications that clearly set forth these aspects of an invention.

[10/26/05 Interim Guidelines at 5 (citation omitted).]

C. Review the Claims

. . . .

The subject matter of a properly construed claim is defined by the terms that limit its scope. It is this subject matter that must be examined. As a general matter, the grammar and intended meaning of terms used in a claim will dictate whether the language limits the claim scope. Language that suggests or makes optional but not require steps to be performed or does not limit a claim to a particular structure does not limit the scope of a claim or claim limitation. The following are examples of language that may raise a question as to the limiting effect of the language in a claim:

(A) statements of intended use or field of use,

(B) ’adapted to’ or ’adapted for’ clauses,

(C) ’wherein’ clauses, or

(D) ’whereby’ clauses.

This list of examples is not intended to be exhaustive. See also MPEP § 2111.04 . . .

[10/26/05 Interim Guidelines at 6-7.]

III. Conduct a Thorough Search of the Prior Art

Prior to evaluating the claimed invention under 35 U.S.C. § 101, USPTO personnel are expected to conduct a thorough search of the prior art. Generally, a thorough search involves reviewing both U.S. and foreign patents and nonpatent literature . . .

[10/26/05 Interim Guidelines at 10.]

IV. Determine Whether the Claimed Invention Complies with the Subject Matter Eligibility Requirement of 35 U.S.C. § 101

A. Consider the Breadth of 35 U.S.C. § 101 Under Controlling Law

. . . .

35 U.S.C. § 101 defines four categories of inventions that Congress deemed to be the appropriate subject matter of a patent: processes, machines, manufactures and compositions of matter. The latter three categories define ’things’ or ’products’ while the first category defines ’actions’ (i.e., inventions that consist of a series of steps or acts to be performed). See 35 U.S.C. § 100(b) (”The term ‘process’ means process, art, or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.”).

Federal courts have held that 35 U.S.C. § 101 does have certain limits. First, the phrase ’anything under the sun that is made by man’ is limited by the text of 35 U.S.C. § 101, meaning that one may only patent something that is a machine, manufacture, composition of matter or a process. See, e.g., Alappat, 33 F.3d at 1542, 31 USPQ2d at 1556; In re Warmerdam, 33 F.3d 1354, 1358, 31 USPQ2d 1754, 1757 (Fed. Cir. 1994). Second, 35 U.S.C. § 101 requires that the subject matter sought to be patented be a ’useful’ invention. Accordingly, a complete definition of the scope of 35 U.S.C. § 101, reflecting Congressional intent, is that any new and useful process, machine, manufacture or composition of matter under the sun that is made by man is the proper subject matter of a patent.

The subject matter courts have found to be outside of, or exceptions to, the four statutory categories of invention is limited to abstract ideas, laws of nature and natural phenomena. While this is easily stated, determining whether an applicant is seeking to patent an abstract idea, a law of nature or a natural phenomenon has proven to be challenging. These three exclusions recognize that subject matter that is not a practical application or use of an idea, a law of nature or a natural phenomenon is not patentable . . .

[10/26/05 Interim Guidelines at 12-13.]

B. Determine Whether the Claimed Invention Falls Within An Enumerated Statutory Category

To properly determine whether a claimed invention complies with the statutory invention requirements of 35 U.S.C. § 101, USPTO personnel must first identify whether the claim falls within at least one of the four enumerated categories of patentable subject matter recited in section 101 (process, machine, manufacture or composition of matter) . . .

The burden is on the USPTO to set forth a prima facie case of unpatentability. Therefore if the examiner determines that it is more likely than not that the claimed subject matter falls outside all of the statutory categories, the examiner must provide an explanation. For example, a claim reciting only a musical composition, literary work, compilation of data, or legal document (e.g., an insurance policy) per se does not appear to be a process, machine, manufacture, or composition of matter. If the examiner can establish a prima facie case that a claim does not fall into a statutory category, that does not preclude complete examination of the application for satisfaction of all other conditions of patentability. The examiner must further continue with the statutory subject matter analysis as set forth below. Also, the examiner must still examine the claims for compliance with 35 U.S.C. §§ 102, 103, and 112.

[10/26/05 Interim Guidelines at 14-16.]

C. Determine Whether the Claimed Invention Falls Within § 101 Judicial Exceptions — Laws of Nature, Natural Phenomena and Abstract Ideas

Determining whether the claim falls within one of the four enumerated categories of patentable subject matter recited in 35 U.S.C. § 101 (process, machine, manufacture or composition of matter) does not end the analysis because claims directed to nothing more than abstract ideas (such as mathematical algorithms), natural phenomena, and laws of nature are not eligible and therefore are excluded from patent protection . . .

While abstract ideas, natural phenomena, and laws of nature are not eligible for patenting, methods and products employing abstract ideas, natural phenomena, and laws of nature to perform a real-world function may well be. In evaluating whether a claim meets the requirements of section 101, the claim must be considered as a whole to determine whether it is for a particular application of an abstract idea, natural phenomenon, or law of nature, rather than for the abstract idea, natural phenomenon, or law of nature itself.

[10/26/05 Interim Guidelines at 16-18.]

1. Determine Whether the Claimed Invention Covers Either a § 101 Judicial Exception or a Practical Application of a § 101 Judicial Exception

An examiner must ascertain the scope of the claim to determine whether it covers either a § 101 judicial exception or a practical application of a § 101 judicial exception. The conclusion that a particular claim includes a § 101 judicial exception does not end the inquiry because “[i]t is now commonplace that an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection.” Diehr, 450 U.S. at 187, 209 USPQ at 8 (emphasis in original).

[10/26/05 Interim Guidelines at 18.]

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