By Susan Perng Pan, Sughrue Mion
Advances in technology impact all aspects of financial services — transfers, security and encryption, customer service, investment and risk analysis. In most industries where technological advance creates a commercial advantage, it is imperative for a company to protect its innovations by patents. Patents serve the dual purpose of 1) protecting a company's products and services from imitation, and 2) providing negotiation leverage in the event that a competitor alleges infringement. The 1998 Federal Circuit decision of State Street Bank1 flung the doors wide open on patents protecting business methods. This decision firmly placed advancements in banking and finance on par with advances in manufacturing, applied science and technology. Since that time, the U.S. Patent and Trademark Office (PTO) and federal courts have struggled with different ways to create certainty on the validity of business methods and what constitutes a business method.2 In July 2012, the Federal Circuit again bolstered business methods as clearly patent-eligible. In CLS Bank Int'l v. Alice Corp. Pty., Ltd., the appeal court determined that patent claims directed to a method, system and computer-readable medium to exchange obligations between first and second parties via an adjustment of respective electronic account records qualify for patent protection.3The latest development affecting the patenting, enforcement and validity challenge of business methods comes in the form of a Post-Grant Review (PGR). President Obama instituted widespread changes in the U.S. patent law on September 16, 2011 by signing the America Invents Act (AIA). As with any major legislative change, provisions of AIA are being phased in over time. One set of provisions for Post Grant Review (PGR) went into effect on Sept. 16. However, the true effective date of PGR is March 16, 2013 based on “first-to-file” requirements in AIA.4 PGR offers a simplified and economical means to challenge patent validity on any statutory basis which would be permitted in a federal district court. Patent invalidity proceedings in a district court, because of their entanglement with co-pending infringement proceedings, will often involve legal expenses on the order of millions of dollars and multiple years to resolve. In contrast, PGR allows similar challenges to be made at a fraction of the expense and is required to conclude within a calendar year of instituting the Review.5
With a March 2013 effective date, PGR appears to be a distant concern. However, the AIA included a special transitional provisional of PGR directed solely to business method patents. This class of PGR went into effect on Sept. 16, 2012, for “covered” business method patents without regard to filing date. A PGR request, whether filed via the transitional or regular PGR, must be made no later than nine months of the patent's issue date.6 PGR offers a quasi-judicial proceeding for challenging the validity of business method patents. This new proceeding will save parties time and expense in comparison to patent challenges in U.S. courts.7
With the availability of business method PGR, companies either holding business method patents or those that become targets of license or infringement allegations of a third party should consider the following.
For companies holding business method patents, a first step is to evaluate the susceptibility of those patents to PGR challenge. The most basic item is to review the PTO classification of their patents to determine whether any fall into the standard business method classification, which is class 705. The definition of class 705 provides:
Generic class for apparatus and corresponding methods for performing data processing operations, in which there is significant change in the data or for performing calculation operations where the apparatus or method is uniquely designed for or utilized in the practice, administration, or management of an enterprise or in the processing of financial data.
There must be a significant claim recitation of the data processing system or calculating computer and only nominal claim recitation of any external art environment.8
Patents bearing a 705 classification or having claims that recite solely the manipulation of data without reciting any external apparatus would be more likely to be accepted by the PTO for early PGR validity challenge.
Notably, the “covered” business method definition for PGR excludes data processing that relate to enterprise management. In particular, the “covered” class claims:
[D]ata 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. (Emphasis added).9
Therefore, claims of financial data manipulations in conjunction with a form of operational control, use of a security mechanism or sensor data, will likely avoid early PGR scrutiny. By the same token, the 705 classification may erroneously encompass patent claims that recite sufficient combination and interaction with an external apparatus (e.g. an interface or operational controller or sensor) which should take the claim out of the realm of early PGR challenge.
However, falling outside class 705 alone may not be sufficient to render a company's patent safe from early validity challenges. Companies should also review wording of their patent claims to determine which ones of their patents may be susceptible to PGR if asserted against a competitor. Claims that merely describe combinations of steps of transferring, storing and updating financial data are especially vulnerable. This is especially true if the data represents an abstract concept such as “monetary value”, “risk” or “time.” Not only would such claims likely qualify for early PGR challenge, they would likely be invalidated as claiming non-statutory subject matter.10 Where possible, business method data should represent 1) a physical feature or 2) an operational feature. These may include the status or location of objects or goods in transit or the configuration of objects being controlled or managed. If necessary, a reissue application may be filed to correct recitations in issued patents.
The U.S. Patent Office's Final Rules on Definitions of Covered Business Method Patent and Technological Invention11 and the corresponding Specific Trial Rules12 provide additional guidance through examples. As a first example, patent claims for a method of hedging risk in the fields of commodities trading will likely be included as part of the covered business methods that are susceptible to early PGR challenge. As a second example, a patent claim for a method for verifying the validity of a credit card transaction will also be susceptible.13 In contrast, a patent that claims a novel and nonobvious hedging machine for hedging risk in the field of commodities trading would not be subject to early PGR challenge. In addition, a patent claim for a novel and nonobvious credit card reader for verifying the validity of a credit card transaction would not be subject to early PGR challenge.
What these examples highlight is that patents drawn to business methods remain highly appropriate. However, the PTO will take a second look at patents that essentially pre-empt all application of basic business tenets. Those business method patent claims having a “novel and nonobvious” feature will not be subject to early PGR challenge. Rather, the patent challenger in such cases will need to turn to the federal courts, with attendant expense and time delays, or wait until the more general PGR provisions of the PTO become available in March 2013.
Financial institutions, banks and insurance companies should also review any pending patent applications. Claim language in pending cases should be amended to steer clear of the business method classification by adding a combination of physical and/or operational interactions in the claim. Claim language may also be modified to provide an alternative statutory basis to protect the innovation. For example, while protecting method steps, the claim can describe the inventive method in terms of the apparatus (computer system) performing the method or in terms of the software recorded into a computer readable medium that performs the method.
As a cautionary note, transforming the claim by these means may still not be a sufficient safeguard if the claims appear to relate to manipulation of abstract concepts, such as value and risk. Therefore, at least dependent claims should be included to introduce as much physical or operational characteristics to the claims as possible. These would include the specific and technical details which will allow financial data to be transferred, stored or updated. The specific technical details are what will disqualify an early PGR challenge since the claim will then be directed to an invention that is “novel and nonobvious.”
Finally, for those on the receiving end of an infringement assertion in the financial, insurance, or supply chain management area, the same considerations set forth above apply similarly to determine which competitors' patents may be susceptible to an early PGR validity challenge. If a third party's assertion of patent infringement is making it difficult for a company to develop new business or advance other goals, then PGR is a viable resource to clear, or at least clarify, the playing field regarding any patent issues.
Susan Perng Pan's expertise includes patent portfolio building, licensing and IP counseling for companies in the electronics and software industries. Ms. Pan is a partner of SUGHRUE MION, PLLC, which specializes in intellectual property law including all aspects of patents, trademarks and copyrights.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
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