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:
choosing an absolute performance standard from a set of absolute performance standards;
measuring an absolute performance of said primary firm with respect to said chosen absolute performance standard for said sampling period;
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;
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;
comparing said measurement of absolute performance of said primary firm with said performance comparison base;
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;
determining the managerial compensation amount derived from said relative performance measure according to a monotonic managerial compensation amount transformation; and
transferring compensation to said manager, said transferred compensation having a value related to said managerial compensation amount.
Following lengthy proceedings in the Patent Office, 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, the Federal Circuit extended to method claims that court’s decision on machine claims in State Street, which held that an application presents patentable subject matter when claims recite a “practical application, i.e., ‘a useful, concrete and tangible result,’ ” 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, 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.
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 and In re Toma — that addresses the “technological arts,” and the 2001 Board decision in Ex parte Bowman — 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.”
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.
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; and identifies three possible tests for determining whether process claims recite patentable material:
a transformation test;
an exceptions-to-patentability test; and
a useful-concrete-and-tangible result test.