The following was written by Dale Lazar (Partner at DLA Piper and one of our newest Practice Center Contributor’s)  and Jim Heintz (Partner at DLA Piper).

When the Supreme Court announced it would hear the Bilski case, many speculated that the Court would use the opportunity to declare an end to patents on business methods. This did not happen. However, the Court did find that Bilski’s claims to a method for hedging risk were not the kind of invention for which a patent should be granted.

What does this mean for other finance industry patents and patent applications? Certain types of business method patents may be safe for now – but warning signs point to hazards down the road.

Most would agree that the claims of Bilski’s patent application are directed toward a business method. Two aspects of the Supreme Court’s Bilski decision are particularly important to the issue of whether finance industry inventions can be protected by patents: (1) business methods are not categorically excluded from patent protection; but (2) Bilski’s claims to methods for hedging risk are unpatentable because they claim an “abstract idea.”

This lack of guidance is the potential hazard. Comparing Bilski’s claims with claims at issue in the Federal Circuit’s opinion in State Street Bank & Trust Co. v. Signature Financial Group., Inc., 149 F.3d 1368 (Fed. Cir. 1998), cert. denied, 525 U.S. 1093 (1999), vacated by In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc), which is the case many view as opening the floodgates to business method patents, highlights the difficulties. State Street upheld the patentability of a claim that constituted a practical application of a mathematical algorithm, formula or calculation because it produced “a useful, concrete, and tangible result.”  “Concrete” is the opposite of “abstract” as those terms are typically understood.  Thus, to some extent, the Supreme Court’s use of an “abstract ideas” test in Bilski might be interpreted as consistent with the State Street holding in which claims must recite a “concrete” result to qualify for patent protection.

Comparing the Bilski and State Street claims highlights another important issue: the Bilski claims were directed toward methods and do not recite any machine (computer) limitations, whereas the State Street claims were directed toward “a data processing system” which can be a general purpose computer programmed to perform specific steps. The issue of whether a general purpose computer performing an unpatentable business method can qualify for patent protection was raised before the Supreme Court, but was not addressed in the majority opinion.  It is therefore an important open question.

Implications for Patent Prosecution

Avoiding statutory subject matter rejections begins with the specification. To avoid creating the impression that an invention is nothing more than an abstract idea, it is important to link the inventive concept to the physical world. The PTO’s Interim Guidelines provides some guidance.  The Interim Guidelines note that even before Bilski, “the Office had used the ‘abstract idea’ exception in cases where a claimed ‘method’ did not sufficiently recite a physical instantiation.”  In analyzing the Bilski claims, the Interim Guidelines conclude that the Supreme Court considered the claims to recite no more than an abstract idea “in the sense that there are no limitations as to the mechanism for entering into the transactions,” thereby indicating a belief that the Supreme Court was using “abstract” in the sense of not related to a tangible thing.

Maximize the likelihood of a favorable outcome by providing in the patent specification a physical instantiation or a mechanism for implementing the inventive concept. In the context of the financial industry, this typically means describing the computer system or network on which the inventive concept is implemented. Providing more details strengthens the case for the invention being more than a mere abstract idea.

Drafting claims for financial industry inventions requires finesse.  Often, the broadest concept of a typical financial industry invention is not tied to a particular implementation. Nevertheless, to avoid a rejection under §101, the claims must recite something about the physical instantiation or mechanism for achieving the inventive concept.  This typically requires the claim to recite that at least some of the steps therein are performed by a computer processor. If the invention requires a computer network, then the claim should include components of the network. It is helpful to enlist the help of the inventor to brainstorm alternative ways for implementing the invention so that generic claims covering all alternative implementations can be drafted, yet still be limited to a physical instantiation of the invention.

Implications for Patent Litigation

Financial industry patents that do not recite a physical instantiation or mechanism for implementing the inventive concept likely are vulnerable in light of Bilski. Patent owners must decide whether the cost of litigation justifies the risk of having claims declared invalid under §101. Parties accused of infringing such claims need to consider §101 in formulating defenses.

Clearly, the law is still developing. To what extent must a claim recite a physical instantiation to avoid a §101 defense? Is it sufficient to merely mention a computer or processor in a claim? Or does a claim require a more granular recitation of a mechanism for implementing a financial services method, with the inventive concept tied into the mechanism for the claim to meet the requirements under §101? Only future case law will provide answers to these questions. Patent owners need to understand that the risk their claims will be held invalid under §101 goes up as the interaction between the inventive concept and its physical instantiation becomes more general. Defendants in litigation have fewer decisions to make, at least early in the litigation. If a financial services company is accused of patent infringement, serious consideration should be given to asserting a §101 defense. One hopes that the law will develop during the course of the litigation.  If not, perhaps the defendant will help advance the state of the law.

Dale Lazar is a partner in DLA Piper’s Northern Virginia office.  He focuses on patent prosecution, counseling and litigation.  Reach him at dale.lazar@dlapiper.com.

Jim Heintz is a partner in DLA Piper’s Washington, DC, office.  He focuses on patent litigation and prosecution with an emphasis on electrical and computer technologies.  He can be reached at jim.heintz@dlapiper.com.

Tags: Abstract Idea, Bilski, Biski v. Kappos, Business Method Patents, finance industry patents, PTO's Interim Guidelines, State Street Bank & Trust Co. v. Signature Fincancial Group., Supreme Court

This entry was posted on Wednesday, October 20th, 2010 at 15:37 and is filed under Bilski, Patent Litigation, Patent Prosecution, posts, Supreme Court Cases, USPTO. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.