Cambridge Assoc., LLC v. Capital Dynamics (PTAB 2014); PNC Bank v. Secure Axcess, LLC (PTAB 2014)

By Michael Borella --

As the fallout of the Supreme Court's Alice Corp. v. CLS Bank decision propagates through the USPTO and lower courts, many patent applications and patents directed to business methods are being rejected or struck down for failing to meet the patentable subject matter requirements of 35 U.S.C. § 101.  The USPTO's Patent Trial and Appeal Board (PTAB), in particular, has been frequently applying the high court's two prong patent-eligibility test in Institution of Covered Business Method (CBM) Patent Review proceedings.  These proceedings allow a petitioner to challenge the validity of one or more claims of an issued patent that are alleged to encompass a business method.  If the PTAB finds that the challenged claims are more likely than not unpatentable (under § 101 or other grounds), a full CBM Patent Review will be ordered.

While many of the Institution of CBM Patent Review opinions that address patentable subject matter find the challenged claims more likely than not fail the § 101 test, some such opinions do not.  These latter opinions provide valuable data points regarding how the PTAB is applying the Alice Corp. ruling, especially when compared and contrasted with opinions that authorize full review.  In particular, when the PTAB finds a business method patent that is subject matter eligible, it effectively provides claiming and argumentation strategies for applicants and patentees seeking to protect inventions that could be deemed ineligible under Alice Corp.

Nevertheless, the two CBM challenges discussed below demonstrate just how nuanced a § 101 analysis can be in practice.

In the first case, petitioner Cambridge challenged the validity of U.S. Patent No. 7,698,196, owned by Capital Dynamics, under § 101 and § 103.  We will focus on the § 101 analysis.

Claim 1 of the '196 patent recites:

A method for benchmarking relative to an index a performance of a financial product having an irregular cash flow, said being method implemented with a computer system comprising one or more computer processors, the method comprising the steps of:
    receiving using at least one of said computer processors first cash flow data for the financial product over a period of time, the data including at least one input event and at least one output event;
    receiving using at least one of said computer processors values for the index over the period of time;
    determining using at least one of said computer processors a performance characteristic of the financial product;
    determining using at least one of said computer processors a value of a scaling function, wherein a performance characteristic of an investment of a second cash flow in shares valued relative to the index during the period of time has a specified relationship to the performance characteristic of the financial product, the second cash flow corresponding to the first cash flow modified by the scaling function;
    the determined value of the scaling function providing a measure of the performance of the financial product relative to the index.

The PTAB panel described the claimed invention as:

[A] method for analyzing a performance of a financial product or asset having an irregular cash flow by benchmarking the performance of the asset relative to a public or other index.  An example of a financial product having an irregular cash flow is a private equity investment where funds are invested into an asset (referred to as draw downs) and funds are returned to the investor (referred to as disbursements).  An example of a public index is exchange traded securities.  A direct comparison between these two types of assets is said to be difficult because the former is measured in terms of an internal rate of return while the latter is measured by time weighted returns.  Therefore the method of the invention uses the traditional asset class as a benchmark or standard in a way that will determine, predict, or model how the non-traditional asset, which has a limited performance history would perform under various market scenarios for which actual performance data for the private equity is not available.  The method of the '196 Patent is said to permit more accurate analysis of the performance of private equity assets relative to the performance of a public index, and also permit the simulation of private equity asset behavior.

Under the Alice Corp. patent-eligibility test, one must apply a two prong analysis.  The first prong is to determine whether the claims are directed to a patent-ineligible law of nature, natural phenomenon, or abstract idea.  If so, the second prong is to determine whether any additional claim elements transform the nature of the claim into a patent-eligible application that amounts to significantly more than the ineligible concept itself.

Cambridge attacked the '196 patent as being "directed to a mathematical computation which is an abstract idea."  Cambridge further alleged that the claims "use computers and processors as nothing more than calculators to expedite a purely mathematical analysis," which "can be performed by a human without a computer."

Capital Dynamics countered by arguing that "because there are different ways to benchmark and analyze financial products with irregular cash flows . . . the '196 Patent claims have meaningful limitations, rather than limitations that completely cover an alleged abstract idea."  Capital Dynamics also contended that the claims "being tied to a computer system comprising one or more processors [is] an indication of patent eligibility."

The panel looked to the Background, Summary of the Invention, and Specification portions of the '196 patent to conclude that "the individual steps of the independent claims were known to analyze the performance of private equity assets relative to the performance of a public index, that sophisticated data analysis tools exist, and that the scaling factor or function is determined using a mathematical function and derived from a set of market data."  The panel found additional evidence in Specification that the claimed scaling function was merely a mathematical operation performed by a computer.  Consequently, the panel concluded that "the individual functions performed by the computer appear to be well-understood, routine, conventional activities previously known to the industry, and previously performed, at least in part, by computer."

Capital Dynamics contended that the presence of the one or more computer processors in the claim meant that the claim passed the machine or transformation test.  The panel quickly disposed of this argument, however, noting that "[i]n order for a machine to impose a meaningful limitation on the scope of a method claim, it must play a significant part in permitting the claimed method to be performed, rather than function solely as an obvious mechanism for permitting a solution to be achieved more quickly."

The panel also considered the other independent claims of the '196 patent, as well as its dependent claims.  But, these claims provided no significant limitations that would lift them over the § 101 bar.  As a result, the panel ordered a full CBM Patent Review proceeding.

In the second case, PNC Bank, along with two other petitioners in the financial services industry, challenged the validity of U.S. Patent No. 7,631,191 under § 101, § 103, and § 112.  Again, we will focus on the § 101 analysis.

The PTAB panel selected independent claims 1 and 29 as representative claims for purposes of § 101 scrutiny.  These claims read as follows:

1.  A method comprising:
    transforming, at an authentication host computer, received data by inserting an authenticity key to create formatted data; and
    returning, from the authentication host computer, the formatted data to enable the authenticity key to be retrieved from the formatted data and to locate a preferences file,
    wherein an authenticity stamp is retrieved from the preferences file.

29.  An authentication system comprising:
    an authentication processor configured to send formatted data having an authenticity key to a client, wherein the authenticity key enables location of a preferences file, and wherein an authenticity stamp is retrieved from the preferences file.

The panel described the invention as being directed to "authenticating a web page, [where] customers can be deceived by web pages that appear to be authentic, but are not."  Further, "[a] web page that has been authenticated according to the techniques described by the '191 patent includes all of the information in the same format as the non-authenticated page [but] also includes an authenticity stamp."

PNC Bank contended that the claims were directed to the abstract idea of "computerizing a purported centuries old practice of placing a trusted stamp or seal on a document to indicate the authenticity of the document."  The panel disagreed, however, observing that to determine "whether a method or process claim recites an abstract idea, we must examine the claim as a whole."  The panel found that, as a whole, claim 1 "relates to a computer-implemented method to transform data in a particular manner – by inserting an authenticity key to create formatted data, enabling a particular type of computer file to be located and from which an authenticity stamp is retrieved."  The panel also criticized PNC Bank for failing to find a nexus between "the claim language [and] the purported abstract concept of placing a trusted stamp or seal on a document."  Notably, in the panel's view, the claimed authentication of computerized information content, involving the retrieval of an authentication stamp, was clearly distinguishable over the purported longstanding practice of placing an authentication stamp on a paper document.

Further, the panel wrote that "the challenged claims specifically recite 'transforming . . . received data by inserting an authenticity key to create formatted data,' thereby authenticating a web page with an authenticity stamp . . . [t]hus, the claims require a fundamental change to the data; a change that cannot be performed in the human mind."  In other words, the computer implementation recited by the claims is necessary for carrying out the invention, rather than being used to automate a well-known manual process.

Based on this reasoning, the panel concluded that the claims were not directed to an abstract idea, and therefore did not address the second prong of the Alice Corp. test.

PNC Bank also argued that the claims failed to pass either prong of the machine or transformation test, contending that they were merely a patent-ineligible "manipulation or reorganization of data."  The panel made short work of this position, stating (perhaps with a hint of judicial sarcasm) that "[w]e are not persuaded that transforming received data . . . fails to satisfy the transformation prong."  Finding that the claims passed the transformation prong, the panel declined to consider the machine prong.

Therefore, the panel denied CBM Patent Review of the claims on the grounds of § 101.

At first blush, it may seem difficult to distinguish these cases.  Both involve claims directed to a product or service implemented on a computer, and both sets of claims were categorized as business methods.  But, upon further consideration, some differences become apparent.

Capital Dynamics may have inadvertently shot itself in the foot by providing evidence in the Specification of the '196 patent that the claimed invention was a combination of known steps, at least some of which had previously been computerized.  Consequently, the Cambridge panel was able to observe the similarities between the claims of this patent and those found ineligible in Alice Corp. and Bilski v. Kappos -- similarities that are missing from the claims of the '191 patent.

But more importantly, the '196 patent does not use its computer implementation for anything more than speeding up these known steps that could be performed manually (and arguably making their execution more convenient and more accurate).  In contrast, the claims of '191 patent recite an improvement to the functioning of a computer, and this improvement could only be performed by a computer.  Arguably, even if the PNC Bank panel had concluded that these claims were directed to an abstract idea, it still could have found that, as an improvement to the functioning of a computer itself or an improvement in another technology or technical field, they meet the requirements of the second prong of the Alice Corp. test.

Cambridge Assoc., LLC v. Capital Dynamics, Case No. CBM2014-00079, 2014 WL 4468530 (PTAB Sep. 8, 2014)

PNC Bank v. Secure Axcess, LLC, Case No. CBM2014-00100, 2014 WL 4537440 (PTAB Sep. 9, 2014)

Comments

[EG]

"In contrast, the claims of '191 patent recite an improvement to the functioning of a computer, and this improvement could only be performed by a computer."

Mike,

That's the key (no pun intended) to why the claims in PNC Bank survived-authentication keys like this one can only be performed by a computer.

By contrast, the claims in Capital Dynamics look very much like Alice and even Bilski. All those "determining steps" are a "red flag" for trouble under the broken Alice test (yes, still broken as far as I'm concerned for many reasons I've stated before, including conflating multiple patent statutes and no adherence to the principles of Diehr that the claim must be judged "as a whole"). For such finance-based claims to survive the Alice test, they probably need to involve "real time" systems. Unless you're a mentat in Frank Herbert's Dune universe, only a computer can really handle "real time" systems.

[MJM]

Thanks for bringing these decisions to my attention! Extremely helpful, especially the PNC Bank decision. Sure it's only one PTAB panel. But so far there's not much else out there as to what kind of software claims ARE directed to patentable subject matter.

[Mike Borella]

EG, I agree with you across the board, but I could see how a different panel could have bought into the petitioner's argument in PNC Bank. Which points to another problem with the Alice test - it allows one to make analogies between analog and digital objects where these objects are not actually analogous to one another.

Mike

[Mike Borella]

MJM,

There is also the Solutran case: http://www.patentdocs.org/2014/09/us-bancorp-v-solutran-inc-ptab-2014.html

[EG]

Mike,

Couldn't agree more with what you said in response to my comment, and further confirmation that the Alice test is utterly broken. Unless Congress intervenes to put the Royal Nine in their appropriate place (i.e., telling them to "stop making law, that's our job"), 35 USC 101 patent law jurisprudence is going to be utter chaos, and a significant drag on U.S. innovation.