The Patent and Trademark Office’s business method technology center is gearing up to handle a new surge of applications from the financial industry, while closely following appeals from recent decisions by the Board of Patent Appeals and Interferences limiting the scope of patentable subject matter available for business method inventions.

On June 19, Technology Center 3600 (TC 3600) of the Patent and Trademark Office (PTO) hosted a “Partnership Meeting” for members of the public at the PTO’s headquarters in Alexandria, Va. The audience, greeted by Commissioner for Patents John J. Doll, heard officials and examiners including Group Director Wynn W. Coggins, Supervisory Patent Examiner John Weiss and Business Practice Specialist Robert Weinhardt, report on the status of activity relating to business method patent applications.

Financial Inventions Lead the Challenges Facing TC 3600 as the Number of Business Method Applications Exceeds the 2000-2001 ‘Bubble’ Rate Filing rates in Class 705 (Business Methods) more than tripled between 1999 and 2001, to 9000-plus per year, a result attributed to the Internet “bubble.” Then, applications filed in 2002, fell by about 2000 applications.

Based on PTO data provided to attendees at the recent meeting, the number of applications gradually increased from 2005 to 2006 and then surged in 2006 to a level exceeding that of 2001. No breakdown was given by subject matter, but Coggins attributed the increase to heavier filing of financial business method inventions.

To handle the influx of finance-related applications, a total of four examining art units have been established, with four more planned by the end of FY2008. Fifty-two new examiners will be added in the finance art during FY2007, for a total of 105 in these art units.

Examiner Growth (USPTO Data)

[see table]

The challenge of high pendency time to the first office action remains but has not worsened, with the average reported to be 3.6 years. The average time to issue or abandonment stands at 4.5 years. Ironically, continuations filed before first action sometimes show up on an examiner’s “special” docket before the examiner has reached the parent application. However, TC 3600 should be pleased to have prevented the pendency time of applications from rising along with the rise in applications filed.

Notably, by mid-year 2007, the number of examiners had increased by 50 since the end of FY2006, close to the projected yearly increase in the finance art. At mid-year, the total number of TC 3600 examiners was 197. While no projection for the total number of examiners expected by the end of FY2007 was provided, the surge of financial applications seems likely to absorb many of the new hires, and thus may delay progress in reducing pendency times in other art units dealing with such subjects as insurance, health care, e-shopping, point-of-sale, inventory, accounting, cost/price, transportation and business processing.

The rate of allowance of patent applications has risen as of mid-year FY2007 to 20 percent from a low point of 11 percent in 2004 and 2005. Coggins expects the rate to continue rising, but does not expect the rate of allowance ever to exceed 50 percent as it does in other Technology Centers. She credits applicants with filing higher quality claims to business method inventions than was the case in earlier years. Another challenge is the rising number of continuing applications. This trend may be exacerbated by the results of the Class 705 reclassification project, which will create new subclasses and subclass definitions.

A questioner who expressed a concern that restriction requirements likely will increase got no comfort from Weiss, who heads the Class 705 reclassification project. Weiss explained that routing each application to an examiner with special credentials in the subject matter of the invention has a high priority.

The Prior Art Challenge

The biggest challenge facing TC 3600, according to Coggins, is providing the means for examiners to have the best prior art, as early as possible, when examining applications. In the business method field, “the Internet is the examiners’ library,” she commented, and the difficulty of effectively using this resource to locate dated evidence of prior practices is well known.

Examiners in TC 3600 place significant reliance upon an Internet archive, the “Wayback Machine,” to provide dated Web page publications. Acknowledging that the data provided by the Wayback Machine is not always accurate and that some courts have refused to accept such data without authentication, Coggins nevertheless noted that the PTO treats it as true unless the applicant shows it to be false.

To increase accessibility to Internet sources, examiners may submit art to an examiners’ electronic digest, which examiners can search. Business methods art units also have their own Web page of links to sources of non-patent literature, such as Web sites, newspapers, dictionaries, books and journals.

Also available is a cross-referencing search strategy tool that lists like terms in response to an input term, similar to a thesaurus. This tool helps examiners avoid overlooking jargon and usage of business, computer and financial fields with which they may not be familiar. Examiners can update the tool dynamically.

Coggins also made reference to a frequently used patents database and to public participation in efforts to compile collections of prior art.1 The patents database gives examiners access to documents providing an overview of a field and to early patents describing foundational concepts. The PTO welcomes industry input on prior art resources.

Examiner Hiring and Training Strategies

TC 3600 reports that it is targeting resources where backlogs exist. In addition to the significant expansion of finance art units, a proposal pending before the Office of Personnel Management would allow pilot hiring of examiners with backgrounds in finance, tax and insurance, rather than science or engineering, beginning August 1, 2007.

This would represent a significant change in hiring practices and provide focused expertise in business method art units. According to the proposal, these examiners would not become members of the patent bar and no proposal is pending to allow general registration to practice based on such educational backgrounds.

Should examiners and potential patent practitioners with business degrees be treated differently from existing examiners and practitioners with engineering and technical backgrounds? While it makes sense to proceed cautiously to protect the public interest, the PTO has not made such distinctions in the past.

For example, a mechanical engineer may handle inventions relating to biochemistry or pricing of derivative financial instruments. Current practice appears to be based on confidence in the professionalism of the bar in determining whether the individual practitioner is qualified to handle a particular subject matter.

If the science-oriented leaders of the PTO do not have the same confidence in people with backgrounds in finance, tax and insurance, they may be forced ultimately to make the barrier reciprocal (and not allow engineers to handle financial matters) or to consider sub-certification within scientific and engineering disciplines.

In the author’s opinion, the present system works well and serious consideration should be given to extending it to business disciplines, rather than creating additional bureaucratic structure.

Examiner staffing of business method applications is challenging, due in part to both the subject matter fields and the PTO’s long established mode of operation. For example, many business method applications claim both business aspects of an invention and computer implementation thereof. To which Technology Center should the application be assigned for examination? In private industry, a team approach likely would be taken, bringing needed intellectual resources together to complete the examination task. However, experiments in team examination have not succeeded, according to Coggins.

The PTO’s goal of classifying claims in narrow specialties and hiring specialist examiners whose expertise matches the subclass definition leads to a complex process of routing applications based in part on a word profile matching algorithm in the PLUS system and to restriction. As noted by Weiss, this has advantages in minimizing subsequent transfers of applications.

However, it appears specialist examiners may still have to deal with claim elements outside their field. For example, an independent claim directed to a method of underwriting insurance coverage based on policy holder activity might be accompanied by dependent claims directed to an electronic telematics device used to monitor the activity.

The speakers made reference to the ability of examiners to communicate with examiners in other Technology Centers informally by telephone or email to seek assistance. However, examiners are given so little time to process applications, one would not expect the examiner asked for help to be able to spend significant time providing it.

Many examiner training initiatives were described by Coggins. Industry and bar organizations have been engaged to provide “technical” training, including the IRS, the Federal Reserve, a banking company and an insurance company.

Partnerships with the IRS and the American Bar Association’s Section of Taxation provide training for finance examiners on financial products, wealth transfer and pensions, as well as information exchange. Examiners may enroll in after-hours training programs in topics such as finance, insurance, tax and operations research and can pursue an MBA. Internal training includes topics such as identifying patentable subject matter, claim interpretation, restriction practice, obviousness rejections, appellate practice and search techniques.

Programmatic Strategies

Several PTO programs that would be expected to impact the burden of backlogged and newly filed applications in Class 705 were discussed during the Partnership Meeting. Interestingly, the new Accelerated Examination program and proposals to limit applicant-initiated continuing applications came up only as a result of attendee questions.

Coggins indicated that fewer than 200 requests for accelerated examination have been filed in TC 3600, but she did not say whether any such applications have issued (of course, less than one year has passed since the program began). She did note that a significant number of applicants pursuing this route have failed to properly “map” the cited prior art against the claims. This suggests that many applicants’ desires to expedite the examination of an application are being frustrated by formal rejections that re-start the one year clock.

That many applicants’ claim maps have not followed the PTO’s sample is not surprising, as the sample requires an unneeded level of admission that claim elements are prior art, in the author’s opinion. A review in Public PAIR of the file history of U.S. Patent 7,188,939 issued under this program to Brother International Corp. (amidst significant fanfare) shows that an applicant need not follow the PTO example to the letter.

TC 3600 could do a great service to practitioners and applicants in the business method arts by making available the serial numbers of published applications in which the applicant’s mapping has been accepted, as a guide for future petitions under the accelerated examination program.

Allowance and appeal conferences have become the focus for improving quality, according to Coggins. The lengthy “second pair of eyes” procedure formerly endured by applicants has been replaced by an allowance conference between the examiner and supervisors. In addition to adding less time to pendency, the procedure reportedly provides better feedback to examiners.

A similar conference is held at the time of an appeal. Also available is the “Pre-Appeal Brief Conference,” which is for the purpose of allowing the applicant the opportunity to have rejections believed to be clearly wrong reviewed prior to the filing of an appeal brief. A new position of Appeal Practice Specialist has been created to provide expert input at these appeal conferences. Some of the Appeal Practice Specialists have expertise in fields related to business methods.

In response to concerns expressed from the audience, Coggins acknowledged some inconsistency among Technology Centers in applying the “clearly wrong” standard under which a rejection is reversed or remanded following a Pre-Appeal Brief Conference. She asserted that examiners in her Technology Center have shown much improvement in determining the prior art and overcoming hesitation to allow cases when the prior art does not support a rejection.

Programmatic Strategies

Several PTO programs that would be expected to impact the burden of backlogged and newly filed applications in Class 705 were discussed during the Partnership Meeting. Interestingly, the new Accelerated Examination program and proposals to limit applicant-initiated continuing applications came up only as a result of attendee questions.

Coggins indicated that fewer than 200 requests for accelerated examination have been filed in TC 3600, but she did not say whether any such applications have issued (of course, less than one year has passed since the program began). She did note that a significant number of applicants pursuing this route have failed to properly “map” the cited prior art against the claims. This suggests that many applicants’ desires to expedite the examination of an application are being frustrated by formal rejections that re-start the one year clock.

That many applicants’ claim maps have not followed the PTO’s sample is not surprising, as the sample requires an unneeded level of admission that claim elements are prior art, in the author’s opinion. A review in Public PAIR of the file history of U.S. Patent 7,188,939 issued under this program to Brother International Corp. (amidst significant fanfare) shows that an applicant need not follow the PTO example to the letter.

TC 3600 could do a great service to practitioners and applicants in the business method arts by making available the serial numbers of published applications in which the applicant’s mapping has been accepted, as a guide for future petitions under the accelerated examination program.

Allowance and appeal conferences have become the focus for improving quality, according to Coggins. The lengthy “second pair of eyes” procedure formerly endured by applicants has been replaced by an allowance conference between the examiner and supervisors. In addition to adding less time to pendency, the procedure reportedly provides better feedback to examiners.

A similar conference is held at the time of an appeal. Also available is the “Pre-Appeal Brief Conference,” which is for the purpose of allowing the applicant the opportunity to have rejections believed to be clearly wrong reviewed prior to the filing of an appeal brief. A new position of Appeal Practice Specialist has been created to provide expert input at these appeal conferences. Some of the Appeal Practice Specialists have expertise in fields related to business methods.

In response to concerns expressed from the audience, Coggins acknowledged some inconsistency among Technology Centers in applying the “clearly wrong” standard under which a rejection is reversed or remanded following a Pre-Appeal Brief Conference. She asserted that examiners in her Technology Center have shown much improvement in determining the prior art and overcoming hesitation to allow cases when the prior art does not support a rejection.

While a detailed analysis of the lengthy Bilski decision in light of relevant precedent is beyond the scope of this advisory, many questions need to be addressed before accepting its logic. For example, does Bilski’s method fail to make a physical transformation? The decision overlooks the fact that many business methods transform the relative state of people and human institutions.6 A method that actually manages risks between people is not directed to an abstract idea. Such steps are not “disembodied.” The issue for close analysis in Bilski should be whether the claimed method manages risk, or merely creates an opportunity for allocation of risk, and, if the latter, whether such a method is statutory. Methods of marketing, for example, do not always result in a sale, but do transform the relative states of people. Similar to the way in which a method of marketing changes people by making them more likely to act in a certain way with respect to a seller, Bilski’s method of identifying market participants and initiating transactions arguably requires real-world steps and affects people by making them more likely to act in a desired way. Claims to such inventions may raise Section 112 issues if they do not clearly relate what is covered by the patent, but arguably should fall within patentable subject matter.

Furthermore, no disastrous consequences will follow from allowing patent applications for methods of assigning parking spaces or running sports leagues (which Weinhardt offered as examples of curious inventions). If such business methods are nonobvious, the innovation should be rewarded with a patent. Within about one month the PTO expects to provide permanent guidelines for examiner application of the obviousness test in light of KSR v. Teleflex.7 No doubt the examining corps will be given more flexibility for analyzing whether an invention would have been obvious than under the previous guidelines requiring proof of a motivation to combine. Obviousness remains a real hurdle that business methods must clear.

The board in Bilski appears to treat every method that is not instantiated in some non-human physical object as an abstract idea. Insufficient explanation is given for why the steps of Bilski’s plan lead to the conclusion quoted above: “Because the steps cover (‘preempt’) any and every possible way of performing the steps of the plan, ... we conclude that the claim is so broad that it is directed to the ‘abstract idea’ itself.” Mathematical algorithms divorced from a practical application are abstract ideas that may not be broadly preempted by a patent. However, methods that claim a practical, real world application of concepts are not “abstract.” Business methods steps typically involve more than abstract concepts.

Application of Section 101 is also under scrutiny in the Federal Circuit appeal of Ex parte Comiskey (Fed. Cir. Appeal No. 06-1286), where the claims are directed to a method for mandatory arbitration resolution. Weinhardt described the office’s position in its brief to the Federal Circuit (which requested supplemental briefs on the Section 101 issue) as indicating a preference for requiring that business methods be machine implemented.

Also, the PTO brief asserts that inventions based on “positive law” for utility, rather than laws of nature, are not patentable subject matter, at least when the claimed invention depends on a legislative enactment for operability to achieve a useful result and some states do not permit the result of the method to be effective.

One must consider this approach as applying only to inventions that would not be useful in the absence of an enacted law. Many inventions rely on the absence of a prohibiting enacted law to be operable. For example, a method of making a toxic material can be practiced legally only in certain areas, but would be useful for its intended purpose in the absence of the prohibition.

Business practices may rely on agreements between people to be useful. Some of those agreements may be embodied in legislation. Perhaps the PTO position is an attempt to do away with many business method patents.

Separately, Coggins remarked on the controversy resulting from the granting of patents for tax reduction strategies. The PTO continues to examine and grant such patents, but adoption of the “positive law” doctrine discussed above would likely affect patents for inventions that would not be useful in the absence of state or federal tax code.

Weinhardt discussed other Section 101 cases. A claim directed to a signal with embedded supplemental data was determined by the board to be directed to an abstract idea not falling into a statutory category of invention (Ex parte Nuijten, Fed. Cir. Appeal No. 06-1301). A claim directed to a marketing “paradigm” was also rejected under Section 101 (Ex parte Ferguson, Fed. Cir. Appeal No. 07-1232).

In addition, Weinhardt pointed out that token reference to computer implementation may not be sufficient to achieve patentable subject matter, if the underlying invention fails the Section 101 test. For example, a pure mathematical algorithm would not become patentable by claiming that it runs on a computer.

On the other hand, audience members commented on recent rejections of claims directed to software recorded on computer readable media, with the examiner requiring addition of the word “storage” or “tangible” to characterize the media. The TC 3600 representatives noted that claim formats approved in the Manual of Patent Examining Procedure should not be rejected.

Conclusion

The TC 3600 officials who spoke at the Partnership Meeting appear to anticipate significant changes in the test for patentable subject matter under Section 101 as a result of cases now on appeal. These cases carry the potential to seriously reduce the types of business methods that can be patented in the United States.

In the author’s view, a requirement that methods be implemented by machine or transform non-human physical items or data would be an undesirable step backward. Similarly, it would be unwise to refuse to patent all innovations that rely on laws for utility.

As the economy of the United States tilts more to the service sector, and a majority of the value of companies today reportedly is in intellectual capital rather than hard assets, innovation in business methods has become as important today as innovation based on physical science or engineering. The philosophy behind the admonition of the State Street court to treat business methods like other methods, and behind the Lundgren decision doing away with the technological arts rejection, is to bring the benefit of patents to mainstream activities of U.S. businesses. It makes good economic sense to reward and thus stimulate innovative business methods.

The rapid rise in the number of financial business method applications filed shows the importance of innovative business methods to the economy. It is ironic that attempts are being made to reduce the scope of patentable subject matter (some supported by the PTO), while resources are directed to increase the examining corps qualified to examine financial business method inventions. Those in the financial industry and other industries who see the benefit of protecting their innovations should speak up, both to the PTO and to their elected legislators, should the Federal Circuit act to limit the broad mandate of State Street.