Software Claims Survive Section 101 Challenge and Are Found to Be Directed to Patent-Eligible Subject Matter

In the U.S. Patent and Trademark Office, the Patent Trial and Appeal Board (PTAB) recently designated its decision in Ex Parte Smith as an informative decision for its application of the revised guidance on the application of 35 U.S.C. § 101.  (Ex parte Eileen C. Smith, Anthony Montesano, Edward T. Tilly, Mark A. Esposito, Stuart J. Kipnes, and Anthony J. Carone, Appeal 2018-000064, Technology Center 3600).

Below, we analyze the decision, which is favorable for applicants, to illustrate that even when claims are found to be directed to a judicial exception (e.g., abstract idea), they will survive section 101 challenges if additional elements in the claim integrate the judicial exception into a practical application.

The decision reviewed a rejection of claims under 35 U.S.C. § 101 as being directed to patent-ineligible subject matter.  The claims are directed to a hybrid trading system for concurrently trading securities or derivatives through both electronic and open-outcry trading mechanisms.  Claim 1, reproduced below, is illustrative of the claimed subject matter:

1.  A method of trading derivatives in a hybrid exchange system comprising:
    collecting orders, via a communication network and order routing system, for derivatives and placing them in an electronic book database;
    identifying at an electronic trade engine a new quote from a first in-crowd market participant, wherein one of a bid or an offer price in the new quote matches a respective price in an order in the electronic book database from a public customer;
    removing at least a portion of the order in the electronic book database, delaying automatic execution of the new quote and the order, and starting a timer;
    reporting, via the communication network and an electronic reporting system, a market quote indicative of execution of the at least a portion of the order while delaying automatic execution;
    receiving at the electronic trade engine a second quote from a second in-crowd market participant after receiving the new quote from the first in-crowd market participant and before an expiration of the timer, wherein the second quote matches the respective price of the public customer order in the electronic book database; and
    allocating the order between the first and second in-crowd market participants at the electronic trade engine, wherein the order is not executed until expiration of the timer.

Standard for Patent Eligibility

The PTAB first noted the two-step test set forth by the Supreme Court in Alice, which includes first determining whether the claims at issue are directed to a patent-ineligible concept, and if so, secondly considering the elements of each claim both individually and as an ordered combination to determine whether the additional elements transform the nature of the claim into a patent-eligible application.

The USPTO recently published revised guidance on the application of § 101.  (USPTO's January 7, 2019 Memorandum, 2019 Revised Patent Subject Matter Eligibility Guidance).  Under that guidance, the USPTO indicated to first look to whether the claim recites:

(1) any judicial exceptions, including certain groupings of abstract ideas (i.e., mathematical concepts, certain methods of organizing human interactions such as a fundamental economic practice, or mental processes); and
(2) additional elements that integrate the judicial exception into a practical application. Only if a claim (1) recites a judicial exception and (2) does not integrate that exception into a practical application, do we then look to whether the claim:
(3) adds a specific limitation beyond the judicial exception that is not "well-understood, routine, conventional" in the field; or
(4) simply appends well-understood, routine, conventional activities previously known to the industry, specified at a high level of generality, to the judicial exception.

Examiner's Findings and Conclusion

In the first step of the Alice inquiry, the Examiner determined that the claims were directed to the abstract idea of comparing new and stored information and using rules to identify options because the claims recite steps such as collecting, identifying, and reporting.  The Examiner further determined the claims are directed to an abstract idea of trading derivatives in a hybrid exchange system which is a concept within the realm of "fundamental economic practices".

At Alice step 2, the Examiner determined that the claims do not recite elements sufficient to amount to significantly more than the abstract idea because the computer as recited is a generic computer component that performs functions which are generic computer functions.

Board's Review

Applying the guidance set forth in the new USPTO Memorandum, the PTAB reversed the decision of the Examiner.

Like the Examiner, the PTAB first found that the limitations of claim 1, under their broadest reasonable interpretation, recite the fundamental economic practice of derivative trading because the limitations all recite the operations that would ordinarily take place in a derivatives trading environment.  Thus, like the concept of intermediated settlement in Alice, and the concept of hedging in Bilski, the concept of trading derivatives recited in the claims was found to be a fundamental economic practice long prevalent in our system of commerce.  Thus, the claims were found to recite a judicial exception of a fundamental economic practice.

Having determined that the claims recite a judicial exception and satisfied step 1 of the USPTO memo, the PTAB turned to determining whether there are "additional elements that integrate the judicial exception into a practical application."  Claim 1 recites various computer-related limitations, but at a high level without any meaningful detail about their structure or configuration.  As such, the PTAB did not find the computer-related limitations themselves to be sufficient to integrate the judicial exception into a practical application.

However, unlike the Examiner, the PTAB found that claim 1 also recites additional limitations which focus on addressing problems arising in the context of a hybrid derivatives trading system in which trades are made both electronically and on a trading floor (i.e., "in the pits").  These limitations include:

• "delaying automatic execution of the new quote and the order, and starting a timer,"
• while "delaying automatic execution" of the order, and "before expiration of the timer," receiving a second matching quote "wherein the second quote matches the respective price of the public customer order," and
• "allocating the order between the first and second in-crowd market participants at the electronic trade engine, wherein the order is not executed until expiration of the timer."

The PTAB found these additional limitations did, in fact, integrate the recited judicial exception of derivative trading into a practical application.  In particular, these additional elements limit the conventional practice of automatically executing matching market orders by reciting a specific timing mechanism in which the execution of a matching order is delayed for a specific period of time.  The PTAB found that the Specification provided further context to conclude that the use of the claimed timing mechanisms and the associated temporary restraints on execution of trades provided a specific technological improvement over prior derivatives trading systems.

Because the PTAB determined that the claim is not directed to the recited judicial exception, the claim satisfied section 101 at step 1 of Alice.

Dissent

The Dissent disagreed with the conclusion that the additional elements recited in the claims actually integrate the judicial exception of derivative trading into a practical application.

Namely, the Dissent disagreed with the majority that the use of the claimed timing mechanisms and the associated temporary restraints on execution of trades provides a specific improvement over prior derivatives trading systems.  Instead, the Dissent maintained that the delay of matching market orders, whether 10 minutes, 10 seconds, or even 1 millisecond, is a necessary requirement for both the conventional trading practice or Appellants' derivative trading practice of automatically executing matching market orders, whether on a trading floor (i.e., "in the pits") or electronically.  It was suggested that such timing features themselves are not technical in nature and do not provide any "technical solution to a technical problem".

The Majority noted, however, that the claimed timing mechanisms are not so trivial.  In fact, the use of the recited "timer" does not occur with each and every trade.  Rather, it is implemented in specific circumstances in a specific trading environment, namely when a matching market order is received from an in-crowd market participant in a hybrid trading system.  Thus, Appellants' claims were found to overcome a problem specifically arising in the realm of computer networks.

Panel: Administrative Patent Judges Bui, Barry, and Bennett
Decision on Appeal by Administrative Patent Judge Bennett; dissent by Administrative Patent Judge Bui