PTAB Ruling Breaks Ranks With Supreme Court and Federal Circuit

Authored by Brian S. Mudge and Tiffany Mahmood

In a recent trial institution decision, the Patent Trial and Appeal Board held that a business method patent for trading securities was patent eligible under 35 U.S.C. § 101. The case, Chicago Mercantile Exchange, Inc. v. 5th Market, Inc., CBM2015-00061 (PTAB July 16, 2015) (paper 9) involved a covered business method (CBM) patent proceeding related to U.S. Patent No. 7,024,387. Chicago Mercantile Exchange (CME), the petitioner, asserted various grounds of unpatentability against patent owner, 5th Market, including patent ineligibility under Section 101. In a holding that appears to be at odds with recent Supreme Court and Federal Circuit precedent, the PTAB ruled that the challenged claims of the ʼ387 were patent eligible because the disclosed structure for a means plus function element was, in effect, a “special purpose computer” that provides a meaningful limitation on the claimed abstract idea.

In Chicago Mercantile Exchange, CME challenged claims 1 and 2 of the ʼ387 patent on several grounds, including arguments that the claims were patent ineligible under section 101. The ʼ387 patent, titled “Automated System for Conditional Order Transactions in Securities or Other Items in Commerce,” relates to a conditional trading system of securities, such as convertible bond “swaps” and risk arbitrage, via electronic networks. CBM2015-00061, paper 9, at 4. According to the ’387 patent, a first client requests to be informed about events relating to a given security, a second client places a bid for that security, and a third client places an ask for the same security. Id. at 7. The system matches an order via a series of steps as listed in Fig. 2: (1) Monitor security; (2) Return Latest Data; (3) Input Bid Order; (4) Distribute Bid Order; (5) Distribute Ticker Data; (6) Input Ask Order; (7) Distribute Ask Order (also Distribute Ticker Data); (8) External prices converge making orders cross; (9) Crossed orders are matched; and (10) Distribute Trade Details. Id. Along with a general purpose computer, these steps form the algorithm disclosed as the structure that corresponds to the claimed “means for matching” element. Id. at 16. According to the Board, these processing steps “amount to a specific algorithm that transforms an otherwise general purpose computer into a special purpose computer” that performs the recited matching function. Id. at 20 (citing Finisar Corp. v. DirectTV Grp, Inc., 523 F.3d 1323, 1340 (Fed. Cir. 2008)).

Addressing the issue of patent eligibility under Section 101, the parties and the Board followed the two-step framework as enunciated by the Supreme Court in Alice1: (1) whether the claims are directed to a patent-ineligible concept, id. at 31, and, if so, (2) whether there are elements (“inventive concept”) that transfer the nature of the claim into patent-eligible subject matter. Id. at 32. Regarding step one, CME argued that the claims were directed to a patent-ineligible abstract idea, namely, “matching algorithmic orders in a trading system where the orders include constraints and dynamically changing prices for multiple items,” which is “both a ‘fundamental economic practice’ and a method of ‘organizing human activity.’” Id. at 32 (quoting petition). 5th Market responded that CME had failed to adequately explain how elements such as “means for matching” are directed to an abstract idea. Additionally, according to 5th Market, the alleged abstract idea argued in this case (order matching) was inconsistent with the abstract idea raised by CME in a related CBM proceeding involving the parent of the ’387 patent (price determination). Id. at 33. Agreeing with CME’s recitation, the Board held that the claimed concept was “a fundamental economic practice long prevalent in our system of commerce,” and “squarely within the realm of ‘abstract ideas.’” Id. at 34 (citing Alice, 134 S. Ct. at 2356–57; Bilski v. Kappos, 561 U.S. 593, 611(2010)). The PTAB also rejected the argument about the parent patent, finding that the patent owner failed to account for differences in the claims of the parent.

As for the second Alice step, CME argued that the challenged claims require no more than generic computer elements such as “network,” “display device,” “trader terminals,” and “trader workstations” that are routine and well-understood activities previously known in the industry. Id. at 36. In response, 5th Market argued that CME’s analysis ignored the “means for matching” claim element. Id. at 36-37.

The PTAB agreed with 5th Market that CME did not address adequately the “means for matching” claim element. Contrary to CME’s position, the Board found that the “means for matching” could not be performed by a generic computer. Id. at 37. Rather, as a means-plus-function limitation, the “means for matching” encompassed the processing steps in Fig. 2 of the ’387 patent that, according to the Board, amounted to “a specific algorithm that transforms an otherwise general purpose computer into a special purpose computer programmed to perform the recited function of ‘matching.’” Id. (again citing Finisar, 523 F.3d at 1340). Thus, according to the Board, “when, as here, a special purpose computer constitutes the structure that performs the recited function of ‘matching,’ in practical terms it imparts a meaningful limitation or adds significantly more to the abstract idea, itself.” Id. at 37-38. Based on this analysis, the Board held that CME had not demonstrated that claims 1 and 2 of the ʼ387 patent lacked the limitations required for an inventive concept. Id. at 38.

Of significance, the Board’s reliance on “special purpose computer” to impart patent eligibility did not cite to any cases deciding patent eligibility under Section 101. While the Board cited to Finisar2 concerning interpretation of means-plus function claims where the structure disclosed in the patent is a computer programmed to implement an algorithm, the Board did not cite Finisar in support of its ultimate conclusion of Section 101 patent eligibility (and Finisar did not address that issue). And the Board did not make any findings as to whether the disclosed algorithm included anything more than routine or conventional programming steps.

Rather, the reliance on a “special purpose computer” for patent eligibility calls to mind the Federal Circuit’s holding in In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) (en banc). The court in Alappat held that a claim reciting means elements in a patent disclosing computer programming as structure was patent eligible under Section 101, stating “a general purpose computer in effect becomes a special purpose computer once it is programmed to perform particular functions pursuant to instructions from computer software.” Alappat, 33 F.3d at 1545. However, the reasoning in Alappat was essentially overturned by the Alice decision, where the Supreme Court held that a claim covering a general purpose computer programmed to carry out conventional functions did not recite enough to turn an abstract idea into a patent eligible invention. Alice, 134 S. Ct. at 2359-60.3 In a request for rehearing, petitioner CME has similarly argued that the PTAB’s decision improperly calls upon the reasoning from the Alappat case. CBM2015-00061 (paper 12 filed July 30, 2015).

Moreover, the Board’s conclusion seems inconsistent with that of the Federal Circuit in Ultramercial, Inc. v. Hulu, LLC, 772 F.3d 709 (Fed. Cir. 2014). Here, the Board accepts the recitation of a series of arguably conventional computerized steps to provide an “inventive concept” in satisfaction of Section 101. In Ultramercial, the Federal Circuit initially ruled that a claim having 11 detailed computerized steps satisfied § 101, but on remand (after the decision in Alice), the court revisited the issue and ruled that merely reciting a number of steps of conventional activity does not amount to a patent-eligible inventive concept. 772 F.3d at 715-16.

Nor does the Chicago Mercantile Exchange case appear to have the same quality of a technical solution that the Federal Circuit approved in DDR Holdings, LLC v., L.P., 773 F.3d 1245 (Fed. Cir. 2014). In the DDR Holdings case, the court held that computer software used to replicate the “look and feel” of a website onto a third party’s website did not involve routine and generic computer steps but instead provided a technical solution to a technical problem, making the claims eligible for patent protection. 773 F.3d at 1257-58. The claim language in the patent at issue in DDR Holdings included specific technical details that described how the “look and feel” would be replicated. Id.

Accordingly, in analyzing the PTAB’s decision in Chicago Mercantile Exchange, the question remains as to where the patent at issue sits within the spectrum of the post-Alice cases, which is clearly an issue with which the lower courts as well as administrative bodies such as the USPTO and PTAB still struggle. The Board’s decision on the rehearing request may shed more light on how similar software patents will fare.

1. Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347, 2355 (2014).

2. In Finisar, the Federal Circuit held, for purposes of construing claims under 35 U.S.C. §112 ¶6, that where corresponding structure in the specification is a computer programmed to implement an algorithm, the disclosed structure is not the general purpose computer, but rather a special purpose computer programmed to perform the disclosed algorithm. 523 F.3d at 1340.

3. The holding in Alappat was also abrogated by the Federal Circuit in In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc), aff’d but criticized Bilski v. Kappos, 561 U.S. 593 (2010).