State Street Bank: Are Useful Algorithms Patentable?

STATE STREET BANK: ARE USEFUL ALGORITHMS PATENTABLE?

by Gregory J. Maier^[1]

The impact of the long-awaited Federal Circuit decision in State Street Bank & Trust Company v. Signature Financial Group^[2] is traveling through the financial and patent communities like a subtle but undeniable earth tremor. Before the Federal Circuit's decision was rendered, debates raged as to the likely outcome of the case, some arguing that the business nature of the invention was not the stuff of patents and others arguing with equal fervor that no reason existed to deny patentability under 35 U.S.C. §101. Finally, the lower court's holding of non-patentable subject matter was reversed and remanded by the Federal Circuit, which held that the declaratory judgment plaintiff, State Street, was not entitled to the grant of summary judgment of invalidity of the subject patent claims under 35 U.S.C. §101 as a matter of law, because the patent claims were directed to statutory subject matter. The tremor felt by the financial community lies in the realization that its industry, presently relying on valuable trade secret processes, will now experience the same shock felt by the software industry a few years ago -- the shock of patents supplanting trade secrets as the bedrock intellectual property on which the industry rests. The tremor felt by the patent community is the realization that State Street is not merely either the demise of the "business method" exception^[3] to patentability or the final debunking of the troubled Freeman Walter-Abele^[4] test for unpatentable algorithms. It is perhaps the dawning of a new age in which all useful algorithms may be protected by patent.

The explicit definition of statutory subject matter is much of what State Street is about:

Today, we hold that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces "a useful, concrete and tangible result" - - a final share price momentarily fixed for recording and reporting purposes....^[5]

This holding is a startling step forward, even to those of us who have patiently watched the law in this area evolve over the past three decades. Read in its broadest sense, this holding can be interpreted as a statement that the transformation of monetary data from one form into another constitutes a practical application of a mathematical algorithm to produce a "useful, concrete and tangible result" rendering the algorithm based invention patentable. Thus such a data manipulation is no longer necessarily within the "abstract idea" exception to patentability. Consequently, the holding is a bold step beyond the limits set in Alappat^[6] and Arrhythmia Research^[7]. However, it is a step that probably should not have been totally unexpected.

First, looking at Alappat, the CAFC held that a "useful, concrete and tangible result" occurred through conducting a series of mathematical calculations on certain electronic data to produce a smooth waveform on a rasterizer monitor. In Alappat the data in question represented a physical display signal that was processed to improve the quality of the resulting display. Similarly, in Arrhythmia Research, a signal that was the output of an electrocardiogram was transformed through a series of mathematical calculations to produce a useful result. Again, the signal in question was not simply arbitrary data; it was a signal representing a distinct, measurable physical condition -- namely, the beating of a human heart.

The State Street holding discards the previously important consideration that the data being manipulated represents a measurable physical phenomenon. In contrast, the State Street holding permits data representing a purely abstract quantity (namely, money) to be the feedstock that is processed to a useful result using a mathematical algorithm. Money is not a property of nature, nor does it possess any physical qualities that can be measured by instrumentation. It is simply something that is accepted by convention as a medium of exchange or as a medium of value. Consequently, its practical significance (when not in the form of hard currency) is purely that of a category of numerical information that has meaning as a matter of definition rather than as a physical measurement. In this sense, money is no different from any other type of numerical data which is given an intellectual significance simply by definition rather than by relationship to a physical quantity or measurement. Given this background, the holding in this case can be taken to mean that essentially any transformation of data from one form to another constitutes a useful, concrete, and tangible result -- provided, of course, that one explains in the patent specification the practical utility of the transformation. This is indeed a broadening of the law of patentability (or a narrowing of the "abstract idea" exception), and it would seem to encompass nearly any computer system implementing mathematical algorithms that can be defined as producing a practical output in some manner. Thus, if this analysis is accepted, the Federal Circuit's holding in State Street comes close to being inconsistent with the Supreme Court's holding in Gottschalk v. Benson^[8] that a claimed process for converting binary information from one form to another was unpatentable under §101.

A petition for a writ of certiorari was filed in the State Street case, providing the Supreme Court with the opportunity to review the case in light of Benson and other Supreme Court precedent. However, on January 11th of this year, the Supreme Court denied the petition, letting the State Street case stand as an intriguing new precedent in the field of software law.

It is appropriate now to glance into history to see why the Federal Circuit's decision in State Street, consistent as it is with today's intellectual property climate, has apparently been considered by the Supreme Court as also consistent with the law of Benson annunciated over one-quarter of a century ago.^[9]

As mentioned above, the Benson case involved the manipulation of arbitrary numerical values from one format to another. Of particular interest is that, in Benson, the lower court's opinion was delivered by Judge Rich, author of the State Street opinion, and the sole active judge on the CAFC^[10] who was also active during the period when the above cases were appealed to and heard by the Supreme Court. Interestingly, Judge Rich's view of the law has not changed over time. In his opinion in Benson, he stated:

Cash registers, bookkeeping machines, and adding machines also work with numbers but this has never been considered a ground for taking them out of the "machine" category of §101.^[11]

In the same opinion, Judge Rich referred to the fact that the Benson case was:

the outgrowth of a blanket Patent Office policy...to deny claims such as those before us here on the ground that they are not for statutory subject matter.^[12]

The second of the two quotes for Judge Rich's opinion in Benson refers to the policy established by the PTO during the 60's not to allow claims that could be considered readable on computer software. The root of that policy was not a philosophical belief that software-related concepts were truly outside the realm of patentable subject matter. Rather, the root of that policy was the more mundane difficulty experienced by the PTO in examining such claims. In the mid- to late-60's, when the question of patenting software or algorithm-type inventions first reached its peak, the software and computer arts were radically different than they are today. One important difference between then and now is the fact that, at that time, software was somewhat of a "black art" practiced by individuals, often living in seclusion and writing code on their own. Normally the code was maintained as a trade secret, and thus there was a paucity of printed subject matter that could be used as prior art. Furthermore, there were relatively few who truly understood the software arts. Thus it was very difficult for the PTO to hire qualified personnel to examine applications of this type.^[13] That difficulty and the PTO's fear that it would receive a flood of software patent applications if it reversed its policy were important factors leading the PTO to adopt the policy that this type of invention simply should not be permitted to be patented.

The Court of Customs and Patent Appeals (one of the predecessors of the CAFC and ,^[14] the court then in existence to review patentability decisions on appeal from the PTO), was not fettered by such bureaucratic concerns. The CCPA, of which Judge Rich was an influential member, had no difficulty in finding computer software-related inventions to be fully patentable under its less biased interpretation of §101. To prevent the CCPA from overriding its no-patent policy on software-related inventions, the PTO took the unusual step of seeking review by the Supreme Court of a number of the CCPA's decisions in this area.^[15]

The Supreme Court, certainly far from a specialist court in the field of patents, was then confronted by the Solicitor of the United States, representing the PTO, in an appeal from the CCPA. In hindsight, and taking into account the generally excellent record of the Solicitor before the Supreme Court, it should be no surprise that the Solicitor prevailed in these cases. On the other hand, the sad aspect of this from the legal point of view is that the PTO position was not an unbiased legal position. Instead it was a concerted effort to deny patentability to a category of inventions for practical administrative and bureaucratic reasons rather than legal reasons.^[16]

Of course, today circumstances are far different than those of 30 years ago. The state of the software art has arguably advanced more rapidly than virtually any other technology, and nearly every graduate engineer and scientist today is well familiar with the general concepts of software creation and use. Similarly, the quantity of available prior art in this area grows exponentially year by year. Furthermore, the practical need to protect intellectual property in this important component of our information economy has now become fully apparent. Thus the concerns that motivated the PTO 30 years ago either do not exist any longer or have been overpowered by other factors. Had the present-day circumstances existed in the late 60's, it is unlikely that the PTO would have maintained its anti-software patent policy, and the law of the CCPA, particularly as written by Judge Rich, would most likely have prevailed from that time forward.^[17] The interesting point here is that the interpretation of §101 by Judge Rich really has not changed over the past three decades. Inventions pertaining to useful algorithms were considered patentable by the CCPA then, and they are considered patentable by the successor CAFC now.^[18] Yet virtually everything else in the industry has changed. The PTO examines and grants computer and software related patents on a regular basis consistent with its published official guidelines for examination of such inventions.^[19] Examination is conducted by skilled computer scientists and relies upon easily accessible prior art selected using computers from extensive data bases formed of collections of relevant publications.

Given the remarkable growth of software technology and the information industry and the extensive evolution of software intellectual property law, particularly the complete reversal by the PTO of its ban on software patents, it should not be surprising that the Supreme Court was willing to let the State Street case stand as precedent in the field.

CONCLUSION

The State Street Bank case is precedent to be reckoned with, and its implications are exciting. New financial algorithms of all types, implemented by computer with supporting disclosure of utility, should be patentable subject matter. Stretching slightly further, new algorithms for the manipulation of other "useful" data should also be patentable. This gives enhanced credibility to the validity of patents such as that issued on the now-famous Karmarkar algorithm^[20], a mathematical approach to optimizing the solution to problems involving a large number of variables. The same can be said of encryption algorithms^[21] and other mathematical processes that are now useful in a practical sense thanks to the broad availability of cheap, powerful computers. Pattern recognition algorithms useful, for example, in identifying DNA segments, could also be patentable as could many other useful mathematical procedures.

The evolution of the cheap, reliable computer has impacted daily life by providing a practical and useful mechanism for transforming mathematical abstractions into useful tools. The State Street case has jolted the law of patentability firmly forward into the computer age.

Published in Intellectual Property Today ,Volume 6, March 1999, pages 18-20.

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Endnotes

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[1] Gregory J. Maier is a senior partner in the firm of Oblon, Spivak, McClelland, Maier and Neustadt P.C. and manages the firm's Electrical/Mechanical practice group. Since graduating from Georgetown University Law Center in 1969, Mr. Maier has maintained a high profile in the Intellectual Property community and is presently Chair-Elect of the ABA Section of Intellectual Property Law. The opinions expressed herein are solely those of the author, and do not represent those of Oblon, Spivak, McClelland, Maier & Neustadt, P.C.

The author wishes to thank Timothy J. Maier, a second-year student at George Mason University's law school, for his extensive research and other help in the preparation of this article.

[2] 1998 U.S. App. LEXIS 16869.

[3] In re Schraeder, 22 F.3d 290, 298 (Fed. Cir. 1994)(Newman, J. dissenting):

[The business method exception] is ... an unwarranted encumbrance to the definition of statutory subject matter in section 101, that [should] be discarded as error-prone, redundant, and obsolete. It merits retirement from the glossary of section 101... All of the "doing business" cases could have been decided using clearer concepts of Title 35. Patentability does not turn on whether the claimed method does "business" instead of something else, but on whether the method, viewed as a whole, meets the requirements of patentability as set forth in Sections 102, 103, and 112 of the Patent Act.

[4] See 33 F.3d at 1359 (The difficulty [with the FWA] test is that there is no clear agreement as to what is a 'mathematical algorithm', . . .. An alternative to creating these arbitrary definitional terms which deviate from those used in the statute may lie simply in returning to the language of the statute and the Supreme Court's basic principles as enunciated in Diehr.")

[5] 1998 U.S. App. LEXIS 16869, *15.

[6] 33 F.3d 1526 (Fed. Cir. 1994).

[7] 958 F.2d 1053 (Fed. Cir. 1992).

[8] 409 U.S. 63 (1972) (The invention claimed a method for converting binary-coded decimal (BCD) numerals into pure binary numerals using a general purpose computer, and the Supreme Court held - - reversing another decision by Judge Rich - - that that method was not statutory subject matter.)

[9] There are four Supreme Court decisions that are related. Gottschalk v.Benson, 409 U.S. 63 (1972), Parker v. Flook, 437 U.S. 584 (1978), Diamond v. Chakrabarty, 447 U.S. 303 (1980), and Diamond v. Diehr, 450 U.S. 175 (1981).

[10] 1971 CCPA LEXIS 348

[11] 1971CCPA LEXIS 348, ***17

[12] 1971 CCPA LEXIS 348, ***13

[13] During that time period a degree in computer science was not considered a sufficiently technical background to qualify one to be hired by the PTO or to take the patent bar examination.

[14] Court of Customs and Patent Appeals, the predecessor court of the Federal Circuit.

[15] The appellants Gottschalk, Parker, and Diamond were all Commissioners of Patents and Trademarks at the time.

[16] This has always seemed to me extremely unfortunate in view of the fact that the PTO is the only agency in the United States charged with the constitutional mandate to promote the progress of science in the useful arts by issuing patents to inventors. In a simpler world, and taking into account its exclusive position as the only Federal agency authorized to issue patents, one would expect the PTO to be firmly in favor of patentability.

[17] Whether or not these circumstances would have been good for the development of the software industry is another question, not addressed here.

[18] A related case that did not arise from a PTO appeal is the Merrill Lynch case (Paine, Webber, Jackson & Curtis, Inc. v. Merrill Lynch et al., 218 USPQ 212 (D. Del., 1983). That case was very similar to the State Street Bank case in that it involved a Merrill Lynch patent to a cash management system and was decided on summary judgment based on unpatentability under §101. The Delaware district court found the patent to be enforceable and denied Paine, Webber's motion for summary judgment of invalidity under §101. Although the case was not appealed, the lower court's decision is somewhat of a precursor to the State Street Bank decision.

[19] See Manual of Patent Examining Procedure §2106.

[20] See U.S. Patent No. 4,744,028 issued May 10, 1988 to AT&T.

[21] See, for example, U.S. Patent No. 4,405,829 issued Sept. 20, 1983 to MIT for the well known RSA encryption algorithm.