<i>Versata v. SAP </i>: Definitions Are Now the Name of the Game

What Is a Financial Product or Service?

A patent must be a covered business method patent to qualify for CBM review. Section 18(d)(1) of the AIA states that a covered business method patent is:

a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.

Whether a patent is eligible for CBM review thus turns on what is a “financial product or service.” The Federal Circuit adopted the USPTO's grammatically incorrect parsing of the term into financial and product or service, and then looked at the definition of financial apart from products and services. According to the PTAB, “The term financial is an adjective that simply means relating to monetary matters.” The court adopted this analysis:

We agree with the USPTO that, as a matter of statutory construction, the definition of “covered business method patent” is not limited to products and services of only the financial industry, or to patents owned by or directly affecting the activities of financial institutions such as banks and brokerage houses. The plain text of the statutory definition contained in '18(d)(1) ' “performing ' operations used in the practice, administration, or management of a financial product or service” ' on its face covers a wide range of finance-related activities. The statutory definition makes no reference to financial institutions as such, and does not limit itself only to those institutions. To limit the definition as Versata argues would require reading limitations into the statute that are not there.

Id . at 26.

However, the phrase financial product or service is not just the adjective financial modifying the nouns products and services; it's not like sweet pastries and pies or complex issues and problems. Rather, in the financial services industry, the term financial product means something specific and different from the simple combination of financial and product. The Cambridge Dictionary of Business English provides the following definition:

• a product that is connected with the way in which you manage and use your money, such as a bank account, a credit card, insurance, etc.
• The U.S. Treasury has a more technical definition:
• A financial product will be defined as:
• A facility or arrangement through which a person does one or more of the following:
• Makes a financial investment;
• Manages a financial risk;
• Obtains credit; or
• Obtains or receives a means of payment.
  The facility or arrangement may be provided by means of a contract or agreement or a number of contracts or agreements.

The term financial services is equally specific:

Financial Services is a term used to refer to the services provided by the finance market. Financial Services is also the term used to describe organizations that deal with the management of money. Examples are the Banks, investment banks, insurance companies, credit card companies and stock brokerages. Streetdictionary.com, “What exactly does financial services mean?”

Indeed, Congress has defined financial product in other legislation. For example, in the Dodd'Frank Wall Street Reform and Consumer Protection Act, 124 Stat. 1376, Pub.L. 111'203, H.R. 4173, Congress defined the term ”financial product” as “a security, an insurance product (including an insurance product that pays a return, whether fixed or variable), a bank product, and a loan product.” Id. at 1942.

The USPTO and the Federal Circuit ignored these definitions of financial products and services as used by Congress and the very industries that sought protection from abusive business methods patents. The court even notes that: “It is often said, whether accurate or not, that Congress is presumed to know the background against which it is legislating.” Indeed, it did here, but the court simply chose to discount both that background and correct English language usage.

The court further indicates that the statutory definition makes no reference to financial institutions as such, implying that Congress did not intend to limit financial products and services to the financial services industries. This argument begs the question. There was no need to explicitly mention the financial industry in the statute because the industry context is already built into the terms themselves. Contrary to the court's final statement, the limitations are already in “the plain text of the statute.”

What Is a 'Technological Invention'?

The other part of the CBM definition at issue in Versata was the exclusion of a technological invention from the scope of CBM review. The court noted that the USPTO's circular definition of technological invention as “essentially one having a 'technological' feature that solves a 'technical' problem using a 'technical' solution,” “does not offer much help.” 2015 U.S. App. LEXIS 11802, 46. At this point, one might have expected the court to return to the dictionary to determine the meaning of technological:

of or relating to the branch of knowledge that deals with the creation and use of technical means and their interrelation with life, society, and the environment, drawing upon such subjects as industrial arts, engineering, applied science, and pure science.

Instead, the court looked to what the PTAB said was not technological, that is “certain characteristics which, if present, did not help support a finding” that an invention was technological. Id. at 47. Here are PTAB's exclusionary factors:

1. Mere “recitation of known technologies”;
2. “Reciting the use of known prior art technology”; and
3. “Combining prior art structures to achieve the normal, expected, or predictable result of that combination.”

Id., quoting Office Patent Trial Practice Guide, 77 Fed. Reg. 48756, 48763-64 (Aug. 14, 2012).

However, these exclusions do not effectively differentiate between technological inventions and non-technological inventions. Every invention is made with some existing technologies, which are often used precisely for their known purpose, and operate according to the laws of physics and engineering to produce a predictable result. The invention lies not in the parts but in the overall combination of elements. The PTAB's exclusionary approach imports novelty and non-obviousness into the definition of technology: something is technological only if it is inventive. That a new machine uses known technologies and operates according to known principles to provide predictable results may make it obvious, but it is still a machine ' it's still technology.

Everything Is a Financial Product

According to the USPTO, financial means “pertaining or relating to money matters.” The court agreed that this definition “readily embraces the '350 patent which expressly claims a “method for determining a price of a product” in Versata's claim 17. See, 2015 U.S. App. LEXIS 11802, 42. Since a product includes a machine , any machine that is used to determine prices is a financial product. This would include the bar code scanning system found in many grocery stores and retail outlets, cash registers, price computing scales that automatically determine the price of an item based on weight and price per pound, and currency counters. Consider the ubiquitous “pay-at-the-pump” gasoline pump. Not only does it determine the price in real time as you pump the gas, but it also conducts the payment transaction with your financial card. Further, these machines are linked to back-end systems that calculate the remaining inventories of gasoline, and can automatically place orders for more fuel. As a result, patents on any of these technologies would be subject to CBM review.

Moreover, once it's determined that such patents are eligible for CBM review, it takes only a few steps to find them invalid under '101. For example, the price determination and the payment performed at a pay-at-the-pump machine could be performed by a gas station attendant by mental steps. Inventory management was done by accountants with pencils, and fuel orders made by clerks or managers over the telephone. Under the test in Mayo v. Prometheus Labs., 132 S.Ct. 1289 (2012), all of these would be abstract mental steps or fundamental economic practices merely implemented with conventional computers, and thus utterly ineligible subject matter.

It is highly unlikely that Congress really intended all manner of machines and systems used in business, and the methods they implement, to be considered non-technological financial products and services subject to CBM review and then quickly dispatched under Section 101. The USPTO's present commitment to such definitions, along with the Federal Circuit's endorsement, will certainly result in patents being invalidated that were never part of the business method patent troll problem Congress was trying to solve with the AIA and the CBM program.

Patent Claims vs. the Invention's Benefits

On the merits, the Federal Circuit decided that Versata's patent claim was an abstract idea (method of determining a price) and did not claim substantially more than the concept itself (conventional to do all of the claimed steps in a computer). The analysis was itself conventional ' the court again relied on the mental steps doctrine that a person could do the calculations by pencil and paper. Yet, Judge Pfaelzer of the Central District of California has convincingly argued that the “pencil-and-paper analysis can mislead courts into ignoring a key fact: although a computer performs the same math as a human, a human cannot always achieve the same results as a computer.” Cal. Inst. of Tech. v. Hughes Commc'ns., 59 F. Supp. 3d 974, 995 (C.D. Cal. 2014).

Versata presented evidence that its method reduced the number of database tables and run-time queries, leading to improvements in computer performance and ease of maintenance, and, therefore, provided “significantly more” than the abstract idea of determining prices. The Federal Circuit finessed this evidence:

Versata argues that its claims recite “a specific approach to determining the price of a product on a computer, using hierarchies so as to enable the desired benefit for the computing environment: fewer software tables and searches, leading to improvements in computer performance and ease of maintenance.” Appellant's Br. at 43'44. However, all of the parties ' including Versata ' recognize that these supposed benefits are not recited in the claims at issue. Versata contends that the benefits are relevant under Genetics Inst., LLC v. Novartis Vaccines & Diagnostics, Inc., 655 F.3d 1291 (Fed. Cir. 2011), but this case is inapposite since it does not concern section 101. Examination of the claims ' as a whole and in terms of each claim's limitations ' reveals that the claims are not directed to improving computer performance and do not recite any such benefit. The claims are directed to price determination and merely use a computer to improve the performance of that determination ' not the performance of a computer.

2015 U.S. App. LEXIS 11802, 69-70.

As a general rule, patent claims do not recite benefits; they recite the structure and function that provide the benefits. To be sure, there are circumstances in the biological, therapeutic, and related arts, where claiming a benefit is an acceptable practice, but in the mechanical, electrical, and software arts, claims are focused on the invention's direct features, not the benefits of the invention ' those are described, if at all, in the specification.

Benefits are not typically claimed for two reasons. First, a claimed benefit becomes an express limitation, and thus anyone who does not provide the claimed benefit avoids infringement, even if they otherwise copy the structure or method. Second, in most cases the patent examiner will not give them any patentable weight in distinguishing over the prior art ' they are excess baggage. This is because an apparatus claim must distinguish over the structure of the prior art. “A claim containing a 'recitation with respect to the manner in which a claimed apparatus is intended to be employed does not differentiate the claimed apparatus from a prior art apparatus' if the prior art apparatus teaches all the structural limitations of the claim.” Manual of Patent Examination Procedure, '2114. Thus, when every word in a patent claim can and will be used against the patentee in a court of law, claiming benefits is likely to do more harm than good. When it comes to methods, claiming a benefit ' which is essentially a result ' often does little to distinguish over the art.

Indeed, the Federal Circuit's prior rulings suggest that prosecutors should avoid reciting objects of the invention and lauding features as superior, lest such objects or features limit the claim construction. Dismissing Versata's argument without any consideration at all because it did not claim the benefits punishes it for adhering to long-standing practices of claim drafting ' practices which the court itself has molded in precisely this way over the years.

In dismissing Versata's argument that Section 101 cannot be raised in a CBM, the court notes:

It would require a hyper-technical adherence to form rather than an understanding of substance to arrive at a conclusion that '101 is not a ground available to test patents under either the PGR or '18 processes.

2015 U.S. App. LEXIS 11802, 57.

But a hyper-technical adherence to the form of the claim, rather than an understanding of the substance of the invention, is precisely what the court is doing with its rule requiring benefits to be claimed in order to be considered improvements to a computer or other technology. The court's strict adherence to claim language here is at odds with its willingness to disregard claim limitations when it comes to determining whether a claim is directed to an abstract idea and whether the claims recite significantly more than that. Nothing in Alice, Bilski, Benson, Diehr, or Flook imposes a rule that the claims must even mention, let alone be “directed to,” the benefits to satisfy '101 safe harbors of improving the functioning of the computer or other technology.

Conclusion

The USPTO has adopted definitions of a covered business method patent that conflict with the underlying context of the patent statute, the rules of English grammar, and the basic logic of how inventions are made. The Federal Circuit has approved these definitions, without consideration of how they play out in real life.

The impact of Versata on patentees and defendants will be far-reaching. Many owners of decidedly non-business method technologies will find their patents before the PTAB in a CBM petition, and arguments that their inventions are not directed to financial products or services or technological too swiftly trumped by a petitioner's citation to Versata.

The Federal Circuit's new rule against unclaimed benefits satisfying the “significantly more” requirement of the Mayo test may be even more problematic. It lets the courts, PTAB and possibly even patent examiners disregard any evidence of improvements in technology if the benefits are not claimed, and thus effectively removes one of the safe harbors of the Mayo test.

Robert R. Sachs is a partner in the Intellectual Property Group of Fenwick & West, LLP. His practice focuses on strategic patent prosecution for software and information technologies; he is also the Patent Evaluator for MPEG-4 Audio, 802.11, LTE, and WiMAX patent pools. He can be reached at [email protected].

Versata Development Group v. SAP America was a closely watched case since it was the first appeal to the Federal Circuit of a Covered Business Methods (CBM) review by the Patent Trials and Appeal Board (PTAB) under Section 18 of the America Invents Act (AIA). See, 2014-1194, 2015 U.S. App. LEXIS 11802 (Fed. Cir. July 9, 2015). The court decided several important questions, including: 1) whether it could review PTAB's determination that Versata's patent was eligible for CBM review; 2) what is the meaning of “covered business method patent,” including whether USPTO's definitions of a “financial product or service” and “technological invention” were correct; 3) what is the appropriate standard for claim construction, broadest reasonable interpretation or one correct construction; and 4) an evaluation of the merits. Briefly, the court decided:

• The court can review PTAB final decisions, even when they touch upon the same legal issues that lead to the institution decision (which the Federal Circuit does not have authority to review), including whether a patent qualifies as a covered business method patent;
• The USPTO's definitions of covered business method patent are acceptable;
• PTAB can use broadest reasonable claim construction; and
• Versata's patent was for a financial service, not a technological invention, and was an ineligible abstract idea.

This article addresses the court's reasoning regarding the definitions of a covered business method patent, and how that reasoning is at odds with norms of statutory construction, technological innovation, and claim drafting.

Case Background

Versata's patent concerns a way of determining prices for complex collections of products types and business groups. Consider a company like General Motors with dozens of divisions and subsidiaries, hundreds of cars, and millions of parts. The problem is that conventional systems use multiple database tables to track and compute prices, requiring significant storage and reducing run-time performance. Versata's patent uses hierarchical data structures representing product and business organizational hierarchies to store and compute product prices, which enabled Versata's invention to use less memory and provide faster run-time performance than existing approaches.

What Is a Financial Product or Service?

A patent must be a covered business method patent to qualify for CBM review. Section 18(d)(1) of the AIA states that a covered business method patent is:

a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.

Whether a patent is eligible for CBM review thus turns on what is a “financial product or service.” The Federal Circuit adopted the USPTO's grammatically incorrect parsing of the term into financial and product or service, and then looked at the definition of financial apart from products and services. According to the PTAB, “The term financial is an adjective that simply means relating to monetary matters.” The court adopted this analysis:

We agree with the USPTO that, as a matter of statutory construction, the definition of “covered business method patent” is not limited to products and services of only the financial industry, or to patents owned by or directly affecting the activities of financial institutions such as banks and brokerage houses. The plain text of the statutory definition contained in '18(d)(1) ' “performing ' operations used in the practice, administration, or management of a financial product or service” ' on its face covers a wide range of finance-related activities. The statutory definition makes no reference to financial institutions as such, and does not limit itself only to those institutions. To limit the definition as Versata argues would require reading limitations into the statute that are not there.

Id . at 26.

However, the phrase financial product or service is not just the adjective financial modifying the nouns products and services; it's not like sweet pastries and pies or complex issues and problems. Rather, in the financial services industry, the term financial product means something specific and different from the simple combination of financial and product. The Cambridge Dictionary of Business English provides the following definition:

• a product that is connected with the way in which you manage and use your money, such as a bank account, a credit card, insurance, etc.
• The U.S. Treasury has a more technical definition:
• A financial product will be defined as:
• A facility or arrangement through which a person does one or more of the following:
• Makes a financial investment;
• Manages a financial risk;
• Obtains credit; or
• Obtains or receives a means of payment.
  The facility or arrangement may be provided by means of a contract or agreement or a number of contracts or agreements.

The term financial services is equally specific:

Financial Services is a term used to refer to the services provided by the finance market. Financial Services is also the term used to describe organizations that deal with the management of money. Examples are the Banks, investment banks, insurance companies, credit card companies and stock brokerages. Streetdictionary.com, “What exactly does financial services mean?”

Indeed, Congress has defined financial product in other legislation. For example, in the Dodd'Frank Wall Street Reform and Consumer Protection Act, 124 Stat. 1376, Pub.L. 111'203, H.R. 4173, Congress defined the term ”financial product” as “a security, an insurance product (including an insurance product that pays a return, whether fixed or variable), a bank product, and a loan product.” Id. at 1942.

The USPTO and the Federal Circuit ignored these definitions of financial products and services as used by Congress and the very industries that sought protection from abusive business methods patents. The court even notes that: “It is often said, whether accurate or not, that Congress is presumed to know the background against which it is legislating.” Indeed, it did here, but the court simply chose to discount both that background and correct English language usage.

The court further indicates that the statutory definition makes no reference to financial institutions as such, implying that Congress did not intend to limit financial products and services to the financial services industries. This argument begs the question. There was no need to explicitly mention the financial industry in the statute because the industry context is already built into the terms themselves. Contrary to the court's final statement, the limitations are already in “the plain text of the statute.”

What Is a 'Technological Invention'?

The other part of the CBM definition at issue in Versata was the exclusion of a technological invention from the scope of CBM review. The court noted that the USPTO's circular definition of technological invention as “essentially one having a 'technological' feature that solves a 'technical' problem using a 'technical' solution,” “does not offer much help.” 2015 U.S. App. LEXIS 11802, 46. At this point, one might have expected the court to return to the dictionary to determine the meaning of technological:

of or relating to the branch of knowledge that deals with the creation and use of technical means and their interrelation with life, society, and the environment, drawing upon such subjects as industrial arts, engineering, applied science, and pure science.

Instead, the court looked to what the PTAB said was not technological, that is “certain characteristics which, if present, did not help support a finding” that an invention was technological. Id. at 47. Here are PTAB's exclusionary factors:

1. Mere “recitation of known technologies”;
2. “Reciting the use of known prior art technology”; and
3. “Combining prior art structures to achieve the normal, expected, or predictable result of that combination.”

Id., quoting Office Patent Trial Practice Guide, 77 Fed. Reg. 48756, 48763-64 (Aug. 14, 2012).

However, these exclusions do not effectively differentiate between technological inventions and non-technological inventions. Every invention is made with some existing technologies, which are often used precisely for their known purpose, and operate according to the laws of physics and engineering to produce a predictable result. The invention lies not in the parts but in the overall combination of elements. The PTAB's exclusionary approach imports novelty and non-obviousness into the definition of technology: something is technological only if it is inventive. That a new machine uses known technologies and operates according to known principles to provide predictable results may make it obvious, but it is still a machine ' it's still technology.

Everything Is a Financial Product

According to the USPTO, financial means “pertaining or relating to money matters.” The court agreed that this definition “readily embraces the '350 patent which expressly claims a “method for determining a price of a product” in Versata's claim 17. See, 2015 U.S. App. LEXIS 11802, 42. Since a product includes a machine , any machine that is used to determine prices is a financial product. This would include the bar code scanning system found in many grocery stores and retail outlets, cash registers, price computing scales that automatically determine the price of an item based on weight and price per pound, and currency counters. Consider the ubiquitous “pay-at-the-pump” gasoline pump. Not only does it determine the price in real time as you pump the gas, but it also conducts the payment transaction with your financial card. Further, these machines are linked to back-end systems that calculate the remaining inventories of gasoline, and can automatically place orders for more fuel. As a result, patents on any of these technologies would be subject to CBM review.

Moreover, once it's determined that such patents are eligible for CBM review, it takes only a few steps to find them invalid under '101. For example, the price determination and the payment performed at a pay-at-the-pump machine could be performed by a gas station attendant by mental steps. Inventory management was done by accountants with pencils, and fuel orders made by clerks or managers over the telephone. Under the test in Mayo v. Prometheus Labs., 132 S.Ct. 1289 (2012), all of these would be abstract mental steps or fundamental economic practices merely implemented with conventional computers, and thus utterly ineligible subject matter.

It is highly unlikely that Congress really intended all manner of machines and systems used in business, and the methods they implement, to be considered non-technological financial products and services subject to CBM review and then quickly dispatched under Section 101. The USPTO's present commitment to such definitions, along with the Federal Circuit's endorsement, will certainly result in patents being invalidated that were never part of the business method patent troll problem Congress was trying to solve with the AIA and the CBM program.

Patent Claims vs. the Invention's Benefits

On the merits, the Federal Circuit decided that Versata's patent claim was an abstract idea (method of determining a price) and did not claim substantially more than the concept itself (conventional to do all of the claimed steps in a computer). The analysis was itself conventional ' the court again relied on the mental steps doctrine that a person could do the calculations by pencil and paper. Yet, Judge Pfaelzer of the Central District of California has convincingly argued that the “pencil-and-paper analysis can mislead courts into ignoring a key fact: although a computer performs the same math as a human, a human cannot always achieve the same results as a computer.” Cal. Inst. of Tech. v. Hughes Commc'ns., 59 F. Supp. 3d 974, 995 (C.D. Cal. 2014).

Versata presented evidence that its method reduced the number of database tables and run-time queries, leading to improvements in computer performance and ease of maintenance, and, therefore, provided “significantly more” than the abstract idea of determining prices. The Federal Circuit finessed this evidence:

Versata argues that its claims recite “a specific approach to determining the price of a product on a computer, using hierarchies so as to enable the desired benefit for the computing environment: fewer software tables and searches, leading to improvements in computer performance and ease of maintenance.” Appellant's Br. at 43'44. However, all of the parties ' including Versata ' recognize that these supposed benefits are not recited in the claims at issue. Versata contends that the benefits are relevant under Genetics Inst., LLC v. Novartis Vaccines & Diagnostics, Inc., 655 F.3d 1291 (Fed. Cir. 2011), but this case is inapposite since it does not concern section 101. Examination of the claims ' as a whole and in terms of each claim's limitations ' reveals that the claims are not directed to improving computer performance and do not recite any such benefit. The claims are directed to price determination and merely use a computer to improve the performance of that determination ' not the performance of a computer.

2015 U.S. App. LEXIS 11802, 69-70.

As a general rule, patent claims do not recite benefits; they recite the structure and function that provide the benefits. To be sure, there are circumstances in the biological, therapeutic, and related arts, where claiming a benefit is an acceptable practice, but in the mechanical, electrical, and software arts, claims are focused on the invention's direct features, not the benefits of the invention ' those are described, if at all, in the specification.

Benefits are not typically claimed for two reasons. First, a claimed benefit becomes an express limitation, and thus anyone who does not provide the claimed benefit avoids infringement, even if they otherwise copy the structure or method. Second, in most cases the patent examiner will not give them any patentable weight in distinguishing over the prior art ' they are excess baggage. This is because an apparatus claim must distinguish over the structure of the prior art. “A claim containing a 'recitation with respect to the manner in which a claimed apparatus is intended to be employed does not differentiate the claimed apparatus from a prior art apparatus' if the prior art apparatus teaches all the structural limitations of the claim.” Manual of Patent Examination Procedure, '2114. Thus, when every word in a patent claim can and will be used against the patentee in a court of law, claiming benefits is likely to do more harm than good. When it comes to methods, claiming a benefit ' which is essentially a result ' often does little to distinguish over the art.

Indeed, the Federal Circuit's prior rulings suggest that prosecutors should avoid reciting objects of the invention and lauding features as superior, lest such objects or features limit the claim construction. Dismissing Versata's argument without any consideration at all because it did not claim the benefits punishes it for adhering to long-standing practices of claim drafting ' practices which the court itself has molded in precisely this way over the years.

In dismissing Versata's argument that Section 101 cannot be raised in a CBM, the court notes:

It would require a hyper-technical adherence to form rather than an understanding of substance to arrive at a conclusion that '101 is not a ground available to test patents under either the PGR or '18 processes.

2015 U.S. App. LEXIS 11802, 57.

But a hyper-technical adherence to the form of the claim, rather than an understanding of the substance of the invention, is precisely what the court is doing with its rule requiring benefits to be claimed in order to be considered improvements to a computer or other technology. The court's strict adherence to claim language here is at odds with its willingness to disregard claim limitations when it comes to determining whether a claim is directed to an abstract idea and whether the claims recite significantly more than that. Nothing in Alice, Bilski, Benson, Diehr, or Flook imposes a rule that the claims must even mention, let alone be “directed to,” the benefits to satisfy '101 safe harbors of improving the functioning of the computer or other technology.

Conclusion

The USPTO has adopted definitions of a covered business method patent that conflict with the underlying context of the patent statute, the rules of English grammar, and the basic logic of how inventions are made. The Federal Circuit has approved these definitions, without consideration of how they play out in real life.

The impact of Versata on patentees and defendants will be far-reaching. Many owners of decidedly non-business method technologies will find their patents before the PTAB in a CBM petition, and arguments that their inventions are not directed to financial products or services or technological too swiftly trumped by a petitioner's citation to Versata.

The Federal Circuit's new rule against unclaimed benefits satisfying the “significantly more” requirement of the Mayo test may be even more problematic. It lets the courts, PTAB and possibly even patent examiners disregard any evidence of improvements in technology if the benefits are not claimed, and thus effectively removes one of the safe harbors of the Mayo test.

Robert R. Sachs is a partner in the Intellectual Property Group of Fenwick & West, LLP. His practice focuses on strategic patent prosecution for software and information technologies; he is also the Patent Evaluator for MPEG-4 Audio, 802.11, LTE, and WiMAX patent pools. He can be reached at [email protected].