Ex Parte Smith – The Name of the Game is the Claim (and the Specification)

As a follow-up to the post on the release of the 2019 Revised Patent Subject Matter Eligibility Guidance on January 7, 2019, (“Revised Guidance”), the Patent Trial and Appeal Board (“PTAB”) recently decided Ex Parte Smith Appeal No. 2018-000064 on February 1, 2019, in view of the Revised Guidance. The PTAB also designated the decision in Ex Parte Smith as informative on March 19, 2019.

Now, what is so surprising about Ex Parte Smith? The PTAB affirmed that a business method for trading derivatives on a hybrid exchange system is patent eligible. How exactly is this any different than a computerized scheme to mitigate settlement risk, which was found to be patent ineligible in Alice Corp. v. CLS Bank Int’l, 573 U.S. 208 (2014) (“Alice”)? The following depicts the two representative claims:

Alice –  Claim 33 (Patent Ineligible) Ex Parte Smith – Claim 1 (Patent Eligible)
A method of exchanging obligations as between parties, each party holding a credit record and a debit record with an exchange institution, the credit records and debit records for exchange of predetermined obligations, the method comprising the steps of:

 

A method of trading derivatives in a hybrid exchange system comprising:
(a) creating a shadow credit record and a shadow debit record for each stakeholder party to be held independently by a supervisory institution from the exchange institutions;

 

collecting orders, via a communication network and order routing system, for derivatives and placing them in an electronic book database;
(b) obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;

 

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;
(c) for every transaction resulting in an exchange obligation, the supervisory institution adjusting each respective party’s shadow credit record or shadow debit record, allowing only these transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order; and

 

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;
(d) at the end-of-day, the supervisory institution instructing ones of the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions. 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.

At a quick glance, the claims appear to be very similar, but with the exact opposite outcomes. What led the PTAB to conclude that Claim 1 of Ex Parte Smith was patent eligible when it looks to be so similar to the patent ineligible claim in Alice?

The Examiner argued the following points:

  1. Claim 1 is directed to an abstract idea of trading derivatives in a hybrid exchange system which is a concept within the realm of “fundamental economic practices,” and
  2. the claim limitations individually and as an ordered combination do not amount to significantly more because the derivative trading system is composed of generic computer components. Essentially, the Examiner argued Claim 1 is no different than Claim 33 in Alice, which at the surface appears to be a reasonable argument.

The Appellant argued the following points:

  1. Claim 1 is not a long-standing business practice;
  2. Claim 1 provides a technological improvement because Claim 1 allows for an in-crowd market participant input in automated trade processing that would ordinarily bypass these participants and point to the “removal” limitation as the technological improvement;
  3. the Examiner’s characterization of the abstract idea is overly broad because it only focuses on narrow individual limitations and not Claim 1 as a whole;
  4. Claim 1 is directed to solving technical problems first encountered when trying to concurrently trade securities through both an electronic system and in the trading pits;
  5. the hybrid trading system is not a generic computer; and
  6. Claim 1 is similar to the patent eligible claims in McRO, Inc. v. Bandai Namco Games Am. Inc., 837 F.3d 1299 (Fed. Cir. 2016).

In applying the Alice/Mayo test along with the Revised Guidance, the PTAB first identified the limitations in Claim 1 under broadest reasonable interpretation that 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. By this identification, the PTAB concluded that Claim 1 did recite a judicial exception of a fundamental economic practice.

After identifying the judicial exception, the PTAB assessed whether various computer-related limitations are more than generic computer components. The PTAB concluded that Claim 1 does not recite more than generic computer components due to the lack of specificity regarding the computer components in Appellant’s Specification.

While the PTAB agreed with the Examiner that Claim 1 recites a judicial exception and generic computer components, in complying with the Revised Guidance, the PTAB proceeded to identify additional limitations that focus on addressing problems arising in the context of a hybrid trading system, which is the fourth argument raised by the Appellant. Just like the identification of judicial exception, the PTAB identified the “timing” limitations in Claim 1 under broadest reasonable interpretation that are focused on addressing the problems in the hybrid trading system. The PTAB concluded that 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 cited to specific sections in Appellant’s Specification as evidence that the “timing mechanism” provides a technological improvement over prior derivative trading systems. The PTAB also dismissed the dissent’s assertion that the “timing mechanism” is inherent by citing DDR Holdings, LLC v. Hotels.com, L.P., 773 F.3d 1245 (Fed. Cir. 2014), where the patent eligible claims “overcome a problem specifically arising in the realm of computer networks.” The PTAB was clearly persuaded with Appellant’s fourth argument because the PTAB concluded that the additional “timing” limitations in Claims 1-6 integrate the judicial exception into a practical application (satisfying prong two in Step 2A of the Alice/Mayo Test), and therefore, Claims 1-6 are patent eligible because they are not directed to a judicial exception.

Ultimately, Appellant’s Claim 1 and Specification made the biggest difference in the outcome of Ex Parte Smith versus Alice because the PTAB was able to identify additional “timing” limitations in Claim 1 that addressed technical problems identified in the Specification. However, the Revised Guidance clearly helped the PTAB look beyond a judicial exception and generic computer components to find the additional limitations in Claim 1 that integrate the judicial exception into a practical application. Thus, Ex Parte Smith truly is informative on the role the Revised Guidance plays in the Alice/Mayo test, as well as being informative on the need to use broadest reasonable interpretation while analyzing a claim using the Alice/Mayo test.

At least for business methods, the name of the game is now the claim and the specification.

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