The Software IP Report

PTAB: Derivatives Trading Patent Claim Passes Alice Test, Opinion Designated “Informative”

By Charles Bieneman

Categories: Patent Eligibility, Software Patents, The Software IP Report

Here is a sign that the USPTO’s January, 2019, guidance on 35 U.S.C. § 101 and patent-eligibility may have an immediate and significant impact on USPTO rejections under the Mayo/Alice abstract idea test. The guidance became effective January 7, 2019. The Patent and Trial and Appeal Board (PTAB) soon thereafter decided In re Smith (Appeal No. 2018-000064; Application 13/715,476; Feb. 1, 2019), reversing an examiner’s § 101 rejection of claims directed to “trading derivatives in a hybrid exchange system.” Then, on March 19, 2019, the PTAB singled out Smith for designation as “informative.”

The PTAB only very rarely designates a decision as “informative,” which it does according to a strictly defined “Standard Operating Procedure.” The “informative” designation means that, while the decision “is not binding authority,” it is deemed to “provide the Board’s general consensus on recurring issues and guidance to examiners, appellants, patent owners, or petitioners in areas where parties routinely misapply the law.”

And what is the patent claim that exemplifies the PTAB’s general consensus? Consider the representative independent claim at issue in Smith:

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.

Now, as a reference point, consider one of the method claims held invalid under § 101 in Alice Corp. Pty. Ltd. v. CLS Bank Intern., 134 S. Ct. 2347, 2361 n2 (2014):

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) 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

(b) obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;

(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

(d) at the end-of-day, the supervisory institution instructing on[e] 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.

You may not see a material difference between Smith’s claims and the claims in Alice, but the Smith majority did. True, applying the January, 2019, guidance, the Smith majority determined that Smith’s above claim was directed to “the concept of trading derivatives,” which was a “fundamental economic practice.” Therefore, the claims were directed to a judicial exception; moreover, Smith’s “computer-related limitations” were not enough “to integrate the judicial exception into a practical application.” But the additional limitations related to the delay and timing of order execution were enough, the majority said, to “integrate the recited judicial exception of derivative training into a practical application.” The dissent disagreed, finding that “the delay of matching market orders” would be necessary in any derivatives trade.

Lessons for Practice

As reflected by the fact that three-judge panel in Smith was actually split 2-1, one might question the “general consensus” that Smith is purported to represent. Nonetheless, the lesson here hardly need be stated – the PTAB has gone out of its way to state a broadening view of § 101 and patent-eligibility.