Friday, November 11, 2011

Research Affiliates and the passive investing patent

Is time running out?In Research Affiliates, LLC. [2010] APO 31 (17 December 2010) we saw yet another Australian patent application kicked out for lack of patentable subject matter.

The patent application

The invention involved a method, system and computer program product for passive investing that was based on indexes which are built with metrics other than market capitalization weighting, share price weighting or equal weighting.

Australian patent application 2005213293 was originally filed on 27 January 2005 and later assigned to Research Affiliates (the applicant).  There were 5 examination reports issued before the matter was set down for a hearing on 29 October 2010.

Claim 1 read as follows:

1. A method of constructing data indicative of a non-capitalization weighted portfolio of assets, the method being implemented in a computer system having at least one computer processor, the method comprising:

(a) receiving in the computer system data gathered in regard to a plurality of assets;

(b) receiving data indicative of a selection of the plurality of assets to create data indicative of an index of assets, wherein said selection is selected based on an objective measure of scale other than market capitalization and share price; and

(c) operating the processor thereby to weight each of said plurality of assets selected in the index based on an objective measure of scale of said each of said plurality of assets,

wherein said weighting comprises:

(i) weighting at least one of said plurality of assets; and

(ii) weighting other than weighting based on at least one of market capitalization, equal weighting, or share price weighting.
Applicable law

The Delegate ran through the usual cases dealing with patentable subject matter.  These included National Research Development Corp (NRDC) v Commissioner of Patents [1959] HCA 67; [1959] 102 CLR 252, referred to in CCOM Pty Ltd v Jiejing Pty Ltd [1994] FCA 1168, as requiring “a mode or manner of achieving an end result which is an artificially created state of affairs of utility in the field of economic endeavour”.

He referred to International Business Machines Corporation v Commissioner of Patents [1991] FCA 625, Welcome Real-Time SA v Catuity Inc [2001] FCA 445, and of course Grant v Commissioner of Patents [2006] FCAFC 120.


The inventive concept

The Delegate acknowledged the statement in Grant that "the fact that a method may be called a business method does not prevent it being properly the subject of letters patent".  He then appeared to decide that the invention was an investment scheme and reject it on that basis.  It doesn't seem to matter much what the applicant actually claims.  It is what the specification as a whole describes.  Apparently.

Citing a case from the 1950's, Re Virginia-Carolina Chemical Corporation’s Application (1958) RPC 35, he concluded that "the application disclosure should be considered as a whole and care should be taken not to allow the form of words used in a claim to cloud the real issue of manner of manufacture."

A physical effect

The applicant argued, citing Grant, that the current test for patentable subject matter is that there must be some “useful product”, some physical phenomenon or effect resulting from the working of a method.  A change in state or information in a part of a machine can be regarded as a physical effect.

The application met the requirements, said the applicant, because the creation of data indicative of an index of assets provided the change in information in a part of a machine.

One of the most extraordinary statements in this decision is where the Delegate says that the Grant decision “needs to be read in context”.  In my view, various Delegates of IP Australia could be accused of developing their own unique context within which to read Grant.  He goes on to say:
“That passage cited a number of examples from decided cases that could be regarded as physical effects in contrast to a specific example, the Grant application, where there clearly was no physical effect. At that passage, it was also stated the alleged invention in that case is a mere scheme, an abstract idea, mere intellectual information, which has never been held to be patentable … [T]he Court appeared to be critical of the absence of any physical consequence at all … [I]t has long been accepted that intellectual information, a mathematical algorithm, mere working directions and a scheme without effect are not patentable (my emphasis).”
The Delegate goes on to state, according to Grant, that there must be some physical phenomenon or effect resulting from the working of a method.  He refers to that old staple of Australian patent law,  Invention Pathways Pty Ltd [2010] APO 10 (see my blog post).  He says that Invention Pathways suggests "a physical effect that is peripheral and subordinate to the substance of the claimed invention is not enough".

He concludes his formulation of his test by saying:
"I think all of the above indicates that a change in state or information in a part of a machine, on its own, is not enough. There may well be a physical effect. Mere working directions would in the main also seem to have a physical effect. See for example Rolls-Royce Ltd’s Application (1963) 80 RPC 251. On the other hand, the Grant (supra) decision states that mere working directions are not patentable. Similarly a prize pool and method of paying prizes, also seemingly having physical effects on the face of it, were also found to be not patentable. See Iowa Lottery [2010] APO 25 [see my blog post]. 
Clearly something more substantial is required than just any physical effect." 
Lack of physical effect

The Delegate acknowledged that the claims encompassed a physical effect, referring to the "derivation or manipulation of data ...  There is processing that occurs, or construction of data as is claimed".

The issue, said the Delegate, is whether there is "sufficient physical effect ... for example, material advantage or mechanical effect in the arrangement of information."

He observed that there is "no material advantage or mechanical effect evident in any arrangement of information in the present case".  He concluded that:
"the claimed method of constructing data amounts to merely the presentation of information without anything more substantial apparently required than data selection and manipulation to operate the investment scheme."
System claims

The applicant argued that some of the claims were not defined as methods.  Therefore it was "entirely inappropriate and nonsensical to apply jurisprudence regarding the patentability of method claims to these non-method claims."

The Delegate didn't accept this, observing that:
"it seems incongruent to divorce system, device or apparatus claims wholly from method claims ... [A] claim to a computer characterised wholly by the features of a method without the requisite physical effect, or any other non-patentable method, would not be saved merely by the presence of a computer. The same would appear to hold for a storage medium characterised wholly by storing instructions to execute a non-patentable method."
Further steps

The Delegate refused all claims, including method, system and computer program product claims as not encompassing a manner of manufacture.  He gave the applicant no opportunity to present amendments.

The applicant has since filed an appeal on 7 January 2011 to the Federal Court.

[UPDATE: Read Research Affiliates and the unpatentable index for a discussion of the Federal Court decision handed down 13 February 2013.]

Photo courtesy of author thinkpanama under Creative Commons licence.

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