Finance, Patent

Financial Software Patents and “Abstract Idea” – Focus on Technology, Not Merely Finance

The laws concerning patent eligibility for software inventions, including financial software inventions, and the concept of “abstract idea” have undergone sea changes in recent years. These changes were meant to weed out overly broad patents, but have inevitably limited or muddled the scope of patent eligibility for software inventions. In light of these changes, inventors of financial software inventions interested in seeking patent protections should not focus merely on the finance ideas, even if they are considered highly innovative, but should also focus on the implementing technology, including both software and hardware.

Software and abstract ideas

Software inventions, particularly those implemented on general-purpose computers, face an additional hurdle to be patent eligible, when compared to the other types of inventions. – Software must not be considered an “abstract idea”, which is not eligible for patent protections even if it satisfies the other patentability requirements. This is because software inventions include primarily “methods and steps” in performing a set of logical operations, which are often described and controlled solely in a high-level programming language detached from the inner working of the general-purpose computer. Such “high-level” operations of software inventions may encroach on the domains of “abstract ideas”, which are considered too fundamental and basic to human societies and activities for any one individual to monopolize by patents, even for a limited period of time.

Examples in financial software: hedging commodity transactions; reducing settlement risks

Financial software inventions are particularly susceptible to the “abstract idea” hurdle, because inventors often focus on the finance or business ideas, giving little consideration of their practical implementations, as software or otherwise. For example, in 2010, the US Supreme Court in the case Bilsky v. Kappo held that methods and software for hedging commodity transactions were “abstract ideas” and not patent eligible. Subsequently, in 2014, the Supreme Court held that methods and software for reducing settlement risks by using a computer as a third party intermediary were patent-ineligible “abstract ideas”, in the case Alice v. CLS Bank.

Unclear definition of “abstract idea”

The exclusion of “abstract idea” from the scope of patent eligible subject matters is not explicitly mandated in the US patent law enacted by the Congress. Instead, it was imposed by the Supreme Court as early as 160 years ago. The Congress, however, has not acted to change the judge-made exclusion.

The patent office and the courts, nonetheless, have struggled to define the scope of the term “abstract idea”. The Supreme Court has not been helpful in this struggle, either. In fact, the Supreme Court outright refused to provide any clear guidance when in the 2014 Alice case mentioned above it stated that “we need not labor to delimit the precise contours of the ‘abstract ideas’ category in this case.”

The Alice Court did provide a 2-step analysis to determine whether a software invention is considered an “abstract idea”:

First, we determine whether the claims at issue are directed to [an abstract idea].

If so, we then ask, “[w]hat else is there in the claims before us?” To answer that question, we consider the elements of each claim both individually and “as an ordered combination” to determine whether the additional elements “transform the nature of the claim” into a patent-eligible application. We have described step two of this analysis as a search for an “ ‘inventive concept’”—i.e., an element or combination of elements that is “sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.”

Ironically, this 2-step analysis was stated in such a high-level language, detached from the practical needs in determining the scope of patent rights, it can be described as an “abstract idea” itself, similar to a software code written in a high-level programming language, detached from the inner working of the computer.

The many terms in this 2-step analysis, such as “directed to”, “transform the nature of the claim”, “inventive concept”, and “significantly more”, remain undefined, and will most likely require a long time to clarify, if possible at all. In practice, therefore, it will be difficult to use the analysis to determine whether a software invention is an “abstract idea”.

Improvements of technology or computer functions are not “abstract ideas”

Despite the unclear definition of the Alice 2-step analysis, through the many court cases applying the analysis, a pattern of holdings has emerged. That is, software inventions that improve the underlying technology or the functionalities of the computer are not “abstract ideas”, and thus pass the first step of the Alice analysis, without the need to undertake the second step.

For example, in the 2016 case Enfish v. Microsoft, the court held that database software using “self-referential” logical tables, instead of conventional “relational” logical tables, was not an “abstract idea”, because they improved the functions of the computer. Also, in the 2018 case Finjan v. Blue Coat Systems, the virus-scanning software used a “behavior-based” methodology to scan downloadable codes for viruses, instead of the traditional “code-matching” methodology. The court held the invention not an “abstract idea”, because it improved computer functionalites.

Examples in financial software: e-trading (patent eligible); statistical re-sampling of investment data (not patentable eligible)

A further example with respect to financial software is the 2016 case Trading Technologies v. CQG. There, the software graphical user interface displayed dynamic market depth info of bid & ask prices and associated volumes on a static axis to reduce errors or slippages in placing trade orders. The court held that the invention was not an “abstract idea” because it resolved a technical problem and improved the technology in the placement of trade orders. In contrast, in the 2018 case SAP America v. Investpic, the patent described methods of statistically re-sampling investment data without having to assume a normal probability distribution. The statistical re-sampling methods described in the patent, however, included only conventional ones, such as bootstrapping. Further, the patent did not describe how the re-sampling relates to the computer, or any other physical device. The court held the software inventions “abstract ideas” and not patent eligible.

Focus on technology

The uncertainty in determining the scope of “abstract idea” will no doubt make it extremely difficult for financial software inventors to determine whether the inventions are “abstract ideas”, and thus reduce the incentive to seek patent protections. By focusing on technology, instead of finance, however, some inventors may be able to reduce the uncertainty and increase the patent incentive. It should be noted that improving the technology or computer functionalities may not be the only path to clear the “abstract idea” hurdle.

On a final note, the “abstract idea” hurdle is only the first one on the road to software patent protection, with many more to come. As an example, the Enfish inventions mentioned above were eventually found to be “obvious”, and not patentable, even though having passed the first “abstract idea” hurdle! (See here.)