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Today is 2016-1318, Capital Dynamics versus Cambridge Associates.

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Okay, Mr. Bannon, please proceed.

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May it please the court, this is an appeal from a final decision of the PTAB and the appeal primarily focuses on step two of the Mayo-Alice test for patentability under section 101.

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It's undisputed in this case

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that the claims or the claimed invention in the 196 patent solved a significant problem in the private equity industry in the early 2000s and also that the inventors were lauded for their contributions.

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It's also significant in this case, I think, that the board that found a violation or rather

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The fact that the invention wasn't patent eligible under Section 101 also addressed Appellee's claims of obviousness under Section 103 and found that the claimed invention did have limitations that defeated the obviousness claim

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Can I answer this question, which I guess actually goes to both of the things that you said about this, solving a significant problem in the financial equity industry and the potential relationship between a 103 inquiry and a 101 inquiry.

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I don't know if this is a good form of the question, and I'm not sure I'm remembering this quite right, but the Black-Scholes theorem solved the significant problem in the financial

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industry, essentially pure mathematics.

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You probably would find it non-obvious if you counted everything that was new and didn't appear in prior art, but you would say that's actually not patentable because it's not the right kind of innovation.

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Why isn't this case that?

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Sorry, I'm not familiar with the case that you're referring to.

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The Black-Scholes theorem is about valuing the options and things.

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Okay.

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But there's a whole world of, I guess, what's called financial engineering, which is essentially mathematics.

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Lots of innovative stuff.

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People make zillions of dollars in Wall Street if they're really sophisticated about it.

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None of it matters if the only innovation is the mathematics.

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Let's generously call what's going on here the mathematics.

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Any process, method, etc.

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is patentable under Section 101 with a few exceptions, one of which is... They may be small in number, but they're not so small in size.

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I've seen two cases here already, Your Honor, on this.

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But at any rate, in our particular case, it's a process that solved the problem.

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which in fact was the subject of a patent before the long 407 patent.

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I think actually in this industry, the financial, at least the equity industry, companies were not going after patents probably until State Street came along.

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Then at some point after that, they did try and start patenting business methods.

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Bilsky confirmed

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that business methods could be patentable.

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You know, at least they could be patented.

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This never saw one that it thought was.

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I guess maybe the case.

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But at any rate, my understanding is that this court as well has also taken the position that business methods could be patentable.

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So in this particular case... I mean, just I guess

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speaking for myself, it has seemed to me that that can easily be understood, I'm not sure if this was the intent, in a way that depends on the breadth of the phrase business method.

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If I have a method for doing something that helps me engage in business, it might actually be focused on some technological component and you might still call it a business method.

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And so the Supreme Court said in Bilsky, there's nothing

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There's no category that we're prepared to call business method that we think the statute excludes.

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I mean, in significant part because there is a provision added to the statute at some point that seemed to confirm that at least something under the heading of business method was included.

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That doesn't mean that if a particular kind of business method in which all the innovation is essentially mathematics or maybe even essentially the entering into

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legal obligations, that those wouldn't be independently ineligible under what then became Alice, basically.

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Right.

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Well, as far as the Alice Mayo test goes, we're looking at a two-step test.

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Identify the abstract idea.

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And then, is there an inventive concept beyond that?

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And obviously, these terms have not been well-defined and they're, you know, they're... But if your invention is math, even if it's a new formula or a new implementation or the like, isn't that, per se, an abstract idea?

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I think that in Dear, there was mathematics involved, but it was applied to

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Right, deer was math applied to a process.

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Right.

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So here I would argue, or I am arguing, that the process is the... Isn't the process you're talking about here inherently part of the math?

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Isn't it the solution to the math problem?

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I kind of think of your... So the difference in deer is deer is... We came up with a new formula that will help

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the rubber curing process.

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You're still going to put rubber in the machine.

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You're still going to heat it.

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It's now, this is going to, we came up with a formula that will determine the exact timing at the exact temperature that will perfectly cure the rubber.

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That is using math to improve a physical process.

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But what your case feels more like, and I know it's more complicated than this and your scaling function is more complicated than this, but I'm not particularly good at investments.

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On top of it, as a judge, I can't invest in many stocks and stuff.

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So we're stuck with mutual funds.

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Well, my husband found this great article that said, buy Vanguard.

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They're the cheapest in terms of their costs.

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And just divide your assets 40, 30, 30 in these three overall mutual fund categories.

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And if you maintain 40, 30, 30 at the end of each year, if one's gone up, you re-evaluate, we switch them.

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It's almost like your scaling function, right?

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It's like this is the asset distribution that will potentially

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result in the greatest value.

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Now, I'm being unfair to my husband because his formula is actually tremendously more complicated than that, but it was so complicated I ceased to listen as he was talking about it.

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So all I got out of it was some 40-30-30 concept.

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And that's the novelty.

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The novelty of what he did is he came up with this idea of this percentage of this, this percentage of this, and this percentage of this, and he thinks that would bring us the greatest overall value with the least risk.

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Why isn't that exactly what you're claiming, except

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More complicated formula for sure.

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Your formula is unique.

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Your scaling function, which is a formula, is unique.

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But you're just using it for evaluation in the same way, a financial cash flow process.

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The scaling function actually is not the invention.

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It's the application of the scaling function to the cash flows of the private equity investment.

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You want to compare the private equity investment

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to an index like the S&P 500.

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It's much more complicated and possibly much more successful financial strategy than what I suggested.

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I tried to make mine as simple as possible in my example, quite frankly, but how is that patent eligible?

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It's just a formula for investing.

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Well, I look at it as a process, actually, and I'm using the term process.

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Well, yeah, mine was a process, too.

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At the end of each year, we're supposed to reevaluate and reallocate the funds so that they maintain the 30-40-40 balance or whatever it is.

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Right.

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So, technically, it's a process.

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It's an iterative process done at the end of every year.

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I mean, you know, 10 years ago, these were perfectly patent-eligible claims.

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Right.

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We're just not there.

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I don't know if that's changed, Your Honor.

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I think patent methods, and again, not a lot has been defined in this area, but I think patent methods are processes that particularly are used in connection with the computer are patentable.

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Only if they improve the functioning of the computer.

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This doesn't do that.

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All this does is use a computer to take financial data as an input, apply a particular formula to it,

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and then determine a value.

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It seems to be entirely about the information manipulation.

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Gathering data, making calculations, comparing a couple of things and getting useful information out of it.

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Why is that not essentially all on the, essentially on the mathematics side of the line or at least the information side of

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So it may be quite innovative, but it's innovative in the wrong realm.

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Right.

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Well, if we want to promote innovation, I think a broader... You understand what I mean by wrong.

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I mean under case law, right?

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Right.

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I do.

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Well, at any rate, Your Honor, I think the idea here, at least under the patent system, is to promote innovation.

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These are novel and new techniques that should qualify as a process.

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You know, that's our argument, basically.

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What can we do with that argument?

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I mean, that argument may have been good before Bilski and Ellis and about a dozen cases from this court, but it's very clear that these kind of business methods that don't actually do anything beyond manipulate numbers or create legal obligations aren't eligible anymore.

[00:11:55] Speaker 01:
I mean, if that's your argument, then you probably need to go down the street to Congress, not to us.

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Right.

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Well, the application of the test looks at whether there's an abstract idea and it's a two-part test, not just a one-part test.

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Test isn't just whether the idea is abstract or the claims are abstract.

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So we have basically not appealed the first part of that test and we're focusing on the inventive concept.

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And the issue in the second part of the test is

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Is there an inventive concept?

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And we believe there is for various reasons.

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But isn't it an abstract inventive concept?

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I mean, just describing it as inventive doesn't mean it's eligible if it's still an abstract inventive concept.

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Right.

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It's a method, Your Honor.

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The scaling cash flows, it is performed on a computer.

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I know in Enfish just recently,

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This court talked about the fact that a general purpose computer doesn't doom the claims.

[00:13:07] Speaker 01:
I think that's not anywhere close to what Infish said.

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Okay.

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Well, you were citing some case law.

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Actually, that wasn't the whole thing.

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Infish is entirely distinguishable because Infish was an invention that actually improved the functioning of the computer itself, not some abstract idea

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done on a computer.

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The fact that you do this on a computer does nothing to help you save your claims based upon at least the last three or four years of our precedent.

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Well, Your Honor, again, I think specific application of the two-part test

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would establish that there's an inventive concept here.

[00:14:00] Speaker 04:
Okay, Mr. Vanden, you wanted to save some rebuttal time, so why don't we turn the podium over to opposing counsel, is it Ms.

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Wendlandt?

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I said it right?

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Oh, good.

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One for six today.

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So go ahead.

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May it please the court.

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The 196 patent

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addresses a mathematical problem, the negative nav problem.

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And all it does is provide for patenting a mathematical solution.

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It is pure math.

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I would submit that even before Bilski, this was not patent eligible.

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In fact, there's no distinction between this case and Parker v. Fluke, the case in 1978 where Justice Stevens said, a new mathematical algorithm, no matter how novel for updating

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alarm limits used to actually adjust the alarm limits is still not patent eligible.

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It's math.

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That's all that we have here.

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I'd like to use my time and oral argument to address three arguments that appellants make.

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The first one is that because the board found that the patent claims were eligible under 103, that they therefore erred by concluding that they weren't patent eligible under 101.

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Now as this panel knows,

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groundbreaking discovery, innovation, things like cleaving the breast cancer gene or cell-free fetal DNA to use in prenatal exams.

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All those were novel discoveries, but they weren't patent eligible because they go to those three things, those limited three things, that are not eligible under patents.

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So the argument that the

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board found that this patent was not obvious in light of the long patent, and therefore it erred, is not a novel argument.

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It's been an argument that has been made and rejected most recently by the Supreme Court in Mayo, when the government said, don't decide this case on 101, decide it on 102, 103.

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And the Supreme Court said, we declined that invitation because it would make 101 a dead letter.

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The second argument made

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um, by appellants is that, um, the board was mistaken because it didn't apply a complete preemption test.

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And here we know again, that that is not a novel argument.

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That argument was made in Bilski where hedging, uh, was limited to the energy markets.

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And the Supreme court said, no, not good enough.

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In Mayo, it was a narrow preemption of a correlation between efficacy and toxicity and metabolites.

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And that was said to be a narrow preemption and therefore not completely preempting the idea.

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And again, the Supreme Court said no.

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And then in fluke, again, in 1978, Justice Stevens said, it's just this one mathematical equation.

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Not all mathematical equations for updating alarm limits are precluded.

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In that case, the court rejected it.

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And most recently,

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Now this court in BuySafe and OIP and Ariosa said, complete preemption may be a sign that 101 is implicated, but it's not required.

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And then finally, appellants say that the PTAB decision was arbitrary and capricious.

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I think that maybe they dropped that allegation in their gray brief, couldn't tell.

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But it's clear to me, and it's clear from the record, that the board considered the arguments made by the petitioner by Cambridge, and that this was pure math.

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It considered the actual claims at issue, which are, for example, claim one that just has three data gathering steps plus the math.

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And then it asked an oral argument before the board on May 5th last year, what besides the math

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is new, and there was no response that was credible.

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It was just a new method.

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Well, frankly, after the current 101 case law and since Fluke, there has been, paradigmatically, I would say quintessentially, math is one of those examples that is just not patent eligible, no matter how groundbreaking it is.

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And that's just an assumption here.

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Appellant's claim is that not.

[00:18:44] Speaker 03:
And that's in your view, even if the particular mathematics is such as to be utterly useless in any realm outside a practical realm like the financial industry.

[00:18:57] Speaker 00:
That's correct.

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The math is just one of those things that the Supreme Court has said is not patent eligible.

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Even if you marry it to a computer, even if you marry it to data gathering steps, it's just not enough.

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And you need not look any further than the Parker v. Fluke.

[00:19:13] Speaker 00:
So if there are no questions from the panel, I'll rest on the papers.

[00:19:17] Speaker 00:
Thank you.

[00:19:19] Speaker 04:
Mr. Bannon, you have some rebuttal time left.

[00:19:23] Speaker 02:
Your Honor, just on the issue of preemption, the Supreme Court has historically always stressed the preemption issue as being very significant.

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And in fact,

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A number of cases in Bascom just recently have been distinguished on that ground.

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With regard to the board, there was a substantial amount of evidence that was in the record regarding various techniques that could be used.

[00:20:05] Speaker 02:
It would have been helpful, I think, that if the board considered the preemption issue

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It would have found that there was no preemption here.

[00:20:20] Speaker 02:
Also, there's a policy argument here relating to the expanded use of Section 101.

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As you all, I'm sure, are aware, Judge Newman and BASCOM just recently suggested that Section 102, 103, and 112 should really control the 101 issue.

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Former Patent Commissioner Kapos

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has written articles saying that he thinks that Section 101 should be just abandoned totally.

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Now, it may be that that's an issue for Congress, Your Honor, but I think that an expanded view of Section 101 would be appropriate in order to innovate, provide innovation in

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in the industries.

[00:21:19] Speaker 04:
Okay Mr. Bannon, I think we have your argument.

[00:21:21] Speaker 04:
I thank both counsels.

[00:21:22] Speaker 04:
The case is taken under submission.

[00:21:24] Speaker 00:
All rise.

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The honorable court is adjourned until tomorrow morning.

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It's at o'clock a.m.