Lempco Industries, Inc.
[2018] APO 61
•12 September 2018
IP AUSTRALIA
AUSTRALIAN PATENT OFFICE
Lempco Industries, Inc. [2018] APO 61
Patent Application: 2015258248
Title:Computer implemented method and apparatus for establishing and executing a dynamic equity instrument
Patent Applicant: Lempco Industries, Inc.
Delegate: Dr S. J. Smith
Decision Date: 12 September 2018
Hearing Date: Written submissions filed on 13 June 2018
Catchwords: PATENTS – examiner’s objection – manner of manufacture –substance of invention a financial scheme – no patentable subject matter identified in specification – application refused
Representation: Patent attorney for the applicant: Allens Patent and Trade Mark Attorneys
IP AUSTRALIA
AUSTRALIAN PATENT OFFICE
Patent Application: 2015258248
Title:Computer implemented method and apparatus for establishing and executing a dynamic equity instrument
Patent Applicant: Lempco Industries, Inc.
Date of Decision: 12 September 2018
DECISION
The claimed invention is not for a manner of manufacture.
I refuse the application.
REASONS FOR DECISION
Lempco Industries, Inc. (the applicant) filed patent application 2015258248 (the application) on 19 November 2015. The application is a divisional application based on application 2010206826, which claims priority from US 61/145,938 and US 12/689,132 and has an earliest claimed priority date of 20 January 2009. I note that a divisional application of the present application was filed on 2 May 2018 (2018203066).
The request for examination of the application was filed on 18 December 2015. Consequently, the amendments of the Patents Act 1990 (the Act) brought about by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 apply to the present application.
A first examination report was issued on 3 May 2017 raising an objection of lack of manner of manufacture. An examination response was filed on 5 April 2018 and a second examination report issued on 27 April 2018. The manner of manufacture objection was maintained. A further response was filed on 1 May 2018, and the applicant was notified by telephone on 3 May 2018 that the examiner would be maintaining their objection. The applicant asked to be heard in relation to the manner of manufacture objection on 3 May 2018. Pursuant to regulation 13.4(1)(g) when the Commissioner gives an applicant an opportunity to be heard in relation to an examiner’s objection and issues a written decision, the period for gaining acceptance of the application may be extended until three months from the date the decision is issued. Of course, this regulation is of no relevance if the application is refused.
The standard of proof that applies to the examination of the present application is the balance of probabilities – if satisfied on the balance of probabilities that the application complies with the Act I must accept the application.[1] If I am not so satisfied, then I can refuse the application.[2]
[1] Section 49 of the Act as amended.
[2] The Explanatory Memorandum, Intellectual Property Laws Amendment (Raising the Bar) Bill 2011 at page 54.
THE SPECIFICATION
Amendments to the specification were proposed on 5 April 2018. References to the specification in this decision are directed to the specification as proposed to be amended.
The specification relates to computer implemented methods “for establishing and executing a class of dynamic owner occupied real estate (DOOR) instruments that provide equity investors with new methods to invest in owner-occupied real estate.”[3]
[3] Page 1, lines 21-23.
The specification explains that under conventional financing consisting of a first mortgage and homeowner equity, the first mortgagee (usually a bank or investor in a securitised pool) has a priority right to all of the proceeds from sale up to the principal balance, and the mortgagor (usually the homeowner) receives 100% of the excess over the principal balance.[4] Typical simple equity finance instruments combined with a first mortgage treat the contribution of the equity investor as a second mortgage with respect to priority, but rather than interest payments, the equity investor receives a share of any appreciation of the home upon sale.[5] Notably, both of these approaches are static. That is, the rules by which the proceeds from sale are shared do not change as a function of economic conditions or the actual value of the home.[6]
[4] Page 1, line 29 – page 2, line 3.
[5] Page 2, lines 5-8.
[6] Page 2, lines 17-18, page 2B, lines 22-24.
DOOR instruments provide equity investors with new methods to invest in owner-occupied real estate.[7] These instruments permit dynamic allocations of sale proceeds between a homeowner and an equity investor. In a preferred embodiment of DOOR instrument the rule can change as a result of economic conditions or the value of the home.[8] Such an approach addresses a number of problems associated with a static sharing rule, including:
“financial strategies for the homeowner that are not sensible, e.g., effectively investing a large share of wealth in a single leveraged asset that is correlated with life outcomes so that home value and total wealth tend to decline sharply at the same time as income declines or a job loss occurs; suboptimal homeowner incentives to maintain the home; the inability of the investor to receive returns on owner occupied housing in a pure and transparent form; the inability to increase borrowing against the home without a costly refinance of the equity instrument; the inability to value instruments easily for purposes of creating or accepting new investments in investment pools; and the presence of incentives to strategically refinance equity instruments when home values fall.”[9]
[7] Page 2B, lines 21-22.
[8] Page 3, lines 8-12.
[9] Page 3, lines 14-23.
The specification initially describes in detail a DOOR variant referred to as ANZIE-DOOR (in this acronym “A” stands for annual dynamic adjustments, “N” stands for the goal of maintaining neutrality, “Z” stands for application of the Z capital structure and “IE” stands for insured equity[10]), which:
“lumps the homeowner’s borrowing (first mortgage, second mortgage, etc.) and the homeowner’s cash equity contributions (down payment, payments of principal on mortgages, etc.) into a single block (‘the priority block’) and gives them legal priority over returns to the equity investor in the event of a low sales price outcome. This block effectively provides leverage for the investor’s returns, and in the ANZIE-DOOR scheme the homeowner is credited with servicing the priority block ‘loan’ via imputed interest payments.”[11]
[10] Page 35, lines 18-21.
[11] Page 3, line 29 – page 4, line 4.
In this arrangement the homeowner’s equity consists of “committed equity”, which includes all of the homeowner’s cash investments in the home (e.g. down payments, payment of mortgage principal, increases in value due to cash-funded improvements), and “insured equity”, which is determined according to a non-linear algorithm, which at any given time specifies a percentage of the gross sale price which must be paid by the investor to the homeowner. The ANZIE-DOOR instrument may also, preferably, create a homeowner obligation to maintain the home to certain standards, wherein failure to do so allows the investor to reduce the amount of insured equity and other returns to the homeowner at sale.[12] In many economic scenarios the insured equity percentage increases over time and the rate of increase is set to balance the homeowner’s and investor’s relative contributions and benefits, and to reflect current economic conditions and the value of the home.[13]
[12] Page 4, lines 4-19; page 14, line 23-27.
[13] Page 4, lines 19-24.
The specification exemplifies various possible outcomes for homeowners and investors. For example, Table 2, reproduced below, exemplifies possible outcomes dependent on sale price. In this example it is assumed that between purchase and sale the homeowner’s insured equity percentage builds to 10% and the homeowner paid $10,000 in principal on the $160,000 first mortgage. [14]
[14] Pages 5-10, 17-19.
The specification describes an algorithm by which the insured equity can be calculated and states that “[a]lgorithms and methods for valuing and defining the instruments can be implemented using any number of ways known in the art.”[15] The specification describes the various parameters involved in the calculation, but it is not necessary to consider these parameters in any detail for the purpose of this decision.
[15] Page 10, lines 8-9.
Neutrality of DOOR instruments prevents the development of incentives for strategic sales or defaults.[16] That is, when the actual value is substantially equal to the intrinsic value of the instrument, it reflects a “market deal” consistently – this means neither the homeowner nor the investor is receiving a net benefit.[17] The desirability of dynamic adjustments is explained as follows:
“Dynamic adjustments can eliminate various options or reduce their value to negligible levels. Doing so makes valuation of the instruments easier, reduces moral hazard problems associated with the strategic exercise of the options, eliminates conflict of interest when the investor has a non-investment connection with the homeowner, and can make open investment pools viable.
When options are present, the instrument’s actual value tends to deviate from its intrinsic value. Consider the conventional first mortgage loan. Such mortgages include a set of embedded options, most prominently the homeowner’s option to default and the homeowner’s option to prepay. These options complicate valuing the mortgage in the hands of the mortgagee. The intrinsic value of the mortgage is the amount of principal the mortgagee would receive if the mortgagor paid off the principal balance, thereby extinguishing the mortgage. This value is only realized prior to expiration if the mortgagor prepays. If interest rates drop enough, there is a financial incentive for the homeowner to refinance, exercising the option to prepay the existing mortgage and replacing it with a new one. In this situation the old mortgage in its alive state is worth more to the mortgagee than the amount of principal due. That is, the mortgagee is receiving interest payments on the remaining principal balance at a rate this is higher than market. As a result the present value of the future interest and scheduled principal payments exceeds the remaining principal balance.
Prepayment may also occur for other reasons. … The presence of prepayment and default options and the complexities of homeowner behavior with respect to these options make mortgage valuation difficult. …
Valuation difficulties tend to reduce the viability of open investment pools – arrangements where new investors may join the pool after it is originally created.”[18]
[16] Page 37, lines 10-12
[17] Page 25, line 6 – page 26, line 12.
[18] Page 21, line 2 – page 22, line 13.
According to the invention, neutrality is implemented by a “dynamic engine” that makes adjustments periodically and restores a “market deal” between the homeowner and investor.[19] In ANZIE-DOOR neutrality is achieved through the insured equity account.[20] The specification describes three common factors in implementation of neutrality: assessment of the relative contribution of the parties; if there is imbalance in the contributions, use of offsetting contractual allowances; and the requirements of dynamic adjustments to maintain neutrality.[21]
[19] Page 38, lines 6-14.
[20] Page 91, line 26.
[21] Page 29, line 13 – page 30, line 13.
The frequency of the adjustments by which neutrality is implemented is variable:
“given current technologies and the costs thereof, in most cases it should be possible to assess and adjust the rate factor frequently enough that refinancing rarely will be profitable due to intraperiod fluctuations. For many homes quarterly, monthly or even daily assessment and rate factor adjustment is feasible. The most difficult element is valuing the home in the absence of a recent sale transaction. AVM (automatic valuation model) methods for estimating home values are quite accurate for many homes and involve computer calculations rather than appraisal or other labor-intensive methods. Many of the economic variables are readily available in the form of daily market prices or monthly data issued by governments, academic institutes or private sector analytic firms.Thus, instead of ANZIE-DOOR, we might have QUANZIE-DOOR, MONZIE-DOOR, or DANZIE-DOOR, the same instrument with quarterly, monthly, and daily adjustment, respectively.
Because adjustment is costly, the optimal approach probably is not to implement the shortest technically feasible adjustment period, i.e. some kind of approximation to ‘CANZIE-DOOR,’ an instrument with continuous adjustment. (‘CA’ stands for ‘continuous adjustment.’) Such an approximation is possible and may even have a degree of accuracy in some cases. Certain data is periodic and only arrives monthly or quarterly. Even actively traded instruments such as bonds and swaps that form a basis for the interest rates underlying the adjustment calculation are not traded every instant and are not traded at all during times when the market is closed. Various extrapolation and missing data techniques would be required to make CANZIE-DOOR approximation as accurate as possible.
Trying to develop such an approximation is not crucial. It will suffice if the adjustment period is short enough to ensure that intraperiod fluctuations do not create potential refinancing gains in the face of transaction costs or departures from intrinsic value that are economically significant. Consider a monthly adjustment regime, MONZIE-DOOR for the variant we are considering. MONZIE-DOOR builds in an automatic monthly refinance that is virtually costless.
Refinancing during the month captures on the transitory benefit of a few days or weeks of a somewhat more advantageous rate factor. This benefit disappears at the next monthly adjustment. Moving forward from that point in time, the deal is the same whether or not the homeowner refinanced. Deviations from intrinsic value due to intraperiod fluctuations in the absence of refinancing have a similar transitory nature.”[22]
“Assuming suitably accurate computer-based home valuation is feasible, daily adjustment might be easy and quite reasonable. Daily adjustment should eliminate any problems with deviations from intrinsic value due to temporal gaps between adjustments.”[23]
[22] Page 60, line 13 – page 61, line 18.
[23] Page 63, lines 1-3.
The specification describes the computer implementation of the algorithm with regard to various figures, some of which are reproduced below, and which are explained as follows:
“All of the figures follow the same conventions with respect to flow chart objects and arrows. Cylindrical objects indicate devices that dynamically store data and the current data stored on the devices. The devices might include servers with dedicated hard drives, optical media that archive data of perpetual value, and other components useful in maintaining the large, expanding data sets relevant to the adjustment process for DOOR instruments. Hexagonal objects (both regular and irregular hexagons) indicate a major computational process. These processes need not occur on a single computing device. Some of the processes are mechanical in nature and can be implemented via fixed software or hardware-encoded logic. Other processes involve learning so that the software and logic elements evolve dynamically with or without human intervention. A bold rectangular or square box indicates a process that is a mixture of computation and information assembly. Arrows indicate the flow of data. If an arrow is solid, the corresponding flow of data is a necessary part of the process every time there is a dynamic adjustment to a DOOR instrument. Arrows with dashes indicate data flows that may or may not be involved in any particular adjustment. A non-bold rectangular or square box indicates information that is output from a cylinder or hexagon. This kind of box typically ‘defines’ the information that is flowing along an arrow. It clarifies the content of the flow indicated by the arrow.”[24]
[24] Page 63, lines 14-31.
Figure 5, which shows the computation of a single or initial adjustment for ANZIE-DOOR, is reproduced below. The specification notes that:
“Data in all of the cylinders is dynamic. Existing data in the cylinders such as financial time series are updated continually. In addition, entirely new data may become available. For example, information from new depreciation studies that involve new data sets may have no existing counterpart in the housing economics data cylinder. New housing futures markets may arise. The analytic machine includes a data updating process component represented by the bold rectangle on the left of Figure 5. This process includes the full spectrum of data updating, ranging from routine additions to existing publicly available time series to the addition of entirely new data elements. The updating requires some computing since new data must be put in a form that comports with the data structures in the cylinders.”[25]
[25] Page 72, lines 16-25.
The specification describes the cylinders and hexagons represented in Figure 5 in terms of the data they source and their function. For example:
“The DOOR instrument characteristics cylinder is the repository of the instructions that govern the analytic machine and the critical history that links present computations to what has happened previously.”[26]
“The expected appreciation hexagon embodies the computation of the expected rate of home appreciation from the available general economic data, housing economics data and house specific data. The relevant housing economics data includes futures prices for regional or national housing indices. Such futures markets already exist in the United States and are in the process of further development and elaboration. In most cases, however, it is not possible to extract the appropriate expected appreciation rate directly from futures prices. A satisfactory computation of that rate requires additional modeling and statistical assessment, both of which typically are elaborate.”[27]
“The five data cylinders stacked on the left side of Figure 5 represent dynamic data collections. The general economic data includes, among other items, various interest rate and macroeconomic time series. These time series are updated periodically. Several items involve daily data. Although this data collection is large, it is well-defined and orderly for the most part. Many of the items are readily available from public or commercial sources.
The housing economics data is an entirely different matter. Although this data collection includes some standard, publicly available data such as publicly available regional and national housing price indices, it also includes transactional and characteristics data on individual homes across the country. This transactional and characteristic data is irregular. … The unevenness of the data presents two challenges. First, organizing the data collection in the face of irregularities is critical – a task ‘inside’ the data cylinder. The various computational elements in the machine must be able to access and use different data elements together. The second challenge exists outside of the data cylinder: the computational procedures must operate in the face of the irregularities. Meeting this challenge requires data imputation routines and other methodologies to cope with missing and uneven data.”[28]
[26] Page 65, lines 4-6.
[27] Page 67, line 26 – page 68, line 2.
[28] Page 71, lines 1-23.
According to the specification the adjustment mechanism accommodates flexibility within the instrument:
“Whether the contract itself is being changed or the parties change the deal on the fly within the four corners of the contract, the DOOR neutrality mechanism accommodates the changes easily. All that is involved is an adjustment to the accumulation algorithm, i.e., an adjustment easily incorporated as an option in the applicable software program. It is easy to imagine implementing changes instantaneously and at almost no cost through a simple online procedure.
The flexibility of neutral DOOR instruments allows many tasks that currently are cumbersome to be accomplished easily and at low cost.”[29]
[29] Page 90, lines 10-18.
The specification goes on to describe a number of DOOR variants, including those in which neutrality is not strictly maintained.
“ANZIE’S SIDE DOOR is an extension of ANZIE-DOOR that is useful in many contexts including low appreciation environments and situations where the goal is targeted home equity accumulation. ANZIE’S NU DOOR solves the problems associated with ‘underwater’ homes and strategic default that arise when home value falls below the mortgage principal balance. ANZ TRIE DOOR and various partially recourse DOOR instruments shift priority block risk from the homeowner to the investor. COZIE-DOOR variants implement homeowner objectives to cash out home equity. IS-A-DOOR allows the homeowner to shift fluidly between DOOR variants. LAZIE-DOOR and FIXED-DOOR are examples of variants that are quasi-neutral or non-neutral.”[30]
[30] Page 95, line 23 – page 96, line 2.
For example, the COZIE-DOOR approach applies where a homeowner wishes to cash out equity from their home, for example, in retirement. In this approach the capital structure and equity accrual positions of the homeowner and investor under ANZIE-DOOR are reversed. Under COZIE-DOOR annuity and lump sum cash out options can be accommodated.[31] It is also possible to combine versions such that a lump sum and annuity are provided.[32]
[31] Page 131, line 23 – page 132, line 12.
[32] Page 138, lines 13-19.
In an annuity version, the investor makes payments to the homeowner indefinitely and in exchange insured or committed equity accrues in favour of the investor. There is no way that accrual of insured equity can become so high that the instrument must terminate and the homeowner remains the residual claimant, which means that if house prices surge the homeowner realises part of the gain. The instrument terminates either at sale or with the death of the homeowner.[33] Figures 17 and 18, reproduced below, depict the arrangement and computer implementation of an annuity version of COZIE-DOOR.
[33] Page 132, line 16 – page 135, line 18.
In a lump sum version of COZIE-DOOR the investor advances the lump sum and takes a priority block position in the home equal to the amount of the advance and accrues insured equity or committed equity. The specification explains that the preferred option is accrual of committed equity, as that avoids the risk of value of the insured equity position exceeding the homeowner’s equity in the home in the case of low appreciation or drops in value. Committed equity accrues quickly, compensating the investor for the risk of providing the lump sum. The homeowner is the residual claimant which provides protection from unexpectedly high rates of appreciation.[34] Figures 19 and 20, reproduced below, depict the arrangement and computer implementation of a committed equity lump sum version of COZIE-DOOR.
[34] Page 135, line 20 – page 137, line 14.
The specification also describes the IS-A-DOOR variant, which provides for a homeowner to switch at any time between neutral DOOR instruments, thereby building in a very low cost, broad and ongoing refinancing option.[35] Implementation of this instrument is described as follows:
“The analytic machine for the existing DOOR instrument includes a DOOR instrument characteristics cylinder that contains the instructions for the instrument as well as the values and history of all critical accounts such as insured equity updated (as step ‘1’) using the existing analytic machine to be current as of the time of the homeowner’s request. A biological analogy is apt: The DOOR instrument characteristics cylinder is like the nucleus of a cell; the analytic machine itself being the cell. The nucleus contains all of the critical information that directs the cell operations. Changing DOOR instruments involves removing the nucleus, altering it, and then implanting it in a new cell, the analytic machine for the new DOOR instrument. The alterations (step ‘2’) include: (i) replacing the operating instructions for the existing DOOR instrument with the operating instructions for the new one; and (ii) adjusting the parameters and accounts to be compatible with the new instrument and its analytic machine.”[36]
[35] Page 142, line 21 – page 143, line 2.
[36] Page 143, lines 13-25.
Figure 22 (reproduced below) is a block schematic diagram illustrating a computer system within which instructions to cause the computer to perform DOOR methodologies can be executed. The specification states:
“Figure 22 is a block schematic diagram of a machine in the exemplary form of a computer system 1600 within which a set of instructions for causing the machine to perform any one of the foregoing DOOR methodologies may be executed. In alternative embodiments, the machine may comprise or include a network router, a network switch, a network bridge, personal digital assistant (PDA), a cellular telephone, a Web appliance or any machine capable of executing or transmitting a sequence of instructions that specify actions to be taken.
The computer system 1600 includes a processor 1602, a main memory 1604 and a static memory 1606, which communicate with each other via a bus 1608. The computer system 1600 may further include a display unit 1610, for example, a liquid crystal display (LCD) or a cathode ray tube (CRT). The computer system 1600 also includes an alphanumeric input device 1612, for example, a keyboard; a cursor control device 1614, for example, a mouse; a disk drive unit 1616, a signal generation device 1618, for example, a speaker, and a network interface device 1628.
The disk drive unit 1616 includes a machine-readable medium 1624 on which is stored a set of executable instructions, i.e., software, 1626 embodying any one, or all, of the methodologies described herein below. The software 1626 is also shown to reside, completely or at least partially, within the main memory 1604 and/or within the processor 1602. The software 1626 may further be transmitted or received over a network 1630 by means of a network interface device 1628.”[37]
“It is understood that embodiments may be used as or to support software programs or software modules executed upon some form of processing core (such as the CPU of a computer) or otherwise implemented or realized upon or within a machine or computer readable medium. A machine-readable medium includes any mechanism for storing or transmitting information in a form readable by a machine, e.g., a computer.”[38]
[37] Page 146, line 27 – page 147, line 17.
[38] Page 148, lines 1-5.
The claim
The specification contains a single claim which reads as follows:
A non-transitory computer-readable medium containing code that creates a dynamic data structure in at least one computer for controlling the inputting and processing of data to provide interdependent information over a data network to an investor and an owner of rights in a real estate asset under a contractual commitment wherein the computer accesses and interacts with multiple, separate, disparate, continuously updated databases for the exchange of data therebetween to perform a method of sharing equity, expenses, returns, and risk between the investor and the owner of rights in the real estate asset under the contractual commitment, the method comprising the steps of:
the computer separately receiving continuously updated data from each of a transaction database, a general economic data database, a housing economic data database, a house specific data database, a homeowner data database, and an instrument characteristics database, wherein the data resides in the databases in different formats and where, upon receipt, the computer converts the data to a common format for processing;
the computer processing the received data from each of the databases, the data comprising transaction data, general economic data, housing economic data, house specific data, homeowner data, and instrument characteristics data;
(a) the computer simultaneously processing the received data from each of the separate databases to create and update the dynamic data structure by calculating, by the computer, each of:
(a)(l) committed equity comprising net contributions by the investor to or on behalf of the owner creditable to committed equity under the contractual commitment, not including debt secured against the real estate asset on which the investor is obligor and the investor used to finance part or all of such payments;
(a)(2) a priority block comprising the creditable net contributions of the investor including the committed equity and the debt;
(a)(3) insured equity, which is a percentage of the real estate asset value realized at sale or upon any other event terminating the contractual commitment;
wherein the percentage is computed by increasing or decreasing a previous insured equity percentage and wherein an initial insured equity percentage is provided in the contractual commitment;
wherein the increase in the amount or the decrease in the amount is determined by a non-linear accumulation algorithm:
wherein
is the insured equity percentage at the time of termination,
is a net contribution rate of the investor, computed based on net contributions by the investor to or on behalf of the owner not creditable to committed equity under the contractual commitment, divided by an expected unleveraged market rate of return on the asset,
is the time at which segment i begins,
is a riskless rate for an investment of the same duration as the real estate asset, and
is length of time segment i.
THE OBJECTION
The examiner’s objection of lack of manner of manufacture maintained in the second report is the subject of the applicant’s request to be heard and reads as follows (emphasis in original):
“Claim 1 does not define a manner of manufacture within the meaning of Section 18(1)(a) of the Patents Act 1990. In general, the principles set out in D’Arcy v Myriad Genetics Inc [2015] HCA 35 (Myriad), Commissioner of Patents v RPL Central Pty Ltd [2015] FCAFC 177 (RPL) and other cases require analysing whether the claimed invention, as a matter of substance rather than form, is suitable subject matter for a patent.
The substance of the claimed invention is to be determined by considering the claimed invention’s actual or alleged contribution to the art. Factors relevant to consider when identifying the substance of the claimed invention include:
· How does the claimed invention work?
· What problem does it address?
· What is the result of performing the claimed invention?
· What was the state of the art as at the priority date?
· What does the claimed invention add to the state of the art?
· What are the advantages of the claimed invention?-
The applicant in its submissions identifies the problem with existing instruments as:
‘Other instruments currently in use or envisioned, such as conventional mortgages and shared appreciation mortgages are static in the sense that they rely on fixed-in-advance allocation rules. A consequence of using a static instrument is that as market conditions fluctuate, the terms of the instrument come to favor one side or the other (the investor/ lender versus the homeowner) compared to current market deals despite being a fair deal at the start.’
Applicant further identifies the novel and inventive elements as:
‘DOOR is specifically designed to circumvent the limitations inherent in the whole class of such rules. The sharing allocation in DOOR can evolve along with interest rates, depreciation rates, the home value, and other economic parameters. That is the dynamic aspect. Frequent enough adjustment of these instrument parameters, implemented in "neutral" DOOR variants, eliminates option elements, including the prepayment option.............. These elements make the instruments an incredibly powerful and flexible way to address a variety of situations such as providing retirement income from home equity............ Second, the technical DOOR innovation includes insured equity, an element outside of the conventional capital structure. In one set of variants, insured equity builds up in favor of the homeowner in the form of an obligation to pay the homeowner a specified percentage of the unleveraged value of the home. This obligation arises even if there is no money available for the homeowner under the conventional capital structure, e.g., if the amount due to the investor or lender exceeds the value of the home. This device significantly expands what can be accomplished in housing finance.’
In RPL [099], the Full Federal Court indicated several factors relevant to consider when determining whether a claimed invention as a matter of substance relates to patentable subject matter. These included:
· Is the contribution to the claimed invention technical in nature?
· Does the claimed invention solve a “technical” problem within the computer or outside the computer?
· Does the claimed invention result in an improvement in the functioning of the computer, irrespective of the data being processed?
· Does the claimed invention merely require generic computer implementation?
· Is the computer merely the intermediary, configured to carry out the method, but adding nothing to the substance of the idea?
In weighing up the variety of factors which indicate what the substance of the claimed invention is and whether or not the claimed invention as a matter of substance relates to patentable subject matter, I have concluded that your claimed invention, as a matter of substance, does not relate to patentable subject matter. As discussed above neither the problem being addressed nor the contribution to the state of the art is technical in nature. The applicant asserts that:
‘The innovation achieves the technical effect of using a single or multiple processors for establishing simultaneous communications with a plurality of disparate data sources to receive data from each of the data sources in real time and perform repeated calculation of that data and maintenance of the dynamic data structure by the modified computer, where the data so received and continually processed are necessary to effect the desired output calculation and to maintain the required dynamic data structure, and where the combination of the repeatedly processed data is necessary to effect the output calculation and to maintain the required dynamic data structure.’
Given the generic description of the computer implementation in your application, I do not consider that your application involves more than a generic utilisation of well-known functions of a computer, including the particular arrangement/combination of functions, and therefore does not involve any invention or ingenuity in any program or operation of a computer, or implementation by a computer to operate the method.
Therefore the claimed invention, as a matter of substance, does not define subject matter suitable for a patent.”
The applicant’s submissions
The applicant submitted that:
“The Courts have indicated a number of signposts that may assist in determining whether the substance of an invention is something patent-eligible, and the Examiner in his reports, refers to a select few of these (referred to as factors). Importantly however is the fact that each of these signposts arose out of the particular facts of prior cases. None of the facts alone, or in combination, provides a definitive test that can be applied in each and every situation.”
The applicant went on to state the following in support of the view that the claimed invention is patentable:
“We disagree with the Examiner's statement, that the substance of the invention is a ‘scheme for sharing equity, expenses, returns, and risk between an investor and an owner of rights in a real estate asset under a contractual commitment’. In light of the authorities, correctly identifying the ‘substance’ of an invention is vitally important to correctly determining whether an invention is for a manner of manufacture.
The Applicant submits that the Examiner has erroneously focused on computational features of the invention rather than the substance of the invention, thereby mischaracterising the substance of the invention. The Applicant submits that the substance of the invention is not simply a scheme, but rather directed to the real time, dynamic calculation of insured equity in a complex contractual relationship that is subject to unpredictable, real time fluctuation. The general applicability of the mathematical relationships implicit in the formulae are not being claimed; neither are all methods of equity sharing by contractual commitment.
In contrast with the inventions considered in Research Affiliates and RPL Central, the Applicant’s invention is not a mere computer implementation of an otherwise non-patentable business method or scheme. The invention as claimed, accesses data in real time from multiple disparate databases. The computer and supporting elements are specifically modified to process such data to perform calculations and to create and maintain a dynamic data structure that could not otherwise be performed, created or maintained, but for the modifications.
The invention achieves a technical effect by use of a either a single processor or multiple processors to establish simultaneous communications with a plurality of disparate data sources to receive data from each of the data sources in real time and perform repeated calculation of that data and maintenance of the dynamic data structure, where (i) the data so received and continually processed are necessary to effect the desired output calculation and to maintain the required dynamic data structure, and (ii) the combination of the repeatedly processed data is necessary to effect the output calculation and to maintain the required dynamic data structure. Thus, the invention both effects receipt of the data, effects transformation of the data, and effects repeated calculation of that data and maintenance of a dynamic data structure in a way such that the data is operated on and combined simultaneously and in real time, even though the data are received from disparate databases in which the data are stored in different formats.
Accordingly, the Applicant submits that the contribution to the claimed invention is technical in nature.
Noting that a further consideration in assessing the substance of the invention is related to improvements in the functioning of the computer, irrespective of the data being processed, the use of dynamic adjustments improves the functioning of the underlying computer system because it reduces system latency by processing changes in real time and not in batch mode. Accordingly, it reduces the need for computing resources because data is processed evenly across time and network bottlenecks attendant with batch processing are avoided. Furthermore, the invention has the effect of reducing computational complexity by processing small amounts of data in real time, rather than large amounts of data in batch mode. The practical effect of these improvements to the functioning of the underlying computing system with regard to the claimed invention is to substantially increase the computer’s throughput of data, which happens to be directed at financing or refinancing housing instruments. Refinancing a substantially neutral DOOR instrument involves a homeowner request and then minimal processor time to complete and effectuate the refinance. There is no need for creating a new application in batch mode with the attendant use of additional computer network facilities and processor time along with the associated error checking and substantial delay. These seamless refinancing options based on efficient real time and exception-based data processing are not possible without the approximate or complete elimination of embedded options that is achieved by the claimed invention. Accordingly the invention involves the creation of an artificial state of affairs where the computer is integral to the invention. The invention would not, and could not exist, without the means of a computer. This is in line with the Court in RPL Central.
Furthermore, RPL Central [at 0104] notes that ‘A computer-implemented business method can be patentable where the invention lies in the way in which the method is carried out in the computer. This necessitates some ingenuity in the way in which the computer is utilized (Research Affiliates).’ As the Applicant has demonstrated in this and the previous response, this is exactly what the Applicant’s dynamic data structure as claimed in Claim 1 (with at least 22 steps) does. Claim 1 reflects necessitated ingenuity in the way in which the computer is utilized.”
The law on manner of manufacture
It is a requirement of paragraph 18(1)(a) of the Act that an invention be a manner of manufacture within the meaning of section 6 of the Statute of Monopolies. The classic definition of “manner of manufacture” is set out in National Research Development Corporation v Commissioner of Patents[39] (NRDC):
“The right question is: ‘Is this a proper subject of letters patent according to the principles which have been developed for the application of s. 6 of the Statute of Monopolies?’”[40]
[39] [1959] HCA 67; 102 CLR 252.
[40] NRDC at 269, [14].
The court went on to set out a test in terms relevant to the facts of that case:
“a process, to fall within the limits of patentability which the context of the Statute of Monopolies has supplied, must be one that offers some advantage which is material, in the sense that the process belongs to a useful art as distinct from a fine art ... that its value to the country is in the field of economic endeavour.”[41]
and
“The effect produced by the appellant's method exhibits the two essential qualities upon which ‘product’ and ‘vendible’ seem designed to insist. It is a ‘product’ because it consists in an artificially created state of affairs, discernible by observing over a period the growth of weeds and crops respectively on sown land on which the method has been put into practice. And the significance of the product is economic; for it provides a remarkable advantage, indeed to the lay mind a sensational advantage, for one of the most elemental activities by which man has served his material needs, the cultivation of the soil for the production of its fruits.”[42]
[41] NRDC at 275, [22].
[42] NRDC at 277, [25].
However, the High Court was not laying down a precise formulation to be applied unthinkingly, as stated in D’Arcy v Myriad Genetics Inc[43] (Myriad):
“This Court in NRDC did not prescribe a well-defined pathway for the development of the concept of ‘manner of manufacture’ in its application to unimagined technologies with unimagined characteristics and implications. Rather, it authorised a case-by-case methodology.”[44]
[43] [2015] HCA 35; 258 CLR 334.
[44] Myriad at [23].
That case-by-case methodology must have regard to the substance of the claimed invention, and not simply the form of the claim.[45] This point was made succinctly in Myriad by Gageler and Nettle JJ:
“Whatever words have been used, the matter must be looked at as one of substance and effect must be given to the true nature of the claim.”[46]
[45] Myriad at [6], [88].
[46] Myriad at [144].
In Commissioner of Patents v RPL Central Pty Ltd[47] (RPL), the Full Court of the Federal Court said the same thing in the context of an invention that was in substance a scheme:
“A claimed invention must be examined to ascertain whether it is in substance a scheme or plan or whether it can broadly be described as an improvement in computer technology. The basis for the analysis starts with the fact that a business method, or mere scheme, is not, per se, patentable. The fact that it is a scheme or business method does not exclude it from properly being the subject of letters patent, but it must be more than that. There must be more than an abstract idea; it must involve the creation of an artificial state of affairs where the computer is integral to the invention, rather than a mere tool in which the invention is performed. Where the claimed invention is to a computerised business method, the invention must lie in that computerisation. It is not a patentable invention simply to ‘put’ a business method ‘into’ a computer to implement the business method using the computer for its well-known and understood functions.
Is the mere implementation of an abstract idea in a well-known machine sufficient to render patentable subject matter? Is the artificial effect that arises, because information is stored in RAM and there is communication over the Internet or wifi, sufficient? Does any physical effect give rise to a manner of manufacture? Are the mere presence of an artificial effect and economic utility, without more, sufficient to determine manner of manufacture?
It is not a question of stating precise guidelines but of deciding, in each case, whether the claimed invention, as a matter of substance not form, is properly the subject of a patent.”[48]
[47] [2015] FCAFC 177.
[48] RPL at [96]-[98].
The Full Court then detailed a number of considerations relevant to that determination and coming from earlier decisions of the Court. Summarising from RPL:
·It is necessary to ascertain whether the contribution to the claimed invention is technical in nature.
·One consideration is whether the invention solves a “technical” problem within the computer or outside the computer, or whether it results in an improvement in the functioning of the computer, irrespective of the data being processed.
·Does the claimed method merely require generic computer implementation?
·Is the computer merely the intermediary, configured to carry out the method using a computer readable medium containing program code for performing the method, but adding nothing to the substance of the idea?[49]
[49] RPL at [99].
In Research Affiliates LLC v Commissioner of Patents[50] (Research Affiliates) the Full Court of the Federal Court stated:
[50] [2014] FCAFC 150.
“When the authorities in Australia prior to and including Grant are considered, a consistent approach emerges as to the relevance of:
· a distinction between a claim to a business scheme and claims to methods which in practice result in a new machine or process or an old machine giving a new and improved result – that is, a distinction between mere intellectual information and a method that affects the operation of an apparatus in a physical form (Grant at [18]);
· the fact that the claimed steps are foreign to the normal use of computers, such as the production of an improved curve image (IBM 2 at 225-226);
· the particular mode or manner of achieving an end result which is an artificially created state of affairs, such as the storage of data as to Chinese characters and retrieval of graphic representations to enable word processing (CCOM at 295);
· whether part of the invention is an inventive method which includes the application and operation in a physical device (Grant at [30]);
· the distinction drawn in Catuity, as explained in Grant (at [24]), between ‘a technological innovation which is patentable and a business innovation which is not’. In Catuity, Heerey J did not accept that a physically observable effect was necessarily required (at [128]) but the Full Court in Grant expressed the opinion that a physical effect in the sense of a concrete effect or phenomenon, or manifestation or transformation is required (at [32]).
· the fact that a physical effect is required does not make it sufficient to confer patentability;
· the fact that a method may be called a business method does not prevent it being properly the subject of letters patent (Grant at [26] citing Catuity at [125]-[126]);
· the fact that for claimed computer programs, the courts look to the application of the program to produce a practical and useful result, so that more than ‘intellectual information’ is involved (Grant at [29]). A method that is in the nature of directions for use does not constitute an invention or a manner of manufacture in the absence of some previously unrecognised property of an aspect of the method (Grant at [29]).”[51]
[51] Research Affiliates at [94].
In considering the substance of the invention the Full Court went on to say:
“In the context of the claim, the significance lies in the content of the data rather than any specific effect generated by the computer. The computer-implementation is an essential integer of the claimed process. That is, of course, important. It is of particular importance in the assessment of, for example, novelty and infringement. However, in examining whether a claimed invention is properly the subject of letters patent, it is necessary to look not only at the integers of that claimed invention but also at the substance of that invention.
The claimed method in this case clearly involves what may well be an inventive idea, but it is an abstract idea. The specification makes it apparent that any inventive step arises in the creation of the index as information and as a scheme. There is no suggestion in the specification or the claims that any part of the inventive step lies in the computer implementation. Rather, it is apparent that the scheme is merely implemented in a computer and a standard computer at that. It is not part of the claimed method that there is an improvement in what might broadly be called ‘computer technology’.[52]
[52] Research Affiliates at [117]-[118].
The delegate in Aristocrat Technologies Australia Pty Ltd[53] provided the following summary in relation to whether a computer related invention is in substance a manner of manufacture:
[53] [2016] APO 49 at [35].
“I conclude that it is relevant to consider a range of matters. Without seeking to be exhaustive, these include:
·there must be more than an abstract idea, mere scheme or mere intellectual information;
·is the contribution of the claimed invention technical in nature;
·does the invention solve a technical problem within the computer or outside the computer;
·does the invention result in improvement in the functioning of the computer, irrespective of the data being processed;
·does the application of the method produce a practical and useful result;
·can it be broadly described as an improvement in computer technology;
·does the method merely require generic computer implementation;
·is the computer merely an intermediary or tool for performing the method while adding nothing of substance to the idea;
·is there ingenuity in the way in which the computer is utilised;
·does the invention involve steps that are foreign to the normal use of computers; and
·does the invention lie in the generation, presentation or arrangement of intellectual information.”
Discussion
The claim, as a matter of form or subject matter, is directed to a computer readable medium containing code. The claim states that this code creates a dynamic data structure for controlling the inputting and processing of data, that data providing interdependent information over a data network to an investor and an owner of rights in a real estate asset under a contractual commitment, wherein the computer accesses and interacts with multiple, separate, disparate, continuously updated databases for the exchange of data to perform a method of sharing equity, expenses, return and risk between the investor and the owner of rights in the real estate asset under the contractual agreement. This method comprises (i) receipt by the computer of continuously updated data from each of a number of databases which the computer converts to a common format for processing; (ii) the computer processing the data; (iii) the computer simultaneously processing the received data from each of the databases to create and update the dynamic data structure by calculating (a) committed equity, (b) a priority block and (c) insured equity. While the specification describes versions of DOOR instruments updated at various intervals, such as annually, monthly or daily, I understand the subject matter of the claim to be limited to a continuously updated instrument.
However, it is the substance, not the form, of the claimed invention, that is important to the assessment of manner of manufacture. While I agree with the applicant that there is no “definitive test” as such for determining whether a computer implemented invention is patentable, it is clear that the principles laid down by the Court have provided relevant factors (as summarised above) to be considered on a case-by-case basis in considering the substance of the invention.
It is apparent from the specification that the invention described addresses problems with the static nature of existing finance instruments by providing a dynamic instrument by which equity, expenses, returns and risk may be shared between a homeowner and an investor. This instrument provides new methods for equity investors to invest in owner-occupied real estate and permits dynamic allocation of sale proceeds between the homeowner and investor, where the allocation varies as a function of, for example, house value or economic conditions. Maintaining neutrality of the instrument over time means that incentives for strategic sale, refinancing or default are avoided – I understand this to be the problem solved and the advantage derived by the invention. It is clear that so described the invention is a financial scheme, and it is well established that such schemes are not, in themselves, patentable.[54] But is the claimed invention, in substance, something more than a scheme?
[54] Grant v Commissioner of Patents [2006] FCAFC 120 at [14]; RPL at [96].
It is not disputed that the use of a computer is necessary to the invention and it is clear that the method of the invention allows the computer to do something that it did not do before. However, this alone is not sufficient to confer patentability. As recently noted by Perram J in Encompass Corporation Pty Ltd v InfoTrack Pty Ltd[55] (Encompass):
“In some senses, any form of software residing in a computer which performs a task is an improvement in the computer because without it the computer could not perform the task. Plainly, that is not what was intended.”[56]
The question that must be considered is: what is the substance of the invention? Is it a scheme which is not patentable, or is there something in the computer implementation which is patentable? To assist in answering that question, considerations identified in RPL and Research Affiliates include whether the functioning of the computer has been improved, whether a “technical” problem has been solved within or outside the computer, and whether the computer implementation is generic. These relate to the consideration of what the claimed invention adds to the state of the art, and it is to these matters that the applicant’s submissions are directed.
[55] [2018] FCA 421.
[56] Encompass at [194].
The applicant submitted that the invention effects receipt of data, transformation of data, repeated calculation of data and maintenance of a dynamic data structure such that data is “operated on and combined simultaneously and in real time”. In the applicant’s submission the computer and supporting elements are “specifically modified to process such data to perform calculations and to create and maintain a dynamic data structure that could not otherwise be performed, created or maintained, but for the modifications.” I understand the applicant to be referring to the requirement for specific software to process the data and create and maintain the data structure. However, as noted above, the requirement for particular programming is not sufficient in itself to render a method patentable. The specification is silent as to the detail of such software and the applicant has not pointed to any particular part of the specification, or identified any particular data structure (as opposed to data content) in support of its submissions. Indeed, I note that in passages of the specification which assert that computing is required or that processes are challenging, non-trivial or elaborate[57] the specification does not expand on the implementation of solutions to those perceived problems, which supports a conclusion that the computer is merely being used for its “well-known and understood functions” in a straightforward manner. For example, with regard to the continuously-updated instrument CANZIE-DOOR, the specification indicates that “[v]arious extrapolation and missing data techniques would be required to make CANZIE-DOOR approximation as accurate as possible”[58] without any description of such techniques. I consider this to be a similar situation to that confronted in Research Affiliates, where the specification described the computer to be used only in general terms.[59] Accordingly, if the capacity of a computer to access and manipulate data in real time from multiple disparate databases is to be understood as a problem that has been addressed by the inventors, then I cannot see that the specification describes its solution. I can only conclude that any modifications required to implement the financial instrument are not beyond “generic computer implementation”. The alternative conclusion would suggest that the specification has not provided a clear enough and complete enough disclosure of the claimed invention.
[57] For example, page 58, lines 6-7; page 67, lines 12-24; page 70, lines 28-29; page 71, lines 17-23.
[58] Page 61, lines 3-5.
[59] Research Affiliates at [108].
The second limb of the applicant’s submission is that the functioning of the computer has been improved by the use of dynamic adjustments. That is, system latency is reduced by processing changes in real time and the computer’s efficiency at financing or refinancing housing instruments is substantially increased. Despite the applicant’s submissions, there is no indication in the specification of any ingenuity in the way the computer is utilised; there appears to be no requirement for steps that are foreign to the normal use of a computer, and no solution to any technical problem(s) encountered in implementing the scheme of the invention has been described in the specification. The high level detail regarding the operation of the computer system is consistent with generic computer implementation, which is unsurprising given that dynamic updating of data is part of the normal function of a computer. Even accepting that receiving continuously updated data and processing small amounts of data in real time avoids the requirement to process large amounts of data in batch mode and thereby reduces system latency, I do not understand this to be improving the efficiency of the computer itself, but working efficiently within the existing constraints of the computer in a manner consistent with the dynamic nature of the financial instrument. In my view that is not a solution to a technical problem within the computer. It is not apparent that a general solution resulting in a substantial increase in the throughput of data has been described or claimed – such a solution may well be considered to satisfy the manner of manufacture requirements, but I do not understand this to form the substance of the invention described and claimed.
Another consideration is whether the real time processing of data results in an advantage in a practical sense that could be considered to confer patentability. It is apparent from the specification that continuously updating the DOOR instrument means that neutrality is maintained at all times – that is, there should be no point where there would be any advantage in refinancing, because the instrument will always reflect a market deal. However, while this may be of benefit (noting that the specification suggests there is limited utility in continuous adjustment compared to adjustment at relatively short intervals), that benefit clearly lies in the sphere of business innovation – that is, as a means of avoiding strategic obtaining of financial advantage within the framework of the instrument – and is the necessary result of the implementation of the abstract idea of the scheme. Business innovations are well established to lie outside the area of what is patentable.
The applicant characterised the substance of the invention as directed to “real time, dynamic calculation of insured equity in a complex contractual relationship that is subject to unpredictable, real time fluctuation”. However, such a characterisation seems to me to describe a financial scheme by which insured equity is dynamically calculated on the basis of a contractual agreement (the DOOR instrument), whereby the implementation entails continuous updating of the data on which the contractual agreement is based. While the applicant asserted that that claim 1, including at least 22 steps, reflects “necessitated ingenuity in the way the computer is utilized”, as discussed above, there is nothing in the specification to support that view. Similarly, it is not apparent that real time implementation gives rise to a practical benefit outside the sphere of business innovation.
In summary, like in Research Affiliates[60] the invention set out in the specification is clearly the DOOR instrument itself, and the specification provides only high level detail regarding the computer implementation of the invention. I must therefore conclude that the implementation of the financial instrument in a computer is generic. Accordingly, I am not satisfied that this contributes to the substance of the invention – this is not the problem which the specification is directed to solving, and the necessity of computer implementation of the scheme does not move the substance of the invention beyond the instrument or scheme. As set out above, it was stated in RPL that:
“Where the claimed invention is to a computerised business method, the invention must lie in that computerisation. It is not a patentable invention simply to ‘put’ a business method ‘into’ a computer to implement the business method using the computer for its well-known and understood functions.”[61]
Further, it is not apparent that any advantage associated with the computer implementation, such as real-time processing, leads to something that could be considered a technological innovation. Dynamic updating of data is simply a normal and usual function of a computer. A consideration of the factors identified by the courts for identification of the substance of the invention leads inescapably to the conclusion that the substance of the invention is a financial scheme, and the computer is merely the tool, or intermediary, by which this scheme is implemented.
[60] Research Affiliates at [114].
[61] RPL at [96].
Conclusion
I conclude that that the invention is, in substance, a financial scheme. It is well established that such schemes are not patentable, and it follows that the claim is not directed to a manner of manufacture. Furthermore, having reviewed the specification I can see no subject matter that could be considered a manner of manufacture.
CONCLUSION
The invention defined by the claim is not directed to a manner of manufacture. As I can see no subject matter in the specification that could be considered a manner of manufacture it is appropriate to refuse the application rather than allow an opportunity to amend.
Dr S. J. Smith
Delegate of the Commissioner of Patents
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