Research Affiliates, LLC. - [2010] APO 31

IP AUSTRALIA
AUSTRALIAN PATENT OFFICE
Patent Application: 2005213293.

Title: Valuation Indifferent Non-Capitalization Weighted Index and Portfolio.
Patent Applicant: Research Affiliates, LLC.

Delegate:  M. G. Kraefft
Decision Date:            17 December 2010
Hearing Date:              29 October 2010
Catchwords:                PATENTS – maintenance of examiner’s objection – alleged invention for constructing a non-capitalization weighted portfolio of assets – whether a manner of manufacture – business method or system – application refused.

Representation: Applicant: Mr Matthew Ward, patent attorney of Shelston IP, assisted by Ms Tam Huynh, also of Shelston IP.

IP AUSTRALIA
AUSTRALIAN PATENT OFFICE
Innovation Patent: 2005213293.

Title: Valuation Indifferent Non-Capitalization Weighted Index and Portfolio.
Patent Applicant: Research Affiliates, LLC.

Decision Date: 17 December 2010
DECISION
Claims 1-19 are not for a manner of manufacture and consequently do not comply with subsection 18(1)(a) of the Patents Act.
There is also nothing of substance in the specification as a whole from which claims to patentable subject matter could be drafted.
The application is refused.
REASONS FOR DECISION

Robert D. Arnott filed patent application 2005213293 on 27 January 2005. The Patent Office had issued five examination reports during the examination stage. Throughout these reports, the examiner had maintained an objection that the claims of the application are not for a manner of manufacture. Mr Arnott had proposed amendments under Section 104 of the Patents Act to the description and claims during the examination stage. However the issue of whether the claims are for a manner of manufacture had remained unresolved.
Consequently the matter was set for a hearing.
An assignment of the application has also taken place. The Patent Office recorded the assignment on 17 November 2010. The application is now proceeding in the name of Research Affiliates, LLC.
SPECIFICATION
The specification describes the invention as pertaining to investment in securities and more specifically to the construction and use of passive portfolios and indexes. The indexes that are built are used as a basis to purchase securities for a portfolio. The specification describes passive portfolio management where the securities in a portfolio duplicate those that make up the index as distinct from active portfolio management where securities are selected for a portfolio individually.
The specification states that, conventionally, passive portfolios are built based on an index weighted using one of market capitalization weighting, equal weighting and share price weighting. Some disadvantages of using these weightings are outlined in the specification. For example, the disadvantages of market capitalization weighting derive from any under-valued securities being under-weighted in the index and related portfolios, while any over-valued securities are over-weighted. Also, portfolios based on market capitalization weighting follow every market (or segment) bubble up and every market crash down.
The alleged invention is described as a new method, system and computer program product for passive investing that is based on indexes which are built with metrics other than market capitalization weighting, share price weighting or equal weighting. Examples of the metrics used are various financial data of the company issuing securities such as book value, sales, revenue, earnings, earnings per share, income, income growth rate, dividends, dividends per share, and earnings before interest, tax, depreciation and amortization (“EBITDA”). Non-financial and non-market capitalization metrics can also be used for compiling an index. A described example of such a metric is an index of companies with chief executive officers (“CEOs”) having graduated from a particular university.
The specification as presently proposed to be amended ends with nineteen claims. The latest proposed claims 1-6 were submitted with the fourth statement of proposed amendments; that is, page 22 dated 23 August 2010. The latest proposed claims 7-19 were submitted with the third statement; that is, pages 23-27 dated 23 July 2010. Claims 1, 17, 18 and 19 are independent claims. They read as follows:-
1.A method of constructing data indicative of a non-capitalization weighted portfolio of assets, the method being implemented in a computer system having at least one computer processor, the method comprising:
(a)receiving in the computer system data gathered in regard to a plurality of assets;
(b)receiving data indicative of a selection of the plurality of assets to create data indicative of an index of assets, wherein said selection is selected based on an objective measure of scale other than market capitalization and share price; and
(c)operating the processor thereby to weight each of said plurality of assets selected in the index based on an objective measure of scale of said each of said plurality of assets,
wherein said weighting comprises:
(i) weighting at least one of said plurality of assets; and
(ii)weighting other than weighting based on at least one of market capitalization, equal weighting, or share price weighting.
17.A system for constructing a non-capitalization weighted portfolio of assets, comprising:
means for receiving in a computer system data gathered in regard to a plurality of assets;
means for receiving, in the computer system, data indicative of a selection of a plurality of assets to create an index of assets; and
a computer processor for providing weighting means for weighting each of said plurality of assets selected in the index based on an objective measure of scale of said each of said plurality of assets,
wherein said weighting means comprises:
means for weighting at least one of said plurality of assets; and
means for weighting other than weighting based on at least one of market capitalization, equal weighting, or share price weighting.
18.A computer-implemented non-capitalization weighted portfolio of assets construction system, comprising:
at least one analysis host processor;
said processor being adapted to gather data about a plurality of assets; adapted to select a plurality of assets to create an index of assets; adapted to weight each of said plurality of assets selected in the index based on an objective measure of scale of said each of said plurality of assets; adapted to weight at least one of said plurality of assets; and adapted to weight other than based on at least one of market capitalization, equal weighting, or share price weighting.
19.A machine readable medium that provides instructions which when executed by a computing platform, causes said computing platform to perform operations comprising a method of constructing a non-capitalization weighted portfolio of assets, the method comprising:
(a)gathering data about a plurality of assets;
(b)selecting a plurality of assets to create the index of assets; and
(c)weighting each of said plurality of assets selected in the index based on an objective measure of scale of said each of said plurality of assets;
wherein said weighting comprises:
(i)weighting at least one of said plurality of assets; and
(ii)weighting other than weighting based on at least one of market capitalization, equal weighting, or share price weighting.
APPLICABLE LAW
Subsection 18(1)(a) is the pertinent part of the Patents Act in this case. This part reads as follows.
(1)Subject to subsection (2), an invention is a patentable invention for the purposes of a standard patent if the invention, so far as claimed in any claim:
(a) is a manner of manufacture within the meaning of section 6 of the Statute of Monopolies.
The High Court in National Research Development Corp (NRDC) v Commissioner of Patents, [1959] 102 CLR 252, has provided a definitive statement of the law in this regard. At page 275, “…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”. The CCOM Pty Ltd v Jiejing Pty Ltd decision, [1994] FCA 1168, at [128], in further referring to the NRDC decision, has summarised this as a requirement for “a mode or manner of achieving an end result which is an artificially created state of affairs of utility in the field of economic endeavour”.
The NRDC (supra) decision has since been applied in numerous cases that have tested the distinction between the useful arts and the fine arts. Amongst computer related inventions for example, the inventions in CCOM (apparatus for assembling text in Chinese language characters) and International Business Machines Corporation v Commissioner of Patents, [1991] FCA 625, (method and apparatus for producing curves on a computer graphics display) were found to be patentable. In Welcome Real-Time SA v Catuity Inc, [2001] FCA 445, a method involving smart cards storing traders’ loyalty programs, and monitoring customer entitlements through a behaviour file in the cards relating to the behaviour (for example, spending history) of card holders towards the traders was also found to be patentable. On the other hand, and perhaps most relevant to the present case, the Grant v Commissioner of Patents decision, [2006] FCAFC 120, found that a method of protecting an asset including the steps of establishing a trust, making a gift of a sum of money to the trust, making a loan of that money from the trust and securing the loan was not a manner of manufacture. The passage in Grant at [47] is pertinent:-
“Whether the method is properly the subject of letters patent is assessed by applying the principles that have been developed for determining whether a method is a manner of manufacture, irrespective of the area of activity in which the method is to be applied. It has long been accepted that “intellectual information”, a mathematical algorithm, mere working directions and a scheme without effect are not patentable. … It is necessary that there be some “useful product”, some physical phenomenon or effect resulting from the working of a method for it to be properly the subject of letters patent”.
DISCUSSION
It is apparent from case law that one must not be swayed too easily by the nature of specific types of subject matter alone when deciding whether there is a manner of manufacture. Similarly to the subject matter of the present application, for example, “the fact that a method may be called a business method does not prevent it being properly the subject of letters patent” (Grant (supra) at [26]). A discussion though of the present specification as a whole is warranted.
The opening statement on page 1 of the specification states that the invention pertains to securities investing and more specifically to construction and use of passive portfolios and indexes. Page 3n, as proposed to be amended, states (last paragraph) that the invention is directed to a new method, system and computer program product for passive investing that is based on indexes which are built with metrics other than market capitalisation weighting, share price weighting or equal weighting. See also for instance the first paragraph on page 5 where the present invention is described as having the potential to improve investment returns versus the securities markets through the use of a securities weighting framework. The present invention also has the potential to reduce portfolio volatility through the use of securities weighting criteria that are less reflective of irrational exuberance. That the nature of the alleged invention is a scheme is clearly borne out in the above parts of the specification. Furthermore the specification plainly describes an investment scheme.
At the hearing Mr Ward correctly pointed out that subsection 18(1)(a) makes it clear that manner of manufacture assessment should be based on the invention as claimed. The Re Virginia-Carolina Chemical Corporation’s Application decision, (1958) RPC 35 at 37, states though that
“Considerable controversy has arisen in the past, …, as to how broadly a new departure in an art could be claimed. Considerations arising from this aspect of the matter may serve to cloud the real issue of manner of new manufacture, so that, in principle, the best approach would appear to necessitate an examination of the application documents as a whole to discover what, if any, contribution it contained and then to pose the question: Can this contribution be expressed in language as constituting a means of manufacture?
In this way, applications containing some useful additions to the known methods or preparation of articles or materials will not be imperilled by injudicious claiming clauses nor will claiming clauses ostensibly directed towards a manner of manufacture cloak the real nature of the applicants’ disclosure.” (my emphasis).
That is, the application disclosure should be considered as a whole and care should be taken not to allow the form of words used in a claim to cloud the real issue of manner of manufacture.
Claim 1 defines a method of constructing data indicative of a non-capitalization weighted portfolio of assets. While implemented in a computer system, the method is wholly characterised by constructing data from weighting assets based on using various received data sets. That is, the claim as a whole defines the steps to generate the data to support the passive investment scheme.
Mr Ward supported the claims largely with reference to the Grant (supra) decision. Mr Ward submitted the current test is that there must be some “useful product”, some physical phenomenon or effect resulting from the working of a method for it to be properly the subject of letters patent. He further stated that, in understanding the application of this test, the Grant decision made clear, at [32], that a change in state or information in a part of a machine can be regarded as a physical effect. Mr Ward submitted the present application met the requirements because the creation of data indicative of an index of assets provided the change in information in a part of a machine.
The above-referenced discussion in the Grant (supra) decision needs to be read in context. That passage cited a number of examples from decided cases that could be regarded as physical effects in contrast to a specific example, the Grant application, where there clearly was no physical effect. At that passage, it was also stated the alleged invention in that case is a mere scheme, an abstract idea, mere intellectual information, which has never been held to be patentable. At the conclusion of [32], the Court appeared to be critical of the absence of any physical consequence at all. See also Grant at [47] where it is stated it has long been accepted that intellectual information, a mathematical algorithm, mere working directions and a scheme without effect are not patentable (my emphasis).
The NRDC (supra) decision appears to be instructive in this respect. The NRDC (supra) decision makes plain, at page 275, that 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. Further, at page 276 and citing from Elton and Leda Chemicals Ld.’s Application, [1957] 74 RPC 267 at 268 and 269, “an inventor … may, by providing some new and useful effect, appropriate for himself a patent monopoly in such improved result by covering the mode or manner by means of which his result is secured.” Also at page 276 of NRDC, what is meant by a “product” in relation to a process is only something in which the new and useful effect may be observed. The “something” need not be a “thing” in the sense of an article; it may be any physical phenomenon in which the effect, be it creation or merely alteration, may be observed: a building (for example), a tract or stratum of land, an explosion, an electrical oscillation.
The Grant (supra) decision further appears to be instructive in this respect. See [29] where it is stated that a “…product of a method is something in which a new and useful effect may be observed. For claimed computer programs, the courts looked to the application of the program to produce a practical and useful result, so that more than “intellectual information” was involved.” Further to that, at [47], the Grant decision indicates there must be some physical phenomenon or effect resulting from the working of a method.
The Invention Pathways Pty Ltd decision, [2010] APO 10, suggests a physical effect that is peripheral and subordinate to the substance of the claimed invention is not enough. In that case the applicant suggested the physical effect produced by the method was an “electronically fillable checklist”. The decision states at [41] that:-
“… the physical effect identified is in my view peripheral and subordinate to the substance of the claimed invention which is a scheme for the commercialisation of inventions. There is no substantive effect produced through the operation of the computer which holds the “electronically fillable checklist” and such an effect does not arise from a synergistic interaction in the operation of the method on the computer or other physical elements.”
I think all of the above indicates that a change in state or information in a part of a machine, on its own, is not enough. There may well be a physical effect. Mere working directions would in the main also seem to have a physical effect. See for example Rolls-Royce Ltd’s Application, (1963) 80 RPC 251. On the other hand, the Grant (supra) decision states that mere working directions are not patentable. Similarly a prize pool and method of paying prizes, also seemingly having physical effects on the face of it, were also found to be not patentable. See Iowa Lottery, [2010] APO 25.
Clearly something more substantial is required than just any physical effect. The NRDC (supra) decision discusses an advantage which is material. The Iowa Lottery case states at [12]:-
“Information even if represented in a physical way has never been considered sufficient for patentability save for some material advantage or mechanical effect in the arrangement of the information. See for example Re Cooper’s Application (1901) 19 RPC 53 and Re Virginia-Carolina Chemical Corporation’s Application (1958) RPC 35.” (my emphasis).
In the present case, one could accept the derivation or manipulation of data in the way defined in the claims has a physical effect. There is processing that occurs, or construction of data as is claimed. The issue is whether there is sufficient physical effect along the lines described above, that is, for example, material advantage or mechanical effect in the arrangement of information.
I indicated earlier that claim 1 of the present application defines a method in a computer system of constructing data from weighting assets based on various received data sets. The claim monopolises the construction of the data from other data that is in regard to assets, a selective index of assets and from operating a processor to weight the index of assets according to specified weighting criteria. The subject matter of the claim is clearly about generating data in a computer system from other data according to specified operations and weighting criteria. Moreover, such data generation from such operations and weighting criteria amounts to little more than enabling the operation of the investment scheme. That the claim essentially monopolises a scheme without the requisite physical effect, as described above, is aptly demonstrated by the earlier described example that one of the metrics to create the claimed index is an index of companies with CEOs having graduated from a particular university. In such case, one could suggest the scheme might even be a mere curiosity.

The requisite physical phenomenon or effect is not present in the method of claim 1 nor is there one resulting from the working of the method. That is, there is no material advantage or mechanical effect evident in any arrangement of information in the present case, contrary to the case for example in Welcome Real-Time SA v Catuity Inc (supra) which was a method involving smart cards storing traders’ loyalty programs, and monitoring customer entitlements through a behaviour file in the cards relating to the behaviour (for example, spending history) of card holders towards the traders. The Catuity case involved a real material consequence in respect to customer access to loyalty rewards from multiple loyalty programs stored in customers’ smart cards. At best, in the present case, the claimed method of constructing data amounts to merely the presentation of information without anything more substantial apparently required than data selection and manipulation to operate the investment scheme.
The alleged invention in claim 1 of the present application falls short of having the required physical phenomenon or effect as described above. I conclude claim 1 is not for a manner of manufacture.
Dependent method claims 2-16 add embodiments related to specific types of assets, weightings and measures of scale. I think claims 2-16 fall short of defining a manner of manufacture for the same reasons as above.
I conclude method claims 1-16 are not for a manner of manufacture and consequently do not comply with subsection 18(1)(a).
In respect to claims 17 – 19, the passages from NRDC (supra) discussed earlier appear pertinent again. At page 276, “what is meant by a “product” in relation to a process is only something in which the new and useful effect may be observed.” Additionally, the Grant (supra) decision at [29] stated:-
“…product of a method is something in which a new and useful effect may be observed. For claimed computer programs, the courts looked to the application of the program to produce a practical and useful result, so that more than “intellectual information” was involved.”
Also the Invention Pathways (supra) decision at [41] stated that the assertion in that case that the physical effect was the electronically fillable checklist was peripheral and subordinate to the substance of the claimed method. In that case, the deputy commissioner stated there was no substantive effect produced through the operation of the computer which holds the electronically fillable checklist and such an effect did not arise from a synergistic interaction in the operation of the method on the computer or other physical elements. In the Iowa Lottery decision at [13], it was held that the claiming of a product characterised by the features of a scheme by which it was produced or is affected, even if a real, physical thing, did not fundamentally alter the question of patentability over the claiming of the scheme as a method.
Mr Ward submitted the above decisions dealt primarily with method claims or at least claims couched in terms of a method by a series of steps. He stated that the inventions defined in claims 17 – 19 of the present application are not methods. Therefore it is entirely inappropriate and nonsensical to apply jurisprudence regarding the patentability of method claims to these non-method claims.
The above decisions appear to require a direct correlation between a method’s “new and useful effect” or “physical effect” being observable in any resultant product or being produced by an associated device or apparatus. It seems incongruent to divorce system, device or apparatus claims wholly from method claims. Furthermore, the Virginia (supra) decision cautioned against claiming clauses ostensibly directed towards a manner of manufacture cloaking the real nature of the applicants’ disclosure. In this light it would also seem incongruent to make an inconsistent finding in respect to patentable subject matter only on account of the claim type. Put another way, it appears that a claim to a computer characterised wholly by the features of a method without the requisite physical effect, or any other non-patentable method, would not be saved merely by the presence of a computer. The same would appear to hold for a storage medium characterised wholly by storing instructions to execute a non-patentable method.
Claims 17 and 18 substantially define mere system variants for operating the method of claim 1, albeit not necessarily even constructing data indicative of but rather constructing the asset portfolio per se. Similarly claim 19 merely defines a machine readable medium that provides instructions which when executed by a computing platform causes the computing platform to perform operations comprising a method of constructing the requisite weighted portfolio of assets. These claims define systems and a medium characterised wholly for executing a method already found to be non-patentable.
Furthermore, neither the claimed computer system nor the storage medium exhibit any requisite physically observable change or effect as a result of the method.
I conclude claims 17-19 also are not for a manner of manufacture and consequently also do not comply with subsection 18(1)(a).
CONCLUSION
I have found that all of claims 1-19 are not for a manner of manufacture and consequently do not comply with subsection 18(1)(a).
In the opening discussion I outlined that the specification described a passive investment scheme. There are some elements of computer apparatus and networks described and illustrated in the specification. On the other hand, there is nothing of substance beyond the operation of the scheme itself to give rise to the requisite physical effect as discussed herein from which suitable claims to define patentable subject matter could be drafted.
I refuse the application.
M. G. Kraefft
Delegate of the Commissioner of Patents