Rules to trade by: Playing the patent game

Any predisposed user of technology should understand the role software patents have played in the trading industry. After all, these patents apply to the tools you use to shape your craft. Unfortunately, patents are a complicated topic—and not just within the trading industry—and the level of their complexity has increased over time. 

The rules of the patent game have been hard to grasp from the beginning. On April 23, 1968, the United States Patent and Trademark Office (USPTO) approved an application filed on April 9, 1965. Martin A. Goetz, a pioneer in the development of the commercial software industry, was granted U.S. Patent No. 3,380,029, despite the 1966 Report of the President’s Commission on the Patent System recommending against patents for computer programs. This patent was based on a data processing system for sorting computer tapes. 

Soon, the U.S. Supreme Court got involved. Gottschallk v. Benson (1972), Parker v. Flook (1978)  and Diamond v. Diehr (1981) are known as the “Patent-Eligibility Trilogy” of Supreme Court rulings on this issue.

Gottschallk v. Benson was a Supreme Court case involving a patent application for a way of converting binary-coded decimal numerals into pure binary numerals. Although the Court of Customs and Patent Appeals reversed an earlier rejection of the patent, the Supreme Court ultimately, and unanimously, decided the patent was indeed for a mathematical process—something that had not been patentable since the 1930s.

In Parker v. Flook, the U.S. Supreme Court rejected a patent for a method of updating an “alarm limit” value on a variable (such as temperature) used for the process of catalytic chemical conversion of hydrocarbons. The court once again said it applied to a method that included an “algorithm or mathematical formula,” and rejected the claim because “there was a specific end use contemplated for the algorithm: utilization of the algorithm in computer programming.”

In 1981, the Supreme Court returned to the issue in Diamond v. Diehr. Diehr and Lutton came up with a math equation that could determine how long to cure rubber. They developed a computer program and installed the same on a rubber molding press so that it could make better precision-molded rubber products. The patent was initially rejected, but that rejection was reversed by the patent appeal court.

In this case, the Supreme Court agreed with the appeal court and upheld the patent, stating that controlling the execution of a physical process by running a computer program did not preclude a patent. The high court reiterated its earlier decisions that mathematical formulas could not be patented. However, this did not mean that the presence of software made an otherwise patent-eligible machine non-patentable. In short, if the invention as a whole meets certain requirements, such as “transforming or reducing an article to a different state or thing,” then it is patent-eligible, even if it includes a software component.

In short, Gottschallk v. Benson and Parker v. Flook dealt with attempts to patent existing algorithms or known mathematical laws that had been computerized. Being the first to computerize something that is prior art does not make it patentable. In Diamond v. Diehr, however, the process itself was new. Just because it was being done on a computer didn’t mean that it couldn’t be patented.

Since the Diamond decision, there have been many software patents granted. However, over time, there have been different interpretations of the applicable limits. The problem is how different examiners view those limits. Similar patents have been granted but some have been denied by others, and not all applicants have the resources to take their cases to the Supreme Court. 

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About the Author

Murray A. Ruggiero Jr. is the author of "Cybernetic Trading Strategies" (Wiley). E-mail him at ruggieroassoc@aol.com.