Nafeh, John

Patent Trials and Appeals Board

Feb 26, 2020

12749445 - (D) (P.T.A.B. Feb. 26, 2020)

UNITED STATES PATENT AND TRADEMARK OFFICE
UNITED STATES DEPARTMENT OF COMMERCE
United States Patent and Trademark Office
Address: COMMISSIONER FOR PATENTS
P.O. Box 1450
Alexandria, Virginia 22313-1450
www.uspto.gov
APPLICATION NO. FILING DATE FIRST NAMED INVENTOR ATTORNEY DOCKET NO. CONFIRMATION NO.
12/749,445 03/29/2010 John Nafeh PA5205US 7053
22830 7590 02/26/2020
CARR & FERRELL LLP
120 CONSTITUTION DRIVE
MENLO PARK, CA 94025
EXAMINER
CAMPEN, KELLY SCAGGS
ART UNIT PAPER NUMBER
3691
NOTIFICATION DATE DELIVERY MODE
02/26/2020 ELECTRONIC
Please find below and/or attached an Office communication concerning this application or proceeding.
The time period for reply, if any, is set in the attached communication.
Notice of the Office communication was sent electronically on above-indicated "Notification Date" to the
following e-mail address(es):
jsamson@carrferrell.com
patdocket@carrferrell.com
smather@carrferrell.com
PTOL-90A (Rev. 04/07)

UNITED STATES PATENT AND TRADEMARK OFFICE
____________

BEFORE THE PATENT TRIAL AND APPEAL BOARD
____________

Ex parte JOHN NAFEH

Appeal 2019-004124
Application 12/749,445
Technology Center 3600
____________

Before RICHARD M. LEBOVITZ, ULRIKE W. JENKS, and
MICHAEL A. VALEK, Administrative Patent Judges.

LEBOVITZ, Administrative Patent Judge.

DECISION ON APPEAL
The Examiner rejected the claims under 35 U.S.C. § 101 as reciting
patent ineligible subject matter. Pursuant to 35 U.S.C. § 134(a), Appellant1
appeals from the Examiner’s decision to reject the claims. We have
jurisdiction under 35 U.S.C. § 6(b).
We REVERSE.

1 We use the word “Appellant” to refer to “applicant” as defined in 37
C.F.R. § 1.42. Appellant identifies the real party in interest as North
American Derivatives Exchange, Inc. (“Nadex, Inc.”). Appeal Br. 3.
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STATEMENT OF THE CASE
Claims 14–18 and 21–28 stand rejected by the Examiner under
35 U.S.C. § 101 because the claimed invention is directed to an abstract
idea. Ans. 3.
Claim 14, the only independent claim on appeal, is reproduced below
(bracketed numbering and lettering added for reference to the claim
limitations):
14. A computer-implemented method for trading a variable
pay-out hedging instrument, the method comprising a computer
processor executing the steps of:
[1] receiving by a computer a quoted point of an
underlying market;
[2] determining by the computer an upper range value,
the upper range value higher than the quoted point;
[3] determining by the computer a lower range value, the
lower range value lower than the quoted point;
[4] forming by the computer a range comprising the
lower range value and the upper range value around the quoted
point;
[5] offering by the computer the variable pay-out hedging
instrument based on the range, the instrument offered at the
quoted point within the range; wherein the range is one of a
multiplicity of ranges and wherein at least two of the
multiplicity of ranges are listed; and wherein at least two of the
multiplicity of ranges have different upper range values, at least
two of the multiplicity of ranges have different lower range
values, and at least two of the multiplicity of ranges range
different underlying markets;

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[6]
[a] a hardware based random number generator
randomly prioritizing two or more orders received
simultaneously and
[b] directing a prioritized order to a validator,
[c] the validator freezing an asset corresponding to
the prioritized order and
[d] directing the prioritized order to a switch; and
[e] the switch communicatively coupled to the
validator, the switch receiving the prioritized order from the
validator, and
[f] directing the prioritized order to an order
matcher.

PRINCIPLES OF LAW
Under 35 U.S.C. § 101, an invention is patent-eligible if it claims a
“new and useful process, machine, manufacture, or composition of matter.”
However, not every discovery is eligible for patent protection. Diamond v.
Diehr, 450 U.S. 175, 185 (1981). “Excluded from such patent protection are
laws of nature, natural phenomena, and abstract ideas.” Id. The Supreme
Court articulated a two-step analysis to determine whether a claim falls
within an excluded category of invention. Alice Corp. Pty. Ltd. v. CLS Bank
Int’l, 134 S.Ct. 2347 (2014); Mayo Collaborative Servs. v. Prometheus Labs,
Inc., 566 U.S. 66, 75–77 (2012).
In the first step, it is determined “whether the claims at issue are
directed to one of those patent-ineligible concepts.” Alice, 134 S.Ct. at
2355. If it is determined that the claims are directed to an ineligible concept,
then the second step of the two-part analysis is applied in which it is asked
“[w]hat else is there in the claims before us?” Id. The Court explained that
this step involves
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a search for an ‘inventive concept’ — i.e., an element or
combination of elements that is ‘sufficient to ensure that the
patent in practice amounts to significantly more than a patent
upon the [ineligible concept] itself.’
Alice, 134 S.Ct. at 2355 (citing from Mayo, 566 U.S. at 75–77).
Alice, relying on the analysis in Mayo of a claim directed to a law of
nature, stated that in the second part of the analysis, “the elements of each
claim both individually and ‘as an ordered combination’” must be
considered “to determine whether the additional elements ‘transform the
nature of the claim’ into a patent-eligible application.” Alice, 134 S.Ct. at
2355.
The PTO has published revised guidance on the application of
35 U.S.C. § 101. USPTO’s January 7, 2019 Memorandum, 2019 Revised
Patent Subject Matter Eligibility Guidance, 84 Fed. Reg. 50, 51–57 (2019)
(“Eligibility Guidance”). This guidance provides additional direction on
how to implement the two-part analysis of Mayo and Alice.
Step 2A, Prong One, of the 2019 Guidance, looks at the specific
limitations in the claim to determine whether the claim recites a judicial
exception to patent eligibility. In Step 2A, Prong Two, the claims are
examined to identify whether there are additional elements in the claims that
integrate the exception in a practical application, namely, is there a
“meaningful limit on the judicial exception, such that the claim is more than
a drafting effort designed to monopolize the judicial exception.” 84 Fed.
Reg. 54 (2. Prong Two).
If the claim recites a judicial exception that is not integrated into a
practical application, then as in the Mayo/Alice framework, Step 2B of the
Eligibility Guidance instructs us to determine whether there is a claimed
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“inventive concept” to ensure that the claims define an invention that is
significantly more than the ineligible concept, itself. 84 Fed. Reg. 56.
With these guiding principles in mind, we proceed to determine
whether the claimed subject matter in this appeal is eligible for patent
protection under 35 U.S.C. § 101.

DISCUSSION
Claim 1 recites a “computer-implemented method for trading a
variable pay-out hedging instrument.” Following the first step of the
Mayo/Alice analysis, we find that the claims are directed to a method, and
therefore fall into one of the statutory categories of patent-eligible subject
matter under 35 U.S.C. § 101. We thus proceed to Step 2A, Prong One, of
the Eligibility Guidance.

Step 2A, Prong One
In Step 2A, Prong One, of the Eligibility Guidance, the specific
limitations in the claim are examined to determine whether the claim recites
a judicial exception to patent eligibility, namely whether the claim recites an
abstract idea, law of nature, or natural phenomenon.
The Examiner found that the claim recites “mental processes” and
“methods of organizing human activity,” which are categories of abstract
ideas. Ans. 4, 6; Eligibility Guidance, 84 Fed. Reg. 52.
The claimed method is directed towards trading a variable pay-out
hedging instrument. The Specification explains that this instrument is a
contract that “provides the in-the-money contract holder with a payment up
to a capped maximum amount, and requires the out-of-the-money contract
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holder to pay up to that same capped maximum amount, depending on the
value or range of values of the underlying by or on the expiration date.”
Spec. ¶ 362. The Specification further explains that a market authority “can
offer a Variable Pay-Out Hedging instrument on any measure with any fixed
number point range.” Spec. ¶ 363. Steps [1]–[4] of claim 14 recite the steps
of determining the point range for the hedging instrument. Step [5]
comprises offering the variable pay-out hedging instrument based on the
point range. These steps of the claimed method recite a fundamental
economic principle, and therefore a method of organizing human behavior,
because placing an order for a hedging instrument is “sales activities,”
specifically listed in the Eligibility Guidance as an abstract idea.
Eligibility Guidance, 84 Fed. Reg. 52.2 See also Trading Technologies
International, Inc. v. IBG LLC, 921 F.3d 1084, 1093 (Fed. Cir. 2019)
(claims directed to trading activity of “graphing bids and offers to assist a
trader to make an order” were found directed to an abstract idea and
ineligible for a patent; placing an order for a hedging instrument is trading
activity).
Steps [2]–[4] also recite mental processes because determining a point
range for a hedging instrument can be accomplished in the human mind. 84
Fed. Reg. 52 (“Mental processes” are listed as category (c) of abstract ideas
which can be “performed in the human mind.”)

2 “(b) Certain methods of organizing human activity—fundamental
economic principles or practices (including hedging, insurance, mitigating
risk); commercial or legal interactions (including agreements in the form of
contracts; legal obligations; advertising, marketing or sales activities or
behaviors; business relations); managing personal behavior or relationships
or interactions between people (including social activities, teaching, and
following rules or instructions.”
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Because we find that claim 14 recites abstract ideas, we proceed to
Step 2A, prong Two, to determine whether the abstract ideas are integrated
into a practical application.
Step 2A, Prong Two
Prong Two of Step 2A under the 2019 Eligibility Guidance asks
whether there are additional elements that integrate the exception into a
practical application. As in the Mayo/Alice framework, we must look at the
claim elements individually and “as an ordered combination” to determine
whether the additional elements integrate the recited abstract idea into a
practical application. As discussed in the Eligibility Guidance, “[a] claim
that integrates a judicial exception in a practical application will apply, rely
on, or use the judicial exception in a manner that places a meaningful limit
on the judicial exception, such that the claim is more than a drafting effort
designed to monopolize the judicial exception.” Eligibility Guidance, 84
Fed. Reg. 54.
Integration into a practical application is evaluated by identifying
whether there are “additional elements” individually, and in combination,
which go beyond the judicial exception. Eligibility Guidance, 84 Fed. Reg.
54–55.
Appellant argues that the claim 14 is patent eligible because it
represents a “technological solution” to the problem that arises when “two or
more electronic orders are received simultaneously in real time from
geographically dispersed parties. Appeal Br. 6. Appellant specifically
points to the limitations in step [6], arguing that the steps achieve an
improvement by determining which hedging instrument order to process
first. Id.
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We agree with Appellant.
As explained above, steps [1]–[5] of claim 14, recite an abstract idea
comprising placing orders for a variable pay-out hedging instrument. In step
[6], when two orders for a hedging instrument are obtained at the same time,
a random number generator prioritizes the orders (step [a]). The order with
the assigned highest priority (“prioritized order”) is sent to a validator (step
[b]) which freezes an asset (step [c]) “to ensure that the originator of the
order has sufficient funds or contracts to satisfy the order” (Spec. ¶ 273).
The prioritized order with the frozen asset is directed to a switch, then to a
validator, and then to an order matcher (steps [d]–[f]). Steps [d]–[f] are not
carried out if there is no asset associated with the order because only a
“prioritized order” with a frozen asset is directed to the switch.
As discussed by Appellant, the steps recited in [6] improve the
hedging instrument order process of steps [1]–[5] by automating the “price-
time priority que” and having another order already queued when a
randomly prioritized order is not associated with an asset comprising
sufficient funds. Reply Br. 5. The use of the random number generator to
prioritize orders (step [a]) in combination with the validator freezing an asset
corresponding to the prioritized order (step [c]), and then only in this
circumstance, directing the order to the order matcher (steps [d]–[f]), are the
additional elements in the claim that provide a technological improvement
over prior hedging instrument trading systems. See Ex parte Smith, Appeal
No. 2018-000064, at 8 (PTAB Feb. 1, 2019) (designated informative )
(“claim 1 also recites additional limitations which focus on addressing
problems arising in the context of a hybrid derivatives trading system in
which trades are made both electronically and on a trading floor”);
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Eligibility Guidance, 84 Fed. Reg. 54–54. Unlike the ineligible claims in
Trading Technologies, 921 F.3d at 1093, the claims solve a “technological
problem.”
In conclusion, the claims “overcome a problem” in a technological or
technical field (see DDR Holdings, LLC v. Hotels.com, L.P., 773 F.3d 1245,
1257 (Fed. Cir. 2014)), namely, in variable pay-out hedging instrument
trading. Accordingly, we conclude that the judicial exceptions recited claim
14 are integrated into a practical application, and claim 14, and dependent
claims 15–18 and 21–28, are patent eligible because the claims are not
directed to the recited judicial exception.

CONCLUSION
In summary:
Claims
Rejected
35 U.S.C.
§
Reference(s)/Basis Affirmed Reversed
14–18, 21–
28
101 Eligibility 14–18, 21–
28

REVERSED