28 December 2011

Why IP Australia is Clearly Wrong About Research Affiliates

Research Affiliates, LLC. [2010] APO 31 (17 December 2010)
Research Affiliates, LLC [2011] APO 101 (5 December 2011)

Manner of manufacture – whether method, system and computer program product for generating a weighted securities index is patent-eligible

RAIn this continuation of IP Australia’s ‘war on business methods’, a Delegate of the Commissioner of Patents has, for a second time, rejected claims directed to an invention directed to the construction and use of passive portfolios and indexes for securities trading.

A first set of claims was rejected in a decision issued on 17 December 2010, with that decision subsequently being appealed to the Federal Court of Australia.  However, the applicant – originally the inventor Robert D Arnott, and subsequently the assignee, Research Affiliates LLC – had filed a divisional application with slightly different claims, and the appeal was placed on-hold pending a decision on this further application.

The outcome in the second case is unsurprising.  The Delegate (who also issued the first decision) has not even bothered to provide full reasoning for his decision, instead settling for a comparison table to explain why the reasons in the first decision apply also to the revised claims of the divisional application.  Indeed, he has gone a step further, stating that the divisional claims constitute ‘an even greater contravention’ of the requirement to define a manner of manufacture than the claims of the parent application.

Research Affiliates has now appealed the second decision also.  We expect that the two appeals will be joined to a single proceeding, to be heard together.

We are hopeful that the appeals will be successful.  IP Australia’s decisions in these cases are not merely wrong, they are demonstrably inconsistent with very clear statements made by the Full Court of the Federal Court of Australia (by which a single judge of the court is bound) plainly indicating that the subject matter of the Research Affiliates claims, in both the parent and divisional applications, is patent-eligible in Australia.


Research Affiliates (‘RA’) describes itself as ‘a global leader in innovative investing and asset allocation strategies’ which is ‘dedicated to solving complex investment issues’ and to ‘creating innovative strategies that respond to the current needs of the market.’

Inventor Robert Arnott is Chairman and CEO of RA, and one of the firm’s lead researchers.  According to the RA website, one of its key competitive advantages is its ‘RAFI® (Research Affiliates Fundamental Index®) methodology’ which:

…involves selecting and weighting securities by fundamental measures of company size, as opposed to market capitalization. The methodology captures many of the benefits of passive investing— such as transparency, objectivity, broad economic representation, and diversification— with less exposure to pricing errors and fads.

The RAFI methodology is designed to work in inefficient markets. We believe that prices contain errors and that they revert back to fair value over time. Using fundamental measures of company size, such as sales and dividends, the RAFI methodology represents a company's economic footprint, not constantly shifting market expectations, bubbles and anti-bubbles reflected in its share price.

So what is so special about this?

Even the most casual observer of share markets, or the finance news, is familiar with the usual concept of an ‘index’.  Examples of indexes (or ‘indices’ depending upon linguistic preference) include the Australian ‘All Ordinaries Index’ and ASX 100, the US ‘Dow Jones’ and ‘S&P 500, the UK ‘FTSE 100’, the Japanese ‘Nikkei 225’ and the Hong Kong ‘Hang Seng’.  Each of these indexes represents a valuation of a market or sector, and is generally some form of weighted sum of a selected set of stocks.

As an individual investor, if you were to buy a portfolio of shares, consisting of all those making up, say, the ASX 100 index, and in exactly the same proportions, then the value of your portfolio would rise and fall exactly in accordance with the index.  Since, over the long term, most of these ‘standard’ indexes tend to rise, this would actually not be a bad investment strategy.  And, of course, it would not require any thought on the part of the investor.  Portfolios built in this way are therefore called ‘passive’.

All of the conventional indexes are based on weighting the investments according to one of market capitalization weighting (i.e. in proportion to total company value – most of the well-known indexes are of this type), equal weighting (self-explanatory – examples are the Value Line index and the S&P 500 Equal Weighted Stock Index) or share price weighting (i.e. in proportion to the price of individual shares – for example the Dow Jones Industrial Average).

Of course, professional investors (and their clients)  expect to be able to outperform the established market indexes.  RA’s claimed contribution is to use measures of company size other than market capitalisation, or the other common weighting methods, to determine the proportions of shares to hold in a portfolio made up of a selected set of stocks.  In other words, RA uses its own index with weightings derived from its own research into improved ways of measuring economic performance.

Assuming this works, it is clearly a very powerful and valuable idea.  To a fund manager, a method of constructing an improved index – and thus a corresponding portfolio – is of comparable significance to giving an auto mechanic an improved supercharger!

This is essentially what the RA applications claim, and what IP Australia has determined in not patentable.  However, as far as we can see this is just as wrong as if the Patent Office had rejected a claim to a new and inventive supercharger – which, of course, it would never do, because mechanical things are always manners of manufacture!


It is very easy to demonstrate that the Delegate has got this one wrong.  It is not even necessary to analyse his convoluted reasoning (although we will come to that in due course).

Here is a representative rejected claim of the RA divisional application:

28. A computer system including:
  1. means for accessing data relating to a plurality of assets;
  2. means for processing the data thereby to identify a selection of the assets for inclusion in an index based on an objective measure of scale other than share price, market capitalization and any combination thereof;
  3. means for accessing a weighting function configured to weight the selected assets;
  4. means for applying the weighting function, thereby to assign to each of the selected assets a respective weighting, wherein the weighting:
                (a) is based on an objective measure of scale other than share price,
                market capitalization and any combination thereof; and
                (b) is not based on market capitalization weighting, equal weighting,
                share price weighting and any combination thereof.

And here is a representative claim as considered by the US Court of Appeal for the Federal Circuit in State Street Bank & Trust Co. v Signature Financial Group 149 F. 3d 1368:

1. A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:
    1. computer processor means for processing data;
    1. storage means for storing data on a storage medium;
    1. first means for initializing the storage medium;
    1. second means for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds’ assets and for allocating the percentage share that each fund holds in the portfolio;
    1. third means for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;
    1. fourth means for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and
    1. fifth means for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds.
Now, as far as we can see these two claims are directly analogous.  Both define an invention in terms of a computer-implemented system using ‘means plus function’ type language (the means generally being some combination of hardware and software).  Both involve manipulating data representing assets within a portfolio in order to produce information for use in managing an investment.  Neither one results in any ‘physical effect’ in the outside world, although both clearly cause changes in physical state of information storage elements within the respective computer systems.

Here is what the US court had to say about the claim in State Street (at p 1373):

Today, we hold that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces "a useful, concrete and tangible result" — a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades.

That seems pretty clear – in the US, at least, the transformation of data representing financial and investment information, using a computer, to produce a ‘useful, concrete and tangible result’, in the sense of something that people actually use as a basis for further action, is patent-eligible.

And here is what the Full Federal Court in Australia had to say about the State Street decision in Grant v Commissioner of Patents [2006] FCAFC 120, at [21-24]:

In State Street … the United States Court of Appeals for the Federal Circuit held that a business system, a data processing system utilising a mathematical algorithm for implementing an investment scheme, constituted a practical and concrete application. This involved the transformation of data by a machine through a series of mathematical calculations to provide a share price fixed for recording and reporting purposes. The Court was careful to emphasise that a mathematical algorithm, formula or calculation was not patentable but the transformation of data by a machine that produced a useful, concrete and tangible result was patentable.

The United States Court of Appeals revisited the subject of patentable subject matter in the context of the manipulation of numbers in the field of computer technology in AT&T. The basic proposition was repeated, that a mathematical formula alone, viewed in the abstract, is unpatentable subject matter. … The Court cited its earlier decision In re Alappat … in which it explained the ‘straightforward’ concept on which previous decisions, including State Street were based, ‘namely, that certain types of mathematical subject matter, standing alone, represent nothing more than abstract ideas until reduced to some type of practical application’ (emphasis in original) …. An application is not limited to a physical transformation, which was said to be an example of a useful application but not an invariable requirement. Where the claimed process did nothing more than take several abstract ideas and manipulate them together, nothing was added that was patentable.

Despite the broad terms of the United States Code (35 U.S.C. SS 101), the courts of that country have held that abstract ideas, laws of nature and natural phenomena are outside the categories of patentable invention until reduced to some type of practical application ….  The same tests apply for patents for business methods as for any other claimed invention. The distinction was between the employment of an abstract idea or law of nature and the idea or law itself.

… While the development of US patent law is derived from the Constitution of the United States rather than the Statute of Monopolies, … the policy behind the two provisions is the same. In both jurisdictions, the courts have confirmed that a broad approach to subject matter should be taken in order to adapt to new technologies and inventions but that does not mean that there are no restrictions on what is properly patentable.

And further, at [32]:

A physical effect in the sense of a concrete effect or phenomenon or manifestation or transformation is required. In NRDC, an artificial effect was physically created on the land. In Catuity and CCOM as in State Street and AT&T, there was a component that was physically affected or a change in state or information in a part of a machine. These can all be regarded as physical effects.

This can only be read as approval of the US approach.  In short, the State Street claims (in fact, the patent was owned by Signature Financial Group) would have been accepted as patentable in Australia by the Full Bench of the Federal Court.

And that being the case, it seems pretty clear that the Research Affiliates claims must also be patentable.  Certainly the Australian Delegate’s finding that (at [16] of the latest decision) ‘there is nothing of substance in the specification as a whole from which claims to patentable subject matter could be drafted’ appears manifestly untenable.


We cannot see a flaw in the above reasoning.  The inevitable conclusion is that computer implemented methods and systems, which take input information and process it to produce new information as an output, at least when that information is ‘useful, concrete and tangible’ in the sense that it is not abstract, but rather can provide the basis for specific further action, is patent-eligible.

So how did an experienced Hearing Office at IP Australia go so far astray?

We would say that this was firstly because he failed to look at what the Grant decision clearly tells us is patentable.  As explained above, the decision is pretty clear on the point that the claims in the State Street case would have been patentable had they been up for consideration in Australia.  In our view, this should have been the starting point for the analysis in Research Affiliates.

However, Mr Grant’s claims were not patentable.  They related to abstract relationships involving legal arrangements between people and entities (such as trusts).  They did not involve, or require, the use of any computer processing.  No input information was received, processed, or transformed into new and useful output information.  Perhaps because of the negative outcome in Grant, the Delegate has been unduly concerned to look in the decision for reasons to reject the Research Affiliates’ claims?

Indeed, at paragraph [22] of the first Research Affiliates decision, the Delegate appears to have been distracted by references to cases relating to printed information, which were cited in the Patent Office’s own earlier decision in Iowa Lottery [2010] APO 25, from which he cited the following passage:

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. (Emphasis added in Research Affiliates.)

Both of the old cited decisions indeed relate to whether particular information (‘printed matter’) was patentable.  In Virginia-Carolina Chemical Corporation the relevant principle was explained as being that the intellectual or visual content of a paper, film or other medium related to the fine and not the useful arts.  In Cooper the claims related to an invention whereby one or more spaces were left across the printed page of a newspaper so that it could be folded and remain readable.  This particular arrangement of information was held to be patentable.

Clearly, neither of these cases have anything to do with the situation in Research Affiliates.  The claimed method and system for index generation does not relate to ‘arranging’ information.  Rather, it relates to conducting specific data processing steps to produce new information.  It is the production of this new information, and the fact that it is ‘useful, concrete and tangible’ in nature, which confers patentability.  ‘Arrangements’ of information are utterly irrelevant to the invention.

The Delegate concluded (at [25] of the first decision), that:

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…

It is apparent, however, that this conclusion is based on a manifestly false premise, namely that an ‘arrangement of information’ has anything relevantly to do with assessing the patentablility of the Research Affiliates’ claims.  It plainly does not.


In our view, IP Australia’s assault on ‘business methods’ is not only producing outcomes that are plainly incorrect in law, it is unduly complicating and obfuscating an area of law which was actually quite clear and well-settled.

In this case, a simple comparison with the Australian Full Federal Court discussion of State Street leads quickly and cleanly to the conclusion that Research Affiliates’ claims are patentable.

In contrast, trying to establish that they are not patentable sends the Delegate off on a round-about path that not only leads to the wrong conclusion, it incorporates irrelevant considerations and citations of case law that have nothing to do with modern data processing applications.  This contributes to confusion and uncertainty for applicants and their advisors.  When we look to the relevant authorities and conclude, on a sound basis, that particular subject matter is patentable, we are not accounting for the possibility that a hearing officer will conclude otherwise on the basis of a 1902 decision relating to the layout of newspaper pages!

If any further evidence is required that all this serves only to complicate and obscure the law, we note that the Delegate’s decision in the first Research Affiliates case is about 200 words longer than the US Federal Circuit court decision in State Street, and about 1000 words longer than this blog post.

It is now up to the Federal Court to set matters right.


Guest said...

whats really interesting about the recent decisions from IP Australia is that not only are the decisions inconsistent with the federal court decisions but each examiner/hearing officer were given the authority to form decisions based on their biased and baseless interpretation of the claim/specification.

The only thing thats consistent in these decisions is that they are aimed at invalidating/ sabotaging/discrediting business method/system related disclosures.

Patentology (Mark Summerfield) said...

Actually, I am more concerned about an apparent lack of independent authority displayed in these decisions.

Senior examiners, and more so those delegated as hearing officers, should be forming their own opinions on the matters which come before them.  Of course, those opinions should in turn be informed by the current state of the law.

However, it is clear that delegates at all levels are acting in accordance with what can only be a policy directed from the highest levels within IP Australia.  As a result, experienced hearing officers are putting their names to decisions that are, in some cases, seemingly wilfully blind to very clear directions provided by the courts.

If it were me, personally I would resign before I would bow to pressure to put my signature to an opinion that I knew to be flawed and so easily open to refutation.

I have done a couple of these dissections on Patentology now, and I really wonder whether the hearing officers in question have read them, and how they feel about it.  I am not unmindful of the fact that this is a fairly harsh form of criticism, and that I may be putting noses out-of-joint, but I did not start this blog to engage in conventional case reporting.  Anyone who does not want their facts delivered with a dose of opinion will find plenty of other places they can go!

In cases in which I am not personally involved, I am in the same position as the hearing officers.  I can read the specification and the claims.  I think I am pretty familiar with the relevant law.  If the issues fell into grey areas on which informed minds might legitimately differ that would be one thing.  But I really cannot see how some of these decisions are defensible.

None said...

Resign? You are joking right? Who would employ them?

Examiners are judged on how they apply the manual, not what the law says. If the manual says black is white, then that is what it is. They defintely wont use an opinion piece as precedent.

Therefore you can look up what the manual says regarding "business methods", and then tell ta them if tjey atr applying the "manual" incorrectly.

Patentology (Mark Summerfield) said...

Examiners -- yes.
But Hearing Officers -- no.  Decisions issued as a result of hearings are one of the sources of guidance that may be incorporated into the Manual.
I am not suggesting that an 'opinion piece' should be used as precedent.  Although it does not seem that such a suggestion could be any less effective right now than the suggestion that decisions of the Full Federal Court and the High Court should be used as precedent!

Guest said...

examiners and hearing officers are NOT allowed to form decisions that are inconsistent with the law (federal court decisions). I believe there is a provision in the admin law that prohibits a government agency such as IP Australia from disregarding precedents.

These lousy examiners are actually breaking the law by willfully disregarding the precedents.

Anon said...

I believe since the introduction of the new quality standards and the use of quality officers checking up on examiners, examiners fear de[arting from the manual and using their judgement.

Guest said...

the manual is not above the law. this new quality standard is supposed to promote quality decisions that are consistent with the law not biased opinions that lack legal grounding.  

Patentology (Mark Summerfield) said...

You are probably referring to the Adminstrative Decisions (Judicial Review) Act 1977, which provides for a court (the Federal Court or the Federal Magistrates Court) to review decisions by administrative bodies on various grounds, including that the decisions was contrary to law.

This is really just an alternative avenue of appeal.  I cannot see any reason why it would not apply to substantive Patent Office decisions, however I am also not aware of it ever having been used for this purpose.  The Patents Act already makes express provision for appeals from most Patent Office decisions.  Using the Administrative Decisions Act would probably involve additional steps of establishing that the Act is applicable, and which provisions are relevant to the matter under review.

Ultimately, the legal basis for the review would be the same as a direct appeal under the Patents Act.

Guest said...

RA's application was rejected because its not State Street Bank (one of the largest and most resourceful organizations in the US).

I feel that IP Australia is really out there to screw the little guys..... 

Guest said...

oh wait...RA is not a little guy is it?

Patentology (Mark Summerfield) said...

I can assure you, from experience, that IP Australia is just as happy rejecting applications by very large and well known organisations.  So it its certainly not picking on 'little guys'.

A none said...

As of thid morning, Patentology had ben blocked for access from Ipaustralia. None of the other patent blogs are similarly affected. Do you have malicious links of the NSFW kind? Maybe temporary.

Patentology (Mark Summerfield) said...

I am not aware of any malicious (or salacious) links on this blog.

Perhaps someone has determined that the opinions expressed on the Patentology blog are NSFW at IP Australia.  That would be disturbing. 

Let's hope it's temporary.  Please keep us posted!

Visitor said...

Access is currently available from within IPA. False alarm!

None A said...

Correct. Working now.

Patentology (Mark Summerfield) said...

That is good to know.  Blocking access would have been a fairly unnecessary response to a little critical opinion.

Hopefully some of what I write is actually useful to IP Australia staff, as well as others in the profession!

Thanks for taking the time to keep us informed.

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