USPTO Revised Subject Matter Eligibility Guidance: Ex parte Smith Designated Informative

By Timothy J. Busse

The USPTO recently designated Ex parte Smith[1] an informative decision as related to the 2019 Revised Patentable Subject Matter Eligibility Guidance (hereinafter, 2019 PEG).[2]  In Ex parte Smith, the Board, applying the 2019 PEG, found that the Examiner erred in rejecting the claims as directed to ineligible subject matter. 

The claims at issue in Ex parte Smith were directed to a hybrid trading system for concurrently trading securities or derivatives through both electronic and open-outcry trading mechanisms.  As an example, claim 1 recited a “method of trading derivatives in a hybrid exchange system” including, inter alia, “identifying at an electronic trade engine a new quote from a first in-crowd market participant . . . delaying automatic execution of the new quote and [an] order, and starting a timer . . . receiving at the electronic trade engine a second quote from a second in-crowd market participant after receiving the new quote from the first in-crowd market participant and before an expiration of the timer . . . and allocating the order between the first and second in-crowd market participants at the electronic trade engine, wherein the order is not executed until expiration of the timer.”

The Examiner rejected claim 1 under the Alice[3] framework.  At Alice step 1, the Examiner asserted that trading derivatives in a hybrid exchange system includes “the abstract idea of comparing new and stored information and using rules to identify options,” explaining that this is “a concept within the realm of ‘fundamental economic practices’ because the concept relates to the economy and commerce.” At Alice step 2, the Examiner reasoned that the recited limitations, individually or as an ordered combination did not add significantly more because “the derivative trading system ‘is stated at a high level of generality’ and that in performing the various recited functions, ‘[t]he computer is employed for its most basic functions and does not impose meaningful limits on the scope of the claims.’”

Appellant argued that the claims are dissimilar to cases in which performing a business method on the Internet were found ineligibly, such as in DDR Holdings,[4] and that the Examiners characterization of the alleged abstract idea was overly broad.  More importantly, Appellant also argued that “the claims provide a technological improvement because they allow for in-crowd market participant input in automated trade processing that would ordinarily bypass such participants . . . [by] the ‘removal of a portion of an order from a database while delaying automated execution and communicating via a network that the portion has been traded to permit another in-crowd market participant to submit quotes during the delay.’”

Under the 2019 PEG Step 2A–Prong One,[5] the Board found that four of five identified claim limitations, under their broadest reasonable interpretation, recite a judicial exception of a fundamental economic practice.  Moving to Step 2A–Prong Two,[6] the Board found that the various specific computer-related limitations recited in claim 1, “described at a high level in the Specification without meaningful detail about their stricture of configuration,” were not enough to integrate the judicial exception into a practical application. 

Beyond the structural limitations, however, the Board defined identified limitations that provided an improvement to a technical field, for example, by “addressing problems arising in the context of a hybrid derivatives trading system in which trades are made both electronically and on a trading floor.”  These additional limitations were directed to delaying automatic execution of first orders using a preset timer to allow for second orders to be received such that the first order and second order may be executed simultaneously.  Importantly, the Board noted that the specification stated an improvement arising from these limitations: “[a]dvantages of temporarily restraining this type of trade include[] encouraging more in-crowd market participants to quote at the best price and the removal of any communication or computer hardware advantage among the in-crowd market participants.”  The Board concluded that “the use of the claimed timing mechanisms and the associated temporary restraints on execution of trades provide a specific technological improvement over prior derivatives trading systems.” 

The dissent disagreed with the findings under Step 2A–Prong Two.  Specifically, the dissent argued that delaying automatic execution of first orders using a preset timer to allow for second orders to be received is not a specific improvement over prior derivative trading systems because “the delay of matching market orders . . . is a necessary requirement for both conventional trading practices or Appellants’ derivative trading practice.”

In response to the dissent, the majority stated that use of the delay “is implemented in specific circumstances in a specific trading environment, namely when a matching market order is received from an in-crowd market participant in a hybrid trading system . . . [thus] Appellants’ claims ‘overcome a problem specifically arising in the realm of computer networks.’”

Ex parte Smith illustrates the importance of clearly defining in the specification technological improvements associated with each limitation of the claims, so as to highlight the manner in which the claimed invention integrates a judicial exception into a practical application.  Further, practitioners would be wise to juxtapose such improvements with the current state of the art to demonstrate that respective limitations are not merely inherent.


[1] Ex parte Smith, 2018-000064 (Feb.1, 2019) (designated: Mar. 19, 2019) (applying 2019 Revised Patentable Subject Matter Eligibility Guidance).

[2] 2019 Revised Patent Subject Matter Eligibility Guidance, 84 Fed. Reg. 50 (Jan. 7, 2019) [hereinafter, 2019 PEG].

[3] Alice Corp. v. CLS Bank Int’l, 573 U.S. 208 (2014).

[4] DDR Holdings, LLC v., L.P., 773 F.3d 1245 (Fed. Cir. 2014))

[5] Whether the claim recites any judicial exception, including any enumerated grouping of an abstract idea (e.g., mathematical concepts, certain methods of organizing human interactions, or mental processes).  See 2019 PEG at 51–54.

[6] Whether the claim as a whole integrates the recited judicial exception into a practical application of the exception.  See 2019 PEG at 54–55.