FEDERAL COURT OF AUSTRALIA

Watson v Commissioner of Patents [2019] FCA 1015

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondent’s costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

RARES ACJ:

1    Dale Watson appeals from a decision of a delegate of the Commissioner of Patents to revoke innovation patent 2017101681 because none of the claims is for a “manner of manufacture” within the meaning of s 6 of the Statute of Monopolies 1623 (UK) (see ss 101B(2)(b), 101E(1)(a)(ii) and 101F(1)(b) of the Patents Act 1990 (Cth)). The delegate was not satisfied on the balance of probabilities that the invention, so far as claimed, complied with s 18(1A)(a). It is common ground that the appeal to this Court is a hearing de novo pursuant to s 101F(4) of the Act.

2    The patent claimed in claim 1 as follows:

A method of innovation comprising the steps of an organisation engaging with an innovation services provider to innovate, said organisation disclosing aspects of the organisation to said innovation services provider and specifying a financial return to said innovation services provider for said innovation, wherein said innovation services provider describes or defines or describes and defines said innovation as a corresponding IP right prior to its disclosure to said organisation and the amount of said financial return is determined, at least partially, from the value or benefit or advantage of any sort or any other consideration or value of any kind to said organisation of said IP right.

3    Claim 2 mirrored claim 1, except that the first step involved the innovation services provider (innovator) engaging with the organisation rather than, as in claim 1, the organisation engaging with the innovator. Claims 3, 4 and 5 were dependent claims. Claim 5 claimed a method of innovation in which the intellectual property right (IP right) claimed in any of claims 1 to 4 comprised a patent application.

Background

4    The examination reports had concluded that the invention was a business model, and that decisions including National Research Development Corporation v Commissioner of Patents (1959) 102 CLR 252 (NRDC), Grant v Commissioner of Patents (2006) 154 FCR 62 and Commissioner of Patents v RPL Central Pty Ltd (2015) 238 FCR 27 established that the claimed invention or innovation could not be patentable. The delegate came to the same conclusion, holding that claim 1 was nothing more than a mere business scheme that outlined the nature of consideration due to one party for the rendering of innovative services to another. The delegate identified five integers in the method of innovation in claim 1 (Mr Watson conflated in his submissions the second and third of those into one integer or step, but did not suggest that any material difference arose):

(1)    an organisation engages with an innovator to innovate;

(2)    the organisation discloses aspects of the organisation to the innovator;

(3)    a financial return to the innovator for the innovation is specified;

(4)    the innovator defines the innovation as an IP right prior to its disclosure to the organisation; and

(5)    the financial return is at least partially based on the value/benefit/advantage to the organisation of the IP right.

Mr Watson’s submissions

5    Mr Watson argued that the financial return to the innovator specified in integers 3 and 5 was not speculative, but, in its preferred form, was cost-free for the organisation until the innovator had created an IP right of value to the organisation. He contended that a necessary step in the method of the claims is the description, or definition, or both, of the innovation as a corresponding IP right (such as a patent, trade mark, design, plant breeder’s right or copyright), being a form of property. He contended that the language of NRDC 102 CLR 252 and Grant 154 FCR 62 supported a conclusion that the product (being the IP right), created by following the method of the invention, consisted of an “artificial state of affairs” discernible by observing an innovator describing or defining, as a corresponding IP right, that the organisation had commissioned with a corresponding financial return, to be determined from the value that the IP right created for the organisation.

6    Mr Watson argued, drawing on NRDC 102 CLR 252, that “[t]he significance of the product is economics, for it provides [an] advantage”. He contended that the invention the subject of the claims was a manner of manufacture because it was “something that can be made by man…or at the least [was] some new mode of employing practically his art and skill”, and therefore amounted to an observable phenomenon. Mr Watson said that this phenomenon was the employment, in a practical way, of the skill of the innovator, in conceiving for the organisation an innovation consisting of an IP right, but before disclosing the innovation to the organisation, the innovator had to describe or define it as an IP right. He submitted that once the innovator so identified that IP right, the innovator would be remunerated on a basis calculated by reference to the value that the IP right created for the organisation. He argued that the specification referred to this as a discernible, artificial state of affairs that fulfilled the purpose of the invention. He said that the purpose was to provide an alternate to the traditional means by which clients, of limited resources, could engage intellectual property professionals, being the innovator, to innovate or define an invention for the client and convert it into property in the form of a recognisable IP right, in effect, without the organisation having to pay ordinary commercial fees for those services as and when the services were rendered over a period of time. Rather, so the argument ran, this allowed the organisation to engage the innovator to develop a new invention and progress it through to the stage of a recognised form of intellectual property (such as a patent application) at which point the IP right would be disclosed to the organisation and, if of use or value to it, would then generate some remuneration or reward for the innovator.

7    Mr Watson argued that the IP right, in the expression of the invention in claim 1, was a tangible, physical and observable effect so that the invention produced a concrete effect sufficient to support the grant of an innovation patent. This IP right was “a useful product”, he submitted, that had been artificially created. Mr Watson contended that:

[t]he effect of the invention (the description or definition by an innovator of their invention, conceived for an organisation, as an IP right and/or the corresponding financial return being determined from the value that the IP right creates for the organisation) is a “physical effect” as required by Grant because it is physically observable and also because it is a concrete effect or phenomenon or manifestation. It is concrete, tangible, physical and observable and is some “useful product” resulting from the working of the method in which a new and useful effect may be observed.

8    Mr Watson argued that when the innovation is described or defined as a corresponding IP right, such as a patent right, in accordance with the method in claim 1 or 2, that, by definition, would be a manner of manufacture for the purposes of s 18(1A)(a). He also submitted that where the IP right is defined and described as a registerable trade mark, registerable design, registerable plant breeder’s right or even a non-registerable IP right, such as copyright, the subject matter of each claim would no less be a discernible artificial state of affairs and therefore a manner of manufacture.

9    Mr Watson contended that the structure of the claims contemplated that the innovator would own the IP right, because the claimed method required that the innovator bring the IP right into existence as an identifiable IP right before disclosing that IP right to the organisation that had engaged the innovator.

10    Mr Watson accepted that the remuneration in any case following the method would be determined individually, but in order to fall within the claimed method, the remuneration would have the characteristic of being determined, at least partially, from the value, benefit, advantage or other consideration or value of any kind that the IP right created or provided for the engaging organisation. He also argued that if, after seeking to perform the engagement, the innovator was unable to describe or define an IP right, then the innovator would not have followed the method of invention and so whatever activity the innovator undertook would fall outside the claims.

11    Mr Watson emphasised that examination report 5 had found, under s 18(1A)(b) of the Act, that the claimed invention satisfied the requirements of novelty and innovative step.

The principles

12    The question is whether the invention claimed is “a proper subject of letters patent according to the principles which have been developed for the application of s.6 of the Statute of Monopolies”: NRDC 102 CLR at 269. The product has to have a value to the country in the field of economic endeavour, or some advantage that is material in the sense that it belongs to a useful art, as distinct from a fine art (102 CLR at 275). There must be a product and something that is, in effect, of value or vendible.

13    A specification must be read as a whole. But, as Dixon CJ, Kitto and Windeyer JJ explained in Welch Perrin & Co Pty Ltd v Worrel (1961) 106 CLR 588 at 610:

it is not legitimate to narrow or expand the boundaries of monopoly as fixed by the words of a claim by adding to those words glosses drawn from other parts of the specification.

14    It is necessary, in a case such as this, to identify the definition of the allegedly patentable invention, by reference to the construction of the impugned claims read in the light of the specification as a whole and the relevant prior art: D’Arcy v Myriad Genetics Inc (2015) 258 CLR 334 at 342-343 [12] per French CJ, Kiefel, Bell and Keane JJ.

15    Here, there are no terms of art in the complete specification or the claims. The patent consists of ordinary English words. Accordingly, the patent must be construed in its natural and ordinary meaning having regard to its character as a patent that will be a public instrument. If it is to be valid, it must define a monopoly in the claims in such a way that is not reasonably capable of being misunderstood.

16    There is no precise verbal formula to apply to determine whether, in any particular case, an invention is a manner of (new) manufacture: Myriad 258 CLR at 346 [20]. In Myriad 258 CLR at 348 [23], French CJ, Kiefel, Bell and Keane JJ said:

This Court in NRDC did not prescribe a well-defined pathway for the development of the concept of “manner of manufacture” in its application to unimagined technologies with unimagined characteristics and implications. Rather, it authorised a case-by-case methodology. Consistently with that approach, and without resort to the “generally inconvenient” proviso in s 6 of the Statute of Monopolies, there may be cases in which the court will decide that the implications of patentability of a new class of invention are such that the invention as claimed should not be treated as patentable by judicial decision.

(emphasis added)

17    They held that the question is whether the claimed invention lies within the established concept of a manner of manufacture and, if not, whether it should nevertheless be included in the class of patentable inventions (relevantly here, as defined in s 18(1A)(a) of the Act). They said “[p]urposive and consequentialist considerations which, no doubt, could be classed as “policy” reasons may play a part in answering the second limb of that question” (258 CLR at 348 [24]). As their Honours went on to point out, the patentability of a manner of manufacture can be described as an act of economic policy, the objectives of which are to encourage industry, employment and growth, rather than to do justice to the inventor for his intellectual percipience (258 CLR at 350 [26]). They referred to six principal factors that may be relevant in determining whether the exclusive rights created by the grant of letters patent should be held to be capable of extension to a particular class of claim by judicial decision, applying s 18(1)(a) (and, as I must do, s 18(1A)(a)). These included whether to accord patentability to the invention as claimed would be consistent with the purposes of the Act because to do so (258 CLR at 351 [28] questions 3.1 and 3.2, 4 and 6):

    under (s 18(1A)(a)) could give rise to a large new field of monopoly protection with potentially negative effects on innovation or, because of the content of the claims, that could have a chilling effect on activities beyond those formally the subject of the exclusive rights granted to a patentee;

    would enhance or detract from the coherence of the law relating to inherent patentability; or

    would involve law making which should be done by the legislature.

18    Their Honours held that (258 CLR at 352 [29]):

the purpose of the Act would not be served by according patentability to a class of claims which by their very nature lack well-defined boundaries or have negative or chilling effects on innovation.

19    Relevantly, as Spender, Gummow and Heerey JJ pointed out in CCOM Pty Ltd v Jiejing Pty Ltd (1994) 51 FCR 260 at 265A-B, a recurrent theme, that distinguishes a subject matter that may not be patentable, is that “intellectual conceptions become patentable only to the extent that they have been embodied in technical applications”. They approved what Professor Lahore had said of Australian patent law (J Lahore “Computers and the Law: The Protection of Intellectual Property” (1978) 9 Federal Law Review 15 at 22-23), namely that “business, commercial and financial schemes…which are mere records of intelligence” have “never been considered to constitute a patentable invention” (51 FCR at 292A-B).

20    Subsequently, Heerey, Kiefel and Bennett JJ adopted Professor Lahore’s statement in Grant 154 FCR at 66 [14]. They held that a mere scheme or plan is not the proper subject of a patent. Their Honours also explained, however, that merely because a method may be called a business method, this did not prevent it properly being the subject of letters patent, provided that it complied with the requirements of the Act: Grant 154 FCR at 69 [26]. They explained that, in NRDC 102 CLR 252, the High Court had looked to the application of the method claimed, and held that a product of a method is something in which a new and useful effect could be observed, saying (154 FCR at 70 [29]):

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. CCOM provides a useful analysis of the development of patent law in this context. The underlying principle, developed from the Statute of Monopolies, that business, commercial and financial schemes, which are “intellectual information” are not themselves properly the subject of letters patent, was maintained. As Gyles J concluded in Arrow Pharmaceuticals Ltd v Merck & Co Inc (2004) 213 ALR 182 at [87], cited by the Full Court in Merck at [23], a method that is in the nature of directions for use does not constitute an invention or a manner of manufacture. Neither in Merck, nor here, has some previously unrecognised property of an aspect of the method been discovered.

(emphasis added)

21    In Grant 154 FCR 62, the applicant claimed to patent an asset protection method consisting of establishing a trust, to which an owner of an asset would gift a sum of money and the trustee would then lend back that sum to the owner, secured by a charge over the asset. Heerey, Kiefel and Bennett JJ said (154 FCR at 70-71 [32]):

…the alleged invention is a mere scheme, an abstract idea, mere intellectual information, which has never been held to be patentable, despite the existence of such schemes over many years of the development of the principles that apply to manner of manufacture. There is no physical consequence at all.

(emphasis added)

22    They held that, regardless of whether it was a business method, Mr Grant’s asset protection scheme was not patentable because it was mere intellectual information concerned with providing working directions and a scheme. They concluded (154 FCR at 73 [47]) that:

[i]t 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. That is missing in this case.

23    The evaluation of whether the claimed invention is a manner of (new) manufacture must be approached as a matter of substance not form. Kenny, Bennett and Nicholas JJ recognised in Research Affiliates LLC v Commissioner of Patents (2014) 227 FCR 378 at 381 [10], applying Grant 154 FCR at 71-72 [38]-[39], unpredictability in advances of human ingenuity and what may be, or be described as, science or technology. They said that, nonetheless, the mere taking of sequential steps may represent only a collocation of integers rather than a new combination and that methods may involve ingenuity and imagination which “could well warrant the description of discoveries. But they are not inventions ([Grant] at [34])”. Their Honours held that there is a distinction between a technological innovation, that is patentable, and a business innovation that is not (relying on Grant at [24]): Research Affiliates 227 FCR at 398 [94].

24    Kenny, Bennett and Nicholas JJ held that a determination as to whether a claimed invention is truly “an artificially created state of affairs”, as NRDC 102 CLR 252 required, could not be made by a mechanistic application of the criterion of artificiality or physical effect. Rather, that determination must be made on an understanding of the claimed invention itself, as a matter of substance, not merely form (Research Affiliates 227 FCR at 401 [107], 402 [114]). In refusing patent protection for a computer-implemented method to generate a securities index, their Honours said (at 402-403 [115]-[116]):

The invention set out in the specification is directed to the index itself. The method of the invention is not one that has any artificial or patentable effect other than the implementation of a scheme, which happens to use a computer to effect that implementation. There is no technical contribution to the invention or artificial effect of the invention by reason of the intervention of the inventors. To take the words of NRDC at 268, the process does not produce “either immediately or ultimately, a useful physical result in relation to a material or tangible entity.” The claimed method, the result of the ingenuity of the inventors, does not produce such a result; the ingenuity is in the scheme. Again, drawing from NRDC at 270, there is a useful result of the claimed process but there is no physical thing “brought into existence or so affected as the better to serve man’s purposes”. There is no “physical phenomenon in which the effect, be it creation or merely alteration, may be observed” (NRDC at 276).

The High Court (in NRDC at 277) spoke in terms of a separate result achieved by the claimed method that has its own economic utility consisting in the improvement. By this reasoning, the High Court directed attention to the subject matter to which the claimed method was directed, which needed to exhibit the required characteristics of a manner of manufacture to be patentable. Here, that subject matter is truly the scheme, the idea, the index. As set out in the specification it may be, and in the claimed method it is, implemented in a computer, but the ingenuity of the inventors, the end result of which is the invention, is directed to the idea, which is not patentable. That method does not have an artificial effect falling squarely within the true concept of what must be produced by a process if it is to be held patentable (NRDC at 277).

(emphasis added)

25    Ultimately, their Honours held (at 403 [119]) that, while the claimed method in that case clearly involved what might well be an inventive idea, it was an abstract idea that was not patentable (see too RPL Central 238 FCR at 49 [96]-[98], 50-51 [101]-[102] per Kenny, Bennett and Nicholas JJ).

Consideration

26    In my opinion, the method in claim 1 is nothing more than a description of a business method for an organisation to engage an innovator in a contractual relationship to produce a result, being an IP right, for an undefined consideration. In substance, it is a description of how to negotiate a vague and imprecise arrangement, and provides no identifiable remuneration structure. The claim seeks to assert a monopoly over the engagement of an innovator (being an intellectual property professional) to “innovate” on behalf of an organisation for an undefined reward, possibly payable upon the innovator creating and disclosing an identifiable IP right, that may be of benefit to the organisation.

27    That field of activity has never been the subject of a patent or statutory monopoly granted by force of a patent. To allow such a claim to form the basis of a monopoly would have a chilling effect both generally on innovation and the engagement of intellectual property professionals. As Mr Watson acknowledged during the course of argument, one would not know, until the innovator had performed the assignment, whether or not any IP right could or would be created. In other words, the method of the invention so claimed would have to be followed to its end point before a person would know whether or not the initial engagement of the intellectual property professional or innovator fell inside or outside the monopoly claimed in the patent, depending on whether, at the end of his or her work, the innovator produced an IP right of value for the client. To allow such a statutory monopoly would have a chilling effect on all intellectual property professionals who did not have a licence from Mr Watson because they would be at risk of infringing the patent if they followed the supposed method and succeeded in producing a useful result, namely an IP right, for the organisation.

28    Moreover, the idea of providing remuneration on the basis of success and the calculation of a reward based on some relationship of the value of what is created for the engaging party is not new. Nor is the combination of such a method of remuneration with the engagement of a professional, being an “innovator”, to produce an IP right. Such a claimed combination does not give the method any characteristic of being a manner of manufacture within the meaning of the authorities: NRDC 102 CLR at 269.

29    Here, the method in claims 1 and 2 is merely an abstract scheme, or idea, that involves a collocation or combination of well-known steps, but that does not result in a material or tangible product: Grant 154 FCR at 70 [29]; Research Affiliates 227 FCR at 402-403 [115]-[116], [119]. Mr Watson’s argument is specious. He contended that because the object of the implementation of the method in the patent is the production of an IP right, as an item of property, his claims fulfilled the requirement (noted in Research Affiliates 227 FCR at 402 [115]) that the invention produce a useful physical result in relation to a material or tangible entity, if the method is followed.

30    The claims amount to no more than assertions of a method or scheme that might produce a result if a person investigated and succeeded in creating an IP right and, if so, the IP right had an unspecified value for the organisation. However, no specific right or product is necessarily created by following the method and its outcome is entirely dependent on the actions and volition of two persons, the innovator and the organisation. If the innovator is unable to fulfil the contractual obligation to produce a result (being the creation of an IP right), nothing is produced. On the other hand, if the innovator follows the method and produces an IP right, the organisation may decide that it is of no value to it or the parties may not agree on that value. That lack of agreement may also occur, perhaps, because the organisation does not have a use for the result, being the IP right (which will be the innovator’s, not the organisation’s, personal property), or because it is unable to exploit the IP right, for reasons of its financial circumstances or inability to undertake that exploitation.

31    Moreover, the idea that the “invention” expresses a method to arrive at a price is equally specious. While a reward must be agreed at the time of the engagement, the claims do not require that the whole reward be agreed or only become payable, once the innovator produces the IP right and the organisation concludes that the right is of value to it. The claimed method only requires that an unspecified part of the reward be payable, or further negotiated, at the time that the innovator discloses its newly created IP right to the organisation and leaves open that a substantial part of the reward can be payable, or further negotiated, at earlier times during the period in which the innovator carries out its task, just as in a conventional contractual relationship between an intellectual property professional and his, her or its client. After all, until the innovator discloses what the newly created IP right is, how could the parties begin to work out what might be its value?

32    Thus, the reward, as disclosed in the claims, is no more than a fee to be agreed, based on indeterminate criteria, that appear to involve the formation (at a later, unspecified point in time) of a subjective value judgment by the organisation of the IP right’s worth to it, independent of the actual value of the IP right itself. Gibbs CJ, Murphy and Wilson JJ said in Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 604-605, that an “agreement” to agree about a price is incomplete and unenforceable because it does not provide any certainty of an outcome. The claims do not identify any objective criterion by reference to which the total reward is calculated or payable.

33    Mr Watson’s answer that, if a price is not struck, the method is not followed and therefore there is no infringement, demonstrates how uncertain the alleged patentable idea is. Claim 1 leaves uncertain any means of identifying how the reward is fixed. This is because until some IP right is created and actually exists, it is impossible to know how to evaluate what, if any, is the “value or benefit or advantage of any sort or any other consideration of value of any kind to said organisation of said IP right” (emphasis added). Thus, if one followed the “method” of the claims, first, it would be impossible to know in advance of the creation of the IP right, what, if any, the unpaid amount of the reward would be and, secondly, once the IP right is disclosed to the organisation, there is no certain result in the form of a reward. All that following the supposed method of the claims produces after disclosure of the IP right is, at most, that the innovator and organisation are to agree to agree on a reward, which is no agreement at all: Booker Industries 149 CLR at 604-605. Thus, any “result” is illusory. The claims lack well-defined boundaries and are not patentable: Myriad 258 CLR at 352 [29].

34    Moreover, if the patent as claimed were granted, that would produce a chilling effect on those involved in providing innovation services and those seeking out those services on a fee-based reward or on a result or other contingency basis. That is because all of those persons would infringe the patent if the innovator succeeded in producing an IP right that the organisation wanted and agreed to pay for, but they would not infringe if that outcome did not occur, even if the innovator actually created an IP right but it was of no value or use to the organisation or the two could not agree on the reward: Myriad 258 CLR at 352 [29].

35    In my opinion, all that the claimed invention does is to set out an abstract idea for a business scheme or model under which persons can agree to contract for the provision of intellectual property services, in the hope that the performance of those services might result in the creation, through an uncertain process, of an IP right that might be useful to the organisation and, if so, the parties will need to make a further agreement as to the quantification of the reward. That simulacrum is not patentable: Myriad 258 CLR at 352 [29].

Conclusion

36    For the reasons above, I am of opinion that the appeal from the Commissioner’s delegate’s decision must be dismissed with costs.

Associate:

Dated:    28 June 2019