Number 3, April 2020 Adjusting To Alice

OFFICE OF THE CHIEF ECONOMISTIP DATA HIGHLIGHTSNumber 3, April 2020Adjustingto AliceUSPTO patent examinationoutcomes after Alice Corp. v.CLS Bank International

U.S. Patent and Trademark Office Office of the Chief EconomistIP DATA HIGHLIGHTS Number 3, April 2020Adjusting to AliceUSPTO patent examination outcomes afterAlice Corp. v. CLS Bank InternationalAndrew A. Toole, PhD, Chief Economist,and Nicholas A. Pairolero, PhD, Economist1KEY FINDINGS The likelihood of receiving a firstoffice action with a rejection forpatent-ineligible subject matterincreased by 31% in the 18 monthsfollowing the U.S. Supreme Courtdecision in Alice Corp. v. CLS BankInternational in 33 “Alice-affected”technology areas. For these technologies, uncertaintyin patent examination — measuredas variability in patent subjectmatter eligibility determinationsacross examiners in the first actionstage of examination — increasedby 26% in the 18 months followingthe Alice decision.1 One year after the United StatesPatent and Trademark Office issuedits January 2019 Revised PatentSubject Matter Eligibility Guidance(2019 PEG), the likelihood of Aliceaffected technologies receiving afirst office action with a rejection forpatent-ineligible subject matter haddecreased by 25%. Uncertainty in patent examination forAlice-affected technologies decreasedby 44% in the 12 months followingthe issuance of the 2019 PEG.Any inquiries regarding this publication should be sent to economics@uspto.gov. Supplementary materials for this report are available ations/reports.United States Patent and Trademark Office1Adjusting to Alice

IntroductionThe U.S. patent system involves an interdependentand dynamic network of institutions. As one of thecentral institutions in this network, the United StatesPatent and Trademark Office (USPTO) evaluates andadjusts to changes that originate in other parts of thesystem. Through those adjustments, the USPTO isable to optimize the timeliness and quality of patentexamination while staying within the legal parametersset by other institutions through U.S. statutes, judicialrulings, and international treaties.On June 19, 2014, the U.S. patent system experienced a major change. The U.S. Supreme Courtreached a unanimous decision in Alice Corp. v. CLSBank International 2 that altered the law on patentsubject matter eligibility.3 Alice Corp., the patentowner, argued that its patent claims directed to acomputer-implemented financial settlement systemwere valid because they did not fall into the patent-ineligible category of “abstract ideas.” Rejecting thepatent owner’s arguments, the Court held the claimspatent ineligible on the basis that generic computerimplementation does not transform a patent-ineligibleabstract idea into a patent-eligible invention. In doingso, the Court effectively broadened the scope of ineligible subject matter. Moreover, the decision createduncertainty in the business and legal communities.Ambiguity in the language of the Alice standard andin the scope of technologies involving “abstract ideas”made it difficult to predict how and where the standard would be applied.4Although legal changes and subsequent adjustments across the institutions in the patent systemare not unusual, Alice deserves attention because ofits potential economic consequences. The primaryeconomic function of the patent system is to provide2345678an incentive for greater invention and innovation. Bybroadening the scope of subject matter perceivedas being ineligible, Alice is likely to have differentialeffects across technologies, with some inventionsthat were previously considered to be patent eligibleno longer qualifying for patent protection. Even moreimportantly, economic theory and evidence show thatgreater uncertainty tends to reduce investments.5Higher levels of uncertainty may also negativelyimpact previously issued patents by lowering theirexpected value, reducing patent purchases and licensing transactions, and limiting opportunities to obtainentrepreneurial financing.6This report focuses on two USPTO patent examination outcomes and evaluates how these outcomeschanged in response to the Alice decision and inresponse to two USPTO adjustments made in the formof guidance for examiners. The first outcome relatesto examiner decisions on patent subject matter eligibility. A metric labeled “Percent of first office actionSection 101 rejections” is used to capture the relativechange in first office actions that include rejectionsfor patent-ineligible subject matter.7 This metric willincrease when examiners issue relatively more firstoffice actions with a rejection for patent-ineligiblesubject matter.8 The second outcome is the degreeof uncertainty in the patent examination process. Ametric called “Section 101 first action examinationuncertainty” is used to capture the variation acrossexaminers in the proportion of rejections for patent-ineligible subject matter. Examination uncertaintywill increase when the percentage of first officeaction rejections for patent-ineligible subject matterbecomes more uneven across examiners within aspecific technology.Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014).The phrase “patent subject matter eligibility” refers to the types of inventions that are legally eligible for patent protection. See the Manual of PatentExamining Procedure for a description of patent subject matter eligibility used at the USPTO e USPTO (2017) and Hickey (2019).See Dixit and Pindyck (1994); Abel et al. (1996); Bloom, Bond, and Van Reenen (2007); and Czarnitzki and Toole (2011).See Sherry and Teece (2004); Arora, Fosfuri, and Gambardella (2004); and Gans, Hsu, and Stern (2008).The data capture all types of Section 101 rejections, including utility and statutory double patenting. See the Manual of Patent ExaminingProcedure is metric does not capture the full breadth of patent examination activities leading to a first office action.United States Patent and Trademark Office2Adjusting to Alice

The Alice decision increased USPTOsubject matter eligibility rejectionsFurther empirical analysis shows this change wasstatistically significant and large in magnitude.10 ForAlice-affected technologies, the chances of receiving a first office action rejection with a rejection forpatent-ineligible subject matter increased by 31% inthe 18 months following Alice.11The early implementation of Alice led patent examiners to increase rejections based on patent-ineligiblesubject matter relative to all first office action decisionsin affected technologies. Figure 1 plots the percentageof first office action Section 101 rejections for patentapplications in Alice-affected technologies (solid blueline) and in other technologies (dashed blue line) from2011 through 2015. The vertical bar (in red) marks thedate of the Alice decision. Although the percentage ofSection 101 rejections was always higher for applications in Alice-affected technologies, the upward turnin the solid blue line following Alice shows that earlyimplementation of this Supreme Court decision led toa significant increase in the percentage of Section 101rejections in those technologies.9This increase reflects at least two aspects of the Alicedecision. First, expanding the application of the Alicestandard to other technology areas would likely leadto more Section 101 rejections. Second, and importantly, professionally trained judges, lawyers, andexaminers can apply reasonable but different interpretations of the Alice standard. Any interpretation of theAlice standard that takes a broader view of patent-ineligible subject matter would lead to an increase inSection 101 rejections.10%20%30%Alice Supreme Court Decision2015t.Sep015.2Mar2014t.2arMAlice-affected rMSept.20110%Percentage of first office actionSection 101 rejections40%Figure 1: The probability of receiving a first office action with a Section 101 rejection inAlice-affected technologies and in other technologies, Sept. 2011 – Dec. 2015.Other technologiesNote: Patent applications included in this figure are restricted to those filed before June 2014 tominimize any influence of applicant drafting and filing decisions in response to Alice.91011Notice that the increase in first office action Section 101 rejection rates is reflected only in applications in the Alice-affected technologiesand not in applications in the other technologies. In the empirical analysis, the other technologies are the “control group” that capturesthe influence of all other events besides the Alice decision on USPTO Section 101 rejections.Other first office action examination rejection types (e.g., Sections 102, 103, 112) do not show statistically significant changes after Alice.Please refer to the supplementary materials for this report available at ions/reportsOur results are consistent with the finding in Chien and Wu (2018) that Alice increased the share of office actions that contain a Section101 rejection across several of the World Intellectual Property Organization’s technology categories.United States Patent and Trademark Office3Adjusting to Alice

The Alice decision increased uncertaintyin patent examinationThe increase in uncertainty seemsto reflect the interpretive latitude inthe language of the Alice standard.The early implementation of Alice increased uncertainty in the first action stage of patent examination inaffected technologies (Figure 2). Within Alice-affectedtechnologies, a higher degree of variability is observedacross examiners in first office action rejections forpatent-ineligible subject matter. For patent applicantsthe examination process for Alice-affected technologies became more unpredictable. Figure 2 plots thevariability for patent applications in Alice-affectedtechnologies and in other technologies. The upwardturn in the solid blue line following the Alice decisionshows that another effect of Alice was to increaseuncertainty related to patent subject matter eligibilityin those affected technologies. Further empirical analysis shows this change was statistically significant andlarge in magnitude. In those technologies, uncertaintyabout patent subject matter eligibility determinations in the first action stage of patent examinationincreased by 26% in the 18 months following Alice.The increase in uncertainty seems to reflect the interpretive latitude in the language of the Alice standard,which fueled a wide variety of perspectives.12 Thiswidening resulted in a higher degree of variabilityin subject matter–related rejection decisions acrossexaminers. As will become evident, the USPTO’sefforts to clarify the Alice standard have substantiallyoffset the uncertainty created by Alice.08.1.12Section 101 first action examination uncertaintyFigure 2: Variation in examiner first office action Section 101 rejection ratesin Alice-affected technologies and in other technologies, July 2017 – Dec. 2015.01ec.201.2July-D-DecJulyAlice-affected 112.02.04.06Alice Supreme Court DecisionOther technologiesNote: Patent applications included in this figure are restricted to those filed before June 2014 tominimize any influence of applicant drafting and filing decisions in response to the Alice decision.12See USPTO (2017), Hickey (2019), and Taylor (2019).United States Patent and Trademark Office4Adjusting to Alice