In re Schrader, 1994

Schrader’s application was directed to a method for competitively bidding on a plurality of related items, such as contiguous tracts of land or the like. After the items have been offered to bidders, bids on one, some, or all of the items are received and entered into a “record.” Then, the combination of winning bids is determined by assembling a “completion” from all the entered bids. A completion is the particular combination of bids which “would complete a sale of all of the items being offered at the highest offered total price.” The items are then sold in accordance with the “completion.”

For example, in an auction involving two contiguous tracts of land, tracts 1 and 2, the following bids might be received and recorded: Bid 1 – $100,000 for tract 1 by bidder A; Bid 2 – $200,000 for tract 2 by bidder B; and Bid 3 – $250,000 for both tracts 1 and 2 by bidder C. The combination of bids that maximizes the revenue to the seller, and thus the combination of bids that forms the “completion,” would be bids 1 and 2.

Schrader claimed that his method constitutes a novel way of conducting auctions. According to Schrader, the type of bids that are normally offered at auctions is dictated solely by the way in which the auctioneer organizes or groups the items to be sold. Through his method, claims Schrader, bids on any combination of the items being auctioned off are offered at the discretion of the bidder. The purported benefit is greater sales revenue or profit to the seller. This is illustrated by the previous example, in which bids were offered on each of the individual tracts as well as on both tracts together. As a result, the seller attained total sales revenue of $300,000. If the seller had only been offered bids on the combined tracts, i.e., Bid 3, the seller would have derived $250,000 in revenue.

Claim 1 was representative:

1. A method of competitively bidding on a plurality of items comprising the steps of identifying a plurality of related items in a record, offering said plurality of items to a plurality of potential bidders, receiving bids from said bidders for both individual ones of said items and a plurality of groups of said items, each of said groups including one or more of said items, said items and groups being any number of all of said individual ones and all of the possible combinations of said items, entering said bids in said record, indexing each of said bids to one of said individual ones or said groups of said items, and assembling a completion of all said bids on said items and groups, said completion identifying a bid for all of said items at a prevailing total price, identifying in said record all of said bids corresponding to said prevailing total price.

During prosecution, the examiner rejected the claims for lack of statutory subject matter under 35 U.S.C. Section 101. After this rejection was made final, Schrader appealed to the Board. On appeal, the Board sustained the rejection on three different grounds.

Schrader appealed to the Federal Circuit and argued that the Board incorrectly invoked the rule that a patent cannot be obtained for a mathematical algorithm in the abstract.

Schrader’s first point was that there was no mathematical algorithm implicit in the claim. The Federal Circuit disagreed. Benson defined a “mathematical algorithm” for purposes of Section 101 as a “procedure for solving a given type of mathematical problem… .” The claim language “assembling a completion” is such a procedure because it describes the solving of a mathematical problem: determining the optimal combination of bids. This conclusion is supported by an admission in Schrader’s brief that the following two-step mathematical process is inherent in the phrase:

Perform a mathematical calculation which

a)determines possible combinations of items and/or groups with the provision that each item only appear once in each combination.

b)selects the combination with prevailing (i.e. highest or lowest) value.

This process, although expressed in general terms, is within or similar to a class of well-known mathematical optimization procedures commonly applied to business problems called linear programming7. Thus, a mathematical algorithm is implicit in the claim.

Schrader further argued that the claim implies no more than the step of summing, hardly a mathematical algorithm in Schrader’s view. The Federal Circuit believed that this was too narrow a view. The claim implied a procedure for determining the optimal combination of bids. While that procedure may have involved summing, it was not limited to it. In any event, even simple summing may be an algorithm.

Schrader’s next point was that, even if a mathematical algorithm is implicit in the claim, the claim recites or implies sufficient physical activity to meet the second prong of the Freeman-Walter-Abele test. Thus, he argued the method physically regroups raw bids into new groupings and ultimately ‘completions’; physically transforms bid data into completion data or display data; and makes physical changes to a “display.” Schrader said that the claim envisages an auction environment in which “all of the bidders are assembled in one large room with a display in front of the room” or with the bidders “assembled in several rooms either adjacent or in different cities interconnected by a closed-circuit television system or the like using large screen displays.”

The Federal Circuit found this argument unpersuasive. The word “display” was nowhere mentioned in the claim. Moreover, there was nothing physical about bids per se. Thus, the grouping or regrouping of bids cannot constitute a physical change, effect, or result. Also, the terms “bid data,” “completion data,” or “display data” are nowhere mentioned in the claim and there was no basis to read them into the claim. Finally, the notion of bidders assembled in a single location in front of a display, or in several locations interconnected by closed-circuit television through a large-screen display was not recited in the claim.

The only physical effect or result which was required by the claim was the entering of bids in a “record,” a step that can be accomplished simply by writing the bids on a piece of paper or a chalkboard. For purposes of Section 101, such activity is indistinguishable from the data gathering steps which according to In re Grams, were insufficient to impart patentability to a claim involving the solving of a mathematical algorithm.

Moreover, the step of entering data into a “record” is implicit in any application of a mathematical algorithm. The recitation of such a step in a claim involving the solving of a mathematical algorithm merely makes explicit what had been implicit. A conclusion that such activity is sufficient to impart patentability to a claim involving the solving of a mathematical algorithm would exalt form over substance. A similar point was recognized in Flook, in which the Court concluded that the recitation of insignificant post-solution activity in a claim involving the solving of a mathematical algorithm could not impart patentability to the claim.

The Federal Circuit found that Schrader’s claims were thus not patentable.

After this case, practitioners such as myself tried to overcome 101 rejections by citing something physical in patent claims. Reciting output devices or displays would often not overcome rejections though.