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COMMODITY FUTURES TRADING COMMISSION 

TECHNOLOGY ADVISORY COMMITTEE MEETING 

Thursday, April 28. 2005 

1:00 p.m. 

First Floor Hearing Room 

1155 21st Street, N.W. 

Washington, D.C.
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A G E N D A 

PAGE 

Welcome and Opening Remarks 

 Committee Chairman Sharon Brown-Hruska 3 

Remarks 

 Commissioner Walter Luken 7 

 Commissioner Fred Hatfield 8 

 Commissioner Michael Dunn 9 

Introduction of TAC Meeting Participants 

Presentations

What is Prior Art in Today's Environment? 

John J. Love, Director of Technology, 

 United States Patent Office 10 

FIA Perspectives on the Emerging Significance 

 of Patent Claims 

Edward Rosen, Cleary, Gottlieb Steen & 

 Hamilton, LLP 50 

Piracy of Market Data 

Jack Sabo, Vice President of Market Data 

 Services, New York Board of Trade 63 

Can Prices be Property? 

James A. Overdahl, Chief Economist, 

 Commodity Futures Trading Commission 79 

A View from the Patent Office 

Remarks from John W. Dudas, Under 

 Secretary of Commerce for Intellectual 

 Property and Director of the United States 

 Patent and Trademark Office 102 

Closing Remarks and New Business 127
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P R O C E E D I N G S

WELCOMING REMARKS 

 CHAIRMAN BROWN-HRUSKA: Okay. Testing 

okay? It seems to be--sometimes it's working and 

sometimes it's not. Can you hear me? Let's see if 

it works. Okay. 

 Good afternoon, and welcome to this meeting 

of the CFTC's Technology Advisory Committee. I'm 

Sharon Brown-Hruska, and I'm Acting Chairman of the 

CFTC and Chairman of this committee. 

 As most of you know, this committee was 

established to advise the Commission on the impact 

and implications of technological innovation in the 

financial services and commodities markets. 

 Well, I'm very excited about our agenda 

this afternoon. The theme is intellectual property, 

and it's really my hope that the remarks of the 

magnificent presenters that we have today will 

facilitate further discussion on the issues 

concerning IP that could have an impact on the 

futures industry. 
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 I'm very pleased that John W. Dudas, Under 

Secretary of Commerce for Intellectual Property, and 

Director of the U.S. Patent & Trademark Office, will 

be here later this afternoon to give a speech 

entitled "A View from the Patent Office." I'm 

especially grateful to Under Secretary Dudas for 

agreeing to speak this afternoon, despite the fact 

that he's scheduled to testify before Congress today 

at noon, so I imagine that's what he's busy doing 

right now. 

 And also, you know, we have--it's my hope 

that our industry will take steps to develop a 

resource center for prior art in the patents area, 

and I also want to hear from the industry about what 

role the CFTC should play in this area. 

 That's why we have advisory committees, to 

provide advice and counsel to us as an agency. 

 Towards that end, I'm also pleased to note 

that our first speaker will be John Love, who is 

Director of Technology in the Patent Office, and his 

presentation is entitled "What is Prior Art in 

Today's Environment?", which is--I especially like 
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it that I had this kind of topic in mind, and I 

really appreciate it, John, that you actually were 

prepared to our specifications in bringing this 

message to us so that we can learn. And the CFTC 

really wants to facilitate knowledge and awareness 

in this area, and to try to find a way again to be 

efficient in our understanding of how patents are 

changing our marketplace. 

 I will also note that I'm speaking--of 

course, it wouldn't be a technology advisory 

committee meeting if I weren't having trouble with 

my technology. And, in fact, all of our table 

mikes, which we had checked, you know, yesterday, 

last night, late, and this morning, which worked 

fine, for some reason when we go to snap them on--I 

guess a couple of hours ago--we find that they're 

not working. 

 So we had to go back to I guess this is 

probably, you know, Lotus 1, 2, 3 or, you know, 

Fortran technology. 

 Anyway, well, so what we'll have to do is 

we're going to have to use lapel and wireless 
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microphones, and this what I'm holding is a wireless 

microphone. The reason--that's the reason, you 

know, but that's why we really need you, so we can 

continue to study technology and advance in the 

process. 

 And I would mention also that we do have 

some committee members who are participating by 

teleconference. And those who are doing so please 

make sure that your telephones are muted when you 

need to speak, because any noise that you make will 

be picked up in the meeting. 

 The committee members I have are Ron 

Hersch, from Bear Stearns, John Foyle, from 

Euronext.liffe, a very technology savvy exchange, 

Brett Paulson, from The Clearing Corporation--again 

very much moving in the positive technology space, 

Jack Gaine, Managed Funds Association, and Pat 

Gambaro, from the New York Board of Trade, who has 

really paved the way for that organization. 

 So let me just pass it over to my fellow 

commissioners for their opening remarks, and I thank 

all of them for coming and especially thank Walt 
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who's been very interested in this area and has 

provided some assistance as we put this together, 

and I appreciate that very much. Walt? 

OPENING REMARKS BY COMMISSIONER WALTER LUKKEN 

 MR. LUKKEN: Thank you, and welcome to 

everyone here today. I want to thank our Chairman 

for putting this session together. This is subject 

matter that I think is very important for our 

industry, something I personally thought about and 

spoken on in the past. 

 I'm not going to give formal remarks here, 

but this is something that, as an agency, we need to 

figure out what indirect role we might have in the 

patent process, and I'm certainly glad that the 

Patent & Trademark Office is here today to speak on 

several levels, and welcome John Love and Director 

Dudas when he arrives here later on. 

 But I think the primary role for our agency 

is to serve as a liaison on educating not only the 

industry, but our own attorneys here so that we're 

able to handle intellectual property issues the best 

we can and facilitate that intellectual property, 
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when it's granted to certain property holders, that 

it's a valid patent, it's not questionable, it's not 

vague. 

 So I'm interested in hearing all the 

comments and what things we need to be looking at 

and how as an agency we can serve as this liaison to 

the industry. 

 So thank you for coming, and I'll pass it 

to our--my fellow commissioner, Fred Hatfield. 

OPENING REMARKS BY COMMISSIONER FRED HATFIELD 

 MR. HATFIELD: Madam Chairman, I want to 

thank you for calling and organizing this meeting 

and all of you around the table for taking time out 

of your busy schedules to participate. 

 Innovation has been in the forefront of the 

futures markets, and has touched every aspect of the 

business in recent years, from contract development 

to methods of trading and the organizational 

structure of exchanges. With technology becoming 

such a driving force in the financial services 

industry in general. As demonstrated by the 

announcement last week of the merger between the New 
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York Stock Exchange and Archipelago--the issues on 

today's agenda will become more important for market 

participants and regulators to understand, so I look 

forward greatly to the discussion today, and I thank 

you again for all being here. 

 I pass it to my commissioner on the left, 

geographically, if not politically, Commissioner 

Dunn. 

OPENING REMARKS BY COMMISSIONER MICHAEL DUNN 

 MR. DUNN: Thank you for that distinction. 

I am extremely pleased to be here this afternoon to 

take part with this advisory group, and I welcome 

the members of the Technology Advisory Committee. I 

want to thank them for their work advising the 

Commission on this most important matter. Issues 

of market surveillance and intellectual property 

have been very much in the forefront recently, and 

today's agenda provides a snapshot of some of the 

more challenging topics facing the futures industry. 

 I am looking forward to the presentation of 

our panelists, and to hear from our advisory 

committee regarding their perspectives on this 
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matter. I am told by the Chair that you are not a 

bashful group, and I am sure we'll be hearing from 

you in-depth. Lastly, I would like to thank our 

Acting Chairman Brown-Hruska for putting together 

this very timely agenda. Thank you. 

 CHAIRMAN BROWN-HRUSKA: So I'll just remind 

everyone after John gives his discussion, we will--

and then if you want to ask a question, we'll have 

to ensure that you have one of these mikes in your 

hands. I think there's going to be one on that side 

of the table and one on this side of the table, and 

we'll just have to make do with this technology. 

 John, I'll turn it over to you, and again 

thank you so much for coming. We're just delighted 

to have you. 

WHAT IS PRIOR ART IN TODAY'S ENVIRONMENT? 

 MR. LOVE: I'll test to see if this 

technology works here. Can you hear me? Thank you. 

Thank you, Sharon, for that introduction, and 

welcome. I appreciate it. 

 It's a pleasure for me to be here today to 

give a face to the Patent & Trademark Office for all 
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of you and give you some information on how we 

operate and what we're doing currently at the Patent 

& Trademark Office, and I'm sure Under Secretary 

Dudas will have some very interesting information 

for you on where we're going and what we've been 

doing recently to help carry out our mission and 

issue valid patents in a timely fashion. 

 To get going, I'd like you to--I passed out 

a handout here that has on the top of it "patent 

laws." Just to show you that the IRS has nothing on 

the PTO. We have a little rivalry as to the number 

of regulations and the wording that we can put 

together in our statutes. 

 Section 101 describes--some of you may have 

heard, and I heard some conversation about 

patentable subject matter--what's patentable; should 

business methods be patentable? The section that 

deals with that is very short. As you can see, 

Section 101, Inventions Patentable. And it's very 

broad, and, of course, it has been interpreted by 

courts over the years. And pretty much we're at the 

point where the Supreme Court has said that anything 
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under the sun that was made by man is patentable, 

except for abstract ideas, laws of nature, and 

naturally occurring matters. 

 Now, having said that, we are led to 

Section 102, and the really--a basic fundamental 

truth I guess that we have to live by at the PTO is 

the first sentence there, and that is a person shall 

be granted a patent unless. It's not that they have 

to prove that they're worthy of it or that they have 

to meet some test of patentability. It's you, an 

inventor, shall be granted unless any of the 

following conditions apply. 

 And it was really--we're up through A 

through F; G now. We keep adding to those, but the 

answer to what is prior art today is basically 

anything that can be used by the Patent Office or 

the examiners to negate, if you will, a patentee or 

an applicant to a patent under Section 102. So if 

we can get the slides up on the--technology. It's 

not up yet. They were going. Okay. Here we go. 

 So rather than--you know, it takes a law 

course to go through--three credit hours of a 
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semester to get into the details of what 102 means, 

but I've tried to summarize it for you. Basically, 

what we commonly use to negate patentability are 

issued patents, published applications, published 

articles, or published information. 

 Now, that's pretty traditional. We know 

what that is. It's kind of--something you can put 

your hands on. You can look at, and you can read. 

 Another condition of patentability, though, 

which is considered to be prior art, is a public 

knowledge or use in the United States by others. So 

if the office or a defendant in a infringement suit 

can establish that the invention was either publicly 

known or in use in the United States, and it doesn't 

limit it to the United States, then that could be a 

condition upon which patentability can be negated. 

 A third issue is on-sale or in public use 

in the United States more than one year prior to the 

date of the application. Any invention or material 

or any article that was in public use or on-sale 

more than one year is what we call a statutory bar 

and that, no matter what happens, if it's more than 
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a year before the filing date of the application, 

that's a statutory bar and that invention or 

material is forever dedicated to the public. 

 Then we have under Section 103, if you'll 

just turn the page there. This talks about nonobvious subject matter. And, of course, this is a 

section that makes many attorneys wealthy in 

arguments about whether or not the invention is 

obvious over the prior art. And that is obvious 

variations of the materials in Section 102 that can 

be used, an obvious variation of that. In other 

words, something that is not--that only differs by 

what we call to subject matter that would be obvious 

to one with ordinary skill in the art. If that's 

the case, then we can also use that as a basis to 

refuse to grant a patent. So anything that 

qualifies under 102 and, in addition, this obvious 

standard under 103 is the two main statutory 

provisions that deal with whether or not we should 

grant a patent. 

 Now, there's another section called the 

112, which has to do with the patent has to be--the 
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invention adequately disclosed so that one with 

ordinary skill in the art could make or use the 

invention. And there are some issues about that, 

but typically the idea behind the patent, of course, 

is that the public gets the benefit of the public 

disclosure of the technology, and the inventor gets 

the ability to exclude others from making, using, or 

selling the invention. And the important part of 

that is the public disclosure of the invention in 

full and concise terms so that we have an idea of 

what the invention really is. 

 An overriding principle of anything in 102 

is that it has to be publicly accessible, and again 

here's a summary of the types of documents or 

activities or information that we could use under 

102. I'll go into each one of these a little bit 

more in detail. 

 Pictures and drawings, although not 

normally used, they can, in fact--a picture in a 

newspaper, in a magazine--or drawings even in 

Popular Mechanics, things of that nature, can be 

used, but they're very limited because typically 
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they don't come with a text. So pictures can only 

be used for what they explicitly show. A picture of 

a complicated machine, for example, wouldn't be of 

any value for anything that was hidden or that was 

deep inside the mechanism. So the picture wouldn't 

be of very much value, and the drawings also can 

only be used to--for what they explicitly or would 

suggest to one with ordinary skill in the art. 

 Now, up until recently, the vast majority 

of materials that examiners would use in examining 

an application under 102 and 103 would be the 

patents--U.S. and foreign patents. And, of course, 

we've issued--now, we're up to over six million 

patents. We used to have these all in paper form at 

the PTO. We would go through them by hand, and that 

would, you know, a very laborious process. We'd 

have the foreign patents. We'd do the same thing. 

And, of course, over the last several years, we have 

automated all this information. We've put it on 

searchable databases and the examiners now pretty 

much work from a desktop and do all their searching 

electronically, and it's text searchable also, so. 
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 But up--even now, in many technologies the 

major source of the prior art for us is to go 

through what we've issued in the past and what we 

can take from those patents and--is not only what 

and this is sometime a misconception--we can use 

those patents for not only the claimed invention in 

the patent, but we can use it for whatever it 

discloses in that patent application. 

 For example, it could be non-claimed 

subject matter that's in the specification. It 

could be what we call non-preferred embodiment. 

Sometimes the inventor will say, well, I've tried 

this, and it's not as good as this other way of 

doing it because you get these drawbacks. Well, 

what they described is not so good. It's still a 

prior art. It's disclosed. It's workable. It's 

just not the preferred embodiment. So that, in 

addition to the disclosed examples, the subject 

matter that sometimes is incorporated by reference 

into a patent, and the patent will say I refer to 

this publication or this document, and we can go 

into that reference document and use the material 
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there. And again, we have this proviso that we can 

also use obvious variations of what's disclosed in 

these U.S. and foreign patents. 

 Now, I say traditionally because we're in a 

new age now, in the information age. We have given 

the examiners access to the Internet, to search 

engines, and now we're--the database is virtually 

world-wide, and that's the challenge we have now at 

the PTO. We're no longer going into our rooms and 

going through these documents by hand. We have the 

Internet. We have the--we have all the resources. 

We have commercial databases that we search, and in 

my area particularly, the business methods area, 

when State Street came out in the late '90s, up 

until then, many people had thought that business 

methods were not patentable subject matter under 

101. So there was a very small amount of patent 

literature dealing with these issues. The people 

that we had hired to do examination were electrical, 

chemical, and mechanical engineers. They weren't 

economists or financial people or anything along 

that line--and they didn't have MBAs. Okay. So 
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we’re immediately hit with a problem. Now, all 

these applications are coming in the door--the 

trading techniques, the finance techniques, banking-

-things of this nature. 

 We really have a little information gap 

here. We have a little problem. 

 So we tried to as soon as possible gear up 

the people with the backgrounds, but the majority of 

examiners, though, we had to develop guides for them 

to go into what we call non-patent literature core 

databases--and also databases that related to the 

specific industry that they were examining patent 

applications in. So right away, we weren't--the 

amount of information available in patents was 

really scarce, and we were forced then to seek 

information in these other areas--commercial 

databases, non-patent literature, the Internet, and 

just hire people and get people with the backgrounds 

in these areas that we needed. 

 Another major change--a major, major change 

in the patent laws occurred in 1999. That's when 

the law provided for publishing of U.S. applications 
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while they were still pending. Up until then, 

pending applications were secret, were held in 

secrecy, and if, for example, the application went 

abandoned, it would never see the light of day. It 

would be stored in some warehouse, and that would be 

the end of it. In other words, hopefully, it would 

never see the light of day. But in the--try to get 

a little bit more in line with the other major 

patent systems of the world, we do publish their 

applications before they're granted. 

 The--what's called the American Inventors 

Protected Act provided for publishing U.S. patent 

applications while they're still pending, and that's 

after months of the date that they're filed. 

 So now, these are all electronically 

available and text searchable by the examiner. So 

this is a very significant and growing database, 

particularly for the business methods area because 

we did experience quite a spike in the late 1990s 

after the State Street decision of pending 

applications. And now, of course, we have to wait 

'til we get cases that are young enough that we can 
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use these for their dates, but eventually this will 

be a very, very fruitful source of data that our 

examiners can search, too, when they're doing their 

examination. 

 And foreign patent applications that have 

been published, and foreign patents also like the 

U.S. application and depending on the laws of the 

different countries when they're published, they can 

be available as of their published date just like 

any other publication for what they disclosed. 

 The--now in our area, this was also very 

important. What a printed publication other than a 

patent or a patent document, it can be prior art. 

Now, this--a printed publication can be basically 

any--it can be a manual. It can be a sales 

brochure. It can be a warranty information on a 

product, newspaper articles, Popular Science, 

journals--you name it. Anything that is public--is 

printed and is accessible--the key is that it's 

accessible to the public. And that it--and, of 

course, we have to make the electronic analogy. 

Now, we're also dealing with, you know, what is in 
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the modern day and age, what is this term printed 

publication. What does that mean in terms of the 

electronic age? And we'll get to that in a little 

while. But prior to the electronic age, if you 

will, one of the cases that came up was a doctoral 

thesis that was done in a college, and there was one 

copy of it, and it was put on a shelf in the 

library, but it was catalogued and identified and 

retrievable, and I don't know who found that, but 

somebody did and used it as a basis to invalidate a 

patent. The court held that that was, in fact, a 

printed publication because it was accessible, it 

was catalogued, and it could be retrieved by a 

member of the public. So that's probably, you know, 

the extreme, the poster child for the extreme case 

in what a printed publication can be. 

 Another common example that would come up 

is--at a seminar o a conference, scientists and 

engineers would present a paper and would have 

copies of their paper or their research, and, you 

know, leave it on their--or pass it around. And if 

you did that and didn't put any restriction on the 
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use or further dissemination of that information, 

that has been held several times to be, in fact, a 

publication within 102, a printed publication, so 

that could be used as a material under Section 102. 

 Now, this is a double-edged sword, and it 

depends I guess what your perspective is. If you're 

a potential inventor and you don't want something to 

be available against you as a 102--let's say you go 

out and you eventually want to get a patent on it. 

You'd better make sure that you don't disclose this 

or make it available under 102, and if you do, you'd 

better file within that year, because that's the 

statutory bar. If you don't--once your invention 

has become public or on-sale or in use, the clock 

starts running. And you'd better get to the Patent 

Office within a year or you're going to lose your 

rights, period. There's no salvation there. 

 But the other side of the coin is--and I 

hear this a lot from industries, such as your own, 

and they said well somebody is getting a patent on a 

technique that we've been using for five or 10 

years. Everybody knows about that in our industry, 
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and, you know, it's in this training manual for our 

people, and it's the dah, dah, dah, dah, dah, dah. 

 Well, the other edge of the sword is if you 

want that to be available to us or someone else to 

use as prior art, then you want to make sure it is a 

printed publication for purposes of 102. And, in 

fact, I don't know if many of you know, but IBM, at 

least in the '80s, they used to publish what they 

call the public disclosure document. They would 

every month round up all these inventions that they 

didn't want to file on, and they would publish them. 

They would publish them. And, you know, send them 

off to libraries and so forth, and the purpose of 

that was so that this--it was now a printed 

publication the examiners and the PTO and other 

people could use as evidence that these--that this 

technology was known by others and so it could 

negate--that's why it's a double-edged sword. If 

it's your own and you want to get a patent on it 

eventually, don't--make sure you don't publish it 

until you get to where you want to file. But if you 

have information that you want out there to stop 
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others from patenting the same thing, then you want 

to make sure it is printed, that it is accessible, 

it's catalogued, and it's available, because once 

that's out there for a year, then you're pretty 

safe, you know, in the future. 

 And that's why IBM--some of these 

documents, they were internal, but rather than--they 

wanted them to be considered prior, so they just 

published it. They got to say, hey, you know, let's 

get this out to the public. We don't want people 

getting patents on these things and coming back and 

trying to enforce them against us. 

 Again, this is another--if you--a little 

quirk here. If you give information to the 

government agencies and there's some requirement of 

confidentiality, that may not be pub--turn it into a 

publication, but if you distribute it to commercial 

companies without restrictions on use, then that 

does become printed publications. 

 CHAIRMAN BROWN-HRUSKA: Can I interrupt you 

a bit? 

 MR. LOVE: Yeah. 
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 CHAIRMAN BROWN-HRUSKA: What if the--this 

is sort of a legal question, but what if the 

information is FOIAble? In other words, if--we have 

a vast amount of information--applications on 

contracts and market methods and methodologies, if 

it's not protected under the laws that would 

normally make it confidential, in other words, you 

can request that information through the legal 

process, would that sort of help bypass that point 

that you just made, that it's--the government--

submitted to government is not prior art? 

 MR. LOVE: Yes. I don't know of a case 

that dealt particularly with the issue of, you know, 

what the effect the FOIAble nature of it is, but my 

guess is that yes, that would tend to indicate that 

it is available to the public and would be a 

publication. 

 We have one slide here, and, in fact, many 

of you are probably involved in this: submissions 

to the SEC--what they call their EDGAR database. We 

do go--our examiners do go in and search that for 

information. Yeah. 
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 A magazine or a flyer or anything that is 

distributed by mail, the date that's at least one 

member of the public receives it is the date of the 

publication. 

 Again, this goes to the applicant's own 

work. If--now, if it's more than one year prior to 

when the applicant files the application, then it's 

prior art to everybody. It's prior art to the 

world, and it's prior art to the applicant. If it's 

within--if you file and you're an inventor and even 

though you've disclosed it or put it on sale, if you 

get into the PTO within 12 months of your 

disclosure, you're safe. But it still can be used 

against others during that one-year period. 

 This is another form of prior art, and it 

does happen. Many times when an applicant files a 

patent application, they will set forth the 

environment of their invention, and they will 

describe what the state of the art was when the 

invention was made and what their contribution was 

so that we can use the statements that they make 

during the prosecution of an application and 
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statements in the specification. We can hold that 

as to be prior art against the applicants. 

 Many times they will refer to applicants, 

and the specification will say figures one and two 

represent the prior art, and my invention--it will 

be like a fuel injector, for example, and they'll 

say, now, my invention is I've got this really nice 

hard valve seat that doesn't wear out, and it's made 

of tungsten. Now, how many--do I have any patent 

attorneys in the audience? 

 [Show of hands.] 

 MR. LOVE: Okay. Oh, oh. Well, I'll say 

this anyway. In spite of indicating these prior art 

drawings as prior art, they will I guess just by 

accident draw claims that happen to read on a prior 

art. But that doesn't happen too often. But if 

they do that, then we can--we will reject the claims 

based on their admission that figures one and two 

constitute prior art. 

 And then there's a third way an applicant 

can admit something as prior art, and that's by the 

type of claim that they chose. We call it a Jepson 
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type claim. It's a formal matter of the claim. It 

typically starts out by--and for those of you--I 

guess many of you don't want a claim is then. The 

claims, of course, are at the end of a patent. And 

they're--the claims legally define the scope of the 

invention. And the last--and it literally starts 

with "I claim." And then you'll have claims--you 

can have as many as you want basically. But 

typically, 10 to 20 to 30 claims in a patent 

application, and they will say, I claim. And that's 

where all these analysis and you know whether or not 

it's obvious, or whether it's novel. That's where 

all, you know, the discussion centers around. But 

one way you can claim an invention is to say in this 

following environment or the car, gasoline engine, 

transmission, the improvement comprising and then 

they use that word, "the improvement comprising." 

So anything above that statement is taken as 

admitted prior--it was a presumption that it's prior 

art. It can be overcome. And then what follows is 

the improvement. So, for that reason I think it's 
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not used too frequently, but it is provided for in 

our rules of procedure. 

 I mentioned these submissions to other 

government agencies that are made public, and I 

presume that can be FOIA--or that are FOIAble. 

That's a good question. I think I'll look into 

that. 

 If it's available to the public or made 

available to the public can be used as prior art 

under Section 102. 

 MR. ROSEN: John, can I just ask a question 

about that. There is a difference between 

information that has been submitted to the 

Commission in connection with an application and 

materials, for example, on EDGAR at the SEC in the 

sense that you can go online and access immediately 

the information that's published in the EDGAR 

database. You have immediate access to it. 

 MR. LOVE: Right. 

 MR. ROSEN: If you want to get the 

materials that I think Sharon is adverting to that 

are not restricted by confidentiality protections, 
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you actually--you have to know or suspect that 

materials that are germane to your interest exist at 

the Commission and request them either specifically 

or with a broad enough inquiry that they would be 

captured, and then in response to that request, if 

the Commission determines that they are not 

protected by confidentiality, they're then released. 

Would that affect your analysis? 

 MR. LOVE: I think so, because that sounds 

like a fishing expedition. And part of this 

accessibility is that we talked about the doctoral. 

It's catalogued. You know it's there. It's easily 

accessible to one in the art to which it pertains. 

So if it's--yes. If it's hidden in the material, 

and you have to have some sort of clue or something 

to ask for, and that wouldn't be available to the 

general public, I would--yes, that would certainly 

mitigate then that it's not a printed publication. 

 The public use--it's pretty much, you know, 

it's--you know it or--it either is or it isn't. 

There's an exception to the public use doctrine 

which is called the experimental use exception. If 
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an inventor is trying to perfect the invention and 

in order to do that needs to get it out there in the 

public use or try to perfect it, that's recognized 

judicial exception. But once it's perfected and 

ready to go then the clock starts ticking with 

respect to the inventor. 

 With respect to a sale, what's important to 

note that is--it doesn't have to be physically 

reduced to practice. If you--if someone has 

invented a new pump, and it's described in brochures 

and drawings and you just haven't built the 

commercial embodiment of it, if you go out there and 

even offer to sell it, if it's a completed 

conceptually finished, then that could be considered 

to be a sale within Section 102 of the statute. So 

it doesn't have to be a physically embodied end 

result. 

 And as I spoke a little about earlier, 

typically we use, you know, in the past hard copies 

of patents and publications. Now, we're going into 

NPL, the Web, Googles, all--you know, we have to 

expand on our searching techniques. 
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 I better hurry up here. This is--I 

mentioned earlier, this--one of the difficulties in 

the business methods area--and certainly that would 

include exchanges and methods of trading is but 

people tell us, well, you know, that's common 

practice. That's the, you know, that's been done in 

this industry for years, and the problem is that 

it's the know-how and the tricks of the trade sort 

of thing, but going back to the statute. We have to 

grant a patent unless we can document that they're 

not entitled to it. So we need hard evidence. And 

that's why we ask, you know, when we have 

partnership meetings with different industries, we 

ask them do you have some databases that we could 

have access to. Do you have some really basic 

reference materials that will be useful for us, that 

our examiners could search, because we do want to--

it's in everybody's interest that the best prior art 

be located and found and discussed while the patent 

is pending, while the application is pending. 

 So we really want to find out what these 

techniques and what these--the common knowledge is 
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in an industry. It's just that it's hard to get it 

dated and documented. 

 But we do go to the net. We--one of the 

things that we, in our--the electronic shopping, of 

course, is, you know, E-bay and that's hundreds of 

patents over electronic auctions. And one of the 

things that our examiners do regularly is go back to 

what we call the way back machine, which I didn't 

even know existed until I got to this. It sounds 

like some futuristic--but it's a web site where you 

can go back and look up what web sites used to look 

like. So we can go back and search through the way 

back or if we get a copy of a web site that, you 

know, doesn't exist anymore. Okay. It was a 

version in 2001, but now they've gotten three 

updates and nobody knows what the first one looked 

like, and it may have a feature that we're 

interested in or that somebody is trying to get a 

patent on. 

 So we can go back there and take a look at 

it and get a date as to when it was actually up on 

the net. 
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 And it's the same concept. Now, we're 

really throwing out, you know, printed doesn't mean 

physically--a printing press or whatever. Now, it's 

just--the key is that--was it at one time existing 

in either electronic format, a stable format, in a 

database or on the Internet and was it accessible--

widely disseminated or was it accessible to persons 

to that art to which it pertained so that they would 

reasonably be able to find it. And that's 

basically--you know, the analogy--it doesn't matter 

if it's, like I said, whether it's from a printing 

press or whatever--it's--that's the key. Is it 

information that existed in a temporal time period 

and was accessible to the public. 

 And that's basically what this next slide 

is saying. 

 And again, anything that's posted on the 

net, it's the date that it was put up there and made 

available or in a database on--you know, there's a 

lot of databases in the--as you know, on the 

Internet, and all those--assuming it's categorized 
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and accessible and any of that information in the 

databases can be used. 

 I mentioned the web sites. 

 Software products. Of course, for many 

years, software wasn't even patentable subject 

matter, but the law evolved there that a program or 

software that is embodied in a physical medium, like 

a CD or whatever, as long as that program would give 

you--would meet the State Street test--so I won't 

bore you with the legal tests, but, we now--you can 

get a patent on a software program that is 

physically embodied in the storage medium. 

 And conversely, then it's fair to use that 

as prior art against these applications, and the 

date that you can use these are would be when it's 

first installed or released. 

 So in conclusion, although each one of 

these things are 10 or 12 major court decisions 

around the subtleties of whether or not it's a 

printed publication or not, but I've tried to give 

you an overview. It's basically anything that 

qualifies as evidence to use against an applicant 
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under 102 in terms of negating patentability. 

Accessibility or dissemination is a key factor when 

you're talking about a printed publication. When 

you're talking about a knowledge or use or on-sale, 

it could be a single event. And it doesn't even 

have to be--I forgot to mention one of my favorite 

examples. Someone had invented an improved bearing, 

and to try it out they put it in an engine, in a 

car, and sold it. Of course, you couldn't see the 

bearing, but that was--tried to get a patent on it 

two years later, and they said, no that was public 

use. Nobody could see it. You couldn't--but, you 

know, it was out there in that car, and it was being 

used. 

 So that's--and that's depending on what 

type of prior art you're talking about a single 

instance in a not so public environment can be 

considered to a bar to the patentability. And the 

third point is the electronic information now. All 

this is also available prior art. Our examiners are 

searching it. We have to be more diligent in 

identifying and exploring new databases, places to 
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search for these materials. And we welcome--we 

have, by the way, on our--we have a web site on our-

-in the business methods area, and on the PTO web 

site, and we have identified the core databases and 

also the auxiliary databases that we search, and, 

you know, I'd ask you to look at that or have your 

counsel--patent counsel--look at that and if you 

know of any other areas that you think we should be 

putting down there--journals, publications. Give me 

an e-mail. We'll look into it. We'll put it on our 

mandatory search list, and we'd be--because we--like 

I said, the most important thing in our perspective 

is to get--identify the best prior art, and that's 

in everybody's interest. It's in the interest of 

the public. It's in the interest of the Patent 

Office, and the interest of the patentee that they 

get a patent that's solid, and that they can rely 

upon. So that's what all our efforts are geared to. 

 Having said that, I thank you very much, 

and I hope I've given you some useful information. 
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 MR. DUNN: John, just as a perspective, how 

many requests for patents do you get annually and 

what percentage are granted? 

 MR. LOVE: Globally, the office gets 

370,000. Intellectual property is alive and well. 

And typically, we grant about 150,000. In the 

business methods area, we are--after the State 

Street decision, we--well, prior to that, we were 

getting about 2,000. We spiked to around 9,000. 

And now, we're leveling off at about 8,000 in the 

business method area, and we grant about 500 a year. 

 CHAIRMAN BROWN-HRUSKA: Let me just ask the 

question that's on my mind, and if one were going to 

try to create one of these databases, as I said, we 

have a lot of information. For example, over the 

years, many applications have come in for new 

contracts, new ways of doing business where they 

needed regulatory approval, and so, but a lot of 

this is probably not in the right format or the 

right, you know, in terms of--a lot of it is up on 

the Web, and we have a significant--I don't know 

when we first established our web site, but it has 
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become a very important way for us to communicate 

what we do and what the industry is up to. And so, 

is there any--have you given any thought to that and 

what makes it sort of a database, a very useful one, 

from your perspective? 

 MR. LOVE: Well, the--if it's in digital 

form or text searchable that's--that would yeah. 

Text searchable and it's--I have to look at the 

exact nature of it, though, to determine whether or 

not it would, you know, to be legally determined to 

be actually prior art. If it's--if there are 

restrictions on access to it or whatever, but if you 

can give it to us or we can work out, you know, we 

can take a look at it, and if it's available, and 

easily text searchable, we'd love to know about it, 

if we're not already doing it. 

 MR. LUKKEN: John, I had a question. You 

had mentioned partnership meetings that you get 

together with certain industries to talk about the 

specific nature of their intellectual property 

issues. Can you describe those a little more and 
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whether that might be a useful exercise for the 

futures and derivatives industry to think about? 

 MR. LOVE: Yes. Well, we currently, 

actually, as coincidence would have it, we're--our 

next partnership meeting, we have them annually as 

next Wednesday, and we just share information. We 

give update information on what's going from our 

perspective. We get information from--and this is 

in all the business areas. Now, we have worked 

individually, for example, with BITS over time. We 

have worked with them, and--their concerns, and 

they've given us some data and some information. So 

we're willing to work either on an ad hoc basis with 

any group, and we also have these formal annual 

meetings now at our Carlisle facility where we just 

get together and talk about points of mutual 

interest. 

 MR. HATFIELD: Excuse me. As a follow up 

to that on business method applications, everything 

you've sort of gone through today seems to be very 

driven by publication and some sort of printed 

material or data that you can reference. To what 
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extent, on a business method application, do the 

comments of the industry matter as to whether or not 

there's prior art. I mean, is that sort of input--

is that something that you spend a lot of resources 

on, and does it have an impact, or does it all still 

have to come back to what you find in writing? 

 MR. LOVE: I'm sorry you--what the 

industry--I guess I didn't hear that particular 

point. Is that--oh, what did you want us to rely 

upon? 

 MR. HATFIELD: No, I mean, I'm asking to 

what extent, if you're looking at a business method 

or a business model, do you guys meet with industry? 

To what extent does what other people say about 

what's going on impact your decisions? 

 MR. LOVE: Well, of course, we don't 

consult with respect to specific applications. And 

so we, for example, can't go out and say to the 

finance industry what do you think about this 

application in terms of, you know, is this really a 

new process or a new trading mechanism. They can 

direct us to databases that they're aware of. 
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 Now, having said that, all applications now 

are published after 18 months. So if you have a 

specific interest in a specific application, any 

member of the public can file information in that 

file. You can actually submit a paper, identify the 

application and say please place this information in 

this application. 

 MR. HATFIELD: But if somebody--sort of 

coming in, you wouldn't be able to meet with them 

and ask them? 

 MR. LOVE: No. No. 

 MR. HATFIELD: You wouldn't be able to 

actually sit down-- 

 MR. LOVE: No. And we can't consult them 

and say, hey, did any of the--no, we can't do that 

kind of consultation. 

 MR. ROSEN: Clearly, the publication 

element of prior art is very important. I'm just 

wondering whether there might not be relevance in 

contemporaneous or pre-existing practice that's not 

public that might bear, for example, on really how 

innovative something is or how obvious it was, and 
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the extent to which examiners might find that 

information useful, even though it's not--it can't 

be demonstrated to have been in the public domain at 

the relevant time. 

 MR. LOVE: That's our dilemma. And that's 

why, you know, the practices that people say are 

known. It's common. We ran into this in the 

surgical area, where doctors would say, well, we've 

been--that technique has been going on for years. 

But due to the secrecy part; of course, the secret 

is not so much a problem anymore, but unless it 

meets the legal requirements of the 102 statute that 

I handed out, we cannot go seeking other people's 

opinion or ask--and even, you know, it's just not 

something we can utilize. 

 MR. ROSEN: But independent of the patent 

prosecution process-- 

 MR. LOVE: Okay. 

 MR. ROSEN: If there was evidence that 

there were four systems that utilized similar 

technology prior to the date of a patent 

application, or claimed date of first use, and those 
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could be demonstrated, even though they may not 

qualify as prior art and may not have been taken 

into account in the application review process, are 

they nonetheless potentially prohibitive of whether 

or not the claimed invention was, in fact, obvious 

or not at the time? 

 MR. LOVE: Yes. In an infringement suit, a 

defendant could raise those issues, and there would 

be an issue of public knowledge, and affidavits, 

evidence, could be considered along those lines, 

certainly. 

 MR. KELLY: First, I'd like to make a--oh, 

I'm sorry. This is Matthew Kelly from the CME. 

 I'm actually setting up a meeting with the 

Patent Office to deal with a training session for 

the examiners for exchange-based technologies. 

Right now, it's targeted for July, and so anyone 

that wants to participate in it, please let me know. 

We're still deciding between one or two days to help 

train the relevant examiners on things that are 

germane to the exchange side, and I imagine some 

other people would be interested in doing the same. 
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I know BITS has done it as an organization, but you 

can also just kind of do it more ad hoc as the 

exchanges are trying to pull together. 

 And then a question for you is a little bit 

technical, but do you feel that the Patent Office 

should focus a little bit more on director--

Commissioner directed re-examinations in the 

business method area? 

 MR. LOVE: I think I'll let Director John 

Dudas answer that question, since they are--the 

horse's mouth will be here at three o'clock. 

 One of the things that's being debated in 

Congress as we speak, as you know, is post-grant 

opposition. 

 MR. KELLY: Yes. 

 MR. LOVE: And that would mean that any 

member--once a patent is granted, any member of the 

public could ask for--could oppose the grant after 

it has been granted. And that's one I think way of 

addressing the issue of what do we do with patents 

that should not have been issued. We have reexamination, and, John, two forms of re-examination 
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now that are rather limited and have some procedural 

setbacks or procedural pitfalls I guess for 

potential defendants. But it's--I would say let's 

see where the Congress goes with post-grant 

opposition and see how that--what particular form 

that takes. 

 MR. KELLY: Okay. As I recall from the 

last roundtable, the PTO Roundtable session I was 

at, the Patent Office is actually supporting that 

legislation; is that correct? 

 MR. LOVE: Again, I would prefer you to 

direct that question to Director Dudas. 

 MR. RAPA: [inaudible]. Mr. Love, 

considering that most of the focus of the audience 

here is financial services derivatives industries, 

what's the type of challenges that the PTO faces 

when people come in with patents in terms of that 

the type of experience that your examiners have to 

understand that the latest new patent application 

for an encrypted funds transfer algorithm, how do 

you understand what that is? What kind of expertise 
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do you have, and how challenging is that going 

forward? 

 MR. LOVE: Well, in the beginning, as I 

mentioned, it was very challenging, because here we 

were dumped with really a new category of invention 

or at least one that was thought prior to that to 

not be patentable subject matter. And it was quite 

challenging. 

 Now, fortunately, cryptography, we had a 

group in the--well, it used to be our technology 

center 2600. We have about 15 examiners who were 

very experienced in cryptography. They would just 

act on cases that would generally involved 

encryption. They now work with us for processes or 

embodiments now that are related to business methods 

or business techniques. So we do have very--in that 

particular area, we do have highly skilled 

technological examiners who were double E's, and 

this is what they used to do. 

 The challenging part, though, is to learn 

about trading techniques. And what we did there is 

we--first we combed the examiners in the U.S. PTO 
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for anyone who had experience in business or anybody 

who had an MBA alone--and we were able to get about 

20 examiners right away who had some sort of either 

an additional degree in finance or banking or 

economics or something or who had an advanced degree 

MBA. 

 Since that time, we have been successful in 

hiring people who not only qualify as a patent 

examiner, a traditional patent examiner, but do have 

either significant--like we had members--we had 

examiners that were members of the New York Stock 

Exchange previously, so they knew the trading 

techniques. They were there. So we hire now--are 

able to hire people with either industry experience 

or academic experience in the business areas, in 

addition to engineering. 

 Now, that doesn't mean that we have people 

who are out there in the cutting edge, you know, and 

there's going to be a hiatus here until we see and 

when we get enough examiners to go through these 

applications and do see the cutting edge, because 

actually that's where the cutting edge is. It's in 
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your patent applications that we filed. So I think 

eventually, it's going to take care of itself. 

We're in a transition period, but I think we're 

getting much better. 

 CHAIRMAN BROWN-HRUSKA: Ed, are you ready? 

I think I want to thank you, John, very much for 

your remarks and I think that we've learned a lot, 

and now I want to sort of hand it over to Ed Rosen, 

who is heading up the committee for the FIA on 

intellectual property. Let's see. Are we getting 

him a mike or is he going to hold this thing here? 

FIA PERSPECTIVES ON THE EMERGING SIGNIFICANCE 

OF PATENT CLAIMS 

 MR. ROSEN: Thank you. It won't come as a 

surprise to those assembled around the table that 

there have been a lot of recent significant patent 

litigations that have caught the attention of the 

industry. There was the patent litigation involving 

the Wagner patent. There was recently E-Speeds' 

patent for work-up in the government securities, 

electronic trading market. And now most recently, 

we have the trading technologies litigations 
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involving their static ladder, single action 

execution patents. 

 And the industry reaction to these 

developments is very reminiscent to me of the 

reaction to the issuance of the first business 

method patents in the financial sphere in the '90s 

that John adverted to earlier when he referred to 

State Street, which was a software patent, business 

method patent, involving the allocation of fees in a 

hub and spoke funds structure that would allocate 

costs and expenses of the group to the various 

satellite special purpose vehicles. 

 The reaction at that time was very similar. 

There was a great deal of consternation. There was 

a great deal of indignation, and there were very 

strongly held views that the relevant claims were 

not novel or that they were obvious; that the 

technology was obvious. And I think I have at least 

anecdotally witnessed a very similar reaction in 

connection with these trading patents. 

 It's clear that we have a steep learning 

curve in the futures industry on patent law. It's 
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not generally well understood, and in addition the 

ability of a patent to emerge two years later and 

sort of surprise everybody gives an added edge of 

surprise and can interfere with significant ongoing 

development efforts because the lead time in 

technology development is so significant. 

 And I think that as observers of these 

developments and the litigation, I think we are 

beginning--only beginning to appreciate how 

enormously powerful these patents are, and I think 

one of the things that seems clear, and I'm 

interested actually to hear that the aggregate 

number of patents that you're seeing in this area is 

actually leveling out because at least my perception 

in the financial sphere is that all indications are 

that this activity is going to accelerate and 

continue to accelerate because people are not just 

seeing the strategic value and power in these 

property rights, but people also see a need for 

defensive purposes to accumulate whatever they can 

in the way of valuable intellectual property patent 

rights in order to have something possibly to barter 
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with as others emerge in potentially overlapping 

applications with patents that they may not be 

currently aware of. 

 Some related observations are that 

defending a patent case, as some are learning, is an 

extraordinarily expensive proposition. I mean the 

cost of preparing, getting witnesses, looking for 

prior art, evaluating it, in addition to the 

overhead just of being in a U.S. court as a general 

matter makes it a very daunting financial prospect. 

 And that means that the issuance of patents 

conveys enormous economic leverage, because 

independent of the ultimate merits, the costs and 

the distraction to management, particularly in 

relatively small organizations, is so significant 

that the pressure to settle and to resolve is 

enormous. 

 When patents are issued and they're 

successfully parlayed in the marketplace, it can 

profoundly impact costs of access to the market, and 

it can fundamentally adjust the competitive balance 

and other competitive forces within a marketplace. 
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 So looking at this from an industry 

perspective, it's clear that the stakes are 

profoundly significant, and we've only seen I think 

the tip of the iceberg because we have all heard 

about quite a number of patent applications that are 

still pending whose force and impact we'll only come 

to understand once the patents are issued or at the 

publication date. 

 So given this, the FIA Board had in its 

planning session devoted a fair amount of time to 

thinking about these issues, and the challenges. 

 And in light of this enormous economic 

leverage and the potentially transformative effect 

of the patents, it seems clear that it is vital that 

the PTO and the courts get it right when they're 

deciding about patents, because if you think about 

it, the balance of benefits and hardships is a 

little bit asymmetric in the sense that you get a 

very enormous property right if the patent is 

issued. 

 On the other hand, if the patent isn't 

issued in the technology sphere, it doesn't deprive 
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you of a leverageable and valuable commercial asset. 

You can still rely on trade secret law and copyright 

law and contractual rights in order to exploit and 

commercialize your technology. 

 But it seems clear, though, given the 

asymmetries and the importance of making sure that 

these decisions come out right that the industry 

needs to be sort of a willing partner, John, to the 

overture that you've made in terms of the interest 

that the office has in getting access to data and 

cooperation from the industry, and so the FIA I 

think is committed to trying to evaluate how it can 

play a role in promoting precisely that result and 

as the Acting Chairman Brown-Hruska indicated, the 

FIA Board has formed a committee and is working to 

try to pursue some defined I should say and pursue 

some initiatives because some of the initiatives are 

not intuitively obvious as to how they should be 

accomplished and some are really a challenge to 

accomplish. 

 Some of the specific initiatives that FIA--

the FIA Board at least--has identified as of 
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interest to it in pursuing include first, 

sponsoring--and this is sort of one of the simpler 

objectives--sponsoring continuing education in FIAsponsored conferences on the subject of patent law 

and other intellectual property rights. FIA 

believes that through its members and its 

connections with exchanges in the United States and 

outside the United States in ISBs and other 

technology providers that it is well positioned to 

participate in an effort to systematically 

accumulate and archive relevant prior art as well as 

contemporary art as it evolves. 

 In thinking about that initiative, there 

are a number of challenges that we've been thinking 

about. One is the sponsorship, the ownership, and 

the funding of the technology. I think it is 

heartening to hear that the Commission would like to 

play a role. I think there are some limits to the 

extent to which I think the Commission can, on its 

own, provide a comprehensive database, both because 

of the nature of the filings that do and don't come 

in, because in some cases filings, particularly 
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those that are technology-related do often make FOIA 

claims or include redactions at the time they come 

into the Commission. There are significant issues 

of where the facilities will be located. What kind 

of hardware and data storage can be committed to it. 

The funding of that is significant. Database design 

and taxonomy. What is going to be the method for 

systematically collecting the data, entering it, and 

storing it on an ongoing basis, and the support and 

maintenance of the system and access to it. Those 

are not trivial challenges. I think FIA is not sure 

that it is an institution in its own right that can 

be the source of the solution, but it is something 

which is worth exploring, both in terms of the 

definition and trying to identify participants who--

and other organizations--who could contribute to 

such an effort. 

 I think FIA is also committed to exploring 

ways in which it can--I think much the same vein as 

Mat described in connection with the exchange 

initiative to try to contribute to the education of 
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PTO examiners and provide sources and access to 

literature that includes prior art. 

 We have talked extensively about how can we 

monitor both issuances of patents, publications of 

patents, and related litigation or judicial 

developments that bear on patents that are relevant 

to the futures industry. 

 And there are really two challenges. One 

challenge is the challenge of monitoring and 

collecting that information. The other challenge is 

that not everybody wants all that information. Even 

people that are interested in theory in being 

apprised of developments are concerned about the 

implications of receiving that information precisely 

because under the statute if your infringement of a 

patent is a knowing infringement, the economic 

consequences are significant because of the treble 

damages, so people are concerned about coming into 

possession of information that might put them in 

that category of being engaged in a knowing 

infringement. 
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 We are very interested in monitoring the 

legislative developments. There are some proposals 

on the table--one John adverted to in his remarks on 

the post-issuance opposition opportunity. I think 

FIA will follow those developments very closely and 

on the legislative sphere and in the judicial sphere 

look for--I don't know that I want to describe them 

as opportunities, but situations in which it may be 

appropriate for FIA to participate or play a role of 

some kind. 

 And most importantly, I think--and I think 

this is maybe the key to getting a lot of this done-

-is I think FIA would like to reach out to other 

trade associations, organizations, agencies like the 

CFTC to try to determine whether on a cooperative 

basis there may be a more--a better prospect for a 

successful outcome because I actually think that 

trying to accomplish some of these larger exercises 

are going to be a test of will, commitment, 

organization, and sponsorship. 
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 CHAIRMAN BROWN-HRUSKA: I wonder if there 

are any questions for Ed? John McPartland. John, 

say your name. 

 MR. MCPARTLAND: Hi. I'm John McPartland. 

I'd like to revisit the access issue, Ed. I could 

envision where no one but the Patent Office had 

access to such an archive, especially if inventions 

are sacrosanct for 18 months. What other 

alternative of access might you envision when you 

put that on this outline? 

 MR. ROSEN: Well, if there is to be an 

archive of contemporary and prior art that's in the 

public domain other than thinking about concerns 

like database integrity, security, and maybe 

funding, I'm not sure that there would be an 

interest in limiting access, and it may be of 

interest to market participants to have access to 

that database for development purposes, for purposes 

in connection with ongoing, you know, litigation. 

I'm not sure that that database would be of 

relevance only to the examiners in the PTO. 
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 MR. KELLY: And actually, it would have to 

be a publicly accessible database for it to become 

prior art. 

 And there is probably quite a few documents 

and systems that you may not be filing patents on, 

but you'd want that information out there, and you'd 

want that out there for a couple of reasons. One, 

to help the Patent Office determine if another 

person's patent on that similar technology should be 

allowed to the Patent Office or not, and so you want 

to start building that archive now. And there are 

many documents that we have, you know, speaking for 

the CME, that we've never released publicly that 

describe how our systems work, and maybe even 

describe how our old systems that we no longer use 

used to work back then. Having a facility where you 

can make those public at the appropriate time would 

allow the Patent Office to reference them and would 

give the CME an easy way of making those documents 

public. 

 MR. SABO: I'll give this a shot. Can 

everybody hear me? 
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 CHAIRMAN BROWN-HRUSKA: Introduce yourself. 

This is my good friend, Jack Sabo. I've known him 

for many years. Before I became a government 

official, I was a professor at George Mason 

University doing research, and I have the great 

pleasure of looking around this table and seeing 

some people who have helped me do my work back then 

and sort of taught about markets, one sitting right 

across from me--Mat Andresen from Citadel, who I had 

the pleasure of visiting when he was at Island, and 

we fought the good fight on many issues, and I 

thought we had lost, but he told me today that, in 

fact, we really won. And the other person that was 

very, very helpful to me and taught me about market 

data services was Jack Sabo, and took me out to the 

New York Board of Trade and showed me how data is 

collected and how it enters into the tape, and it 

was really fascinating and very encouraging that 

these markets, even though their open outcry, were 

still very up to the minute and contemporaneous in 

the way that they got that information out there. 
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 So I just want to welcome Jack, who's my 

good friend, and he is going to talk about an issue 

that's rather troubling and that is the market data 

that exchanges have been producing for all these 

years as a result of their price discovery mechanism 

have recently become of interest to those who would 

steal it. And so, Jack, welcome. 

PIRACY OF MARKET DATA 

 MR. SABO: Shucks. Thank you, Sharon. 

 I'm really happy to be here. At the same 

time, it's been a long time since I've done any 

public speaking. It might be as long ago as high 

school, and I'm not going to tell anybody how long 

ago that was. I don't even want to remember. 

 So if I studder and stammer a little bit, 

just please be patient. 

 First of all, our general counsel has asked 

me to let you all know that some of the opinions or 

actually all of the opinions I am going to talk 

about or provide you are my opinions and not 

necessarily those of the New York Board of Trade. 
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 She didn't really ask. She sort of 

threatened. But, you know, only kidding, of course. 

 I have the job of being in charge of market 

data services at the New York Board of Trade. And 

it's a really terrific job. It's terrific because 

you get involved in so many different facets of the 

business. You have to be really involved in 

technology. The old technology. The current 

technology. And you got to keep an eye out for all 

future technology. That makes it exciting. Of 

course, there's the financial aspect of it, and 

there's a little bit of marketing. 

 The really good part is that you get 

involved in long-term planning and short-term 

planning, and all of it, all of it, has a huge 

impact on your exchange. 

 Additionally, I get to deal with my 

counterparts at the other exchanges--the people at 

the vendor firms, the large traditional vendors, the 

smaller vendors, and, of course, our end-user firms. 

And they're all a pretty good bunch of people to 
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deal with. You know, we're really very, very 

fortunate. 

 Let me give you a little background about 

how exchanges get data out to the world. 

Traditionally, years and years ago, everybody--you 

had your large vendors and those vendors had 

proprietary terminals. They had permissioning to 

those proprietary terminals, and everything was 

very, very, very controlled. 

 Nowadays, of course, you have Internet 

access, which is not a bad thing. The exchange, of 

course, provides its data directly over the Internet 

via a web site called NYBOT Live. And if you want 

to get our data, go to www.nybotlive.com. And this 

web site provides information to a lot of people 

that wouldn't afford to get the data if it weren't 

at a reduced price directly from the Exchange. 

 But most importantly is the way our data is 

provided to our vendors. The Exchange provides 

private lines, leased lines, out to the vendors, and 

those vendors provide data directly to other sub 

vendors and to user firms. They do this today very 
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often by means of data feeds. So there are 

thousands of data feeds out there with information 

from all the derivative exchanges. And that makes 

it liable. It makes it potentially difficult to 

trace. 

 It's these data feeds that I'm going to 

talk to you today about. 

 Because of these data feeds, you have to 

realize, that in any--can people hear me? That in 

any part of those data feeds a leak could exist. 

Are we okay? Do I have to hold it closer? 

 Just hold it? Just place it down? 

Everybody hear me? Okay. 

 So leaks could be anyplace. But understand 

all the parties, all the licensed parties have a 

vested interest in having no leaks. No vendor wants 

a leak. No user firm wants a leak. You know, and 

that's never going to--well, theoretically, it's 

possible that a leak could occur. Let's say a rebel 

employee, you know, somehow provides the data 

outside for some particular gain. But that's--but 
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all these firms have a vested interest in protecting 

that data. 

 The exchanges protect their market data by 

contractual agreements with our sub vendors, our 

vendors, and with subscriber agreements. We also 

conduct vendor audits. These are primarily 

accounting type audits, comparing permissioning 

versus reporting systems. I do remember at one time 

someone telling me that they could do a foolproof 

audit of a vendor's system. That's not really 

possible, not unless you're going to scope out every 

cable, under every computer room that that vendor 

has. 

 But again, nobody really wants a leak. 

 Additionally, we also do refined Internet 

searches, using specialized software to discover 

pirates redistributing data over the Internet. 

 Lastly, we do a little detective work. 

 This short story is about the last item. A 

little detective work. 

 I don't really remember what prompted me, 

but years ago I started thinking that, you know, in 
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China, they pirate software. They pirate music. 

They pirate videos. I wonder, you know, they got to 

be pirating market data. 

 One of the people in our New York office is 

a very intelligent young woman from Beijing. So I 

asked her to give her brother a call and find out 

who the largest information provider of financial 

information was in China. 

 He did a little research with his friends 

and discovered a very well-known Chinese firm that 

sells real-time market data via their web site. 

It's not a fly by night company. It's not somebody 

in a garage someplace copying a disk. Not at all. 

As a matter of fact, they have this big brand new 

office in the middle of Beijing. It's also owned 

by, it’s a subsidiary rather of a larger firm traded 

on the Hong Kong Stock Exchange. Its chairman and 

CEO, in fact, graduated from a university here in 

the United States. 

 So what we did was we subscribed to realtime data from every derivatives exchange in the 

world. It probably should have cost us somewhere 
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between I don't know $10,000 and $20,000 per year. 

We got it for the bargain price of--I'm sorry. It 

should have cost around $10,000 to $20,000 per 

month. All right. 

 But we got it for the bargain basement of 

$600 a year. 

 Now, sometimes when we do our searches we 

find that the web sites say, oh, yeah. We'll give 

you real-time data from every exchange in the world, 

and it's all BS. All right. They don't really have 

the data or it's delayed data. It's still our data, 

but it's delayed data, which is not quite so 

hurtful. All right. 

 So we had to do our due diligence and prove 

whether or not it was delayed data. So we got on 

the system, tested against NYBOT Live, against CBOT 

data, against CME data, and NYBOT data. All right. 

And it definitely was real-time data. 

 When it comes to piracy issues, we work 

pretty closely especially with Glenn Madeja of the 

CME and Steve Dickey of the CBOT. This is something 

that we all have in common. We all belong to an 
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organization called the FISD. It's probably the 

largest and most influential market data association 

in the world. After discovering the Chinese pirate 

and proving it out, we demonstrated the site to the 

other exchanges during one of the FISD meetings, and 

we've kept them in the loop throughout the 

investigation. 

 FISD stands for Financial Information 

Services Division, and as you might guess from that 

name it's a division of the Software and Information 

Industry Association, the SCIIA. 

 Another of SIIA's divisions is its antipiracy unit. Those are the people that have pursued 

software pirates over the last couple of decades. 

Last fall, the anti-piracy division notified us that 

the United States Trade Rep was conducting an out of 

cycle review to determine if China was making any 

progress in combating piracy, apparently that was 

one of the requirements in China becoming part of 

the WTO. 

 USTR was looking for feedback. Working 

with the SIIA and with NYBOT's Washington 
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representative, Ellen Levenson, we provided USTR 

with a letter detailing the Chinese piracy. USTR's 

Paul Mendelson and team were gracious enough to meet 

with us and told us that Chinese piracy such as this 

definitely, definitely concerned the Administration. 

He also stated that the USTR would have to 

coordinate this issue with the Treasury Department 

and with the Department of Commerce. We've met with 

the Treasury Department, and they have agreed with 

that. 

 Of course, Chairman Brown-Hruska and the 

CFTC have also helped in dealing with the other 

government agencies. 

 While we were asking the Administration for 

help in this area, we are also pursuing a somewhat 

more direct approach. The SIIA has just hand 

delivered a letter to the pirate company's 

chairman's office. The letter notifies him of the 

piracy, asks him to contact us, and to help resolve 

the problem. Even though, he graduated from a U.S. 

university, all right, we sent the letter in both 

English and in Chinese. 
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 That's where we stand today. And nobody 

wants to barge into China like a bull in a China 

shop, although there are people in my organization 

that will tell you I frequently do do that. But 

because there's so much potential with China. 

 What we want to do is somehow legitimize 

the distribution of market data in China. Our next 

step will depend on what response we get from the 

chairman, the pirate's chairman. And that's where 

we stand. Thank you, all. 

 CHAIRMAN BROWN-HRUSKA: Thank you, Jack. I 

appreciate that very much, and I don't know if 

anyone has any questions or any-- 

 MR. HATFIELD: Jack, first I'd like to say 

if that's the first speech since high school, you 

did an actually amazing post high school job. 

 MR. SABO: You mean you couldn't see me 

shaking? 

 MR. HATFIELD: No. You did great. 

 MR. SABO: Oh, good. Great. 

 MR. HATFIELD: On the data that the Chinese 

company has, is there any way of us finding out who 
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else is getting access to that data, and how it 

might be being used. 

 MR. SABO: Who their customers are? 

 MR. HATFIELD: Yes. And how it's being 

used? 

 MR. SABO: Yeah. No. Not really. 

Although we've had the--the SIIA belongs to a 

technology association in Beijing, in China, called 

the U.S. ITO, the United States Information 

Technology Organization, and they've done some 

research and actually, you know, been part of our 

investigation team, and they're trying to determine 

things like that. How many users they have? I 

don't know. NYBOT Live actually has some 

subscribers in China. Why they would pay us a 

legitimate fee, subscriber fee, rather than get it 

from Chiwa.com, I'm not sure. Maybe it's because it 

does come directly from the Exchange, and they're 

interested in only one of our products, like cotton 

specifically. 

 But, you know what? We have to find out 

more. And, you know, that's one of the problems. 
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We know so little, so little about doing business in 

China. Years ago, I lived in Rome, Italy, for three 

years--years ago. And I lived in a dormitory with 

people from Madagascar, from obviously Italy, 

France, the Philippines, and at that time I actually 

played on their soccer team because they needed one 

extra person and they convinced me that soccer was 

like basketball. You just used your feet instead of 

your hands. Well, so I proceeded to embarrass 

myself as part of their team. 

 But what I did learn is that with the best 

of intentions, when there is so many different 

cultures, you have to tread lightly. And you have 

to go slowly. You have to keep moving. You have to 

keep moving. You have to make some progress, but 

you have to understand how little you know. 

 MR. ROSEN: So out of curiosity, this 

Chinese company, were they taking legitimate 

[inaudible] and then just redistributing ad nauseam 

or were they scraping your site? 

 MR. SABO: They're not scraping a site. 

Scraping a site is not really a practical way of 
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getting the data. It takes too long, plus we could 

see it. We could see it. 

 Now, it's somehow--they've got a pipe, a 

data feed pipe, with all the Exchange data. All 

right. So, there's no doubt about that. Where it's 

coming from, we don't know. We actually--the CBOT 

shut a sub vendor off--oh, I guess last fall. And 

we thought that sub vendor may have been providing 

the data to this pirate. And so what we did is we 

conducted a test to see if the pirate still had CBOT 

data. Yes, they did. 

 MR. ROSEN: Is it possible to encode or tag 

the data for different distribution so that you 

could surreptitiously evaluate what route that data 

took to come back to you? 

 MR. SABO: Well, actually, I've had many 

plans in front of our general counsel to try to do 

something, send out--just stop a broadcast to a 

vendor. Well, we can't do that. All right. You 

specify a vendor that you thing may be suspect. And 

mind you that--or a user firm or something like 

that. That's completely against our contracts with 
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those firms. All right. In the future, you have 

something where we're hoping, and the SIIA people 

could talk better about this than I can, there's 

something called the digital object identifier that 

may be on our horizon or it could be one of those 

things that's on our horizon forever. All right. 

But what it’s talking about is putting that type of 

tag to every bit of your data. All right. So every 

piece of your data would have a tag to it. It's 

almost like a bar code when you're checking out of 

the supermarket. And you're going to check it out, 

check it out. You're going to take coffee. Or 

you're going to take U.S. dollar index, and you're 

going to pay a fee for that. And that I think has 

tremendous possibilities. At the same time, it's 

tremendously complex. You're talking about setting 

up something more complex than the current URL set 

up, which is very, very controlled on the Internet. 

All right. Which is an amazing feat. 

 So, yeah, Mike. Matt? 

 MR. KELLY: Jack, have you run across the 

problem of foreign countries not recognizing your 
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rights in the data as opposed to your contractual 

rights with your market data vendors. Just like 

with patents and copyrights and trademarks, certain 

countries recognize them and certain ones don't. 

 MR. SABO: Well, as a matter of fact, they 

started this process before China was in the WTO. 

You know, we started looking into it. And 

basically, everybody told me, China just does not 

recognize your rights here. And that's what we're 

looking into. There are people at the U.S. embassy 

that are very knowledgeable in the Chinese law, and 

through the U.S. Trade Rep, we're going to be 

talking to those people. 

 CHAIRMAN BROWN-HRUSKA: Well, I just want 

to thank you very much. I mean I think what really 

inspired me to look at this area and how I got to 

know Jack was that I was very interested in market 

information. I think it was a few years ago that 

the SEC was seeking to regulate the way that the 

networks and network A, B, and C in the securities 

market space priced the market data that they 

distribute to investors and to firms, and so I did 
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an exhaustive study and, but one of the things that 

inspired me to think about this and is sort of 

theoretical, you know, market, the information--

market for information, and my view that there is a 

market for information, and it's fundamental to the 

competitive process; that people invest time 

resources; companies invest time and resources to 

collect information and then they trade on that 

basis. And the exchanges are, and the firms that 

implement those transactions are at the--are part of 

the process that contributes to creating prices, to 

producing prices, and I was brought along on that 

way of thinking by our next speaker, Jim Overdahl. 

 He's our Chief Economist, and he had 

written probably one of my favorite papers a few 

years back in '91 that looked at the price discovery 

process and looked at trading as part and parcel to 

production of prices and the view that at least 

where the market data is concerned that exchanges 

and those who produce prices have some expectation 

of revenue from that process. 
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 So without further adieu, let me turn it 

over to Dr. Jim Overdahl, Can Prices Be Property? 

CAN PRICES BE PROPERTY? 

 DR. OVERDAHL: Thank you, Sharon. Thank 

you for the invitation to speak today, and the usual 

disclaimer applies. And in addition to the usual 

disclaimer, I need to fully disclose that I am not 

an attorney and what you're about to hear here today 

does not in any way represent a legal opinion. It 

does cross the line between economics and law. But 

it is--I am not an attorney. There may be one or 

two in the room here today who would be wiling for 

the right price to offer you their opinions, but 

that's not what I'm about today. 

 What I want to do today is steer away from 

any of the sort of hot legal issues because I don't 

really feel qualified to speak on those matters, but 

to step back and get a broader look at some of the--

how these issues have evolved through time. I think 

it is interesting when you look through history to 

see that a lot of these issues are not new, that 

they arise time and time again and to look at 
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perhaps some of the reasons why that happens. And 

then the second thing I would like to do is just a 

brief review of the scholarship that's related to 

this subject. And finally, to review some of the 

policy issues that are posed by intellectual 

property disputes over prices. 

 Now first of all, if you go back you see 

there's an interesting book that I would recommend 

to you who have interest in this subject by Ronald 

Coase, The Firm, The Market, and the Law. And in 

there he goes back and actually looks, reviewing 

some of the scholarship related to medieval fairs 

and markets and how they actually had restrictions 

on the prices that were used that were discovered in 

the markets. And what you can do with those prices 

as you left the marketplace and traveling to and 

from the market. So it dates back a long time. 

 Certainly in the 19th century here in the 

United States there was extensive litigation 

involving the right to ownership of quotations and 

transactions prices from stock exchanges and futures 

exchanges, and going into the modern times in the 
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1970s with the National Market System Act and the 

consolidated tape. A lot of issues arose out of 

there, including some of the ones that Sharon just 

mentioned about the role of the SEC and the 

regulation of the pricing of that data and the 

format of that data. 

 We have also seen price data disputes in 

the government bond market, the municipal bond 

market in the 1990s, and an issue that perhaps 

wasn't cast as a settlement or a pricing issue, but 

certainly had aspects of it that were related to the 

question of ownership of prices back in 1994 with 

the CME and issues related to the back-month 

Eurodollar contracts. 

 One illustration that I would like to give 

as to how these disputes are not new is to look in 

one particular instance, and that's with the Chicago 

Board of Trade and the process by which they 

establish property rights to their real time prices 

and quotations. I mention real time because I know 

one of the big issues today is related to settlement 

prices. We could argue I guess about how broadly 
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the historical record and the analysis from that 

applies, but the disputes through history have 

primarily been over real-time prices because that's 

been where the value has been. 

 And in particular in the 19th century you 

had advanced trading technology of that day, the 

telegraph, which I know one author wrote a nice 

little book called The Victorian Internet, about the 

development of the telegraph and how it 

revolutionized trade and so forth. But it was the 

big advanced trading technology of its day and it 

posed a lot of the same challenges at that time to 

existing contracts and led to a lot of disputes over 

prices, very similar to the things that we've seen 

in later history and in the modern day with the 

Internet and other related technology. 

 But one of the things that happened is that 

this new technology made price quotations more 

valuable and made them of course worth fighting 

over, and it also, for the exchanges, posed a 

dilemma. On the one hand it allowed them to 

distribute their quotes widely and enhance the 
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volume of trade, made it easier and less costly for 

people over a wide geographic area to trade at the 

exchange, but at the same time it facilitated offexchange traders, who would use the exchange 

generated quotations without contributing to the 

price discovery process at the exchange. And of 

course, some of the things that Mr. Sabo just 

mentioned sounds like it's a similar issue then that 

he faces today. 

 Over about a 30-year period there was 

disputes over just what the strength of the CBOT's 

property right was to the price data that they had 

produced, whether in fact there was a property right 

to that data at all, and at one point during this 

dispute there were a number of court opinions 

throughout this process, but at one point the courts 

ordered the Chicago Board of Trade to furnish their 

quotations to everybody on the same basis or to 

nobody at all. 

 And to prove a point, the Chicago Board of 

Trade decided, well, if that's the choice, we'll put 

the plug on everybody, and there was the period that 
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lasted about 20 months that's known as the Baker 

Blackout period, named after the president of the 

exchange at that time, where the telegraph operators 

were tossed out, the windows of the exchange hall 

were soaped to prevent the transmission of price 

quotations to outsiders through hand signals, and 

you had an instance of what I would call literally 

opaque markets. We're so used to talking about 

transparent markets, but this is one in which prices 

that were discovered were available only to the 

people standing on the exchange floor. 

 And actually you had similar instances at 

other exchanges. The Wall Street Journal a few 

years ago ran a story--it was on the 100th 

anniversary of the Wall Street Journal--looking back 

through time, and one of the things was about how 

people used to drill through the mortar of the 

exchange halls in New York to peek inside to see 

what the prices were so that they could use them. 

 The upshot of all this was that in 1905 

there was a Supreme Court opinion, actually written 

by Justice Holmes, that established this property 
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right to the price quotations and allowed the 

Chicago Board of Trade to protect their price 

quotations from unauthorized use, and one quote that 

stands out from that opinion is the one that I have 

put up here, that, "The [CBOT's] collection of 

quotations is entitled to the protection of law. It 

stands like a trade secret." So we are not talking 

about patent or copyright or those type of issues 

here, but on the basis of trade secret. 

 At one time when I was working on the paper 

that's in your packet, I did a lot of work in the 

archives of the Board of Trade, and pulled a lot of 

copies of interesting little artifacts. This is 

just one example. It sounds, I guess from what Mr. 

Sabo says, very similar to what's done today. This 

is from 1888, the Committee on Market Reports, where 

they would actually go through the list of 

correspondence, the people entitled to receive the 

quotations, and they would approve those who could 

get the quotes, and then you see here on the bottom, 

Mr. Pride of Baltimore was judged to be unworthy of 

receiving the quote. So he was disapproved. And 
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there was records like this periodically as the 

committee met. 

 I like to tell this story because I think 

some of these stories are rather colorful, but it 

also reminds us that these disputes are not new. 

 If we look to the scholarship on the issue, 

there's of course in general terms a broad 

literature related to the role of property rights 

and facilitating market transactions, and this has 

been an area of interest to both economists and 

lawyers, and most of the scholarship I guess can be 

traced back to the University of Chicago Law School 

with Ronald Coase. If you read his paper that was 

published in the American Economic Review, that is 

actually the speech that he gave upon receiving the 

Nobel prize in 1991. One of the things he focuses 

on is the rules and workings of financial exchanges. 

And I think in a lot of ways he was thinking well 

ahead of the modern disputes, but it's certainly 

very applicable. 

 Yorem Barzel has a nice little book called 

The Economic Analysis of Property Rights that 
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summarizes the whole scope of this literature, and 

of course many other people have been working on 

this same area. If you go specifically to 

scholarship related to intellectual property issues 

related to prices, there is a small literature. One 

is the paper that Sharon referred to that I wrote 

with Jeff Netter and Harold Mulherin back in 1991, 

and there's actually a couple of papers flowing out 

of that, but--the one that we've distributed in your 

packet today, and then Chairman Brown-Hruska, some 

of her own work that she did. 

 Robert Webb, who's at University of 

Virginia actually wrote a nice little piece in the 

Journal of Futures Markets a couple of years ago on 

transitory property rights, trying to look at some 

of the areas of intellectual property law dealing 

with--he traces it back to like Old England rules 

over what happens when a wild animal walks across 

your property. Do you get the ability to hunt that 

animal while it's on your property? Kind of traces 

a lot of the issues related to prices and property 
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to some of these legal opinions related to 

transitory property rights. 

 The literature related to property rights 

and prices I think also is closely related to the 

literature on price transparency, economics of 

information literature and also Richard Epstein, 

University of Chicago, wrote a nice paper that was 

actually dealing with the evolution of law, but 

actually focuses on the Christie decision. 

 What's the upshot of this scholarship? I 

think one of the main points that's come out of it 

is that prices do not just spontaneously appear. 

They're not dropped from heaven, that they are the 

result of a production process and this process 

involves considerable investment and expense, and 

also that one of the things that--one of the 

features or attributes of these prices, it isn't 

just the price itself but it's the quality of the 

price. So that's why I've qualified this by saying 

high quality prices is the result of a production 

process. 
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 Exchanges are the firms that produce these 

prices. They are the creators of markets, and you 

can think of them as they are the creator of prices, 

just like GM is the creator of cars. The exchanges 

exist and if you take--stand back and take the 

30,000 foot view of why exchanges exist, it's 

because they provide an efficient means to economize 

on the transactions costs that are associated with 

trading. This comes out of Ronald Coase's work. 

 One of the things that the ability of the 

exchanges to establish and enforce the property 

rights over their prices and quotations is that it 

helps solve the externality problem associated with 

the price production of having non-contributors 

using the prices without contributing to the price 

discovery process, and it I think is essential to 

allowing exchanges to perform their cost-reducing 

role in the trading process. 

 The other thing that the establishment and 

enforcement of property rights to these prices and 

quotes has done is it's helped improve, I believe, 

the quality of prices that are discovered at the 
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exchange by helping to concentrate trading in a 

central venue. 

 Also, I think the scholarship shows us that 

there is nothing new about new technology. 

Technological innovation is continual, but one thing 

we see is that every time something new comes on the 

scene, that it has the ability to compromise 

existing contractual relationships by introducing 

new opportunities that were not foreseen at the time 

the contracts were written, and that this innovation 

in trading technology also has the feature of making 

prices more valuable and worth fighting over, and 

we've seen this continually with the development of 

the telegraph, the telephone, the ticker tape, the 

Internet, electronic trading platforms. 

 And I would also include a new technology, 

new financial innovations such as the rise in dealer 

swap markets as part of innovation in trading 

technology. 

 What kind of policy issues are posed by 

intellectual property disputes over prices? I'm 

sure this is not an exhaustive list. It's just what 
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I can come up with in one afternoon of thinking 

about this, but one thing that of course comes up is 

property restrictions versus monopoly restrictions--

I'll go into each of these in details, well, not 

detail, as time permits here--market transparency 

issues, public good issues and efficiency issues. 

 The first one, property restrictions versus 

monopoly restrictions--I guess this really gets to 

the heart of the matter of what property rights and 

monopolistic restrictions can exclude or restrict, 

and how do we tell the difference? They can be 

confused, and I think for a long time people would 

look at these restrictions and just assume that they 

were monopolistic restrictions, but I think one of 

the things that we've learned from looking at how 

these property rights have evolved, that there 

really was an efficiency explanation for why a lot 

of these restrictions evolved, and it wasn't just 

out of a monopolistic motive but an efficiency 

motive that actually helped lower the cost of 

trading and expanded the volume of trade. 
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 Market transparency issues. Years ago when 

Corinne Brofman [ph] was working here we wrote a 

little paper called "Will the Invisible Hand Produce 

Transparent Markets?" And I guess that really is 

one of the big issues here, is whether or not there 

are sufficient incentives for organized exchanges to 

offer the data that they had to the public, and in 

offering that data, I guess the question comes up as 

to what price, and of course, that's something that 

Mr. Sabo and his colleagues have to deal with all 

the time, what's the right price that will expand 

the volume of trade, but at the same time protect 

the use of that data or the production of that data 

for the exchange. 

 We've seen different transparency regimes. 

The SEC has very detailed requirements on 

disclosure, quote vendor rule, and also on the 

pricing of the data. I know years ago when I worked 

at the SEC, Howard Kramer, who a lot of you know, 

was the guy who got to decide what the right price 

was, and he was the guy who got to decide what a 

reasonable price was, and he had his own little 
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formula for figuring that out, but it gives you an 

idea of the extent of the detail of those type of 

regulations. 

 CFTC-style transparency requirements 

actually stem from the Commodity Exchange Act, and 

now with the Commodity Futures Modernization Act 

Core Principle 8 for designate contract markets, 

talks about daily publication of data. One of the 

issues of course is publication of data, but what 

does that mean in terms of control of its use? 

Which of course is part of what defines the strength 

of that property right. 

 Issues that also come up related to 

information producers and consumers, in other words, 

things that can benefit one group might directly 

harm the other. And let's go on to the next one. 

 One issue that comes up with are prices a 

public good? And economists have a test for 

determining whether something is a public good, and 

one of them is the nonrivalrous consumption 

criterion; the other is the nonexcludability 

criterion. I can argue I think that prices do not 
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meet this test. In addition, if you look at the 

work of Ronald Coase on public goods, one of the 

things he asks is, he says, well, you can really 

recast a public goods problem as a costly 

contracting problem and is there a way to contract 

for the use of prices, and in fact, it seems to be 

that we see a thriving market for information from 

data vendors and from the exchanges. 

 And one thing I think from the literature 

on public goods and contracting is that one of the 

dangers is that fuzzy property rights, in other 

words, uncertain property rights, can raise the cost 

of this private contracting. 

 And then the last thing I'll leave you with 

is that I think one of the issues that is posed by 

property issues is that any policies that can affect 

the strength or certainly of property rights over 

price information, one of the things we have to be 

careful with as policymakers is being able to 

distinguish between efficiency effects, in other 

words, those effects that on average make everyone 

better off versus those effects that are really what 
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economists call wealth transfer effects that just 

benefit one group at the expense of the other. 

 And I think I am one minute over, but sorry 

for rushing, but I'll quit right there. 

 CHAIRMAN BROWN-HRUSKA: Thanks James. 

Actually, I was going to thank you for rushing, so 

thank you very much. 

 This is a lot to digest, but I think it's 

very interesting and I also would say, again, this 

is a nice paper and it's included. 

 Laurie? 

 MS. FERBER: Laurie Ferber. I'm not sure, 

looking at this, whether you are focusing on realtime data, real-time and delayed feed of data, or 

equally--or whether your comments would apply 

equally to settlement prices. And I would 

distinguish between the two when I think about them 

as a business matter. And I think, I guess I think 

all these points are very intellectually interesting 

and probably important, economically interesting, 

but I also think of this from a business point of 
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view, and think that the markets have really 

addressed a lot of this. 

 You know, I think about how I'd treat this 

from a business point of view, you know, market data 

vendors charge me a lot of money, and in turn pay a 

lot of money to the exchanges, piracy and things 

like that aside that everybody has to deal with, but 

you know, we pay a lot of money for real-time feeds 

and you pay a different amount or you have different 

rights of using delayed feeds. And you know, we've 

built indexes and other things off of that. You 

decide your rights, but you know, our traders 

desperately need real-time data so you pay a lot of 

money for those things and build markets off that. 

 The OTC markets have developed very active 

trading in today's settlement prices, and that is I 

think, with the encouragement and the support of the 

exchanges who know that all of that trading finds--a 

very large amount of that trading finds its way 

hedged back to the exchanges. 

 So I think, you know, economically, I think 

those things have really, you know, found a balance 
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and I think there's been a lot of knowing acceptance 

of how those prices are used. So what you charge 

for real-time whether they vary a major effect on a 

trading value at the time, and then a kind of 

acceptance on how end-of-day settlement prices are 

used, and kind of--you know, that's the way it's 

been treated over a large period of time. So I 

think this is the overlay of that, but I guess I'm 

trying to figure out sort of, you know, where we go 

from here, and want to make sure there's that 

overall business perspective of where we've gotten 

to. 

 MR. OVERDAHL: Well, I mean, that's a good 

point, that clearly settlement prices and real-time 

data are different. Traditionally it's been just in 

their value, but I think from the exchanges' point 

of view, as an academic look at the exchanges' point 

of view, that probably the externality problem to 

them conceptually is the same. 

 Now, obviously, there are differences, but 

I think one thing I might point you to is a paper by 

Robert Webb that was in the Journal of Futures 
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Markets--Robert actually is an alumnus of the CFTC 

from years ago--that talks about transitory property 

rights and whether that model might be more 

appropriate for futures data. 

 MS. FERBER: [Inaudible] -- maybe be 

expensive, and I just would note that those who have 

not lived inside a trading business and hundreds of-

-you know, agreements and all the other ways that 

contract rights are defined and how you track those 

things, to think that it's as simple an answer as, 

no, there's been thriving markets of price 

information, and, yes, fuzzy property rights add 

expense. I mean, that's an economist's answer. 

 But thinking about how things are done, 

settlement prices and how you might license and 

pricings and track them, and the complexity of that, 

as opposed to a perhaps much more sensible answer of 

you make your fees by those things being in the 

public domain, and realizing trading value comes 

back to the exchanges, you know, without going into 

all the other reasons that transparency has mandated 

in the Commodity Exchange Act. So just to say if 
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you're ever going to start thinking about the 

expense and the difficulty of contracting, I think 

we need to look at the markets much more and 

understand the effects on them. 

 MR. OVERDAHL: Useful perspective. 

 CHAIRMAN BROWN-HRUSKA: I want to get John 

going here, but, Tony, you'll have the final 

question. 

 MR. LEITNER: This is Tony Leitner. As I 

take it, a key question for the CFTC, if you compare 

what the current legislative attitude and regulatory 

attitude of the CFTC is in Principle 8, compared to 

the latest chapter of what the SEC has done--and 

it's only the latest chapter in several and this is 

proposed in the Reg NMS--where the debate has been 

the desire to try to keep data costs at least 

current, you know, last sale prices, as broadly 

distributed and as cheap as possible to the user, 

versus I guess--because in part there's been the 

policy that those revenues that come back to the 

exchange from those data prices get used in the 

regulatory process to fund regulation. 
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 And so the sort of, if you will, over 

regulation of market data at the SEC level has had 

this potential tradeoff that is maybe distorted, 

created several kinds of distortions in the 

marketplace. And it seems to me that the issue for 

regulators is to see how technology alters these 

distortions. The securities markets perceive 

distortion because the way data revenue was paid 

back to exchanges was based upon how trades could 

be--what trades were sent to the exchange by some of 

the execution venues, which then got rebates. And 

the SEC's view about that was that that distorted 

the exchanges as real price discovery sources. That 

may be less of a problem where you have monopolistic 

markets where there's only one price discovery 

mechanism, but looking at the future, that's 

something I think the Commission would want to take 

a look at. 

 CHAIRMAN BROWN-HRUSKA: All I'd like to say 

is that I think from our perspective we try to be 

objective about this, and I think the point that I 

would make, having written extensively and thought 
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about this a great deal, is that those contractual 

relationships that have been established in the 

futures markets have worked very well and without 

the CFTC being involved. And the mandates in our 

Act are very minimal in this regard, and that's been 

our approach and I imagine that we will again try to 

the extent possible to step back and let the markets 

for information work, and that these parties can 

work out their contractual agreements and their 

differences in the courts without our intervention 

to the extent possible. 

 So I'm going to quickly turn to Jon Dudas 

because we are so delighted to have him here. I 

hope you don't mind, but I'm going to skip the 

refreshment break in the interest of time, and also 

some of you, many of you are invited to some 

refreshments after our meeting. 

 So without further ado, I would like to 

introduce Jon Dudas, who is the Under Secretary of 

Commerce for Intellectual Property and Director of 

the U.S. Patent and Trademark Office. He is here I 

think as an emissary of the Patent Office and 
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Department of Commerce to show that he in fact is a 

friend, and is very interested in educating and 

interested in learning from us about our industry. 

So I would pass the baton to Jon. 

 MR. DUDAS: Thanks very much, Sharon, and 

thank you all for having me here. 

 I just came from testifying on Capitol Hill 

about issues that are probably important to all of 

you in light of the conversation here, and I thought 

that was a lot of pressure until I realized that I 

was going to be the person replacing your 

refreshments break. 

 [Laughter.] 

 MR. DUDAS: So I'll try to make it as 

interesting as I can, and what I find most important 

is to get to your questions so I have an 

understanding of where you are and can answer 

questions that you might have there. So I'll give a 

little bit of a background. It's relatively basic. 

If it's too basic, let me know either by raising 

your hand or just when we get into the questions. 
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 But we've run into the issue that you're 

facing several times at the Patent and Trademark 

Office and I start with--we've had this on Capitol 

Hill just today--maybe a misunderstanding sometimes 

or a difference of opinion on what a patent is. A 

lot of people think patents are rights to sell 

products or a patent is a right to a product. It's 

not that. You can patent a nuclear bomb. You can 

patent an assault weapon. It doesn't give you a 

right to sell it. 

 And in fact, what it really is is a right 

to exclude others. It's fundamental in the 

Constitution. It's the right to say there's 

basically a contract between society and the 

inventor that says: You go out and invent something 

that's new, useful and non-obvious, something that 

no one else has done. You put the investment in 

there and we'll give you for a limited time the 

right to use that exclusively, and you can exclude 

others. And that's where a lot of the issues come 

up, that it's a right to exclude others, not 

necessarily the right to go forward. So some of the 
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market-based ideas that go along with the idea of 

owning a product are not the same as what a patent 

is. 

 Why is that the case? Why is it a right to 

exclude others? It's basically a right to exclude 

others because you own that and can do with it as 

you see fit. You can go to the investment markets 

and try to get venture capital, but it's yours. For 

20 years it's yours. The idea is not to make 

inventors rich; it's a nice byproduct of it, it's 

helped our economy, but the ultimate goal of the 

patent system is to get ideas out and disclose 

ideas, but it's the incentive that's put in there by 

giving 20 years of exclusive rights to use that 

idea. So anything that's new, useful and nonobvious is something that's subject to a patent. 

 The theory in the United States has been--

and it's proven successful throughout--has been not 

to ever be prejudiced against a certain technology 

or a certain area. We're technology neutral in the 

United States. And the reason I say that theory has 

worked out is because several decades ago when the 
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biotechnology industry was at its infancy, many 

nations decided this isn't an area that they felt 

that patents should be granted. In the United 

States the theory was patents should be granted. 

It's turned out to be a tremendous boon for the 

United States. The same is true for software. The 

same is true for other technologies, and there are 

still fights going on throughout the world, is it 

appropriate or inappropriate to patent in certain 

areas? It's worthy of debate and might be worthy of 

debate right here. 

 But generally, by and large, the idea has 

been not to exclude any particular technology, but 

to have patents available for all technology, but to 

make sure that you get it right, to make sure that 

they are truly new, that they're truly useful, and 

that they're truly non-obvious. 

 So we've seen that in areas of business 

methods patents, which is largely the concern that 

you might have here. And the good news is we've had 

experience with industries going through some of the 

same issues, same concerns that you're going through 
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right now that I think are the subject of some of 

today's meeting. 

 What we find is that originally industries 

are surprised. This is an area where patenting is 

occurring that they've never seen it before. So 

what seems like an unusual business practice enters 

into the industry, and we saw that soon after the 

State Street Bank case when the Supreme Court ruled 

that business method patents are indeed patents that 

are allowed. 

 I don't think our office is necessarily 

taken by surprise, but at moments like that we find 

an influx in patent applications as well, and we're 

now operating in a technology that's relatively new, 

in an area that perhaps--I think John will know, how 

many examiners did we have with Business Method 

Patents before the State Street Bank case? 

 MR. LOVE: We have about 8. 

 MR. DUDAS: Had 8, and we now have what? 

 MR. LOVE: 130. 

 MR. DUDAS: 130. And you also see a change 

in the way things go. We learn the technology 
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better at the Patent and Trademark Office. The 

applicants learn the technology better. I don't 

think that rejection rates are the equivalent of 

quality, but I do think that in certain areas you'll 

see when a new area of industry, a new area where 

patenting occurs, you'll see at first people are 

trying to get a sense of what is patentable and what 

isn't. And our allowance rate, those that were 

considered patents from the applications we had 

early on was over 50 percent I think. It's now at 

11 percent. So the market, if you will, is bearing 

out what it patentable, what isn't patentable, and 

that comes to fruition throughout the process. 

 In addition to originally being surprised--

and industry will say, "I had no idea these were 

patentable"--then there's a flood of questions and 

issues about, well, do I need to file defensive 

patents? Do I need to make sure everything I have 

that looks like an idea along these lines is 

something I need to file a patent on? Obviously, 

that's a decision that needs to be made industry by 

industry and company by company, but it is something 
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that adds to the system and an issue that you may 

want to address. 

 But the issues that basically come up, 

first and foremost, one question is, I can't believe 

this is patentable. And what I can tell you there 

is don't think in terms of the average person off 

the street wondering what a patent is and thinking 

of Thomas Edison with the light bulb. New, useful, 

non-obvious are terms of art, they're legal terms of 

art, and there's volume upon volume of legally what 

that means and what it can. So often we see a 

disconnect between what someone would generally 

think is patentable and what is actually patentable. 

And often things that seem obvious are only obvious 

after they're invented. The paper clip, I've seen 

the mansion of the guy that developed the paper 

clip. It seems obvious to me. I could have done 

that. But I didn't. So there are a lot of things 

that seem obvious later. 

 The next question--that is an issue to 

grapple with, it's one to understand. That's a 

little more philosophical. 
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 The one that's less philosophical is the 

question of, are the patents that are being issued 

of the highest quality? Is the Patent and Trademark 

Office getting all the art and background? Is there 

something that really is obvious to all of you, but 

for some reason we're unaware that that's obvious 

now. Or is there prior art out there? Is this 

something that's been written about and out there 

day in and day out that is available, and for some 

reason we're not unaware of it? And that's probably 

the most fruitful area, and I think John probably 

went much more in depth about that. 

 I'll be done quickly so you can ask 

questions or get your refreshments. 

 The issue there for us, the good news is we 

have, again, been through this before on business 

methods patents, et cetera. There was a time when 

what our examiners looked at was primarily other 

patents, and that makes a lot of sense for 

traditional mechanical, chemical and electrical 

engineering areas. In the last 15 years our 

examiners are looking at three times the amount they 
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used to. We've broken a record every year in the 

United States. This is good news for economists and 

for people who follow the U.S. economy. We've 

broken a record every single year for the last 20 

years in the number of applications we've received 

in the U.S. But it means we have more to look at. 

 Other good news is our examiners are much--

it's much more common for them to look at non-patent 

literature, not just looking at patent examination, 

which of course is critical if you start seeing 

patents coming in in an area where there haven't 

been patents in the past. There won't be much to 

look at. We now have advanced search tools looking 

at other literature, and that's a fruitful area for 

us to discuss, and we've entered into partnerships 

in the past--John, I don't know if you talked about 

that. So I won't go into the details of someone who 

can more expertly go into those details. 

 One of the things we want to be able to do 

with you and have done with other industries is make 

certain that we bring your experts in to help train 

our examiners, to let our examiners know what you 
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know. Where should we be looking? What else can we 

be looking at? What are the areas where you think 

we might miss something or areas of publications 

that we're not reviewing? 

 We also have an opportunity to submit prior 

art after a patent application is published, for 

about two months. That's one of the discussions on 

Capitol Hill right now, is how can that be expanded, 

the ability to get appropriate prior art for the 

office, but without allowing the opportunity to 

harass or delay the application the patent applicant 

is seeking. 

 The other issue that I can tell you that is 

critically important, that's something we can do 

specifically together and open up that dialogue. We 

can tell you what's worked in our office. You can 

tell us what's worked as far as informing us and 

informing other people of these issues. 

 The second thing that's important is the 

legislation that I testified to today and that 

others testified about. We're also looking at a 

post grant review process. You can litigate now. 
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The other good news--I keep saying there's all this 

good news, but there's a lot of solemn faces-- 

 [Laughter.] 

 MR. DUDAS: The other good news is if 

there's a mistake that's made or there's perceived 

to be a mistake, there are options. There's a 

reexamination of the patent. It's based on prior 

art. It's a fairly simple way to do it. It's 

inexpensive. It can be done at our office. It's 

done all the time. We're actually in the process 

now of really bolstering our reexamination process, 

shortening the timeframe, making it much better than 

it has been in the past. So that's one option. 

 The other option of course is to go to 

court. It's costly or it's at least more expensive. 

There's a question at times about whether or not 

you're before experts when you're before a District 

Court judge or a jury. Are they going to understand 

the issues that deeply? What's the likelihood of 

success in that type of an arena? 

 What we're trying to do with the post grant 

opposition system is basically say, we can get the 
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best of both systems. You can have the protections 

of litigation but you'll still be before the 

experts. We think we can conclude it in one year. 

So your thoughts on areas where you think a patent 

shouldn’t have issued, we can talk about that, and 

also what we can do to make sure that we're better 

informed on your industry, and then finally, 

whatever we can do to let you know what happens at 

the Patent and Trademark Office and what we see 

coming down the road, we'd be happy to do. 

 So I'll leave it at that so that you can 

ask any questions you might have. If you don't have 

questions I'll take that to mean that you're really 

interested in the refreshments, not that you were 

turned off by the presentation. 

 [Laughter.] 

 MR. DUDAS: Thank you. 

 COMMISSIONER HATFIELD: John, thank you. I 

wanted to ask you on--you mentioned the number of 

staff on the business method patent applications, 

that you'd ratcheted up to 130. But Mr. Love 

previously talked about the immense caseload 
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increase over the years. What's the length of time 

that an application would be pending there? And 

also, how many hours would your officers, your 

examiners put in on a single application? 

 MR. LOVE: Right now the applications we're 

working on the average pendency is three years, and 

we're working through the bubble, what we call the 

bubble that was filed after the State Street case, 

which is Decision '98. So the peak years were '99, 

2000, 2001. We're working through that. We've 

gotten over the hump and we're on the down slope 

now. With the number of examiners and resources 

that we've been given we can make significant 

inroads to the first action pendency. 

 COMMISSIONER HATFIELD: And how many hours 

does your staff actually put in on a case? 

 MR. LOVE: A typical case, depending on the 

experience of the examiner, 22 hours. 

 COMMISSIONER HATFIELD: 22? 

 MR. LOVE: For an experienced examiner, 

yes. 
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 MR. DUDAS: One point to make on that, or 

two points actually to make on that, one of the 

things that John talked about, getting past the 

bubble, it's very important how we measure in our 

office. This is an area that we've turned the 

corner which means we're actually getting to the 

backlog. And so pendency varies. To give you some 

perspective, from 9 months to a first office action 

which is meaningful, or 14 months for pendency, all 

the way up in some areas to 7 years. 

 But the one key element for those who 

think, "Three years before I learn what's going on," 

is that there is a provision in the law that after 

18 months all applications are published. One of 

the most important--and John, I don't know if you 

talked about that--that's one of the most important 

things you can do to become informed, is to look at 

those published applications. 

 COMMISSIONER LUKKEN: Secretary Dudas, it's 

good to see you. Sharon and I have been down to bug 

you a couple times on some of these issues. But as 

we've stated in the past, one of our missions is to 
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promote innovation and competition within our 

industry. We sort of mentioned a couple of the 

roles that we might play today. One is facilitating 

education, which we're doing today. One that Sharon 

mentioned is sort of a passive role, providing a 

website or some type of database that can be 

searched. But what about a more proactive role by 

agencies and what has your experience been as to 

agencies submitting prior art that they might have 

access to? Not just a passive role of sort of 

putting it out for public viewing, but actually in 

one of its mission statements of making sure that 

these are legitimate patents and promoting 

innovation, actually supplying prior art to your 

office, and have other agencies done this? 

 MR. DUDAS: I wasn't aware of any agency 

that we've worked on with, but we are working with 

the IRS. Patent donations have become a big issue 

and some of the databases--well, actually, that's 

really a separate issue, but some of the databases 

at the IRS are being made open. 
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 Now, clarify one thing. Do you mean if you 

see a particular patent application and then 

submission of prior art or general education? 

 COMMISSIONER LUKKEN: [Inaudible]. 

 MR. DUDAS: Or both? I think in the case of 

a particular application, that's something that is 

being discussed right now. It's not in the 

committee print that's before Congress. But there 

is an opportunity now again after 18 month 

publication, after it's published there's an 

opportunity for two months to submit prior art, but 

not a relevancy statement or anything along those 

lines, again, the idea being that it would be what's 

considered a pre-grant opposition system, which 

we're precluded by law from engaging in, where you'd 

be able to oppose a patent before it was granted. 

 You have to oppose a patent after it's been 

granted. But you can submit prior art within that 

two-month window. Just don't comment on the prior 

art. If you comment on it, we'll destroy it or send 

it back. But if you think you've got something 
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that's a smoking gun, that can be done. I'm not 

aware of any agencies doing that. 

 CHAIRMAN BROWN-HRUSKA: Do we have any 

other questions? Ed, surely you've got some. 

 MR. ROSEN: I was just going to ask 

whether--is the office supportive of the post-grant 

opposition proposal? 

 MR. DUDAS: Yes. Not only are we 

supporting, we believe we're the first ones to come 

up with the idea, but we've been supportive for over 

three years now, and the good news, everyone who's 

watching the patent system, from the FTC to the NAS, 

anyone who's done a study pro or con, and most of 

the major industry groups, and it seems that every 

member in Congress on both sides of the aisle, both 

sides of the Capitol, are supportive of that. So I 

think it's something that is likely to occur fairly 

soon as long as it doesn't get bogged down in other 

issues. 

 MR. ROSEN: Which rarely happens in 

Congress. 

 MR. DUDAS: Exactly. 
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 [Laughter.] 

 MR. KELLY: I actually have two questions. 

One I posed to you when you were in Chicago a couple 

months ago. I'll pose it again. One of the 

problems with--from a business standpoint, now that 

I'm in-house counsel, is trying to figure out what 

the patents mean, what other people's patents mean. 

Is there anything within the current Patent Office 

structure not requiring new legislation that could 

help define what the patents truly mean, what the 

claim scopes cover? 

 And last time when we talked about this, we 

talked about the reason for allowance, and perhaps 

making it more of a--you know, anything from a 

dictionary definition of what the examiner thought 

he was looking at, so that the applicant could 

confirm or modify that so that they could define the 

terms better or come up with some mechanism within 

the existing structure to better define what the 

scope of the claims are from the Patent Office 

standpoint without doing litigation, without doing a 
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post-grant opposition, that the patent as issued 

from the Patent Office is as clear as possible? 

 MR. DUDAS: What was my answer in Chicago? 

 [Laughter.] 

 MR. DUDAS: No, I'm kidding. It will be 

better this time because I have a fantastic group 

director with me. I'll give a short answer, and 

then I'll go to--it's actually an issue we have 

within our office on defining the scope of claims. 

I think there are ideas we have on how we can better 

define the scope of claims and ways that we can do 

that. It's a huge challenge for our examiners. We 

talked about how much time an examiner gets. We're 

trying to make the whole system make more sense. 

Somebody who applies and has 15 claims versus 

someone who applies and has 1,900 claims and a 

patent application will pay a different price now. 

That wasn't the case a few years ago. 

 And then how we actually go through the 

process of defining what the claims mean, it's 

difficult to some degree because we're not certain 

what we're going to be getting, how people's claims 
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come in, and quite honestly, what technology, what 

kind of invention is this? Is it a minor 

improvement so they can be very specific about it, 

or are they claiming much more? That's what our 

examiners have to do day in and day out. 

 There are ways that we're looking at right 

now--I'll let John talk a little bit more 

specifically about theoretically what we can do--one 

of the things I will tell you that's very important 

for our office, and you won't hear it anywhere else 

probably but our office, is that we're very 

concerned about application quality. So it's how we 

define claims in the office. We have a duty to do 

that. We have a duty to get it to the right point. 

But we're very concerned now, our system is so 

incredibly flexible, and we want to maintain that 

flexibility to a degree, but there's a sense that 

the applications coming in sometimes are 

intentionally vague, the claims are intentionally 

vague. It makes it very difficult on the process. 

 If they're hard to understand, it's almost-

-if things don't come in the office nicely, it's 
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difficult to put them on the right track. I think 

our examiners have the responsibility to do that and 

do it well. But one of the areas that you'll see us 

coming back is on application quality, and I think 

we discussed that a little bit. 

 At some point we may come out with some 

proposals about how we can tighten up what comes 

into the office, and we'll probably be looking to 

industries for support on those. There will be some 

people who--well, just traditional patent watchers 

that would not like to see any flexibility gone, but 

we're at the point now where we think we need to 

bring some of those in. 

 But for a better answer than you got in 

Chicago or just now, I'll give you to John. 

 MR. LOVE: You did very well. I don't know 

if I could--I'll just add a few comments. 

 Unfortunately, it is a difficult task and 

there's no shortcut. You really need--if you truly 

want to understand the scope of the claims, which we 

talked about earlier, the last part of the patent, 

you really need to go through the entire record, the 
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specification, description, in some cases the office 

actions and the attorneys' remarks about the prior 

art. These all have potentially an effect on the 

scope of the claims. 

 There is a requirement in the statute, 112, 

that requires the claims to be specific enough, 

particularly point out and distinctly claim the 

invention, and the idea behind that is precisely 

what we're talking about, so that the public knows 

when they would infringe the claim. So presumably, 

every examiner and every claim that has been allowed 

has passed that test. The examiner is satisfied 

that the claims particularly point out and 

distinctly claim the invention with enough certitude 

that members of the public know when they would 

infringe that claim. 

 There's no shortcut to arriving at that 

understanding, and part of that is with the 

Amazon.com single click patent, people focused on, 

oh, single click. But really what's being claimed 

there is the technology and the software to 

accomplish all of that. So it's really not a 
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simple--there's no simple fix on having to make it 

an easier--or to allowing the office to make it 

easier for the applicants and the public to know 

exactly what's being claimed. 

 The other principle here that we're dealing 

with is that the courts have consistently held for 

decades that applicants can claim their invention 

any way they want to. There's no magical words, 

there's no prescribed form, so any way they want to 

describe it in those claims they're entitled to. So 

until we have some more restrictive type of format, 

like the Jepson claim I talked about, where you do 

lay out the improvement, or more structure in 

formalities in how you lay out the claim. It's 

simply a very difficult task and I don't see any way 

out of that. It's almost a legal necessity. 

 MR. KELLY: I have one kind of related one. 

In areas such as the business method group, which is 

kind of in its infancy still, coming up to maturity 

level from the patent office, do you think that 

there's a heightened need for Commissioner-directed 

reexaminations in that area? 
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 MR. DUDAS: I don't think there's a 

heightened need for director-ordered reexaminations 

because reexaminations are available to any and all. 

In other words we do have heightened quality 

mechanisms in areas that we think are newer 

technologies or we identify certain areas, including 

business methods patents was the basis for the 

second pair of eyes, which was basically saying, 

let's have a second examiner just take a look at 

patents that are coming out of that area, make sure 

we just haven't missed something that might be 

obvious to another examiner, et cetera. So there 

are ways we're doing that. 

 Director-ordered reexaminations in 

particular I think are most useful when within the 

office we find something that we think is 

problematic and equity suggests that we look at it. 

But I do think that reexaminations by and large are 

just as easy to come about from outside. So I 

wouldn't argue that there needs to be more directorordered re-exams. Maybe what you're suggesting is 
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that there's more reviews within there, and that's 

already occurring. 

 CHAIRMAN BROWN-HRUSKA: Do my colleagues 

have any additional questions, or any other issues? 

 [No response.] 

 CHAIRMAN BROWN-HRUSKA: Well, wonderful. 

Again, I want to thank Jon for coming. I just saw 

Barbara Wierzynski--Barbara, did you have a question 

from [inaudible]? 

 MS. WIERZYNSKI: [Inaudible]. 

 CHAIRMAN BROWN-HRUSKA: In any case, I want 

to thank you so much for coming and reaching out to 

this industry. I think that we found much of this 

or the industry has found much of this to be very 

disconcerting in many respects, and that in fact 

they're now starting to have to think about--

especially as our trading technologies have become 

more automated, more global, questions of, you know, 

the old way of doing things, and it's a very 

innovative industry, and I think that we've seen a 

lot of interest in protecting the property 

associated with that innovation. 
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 So we're interested--I think the industry 

is interested both from the perspective of defending 

against patents, but also protecting their own 

property. So it's very helpful to have you here and 

to provide this information. 

 And with that, I will invite everyone up to 

my suite, I believe is where we're having some 

refreshments. Thank you for being patient. It 

looks like we're done a little early, so I think my 

plan worked to make Jon talk fast. 

 [Laughter.] 

 CHAIRMAN BROWN-HRUSKA: And again, thanks 

everyone for coming, and let's adjourn. 

 [Whereupon, at 3:35 p.m., the Commission was 

adjourned.]