As a patent attorney and part-time angel investor in Silicon Valley, one trend I observed over the past few years is that software companies continue to be one of the most profitable sectors in technology. Software stocks see increased revenue growth due to the increasing corporate spending on cloud computing and digital transformation.
SaaS customers purchase subscriptions that can be renewed rather than purchasing one-time licenses. Customers also receive software updates via the internet.
Due to the ease of use and low cost over traditional data center cost, software as a service startups have blossomed. Investors like the high growth rate and high profitability of software companies. Investors value the company based on these two factors. To keep increasing valuation in the next round of funding, the startup must keep up the SaaS revenue growth rate. The challenge is how to do this when others can easily clone the novel features of the software.
What is SaaS revenue growth rate?
The growth rate shows a company’s revenue increase over a certain period. It’s one of the most important business metrics, as it indicates how quickly your startup is growing. For investors, the revenue growth rate is the most significant factor in the startup’s valuation process. The increasing revenue trend is evidence of the company’s sustainability and profitability.
Paul Graham, VC and co-founder of Y Combinator says:
“If there’s one number every founder should always know, it’s the company’s growth rate. That’s the measure of a startup. If you don’t know that number, you don’t even know if you’re doing well or badly… The best thing to measure the growth rate is revenue…”
Competition can Adversely Affect Revenue Growth Rate
The ease of developing software and the low cost of software development means that the idea behind the software can be easily duplicated. Once duplicated, a second to market, but more established competition can outrun the pioneer who first created the software. One only needs to look at the Phhhoto v. Meta lawsuit to see the danger of being first-to-market without IP protection.
Software is relatively easy to copy and distribute, which can make it difficult to protect with traditional forms of intellectual property such as patents and copyrights.
Copyrights protect the original expression of an idea, but not the idea itself. In the case of software, the source code is protected by copyright, but the underlying logic or functionality of the software is not.
Patents can provide protection for certain types of software inventions, but the process of obtaining a patent can be time-consuming and costly. Additionally, not all software is eligible for patent protection, and the standards for what is considered patentable subject matter in the software field are constantly evolving.
Despite these challenges, there are still ways to protect software from infringement and unauthorized use. For example, using digital rights management (DRM) technology, encryption, and code obfuscation can make it more difficult for others to copy and distribute software without permission. Additionally, using end-user license agreements (EULAs) can also help protect software by specifying the terms and conditions of use.
Another solution is to use open-source software licenses, which allows anyone to use, modify and distribute the software, but also requires that any derivative works be distributed under the same license. This can give the software developer the ability to control how their software is used, and to make money by providing support and services.
Benefits of Patenting Software
Patenting software can provide several benefits, including:
- Exclusive rights: A patent gives the holder the exclusive right to prevent others from making, using, selling, and importing the invention for a certain period of time.
- Competitive advantage: Patents can give your company an advantage over competitors by preventing them from using your invention without your permission.
- Potential licensing revenue: You can license your patented software to others, providing a source of additional revenue.
- Attract investment: Patents can help attract investment, as they demonstrate that your company’s products or services are unique and have a competitive edge.
- Legal protection: Patents provide legal protection for your invention, which can be used to defend against infringement lawsuits.
It is important to note that not all software is eligible for patent protection and the process of obtaining a patent can be time-consuming and costly. It is best to consult a patent attorney or agent to determine whether your software invention is eligible for patent protection and the best way to proceed with obtaining a patent.
Statutory Requirements for Software Patenting
The statute 35 U.S.C. §101 on Inventions Patentable states: “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”
The U.S. Patent Act sets one of the most broad standards in patentability among all countries. You must consider the requirements for patentability when you file a provisional or non-provisional patent application. Patentability requires that the invention be statutory, novel, non-obvious and useful. Certain requirements, such as novelty and non-obviousness, may involve conducting a preliminary patent search with the assistance of an attorney or agent.
“Statutory” refers to whether an invention involves subject matter that can be patentable. There are many subject matter that is patentable include, processes, machines, manufactured articles, and compositions of matter.
Some inventions are not patentable according to the Patent Act. They do not meet the requirement o patentability, that the invention must be “statutory.” Examples of clearly non-statutory inventions are data structures, nonfunctional descriptive material like books or music.
Statutory categories of invention
- Composition of matter
“Process” means process, art, or method. It includes a new use for a known process, machine, manufacture, composition of matter, or material. A process is a series of steps.
- Parts of devices
- Complete devices
- Combinations of devices
- Produced items
- Physical articles or objects
Composition of matter
- Chemical compounds
- Combinations of compounds
- Composition of substances
- Composite articles
Jepson format claim: It refers to a claim where the preamble contains some type of statement that pertains to the state or prior art and then claims an improvement over it. Jepson format allows patentees to use the preamble for a list of elements or steps that are known or conventional.
The utility requirement serves to ensure that patents are only granted on those inventions that are “us eful.” This is determined using a 3-pronged test:
- Is there a specific utility;
- Is there a substantial utility; and
- Is there a credible utility?
Rejections for lack of utility should not normally be based on a determination that the invention is frivolous, fraudulent, or against public policy. Consult Supervisory Patent Examiner (SPE) if this applies.
Determine the function of the invention, that is, what the invention does when used as disclosed. More than one utility may be asserted or apparent, but only one is necessary. Applicant is in the best position to explain why the invention is believed to be useful.
A utility is specific if it is particular to the subject matter claimed. This contrasts with a general utility that would be applicable to the broad class of the invention. For example:
- Providing a general statement of diagnostic utility, such as diagnosing an unspecified disease, would ordinarily be insufficient absent a disclosure of what condition can be diagnosed.
- Use of protein in general as “shampoo ingredient” would ordinarily be insufficient as proteins generally as a class can provide this utility.
- Providing a statement of a particular biological activity (e.g., sedative or paralytic activity) for a compound is a specific utility.
It is a utility that defines a “real world” use. They are utilities that require or constitute carrying out further research to identify or reasonably confirm a “real world” context of use are not substantial utilities.
Substantial utility: Positive examples
- Both a therapeutic method of treating a known or newly discovered disease and an assay method for identifying compounds that themselves have a “substantial utility” define a “real world” use.
- An assay that measures the presence of a material which has a stated correlation to a predisposition to the onset of a particular disease condition would also define a “real world” use in identifying potential candidates for preventive measures or further monitoring.
Substantial utility: Negative examples
The following are examples of situations that require or constitute carrying out further research to identify or reasonably confirm a “real world” use and, therefore, do not define “substantial utilities”:
A. Basic research such as studying the properties of the claimed product itself or the mechanisms in which the material is involved
B. A method of treating an unspecified disease or condition
C. A method of assaying for or identifying a material that itself has no “specific and/or substantial utility“
- A method of making a material that itself has no specific, substantial and credible utility
- A claim to an intermediate product for use in making a final product that has no specific, substantial and credible utility
Substantial utility: “Throw away” examples
Note that “throw away” utilities do not meet the tests for a specific or substantial utility.For example:
- Using transgenic mice as snake food is a utility that is neither specific (all mice could function as snake food) nor substantial (using a mouse costing tens of thousands of dollars to produce as snake food is not a “real world” context of use).
- Similarly, use of any protein as an animal food supplement or use of a new DNA sequence as landfill are “throw away” utilities that would not pass muster as specific or substantial utilities under 35 U.S.C. § 101.
- This analysis should be tempered by consideration of the context and nature of the invention. e.g., if the transgenic mouse was generated with the specific provision of an enhanced nutrient profile, and disclosed for use as an animal food, then the test for specific and substantial asserted utility would be considered to be met.
An assertion is credible unless:
(A) The utility is unbelievable (incredible utility), or
(B) The claimed invention is wholly inoperative.
Incredible utility: An assertion of utility is credible unless the logic underlying the assertion is seriously flawed, or the facts upon which the assertion is based are inconsistent with the logic underlying the assertion. A credible utility is assessed from the standpoint of whether a person of ordinary skill in the art would accept that the recited or disclosed invention is currently available for such use.
For example, one skilled in the art would not accept that a device could be used to generate more energy than it consumes or that a device could be used with at least 100% efficiency.
Well-established utilities – Definition
A specific, substantial, and credible utility which is well known, immediately apparent, or implied by the specification’s disclosure of the properties of a material, alone or taken with the knowledge of one skilled in the art
“Well-established utility” does not encompass any “throw away” utility that one can dream up for an invention or a nonspecific utility that would apply to virtually every member of a general class of materials.
Utility analysis procedure
Upon initial examination, the examiner should review the specification to determine if there are any statements asserting that the claimed invention is useful for any particular purpose. A complete disclosure should include a statement which identifies a specific, substantial, and credible utility for the invention.
If no statements can be found asserting a specific, substantial, and credible utility for the claimed invention in the specification, Office personnel should determine if the claimed invention has a well- established utility that is specific, substantial, and credible.
A Rejection will be made if there is no specific, substantial, and credible asserted utility, nor any specific, substantial, and credible well-established utility.
Rejection shifts the burden to applicant to provide rebuttal arguments and/or supporting evidence. Rejection is made under both 35 U.S.C. § 101 and 112(a), as lacking utility and lacking enablement. Rejection under both sections is required, because if there is no utility, the applicant has necessarily failed to enable the public to make and use the invention. The rejection should include enough explanation to provide a clear record of the examiner’s determination
Patent eligible subject matter
There are boundaries on the types of subject matter that can be patented. The boundaries are set forth in two criteria for subject matter eligibility.
1. The claimed invention must be to one of the four statutory categories, i.e. process, machine, manufacture, or composition of matter.
- 35 U.S.C. 101 defines these categories of invention that Congress deemed to be appropriate for patenting.
2. The claimed invention must not be directed to a judicial exception unless the claim as a whole includes additional limitations amounting to significantly more than the exception.
- Judicial exceptions are limited to abstract ideas, laws of nature, and natural phenomena.
- The Supreme Court has expressed concern that monopolizing this type of subject matter may impede innovation rather than promote it.
- The office’s current eligibility guidance is found in the Ninth Edition, Revision 10.2019 (revised June 2020) of the Manual of Patent Examination Procedure (MPEP), and particularly Sections 2103 through 2106.07(c).
Determining patent eligible subject matter
1. They determine what applicant has invented and is seeking to patent.
- They review the detailed disclosure and specific embodiments of the invention to understand what the applicant has invented.
- They review the claims.
2. They determine whether the claimed invention complies with 35 U.S.C. § 101.
Determine what applicant has invented
Examination begins with a determination of what, precisely, the applicant has invented and is seeking to patent. Read and understand the complete disclosure. Read and understand the metes and bounds of the claims. Claims define the property rights.
What the claim covers is based on “broadest reasonable interpretation” (BRI) of the claim in view of the specification and consistent with the interpretation those skilled in the art would reach. Language that suggests or makes optional but does not require steps or structure may not limit the claim.
Subject Matter Eligibility flowchart
Step 1 – Statutory categories
The claim must be directed to one of the four statutory categories of invention.
- It must be a process, machine, manufacture, or composition of matter.
- Claim may satisfy the requirements of more than one category.
- Analyze based on the broadest reasonable interpretation (BRI) of the claims as a whole.
If the claimed invention does not fall within one of the four categories, the claim is not eligible. Examples of claims that are not eligible include transitory signals per se, a human per se, or software per se.
Step 2 – Judicial exceptions
The Supreme Court has interpreted the statutory categories to exclude certain subject matter as ineligible for patenting. They are called the “judicial exceptions”.
- Abstract ideas (mathematical concepts, mental processes, and certain methods of organizing human activity)
- Laws of nature (e.g., naturally occurring correlations, scientific principles)
- Natural phenomena (e.g., wind)
- Products of nature (e.g., a plant found in the wild, minerals)
Even if the claim is directed to a statutory category, it must still avoid the judicial exceptions to be eligible.
Judicial exceptions test – Step 2A
Is to determine if the claim is “directed to” a judicial exception by answering the following questions:
- 2A Prong 1: Does the claim recite an abstract idea, law of nature, or natural phenomenon? If no judicial exception is recited, then the claim is eligible.
- 2A Prong 2: If so, does the claim recite additional elements that integrate the judicial exception into a practical application? If the additional elements provide integration into a practical application, then the claim is eligible.
Prong two considerations: Details
Judicial exceptions test – Step 2B
•Step 2B: If the claim is “directed to” a judicial exception, determine whether any additional element, or combination of additional elements, in the claim is sufficient to ensure that the claim as a whole amounts to significantly more than the judicial exception.
If the additional elements ensure the claim as a whole amounts to significantly more than the judicial exception, the claim is eligible.
Step 2B considerations overlap with step 2A
Claims encompassing a human organism
Section 33(a) of the Leahy-Smith America Invents Act (AIA) states: “Notwithstanding any other provision of law, no patent may issue on a claim directed to or encompassing a human organism.”
- Codified existing USPTO policy in MPEP 2105.
- Such a claim would be rejected under 35 U.S.C. § 101 and Section 33(a) of the AIA.
“Use” claim should be rejected under alternative grounds based on 35 U.S.C. §§ 101 and 112(b). e.g. “The use of a high carbon austenitic iron alloy having a proportion of free carbon as a vehicle brake part subject to stress by sliding friction.”
35 U.S.C. § 101 states in the singular that an inventor “may obtain a patent therefor”
- Statutory Double Patenting Rejection – applies when the same invention is claimed in two pending applications, or in a pending application and a patent.
- Non-Statutory type Double Patenting Rejection – applies when e.g. obvious variants are claimed in two pending applications, or in a pending application and a patent.
Improper naming of inventor
The USPTO office presumes that the named inventor or joint inventors in an application are the actual inventor or joint inventors of the claimed invention. In the rare situation it is clear the application does not name the correct inventorship and the applicant has not filed a request to correct inventorship the examiner should reject the claims under 35 U.S.C. § 101.