Welcome Real-Time SA v Catuity Inc - [2001] FCA 445 - FCA 2001 case summary — Zoe

CTHFCA

Welcome Real-Time SA v Catuity Inc

[2001] FCA 445

Federal Court of Australia|2001-07-01|Before: Heerey J

View original source

At a glance

Source facts

Court

Federal Court of Australia

Decision date

2001-07-01

Before

Heerey J

Source

Original judgment source is linked above.

Judgment (57 paragraphs)

[1]

Welcome Real-Time SA v Catuity Inc [2001] FCA 445 PATENTS - patent for process and device for operation of smart cards in connection with traders' loyalty programs - claim for infringement and cross-claim for revocation - construction - "Behaviour file", "coupon" - whether infringement - whether definite steps to use infringing system before priority date - whether manner of manufacture - whether lacking in novelty - whether obvious - whether useful - whether lacking in clarity - sufficiency or description - fair basis WORDS AND PHRASES - "Behaviour file" "coupon" Patents Act 1990 (Cth) ss 7, 13(1), 18(1)(a), 40(2)(a), 40(3), 119(1)(b) Patents Act 1977 (Imp) s 64 Statute of Monopolies 1623 (Imp) s 6 Constitution of the United States Art 1, s 8, cl 8 Flexible Steel Lacing Company v Beltreco Ltd (2000) 49 IPR 331 at [70]-[81] followed Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 at 496 applied CCOM Pty Ltd v Jiejing Pty Ltd (1993) 27 IPR 577 at 627 followed Helitune Ltd v Stewart Hughes Ltd [1991] FSR 171 mentioned Lubrizol Corporation v Esso Petroleum Ltd [1998] RPC 727 mentioned Dyno Nobel Asia Pacific Ltd v Orica Australia Pty Ltd (1999) 99 FCR 151 at [222] mentioned Rolls Royce Ltd's Application [1963] RPC 251 mentioned Re Brown (1899) 5 ALR 81 mentioned Commissioner of Patents v Lee (1913) 16 CLR 138 mentioned Nielson v Minister for Public Works (NSW) (1914) 18 CLR 423 mentioned Re Kelvin & Hughes Ltd's Application (1954) 71 RPC 103 mentioned Rogers v Commissioner of Patents (1910) 10 CLR 701 mentioned ESP's Application (1945) 62 RPC 87 mentioned W's Application (1914) 31 RPC 141 mentioned International Business Machines Corporation v Commissioner of Patents (1991) 33 FCR 218 followed CCOM Pty Ltd v Jiejing Pty Ltd (1994) 51 FCR 260 applied Commissioner of Patents v Microcell Ltd (1959) 102 CLR 232 at 249 distinguished National Research Development Corporation v Commissioner of Patents (1959) 102 CLR 252 applied Joos v Commissioner of Patents (1972) 126 CLR 611 at 616 mentioned Crane v Price (1842) 3 Man & G 580, 134 ER 239 mentioned Re GEC's Application (1942) 60 RPC 1 mentioned Re Cementation Co Ltd's Application (1945) 62 RPC 151 mentioned Rantzen's Case (1946) 64 RPC 63 mentioned Burroughs Corp Application [1974] RPC 147 at 161 mentioned International Business Machines Corporation's Application [1980] FSR 564 mentioned State Street Bank & Trust Co v Signature Financial Group 149 F 3d 1368 (1998) discussed Meyers Taylor Pty Ltd v Vicarr Industries Ltd (1977) 137 CLR 228 at 235 applied Flour Oxidising Co Ltd v Carr Atco Ltd (1908) 25 RPC 428 at 457 mentioned General Tyre & Rubber Co v Firestone Tyre & Rubber Co Ltd [1972] RPC 457 at 485-6 mentioned Minnesota Mining and Manufacturing Co v Beiersdorf (Australia) Ltd (1980) 144 CLR 253 at 293 applied Aktiebolaget Hassle v Alphapharm Pty Ltd (2000) AIPC 91-636 at [69] applied Sach v Hartford Electric Co 47 F 2d 743 (1931) at 748 mentioned Fawcett v Homan (1896) 13 RPC 398 at 405 applied Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 applied Kimberley-Clark Australia Pty Ltd v Araco Trading International Pty Ltd (2001) 177 ALR 460 at [25] applied Universal Oil Products Co v Monsanto Co (1972) 46 ALJR 658 at 661 applied Décor Corporation Pty Ltd v Dart Industries Inc (1988) 13 IPR 385 at 393, 400 applied Pearce v Paul Kingston Pty Ltd (1992) 23 IPR 303 at 307-308 applied Rehm Pty Ltd v Websters Security Systems (International) Pty Ltd (1988) 11 IPR 281 at 302-305 applied WELCOME REAL-TIME S.A. v CATUITY INC & ORS V 526 OF 2000 HEEREY J 17 MAY 2001 MELBOURNE

[5]

The field of the invention 6 Loyalty programs have been a feature of retail trading for many years. It is an incentive for a customer to deal with a particular trader if, after a specified number or value of transactions, a free benefit will be received. Earlier examples included Green Shield stamps. The customer received a stamp at the time of purchase, collected a prescribed number of stamps, sent them to a central location and received a gift. Another example began in the early 1980s when airlines in the United States, and shortly afterwards in Australia, introduced frequent flyer programs. A passenger flying for a certain mileage became entitled to a specified free fare. 7 The operation of such programs involved cost and inefficiency. Typically, information about customers' entitlements had to be sent to some central repository and maintained in a retrievable form. Evidence of entitlement had to be sent by post or some other means to the customer who would in turn have to send off a claim for a benefit. The trader would then have to check the entitlement and forward the reward. All this was a cost. Moreover, documents evidencing entitlement might be lost or fraudulently duplicated. 8 With the advent of smart cards it became apparent that some of these problems could be overcome. If the information relating to the customer's entitlement could be stored on the card and read at a point of sale (POS) terminal, benefits to which the customer became entitled could be provided immediately at the retail outlet. 9 But, easier said than done. The more particular problems encountered in applying smart card technology to loyalty programs can be illustrated by the development of the invention the subject of the Patent by its inventors M Aneace Haddad and M Bernard Chevalier. In 1995 the applicant's parent company High Co S.A. became a shareholder in Carte Jeunes SA, a company that operates the Carte Jeunes card on behalf of the French Ministry of Youth and Sports. The card is intended to encourage merchants to provide discounts to young people in France. Initially the Carte Jeunes card was a "flash card", that is to say a card which is simply shown to a participant merchant to obtain a discount. The Ministry decided to investigate the conversion of the Carte Jeunes card to a chip card. 10 By 1995 most loyalty programs were based on a "scheme-wide currency" which centred on there being a single points counter for the accumulation of points within a customer data base. In some of these programs, such as airline frequent flyer programs, cards were not electronic; the card contained a customer identification number which was typed into a terminal when the customer checked in. Other versions had a card with a magnetic stripe which dispatched information concerning a processed transaction to a central data base where the points balance for each customer resided. Account statements would be sent to each customer by mail indicating the points balance and information on rewards obtainable. These centrally processed scheme-wide currency programs (whether or not involving electronic cards) were relatively straightforward as there was usually just one points counter and all participating merchants' transactions sent points to the same counter. 11 In 1995 Shell in the United Kingdom and Takashimaya in Singapore introduced scheme-wide currency programs based on chip cards which removed the need to send statements or redeem awards by mail. 12 High Co's work with Carte Jeunes, starting in 1995, progressed through a number of stages. First there was a system based on scheme-wide Carte Jeunes "currency" in which the customers' points counter resided in the card's chip as well as on a central data base. All participating merchants would give points in the form of Carte Jeunes "currency" which was exchangeable for payment at any participating merchant. The balance of the "currency" was contained in the card and could be provided at each transaction, thus obviating the need for statements or reward request forms. However, the Bank of France considered that the proposed Carte Jeunes "currency" was too like real money and could compete with cash in the French economy. Apart from that problem, investigations revealed it was going to be difficult to persuade many small traders to participate in universal point schemes. Unless all invested in electronic payment terminals it could not be stated that points could be redeemed at any Carte Jeunes merchant. 13 A second stage was a proposal that universal points could be redeemed only at participating cinemas. However this proposal was not implemented because Carte Jeunes considered a currency valid only at cinemas was of limited benefit to card holders. 14 These examples illustrate the difficulty in developing a system which linked together many diverse traders with different technical infrastructures and promotional methods. Since a universal scheme-wide currency proved impractical, attention turned to exploring systems operated by single chains where points accumulated within the chain did not mingle with points accumulated elsewhere and where specific rewards could be provided for specific merchants or groups of merchants. To implement multiple distinct merchant programs on a single chip card, the inventors became aware that the chip card based system needed to be capable of using multiple counters within the chip, each counter dedicated to an individual merchant or chain of merchants. 15 The world's leading supplier of chip card technology was the French company Gemplus. Gemplus proposed to Carte Jeunes a chip card with several points counters. However, the problem remained that with multiple loyalty programs, if a chip card was intended to function with loyalty programs A and B, the card would have to be produced with loyalty programs A and B predefined within the chip's data memory. Each program operator would have to ensure that they used only the memory space which had been assigned to them. This allocation could not later be amended. A customer's chip card would carry all available loyalty programs regardless of whether or not the customer participated in all of them. With the then available technology there was a limit of about ten programs which could be loaded to pre-assigned memory locations for merchants. The inventors recognised that such types of chip card would not be able to provide a system which could be implemented in an environment consisting of potentially thousands of different merchants running their own distinct loyalty programs. 16 The next proposal made by Gemplus to Carte Jeunes was to create co-branded chip cards for local merchants. For example, a chain of cinemas in Paris would issue their own Carte Jeunes cards with their name on it and their dedicated loyalty program memory zoned within the chip. Merchants who did not have nationwide outlets would be limited to those co-branded cards. However, that would effectively limit the merchants' loyalty program only to those cards with the merchants' co-branded cards. Most merchants wanted to provide loyalty rewards to all Carte Jeunes card holders in their geographic area. 17 The inventors' thinking at the time as to these practical limitations was that the POS terminal of a particular merchant would have to be configured to read and write to a single memory zone or file with a specific address with which it had been predefined. For example, merchant A's terminal would be programmed to always function with memory zone A in the chip. Thus the number of merchants which could participate in the loyalty system was limited. 18 The solution arrived at by the inventors, which is said to be the invention of the Patent, is to "dynamically" store each merchant's loyalty program in a separate record of a file called the Behaviour file. The merchant's loyalty program is added to the Behaviour file by the POS terminal the first time the card holder uses the card at that merchant's store. Behaviour information and a points counter for merchants that the card holder never visits are never added to the chip card. There is not a pre-allocated memory slot for such non-visited merchants. Any chip card can still have only just a few points counters but the first points counter of any one card would be allocated to one merchant, while the same points counter on another card could be allocated to another merchant. The approach of the invention was to allow chip cards with a small memory capacity to be used across thousands of merchants each operating their own proprietary loyalty program. M Haddad knew of no other system before the priority date of the Patent that dynamically supported a plurality of different merchants each operating a different loyalty program within the chip card's memory, and each program being added only to those cards actually participating in the loyalty program. This was because all the previous systems lacked a Behaviour file indicating which merchant loyalty programs the customer was involved in, within a much larger pool of merchant loyalty programs available on the same chip card network.

[7]

The Patent 22 The Patent commences with a brief summary of the invention. It notes that the invention finds "a particularly important though non-exclusive application in the field of the processing of loyalty cards, presented by customers at the time of payment at a trader's". Thus with the invention "… it is possible to alter a trade offer on the basis of the a posteriori behaviour of the card holder, thus making it possible to grant him specific benefits in a customised and immediate manner, and which may moreover be recorded on the card." 23 I take the expression "alter a trade offer" to refer to alteration of an offer made to the public at large. For example, if a trader offers an item for $100, a loyalty program may stipulate that a cardholder who has already purchased items to the value of $500 may obtain the item for a 15 per cent discount. 24 The drawbacks of existing mail-based systems are noted, such as delays and limited reliability caused by loss of coupons and changes of address. But, according to the invention, the trader will be able to "recognise a customer on the basis of the frequency with which he calls in and the size of his spending. It will then be possible to grant him a specified definite benefit automatically and instantaneously." 25 The specification then sets out a statement of the method of the invention and advantageous embodiments which together are reflected in claim 1. It also sets out a statement of the device of the invention and advantageous embodiments which together are reflected in the device of claim 6. 26 It is said that advantageous embodiments of the method include the following provisions: " - the algorithmic processing includes a step of incrementing or decrementing the Points file by a pre-specified number of points; - the coupon is only printed if the number of points contained in the Points file is greater than a specified value; - the coupon is only printed and/or the Points file is only incremented or decremented if the Member file corresponds to specified criteria; - the Points file is incremented more or less depending on the amount of the purchase or payment operation; - the Points file is incremented more or less depending on frequency and/or on the nature of first, second or xth visit by the cardholder over a period of time of specified duration. - information corresponding to the operation is entered into a memory of a payment terminal located on the premises of said trader, said entered information is compared with information stored in storage means and relating to prespecified series of operations, and the results of these comparisons are processed in order to print a coupon and/or write to the Points file. It is thus possible to undertake promotional operations which are limited in time and pertain to a collection of traders belonging to the same network." 27 A "non-limiting" example of the invention is provided, with reference to drawings (figures 1, 2 and 3). 28 The manufacturers of suitable POS terminals and chip cards are identified. It is stated that the cards can be bank cards, personal credit cards or loyalty cards. 29 Embodiments of the Member file, the Behaviour file and the Points file according to the invention are then described "by way of example": Member file 18 Read code: Free Update code: RCode01 Field Format Width Card number 999999999 9 Type Alpha 2 Version 99 2 Present applications Y / N 9 Month/year of customization (manufacture) yymm 4 Month/year of 1st use yymm 4 Month/year of expiry yymm 4 Reserved Alpha 46

[18]

Behaviour file 35 It was not disputed that a file in this context means a collection of records or data or information stored for use by a computer. A file, whether a computer file or an ordinary physical file, usually contains records which have some commonality or relationship with each other, such as correspondence with a particular person or documents concerning a particular topic. 36 "Behaviour" in this context means "… observable actions; treatment shown to or towards another or others" (New Shorter Oxford Dictionary). In the Patent the behaviour with which the Behaviour file is concerned is that of the card holder "towards the user trader or traders" (claim 1 line 14). So in this context the behaviour of the card holder could include such conduct as visiting the premises of the trader or traders and, if so, how often, or spending money there and, if so, how much. 37 But, and at this point the parties diverge, what is the minimum information that a file must contain before it is a Behaviour file within the meaning of claim 1? The respondents contend that behaviour refers to more than just the presence of a trade code (or loyalty program ID) and is concerned with recency and frequency of dealings. They say that recency and frequency and monetary amount (RFM) are part of the concept of the Behaviour file. 38 The applicant argues that the trader code is the minimum field necessary. It is not necessary that the Behaviour file of the claims should have all of the data fields in the table of the example ([30] above) (i.e. date of first visit, date of last visit, number of visits this month etc). 39 In my opinion, the applicant's contention is to be preferred, for the following reasons. 40 The content of each of the three files referred to in claim 1 is identified in the claim: the content of the Member file is something identifying the cardholding customer; the content of the Points file is something counted; and the content of the Behaviour file is, as stated, something relating to the behaviour of the cardholder towards the user trader or traders. It is evident therefore that the Behaviour file and the Points file cannot be the same thing and that the Behaviour file must have something in it which does not include accumulated points. If there be any doubt as to this, the specification makes it clear that the Points file contains a points counter (claim 1 line 4) and the Behaviour file does not. 41 The algorithmic processing referred to in the claim is dependent, amongst other things, on information in the Behaviour file. Integers [h] and [m], in contrast to integer [l], use the terms "information" and "new information" rather than the term "data". Accordingly, upon first use of a card at a trader's premises (when there is no trader code in the Behaviour file) the Behaviour file contains the information that this customer has not previously attended this trader. This information arises from the absence of a trader code in the Behaviour file. The non-existence of a fact (for example, it is not raining today) is properly to be characterised as information. The processing proceeds to add new information, being the trader's trader code, to the Behaviour file. The algorithmic processing is dependent on that information. 42 Moreover, as the applicant submitted, there is no reason why the area set aside and structured for a Behaviour file (as in the example in the Patent) should not be regarded as a Behaviour file whether or not data is recorded in it. Physical files may exist in the sense of a folder being appropriated to a subject, labelled and structured (for example, by alphabetic tabs) before any documents are inserted. An electronic file is essentially the same in this regard. 43 The language "relating to the behaviour of the card holder towards the user trader or traders" is quite general. Information that on a given date a card holder has visited a trader for the first time tells us something about the behaviour of that card holder towards that trader. Applying the principles of construction discussed in Flexible Steel, I see no reason to read down or qualify that meaning. 44 The respondents argued that the reference to the singular "trader" suggested that "behaviour" is referring to something more than the identification of a trader. The short answer is that information that a card holder has visited a (singular) trader for the first time does convey more than the identification of that trader, namely that that card holder has visited that trader for the first time. 45 There is nothing in integers [i] to [j] (lines 20-25) which militates against the applicant's interpretation of "Behaviour file". The requirement of the claim that the algorithmic processing should include a step of incrementing or decrementing the points file depending on the frequency and/or the nature of the first, second or xth visit by the card holder over a time period of specified duration means no more than that the points file is incremented or decremented depending on the number of visits made to the trader, or the nature of such visits to the trader, during the currency of the program. "Frequency" in this context refers to the number of times something occurs during the currency of a program and not to the number of times something occurs during a particular time interval during the currency of a program. Accordingly, these lines of the claim refer to the function of the Points file, which may accumulate points in a variety of ways during the currency of a program, not to the Behaviour file. It is wrong to say that "nature" cannot mean "amount" in an appropriate case because "amount" is referred to in claim 3. On the contrary, the dependency of claim 3 on claim 1 suggests that "nature" does include "amount" and the purpose of claim 3 is simply to narrow the broader claim 1.

[19]

Coupon 46 The issue here is whether "coupon" is (i) a document which represents entitlement, that is to say a "store of value", or (ii) whether it is something in the nature of a voucher evidencing a transaction. The former meaning is the respondents' case and the latter the applicant's. 47 I have no doubt that whatever be the meaning, in the context of the Patent an actual document or piece of paper is intended. This follows from the reference to the coupon being printed and the representation of what is obviously a document in 12 in figure 1. 48 "Coupon" derives from the French verb couper (to cut). It appears from the Oxford English Dictionary that the term was first used in the 1820s in relation to securities issued to bearer where a ticket or certificate could be detached when an interest payment or dividend became due and presented as evidencing entitlement to payment thereof. 49 In 1864 Thomas Cook introduced the system whereby tourists prepaid a single fixed sum for travel and hotel expenses. Instead of paying money, the tourist would give up a coupon at the appropriate stage of the tour. In the First and Second World Wars coupons became familiar in connection with rationing schemes. Coupons were issued by government authorities and had to be produced when certain foodstuffs, petrol and other rationed goods were purchased. In that historical context, "coupon" corresponds with meaning 2a in the OED, viz: "A form, ticket, part of a printed advertisement, etc, entitling the holder to a gift or discount, etc, or designed to be filled up by an intending user or purchaser and forwarded to the advertiser for information, goods, etc." 50 If the term is viewed in isolation, there is much to be said for the meaning propounded by the respondents. However, I do not think claim 1 is speaking of a coupon in that sense. The function of the piece of paper is to notify trader and customer of immediate entitlement of the latter to a benefit. Data and new information are written to the Points file and Behaviour file respectively (claim 1 lines 29 and 30). This is most obvious in the case of a discount. The coupon functions as a manifestation of an existing entitlement recorded in the card. Read as a whole, claim 1 is not concerned with producing a coupon of the Thomas Cook type, which is intended to be presented at some later time as payment for goods or services rendered, and the loss whereof will mean the former holder does not receive the benefit.

[22]

The respondents' system 56 For present purposes the corporate structure of the respondent companies, and the changes which have occurred in that structure from time to time, are not relevant. It will be convenient simply to refer to "the respondents". 57 In March 1995 the respondents launched their Wizard/Transcard system, which provided for electronic purse (e-purse) payments, ticketing and loyalty and incentive programs on a contactless smart card. An e-purse is an electronic substitute for cash; a pre-paid card is used by the card holder to make payments for goods and services until the stored value is used up. In the Wizard/Transcard system the card could then be "reloaded" by the cardholder paying cash to a Transcard agent who would then "load" the equivalent value on to the card by means of a transaction on the terminal. A contactless smart card is one with a computer chip and antenna which can be activated by a magnetic field generated by a terminal reader so as to communicate and conduct transactions. 58 From April 1995 the Wizard/Transcard system was trialed on Westbus buses in the western suburbs of Sydney, in Cabcharge taxis and a number of small retailers in Western Sydney offering e-purse payment, and ticketing. On the Westbus buses there was a loyalty program offering one free trip after every ten. A portion of the memory area on the cards would be used to store a record of points. Each time the card holder purchased a ticket an extra point would be recorded. Each time the points counter reached eleven, the ticket machine was programmed to provide a free ticket and not to deduct money from the e-purse. The points counter would then be set back to zero. 59 The Wizard/Transcard trial proved to be successful. Users made a number of suggestions. The respondents in August 1996 launched an upgraded system called CiT/Transcard. In an affidavit sworn on 3 August 2000 Mr Anthony Garton, the respondents' Software Development Manager, described this upgraded system as follows: "21. The CiT Transcard system offered essentially the same functions as the Wizard/Transcard system it replaced. However, with the change over to CiT Transcard, we improved the system. These improvements included the development of a common device to read the cards (called a validator), increasing the security of the system, and changing the way we managed the space on the card to make it more efficient.
The CiT Transcard system was now able to store any combination of electronic purses, loyalty programs and tickets and thereby better use the limited space in the card memory. We defined a range of program IDs and data formats for each program type (EP, loyalty, tickets). We standardised on 16 byte "blocks" for each program entry in the program area as this matched the memory addressing architecture of the contactless card we were using. This new design allowed us to store up to 36 programs of any type on a card. The actual location and number of programs on a specific card would now depend entirely on how the card was used not by some arbitrary space allocation. This card layout is still used by the Catuity system today." 60 The respondents produced later improvements - the CAT system (late 1997/early 1998) and the Catuity system (December 1999/early 2000). However, it is the CiT/Transcard system (hereafter "the respondents' system") which gives rise to the infringement issues in the present case. It will be necessary to consider it in a little more detail. The following description comes largely from the evidence of Mr Ben-Meir. 61 The respondents' system stores application data (including customer loyalty programs) on the chip card by means of a specific organisation of the chip card memory. The memory in the chip card is divided into three separate areas, each having a specific role with respect to the use of memory on the chip card. The three areas are described by the respondents as follows: "(a) Chip static area (the Static Area); (b) Application index area (the Index Area); and (c) Application data area (the Application Area)." 62 The Static Area contains (among other things) pointers that tell a terminal or validator where to find the start of the Index Area and the start of the Application Area. The Static Area also stores the identification number of the card. The Static Area includes the first block of the first sector of the card's memory, which includes the chip card's serial number (the Card Serial number) incorporated into the card at the time of manufacture. This serial number ensures that reading and writing operations remain confined to a single card during a single transaction. The "Card External ID" is a further identification number in the Static Area which can be assigned by the card issuer and can also perform the role of identifying a chip card and card holder data within the system. This number is used for printing on receipts. 63 The Index Area provides an index to the location of applications (the Applications) that are stored in the Application Area of the card. Applications can be loyalty programs, e-purses or ticketing programs. The Index stores a unique reference number that identifies each Application (the Application ID). The Index Area acts as an index in that the memory location of an Application in the Application Area is implied by the position of the corresponding Application ID within the Index Area. An Application ID that identifies a loyalty program is termed a Loyalty Program ID. The memory in the Application Area is addressed by the Index Area in 16 byte blocks. Each of these 16 byte blocks is represented by a location in the Index Area, that is to say Application IDs are arranged in the Index Area in such a way that the position of an Application ID within the Index Area indicates the position of the corresponding 16 byte block in the Application Area. For example, the first record in the Index Area will store the Application ID for the Application that is stored in the first 16 byte block of the Application Area, and so forth. 64 The Index Area of the respondents' system was described in their Power Point slides shown at a presentation attended by Mr Ben-Meir in these terms: "• Dynamic, reusable indexed use of storage • No fixed position of application data on the card • Flexible use of storage depending on card usage • No pre-allocation of space". This functionality was also described by Mr Garton at par 22 of his affidavit (see [59] above). 65 In Mr Ben-Meir's view, which I accept, the Index Area performs the role of a file that accumulates the Application ID for each Application as and when it is loaded onto the customer's chip card by a card terminal or validator at a trader's. Because the Index Area contains a store of the Loyalty Program IDs for the loyalty programs in which a card holder is participating, the Index Area of a chip card is a store of the particular card holder's chosen relationship with one or more traders that operate loyalty programs through the respondents' system. When the customer engages in his or her first transaction with a trader offering a loyalty program, the Loyalty Program ID for that new loyalty program is loaded into the Index Area and the loyalty program Application itself is loaded into the Application Area of the card. 66 As old loyalty programs expire they may be removed from the Index Area and the chip card memory may be reused. The Index Area on any particular chip card operating in the respondents' system will therefore be a catalogue of current loyalty programs stored on the chip card as a consequence of the customer's choices in relation to a trader or traders operating loyalty programs through the system. The indexing function of the Index Area plays an essential role in accessing data that is stored for loyalty programs in the Application Area. Data in the Index Area is used to reference loyalty program data every time that loyalty program data is updated in the operation of the system. 67 The Application Area contains data for each loyalty program stored on the chip card. Data fields for each of the following pieces of information for each loyalty program are as set out in the respondents' PowerPoint slides. (i) Application expiry date: This is the date at which the loyalty program on the card expires and the memory space allocated to that program can be reused for the storage of data for another program. (ii) Country: This is a code for the country in which the loyalty program is running. The field makes it possible for Application IDs to be allocated on a country by country basis where the respondents' system operates in more than one country. (iii) FIP detail: "FIP" is used in the respondents' documents to refer to Frequency Incentive Programs which are equivalent to the loyalty programs. (iv) Counter 1 and Counter 2: Counter 1 is used to store units or points accrued by a customer towards rewards offered in a loyalty program. Points are accrued according to the loyalty program rules depending on the cardholder's spending or frequency of visits. 68 The Index Area and Application Area are used as described above for storing data on the chip card and for reading and writing data to and from the chip card for the operation of loyalty programs. The data processing operations by which card holders accumulate points towards rewards, and by which rewards are granted, are performed on POS terminals which read data from the chip card and write updated data to the chip card. 69 Loyalty programs operated through the respondents' system are created on a centralised computer called the "host" and transmitted to the relevant POS terminal or terminals in the form of "parameter files". The software that operates the loyalty programs is of a standard kind and the particular characteristics of each loyalty program are generated by the parameter files downloaded to the POS terminal(s) for the operation of the software. Changes can be made to the rules of loyalty programs simply by sending new parameter files from the host to the terminal. 70 Reward entitlements are displayed on a screen visible to both trader and cardholder and receipts are printed. 71 The respondents' PowerPoint presentation states: "• In CiT/Transcard onwards the following rewards are supported: Fixed value discount (eg ($10), Percentage discount (eg 10%) or message only (eg 'Give Free Coke'). • For discount rewards the discount amount is automatically applied to the current transaction. • For message only rewards, message on screen and receipt used to prompt the operator to offer the free good or service. • If goods/service reward is not accepted reward is lost. • All rewards are given at the time of transaction. The consumer does not have the choice which reward to redeem or when."

[25]

Behaviour file 76 In cross-examination Mr Ben-Meir accepted that the only basis for saying that the respondents' system contained a Behaviour file was that it had an index containing the trader codes that related to each of the programs stored in it at any one time. But he pointed out that the presence of a trader code did tell something about the card holder's behaviour towards that trader, namely that the card holder had chosen to deal at least once with that trader. And, over a series of transactions, the Index area of each card accumulates a series of loyalty program IDs that reflect the card holder's choice of particular traders, this being a sub-set of traders within a potentially much larger set of traders with available loyalty programs. 77 I do not accept the respondents' argument that information of this sort is trivial or commercially useless. 78 It is true that in the respondents' system there is no writing to the equivalent of the Behaviour file after the first visit to the particular trader. The system simply adds points depending on the program, such as one point per bus ride or one point per dollar spent. It does not store complicated data such as date of last visit or number of visits this month. Accordingly, much stress was put on the fact (in itself not disputed) that, on the applicant's case, the respondents' system only infringed on the first day it is used at each of a number of traders or with respect to their individual programs. 79 However, I do not see how this fact prevents infringement taking place. The respondents obviously see the capacity to add new programs as an important part of their system. Their PowerPoint presentation promotes a number of features, including "• Programs automatically added to card by terminal when used • Multiple programs can exist on a card or terminal." 80 So in this regard the respondents' system necessarily operates in a way that infringes an essential integer of claim 1. It does not matter that once a trader's program has been loaded subsequent use of that program will not infringe. If an infringer's device or process adopts all integers of the claim of the patent, it is not to the point that some embodiments of the patent provides benefits which the infringer's device or process does not.

[26]

Other integers 81 The respondents argued that integers [f], [g] and [h] meant that the calculations which lead to the various results (incrementing or decrementing points, printing coupon etc) depend on various items of information, including date of operation and information in the Behaviour file, things that are not present in the respondents' system. 82 But it is enough that the processing of integer [f] be dependent upon, among other things, the date of the operation. It is not necessary that the date of the operation be "used in" calculation of points. 83 It is to be noted that the respondents' PowerPoint presentation, when dealing with POS terminal parameters, refers to "Accumulation Start Date The date and time when the terminal will start accumulating points. Accumulation End Date/Time The date and time when the terminal will stop accumulating points." 84 The operation of a loyalty program defined by these parameters requires that the date of the operation, that is, a purchase or payment operation by a card holder, be compared to the Accumulation Start Date and to the Accumulation End Date to determine whether the system will proceed to accumulate points for that card holder for that transaction. Therefore, the date of the operation is used in the specified algorithmic processing. 85 The foregoing analysis assumes a construction of the integers [f], [g] and [h] advanced by the applicant, namely that the integers do not necessarily require the date in question to be stored on the card itself - they can be stored in the POS terminal. In my opinion, that construction is correct. 86 The respondents argued that in integers [i] and [j] the words "over a time period of specific duration" related to the frequency of visits and nature of visit. On the first use of the respondents' card at a trader's - the only case said to infringe - the time period of specified duration cannot have begun. Frequency and/or nature can only be calculated over a period of time, not on the first occasion. 87 However, I see no reason why the period of specified duration would not apply to the beginning and end date of a loyalty program or, in the respondents' terms, the Accumulation Start Date and Accumulation End Date.

[30]

The construction of s 119 91 Section 119 of the Act provides as follows: "(1) Where, immediately before the priority date of a claim, a person: (a) was making a product or using a process claimed in that claim; or (b) had taken definite steps (whether by way of contract or otherwise) to make that product or use that process; the person may, despite the grant of a patent for the product or process so claimed, make the product, or use the process, (or continue to do so) in the patent area, without infringing the patent. (2) Subsection (1) does not apply if the person: (a) derived the subject-matter of the invention concerned from the patentee or the patentee's predecessor in title in the invention; or (b) before the relevant priority date, had stopped making the product or using the process (other than temporarily), or had abandoned (other than temporarily) the steps mentioned in paragraph (1)(b)." 92 The respondents rely on s 119(1)(b). 93 The product or process referred to in s 119(1) is the product or process claimed in the claim of the patent: CCOM Pty Ltd v Jiejing Pty Ltd (1993) 27 IPR 577 at 627 per Cooper J. For s 119 to be applicable, it must be possible to say that immediately before the priority date the product or process of the patent was being made or used by the infringer or he or she had taken definite steps to make or use that particular product or that particular process. 94 The concept of which s 119 speaks may be illustrated by the following example. Assume a patented product consisting of components A, B and C. Immediately before the priority date an infringer: has drawings depicting the product; has actually made A; has on his premises the raw materials for component B; and has ordered the raw materials for component C. It can then be said that the infringer had taken definite steps to make that product. Conversely, it would not be sufficient that immediately before the priority date, the infringer has made A, has received the raw materials for B but is investigating whether C, D or E would be the preferable final component. And the infringer would be in no better position if, after the priority date, he in fact decided that C was preferable and then proceeded to manufacture a product consisting of A, B and C. 95 Reference was made in the course of argument to s 64 of the Patents Act 1977 (Imp) which provides: "Where a patent is granted for an intention, a person who in the United Kingdom before the priority date of the invention (a) does in good faith an act which would constitute an infringement of the patent if it were in force, or (b) makes in good faith effective and serious preparations to do such an act, has the right to continue to do the act or, as the case may be, to do the act, notwithstanding the grant of the patent, but this right does not extend to granting a licence to another person to do the act." 96 In Helitune Ltd v Stewart Hughes Ltd [1991] FSR 171 the production of prototypes before the priority date was held not enough to show effective and serious preparations. In Lubrizol Corporation v Esso Petroleum Ltd [1998] RPC 727 the patent related to a lubricating oil. The first batch of the defendants' product was imported into the United Kingdom before the priority date and the defendants had given consideration to appropriate pricing. The defendants had also contemplated manufacturing the product in the United Kingdom. It was held that the defendants had not undertaken effective and serious preparations. Aldous J said (at 770) that the preparations must be "so advanced as to be about to result in the infringing act being done". 97 Thus the English courts have adopted a strict interpretation of s 64, a provision which, on its face, seems more favourable to infringers that s 119. Assuming for the moment that doing an act which would constitute infringement in the UK Act can be equated to making a product or using a process claimed in the claim of the patent in the Australian Act (but as to which, see below), in the normal course of events making preparations for the making of a product would be something that occurs prior to steps in the actual making.

[32]

Conclusion 100 Neither Mr Garton nor Mr Ben-Meir was cross-examined on their evidence on this issue. The onus is on the respondents. I am not satisfied that, within the meaning of s 119(1)(b), the respondents had taken definite steps to use their system by 21 January 1996. Quite apart from questions of onus, I note that in terms of Mr Garton's evidence the design of the respondents' system was only "substantially completed" by 21 January 1996. The fact that the respondents' system did not become operational until seven months later confirms the impression that what the respondents were doing as at the priority date was engaging in the ongoing development of a system. 101 Although this was not mentioned in argument, it is worth noting that s 119 may have a quite limited effect. If an infringer comes within the section, it by no means follows that it can act as though the patent did not exist. As Ann Monotti points out in her article "Balancing the Rights of the Patentee and Prior User of an Invention; The Australian Experience" (1997) 7 EIPR 351, s 119 in its terms appears to limit its protection to the act of making a product or using a process and does not extend to other acts which would constitute exploitation, and hence infringement, such as sale or importation of a product: see s 13(1) and the definition of "exploit" in Sch 1. 102 Another point is whether the making or using referred to in s 119 must be secret. If the making or use is public, whether by the patentee or anyone else, there will be an anticipation of the patent and thus ground for revocation for want of novelty: ss 7, 18(a)(b)(i), 138(3)(b). Secret use by or on behalf of the patentee is also a ground for revocation: ss 9, 18(1)(d), and 138 (3)(b). In Dyno Nobel Asia Pacific Ltd v Orica Australia Pty Ltd (1999) 99 FCR 151 at [222] Dowsett J, in dealing with a prior use which was found to be not secret, expressed the obiter view that "… it (is) at least arguable that s 119 prescribes the protection to be afforded to a person who has previously used the process or product in question. If such prior use were sufficient to deprive an invention of novelty, there would be little purpose in express protection of a person who has previously used it." 103 A possible rationale is that s 119 applies to all prior making or using, whether public or secret. The section may have value for an infringer who has engaged in a public making or using but does not wish to engage in the risk and expense of a revocation suit. It seems a reasonable reading of the section that such an infringer obtains relatively clear cut protection over a limited area leaving the patentee otherwise free to exploit the patent. Of course this would not prevent third parties relying on such making or using in their revocation claims. But the whole purpose of s 119 (and its UK counterpart) is to confer a personal right on somebody who would otherwise be an infringer rather than to interfere with the validity of the patent.

[33]

The respondents' case 104 The respondents argued that the alleged invention the subject of the Patent covered material that had never been previously held to be within the concept of "manner of manufacture" for the purposes of s 6 of the Statute of Monopolies 1623, which is adopted as part of the definition of "patentable invention" by s 18(1)(a) of the Act. 105 Section 6 of the Statute of Monopolies provided that the invalidating of monopolies contained in preceding provisions of the statute "shall not extend to any letters patents and grants of privilege for the term of fourteen years or under, hereafter to be made of the sole working or making of any manner of new manufactures within this realm, to the true and first inventor and inventors of such manufactures, which others at the time of making such letters patents and grants shall not use, so as also they be not contrary to the law or mischievous to the State by raising prices of commodities at home, or hurt of trade, or generally inconvenient." (Modern spelling) 106 The respondents argued that working directions and methods of doing things fell outside the concept. Directions as to how to operate a known article or machine or to carry out a known process so as to produce an old result were not patentable, even though they may be a different and more efficient method of doing things. An example was the rejection of a patent for operating a jet engine in a way so as to reduce noise during takeoff: Rolls Royce Ltd's Application [1963] RPC 251. Counsel referred to a number of earlier cases in which patents were refused for an improved method of preventing the fraudulent re-use of sales books dockets (Re Brown (1899) 5 ALR 81), improved methods for charcoal burning (Commissioner of Patents v Lee (1913) 16 CLR 138), improved methods for utilising an existing mechanism of septic tank purification (Nielson v Minister for Public Works (NSW) (1914) 18 CLR 423) and a method for felling trees by use of fire (Rogers v Commissioner of Patents (1910) 10 CLR 701. 107 Also rejected were patents for methods of calculation and theoretical schemes, plans and arrangements such as a stellar chart for ascertaining the position of an aircraft in flight (Re Kelvin & Hughes Ltd's Application (1954) 71 RPC 103), a plan relating to the layout of houses in a row or terrace so as to prevent overlooking (ESP's Application (1945) 62 RPC 87) and an arrangement of buoys for navigational purposes (W's Application (1914) 31 RPC 141). 108 In the present case it was said that the Patent was no more than a method or system for using well known integers - a chip card, the memory space on that card, various computer programs, readers and printers - to operate familiar kinds of loyalty and incentive schemes for customers. Counsel argued that the recent Federal Court decisions in International Business Machines Corporation v Commissioner of Patents (1991) 33 FCR 218 (Burchett J) and CCOM Pty Ltd v Jiejing Pty Ltd (1994) 51 FCR 260 (Full Court) should be distinguished. Although like the present case in that they occurred in an environment of computing, in each case there was a physically observable effect that met the manner of manufacture requirement:the screen curve in IBM and the retrieval to graphical representations of desired characters for the assembly of text in CCOM. 109 As a variation of this argument it was also said that the invention fell within the principle stated in Commissioner of Patents v Microcell Ltd (1959) 102 CLR 232 at 249: "Many valid patents are for new uses of old things. But it is not an inventive idea for which a monopoly can be claimed to take a substance which is known and used for the making of various articles, and make out of it an article for which its known properties make it suitable, although it has not in fact been used to make that article before."

[34]

Principles 110 The leading authority in this area is the decision of the High Court in National Research Development Corporation v Commissioner of Patents (1959) 102 CLR 252 which has been described as a "watershed" (Joos v Commissioner of Patents (1972) 126 CLR 611 at 616 per Barwick CJ) and a decision which "changed the direction of the case law not only in Australia but also in the United Kingdom" (CCOM at 287). The case was an appeal from a rejection by the Deputy Commissioner of Patents of an application for a grant in respect of a herbicidal composition. The composition was effective against a number of common broad-leafed weeds, but did not harm certain broad-leafed crops, such as lucerne. So application of the composition to a weed-infested crop would kill the weeds but allow the crop to flourish. The Commissioner's grounds for rejection were that (i) this was merely a new use of a known substance and (ii) there was no manner of manufacture because the use of the composition did not result in a "vendible product"; manufacture will ordinarily result in a physical or tangible object, but here all that happened was that the existing weeds were killed. 111 The Court (Dixon CJ, Kitto and Windeyer JJ) first held (at 264) that the application disclosed an invention since it claimed "… a new process for ridding crop areas of certain kinds of weeds, not by applying chemicals the properties of which were formerly well understood so that the idea of using them for this purpose involved no inventive step, but by applying chemicals which formerly were supposed not to be useful for this kind of purpose at all." 112 In turning to the question whether the process claimed was a "manner of new manufacture" the Court pointed out that it was a mistake to treat the question as to whether a given process or product was within the term as if the question could be restated in the form: "Is this a manner (or kind) of manufacture?". Their Honours said (at 269): "It is a mistake which tends to limit one's thinking by reference to the idea of making tangible goods by hand or by machine, because 'manufacture' as a word of everyday speech generally conveys that idea. The right question is: 'Is this a proper subject of letters patent according to the principles which have been developed for the application of s 6 of the Statute of Monopolies?'" 113 By 1842 it had been settled that "manufacture" comprehended both a process and a product: Crane v Price (1842) 3 Man & G 580, 134 ER 239. But their Honours noted (at 270) that the question remained whether it was enough that a process produced a useful result or whether it was necessary that some physical thing was either bought into existence or so affected as the better to serve man's purposes. After discussing a number of authorities their Honours said (at 271): "The truth is that any attempt to state the ambit of s 6 of the Statute of Monopolies by precisely defining 'manufacture' is bound to fail. The purpose of s 6, it must be remembered, was to allow the use of the prerogative to encourage national development in a field which already, in 1623, was seen to be excitingly unpredictable. To attempt to place upon the idea the fetters of an exact verbal formula could never have been sound. It would be unsound to the point of folly to attempt to do so now, when science has made such advances that the concrete applications of the notion which were familiar in 1623 can be seen to provide only the more obvious, not to say the more primitive, illustrations of the broad sweep of the concept." 114 Their Honours then discussed the proposition of Morton J in Re GEC's Application (1942) 60 RPC 1 which held that a method or process was a manufacture if it (i) resulted in the production of some vendible product or (ii) improved or restored to its former condition a vendible product or (iii) had the effect of preserving from deterioration some vendible product to which it is applied. In subsequent cases patents were upheld for a process of treating a stratum of subterranean soil (Re Cementation Co Ltd's Application (1945) 62 RPC 151) and a method of electrical transmission(Rantzen's Case (1946) 64 RPC 63). In discussing the last mentioned case their Honours said (at 275): "The point is that a process, to fall within the limits of patentability which the context of the Statute of Monopolies has satisfied, must be one that offers some advantage which is material in the sense that the process belongs to a useful art as distinct from a fine art (see Re Virginia-Carolina Chemical Corporation's Application [1958] RPC 35 at 36) - that its value to the country is in the field of economic endeavour." 115 Their Honours' conclusion on this issue was as follows (at 277): "… the view which we think is correct in the present case is that the method the subject of the relevant claims has as its end result an artificial effect falling squarely within the true concept of what must be produced by a process if it is held to be patentable. This view is, we think, required by a sound understanding of the lines along which patent law has developed and necessarily must develop in a modern society. The effect produced by the appellant's method exhibits the two essential qualities upon which 'product' and 'vendible' seem designed to insist. It is a 'product' because it consists in an artificially created state of affairs, discernible by observing over a period the growth of weeds and crops respectively on sown land on which the method has been put into practice. And the significance of the product is economic; for it provides a remarkable advantage, indeed to the lay mind a sensational advantage, for one of the most elemental activities by which man has served his material needs, the cultivation of the soil for the production of its fruits. … (The method) achieves a separate result and the result possesses its own economic utility consisting in an important improvement in the conditions in which the crop is to grow whereby it is afforded a better opportunity to flourish and yield a good harvest." 116 In CCOM a Full Court of this Court upheld a patent for an invention for a Chinese language word processor. The idea of the invention, in the Full Court's description (at 287), lay in the use of a particular method of characterisation of character strokes which is applied to an apparatus in such a way that operation of the keyboard will enable the selection through the computer, in a particular way, of the appropriate Chinese characters required for word processing. The primary judge had held that a manner of manufacture was not disclosed because there was no more than a procedure to organise and process the data; the other integers of programming and computer hardware were merely conventional means to produce the desired result. 117 In discussing this issue the Full Court noted (at 292) with apparent approval the observation of Professor James Lahore in (1978) 9 Federal Law Review at 22-23 that (inter alia) business, commercial and financial schemes had never been considered patentable. Also a distinction had been drawn between the discovery of laws or principles of nature and the application thereof to produce a particular practical and useful result. 118 Of particular importance for present purposes is the Full Court's discussion of English decisions concerning computer programs given after NRDC but before the United Kingdom Act of 1977. (The latter Act, unlike the Australian Act of 1990, expressly excluded business methods and computer programs from the ambit of patentability to the extent that the operation "relates to that thing as such": CCOM at 288.) 119 In Burroughs Corporation's Application [1974] RPC 147 at 161 Graham and Whitford JJ had expressed the view that computer programs which have the effect of controlling computers to operate in a particular way, where such programs are embodied in physical form, are proper subject matter for letters patent. Their Lordships had also pointed out (at 158): "[I]t is not enough to take a narrow and confined look at the 'product' produced by a method. Of course, if a method is regarded purely as the conception of an idea, it can always be said that the product of such a method is merely intellectual information. If, however, in practice the method results in a new machine or process or an old machine giving a new and improved result, that fact should in our view be regarded as the 'product' or the result of using the method, and cannot be disregarded in considering whether the method is patentable or not." 120 This decision was followed by Burchett J in International Business Machines Corporation v Commissioner of Patents (1991) 33 FCR 218. 121 International Business Machines Corporation's Application [1980] FSR 564 (decided before the commencement of the 1977 Act) concerned a program designed to calculate automatically the selling price of shares by comparing a set of buying and selling orders. It was accepted that the scheme was not itself novel, and that a completely standard computer could be programmed to perform it. Nevertheless, Graham and Whitford JJ held that the patent was good. They said (at 572) that what the inventor sought to claim was a method involving the operation or control of a computer, such that it was programmed in a particular way to operate in accordance with the inventor's method. More than 'intellectual information' was involved because the method was involved in the program and in the apparatus in physical form. 122 The conclusion of the Full Court in CCOM on this issue was expressed in the following terms (at 295): "The NRDC case at 275-277 requires a mode or manner of achieving an end result which is an artificially created state of affairs of utility in the field of economic endeavour. In the present case, a relevant field of economic endeavour is the use of word processing to assemble text in Chinese language characters. The end result achieved is the retrieval of graphic representations of desired characters, for assembly of text. The mode or manner of obtaining this, which provides particular utility in achieving the end result, is the storage of data as to Chinese characters analysed by stroke-type categories, for search including 'flagging' (and 'unflagging') and selection by reference thereto." 123 An issue analogous to that in the present case was considered by the United States Court of Appeals for the Federal Circuit in State Street Bank & Trust Co v Signature Financial Group 149 F 3d 1368 (1998). The relevant United States statute (35 USCA s 101) refers to four categories of statutory subject matter for patentability: "Any new and useful process, machine, manufacture or composition of matter". The case concerned a patent for a data processing system for implementing an investment structure. Mutual funds ("Spokes") pooled their assets in an investment portfolio ("Hub") organised as a partnership. This system allowed for consolidation of costs of administering the funds combined with the tax advantages of a partnership. In particular, it provided means for a daily allocation of assets for two or more Spokes that were invested in the same Hub. The system determined the percentage share that each Spoke maintained in the Hub, while taking into consideration daily changes both in value of the Hub's investment securities and the concomitant amount of each Spoke's assets. 124 Previous decisions of the United States Supreme Court had held that mathematical algorithms are not patentable subject matter to the extent that they are merely abstract ideas. However, in State Street the Court of Appeals held (at 1373) that the transformation of data representing discrete dollar amounts by a machine through a series of mathematical calculations into a final share price constituted a practical application of a mathematical algorithm formula and calculation because it produced "a useful, concrete and tangible result" in the form of a final share price momentarily fixed for recording and reporting purposes. 125 Reliance had been placed on the judicially created "business method" exception to statutory subject matter. The Court's response (at 1375) was terse, to the point of brutality: "We take this opportunity to lay this ill-conceived exception to rest". 126 Their Honours considered that business methods should be subject to the same legal requirements for patentability as applied to any other process or method.

[35]

Conclusion 127 In my opinion the Patent does produce an artificial state of affairs in that cards can be issued making available to consumers many different loyalty programs of different traders as well as different programs offered by the same trader. All this can be done instantaneously at each retail outlet. So what is involved here is not just an abstract idea or method of calculation. Moreover this result is beneficial in a field of economic endeavour - namely retail trading - because it enables many traders (including small traders) to use loyalty programs and thereby compete more effectively for business. Such competition is in turn beneficial to consumers, both in the general sense that competition is good and in the sense that they can obtain benefits in the form of discounts and free goods and services. 128 What is disclosed by the Patent is not a business method, in the sense of a particular method or scheme for carrying on a business - for example a manufacturer appointing wholesalers to deal with particular categories of retailers rather than all retailers in particular geographical areas, or Henry Ford's idea of stipulating that suppliers deliver goods in packing cases with timbers of particular dimensions which could then be used for floorboards in the Model T. Rather, the Patent is for a method and a device, involving components such as smart cards and POS terminals, in a business; and not just one business but an infinite range of retail businesses. CCOM and the English decisions referred to therein are in my opinion indistinguishable. The respondents' argument for distinguishing CCOM - the supposed lack of "physically observable effect" - turns on an expression not found in CCOM itself. Nor does such a concept form part of the Full Court's reasoning. In any event, to the extent that "physically observable effect" is required (and I do not accept that this is necessarily so) it is to be found in the writing of new information to the Behaviour file and the printing of the coupon. 129 The State Street decision is persuasive. It may be true, as the respondents argue, that United States patent law has a different historical source owing little or nothing to the Statute or Monopolies. The Constitution of the United States, Article 1, s 8, cl 8 confers power on Congress "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries". But the social needs the law has to serve in that country are the same as in ours. In both countries, in similar commercial and technological environments, the law has to strike a balance between, on the one hand, the encouragement of true innovation by the grant of monopoly and, on the other, freedom of competition. 130 As to the Microcell point, it cannot amount to the mere new use of a known article in a manner for which the known properties of that article make it suitable to have devised a particular method of processing data using a chip card, the properties of which (particularly its limited memory space) presented difficulties which were overcome only after much time and effort.

[42]

The alleged inventive step 139 Although the respondents carry the onus on this and all other revocation issues, it is convenient to identify at the outset what the applicant claims to be the inventive step. M Haddad characterised the step as the "dynamic use of memory". In cross-examination (T 84) he described that as "… the difference between having pre-allocated loyalty programs in the chip to being able to dynamically allocate loyalty programs in the chip as you use the card in the store". 140 He accepted that the idea of using memory dynamically was a well known computer systems technique in 1995, but not in that context. 141 Later M Haddad said (T 89): "It comes down to absence of information being something very important. That was the trigger point that - it was like - the light bulb that flashed when we came up with the solution was when we were trying to look at how do you do a system where you want to go to a number of restaurants, for example. In France you can go to any restaurant. There are many restaurants that are not part of chains and, say, the restaurant wants to give you a free cocktail on your visit and then perhaps subsequent visits they don't do anything or they give you then a free dessert after your fourth visit. The trick, when we were thinking through that kind of thing - the type of thinking at the time was that you would need to know beforehand all of the restaurants that you'd be working with and have them all in there so that you can go and see if you have been to that restaurant before or not. The interesting thing and what we discovered was that in fact if there is no information there, that signifies a lot. If you go to the restaurant and you scan through the Behaviour file and you see that you have not been to this restaurant, that is significant information because it's telling you that it's your first visit there. So it's your first visit there. You give the free cocktail. You add the information into one of the slots that you drew there and then you can either let it stand there and no longer give anything else, or if the merchant's program is then to give you a free dessert at your third visit then you are able to add points information to count the number of visits and then trigger the free dessert. So it relates to the behaviour even if it is empty, because you know that the customer has not been to this restaurant." 142 And later (T 110): "So that's what I was saying earlier, it's the reverse. It's the lack of information that all of a sudden appeared very important. Prior to that the information had to be loaded in the card, I had to have the coupon for that cocktail to be able to pull it out when I go to the restaurant. That's how most people were thinking about loyalty programs as well. If I want the loyalty program for the restaurant, somehow it needs to be in my card and then when I go use it, I update it and that's … The first occasion information, that was the light bulb that went off and then by saying 'Well now that I've got that first occasion information I can envision having other pieces of information that are tacked on to that piece there'. So it could start out simply like the cocktail example that simply, 'This is my first visit so I get that free cocktail'. But it's not going to stop there, it needs to go further because you can say, 'At the fifth visit then let's give a free dessert. At the tenth visit give a two for one meal'. So that's where the link to the points file comes in and you have a point of departure that allows you then to begin going a lot further. But that point of departure was based on the lack of that information in the card and then adding it in. So the technology of writing a file and reading a file, I mean, that's there, that's been around, that's not what we're claiming. 143 Counsel for the respondents pointed out that the expression "dynamic use of memory" does not appear in the specification of the Patent itself. Reference to the expression by the applicant's witnesses was, they said, a case of "recent invention". 144 In final submissions the respondents said that the applicant "… is driven to say (M Haddad's 'light bulb') that this absence of information is a file, relating to the behaviour of the card holder towards the trader." 145 If this is meant to suggest that M Haddad was not genuine, I note that such a proposition was not put to him in cross-examination. I accept M Haddad, both in relation to this evidence and generally, as a truthful and reliable witness. His evidence just quoted is persuasive on the issue of obviousness. 146 Moreover, it does not seem to me to matter if the inventive step can be described or encapsulated in words which do not appear in the specification. After all, when issues of obviousness arise, the inventive concept has to be explained to the judge, a person who will not usually qualify as a skilled addressee. In Gerald Gunther's biography "Learned Hand - The Man and the Judge" (Alfred A Knopf, New York, 1994) at 314 the author quotes a pre-conference memo of the judge to other members of the Second Circuit Court of Appeals in a case concerning a new kind of zipper. Learned Hand said that the language used in court ("jargon" as Gunther described it) was merely "an easy way of disguising the question, which really is, whether the collocation of the old slider with the old lock required more than the ingenuity of an ordinary boob, of a judge for instance."

[44]

The respondents' case 148 The respondents relied on the evidence of two experts. Dr Cyril Brookes is the Managing Director and Chief Executive Officer of Grapevine Technologies Ltd which "provides software and services that enable corporations to maximise their use of information resources and key staff". He has held that position since 1995. Prior to that he was from 1974 Professor of Information Systems at the University of New South Wales. Before taking up that academic appointment he had from 1964 to 1974 worked in various senior positions in data processing with BHP Ltd. Dr Roger Clarke through his company Zamax Consultancy Pty Ltd provides "consultancy support to corporations and governments in relation to strategic and public policy aspects of electronic commerce, information infrastructure, data surveillance and privacy". For ten years up till 1995 he was a senior academic at the Australian National University performing research and teaching in information technology and information management and for twenty years prior to that he engaged in professional managerial and consultancy roles predominantly in the information technology industry. In relation to chip cards he has done academic research and undertaken consultancy assignments for corporations and government agencies in Australia and Hong Kong. 149 Clearly both gentlemen have had distinguished careers and I do not mean to be in any way disrespectful when I say that there is a basic problem with their evidence. That problem is, as the applicant submits, that they have combined their own knowledge with information gained from certain publications which were not gathered together by them in the course of their professional lives, but rather, were selected and compiled for the purpose of this case by the respondents and then given to them. It is therefore not possible to determine what is being asserted by them as their own knowledge at the priority date. 150 Thus Dr Brookes deposed in one of his affidavits that his comments on common general knowledge are based "on my knowledge of the computing and systems design field at the time, and on what I have read in the newsletters and other commonly available publications cited in par 11 of this opinion." Similarly Dr Brookes said (T 233-4) that his conclusions about what formed part of common general knowledge were based on the assumption that the addressee would have had available and would have read all the publications provided to him. Some of those publications are patent specifications. They have been selected from professional searches conducted on behalf of the respondents. The non-patent publications have been carefully selected for the purpose of this litigation from a much larger collection of documents in the possession of the respondents. 151 Dr Clarke's comments on general knowledge are also expressly based upon the selected documents. He had not seen the patent documents and of the non-patent documents had seen only four and or possibly five. 152 In my opinion the applicant was justified in submitting that this approach manifested the vice spoken of by Aickin J in Minnesota Mining and Manufacturing Co v Beiersdorf Australia Ltd (1980) 144 CLR 253 at 293: "An allegation of want of inventive step is not made out by saying you may take one or two, or twenty-one or twenty-two, prior publications and then select from them appropriate extracts or pieces of information, which will add up to the invention claimed and so demonstrate that it was obvious. So to proceed is to mistake the nature of an invention and the nature of the objection of obviousness. The question is, is the invention itself obvious, not whether a diligent searcher might find pieces from which there might have been selected the elements which make up the patent." 153 There is the further problem that statements by an expert as to what "would have been obvious" raise questions as to what the expert understands by the concept of obviousness. In Aktiebolaget Hassle v Alphapharm Pty Ltd (2000) AIPC 91-636 at [69] the Full Court said: "Such evidence ought not to be received unless it is first demonstrated that the expert understands the concept of obviousness as explained in the 1990 Act and the authorities." 154 I have some doubt whether this requirement has been met in the present case. The respondents' solicitors' letter of instructions to the witnesses asked amongst other things whether the hypothetical skilled person "… would have thought it to be obvious or routine to do what the applicant claims as its invention in the WRT patent." Dr Brookes speaks of claim 1 of the Patent being "obvious or a 'routine next step'". Likewise Dr Clarke identifies as the question of whether the invention of the Patent was "obvious to, or a natural next step for, persons skilled in the relevant art in the light of the knowledge readily available at the time". However, neither witness expounded his understanding of this concept. Since the Full Court speaks of this deficiency as a matter of admissibility and no objection was taken I do not reject the evidence on this ground, but it affects weight. 155 The respondents submitted that the hypothetical skilled addressee could be expected to have knowledge of the following matters: (i) The activity of processing loyalty cards at the time of payment at a trader's. (ii) The granting of specific benefits depending upon the previous behaviour of a customer towards the trader for example as in Wizard/Transcard a free bus ride after ten. (iii) The sending of discount coupons through the post. (iv) The issue by retail stores of cards (which may or may not be smart cards) bearing individual numbers associated with a customer which may contain information which will automatically be detected by a POS reader. (v) Providing coupons to customers as rewards in loyalty schemes. (vi) Keeping an ongoing tally of points as a convenient means of summarising past consumer behaviour, for example in frequent flyer schemes. (vii) Keeping an ongoing record of consumer behaviour on a smart card or another data base. (viii) Using data encryption to store data on smart card. (ix) Dynamic indexing of fields within a computer program or data base. (x) The general concepts of recency, frequency and monetary value as a basis for organising loyalty and inventive incentive schemes. (xi) Storing customer information on smart cards.

[45]

Conclusion 156 The principles relating to obviousness and inventive step have recently been restated by the Full Court in Alphapharm at [31] to [37]. I incorporate that passage by reference. I note the observation of Judge Learned Hand in Sach v Hartford Electric Co 47 F 2d 743 (1931) at 748 (1931): "[I]nventions depend upon whether more was required to fill the need than the routine ingenuity of the ordinary craftsman. Such a standard is no more of a will-of-the-wisp than others which the law adopts, reasonable care, reasonable notice and the like; the effort is to fix that standard by recourse to average propensities, dispositions and capacities. Any attempt to define it in general terms has always proved illusory; it is best to abandon it." 157 Since the respondents' attack on the grounds of obviousness was largely based on the proposition that it was easy, with existing technology, to put the inventors' idea into effect, reference might be made to the following passage from NRDC (102 CLR at 264): "But where a person finds out that a useful result may be produced by doing something which has not been done by that procedure before, his claim for a patent is not validly answered by telling him that although there was ingenuity in his discovery that the materials used in the process would produce the useful result no ingenuity was involved in showing how the discovery, once it had been made, might be applied. The fallacy lies in dividing up the process that he puts forward as his invention. It is the whole process that must be considered; and he need not show more than one inventive step in the advance which he has made beyond the prior limits of the relevant art. This is perhaps no where more clearly put than it was by Fletcher Moulton LJ in Hickton's Patent Syndicate v Patents and Machine Improvements Co Ltd (1909) 26 RPC 339 at 347-348 when he said of Watt's invention for the condensation of steam, out of which the steam engine grew: 'Now can it be suggested that it required any invention whatever to carry out that idea when once you had got it? It could be done in a thousand ways and by any competent engineer, but the invention was in the idea, and when he had once got that idea, the carrying out of it was perfectly easy. To say that the conception may be meritorious and may involve invention and may be new and original, and simply because when you have once got the idea it is easy to carry it out, that that deprives it of the title of being a new invention according to our patent law, is, I think, an extremely dangerous principle and justified neither by reason nor authority.'" 158 In coming to a conclusion that the respondents have not made out a case of obviousness, one cannot help but be influenced by a consideration of the field of the invention. This field concerns the application of state of the art information technology to large scale retail operations in leading industrialised countries. The financial stakes were high. We are not concerned with an improved model of button-up boot. The vast array of prior art unearthed by the respondents shows that many people - no doubt highly talented - were working in the field without having come up with the invention. It took the respondents themselves twelve months to progress from their Wizard/Transcard to CiT/Transcard system. As is recounted above ([9] to [18]), the applicant's parent in its work with Carte Jeunes encountered obstacles and went down blind alleys. It is hard to ignore the comment that if what the inventors did was all that obvious, somebody else would have done it. 159 I accept the respondents' submission that the hypothetical skilled addressee would have been aware of the facts and circumstances (i) to (xi) above. However, I am not satisfied that there was no inventive step in the inventors going beyond that knowledge to produce the invention of the Patent.

[49]

x clarity 164 Section 40(3) of the Act provides that the claim or claims of a specification must be "clear and succinct". 165 The respondents' first argument runs along these lines. The inventor (M Haddad) and the applicant's experts have sworn that they read terms in the specification in a way which was "radically different" from the construction advanced by the respondents. So if the respondents' construction is accepted, the fact that skilled addressees make a mistake means that the terms are ambiguous. Even if a court itself is able to resolve an ambiguity (and in the respondents' favour), the fact remains that skilled addressees cannot. 166 This is akin to shooting two birds with one barrel. The respondents have their construction accepted, and so win on infringement, but because their construction is problematic (albeit correct) the court finds lack of clarity, so the respondents win on revocation. 167 When a court construes any document there are usually two (or more) possible meanings. Were this not so, a construction issue would not have arisen in the first place. In Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Barwick CJ (with the agreement of McTiernan, Kitto and Windeyer JJ) said (at 436-437): "But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction: and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it. Lord Tomlin's words in this connexion in Hillas & Co. Ltd. v. Arcos Ltd. (1932) 147 LT 503 at 512 ought to be kept in mind. So long as the language employed by the parties, to use Lord Wright's words in Scammell (G.) & Nephew Ltd. v. Ouston [1941] AC 251 is not 'so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention', the contract cannot be held to be void or uncertain or meaningless. In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning, as distinct from absence of meaning or of intention, be resolved." 168 This statement of principle is equally applicable to the construction of a patent specification. 169 The respondents then argued that if the applicant's construction is adopted certain terms are lacking in clarity, notably "coupon", "Behaviour file" and "behaviour", "a coupon is or is not printed on the basis of the information arising from the contents of the said memory", "a specified algorithmic processing", "the nature of the first, second or xth visit", "the coupon is printed only if the number of points contained in the Points file is greater than the specified value "when read in conjunction with" and the said coupon is or is not printed on the basis of the result of the said algorithmic processing" and "new information is written to the Behaviour file … on the basis of the result of the said algorithmic processing". 170 The short answer to this is that neither Dr Brookes nor Dr Clarke nor any other witness called by the respondents said that they could not make something fall in with the claims of the specification. The evidence of M Haddad was that his own programmers needed no more than a draft of the patent specification to make the functional system of the patent. The only witness called by the respondent who had practical experience of systems of this nature, Mr Garton, did not claim to be unable to read the Patent.