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Article: The Supreme Court Revisits Patent Eligible Subject Matter in Alice v. CLS Bank

September 01, 2014
Business Litigation Reports

The Supreme Court recently addressed the question of patent eligibility under Section 101 of the Patent Act, holding a software patent in the financial services industry invalid for failing to meet the minimum requirements of Section 101. This decision calls into question the value of software patents and reinforces Section 101 as a potentially powerful defense to infringement allegations directed to such patents. The decision has already had a significant impact, as courts around the U.S. have granted dispositive motions based on it.

An Overview of Patent Eligibility Under Section 101
The Patent Act states that “[w]hoever 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 therefore, subject to the conditions and requirements of this title.” 35 U.S.C. § 101. There are, however, certain implicit exceptions to this grant. Specifically, Section 101 has been found to exclude protection for “[l]aws of nature, natural phenomena, and abstract ideas.” Diamond v. Diehr, 450 U.S. 175, 185 (1981). This restriction has been put in place to avoid “monopolization of [the basic tools of scientific and technological work that]…might tend to impede innovation more than it would tend to promote it,” thwarting the main objective of the patent laws. Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. ___, 132 S. Ct. 1289, 1293 (2012).

In recent years, the Supreme Court has addressed the line between a patent-ineligible “building block” and a patent-eligible transformation of this building block into something more.

The Court has addressed patent eligibility in relation to laws of nature and natural phenomena, particularly within the life sciences. For example, in Mayo, the Court addressed patent eligibility of the relationships between concentrations of certain metabolites in the blood and the likelihood that a thiopurine drug dosage will prove ineffective or cause harm. 132 S. Ct. at 1294. In Association for Molecular Pathology v. Myriad Genetics, Inc., the Court addressed patent eligibility of a naturally occurring DNA segment. 559 U.S. __, 133 S. Ct. 2107, 2111 (2013).

The Court has also dealt with patent eligibility as it relates to known abstract ideas carried out through software running on a computer. For example, the Court has found patent claims reciting an algorithm for converting binary-coded decimal numerals into pure binary form ineligible for patent protection. Gottschalk v. Benson, 409 U.S. 63, 67 (1972). Patent claims directed to a mathematical formula for computing “alarm limits” in a catalytic conversion process have also been found patent ineligible. Parker v. Flook, 437 U.S. 584, 594-95 (1978). And in Bilski v. Kappos, the Court found a claim directed to how commodities buyers and sellers in the energy market can protect, or hedge, against the risk of price changes ineligible for patent protection. 516 U.S. 593, 599 (2009).

The Court Revisits and Refines the Application of Its Test for Patentability Under Section 101
Most recently, the Court again addressed the question of patent eligibility in Alice Corp. v. CLS Bank Int’l., 573 U.S. __ , 134 S.Ct. 2347(2014). In Alice, the patentee was the assignee of several patents disclosing a scheme for mitigating “settlement risk”—i.e., the risk that one party to a financial transaction will not satisfy its obligations to the other party—by using a computer system as a third-party intermediary. The patents, which generally share a common specification, explain that the “invention relates to methods and apparatus, including electrical computers and data processing systems applied to financial matters and risk management.” Alice, 134 S.Ct. at 2352.

The claims at issue in Alice recite a scheme designed to facilitate the exchange of financial obligations between two parties by using a computer system as a third-party intermediary. This intermediary creates “shadow” credit and debit records that mirror the balances in the parties’ real-world bank accounts. The intermediary updates these records in real time as transactions are entered and limits allowable transactions to those “for which the parties’ updated shadow records indicate sufficient resources to satisfy their mutual obligations.” At the end of the day, the intermediary instructs the applicable financial institutions to implement the “permitted” transactions in accordance with the updated shadow records. By tracking parties’ resources in real time and approving only those transactions for which the parties have sufficient resources, the risk that only one party will perform the agreed-upon exchange is mitigated. Claims directed to this scheme are presented in three formats: (1) a method for exchanging obligations; (2) a computer system configured to carry out the method for exchanging obligations; and (3) a computer-readable medium containing program code for performing the method for exchanging obligations. Each of these claims requires the use of a computer, either expressly recited or required for performance of applicable method steps.

Below, the district court, relying on Bilski, held that all of the claims of Alice’s patents were patent ineligible under Section 101 because they are directed to the abstract idea of “employing a neutral intermediary to facilitate simultaneous exchange of obligations in order to minimize risk.” 768 F. Supp. 2d 221, 252 (D.D.C. 2011). On appeal, a divided panel of the United States Court of Appeals for the Federal Circuit reversed, holding that it was not “manifestly evident” that Alice’s claims were directed to an abstract idea. 685 F.3d 1341, 1352, 1356 (Fed. Cir. 2012). The Federal Circuit then granted rehearing en banc, at which time it vacated the panel opinion and affirmed the judgment of the district court. 717 F.3d 1269, 1273 (Fed. Cir. 2013). In affirming the district court, the Federal Circuit relied on the Supreme Court’s decision in Mayo, reasoning that a court must first “identif[y] the abstract idea represented in the claim” and then determine “whether the balance of the claim adds ‘significantly more.’” Id. at 1286. In this instance, the Federal Circuit found that the claims of Alice’s patents did not; they were “drawn on the abstract idea of reducing settlement risk by effecting trades through a third-party intermediary” and the use of a computer to manage this risk by maintaining, adjusting, and reconciling shadow accounts added nothing of substance to this abstract idea. Id.

In addressing the Federal Circuit’s holding, the Supreme Court applied the framework for distinguishing unpatentable laws of nature, natural phenomena, and abstract ideas from patent-eligible applications of those concepts that it established in Mayo. The Mayo framework calls, first, for a determination of whether the claims at issue are directed to a patent-ineligible concept. If so, a determination is made of “[w]hat else is there in the claims before us?” The question is answered by considering the elements of the claim both individually and “as an ordered combination” to determine whether the additions “transform the nature of the claim” into something that is patent-eligible; in other words, a determination is made whether an element or combination of elements is “sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.” Mayo, 132 S. Ct. at 1294.

Petitioner argued that its claims, while describing intermediated settlement, do not recite an abstract idea. Specifically, Petitioner argued that abstract ideas are confined to “preexisting, fundamental truth[s]” that “exis[t] in principle apart from any human action.” Alice, 134 S. Ct. at 2356. The Court rejected this argument, relying on Bilski. As was the case in Bilski, the Alice patents are directed to a “fundamental economic practice long prevalent in our system of commerce.” Id. The Court further found that the use of a third-party clearing house was a “building block” of the modern economy. Id. As a result, the Court reasoned that the claimed “intermediated settlement” of the Alice patents is an abstract idea beyond the scope of Section 101. Id. at 2357.

Finding the Alice claims directed to an abstract idea, the Court then turned to the second step in the Mayo framework to identify whether the elements of the claim contain an “inventive concept” sufficient to “transform” the claimed abstract idea into a patent-eligible application. Mayo, 132 S. Ct. at 1299. Citing Benson and Flook, the Court acknowledge that “the introduction of a computer into the claims does not alter the analysis of Mayo step two,” particularly where the computer implementation was “purely conventional.” Alice, 134 S. Ct. at 2357. This was distinguished from the Court’s holding in Diehr, in which a “‘well-known’ mathematical equation” was used in a computer-implemented process to solve a technological problem in “conventional industry practice.” In that case, a thermocouple was used to record constant temperature measurements inside a rubber mold—a result that “the industry ha[d] not been able to obtain”—and a computer used these measurements to repeatedly recalculate remaining cure time using this mathematical equation. Id. at 2358 (citing Diehr, 450 U.S. at 177-78). Unlike in Benson and Flook, the additional steps in Diehr “transformed the process into an inventive application of the formula” as a function of their improvement on existing technological processes (and not their implementation on a computer). Id. (citing Mayo, 132 S. Ct. at 1299).

The Court reasoned that these cases demonstrate that neither the mere recitation of a generic computer, nor limiting the use of an abstract idea to “a particular technological environment,” is sufficient to establish patent eligibility. Id. Merely taking an abstract idea and “apply[ing] it with a computer” does not make this idea patent eligible. Id. at 2350-51 (“wholly generic computer implementation is not generally the sort of ‘additional feature’ that provides any ‘practical assurance that the process is more than a drafting effort designed to monopolize the [abstract idea] itself”) (citing Mayo, 132 S. Ct. at 1297).). Applying this rationale, the Court found that Alice’s claims do no more than simply instruct the practitioner to implement the abstract idea of intermediated settlement by virtue of generic computer functions carried out on a generic computer. The Court further found that the steps of the claims at issue amount to nothing more than the application of “electronic recordkeeping,” which the Court refers to as “one of the most basic functions of a computer.” Id. at 2359 (citing Benson, 409 U.S. at 65). And this generic application does not change when the individual claim limitations are taken “as an ordered combination,” as again the claims in their entirety merely recite the performance of intermediated settlement on a generic computer.

The Court further found that Alice’s system and computer-readable medium (or Beauregard) claims are patent ineligible for the same reasons as its method claims. The recitation of “specific hardware” configured to perform “specific computerized functions” does nothing to change the result. Id. at 2360. The “specific hardware”—e.g., a “data processing system” with a “communications controller” and “data storage unit”—is purely functional and generic. None of the recited hardware “offers a meaningful limitation beyond generally linking ‘the use of the [method] to a particular technological environment,’ that is, implementation via computers.” Id. (quoting Bilski, 561 U.S. at 610-11). Thus, the Court found the system claims to be no different from the method claims, preventing any difference in result between the two. Id. (quoting Mayo, 132 S. Ct. at 1294 (This Court has long “warn[ed]…against” interpreting Section 101 “in ways that make patent eligibility ‘depend simply on the draftsman’s art’.”)).

The Future of Software Patents?
The impact of the Court’s decision has already been seen. A multitude of courts across the country, including the Federal Circuit, have already relied on the Alice decision to invalidate software patents under Section 101. For example, in Digitech Image Tech., LLC v. Electronics for Imaging, Inc. et al, the Federal Circuit affirmed a lower court ruling that a patent directed to a device profile and a method for creating a device profile within a digital image processing system is invalid under Section 101. 758 F.3d 1344 (Fed. Cir. 2014); see also BuySAFE, Inc. v. Google, Inc., No. 2013-1575, 2014 WL 4337771 (Fed. Cir. Sept. 3,2014) (invalidating under Section 101 methods and machine-readable media encoded to perform steps for guaranteeing a party’s performance of its online transaction). Courts in Delaware, New York, California, Texas and Florida have also invalidated software patents under Section 101 since the Supreme Court’s ruling. See, e.g., Tuxis Tech., LLC v., Inc., C.A. No. 13-1771-RGA (D. Del. Sept. 3, 2014); Comcast IP Holdings I, LLC v. Sprint Communications Company L.P., et al., C.A. No. 12-205-RGA (D. Del. July 16, 2014); Dietgoal Innovations LLC v. Bravo Media LLC, 13 Civ. 8391 (PAE) (S.D.N.Y. July 8, 2014); CMG Financial Services, Inc. v. Pacific Trust Bank, F.S.B., Case No. CV 11-10344 PSG (MRWx) (C.D. Cal. August 29, 2014); Loyalty Conversion Sys. Corp. v. American Airlines, Inc., Case No. 2:13-cv-00655-WCB (E.D. Tex. Sept. 3, 2014); Every Penny Counts, Inc. v. Wells Fargo Bank, N.A., Case No. 8:11-cv-2826-T-23TBM (M.D. Fla. Sept. 11, 2014). As illustrated in these cases, the analysis will be fact intensive, focusing on the ability of a patentee to adequately persuade a Court or jury that its software-based implementation is more than merely the performance of a known, manual procedure using a computer. This will include proof that the claimed invention is directed to a tangible, hardware based implementation as opposed to merely the underlying data itself. This inquiry is also likely to include an analysis of whether the method or system at issue improves upon a known procedure, providing a solution to a problem that had not previously been (or could not be) achieved without the invention at issue. While this decision is unlikely to signify the death knell of all software patents, one thing is clear—going forward, a Section 101 defense will likely be raised in any patent infringement in which software patents are being asserted.