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Machine-or-Transformation Test Fails When Computer in Patent Claims Performs Only Calculations

July 26, 2012

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Last Month at the Federal Circuit - August 2012

Judges: Lourie (author), Prost, Wallach

[Appealed from: E.D. Mo., Judge Jackson]

In Bancorp Services, L.L.C. v. Sun Life Assurance Co. of Canada (U.S.), No. 11-1467 (Fed. Cir. July 26, 2012), the Federal Circuit affirmed the district court’s grant of SJ in favor of Sun Life Assurance Company of Canada (U.S.) (“Sun Life”) and held the patents-in-suit invalid.

Bancorp Services, L.L.C. (“Bancorp”) owns U.S. Patent Nos. 7,249,037 (“the ’037 patent”) and 5,926,792 (“the ’792 patent”), which are directed to systems and methods for administering and tracking the value of life insurance policies in separate accounts. Under separate account plans, the policy owner pays an additional premium beyond that required to fund the death benefit, and specifies the types of assets in which the additional value is invested. The value of a separate account policy fluctuates with the market value of the underlying investment assets. Stable value protected investments address that volatility by providing a mechanism for stabilizing the reported value of the policies, wherein a third-party guarantor (the “stable value protected writer”) guarantees a particular value (the “book value”) of the life insurance policy regardless of its market value. To offset the risk to a potential guarantor for providing that service, the guarantor is paid a fee and restrictions are placed on the policyholder’s right to cash in on the policy. The asserted patents “provide[] a computerized means for tracking the book value and market value of the policies and calculating the credits representing the amount the stable value protected writer must guarantee and pay should the policy be paid out prematurely.” Slip op. at 3 (alteration in original) (quoting Bancorp Servs., L.L.C. v. Hartford Life Ins. Co., 359 F.3d 1367, 1369 (Fed. Cir. 2004)).

The asserted patents disclose specific formulae for determining the values required to manage a stable value protected life insurance policy. The specification discloses, for example, creating and initializing a fund by performing particular “calculations and comparisons” to determine an “initial unit value of the policy.” Id. at 4.

Bancorp sued Sun Life for infringement of the ’792 patent. In 2002, in a separate patent infringement suit filed by Bancorp, the district court invalidated all claims of the ’792 patent for indefiniteness. See Bancorp Servs., L.L.C. v. Hartford Life Ins. Co., No. 4:00-CV-70, 2002 WL 32727071 (E.D. Mo. Feb. 13, 2002). Bancorp and Sun Life then jointly stipulated to dismiss their case due to collateral estoppel arising from the district court’s invalidity ruling in Hartford. The parties further agreed that, if the district court’s Hartford ruling was reversed on appeal, then their case would be reinstated. The district court entered a judgment of conditional dismissal. In 2004, the Federal Circuit reversed on appeal and the district court vacated the dismissal. Bancorp then filed an amended complaint adding a claim for infringement of the ’037 patent. Sun Life subsequently moved for SJ of invalidity under 35 U.S.C. § 101 for failure to claim patent-eligible subject matter. The district court stayed the briefing on Sun Life’s motion pending the Supreme Court’s decision in Bilski v. Kappos, 130 S. Ct. 3218 (2010).

After Bilski was decided, the district court granted Sun Life’s motion for SJ of invalidity under § 101 without addressing the parties’ claim construction dispute. The district court concluded that there was no meaningful distinction between the asserted “process,” “system,” and “media” claims, and that each would be analyzed as a process claim. Applying the machine-or-transformation test, the district court noted that, for the machine prong, the specified computer components are no more than objects on which the claimed methods operate, and that the central processor is nothing more than a general purpose computer programmed in an unspecified manner. When analyzing the transformation prong, the district court determined that the claims do not effect a transformation, as they do not transform the raw data into anything other than more data and are not representations of any physically existing objects. Accordingly, the district court concluded that the claims were invalid under § 101 as directed to patent-ineligible abstract ideas, and denied Bancorp’s motion for reconsideration and entered final judgment in favor of Sun Life.

On appeal, the Federal Circuit first noted that resolving claim construction disputes prior to a § 101 analysis is not required. The Court found that the parties’ disagreement boiled down to whether the claimed systems and methods require a computer. The Court found that, although the district court declined to construe the claims, the issue on appeal could be resolved. The Court proceeded to construe, holding that the asserted system claims require “one or more computers.” Specifically, the Court concluded that the system claims require particular computing devices, such as a “generator,” a “calculator,” and “digital storage.” Regarding the computer-readable medium claims, the specification explains that the plain and ordinary meaning of the term refers generally to “high density removable storage means,” such as a “compact disc.”

With regard to the method claims, the Federal Circuit first distinguished between the independent and dependent claims, finding that the plain language of the independent method claims do not require a computer and that each independent method claim is followed by a dependent claim requiring that the method be “performed by a computer.” The Court applied the doctrine of claim differentiation, which presumes that the independent claims do not require implementation on a computer.

The Court turned next to the issue of patent eligibility and concluded that, without computer limitations, the underlying inventions of those patents are abstract ideas, which are patent ineligible under § 101. The Federal Circuit explained that, under its precedent, it looks not just to the type of claim but also to the underlying invention for patent-eligibility purposes. In this case, the Court held that the district court correctly treated the system and medium claims the same for patent-eligibility purposes. For example, the Court compared the language in method claim 9 of the ’037 patent with that in medium claim 18 and system claim 1, and the only difference the Court saw between the claims is the form in which they were drafted.

The Federal Circuit disagreed with Bancorp’s argument that its claims are limited to being performed on a computer, finding that any recited computer is not integral to the claimed invention by facilitating the process in a way that a person making calculations or computations could not. The Court distinguished the claims-at-issue here with those in Research Corp. Technology, Inc. v. Microsoft Corp., 627 F.3d 859 (Fed. Cir. 2010), and found two critical differences. First, the Court found that the claimed processes in Research Corp. “plainly represented improvements to computer technologies in the marketplace.” Slip op. at 21. Second, the method in Research Corp. was dependent upon the computer components required to perform it.

The Court also distinguished SiRF Technology, Inc. v. ITC, 601 F.3d 1319 (Fed. Cir. 2010), explaining that, in SiRF, the GPS receiver is a required machine, but in the present case, the calculations could be performed entirely in the human mind. Without the computer-based limitations, the only feature left in the claims is a matter of mere mathematical computation. Therefore, the Court concluded that the district court correctly held that the ’037 and ’792 patents are invalid under § 101 because Bancorp’s claimed abstract idea impermissibly “preempt[s]” the mathematical concept of managing a stable value protected life insurance policy. The Court also rejected Bancorp’s argument that its claims are not abstract because they are limited to use in the life insurance market, because the Supreme Court in Bilski discredited a similar argument. Accordingly, the Court affirmed the district court’s decision and held that Bancorp’s ’037 and ’792 patents are invalid under § 101.

Summary authored by Fan Wu, law clerk at Finnegan.