September 2014
CIPA Journal
Authored by Timothy P. McAnulty and Anthony C. Tridico, Ph.D.
On June 19, 2014, the U.S. Supreme Court unanimously held in Alice Corp. Pty. Ltd. v. CLS Bank International et al., 573 U. S.___(2014), that claims for a computer-implemented technique of mitigating "settlement risk" in financial transactions were ineligible for patenting under 35 U.S.C. § 101. The Court's opinion was written by Justice Thomas, with a concurring opinion by Justice Sotomayor, joined by Justices Ginsburg and Breyer. Few really expected the Supreme Court to hold that clams directed to "financial matters and risk management" were patent-eligible in Alice. Indeed, the Court did not hold such. The real question of Alice, which we can now answer, was how would the Court strike down Alice Corporation's patent claims directed to computerized systems and methods "applied to financial matters and risk management." Would the Court articulate a new standard or would the Court charter a new direction in the law? The answer to both questions is an unambiguous "no." Before we get into the specifics of the Courts decision, let us set the stage with some background.
CLS Bank International and CLS Services Ltd. (collectively, "CLS Bank") filed a declaratory judgment suit in 2007 in the U.S. District Court for the District of Columbia, alleging that several patents assigned to Alice Corporation Pty. Ltd. ("Alice") are invalid, unenforceable, and not infringed. The court granted summary judgment of invalidity under 35 U.S.C. § 101 on the basis that both the system and method claims are not directed to patent-eligible subject matter because they claim an abstract idea. On appeal, a divided panel of the Federal Circuit initially overturned the district court's ruling. Then the Federal Circuit granted rehearing en banc, vacated the panel decision, and affirmed the district court's decision in a fractured opinion. With the Federal Circuit's decision generating seven separate opinions from the panel, the decision reflected disharmony within the Federal Circuit and generated no majority opinion that clarified the legal standard for determining patent eligibility under 35 U.S.C. § 101. On December 6, 2013, the Supreme Court granted certiorari, and on March 31, 2014, oral arguments were held.
As characterized by the Supreme Court, the patent claims at issue relate to a computerized technique for mitigating "settlement risk," which is the risk that only one party to a financial transaction will satisfy its obligation. Alice Corporation v. CLS Bank International, 573 U. S.___(2014), Slip Op. at 2. The claims included methods for exchanging obligations, computer systems configured to perform settlement risk mitigation, and computer-readable media containing program code for implementing obligation exchange. The parties stipulated that the method claims require a computer, so it was undisputed that all of the claims at issue involve the use of a computer.
First, Alice confirms that the Mayo Collaborative Services v. Prometheus test should be used to determine if abstract ideas are ineligible under § 101. Id. at 7. Building on Mayo, the Supreme Court in Alice reiterated that abstract ideas are not patentable, because granting a monopoly over an abstract idea threatens innovation. And, to be patentable, a claim that recites an abstract idea must include "additional features" to ensure "that the [claim] is more than a drafting effort designed to monopolize the [abstract idea]." Id. at 11 (citation omitted).
Second, Alice also confirms that the same two-step Mayo analysis should be applied to all types of claims—method, system, and media claims. Id. at 16. Thus, for all types of claims, the Supreme Court made clear in Alice that it applies the single two-step framework from Mayo to assess the existence of any "additional features": (1) whether the claims at issue are "directed to one of those patent ineligible concepts," such as an abstract idea, and (2) if so, whether the claim has an "inventive concept"—an element or combination of elements "sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept itself." Id. at 7 (citation omitted). For corresponding system and media claims, if nothing of substance is added to ineligible method claims, these claims also fail to meet § 101. Id. at 10.
From the opinion, it is also clear the Supreme Court strived to strike a balance between tying up fundamental building blocks that would impede innovation while not swallowing patent law whole, because everything at its core is based on an abstract idea, law of nature or natural phenomenon:
We have "repeatedly emphasized this . . . concern that patent law not inhibit further discovery by improperly tying up the future use of" these building blocks of human ingenuity. At the same time, we tread carefully in construing this exclusionary principle lest it swallow all of patent law. "At some level, 'all inventions . . . embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas.'" Id., (quoting Mayo, slip op., at 2).
Accordingly, in applying the §101 exception, we must distinguish between patents that claim the "'buildin[g] block[s]'" of human ingenuity and those that integrate the building blocks into something more, Mayo, 566 U.S., at__(slip op., at 20), thereby "transform[ing]" them into a patent-eligible invention. The former "would risk disproportionately tying up the use of the underlying" ideas, id., at__(slip op., at 4), and are therefore ineligible for patent protection. The latter pose no comparable risk of pre-emption, and therefore remain eligible for the monopoly granted under our patent laws.
Id. at 6 (quoting Mayo) (citing Morse). As support, the Supreme Court quickly surveyed its prior § 101 cases outlining ineligible subject matter directed to an algorithm, a mathematical formula, and hedging risk. The Court noted that "[l]ike the risk hedging in Bilski, the concept of intermediated settlement is a fundamental economic practice long prevalent in our system of commerce." Id. at 7.
The Court noted that in Gottschalk v. Benson, 409 U.S. 63 (1972), for example, implementing an algorithm using a "general-purpose digital computer" was insufficient to produce a patent-eligible invention. Id. at 11-12. Similarly, in Parker v. Flook, 437 U.S. 584 (1978), implementing a mathematical formula with a conventional computer was insufficient to confer patent-eligibility. Id. at 12. By contrast, the Court noted, in Diamond v. Diehr, 450 U.S. 175 (1981), a computer-implemented method for curing rubber was found patent-eligible because it involved a process "designed to solve a technological problem" and "improved an existing technological process," but not because it was implemented using a computer. Id. at 12-13. The Court concluded that "[t]hese cases demonstrate that the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention." Id. at 13. Applying this principle, the Court found that Alice's patent claims did not involve an "inventive concept." According to the Court, the claims do not "do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer." Id.at 14.
First, the Court explicitly articulates a framework for addressing § 101 that mirrors its decision in Mayo. While Mayo involved the "natural law" exception to patent-eligibility in the context of a process for medical treatment, here the Court applied the same framework to the "abstract idea" exception in the context of a computer-implemented method for managing financial risk. Under this framework, you first determine whether the claims are directed to one of the judicially recognized exceptions. If so, you then consider the elements of each claim both individually and in ordered combination to determine if there is an inventive concept present in the claim that adds "enough" to transform an abstract idea into a patentable invention.
Second, the Court provides important, although incomplete, guidance on what constitutes an abstract idea. Surveying its prior precedent, the Court states that subject matter directed to ideas, an algorithm (Benson), mathematical formula (Flook), and hedging risk (Bilski) and using intermediated settlements (Alice) are not patent-eligible. The Court rejected the argument that abstract ideas are limited to preexisting truths existing apart from any human action. Alice makes clear that some subject matter—unquestionably subject matter that can be performed by the human mind, or is capable of replication by a human using only a pencil and paper—is probably, even if not definitely, ineligible for patent protection under current U.S. law.
The Court's opinion also provides some guidance on what must be added to a claim to qualify as "enough" to elevate the claim from an abstract idea, law of nature or natural phenomenon to render a claim encompassing these categories to be patent-eligible, based on the rubric that there must be something in the claimed invention that improves existing technology:
The method claims do not, for example, purport to improve the functioning of the computer itself. ("There is no specific or limiting recitation of . . . improved computer technology . . . "); Brief for United States as Amicus Curiae 28–30. Nor do they effect an improvement in any other technology or technical field. Instead, the claims at issue amount to "nothing significantly more" than an instruction to apply the ab¬stract idea of intermediated settlement using some un¬specified, generic computer. Under our precedents, that is not "enough" to transform an abstract idea into a patent-eligible invention [citations omitted]. Id. at 15.
According to Alice, whether viewed individually or as a combination of elements, claims must amount to "significantly more" than a patent on an abstract idea—there must be "additional features." Id. at 7. Merely, automating an abstract idea is insufficient to constitute an "inventive concept." Id. at 3. Further, if the Court finds the system claim "recite[s] a handful of generic components configured to implement the same idea" as the method claim is too, not patent eligible.
In view of Alice, parties should take a close look at their offensive and defensive patent strategies. From a patent owner's perspective, Alice requires a thorough assessment of one's patent portfolio and a reevaluation of drafting techniques. In the application stage, one may want to consider framing the invention as a technological improvement and stating how the invention solves existing technical or industry problems and improves performance. Therefore, a claim drafter is advised to include more in a claim, details of a computer, details relating to software interaction with hardware, e.g., actuation, control, etc., or other limitations relating to hardware.
From a patent owner's perspective, Alice requires a thorough assessment of one's patent portfolio and a reevaluation of application drafting techniques. In the application drafting stage, the drafter may want to consider framing the invention as a technological improvement and stating how the invention solves existing technical or industry problems and improves performance. On June 25, 2014, the PTO issued a memorandum to the examining corps, entitled, Preliminary Examination Instructions in view of the Supreme Court Decision in Alice v. CLS Bank.
Furthermore, a patent owner considering asserting an issued patent may want to consider first instituting an ex parte reexamination or reissue proceeding to provide a vehicle for amending claims and adding new claims that frame the claimed subject matter as a technological improvement. Ex parte reexamination allows the patent owner, any third party (with or without an interest in the patent), or the Director of the United States Patent and Trademark Office ("USPTO") to file a request for reexamination of any claim of a patent. Allowing the reexamination to be initiated by the patent owner provides the patent owner with a strategic opportunity to either bolster their patent or to sharpen any claims that might be ambiguous or otherwise at trial before filing a lawsuit. Before using this strategy, one should weigh the risk of intervening rights.
A patent owner which finds itself defending against a § 101 challenge, may want to consider a strategy of trying to craft arguments identifying technological innovations required by the claims. Moreover, in articulating claim constructions, the patent owner should contend that the claims require more than generic software or computer elements disputing the charge by the challenger that the claims recite mere "generic" components.
From a patent challenger's perspective, Alice further highlights the need to evaluate whether an early dispositive motion under 35 U.S.C. § 101 will conclude the litigation. In drafting such a motion, it is imperative to clearly articulate the abstract idea. Once the abstract idea is clearly articulated, it is equally important to demonstrate that the claims recite "generic" components implementing conventional functionality that do not qualify as "significantly more" under Alice. It is important to diminish the patent owner's arguments that the claims recite technological improvements in view of the prior art.
Another option is considering whether to take advantage of the Transitional Program for Covered Business Method Patents, which provides for post-grant covered business method ("CBM") reviews at the USPTO. A CBM proceeding may be preferred, as the evidentiary burden is lower compared to district court litigation. Currently, the PTO has taken the position that § 101 is an available basis for challenging claims in a CBM proceeding. A CBM review is an administrative trial conducted by the Patent Trial and Appeal Board (the Board) to determine the patentability of a patent.1 A CBM review can be a powerful tool for accused infringers wanting to challenge the validity of a patent because it does not have the limitations of other patent validity challenging tools. For example, unlike an ex parte reexamination, a CBM review is an adversarial proceeding in which the accused infringer can and does fully participate in the proceeding.2
Not all patents, however, can be the subject of a CBM review. CBM review is available only to patents that the Board determines are "covered business method patents" ("CBM patents"). USPTO regulations define a CBM patent as a patent having claims: (1) used in the practice, administration, or management of a financial product or service, and (2) that do not claim a "technological invention."3 But "financial product or service" "should be interpreted broadly" to include services complementary to banks, businesses, and sales. Covered Business Method and Technological Invention Definitions Final Rules, 77 Fed. Reg. 48,734, 48,735 (Aug. 14, 2012).
While the Supreme Court's decision has been out for nearly three months, this is an evolving area in the U.S. and we continue to monitor the activity and stay abreast of the Courts decisions. Unfortunately, the Supreme Court ruling did not established a safe harbor for software patents by providing examples of technical software patents that meet the test. While the Court has clearly left room for software patents, patents that take an abstract idea implemented on a "generic" computer that does not add "significantly more" are not patent eligible. The Alice decision is narrowly focused on issues that relate to abstract ideas—for example, business methods—but the decision left practitioners wanting more. Stay tuned: we will continue to provide further guidance on these and other lessons from the Courts and the Board in the coming months.
Endnotes
1 See 37 C.F.R. § 42.300(a).
2 See 37 C.F.R. § 42.300(a).
3 See 37 C.F.R. § 42.301(a) ("Covered business method patent means a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.").
Originally printed in CIPA Journal. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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