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Evaluating Patentability of Software and Business Method Inventions

October 29, 2014

 

On June 19, 2014, the Supreme Court of the United States held in Alice Corp. v. CLS Bank Int’l that Alice Corp’s claims was ineligible for patent protection under 35 U.S.C. §101 because they were directed to an abstract idea.[1]

 

The Claim

Petitioner, Alice Corporation, was the assignee of several patents that disclose schemes to manage certain forms of financial risk. The invention “enables the management of risk relating to specified, yet unknown, future events. In particular, the claims are designed to facilitate the exchange of financial obligations between two parties by using a computer system as a third-party intermediary. The intermediary creates shadow credit and debit records that mirror the balances in the parties’ real-world accounts at exchange institutions, [and] updates the shadow records in real time as transactions are entered. [This] allow[s] only those transactions for which the parties’ updated shadow records indicate sufficient resources to satisfy their mutual obligations.” The result is that the “intermediary instructs the relevant financial institutions to carry out the permitted transactions…thus mitigating the risk that only one party will perform the agreed-upon exchange.” Alice’s claims patent protection for (1) the foregoing 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 of exchanging obligations.[2]

Respondents, CLS Bank International, operates a global network that facilitates currency transactions. It filed a suit against Alice Corp. in 2007 seeking a declaratory judgment that the claims at issue are invalid, unenforceable, or not infringed. Alice Corp. counterclaimed, alleging infringement.

 

Procedural History

The District Court held that all of the claims are patent ineligible because they are directed to the abstract idea of “employing a neutral intermediary to facilitate simultaneous exchange of obligation in order to minimize risk.”[3] Alice Corp. appealed and the Federal Circuit initially reversed, holding that “after taking all of the claim recitations into consideration—it is not manifestly evident that a claim is directed to a patent ineligible abstract idea.”[4] On rehearing en banc, the Federal Circuit vacated its opinion and affirmed the judgment of the District Court.

 

Patent Eligibility for Software and Business Methods before Alice Corp.

The Court has answered questions regarding the patentability of software in previous decisions. However, due to its skepticism of altering the intent of Congress, the courts have narrowed their decisions to answer only the particular question in its instant cases.[5]  In Gottschalk v. Benson, the Supreme Court held that a mathematical formula with no substantial practical application exception in connection with a digital computer cannot be patented.[6]  Although the Court provided some direction in the area of software patents, there was still ambiguity with how much connection a claim must have to a computer to be patentable. Six years later, in Parker v. Flook, the Court revisited this issue and held that the applicant’s method for updating alarm limits was not patentable because the only novel feature in the claim, which did consist of the use of computers, was a mathematical formula.[7] This holding revealed that just because a mathematical formula is connected to a computer, does not mean that it is patentable. In an attempt to clarify the role of mathematical formulas as they relate to computer devices, the Court in Diamond v. Diehr held that “when a claim containing a mathematical formula implements or applies that formula in a structure or process which, when considered as a whole, is performing a function which the patent laws were designed to protect (e. g., transforming or reducing an article to a different state or thing), then the claim satisfies the requirements of § 101.”[8] This indicates that just because a mathematical formula is used in the claim and has an integral role, does not mean that the claim is ineligible.

 

In Bilski v. Kappos, the Court held that the applicant’s method of hedging risk by communicating and negotiating with the consumers and suppliers of a commodity was an abstract idea and therefore patent-ineligible.[9] In affirming, the Federal Circuit attempted to clarify software patentability by concluding that a claimed process is patent-eligible if it passes the machine-or-transformation test. The test provides that “if the claim (1) ties to a particular machine or apparatus, or (2) transforms a particular article into a different state or thing” it is patent eligible.[10] It found that the method of hedging risk did not pass the test, therefore supporting the rejection of the application. On appeal, the Supreme Court, however, held that the machine-or-transformation test is not the sole test for determining the patent eligibility of a process, and the applicant’s method was an unpatentable abstract idea.[11] This holding, however, did create a clear definition of patentable processes, stating that “the Court once again declines to impose limitations on the Patent Act that are inconsistent with the Act’s text. The patent application here can be rejected under our precedents on the unpatentability of abstract ideas. The Court, therefore, need not define further what constitutes a patentable “process,” beyond pointing to the definition of that term provided in § 100(b) and looking to the guideposts in Benson, Flook, and Diehr.” This case did little to clarify software patent eligibility, creating a need for further clarification.

 

The Impact of Software and Business Method Patents after Alice Corp. 

In its unanimous decision, the Supreme Court affirmed the Federal Circuit’s holding that the claims are invalid because they are abstract ideas.[12] The Court begins its analysis of this case with understanding Section 101 of the Patent Act which states, “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”[13] In analyzing this, the Court recalls that it has formerly held that laws of nature, natural phenomena, and abstract ideas are not patentable.[14] It restated that “monopolization of [abstract ideas] through the grant of a patent might tend to impede innovation more than it would tend to promote it.”[15] In following Diamond v. Diehr, the Court further stated that an invention is not rendered ineligible for patent simply because it involves an abstract concept. Moreover, in following Gottschalk v. Benson, the Court stated that applications of such concepts to new and useful ends remain eligible for patent protection.[16]Ultimately, the Court adapted the two-part test in Mayo Collaborative Services v. Prometheus Laboratories, Inc. [17]

 

The Test

First, courts must determine whether the claims at issue are directed to one of the patent-ineligible concepts (i.e. a law of nature, a natural phenomenon, or an abstract idea). If so, courts must then determine whether the elements of each claim, both individually and as an ordered combination, transform the nature of the claim into a patentable application. In applying the first part of the test, the Court determined that Alice Corp’s claims are drawn to the abstract idea of intermediated settlement. It reasoned that like the risk hedging in Bilski, the concept of intermediated settlement is a “fundamental economic practice long prevalent in our system of commerce.”[18] In analyzing the second part of the test, the Court also concluded that the method claims, which merely require generic computer implementation, fail to transform the abstract idea into a patentable invention. 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].”[19] Mayo made clear that transformation into a patent-eligible application requires “more than simply stat[ing] the [abstract idea] while adding the words ‘apply it.’”[20] Benson, Flook, and Diehr demonstrate that the mere recitation of a generic computer cannot transform patent-ineligible abstract ideas into a patent-eligible invention. Based on its analysis, the Court held that Alice Corp’s method claims simply recite the concept of intermediated settlement as performed by a generic computer. Under the precedents, that is not enough to transform an abstract idea into a patent-eligible invention.[21]

 

Conclusion

The holding in Alice Corp. did not change previous holdings relating to software and business method patents, but finally established a clearer test to evaluate patentability. Based on the holding in Alice Corp., litigants should re-evaluate any pending actions involving claims that arguably may be directed at patent-ineligible concepts, such as abstract ideas. Inventions that could be seen as well-known commercial practices or methods of organizing human activity may face greater scrutiny. In making these evaluations, it is crucial to apply the two-part test to avoid a challenge on patentability.[22]

 

[1] Supreme Court of the United States, Alice Corporation PTY. LTD. Petitioner v. CLS Bank International et al. (Jun. 19, 2014), http://www.supremecourt.gov/opinions/13pdf/13-298_7lh8.pdf.

[2] Id.

[3] CLS Bank Int’l v. Alice Corp. Pty., 768 F. Supp. 2d 221, 252 (D.D.C. 2011) rev’d, 685 F.3d 1341 (Fed. Cir. 2012) reh’g en banc granted, opinion vacated, 484 F. App’x 559 (Fed. Cir. 2012) and aff’d, 717 F.3d 1269 (Fed. Cir. 2013) aff’d, 134 S. Ct. 2347, 189 L. Ed. 2d 296 (U.S. 2014).

[4] CLS Bank Int’l v. Alice Corp. Pty., 685 F.3d 1341, 1352 reh’g en banc granted, opinion vacated, 484 F. App’x 559 (Fed. Cir. 2012)

[5] “We must proceed cautiously when we are asked to extend patent rights into areas wholly unforeseen by Congress.” Parker v. Flook, 437 U.S. 584, 596 (1978).

[6] Gottschalk v. Benson, 409 U.S. 63, 71 (1972)

[7] 437 U.S. at 594.

[8] Diamond v. Diehr, 450 U.S. 175, 192 (1981)

[9] Bilski v. Kappos, 561 U.S. 593, 130 S. Ct. 3218, 3231, 177 L. Ed. 2d 792 (2010)

[10] In re Bilski, 545 F.3d 943, 954 (Fed. Cir. 2008) aff’d but criticized sub nom. Bilski v. Kappos, 561 U.S. 593, 130 S. Ct. 3218, 177 L. Ed. 2d 792 (2010).

[11] Bilski v. Kappos, 561 U.S. 593, 130 S. Ct. 3218, 3231, 177 L. Ed. 2d 792 (2010)

[12] Alice Corp. Pty. Ltd. v. CLS Bank Int’l et al., No. 13-298 (U.S. June 19, 2014).

[13] 35 U. S. C. §101

[14] Association for Molecular Pathology v. Myriad Genetics, Inc., 569 U. S. ___, ___ (2013)

[15] Alice Corp. Pty. Ltd. v. CLS Bank Int’l et al., No. 13-298 (U.S. June 19, 2014) (citing Mayo v. Prometheus, 566 U.S. ___ (2012))

[16] Alice Corp. Pty. Ltd. v. CLS Bank Int’l et al., No. 13-298 (U.S. June 19, 2014)

[17] Mayo v. Prometheus, 566 U.S. ___ (2012)

[18] Id.

[19] Id.

[20] Id. (citing Mayo, Supra, at ___)

[21] Id.

[22] Supreme Court of the United States, Alice Corporation PTY. LTD. Petitioner v. CLS Bank International et al. (Jun. 19, 2014), http://www.supremecourt.gov/opinions/13pdf/13-298_7lh8.pdf.

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