On June 19, 2014, the United States Supreme Court issued its opinion in Alice Corp. Pty. Ltd. v. CLS Bank International, No. 13-298, addressing the question of when patents claiming aspects of computer software satisfy the patentable subject matter requirement of 35 U.S.C. § 101. In yet another unanimous opinion (albeit one with a very short concurrence from three of the Justices) authored by Justice Clarence Thomas, the Supreme Court ruled that the method, system and computer media claims under review all claimed an abstract idea and thus failed to meet the requirements for patentable subject matter. As the Court stated, “merely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention.”
The High Court thus was able with one voice to resolve an issue that had utterly divided the en banc Federal Circuit, which famously could not produce any clear majority on the exact same question involving the exact same claims. In so holding, the Court liberalized a major defense to patent claims drawn to computer media by stating clearly that the mere recitation of the use of a general purpose computer cannot transform an otherwise abstract idea into patent-eligible subject matter. However, the Court also left open the question of precisely what is an “abstract” idea in the context of software patents, suggesting that this issue may become a source of ongoing investigation by the lower courts.
The case began in 2007 when CLS filed suit seeking a declaratory judgment of non-infringement, invalidity and unenforceability of Alice’s patents. Alice countersued alleging infringement of its patents, which described a process in a computerized trading platform for two parties to conduct financial transactions, such as stock trades, which are then settled by a third party. More specifically, the claims at issue related to a computerized scheme for mitigating “settlement risk” – i.e., the risk that only one party to an agreed-upon financial exchange will satisfy its obligation. In particular, the claims were designed to facilitate the exchange of financial obligations between two parties by using a computer system as a third-party intermediary.
In 2009, CLS filed a motion for summary judgment arguing that it could not infringe Alice’s patents because those patents were not eligible under 35 U.S.C. § 101, which reads: “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.” The U.S. District Court for the District of Columbia granted CLS’s motion in 2011, finding that Alice’s patent claims-at-issue were “directed to an abstract idea of employing an intermediary to facilitate simultaneous exchange of obligations in order to minimize risk.” CLS Bank Int’l v. Alice Corp. Pty. Ltd., 768 F. Supp. 2d 221, 243 (D.D.C. 2011).
Alice appealed to the U.S. Court of Appeals for the Federal Circuit. On July 9, 2012, a split panel of the Federal Circuit reversed the district court’s decision and held that the claims at issue covered patent-eligible subject matter. The majority decision, written by Judge Richard Linn and joined by Judge Kathleen O’Malley, found that the claims were not drawn to mere “abstract ideas” but rather were directed to “practical applications of invention.” CLS Bank Int’l v. Alice Corp. Pty. Ltd., 685 F.3d 1341, 1343 (Fed. Cir. 2012).
On October 9, 2012, the Federal Circuit granted CLS’s petition for an en banc rehearing and vacated the panel opinion. In its en banc order, the Federal Circuit asked the parties to file new briefs addressing the following two questions:
CLS Bank Int’l v. Alice Corp. Pty. Ltd., 484 F. App’x 559, 559-60 (Fed. Cir. 2012) (per curiam).
As reported in our Alert of May 16, 2013 [http://www.orrick.com/Events-and-Publications/Pages/CLS-Bank-A-Deeply-Divided-En-Banc-Federal-Circuit-Fails-to-Rule-When-Computer-Claims-are-Invalid.aspx], the eventual Federal Circuit en banc decision revealed a deeply divided court that failed to provide a definitive standard for determining patent-eligible subject matter in the context of software or hardware. The en banc panel issued six separate opinions that spanned a collective 135 pages and offered at least three different views on patent eligibility, with additional reflections by Chief Judge Randall Rader. Because none of the opinions garnered majority support, all were non-precedential.
The parties petitioned for certiorari, which was granted, and numerous amici briefs were filed. The Court issued its ruling last week.
Beginning with a citation to 35 U.S.C. § 101, the Court reiterated the 150 year old principle that the Patent Act contains an important exception: laws of nature, natural phenomena, and abstract ideas are not patentable. The concern is pre-emption – namely, that monopolization of those tools rooted in scientific and technological work will tend to impede innovation more than promote it. Of course, the Court also acknowledged that it must “tread carefully in construing this exclusionary principle lest it swallow all of patent law.” Accordingly, the Court indicated that in applying the § 101 exception, it “must distinguish between patents that claim the ‘building blocks’ of human ingenuity and those that integrate the building blocks into something more, … thereby transforming them into a patent-eligible invention.”
The Court found many parallels between this case and its earlier decision in Mayo Collaborative Services, which addressed patent eligibility in the life sciences context. The Court reiterated the framework it applied there for distinguishing between patents that claim laws of nature, natural phenomena, and abstract ideas and those that claim patent-eligible applications of those concepts. Under this framework, a court first determines whether the claims at issue are directed to one of those patent-ineligible concepts. If so, the Court then asks “what else is there in the claims before [the court that might render the claims patentable]?” To answer that question, the Court considers the elements of each claim individually and as an ordered combination to determine whether the additional elements transform the nature of the claim into a patent-eligible application. This is a search for an “inventive concept” – i.e., an element or combination of elements that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept itself.
Applying these principles, the Court first concluded, drawing on its earlier precedent like Bilski, that Alice’s method claims were directed to a patent-ineligible concept because they were drawn to the abstract idea of the intermediated settlement. The Court reasoned that the concept of intermediated settlement is a fundamental economic practice long prevalent in our system of commerce, citing support from trade publications in 1896 and 2013. In so ruling, the Court rejected the patent owner’s argument that given the presence of mathematical formulas in some of the Court’s earlier abstract-ideas precedents, the abstract-idea category is confined to preexisting, fundamental truths that exist in principle apart from any human action. The Court nonetheless cautiously noted that it “need not labor to delimit the precise contours of the ‘abstract ideas’ category in this case,” because it found there was no meaningful distinction between the patent-ineligible concept of risk hedging in Bilski and the concept of intermediated settlement at issue here.
The Court next concluded that Alice’s method claims, which merely require generic computer implementation, failed to transform the identified abstract idea into a patent-eligible 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. Significantly, “the introduction of a computer into the claims does not alter the analysis” previously set forth in the second step of the Mayo Collaborative Services framework. The Court was clear that its earlier precedent from cases like Flook stand for the proposition that the prohibition against patenting abstract ideas cannot be circumvented by attempting to limit the use of the idea to a particular technological environment. All of the earlier Supreme Court cases demonstrated that the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention. Thus, if a patent’s recitation of a computer amounts to a mere instruction to implement an idea on a computer, that addition cannot impart patent eligibility. The fact that a computer necessarily exists in the physical realm, rather than the purely conceptual realm, is beside the point. The relevant question is whether the claims under review do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer, and the Court found that they did not. Taking the claim elements separately, the function performed by the computer at each step of the process was “purely conventional.”
Equally significantly, the Court found that the patent claims directed to a computer system and a computer-readable medium failed for substantially the same reasons. The Court determined that none of the hardware recited by the system claims offered “a meaningful limitation beyond generally linking the use of the [method] to a particular technological environment, that is, implementation via computers." The Court thus easily resolved the issue that had so deeply divided the Federal Circuit: namely, whether the type of patent claim (method vs. system vs. computer-readable media) affected the claim’s patent-eligibility. The Supreme Court answered in the negative, as the Judge Lourie plurality had done at the en banc stage, finding that all the claims were patent-ineligible because “the system claims are no different from the method claims in substance.” Notably, the Supreme Court did so in one page of discussion.
Three Justices, in a concurrence authored by Justice Sotomayor, would have gone further and held that all business method patents claim ineligible subject matter. They did not, however, explain whether they would have treated Alice’s system or media claims the same as the method claims.
In reaching such a definitive result, the Court endorsed its recent adoption of an “inventive concept” approach to patent eligibility in Mayo Collective Services. In addition, the Court clearly articulated a process of claim analysis for courts to apply in segregating patent-ineligible claims to laws of nature, natural phenomena, and abstract ideas from claims to patent-eligible applications thereof. This may open the door in future litigation to early resolution of affirmative defenses based on the patent-eligible subject matter requirement. However, the question of exactly what is an abstract idea likely will continue to percolate in the district courts in cases involving software and hardware functionality.