Curiouser and Curiouser? More details on Alice v CLS Bank decision of SCOTUS

This Kat is not a US attorney; nor is he a specialist in computer implemented inventions,  so he hesitated to write a report of the US Supreme Court decision Alice Corp. v CLS Bank International, which has attracted a lot of comment from the brief mention in Friday Fantasies.  He is therefore fantastically grateful to his EIP US colleague Nick Transier for providing him with this report.  Over to Nick.

Abstract and Observations

The question presented in Alice was whether claims directed to a computer-implemented scheme for mitigating “settlement risk” are patent eligible under 35 U. S. C. §101. The Supreme Court affirmed the Federal Circuit’s holding (unanimously) that the claims at issue were drawn to the abstract idea of intermediated settlement, and that merely requiring generic computer implementation failed to transform that abstract idea into a patent-eligible invention. The following are high-level observations regarding this opinion:

·        Alice could have been much broader/worse. For better or worse, the Court did not wade into what is and is not an “abstract idea.” Specifically, the Court did not say that software-related inventions are presumed abstract or otherwise unpatentable. The Court also relied strongly on very similar facts from previous cases to reach its decision in the present case, which may limit the applicability of Alice to factually similar cases.

·        Alice may have a greater impact on business methods implemented by computer rather than other methods implemented by computer. While the Court made abundantly clear that mere computer hardware does not dispense with the Section 101 question, it also retreated a bit and noted that “many computer-implemented claims are formally addressed to patent-eligible subject matter.” In particular, the Court made an example of Diehr, which was directed to an improvement of “an existing technological process.” As such, the Court seemed to imply tacitly that “conventional” business methods (e.g. risk hedging) are not “technological processes.” Notably, this squares nicely with the Covered Business Method review procedures, which explicitly exempts “technological inventions.” Accordingly, when faced with a Section 101 challenge to a computer implemented process, it seems best to argue that the process is an improvement of “an existing technological process,” or an entirely new technological process.

·        The Court acknowledges, but does nothing to resolve the inexorable tension between Section 101 and the implicit exception to Section 101. Notably, the major changes to the patent laws in the recent AIA did not address Section 101, which may arguably imply that Congress did not want to change the metes and bounds of patent-eligible subject matter. There is also a good argument that Section 102 and 103 are really more suited to dealing with these questions given the explicit language of Section 101. Notwithstanding, for the immediate future, the amorphous Section 101 exceptions, and the uncertainty they breed, will have to be dealt with.

·        Conventional claim sets may not afford much subject matter protection. While the Court primarily focused on claim substance and not form, the Court made quick work of the CRM and apparatus claims since they were basically just transformed method claims. And this is how most claim sets (i.e. sets of apparatus, method and CRM [computer readable medium]) are drafted when dealing with inventions that are not very hardware/apparatus specific. Tellingly, the Court twice stated “[we have] long warned against interpreting §101 in ways that make patent eligibility depend simply on the draftsman’s art.” Therefore, while drafting claim sets in this manner is both convenient for prosecution arguments and helpful to avoid restriction requirements, it may be worth bolstering the importance of apparatus components in the apparatus claims e.g. tying the method steps more closely to particular bits of hardware. Further, in new applications, it is probably worth dedicating more space to specific apparatus features to be used for fallback claim positions.

·        We may have to wait and see how this formally affects prosecution. The USPTO is likely to issue new guidelines to Examiners at some point based on Alice. It will be difficult to draw bright-line rules based on Alice, but I think we can expect more Section 101 challenges—particularly for anything business method related. As above, the key will be to rely on arguments aligning with Diehr.

·        This is not likely to affect late-stage litigations. Because Alice was decided consistently with the framework of Mayo, which was decided in 2012, and consistent with the facts of Bilski, which was decided in 2010, it will be hard for a litigant to argue that a material change in law has happened such that they can assert a new invalidity position outside of the established Scheduling Order. Put differently, if a challenger did not have a good argument under Mayo or Bilski, then Alice should  not change much. In an early stage litigation, I would not be surprised to see a lot of defendants jump at the chance to leverage Alice, but again, Alice really did not break new ground. I think the most detrimental effect of Alice on the subject matter question will be the de-emphasizing of computer hardware.

Factual and Procedural Background

Alice’s patents are directed to “enabling the management of risk relating to specified, yet unknown, future events,” including electrical computers and data processing systems applied to financial matters and risk management.” “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.” Or as the Supreme Court summarized, “the patents in suit claim (1) the foregoing method for exchanging obligations (the method claims), (2) a computer system configured to carry out the method for exchanging obligations (the system claims), and (3) a computer-readable medium containing program code for performing the method of exchanging obligations (the media claims).”

CLS Bank initially filed an action against Alice seeking a declaratory judgment that the claims are invalid, unenforceable, or not infringement. Following the Bilski v. Kappos decision, 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 obligations in order to minimize risk.” The Federal Circuit initially reversed, holding that it was not “manifestly evident” that the claims are directed to an abstract idea, but then reheard the case en banc and subsequently vacated its previous opinion, and affirmed the judgment of the District Court in a one-paragraph per curiam opinion. In the per curiam opinion, the Federal Circuit concluded that the claims “draw on the abstract idea of reducing settlement risk by effecting trades through a third-party intermediary,” and that the use of a computer to maintain, adjust, and reconcile shadow accounts added nothing of substance to that abstract idea.

Supreme Court Decision Reaffirms Mayo Framework

The Supreme Court started by reciting the text from 35 USC § 101, which explicitly recites in relevant part that “any new and useful process [or] machine, … or any new and useful improvement thereof, may obtain a patent therefor ….” However, the Supreme Court quickly noted that “[w]e have [for more than 150 years] held that [Section 101] contains an important implicit exception: Laws of nature, natural phenomena, and abstract ideas are not patentable.” Tacitly acknowledging the tension between the explicit text of the statute and the “implicit exception,” the Supreme Court explained that “Laws of nature, natural phenomena, and abstract ideas are the basic tools of scientific and technological work. [M]onopolization of those tools through the grant of a patent might tend to impede innovation more than it would tend to promote it, thereby thwarting the primary object of the patent laws.” But, “[a]t 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. Thus, an invention is not rendered ineligible for patent simply because it involves an abstract concept.”

The Supreme Court then reaffirmed the Mayo framework for the 101 inquiry, which includes a two-part inquiry: (1) first, determine whether the claims at issue are directed to a patent-ineligible concept; and (2) then, examine the elements of the claim to determine whether it contains an inventive concept sufficient to transform the patent-ineligible concept into a patent-eligible application.

Well, there had to
be some kind of cat

Regarding the first part of the Mayo inquiry—whether or not the claims are directed to a patent-ineligible concept—the Court explicitly passed on defining “the precise contours of the ‘abstract ideas’ category.” Rather, the Supreme Court relied on its prior holdings to establish some relative boundaries. For example, the Supreme Court noted that in Benson it rejected claims involving an algorithm for converting binary-coded decimal numerals into pure binary form because those claims were “in practical effect … a patent on the algorithm itself.” Similarly, in Parker the Court rejected claims directed to a mathematical formula for computing alarm limits in a catalytic conversion process because they too were patent-ineligible abstract ideas. And most recently in Bilksi, the Court held that claims directed to “a method for hedging against the financial risk of price fluctuations” were an unpatentable abstract idea. Specifically, in Bilski the Court explained that “hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class, and as such, the concept of hedging as recited by the claims was “a patent-ineligible abstract idea.”

Turning then to the claims at issue, the Court stated that “[o]n their face, the claims before us are drawn to the concept of intermediated settlement, i.e., the use of a third party to mitigate settlement risk,” and “[l]ike the risk hedging in Bilski, the concept of intermediated settlement is “‘a fundamental economic practice long prevalent in our system of commerce’ … Thus, intermediated settlement, like hedging, is an ‘abstract idea’ beyond the scope of §101.” In doing so, the Court rejected the petitioners attempt to limit abstract ideas to “preexisting, fundamental truths that exist in principle apart from any human action” by noting that “[a]lthough hedging is a longstanding commercial practice, it is a method of organizing human activity, not a ‘truth’ about the natural world ‘that has always existed.’” And the court further dispensed with the significance of any mathematical formula applied to risk hedging, stating that “[o]ne of the claims in Bilski reduced hedging to a mathematical formula, but the Court did not assign any special significance to that fact, much less the sort of talismanic significance petitioner claims.”

Regarding the second part of the Mayo inquiry—whether or not the claims contain an inventive concept sufficient to transform the patent-ineligible concept into a patent-eligible application—the Court stated that “[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,” and “a patent-eligible application requires more than simply stating the abstract idea while adding the words ‘apply it.’” Specifically, the Court noted that in Mayo, “the process at issue amounted to nothing significantly more than an instruction to doctors to apply the [natural] laws when treating their patients,” which was not “enough” to supply an “‘inventive concept.”

Critically, the Court noted that “[t]he introduction of a computer into the claims does not alter the analysis at … step two” because “simply implementing a mathematical principle on a physical machine, namely a computer, is not a patentable application of that principle.” More specifically, the Court noted that, “Flook stands 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.” However, the Court noted that in Diehr, a computer-implemented process for curing rubber was patent eligible, not because it involved a computer or a “well-known” mathematical equation, but because it used that equation in a process designed to solve a technological problem in “conventional industry practice.” “In other words, the claims in Diehr were patent eligible because they improved an existing technological process, not because they were implemented on a computer.” Thus, the Court summarized that “a mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention” despite the fact that “[t]here is no dispute that a computer is a tangible system (in §101 terms, a ‘machine’)” and “many computer-implemented claims are formally addressed to patent-eligible subject matter.”

Turning back to the claims at issue, the Court dismissed the petitioner’s arguments that “the claims are patent eligible because [the] steps “require a substantial and meaningful role for the computer” and “[t]he computer is itself the intermediary.” Rather, the Court noted that “the relevant question is whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer.” The Court then held that “the claims at issue amount to nothing significantly more than an instruction to apply [“the purely conventional”] abstract idea of intermediated settlement using some unspecified, generic computer,” which fails to transform that abstract idea into a patent-eligible invention.

Notably, while the preceding analysis dealt with method claims, the Court dispensed with the apparatus and computer readable media claims at issue by noting that (1) “none of the hardware recited by the system claims offers a meaningful limitation beyond generally linking the use of the [method] to a particular technological environment, that is, implementation via computers;” and (2) that the CRM claims “fall with the method claims.” “Put another way, the system claims are no different from the method claims in substance. The method claims recite the abstract idea implemented on a generic computer; the system claims recite a handful of generic computer components configured to implement the same idea.”

As usual, over to you, dear readers, for your thoughts, analysis and comments