Alice Corp. v. CLS Bank ruling impact on the software industry?

By Francis Mubwaro Mwine

The Constitution empowers Congress with the authority “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Of particular note is the fact that this monopoly is limited; the temporal restriction in theory serves the dual function of first, encouraging inventors to engage in research and innovation, and second, rewarding the public by having more fruit strung to the tree of human knowledge that is sufficiently ripe for consumption and progress.

Thus, a patent, at its undeniable quintessence, is a contract between the federal government and an inventor: in exchange for disclosing an invention, the inventor receives from the government a limited monopoly to exclude others from using or exploiting the claimed invention.

Against this Article 1, Section 8, Clause 8 backdrop, Congress has enacted several legislative initiatives that have provided a framework for patent protection. These legislative initiatives have most recently culminated with the America Invents Act, which substantially revised the Patent Act of 1952. Section 101 of the current Patent Act governs patentable subject matter and 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 therefore, subject to the conditions and requirements of this title.” Courts have repeatedly emphasized the breathtaking scope of what constitutes patentable subject matter under section 101 by repeating the House Note to the 1952 Patent Act, which specifies that “anything under the sun that is made by man” is eligible for the patent monopoly.

Yet the overwhelming breadth of what is patentable is not boundlessly unfettered and fantastically unrestrained. The Supreme Court has stated that natural laws, physical phenomena, and abstract ideas notably do not fall under the ambit of patentability. The thinking behind excluding these three areas from patentable subject matter is purportedly that they represent categories that serve as the building blocks for human ingenuity. If an individual could obtain a patent on these foundational building blocks, then the goal of patents would be frustrated and such ingenuity would be stifled. Therefore, Einstein could not have patented relativity, just as Archimedes would have lacked the ability to assert primacy of ownership over his geometric discoveries.

Perhaps there is no better proof of the lack of viability of the abstract idea exception than the Federal Circuit's decision 35 years after Flook in CLS BankInternational v. Alice Corp. Pty. Ltd. In determining whether certain claims that implicated the use of a computer qualified as patent eligible under section 101, the Federal Circuit produced no fewer than five separate opinions that reflected varying interpretations of how to apply the abstract idea exception. Importantly, the Federal Circuit sitting en banc did not achieve a majority consensus on abstract idea jurisprudence, and any attempt to structure a cohesive narrative regarding the abstract idea exception from CLS Bank is an exercise in legal masochism.

The patents in CLS Bank involved a way to decrease settlement risk. More specifically, in a situation where two parties are exchanging financial obligations, the patents disclose a mechanism whereby a third party computer system ensures that each of the two parties to the transaction can indeed perform its end of the bargain. The third party computer system makes use of “shadow records,” which replicate the financial data of the parties, and then evaluates whether the exchange can go forward by looking to the data in the shadow records. If both parties are able to fulfill their obligations, as indicated by analyzing the shadow records, the real exchange is allowed to proceed. Alice Corp., the patentee, argued that the disclosed manipulation of the shadow records constituted patent eligible subject matter. CLS Bank, the alleged infringer, argued in contrast that the patents were directed toward nothing more than the concept of escrow done online.

Ultimately, the Federal Circuit asserted that the claims were patent ineligible under section 101. However, this decision constituted only a plurality opinion and not a majority as only five of the ten judges on the Federal Circuit signed on to this decision, with four other judges writing separate opinions. The plurality in CLS Bank conceded that “deciding whether or not a particular claim is abstract can feel subjective and unsystematic, and the debate often trends toward the metaphysical, littered with unhelpful analogies and generalizations.”

Patent law subject matter eligibility under 35 U.S.C. section 101 creates a balance between incentivizing inventors to publicly disclose their knowledge and protecting the public from monopolies on ideas. Allowing inventors to monopolize the basic tools of scientific and technological work might “tend to impede innovation more than it would tend to promote it.” “Laws of nature, natural phenomena, and abstract ideas” constitute unpatentable subject matter under section 101.

The section 101 inquiry serves as a threshold test to determine if the subject matter of the patent is directed to a general idea or a “new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof. The 2014 Alice Corp. v. CLS Bank Int'l (“Alice”) decision became the first Supreme Court decision since Bilski v. Kappos to address the section101 subject matter analysis for software.

The Supreme Court's Decision in Alice Corp. v. CLS Bank.

In May 2007, CLS Bank International and CLS Services Ltd. (“CLS”) filed suit against Alice Corp. in the U.S. District Court for the District of Columbia, seeking a declaratory judgment that CLS was not infringing Alice Corp.'s patents and that the patents in question were unenforceable. The patents at issue were directed to 1) a method for financial exchange, 2) a computer system used as a third-party intermediary, and 3) “a computer-readable medium containing program code for performing the method of exchanging obligations.”

CLS contended that all of Alice Corp.'s patents were invalid under section 101 for lack of patent-eligible subject matter. Alice Corp. filed a cross-motion for partial summary judgment, asking the court to find that the claims at issue were directed to patent-eligible subject matter. The district court granted CLS's motion for summary judgment in full, finding that all claims at issue were directed to unpatentable subject matter.

The court invalidated Alice's patent claims under section 101, maintaining that the patents represented “merely the incarnation of [an] abstract idea on a computer, without any further exposition or meaningful limitation.” According to the court, Alice’s patented methodology of minimizing risk represented a “basic business or financial concept” that “remains a fundamental, abstract concept.”

Alice appealed the decision to the United States Court of Appeals for the Federal Circuit. In 2012, that court reversed the district court's decision in a two-to-one vote, finding that the process and product claims constituted patent-eligible subject matter under section 101. The court acknowledged that “mere computer implementation cannot render an otherwise abstract idea patent eligible.” The court found that the district court ignored the claim limitations, treating the claims at issue “as encompassing nothing more than fundamental truths.” The court emphasized that subject-matter eligibility under section101 considers “the limitations of the claims as a whole” rather than the computer implementation component standing alone. The court of appeals said that unless it is “manifestly evident that the claims are patent ineligible under [section] 101,” the subject matter at issue is patent-eligible.

CLS successfully petitioned for an en banc hearing. Seven judges from the ten judge panel affirmed the district court's ruling that the patents at issue were not directed to patent-eligible subject matter. The panel issued no majority opinion, nor did the panel declare a rule to determine if a computer-implemented invention is directed to patentable subject matter.

In 2013, Alice Corp. petitioned the U.S. Supreme Court for a writ of certiorari. The Court granted certiorari on the question “whether claims to computer-implemented inventions - including claims to systems and machines, processes, and items of manufacture - are directed to patent-eligible subject matter within the meaning of section 101.” The Supreme Court unanimously upheld the en banc determination that the patents were directed to a patent-ineligible abstract idea.

The Court determined that the claims concerning settlement risk mitigation were “drawn to the abstract idea of intermediated settlement, and that merely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention.” The unanimous decision rested on the concern of pre-emption, in that allowing Alice Corp. to hold patents on mitigating settlement risk would “effectively grant a monopoly over an abstract idea.”

The Court used the Mayo Collab. Service v. Prometheus Labs. framework to distinguish patent eligible and ineligible subject matter under section 101. First, the Court looked to “whether the claims at issue [were] directed to a law of nature, natural phenomena, or abstract idea.”

Second, the Court asked “what else is there in the claims,” looking to “the elements of each claim both individually and ‘as an ordered combination’ to determine whether the additional elements ‘transform the nature of the claim’ into a patent-eligible application.”

The Court found that the claims at issue were directed to a patent-ineligible concept of intermediated settlement. Comparing the claims to those in Bilski v. Kappos, the Court determined that the “method of exchanging financial obligations between two parties using a third-party intermediary to mitigate settlement risk” were a “fundamental economic practice long prevalent in our system of commerce.” The third party intermediary was a “building block of the modern economy,” and therefore intermediated settlement was patent-ineligible subject matter. The Court rejected Alice Corp's contention that an abstract idea is confined to “preexisting fundamental truths that exist in principle apart from any human action,” determining that there was “no meaningful distinction” between the risk-hedging process in Bilski and Alice Corp.'s intermediated settlements patents. Still, the Supreme Court refused to “delimit the precise contours of the ‘abstract ideas' category in this case.”

The Federal Circuit in Alice v. CLS Bank could not reach a majority decision regarding whether certain claims constituted patent eligible subject matter. Despite the Federal Circuit's internal dissonance, the Supreme Court was unanimous in finding that the claims were patent ineligible. Justice Thomas, writing for the Court, applied the conventional two-part framework: first, he inquired whether the claims were directed to an abstract idea, and then he examined whether the claims were allowable because they constituted an inventive concept of an abstract idea.

In examining whether the claims attempted to monopolize an abstract idea, Justice Thomas concluded in the affirmative, stating that the claims were “the abstract idea of intermediated settlement.” Importantly, in making this determination, Justice Thomas relied on several texts that indicated the concept of intermediated settlement was long standard in the industry:

[T]he concept of intermediated settlement is “‘a fundamental economic practice long prevalent in our system of commerce.”’ Ibid.; see, e.g., Emery, Speculation on the Stock and Produce Exchanges of the United States, in 7 Studies in History, Economics and Public Law 283, 346-356 (1896) (discussing the use of a “clearing-house” as an intermediary to reduce settlement risk). The use of a third-party intermediary (or “clearing house”) is also a building block of the modern economy. See, e.g., Yadav, The Problematic Case of Clearinghouses in Complex Markets, 101 Geo. L.J. 387, 406-412 (2013); J. Hull, Risk Management and Financial Institutions 103-104 (3d ed. 2012). Thus, intermediated settlement, like hedging, is an “abstract idea” beyond the scope of § 101.

Thus, similar to section 103, Justice Thomas looked to prior art references in making a section 101 analysis but did not provide a rubric as to how to select those prior art references.

Significantly, Justice Thomas rejected the patentee's argument that, like mathematical formulas, abstract ideas should be limited to “preexisting, fundamental truths that exist in principle apart from any human action.” In other words, the patentee had argued that abstract ideas should not depend on a particular timeframe of reference: whereas a natural law always existed as a natural law, an abstract idea should always be an abstract idea. However, Justice Thomas rejected this assertion. In particular, he analogized the concept of intermediated settlement to the concept of hedging risk in Bilski and noted that neither practice has always been in existence. Specifically, Justice Thomas asserted 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.”

In deciphering what precisely constituted an abstract idea, Justice Thomas conceded that he was not endeavoring to define exactly the parameters of the term: “[W]e need not labor to delimit the precise contours of the ‘abstract ideas' category in this case. It is enough to recognize that there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediated settlement at issue here.” Thus, Justice Thomas noted that the abstract idea had something to do with “intermediated settlement” and that since it was analogous to the concept of hedging in Bilski, it was an abstract idea for section 101 purposes.

After determining that the claims were drawn toward an abstract idea, Justice Thomas then proceeded to the next step of the Alice framework, namely, determining whether the claims involved any sort of “inventive concept” such that they could nevertheless be patent eligible. He concluded that no inventive concept existed as “the claims here do [no] more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer.” Indeed, Justice Thomas wrote that “the function performed by the computer at each step of the process is purely conventional.” Since the claims were directed to an abstract idea and no inventive concept of the abstract idea was offered, the claims were patent ineligible under section 101.

B. Subsequent Federal Circuit Decisions: Ultramercial and DDR Holdings; Ultramercial v. Hulu

Shortly after the Supreme Court's decision in Alice, the Federal Circuit in Ultramercial, Inc. v. Hulu, LLC invalidated a software patent on grounds that the claims were directed toward ineligible subject matter. In Ultramercial, the patentee owned a patent for a method of displaying copyrighted content over the Internet to a consumer, where the consumer would have access to the copyrighted material for free in exchange for watching an advertisement. The alleged infringer argued that the claims impermissibly covered the abstract idea of “offering free media in exchange for watching advertisements and that the mere implementation of that idea on a computer does not change that fact.” The Court agreed with the alleged infringer's position, though it did not provide extensive background as to why the claims constituted an abstract idea but rather proclaimed that the claims covered the abstract idea of “showing an advertisement before delivering free content.” The Ultramercial Court then moved on to the second step of the Alice inquiry. In determining whether the claims constituted an inventive concept of the abstract idea of showing an advertisement before displaying free content, the Court examined whether the claims added additional features that were more than “well-understood, routine, conventional activity.” The Court decided that no inventive concept was present, and that the claims were patent ineligible under section 101. In finding that there was no inventive concept, the Court did not cite prior art, but rather summarily concluded that the claims were “routine, conventional activities.”

CONCLUSION

The Court appeared to follow this advice, in that the Alice decision never mentioned the word “software.” Furthermore, the Court never addressed the argument that the Alice patents are invalid under 35 U.S.C. sections 102 (anticipation) or 103 (obviousness). Additionally, though many requested the Court to articulate a clear, specific rule of patentability with respect to software or computer-implemented processes, the Supreme Court simply stated that “the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention.” Justice Thomas explicitly refused to write a more specific test, stating “we need not labor to delimit the precise contours of the “abstract ideas” category in this case. It is enough to recognize that there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediated settlement at issue here.” However, Justice Thomas did explain that subject matter eligibility analysis under section 101 must evaluate the “risk of pre-emption” to distinguish between abstract ideas and those that transform those abstract ideas into patent-eligible inventions.

Many intellectual property attorneys and scholars were not satisfied with the Court's decision. Scott Alter, Chair of the American Bar Association's Post- Alice Task Force, has said that “if [an entity's] primary interest is in a strong patent system that protects and rewards innovation, [ Alice] is arguably not a good decision.” Professor Robert Merges, Director of the Berkeley Center for Law & Technology, opined: “To say we did not get an answer is to miss the depth of the non-answer we did get.” The Supreme Court did not invalidate the patent eligibility of all software or business methods. Many have called the case overbroad, though this characterization may be based on the Federal Circuit's application of the decision, rather than the text itself.

While the Court cautioned lower courts to “tread carefully in construing [[the] exclusionary principle” outlined in Alice, lower courts have applied the Alice decision to many technological fields, including business methods, digital image management, and medical records. Between June 2014 and January 2015, the Federal Circuit has invalidated 344 of 377 claims related to business method patents and computerization under Alice. Similarly, district courts have invalidated approximately three-fourths of all claims under the Alice decision. District courts invalidated all claims in ten patents under a Rule 12 motion, finding there was no plausible interpretation of the claims that would create a valid patent.

The Federal Circuit seems to ignore the Court's preemption analysis, looking just to whether there were additional articulated limitations to modify a “process that employs mathematical algorithms to manipulate existing information.” Some district courts are following suit. Ignoring the preemption analysis can allow courts to “reach any patentability outcome it desires” by allowing the court to decide significant limitations, as opposed to the marketplace where the invention is used. Furthermore, the Federal Circuit has used limitations to invalidate patents, such as “mental steps,” that the Court never articulated, in Alice or in any preceding patent case. Still, some district courts correctly identify that, under Alice, software remains patentable and courts must conduct a preemption analysis to protect this status.

The U.S. Patent and Trademark Office issued the 2014 Interim Guidance on Patent Subject Matter Eligibility for “USPTO personnel to use when determining subject matter eligibility under section 101.” This synthesized the decision in Alice, providing examples and explanations distinguishing patent-eligible subject matter from abstract ideas. The Guidance explained that an examiner must first determine if a claim is “directed to a law of nature, natural phenomenon, or abstract idea.” If so, the claim as a whole should amount “to significantly more than the exception” to be patent-eligible.

Though the Alice decision still does not specifically articulate examples of claims that would be patent-eligible, patent applicants can use the post- Alice decision of DDR Holdings, LLC v. Hotels.com, LP as a reference. The DDR method patent articulated a method of “generating a composite website page that combines . . . visual elements of a ‘host’ website with content of a third-party merchant,” so that a third-party advertisement would “retain the host website's ‘look and feel.”’ The Federal Circuit found that this method was not “[reciting] a mathematical algorithm [[or] a fundamental economic or longstanding economic practice.”

Instead, the solution “is necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.” Furthermore, the Patent Trial and Appeal Board has issued U.S. Bancorp v. Solutran, Inc, determining that the method of processing checks and check transactions “is more akin to a physical process than an abstract idea” and the claim elements “are not fundamental economic practices, mathematical algorithms, or basic tools of scientific and technological work.” It remains to be seen whether the Alice decision will become clearer or murkier over time. For now, many software and computer-implemented inventions remain in patent limbo under section 101.

1 U.S. CONST. art. I, § 8, cl. 8.

2 Mark Schafer, Note, How the Leahy-Smith America Invents Act Sought to Harmonize United States Patent Priority with the World, A Comparison with the European Patent Convention, 12 WASH. U. GLOBAL STUD. L. REV. 807, 809 (2013).

3 Ibid.

4 35 U.S.C. § 101 (2011).

5 Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289, 1304 (2012).

6 Ibid.

7 Robert A. Armitage, Understanding the America Invents Act and Its Implications for Patenting, 40 AIPLA Q.J. 1, 5 (2012).

8 Ibid.

9 CLS Bank Int'l v. Alice Corp. Pty. Ltd., 717 F.3d 1269 (Fed. Cir. 2013).

10 Ibid.

11 Ibid.

12 Ibid.

13 Ibid.

14 Ibid.

15 Ibid.

16 Ibid.

17 Ibid.

18 Ibid.

19 Ibid.

20 Mayo Collaborative Servs. v. Prometheus Labs., 132 S. Ct. 1289, 1293 (2012).

21 Assn. for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2116 (2013).

22 35 U.S.C. § 101 (2012).

23 Alice Corp. v. CLS Bank Int'l, 134 S. Ct. 2347, 2349-50 (2014).

24 Bilski v. Kappos, 561 U.S. 593, 601 (2010).

25 Timothy B. Lee, Will the Supreme Court Save Us from Software Patents?, WASH. POST (Feb. 26, 2014), http://www.washingtonpost.com/blogs/the-switch/wp/2014/02/26/will-the-supreme-court-save-us-from-software-patents/ (archived at http://perma.cc/5JK9-3ANW).

26 CLS Bank Int'l v. Alice Corp.., 768 F. Supp. 2d 221, 255 (D.D.C. 2011).

27 Alice Corp, 134 S. Ct. at 2349.

28 CLS Bank Int'l, 768 F. Supp. 2d at 223.

29 CLS Bank Int'l, 768 F. Supp. 2d at 223.

30 Ibid.

31 Ibid.

32 Ibid.

33 CLS Bank. Int'l v. Alice Corp., 685 F.3d 1341, 1343 (Fed. Cir. 2012).

34 Ibid.

35 Ibid.

36 Ibid.

37 Ibid.

38 Ibid.

39 CLS Bank Int'l v. Alice Corp., 717 F.3d 1269 (Fed. Cir. 2013) (en banc).

40 Ibid.

41 CLS Bank Int'l v. Alice Corp., 717 F.3d 1269 (Fed. Cir. 2013) (en banc), cert granted, (U.S. Dec. 6, 2013) (No. 13-298).

42 Ibid.

43 Alice Corp. v. CLS Bank Int'l, 134 S. Ct. 2347, 2352 (2014).

44 Ibid.

45 Ibid.

46 Ibid.

47 Ibid.

48 Ibid.

49 Ibid.

50 Ibid.

51 Ibid.

52 Brief for Petitioner at 23, Alice Corp. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014) (No. 13-298).

53 Alice Corp. v. CLS Bank Int'l, 134 S. Ct. 2347, 2357 (2014).

55 Alice Corp. v. CLS Bank Int'l, 134 S. Ct. 2347, 2357 (2014).

56 Alice Corp. Pty. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014).

57 Ibid.

58 Ibid.

59 Ibid.

60 Ibid.

61 Ibid.

62 Ibid.

63 Ibid.

64 Ibid.

65 Ibid.

66 Ibid.

67 Ibid.

68 Ibid.

69 Ibid.

70 Ibid.

71 Ultramercial, Inc. v. Hulu, LLC, 772 F.3d 709 (Fed. Cir. 2014).

72 Ibid.

73 Ibid.

74 Ibid.

75 Ibid.

76 Ibid.

77 Ibid.

78 Ibid.

79 Ibid.

80 Ibid.

81 Alice Corp. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014).

82 Ibid.

83 Alice Corp., 134 S. Ct. at 2358.

84 Ibid.

85 Ibid.

86 Gene Quinn, The Road Forward for Software Patents Post-Alice, IPWATCHDOG (Feb. 25, 2015), http://www.ipwatchdog.com/2015/02/25/the-road-forward-for-software-patents-post-alice/id=55142/ (archived at http:// perma.cc/2928-TZCY).

87 Ibid.

88 Ibid.

89 Ibid.

90 Ibid.

91 Robert R. Sachs, A Survey of Patent Invalidations Since Alice, LAW360 (Jan. 13, 2015, 10:25 AM), http://www.law360.com/articles/604235/a-survey-of-patent-invalidations-since-alice (archived at http://perma.cc/WJ58-6Z4V).

92 Ibid.

93 Ibid.

94 Ibid.

95 Sachs, supra note 74; see Digitech Image Tech,, LLC, v. Elecs. for Imaging, Inc., 758 F.3d 1344 (Fed. Cir. 2014); Planet Bingo, LLC v. VKGS, LLC, 2014 WL 4195188 (C.A. Fed. Mich., Aug. 26, 2014).

96 Ibid.

97 Ibid.

98 Ibid.

99 Enfish,LLCv.MicrosoftCorp.,2014WL5661456(C.D.Cal.Nov.3,2014).

100 2014 Interim Guidance on Subject Matter Eligibility, U.S. PATENT & TRADEMARK OFFICE, available at http://www.uspto.gov/patent/laws-and-regulations/examination-policy/2014-interim-guidance-subject-matter-eligibility-0 (archived at http://perma.cc/B7GD-RYDD).

101 2014 Interim Eligibility Guidance Quick Reference Sheet, U.S. PATENT & TRADEMARK OFFICE, available at http:// www.uspto.gov/patents/law/exam/2014_eligibility_qrs.pdf (archived at http:// perma.cc/5VEL-6D8C).

102 Ibid.

103 Jim Singer, Patent-eligibility after Alice: a Summary of Decisions that Found Software Inventions Eligible for Patenting, IP SPOTLIGHT (Nov. 25, 2014), http://ipspotlight.com/2014/11/25/patent-eligibility-after-alice-a-summary-of-decisions-that-found-software-inventions-eligible-for-patenting/ (archived at http://perma.cc/76QG-TWA6).

104 DDR Holdings, LLC v. Hotels.com, 733 F.3d 1245, 1248 (Fed. Cir. Dec. 5, 2014.

105 Ibid.

106 Ibid.

107 U.S. Bancorp v. Solutran, Inc., No. CBM2014-00076, 2014 WL 3943913, *7 (PTAB Aug. 7, 2014).