United States: Connections To The Physical World Through Deeds, Contracts, And Real Property Fail To Render Claims Directed To An Investment Tool Patent Eligible Under 35 U.S.C. § 101

Last Month at the Federal Circuit - March 2012

Judges: Prost (author), Schall, Moore

[Appealed from C.D. Cal., Judge Guilford]

In Fort Properties, Inc. v. American Master Lease LLC, No. 09-1242 (Fed. Cir. Feb. 27, 2012), the Federal Circuit affirmed the district court's SJ of invalidity under 35 U.S.C. § 101 for claims relating to an investment tool.

American Master Lease LLC ("AML") owns U.S. Patent No. 6,292,788 ("the '788 patent"), which is directed to an investment tool enabling property owners to buy and sell properties without incurring tax liability. The '788 patent contains forty-one method claims, all reciting steps such as "aggregating real property to form a real estate portfolio," "encumbering the property . . . with a master agreement," and "creating a plurality of deedshares . . . subject to a provision in the master agreement for reaggregating the plurality of tenant-in-common deeds after a specified interval." Claims 1-31 of the '788 patent are directed to an investment tool having ties to deeds, contracts, and real property, but not requiring the use of a computer. Claims 32-41 of the '788 patent have the same ties to deeds, contracts, and real property as claims 1-31, but additionally require a computer to "generate a plurality of deedshares."

The district court, prior to the Supreme Court's decision in Bilski v. Kappos, 130 S. Ct. 3218 (2010), considered the patentability of the forty-one claims of the '788 patent only under the "machine-or-transformation test." The district court invalidated all claims of the '788 patent for failing to meet the subject matter eligibility requirements of § 101 and granted SJ in favor of Fort Properties.

"Under Bilski, this abstract concept cannot be transformed into patentable subject matter merely because of connections to the physical world through deeds, contracts, and real property." Slip op. at 10.

On appeal, the Federal Circuit reconsidered the patentability of the '788 patent claims de novo. The Court first reviewed four "seminal Supreme Court precedents [that] provide guidance regarding when an invention qualifies as a patent-eligible process as opposed to an abstract idea: Bilski, 130 S. Ct. 3218; Diamond v. Diehr, 450 U.S. 175 (1981); Parker v. Flook, 437 U.S. 584 (1978); and Gottschalk v. Benson, 409 U.S. 63 (1972)." Slip op. at 7. The Court identified claims 1-31 of the '788 patent as "very similar" to those in Bilski involving "a method by which buyers and sellers of commodities could protect, or hedge, against risk of price changes." Id. at 8. Despite AML's arguments that the claimed method "take[s] place in the real world" and "involves real property, deeds, and contracts," and that the deeds are physical legal documents, the Federal Circuit held that, like the Bilski claims, the '788 patent claims 1-31 did not require the use of a computer and involve "conceptual steps." Id. at 9-10. The Court explained that Bilski's claims were also tied to the physical world through tangible commodities and money, but that these ties were insufficient to render the claims patentable. Further noting that the ineligible invention in Flook involving the catalytic chemical conversion of hydrocarbons also "had ties to the physical world," the Federal Circuit explained that the "abstract concept cannot be transformed into patentable subject matter merely because of connections to the physical world through deeds, contracts, and real property." Id. at 10.

The Federal Circuit then reviewed its own recent precedent and found it consistent with the conclusion that claims 1-31 are directed to an abstract idea. The Court noted that in In re Comiskey, 554 F.3d 967, 981 (Fed. Cir. 2009), claims were unpatentable even though they required the use of physical contract documents, and that in In re Schrader, 22 F.3d 290, 291 (Fed. Cir. 1994), claims to a method of bidding at an auction were unpatentable despite the physical effect or result of entering bids in a record because "[t]he dispositive issue [was] whether the claim as a whole recite[d] sufficient physical activity to constitute patentable subject matter." Slip op. at 11 (alterations in original) (quoting In re Schrader, 22 F.3d at 294).

Next, the Federal Circuit considered claims 32-41 of the '788 patent, which contain an additional limitation requiring a computer to "generate a plurality of deedshares." The Court noted that its own recent precedent provides guidance on how claim limitations involving computers should be treated under 35 U.S.C. § 101. The Court explained that "the basic character of a process claim drawn to an abstract idea is not changed by claiming only its performance by computers, or by claiming the process embodied in program instructions on a computer readable medium." Id. at 12 (quoting Cybersource Corp. v. Retail Decisions, Inc., 654 F.3d 1366, 1375 (Fed. Cir. 2011)). As an example of when "the use of a machine '[would] impose meaningful limits on the claim's scope,'" the Court pointed to Ultramercial, LLC v. Hulu, LLC, 657 F.3d 1323, 1328 (Fed. Cir. 2011), in which the use of a computer was not a "merely insignificant post solution activity." Slip op. at 12 (quoting Cybersource, 654 F.3d at 1375). The Court characterized the Ultramercial invention as a "specific application to the Internet and a cyber-market environment" involving "advances in computer technology." Id. (quoting Ultramercial, 657 F.3d at 1328, 1329). The Court then contrasted Ultramercial's claims requiring "an extensive computer interface" with the claims in Dealertrack, Inc. v. Huber, Nos. 09-1566, -1588, 2012 WL 164439, at *14, *18 (Fed. Cir. Jan. 20, 2012), which, despite limitations requiring the invention to be "computer aided," were "silent as to how a computer aids the method, the extent to which a computer aids the method, or the significance of a computer to the performance of the method." Slip op. at 12-13 (quoting Dealertrack, 2012 WL 164439, at *17).

Finding this precedent in accord with its conclusion that the "computer limitation" in claims 32-41 is "simply insignificant post-solution activity," the Court affirmed the district court's invalidation of all the claims of the '788 patent.

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