United States: Fractured Court Holds Computer-Implemented System, Method, And Computer-Readable Media Claims Invalid Under 35 U.S.C. § 101

In CLS Bank International v. Alice Corp., No. 11-1301 (Fed. Cir. May 10, 2013) (en banc), the Federal Circuit, upon consideration en banc, affirmed the district court's grant of SJ in favor of CLS Bank International and CLS Services Ltd. (collectively "CLS Bank"), finding that method and computer-readable media claims directed to risk management for computerized trading are not eligible subject matter under 35 U.S.C. § 101.  No majority of the judges, however, agreed as to the legal rationale for that conclusion.  In addition, the Court was evenly split on the patent eligibility of the system claims. 

Alice Corporation Pty. Ltd. ("Alice") is the owner of the patents-in-suit, which include U.S. Patent Nos. 5,970,479 ("the '479 patent"); 6,912,510 ("the '510 patent"); 7,149,720 ("the '720 patent"); and 7,725,375 ("the '375 patent").  The four related patents-in-suit are directed to "the management of risk relating to specified, yet unknown, future events."  Slip op. at 3 (citation omitted).  Specifically, the patents-in-suit include system, method, and media claims directed to a computerized trading platform that enables a trusted third party to settle obligations between first and second parties in a manner that eliminates a "settlement risk" associated with a transaction.

CLS Bank sued Alice, seeking DJ of noninfringement, invalidity, and enforceability as to the '479, '510, and '720 patents.  Alice filed a counterclaim, alleging infringement of the '479, '510, and '720 patents.  CLS Bank subsequently moved for SJ, contending that the asserted claims of the '479, '510, and '720 patents are invalid under 35 U.S.C. § 101.  Alice opposed and cross-moved for SJ.  Following the Supreme Court's grant of certiorari in In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc), cert. granted sub. nom. Bilski v. Doll, 129 S. Ct. 2735 (June 1, 2009), the district court denied the parties'
cross-motions for SJ as to subject matter eligibility without prejudice.

In the meantime, the '375 patent issued and Alice filed amended counterclaims additionally asserting that CLS Bank infringed the claims of the '375 patent.  After the Supreme Court's decision in Bilski v. Kappos, 130 S. Ct. 3218 (2010), the parties renewed their cross-motions for SJ, and CLS Bank added invalidity contentions under § 101 with regard to the '375 patent.  The district court granted CLS Bank's motion for SJ and denied Alice's cross-motion, holding that the asserted claims of the patents-in-suit were invalid for failing to claim patent-eligible subject matter under § 101.  Alice appealed.

On appeal, in a per curiam decision, a majority of the Federal Circuit affirmed the district court's decision that the asserted method and computer-readable media claims are not directed to eligible subject matter under 35 U.S.C. § 101.  An equally divided Court affirmed the district court's holding that the asserted system claims are not directed to eligible subject matter under the same statute.

Judge Lourie wrote a concurring opinion, which Judges Dyk, Prost, Reyna, and Wallach joined.  Before reviewing foundational § 101 precedent, Judge Lourie explained the basic steps in a patent-eligiblity analysis:  (1) ask whether the claimed invention falls within one of the statutory categories, i.e., is a process, machine, manufacture, or composition of matter.  If not, the claim is ineligible under § 101; (2) if so, determine whether the claim is drawn to a patent-ineligible law of nature, natural phenomenon, or abstract idea?  If so, the claim is not patent eligible.

"[W]e conclude that the district court correctly held that the asserted claims drawn to methods, computer-readable media, and systems are not patent eligible and are hence invalid under § 101."  Lourie Concurrence at 23.

"[I]f all of these claims, including the system claims, are not patent-eligible, this case is the death of hundreds of thousands of patents, including all business method, financial system, and software patents as well as many computer implemented and telecommunications patents."  Moore Dissent-in-Part at 2.

Turning first to the asserted method claims, Judge Lourie found claim 33 of the '479 patent representative.  Claim 33 recites a method for facilitating a previously arranged exchange between two parties requiring the use of "shadow records" maintained by a third-party "supervisory institution."  Lourie Concurrence at 25.  The shadow records mirror the parties' real-world accounts held at their respective "exchange institutions."  Id.  Although claim 33 does not expressly recite any computer-based steps, the parties agreed that the recited shadow records and transactions require computer implementation.

Judge Lourie found that claim 33 of the '479 patent recites a process and questioned whether that process amounts to no more than a patent-ineligible abstract idea.  Judge Lourie explained that the concept of reducing settlement risk by facilitating a trade through third-party intermediation is an abstract idea because it is a "disembodied" concept that, standing alone, is not patent eligible.  Id. at 26.  Judge Lourie's analysis, therefore, turned to whether the balance of claim 33 adds "significantly more."  Id.  Judge Lourie found nothing in the asserted method claims represents "significantly more" than the underlying abstract idea for purposes of § 101.  Id. at 25-26.  Accordingly, Judge Lourie found that the method claims of the patents-in-suit are drawn to patent-ineligible subject matter and invalid under § 101.

Judge Lourie further concluded that the computer-readable medium claims of the asserted patents are merely method claims in the guise of a device and thus do not overcome the Supreme Court's warning to avoid permitting a "competent draftsman" to endow abstract claims with patent-eligible status.  Id. at 31.  Turning to the asserted system claims of the patents-in-suit, Judge Lourie concluded that they represent nothing more than a "Trojan horse" designed to enable abstract claims to slide through the screen of patent eligibility.  Id. at 33-34. 

Judge Rader, concurring-in-part and dissenting-in-part, explained that the relevant inquiry in the § 101 analysis must be whether a claim as a whole includes "meaningful limitations" that restrict it to an application, rather than merely an abstract idea.  Rader Concurrence-in-Part and Dissent-in-Part at 2.  When making such an inquiry, Judge Rader emphasized that a court cannot go hunting for abstractions by ignoring the concrete, palpable, tangible limitations of the invention the patentee actually claims. 

In drawing a line between claims that do and do not include such "meaningful limitations," Judge Rader identified useful "guideposts" within the Supreme Court's own case law.  Id. at 17.  In particular, with respect to computer-implemented inventions, Judge Rader explained that where a claim is tied to a computer in such a way that the computer plays a meaningful role in the performance of the claimed invention, and the claim does not preempt virtually all uses of an underlying abstract idea, the claim is patent eligible.

Applying these guideposts to the patents-in-suit, Judge Rader found that the asserted system claims recite complex interrelated machine components that squarely fit within the terms of § 101 and involve nothing theoretical, highly generalized, or otherwise abstract.  For at least these reasons, Judge Rader, joined by Judges Moore, Linn, and O'Malley, would affirm that the asserted system claims are patent eligible. 

Turning to the asserted method claims, Judge Rader found that each method claim as a whole embraces using escrow to avoid risk of one party's inability to pay, i.e., an abstract concept.  Thus, Judge Rader and Judge Moore would affirm that the asserted method and media claims are not eligible for patenting, but for reasons different than those articulated by Judge Lourie.  Judges Linn and O'Malley wrote separately with regard to these latter claims.  For these reasons, Judge Rader, joined by Judges Moore, Linn, and O'Malley, would remand for additional proceedings.

Judge Moore, dissenting-in-part, observed that her colleagues erroneously apply Prometheus's "inventive concept" language by stripping away all known elements from the asserted system claims and analyzing only whether what remains, as opposed to the claim as a whole, is an abstract idea.  Moore Dissent-in-Part at 6.  According to Judge Moore, the only way to determine if Alice's asserted system claims are merely directed to an abstract idea is to analyze each claim as a whole, looking at the language of the claims.  Applying such an approach, Judge Moore concluded that the asserted system claims are directed not to an abstract idea, but to a specific machine configured to perform certain functions, and, as such, Judge Moore concluded that the asserted system claims are patent eligible under § 101.  Judge Moore cautioned that "if all of these claims, including the system claims, are not patent-eligible, this case is the death of hundreds of thousands of patents, including all business method, financial system, and software patents as well as many computer implemented and telecommunications patents."  Id at 2.

Judge Newman, concurring-in-part and dissenting-in-part, observed that the Court's irresolution concerning § 101 affects not only the Court and the trial courts, but also PTO examiners and agency tribunals, and all who invent and invest in new technology.  In view of the present impasse, Judge Newman proposed that the Court return to the time-tested principles of patent law and recommended that the Court hold that (1) § 101 is an inclusive statement of patent-eligible subject matter; (2) the form of the claim does not determine § 101 eligibility; and (3) experimental use of patented information is not barred. 

Judges Linn and O'Malley, in a dissenting opinion, emphasized that the method, media, and system claims of the patents-in-suit must rise and fall together, not because they are tainted by the same abstract concept, but because the record makes clear that they are grounded by the same meaningful limitations that render them patent eligible.  In Judges Linn and O'Malley's view, no intellectually sound way exists to distinguish the method claims as construed by the district court from the system claims.  Thus, Judges Linn and O'Malley found the asserted system claims, as well as the method and media claims, patent eligible.

Judge Rader, in an additional reflection, counsels us that "[w]hen all else fails, consult the statute!"  Rader Additional Reflections at 4.

This article previously appeared in Last Month at the Federal Circuit, June 2013

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