On June 19, 2014, in Alice Corp. Pty. Ltd. v. CLS Bank International, a unanimous Supreme Court stated that "[t]here is no dispute that ... many computer-implemented claims are formally addressed to patent-eligible subject matter[,]" sparing computer software patents in general.1 However, the Supreme Court found that an abstract idea is not transformed into a patent eligible invention by merely implementing it on a computer.2 Specifically the Supreme Court held that:
the claims at issue are 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.3
It is worth noting that Justice Sotomayor, in a concurring opinion joined by Justices Ginsburg and Breyer, "adhere[d] to the view that any 'claim that merely describes a method of doing business does not qualify as a 'process' under § 101.'"4
The asserted claims relate to "a computerized scheme for mitigating 'settlement risk'" and "are designed to facilitate the exchange of financial obligations between two parties by using a computer system as a third party intermediary."5 The asserted patents claim methods of exchanging obligations, systems configured to carry out the methods, and computer-readable media claims containing software for performing the methods, which are all implemented using a computer.
The district court found that the asserted claims were "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.'"6 After granting rehearing en banc and vacating its panel decision reversing the district court, a divided Federal Circuit affirmed the district court judgment in a one-paragraph per curiam opinion.7
The Supreme Court's Analysis
The Supreme Court began its analysis with 35 U.S.C. § 101 ("Section 101"), which defines patent eligible subject matter as "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof[.]" However, the Supreme Court immediately referred to "an important implicit exception: Laws of nature, natural phenomena, and abstract ideas are not patentable."8 The Supreme Court was mindful that at some level all inventions embody or apply laws of nature, natural phenomena or abstract ideas and that an invention is not rendered ineligible for patent protection merely because it involves an abstract idea or law of nature. The hard part is distinguishing between patents that claim the "'buildin[g] block[s]' of human ingenuity and those that integrate the building blocks into something more, thereby 'transform[ing]' them into a patent-eligible invention[.]"9
The Supreme Court approved the framework it provided in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. __, 132 S. Ct. 1289 (2012) "for distinguishing patents that claim laws of nature, natural phenomena, and abstract ideas from those that claim patent-eligible applications of those concepts."10 Under the Mayo framework:
- First, a court determines "whether the claims at issue are directed to one of [the] patent-ineligible concepts."
- Second, if the court finds that claims are directed to patent-ineligible concepts, the court performs an "inventive concept" analysis looking at the claim elements "both individually and 'as an ordered combination' to determine whether the additional elements 'transform the nature of the claim' into a patent-eligible [invention]."11
Applying the first step of the Mayo framework and following the reasoning from its prior cases, particularly Bilski, the Supreme Court concluded that the asserted claims are drawn to the abstract idea of intermediated settlement, i.e., using an intermediary to mitigate risk in a financial exchange.12 The Supreme Court reasoned that intermediated settlement, like hedging risk in Bilski, is "a fundamental economic practice long prevalent in our system of commerce[,]" citing an economic text book from 1896.13 The Supreme Court rejected the argument of the patent owner (Alice) that abstract ideas "[are] confined to 'preexisting, fundamental truth[s]' that 'exis[t] in principle apart from any human [behavior or] action.'"14 The Supreme Court relied on the holding in Bilski that the concept of hedging risk was an abstract idea even though it was not a "preexisting, fundamental truth."15
Applying the second step in the Mayo framework, the Supreme Court concluded that "generic computer implementation, fail[s] to transform [the] abstract idea [of intermediated settlement] into a patent-eligible invention."16 Here, the Supreme Court examined the asserted claims for "'additional features' to ensure 'that the [claim] is more than a drafting effort designed to monopolize the [abstract idea].'"17
The Supreme Court looked for a transformation that was more than simply applying the abstract idea. Relying on its precedence in Gottschalk v. Benson, 409 U.S. 63 (1972), Parker v. Flook, 437 U.S. 584 (1978), and Diamond v. Diehr, 450 U.S. 175 (1981), the Supreme Court concluded that merely implementing an abstract idea on a computer, or providing a specific implementation of an abstract idea without more is not enough to transform an abstract idea into patent eligible subject matter. The Supreme Court concluded that the steps of the claims were routine and conventional steps "previously known to the industry," and that "the claims here do [nothing] more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer."18 Thus, the Supreme Court found that the method claims were not patent eligible.19
The Supreme Court also rejected the system and media claims. The system claims were rejected because the addition of hardware found in nearly every computer was not enough to transform the abstract idea of intermediation into patent eligible subject matter. The Supreme Court concluded that the media claims were not transformed because Alice agreed that the media claims "rise or fall with its methods claims."20
The Supreme Court decision did not significantly alter the landscape for computer or business method patents and its holding may be limited in future applications by courts to its facts. The decision specifically acknowledged that there is "no dispute" that many computer implemented claims are directed to patent-eligible subject matter. The difficulty will lie in applying the Mayo framework to distinguish between claims on the one hand that are merely directed to abstract ideas or laws of nature, and claims on the other hand that contain additional steps or material to transform the process into an inventive application of the abstract idea or law of nature. The mere recitation of a generic computer cannot transform an abstract idea into a patent eligible invention so applicants filing business method or software patents should make sure that the underlying method or system is sufficiently patentable on its own notwithstanding implementing the method or system on a computer.
Patent holders of business method or software patents should consult their attorney to review any patents that are the subject of licenses or that they expect to assert in litigation.
The U.S. Patent & Trademark Office will issue examiner instructions within the next few days and we will keep you posted as to any new instructions and the likely impact on the prosecution of business and software patents.
1 Alice Corp. Pty. Ltd. v. CLS Bank Int'l, No. 13-298, 2014 WL 2765283, at *10 (S. Ct. June 19, 2014).
3 Id. at *3.
4 Id. at *13 (quoting Bilski v. Kappos, 561 U.S. 593, 614 (2010) (Stevens, J., concurring in judgment)).
5 Id. at *3.
6 Id. at *4 (quoting CLS Bank Int'l v. Alice Corp. Pty. Ltd., 768 F. Supp. 2d 221, 252 (D. D.C. 2011)).
7 Id. (citing (CLS Bank Int'l v. Alice Corp. Pty. Ltd., 717 F.3d 1269, 1273 (Fed. Cir. 2013)).
8 Id. at *5 (quoting Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 569 U.S. ___, 133 S. Ct. 2107, 2116 (2013)).
9 Id. at *6 (internal citations omitted) (quoting Mayo, 132 S. Ct. at 1303, 1294).
10 Id. at *6.
11 Id. (quoting Mayo, 566 U.S. at ____, 132 S. Ct. at 1294, 1297).
12 Id. at *7-8.
13 Id. at *8 (citations omitted).
16nId. at *9.
18 Id. at *11.
19 Representative claim 33 of U.S. Patent No. 5,970,479 recites:
- "A method of exchanging obligations as between parties, each party holding a credit record and a debit record with an exchange institution, the credit records and debit records for exchange of predetermined obligations, the method comprising the steps of:
- creating a shadow credit record and a shadow debit record for each stakeholder party to be held independently by a supervisory institution from the exchange institutions;
- obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;
- for every transaction resulting in an exchange obligation, the supervisory institution adjusting each respective party's shadow credit record or shadow debit record, allowing only these transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order, and
- at the end-of-day, the supervisory institution instructing on[e] of the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions."
20 Id. at *12 (citations omitted).
By Angie M. Hankins and Brian M. Rothery, Partners in the Intellectual Property Practice Group
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.