Alert April 11, 2013

Federal Circuit to Decide En Banc Patent Eligibility of Software Technologies in CLS Bank Corp. v. Alice Corp. Pty. Ltd.

Ever since the Supreme Court breathed new life into the question of patent eligibility under 35 U.S.C. § 101 in Bilski v. Kappos, __ U.S. __, 130 S.Ct. 3128 (2010), courts have struggled to consistently and clearly apply Bilski and its progeny to inventions implemented in software. The Federal Circuit sitting en banc recently heard oral argument in CLS Bank Corp. v. Alice Corp. Pty. Ltd. in a case that will likely have a profound effect on software patent cases and change the way courts analyze questions of patent eligibility in such cases.

The Problem with the Section 101 Framework in Software Cases

Faced with an invention implemented in software, courts must reconcile recent Supreme Court decisions on patent eligibility with the Federal Circuit’s traditional (and still preferred) “machine-or-transformation test.”  On the one hand, the Supreme Court has stated that section 101’s otherwise broad threshold for patent-eligibility is subject to three judicially-created exceptions:  (i) laws of nature, (ii) physical phenomena, and (iii) abstract ideas. In software cases, the question becomes whether the claimed invention is an “abstract idea” that is simply implemented in a computer. The Federal Circuit’s “machine-or-transformation test,” on the other hand, directs courts to analyze whether a particular patented invention “is tied to a particular machine or apparatus, or it transforms a particular article into a different state or thing.”  As will be discussed below, neither test is particularly well-suited for software cases.

Although the Supreme Court in Bilksi rejected the Federal Circuit’s “machine-or-transformation test” as the exclusive test to determine patent eligibility, it remains a “useful tool” and the Federal Circuit’s preferred starting point for any section 101 analysis. The problem, however, is that software patents are inherently tied to machines: computers. Moreover, the execution of software invariably results in some articulable transformation, whether it be an altered data structure, some change in memory, or other type of digital manipulation. Thus, at least at some level, a software patent will always satisfy the machine-or-transformation test. The Federal Circuit, however, has acknowledged that “[t]he mere implementation on a computer of an otherwise ineligible abstract idea will not render the asserted ‘invention’ patent eligible,” and over the last two years it has found a number of software patents invalid for failing to meet the section 101 test for patent eligibility. The analysis in such cases has turned on whether the computer played a “significant part in permitting the claimed method to be performed.”  See, e.g., Fort Props., Inc. v. Am. Master Lease LLC, 671 F.3d 1317, 1324 (Fed. Cir. 2012) (investment tool for real estate property owners); CyberSource Corp. v. Retail Decisions, Inc., 654 F.3d 1366, 1371-72 (Fed. Cir. 2011) (method and system for detecting fraud in a credit card transaction).

Thus, courts faced with section 101 challenges typically engage in a perfunctory machine-or-transformation analysis only to return to the core question:  is the patented invention simply the implementation on a computer of an ineligible abstract idea?  Unfortunately, the Supreme Court’s abstract idea test is even less defined. As the Federal Circuit panel in CLS Bank stated, “[a]ny claim can be stripped down, or simplified, removing all of its concrete limitations, until at its core, something that could be characterized as an abstract idea is revealed.”  CLS Bank Int’l v. Alice Corp. Pty. Ltd., 685 F.3d 1341, 1351 (Fed. Cir. 2012). There is no easy way to define an abstract idea. The Supreme Court has stated that an abstract idea is a “fundamental truth; an original cause; a motive.”  See Bilski, 130 S.Ct. at 3230 (quotations omitted). And, the Federal Circuit has explained that “abstract ideas constitute disembodied concepts or truths which are not ‘useful’ from a practical standpoint standing alone, i.e., they are not ‘useful’ until reduced to some practical application.”  In re Alappat, 33 F.3d 1526, 1542 (Fed. Cir. 1994) . These attempts to define an unpatentable abstract idea have provided little guidance to courts evaluating whether computer-implemented inventions are valid under section 101, and considerable confusion remains as to when such inventions cross the line from patent eligible to ineligible.

CLS Bank v. Alice Corp. – The Federal Circuit Panel’s Solution

In CLS Bank, the asserted patents covered systems, methods and computer products for exchanging obligations in which a trusted third party settles obligations between a first and second party so as to eliminate settlement risk. In essence, the patents claimed the use of an intermediary in a financial transaction to reduce the risk that one party fails to perform after it has received the consideration from the other party. At summary judgment, the district court held that all claims were invalid for failing to claim patent eligible subject matter because they were directed to abstract ideas. On appeal, the panel was presented with two questions:  (i) are the method claims directed to patent ineligible abstract ideas and (ii) should the test for patent eligibility of system and products claims be different than method claims because they are tangible physical objects (and therefore literally not abstract)? 

The majority in CLS Bank held that the method claims were not abstract ideas and were patent eligible under section 101, and all three judges on the panel agreed that the test for patent eligibility does not depend on whether the claims are drafted as system, product or method claims. The majority opinion, authored by Judge Linn, recognized the current problems in the framework for the section 101 analysis for inventions implemented in computers. According to the panel, “[m]any patents [] drawn to inventions implemented in computer hardware or software … are argued not to pass the machine-or-transformation test,” requiring courts to “sometimes look beyond the machine-or-transformation test to distinguish eligible from ineligible computer-related claims.”  CLS Bank, 685 F.3d at 1350-51. The panel also acknowledged that “[t]he abstractness of the ‘abstract test’ to patent eligibility has become a serious problem….”  Id. at 1348.

In light of this uncertainty, the panel articulated a new test of patent eligibility of software claims:  “when—after taking all of the claim recitations into consideration—it is not manifestly evident that a claim is directed to a patent ineligible abstract idea, that claim must not be deemed for that reason to be inadequate under § 101.”  Id. at 1352. The panel went on to state that to be ineligible the “abstract idea” (loosely defined as a “fundamental truth” or “disembodied concept”) must be “the single most reasonable understanding” of the claim. If, however, the claim is directed to a “specific application” or a “practical application,” then it will pass muster under section 101. In reaching its conclusion, the majority rejected the dissent’s argument (authored by Judge Prost) that in order to be patent eligible under section 101, the claims must include an “inventive concept.”  Id. at 1357 (Prost, J. dissenting).

En Banc Review

On October 9, 2012, the Federal Circuit granted CLS Bank’s petition for rehearing en banc and vacated the panel’s decision. The parties were requested to file new briefs addressing two questions: 

a. What test should the court adopt to determine whether a computer-implemented invention is a patent ineligible “abstract idea”; and when, if ever, does the presence of a computer in a claim lend patent eligibility to an otherwise patent-ineligible idea?

b. In assessing patent eligibility under 35 U.S.C. § 101 of a computer-implemented invention, should it matter whether the invention is claimed as a method, system, or storage medium; and should such claims at times be considered equivalent for § 101 purposes?

Oral argument was held on Feb. 9, 2013. Questioning from the judges focused on the definition of an abstract idea; how systems and products can be “abstract” when they claim physical, tangible objects; the role of claim construction in the section 101 analysis; and whether the patented inventions preempt other methods of using third-party intermediaries in financial transactions. If anything, oral argument revealed an en banc court that is sharply divided on the role of section 101 as a threshold inquiry of patent eligibility and the application of section 101 to software patents. Further complicating the analysis is the number of and differences among the claims at issue in CLS Bank, which include systems, methods and products as well as claims that both expressly recite and do not recite the use of computers. Given this complexity and uncertainty, it could very well be that this will be the third section 101 case to reach the Supreme Court in three years.