Business Method Patents: Murkier Water

The long-awaited decision by the United States Supreme Court on business method patents was issued on June 19, 2014.  Unfortunately, the decision raised more questions than it answered.  The expectation was that the Supreme Court would clearly explain the difference between unpatentable abstract ideas and patentable software, including business methods.  Instead, the Court issued a very narrow decision with broad, but uncertain ramifications.  The Court applied a test it has previously relied upon, striking down all of the patents in the case and expressly stating that it was not opining on the patentability of software or business methods in general.

The case is Alice Corporation Pty. Ltd. v. CLS Bank International, 2014 U.S. Lexis 4303 (U.S. Supreme Court, June 19, 2014). Alice Corporation’s patents were directed to a computer-implemented process of minimizing “settlement risk” – the risk to a party in a financial transaction that the other party would not perform the transaction, by creating an intermediary using “shadow” financial records of both parties.  The claims covered the computer system to perform the process, the computerized method itself, and a computer-readable medium with the instructions to perform the method.

Alice Corporation had sued CLS Bank for patent infringement.  The district court had granted summary judgment for CLS Bank on the grounds that all of the claims were not eligible for patent protection as they were directed to an abstract idea.  A panel of the Federal Circuit Court of Appeals had reversed the district court, but then, in an en banc hearing, affirmed the district court in a set of multiple opinions.  A plurality of the Federal Circuit found all of Alice Corporation’s claims patent-ineligible, relying on the Supreme Court’s 2012 decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S.Ct. 1289 (2012).

The Supreme Court unanimously affirmed the Federal Circuit’s decision.  The Court applied the “framework” it had set forth in Mayo for determining whether a claim is directed to a patent-ineligible law of nature, natural phenomenon, or abstract idea, or to a patent-eligible application of those concepts.  Under that framework, a court must first determine whether the claim is directed to a patent-ineligible concept.  If the answer to the first question is yes, then the second step is to decide whether the elements of the claim, individually or as a combination, “transform the nature of the claim’ into a patent-eligible application.”  (2014 U.S. Lexis 4303 at *16.)

In applying the Mayo framework to Alice Corporation’s patent claims, the Court answered the first step affirmatively.  The Court found that the claims were directed to the abstract idea of an intermediate settlement.  (Id. at *17.)  The Court compared Alice Corporation’s method of using an intermediary third party to minimize settlement risk to the method of hedging against financial risk in price fluctuations that the Court had held to be an abstract idea in Bilski v. Kappos, 561 U.S. 593 (2010).  According to the Court, both methods were “fundamental economic practice[s] long prevalent in our system of commerce.”  (Id. at *20.)

The Court then analyzed Alice Corporation’s claims under the second Mayo step.  The Court explained that the use of a computer does not necessarily transform a patent‑ineligible abstract idea into a patent-eligible invention.  (Id. at *22, *26.)  General purpose computers or related components do not make a claim patent-eligible as the Court said, at *26:

“Stating an abstract idea while adding the words ‘apply it’ is not enough for patentability eligibility.  [citation omitted.]  Nor is limiting the use of an abstract idea ‘to a particular technological environment.’  [citation omitted.]  Stating an abstract idea while adding the words ‘apply it with a computer’ simply combines those two steps, with the same deficient result.”

The Court explained the long-standing rationale for excluding abstract ideas from patentability, at *14:

“We have described the concern that drives this exclusionary principle as one of pre-emption.  See, e.g. Bilski, supra, at 611-612 (upholding the patent ‘would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea’).  Laws of nature, natural phenomena, and abstract ideas are ‘the basic tools of scientific and technological work.’  [citation omitted.]  Myriad, supra, at ___ (slip op. at 11).  ‘[M]onopolization of those tools through the grant of a patent might tend to impede innovation more than it would tend to promote it …’”

With respect to computer-implemented inventions, the Court stated, at *26-27:

“Given the ubiquity of computers [citation omitted], wholly generic computer implementation is not generally the sort of ‘additional feature[e]’ that provides any ‘practical assurance that the process is more than a drafting effort designed to monopolize the [abstract idea] itself.’”

The Court held that Alice Corporation’s claims did nothing more than instruct the user how to perform the abstract idea of an intermediated settlement on a generic computer using generic functions.  (Id. at *28-*29.)  The claimed function was “purely conventional.”  Id.

Based on the application of the Mayo framework, the Court concluded that Alice Corporation’s method claims were not patent eligible.  The Court summarily reached the same conclusion as to the system claims, stating that the hardware described in the claims was “a handful of generic computer components.”  (Id. at *31.)  Lastly, the Court reached the same conclusion as to Alice Corporation’s computer-readable media claims.

In its decision, the Court stated that it was cautious in its approach.  In trying to explain what is patent-eligible, the Court said, at *15:

“[w]e tread carefully in construing this exclusionary principle lest it swallow all of patent law.  [citation omitted.]  At some level, ‘all inventions…embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas.’  [citation omitted.]  Thus, an invention is not rendered ineligible for patent simply because it involves an abstract concept.  See Diamond v. Diehr, 450 U.S. 175, 187 (1981).  ‘[A]pplication[s]’ of such concepts ‘to a new and useful end,’ we have said, remain eligible for patent protection.”

Despite its suggestion that claims “involving” abstract ideas are still patent eligible, many practitioners are concerned that software is going to be more difficult to patent.  Even though the Court did not even use the word “software”, its decision struck down the three ways that software is typically claimed.  Perhaps the Federal Circuit will limit the impact of the case by narrowing its application to financial processes, but, even so, it is clear that software will be now much harder to patent, much more uncertain, and more costly than it was before.