Why Business Methods Are Difficult to Patent
November 13 2015
Although the general rule (based on 35 USC section 101) is that anything made by humans is patentable, there are exceptions. Laws of nature, physical phenomena, and abstract ideas are not patentable. Inventions that fall in these categories are “patent-ineligible,” that is, directed to subject matter that is not eligible to be patented. After the Supreme Court’s key decisions over the last few years in Bilski v. Kappos, 130 S. Ct. 3218 (2010); Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (2012), and Alice Corp. Pty. Ltd. V. CLS Bank International, 134 S. Ct. 2347 (2014), the courts have increasingly held computerized methods of doing business unpatentable.
The district court for the Eastern District of Texas, where many patent infringement cases are filed, handled such a case in Kroy IP Holdings, LLC v. Safeway, Inc., 2015 U.S. Dist. LEXIS 69363. In Kroy, the court provides a useful review of the state of the law, starting with the three Supreme Court cases.
In Bilski, supra, decided in 2010, the Supreme Court held that claims to a method for commodities traders to minimize the risk of price fluctuations was an unpatentable abstract idea. The idea of hedging against risks is a common practice in our economy. The Court found that an idea cannot be made patentable by limiting it to a particular field, such as commodities. The Court held that the Federal Circuit Court of Appeals’ previous test for claims that appear directed to abstract ideas, the machine-or-transformation test (which requires a claimed method to be linked to a particular machine or to transform an article into something else in order to be patentable) is one test that can be used, but is not the sole test.
In Mayo, supra, decided in 2012, the Supreme Court held that a method of increasing the dosage of drug in a patient if the concentration of the drug in the patient’s blood was below a certain level (and doing the reverse if it was too high) was an unpatentable law of nature. The Court emphasized that applying a law of nature to a particular field does not make it patentable. The Court also clarified that using a machine, such as a computer, to perform an abstract idea does not make the idea patentable. In reaching its decision, the Court set forth a two-part test to determine whether a claimed invention is patent-eligible or falls within the exception. First, a court must decide if the claim is directed to one of the categories of the exception. Second, if that is the case, then the court must decide whether the other elements of the claim transform the idea into an “inventive concept,” something more than an idea.
In Alice, supra, decided in 2014, the Supreme Court held that a computerized method for limiting the settlement risk in two-party financial transactions, using a computer as a third party intermediary, was an unpatentable abstract idea. Like Bilski’s risk hedging method, this method was a fundamental economic practice. Unlike Bilski’s method, however, the claims in Alice Corp. required the use of a computer. The Court held that the use of a generic computer cannot make an abstract idea patentable.
The Texas court also discussed several Federal Circuit cases, including Ultramercial, Inc. v. Hulu, LLC, 772 F.3d 709 (2014), which involved patent for a method of distributing copyrighted materials over the Internet. On remand from the Supreme Court, after Alice was decided, the Federal Circuit held the claims unpatentable. Under the Mayo test, the court found that the claims were directed to an abstract idea and that the other limitations in the claims did not transform the idea into patent-eligible subject matter.
After discussing these and more cases, the district court concluded that most of the time, district courts have invalidated patents directed to computer-implemented business methods. In considering Kroy’s patent, the court reached the same conclusion. The court said that incentive award systems using a computer are “plainly unpatentable.” With respect to Mayo’s first step, like the claims in Bilski and Alice, the court found that Kroy’s claims were directed to an abstract idea. As to Mayo’s second step, the court found no “inventive concept.” The use of computers and a network, like the Internet, did not make the claims patentable. As the Supreme Court explained in Alice, the addition of a generic computer does not make an invention patentable that would not otherwise have been patentable.
In invalidating Kroy’s patent, the court said that the claims were like many other business method patents: broad and not limited to a particular means, performing standard computer operations. Reiterating a point made by the Supreme Court in Mayo, the court said that such patents have “the potential to foreclose future innovation disproportionately” compared to the inventor’s contribution.