Defendant American Master Lease LLC ("AML") appealed the decision of Judge Guilford of the Central District of California holding that all claims of U.S. Patent No. 6, 292,788 were invalid for failing to meet the subject matter eligibility requirements of Section 101 of the Patent Statute. The Federal Circuit (in a panel consisting of Circuit Judges Prost, Schall and Moore) affirmed the invalidity of the claims based on the district court's pre-In re Bilski application of the machine or transformation test.

The claims at issue relate to an investment tool to enable property owners to buy and sell property without incurring tax liability pursuant to 26 U.S.C. § 1031 ("1031 Exchange"). All claims in the '788 patent are method claims, with claim 1 being representative:

  1. A method of creating a real estate investment instrument adapted for performing tax-deferred exchanges comprising:

aggregating real property to form a real estate portfolio;

encumbering the property in the real estate portfolio with a master agreement; and

creating a plurality of deedshares by dividing title in the real estate portfolio into a plurality of tenant-in-common deeds of at least one predetermined denomination, each of the plurality of deedshares subject to a provision in the master agreement for reaggregating the plurality of tenant-in-common deeds after a specified interval.

The Federal Circuit framed the issue as being whether "the real estate investment tool disclosed in the '788 patent falls under the 'process' category of § 101." While AML contended its invention was a patent-eligible process, Defendant Fort Properties argued that the invention was an unpatentable abstract idea.

After summarizing the Supreme Court jurisprudence on this issue, i.e. Bilski, Diamond v. Diehr, Parker v. Flook, and Gottschalk v. Benson, the Federal Circuit analyzed the claims under the machine and transformation test. The Court quickly dismissed any notion that the claims were tied to a machine, i.e., computer. Regarding the transformation test, AML argued that the process was patentable because the claims involve property deeds, which "remove the invention from the realm of the abstract because they are physical legal documents signifying real property ownership that must be publicly recorded." Fort Properties, on the other hand, argued that the methods were entirely mental processes and abstract concepts. The intertwinement with deeds, contracts, and real property does not transform them into a patentable process.

The Court sided with Fort Properties and explained that the claims at issue were not unlike those in Bilski and thus were not patent-eligible subject matter:

We agree with Fort Properties. Indeed, the claims in Bilski were tied to the physical world through at least two tangible means: commodities and money. Id. at 3223-24. These ties, however, were insufficient to render the abstract concept of hedging patentable. See id. at 3231. We view the present case as similar to Bilski. Specifically, like the invention in Bilski, claims 1-31 of the ′788 patent disclose an investment tool, particularly a real estate investment tool designed to enable tax-free exchanges of property. This is an abstract concept. Under Bilski, this abstract concept cannot be transformed into patentable subject matter merely because of connections to the physical world through deeds, contracts, and real property. Our reasoning is further supported by the fact that the claimed algorithm in Flook also had ties to the physical world (i.e., the invention involved the "catalytic chemical conversion of hydrocarbons"), yet the Supreme Court still characterized that invention as unpatentable. 437 U.S. at 586, 594-95.

The Court similarly held that other claims were not patentable for the same reason, despite the existence of an additional limitation requiring a computer to "generate a plurality of deedshares." The Court dismissed the addition of the computer as "simply insignificant post-solution activity" based on AML's broad definition of a computer during the claim construction process.

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This case illustrates the on-going development of the jurisprudence related to the patentability of business method claims. It is also reinforces that although the machine or transformation test no longer is the exclusive test for determining patent-eligibility, it continues to play a central role in that determination.

Fort Properties Inc. v. American Master Lease LLC, No. 2009-1242, 101 USPQ2d 1785 (Fed. Cir. February 27, 2012).