Ultramercial, Inc. et al. v. Hulu, LLC, et al.,

No. 2010-1544 (November 14, 2014) (Lourie, Mayer, and O’Malley)

On November 14, 2014, after twice before reversing the lower court’s dismissal of Ultramercial’s complaint for failing to claim statutory subject matter, the Federal Circuit agreed with the lower court that Ultramercial’s patent claims are ineligible under 35 U.S.C. § 101. Applying the new test set forth in the Supreme Court’s recent decision in Alice Corp. v. CLS Bank International, 134 S. Ct. 2347 (2014). the Federal Circuit found that Ultramercial’s claims directed to distributing copyrighted media over the Internet at no charge in exchange for viewing an advertisement, claimed nothing more than an ineligible abstract idea.

According to the two-step test, the court first determines whether the claims are directed to one of the three exceptions to patent-eligible subject matter: laws of nature, natural phenomena, and abstract ideas. If so, it is then determined whether the claim contains “an element or combination of elements that is sufficient to ensure that the patent practice amounts to significantly more than a patent upon the [ineligible concept] itself.” Alice, 134 S. Ct. at 2355. The additional elements must be more than “well-understood, routine, conventional activity” in order to transform the abstract idea into patent-eligible subject matter. Slip. Op. at 10 (quoting Mayo Collaborative Services. v. Prometheus Laboratories, Inc., 132 S. Ct. 1289, 1298 (2012)). The Federal Circuit found that Ultramercial’s claims are directed to the abstract idea of “showing an advertisement before delivering free content.” Slip. Op. at 10. Although the claims included limitations such as the user selecting the advertisement to view, and recording the transaction in an activity log, the Court found that these limitations merely add a degree of particularity but the claim as a whole is still devoid of a concrete or tangible application. The Court was careful to note that not all software-based patent claims are directed to abstract ideas, but agreed with the lower court in this case that the claims are directed to the abstract idea of “using advertising as an exchange or currency.” Id.

Moving to the second step of the analysis, the Federal Circuit examined the remaining claim limitations to determine whether they constitute an “inventive concept” that renders the claim patent-eligible. The Court found that the majority of the eleven claimed steps are merely incidental to the abstract concept of offering media content in exchange for viewing an advertisement (e.g., receiving the media content, selecting the advertisement, making the content available subject to the condition that the consumer views the advertisement, displaying the advertisement, allowing access to the content, and receiving payment from the advertiser). The additional steps of updating an activity log, requiring a request from the user to view the advertisement, restricting public access, and using the Internet, are merely conventional steps that are “insufficient to supply an inventive concept.” Slip. Op. at 11. Although not necessary to finding the claims patent-ineligible, the Court also noted that the claims fail the machine-or-transformation test because the claims are not tied to particular machine or apparatus and do not transform a particular article into a different state or thing.

Writing in concurrence, Judge Mayer made several interesting points with respect to patent eligibility. First, Judge Mayer encouraged lower courts to address patent eligibility at the outset of litigation–like the trial court in this case did–to conserve judicial resources, reduce vexatious litigation by resolving disputes before engaging in expensive discovery, and to free the public from innovation-stifling patents. Second, Judge Mayer argues that no presumption of validity should attach when conducting a section 101 analysis, unlike the presumption of validity for prior art challenges. Third, Judge Mayer interpretsAlice as essentially implementing a “technological arts” test. Judge Mayer’s interpretation relies on the Supreme Court’s finding claims ineligible where they did not “improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field.” Alice, 134 S. Ct. at 2359. Under this interpretation advances in non-technical disciplines such as business, law, or the social sciences––seemingly, any business method patent–– would be patent-ineligible.

The Ultramercial decision is not surprising given the Supreme Court’s decision inAlice, and the recent flood of decisions invalidating patent claims on patent-eligibility grounds. The most interesting aspects of the case come from Judge Mayer’s concurrence arguing that there is no presumption of patent-eligibility and that the issue of patent-eligibility should be determined at the outset of litigation. Over the last several months, district courts have decided the patent-eligibility issue at the pleadings stage with increased frequency, as opposed to on summary judgment. Judge Mayer’s concurrence further encouraging this practice should result in even more trial courts addressing the issue earlier in litigation.