In Versata Development Group, Inc. v. SAP America, Inc., the Federal Circuit outlined the permitted extent of judicial review of Covered Business Method (CBM) patent review proceedings conducted by the USPTO Patent Trial and Appeal Board (PTAB). While the court held that it has jurisdiction to review PTAB determinations that underlie decisions to institute CBMs and CBM decisions on the merits, it also showed that it will grant substantial deference to the PTAB on many of these issues.

The Versata CBM Patent At Issue

The patent at issue was Versata’s  U.S. Patent No. 6,553,350, directed to “method[s] and apparatus[es] for pricing products in multi-level product and organizational groups.” SAP petitioned for Covered Business Method review of the ‘350 patent on September 16, 2012, the first date that such petitions could be filed.  The PTAB granted the petition and ultimately held the claims at issue invalid under 35 USC § 101.

Judicial Review of Covered Business Method Review Proceedings

Versata challenged the PTAB’s decision on several grounds, arguing that the ‘350 patent is not a CBM patent subject to Covered Business Method review, that § 101 is not a basis for invalidating a patent in a CBM proceeding, and that the ‘350 patent is not invalid. Although 35 USC § 329 provides for Federal Circuit review of PTAB CBM decisions, 35 USC § 324(e) precludes review of a decision to institute a CBM proceeding. SAP argued that § 324(e) precluded review of “any questions decided by the PTAB in the course of making its initial decision to institute,” while the USPTO (an intervenor in the appeal) focused its arguments on preclusion of review of the determination that the patent is a CBM patent.

The Federal Circuit opinion was authored by Judge Plager and joined by Judge Newman. Judge Hughes filed an opinion concurring in part and dissenting in part.

Issue 1: Can The Federal Circuit Review The PTAB’s Determination That A Patent Is A CBM Patent?  YES

The Federal Circuit reviewed the language of the CBM statutes at issue, the language of the parallel IPR statutes and recent Federal Circuit decisions interpreting them, and noted the “long tradition of judicial review of government actions that alter the legal rights of an affected person” and “the general presumption favoring judicial review of rights-changing administrative action.” The court found “nothing in § 324(e) [that] meets the high standard for precluding review of whether the PTAB has violated a limit on its invalidation authority,” and determined that is has jurisdiction to review whether a patent is a CBM patent.

Issue 2: Is The ‘350 Patent A CBM Patent?  YES

Congress defined a CBM patent in Section 18 of the America Invents Act (AIA) as “a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service,” and excluded “patents for technological inventions.” The USPTO’s implementing regulations set forth the same definition in 37 CFR § 42.301(a) , and provide further guidance on “technological inventions” in 37 CFR § 42.301(b):

Technological invention. In determining whether a patent is for a technological invention solely for purposes of the Transitional Program for Covered Business Methods (section 42.301(a)), the following will be considered on a case-by-case basis: whether the claimed subject matter as a whole recites a technological feature that is novel and unobvious over the prior art; and solves a technical problem using a technical solution.

As noted by the Federal Circuit the USPTO’s “interpretation” does little to elucidate the scope of the term!

Versata argued that Congress intended CBM patents to be limited to “products or services from the financial sector—i.e., banks, brokerages, holding companies, insurance, and similar institutions with a finance focus,” which its patent was not. SAP and the USPTO argued that the plain language used by Congress encompassed patents “relating to monetary matters,” which the ‘350 patent did.

The court agreed with the appellees:

We agree with the USPTO that, as a matter of statutory construction, the definition of “covered business method patent” is not limited to products and services of only the financial industry, or to patents owned by or directly affecting the activities of financial institutions such as banks and brokerage houses.

With regard to the “technological inventions” exception, the court questioned the need for the “novel and unobvious” language in the USPTO’s definition, but overall found no fault with the “definition of a ‘technological invention’ as essentially one having a ‘technological’ feature that solves a ‘technical’ problem using a ‘technical’ solution,” other than its circularity. The court agreed that Versata’s claims did not fall under the exception, citing the Supreme Court decision in Alice Corp. v. CLS Bank for the proposition that “even if the invention required the use of a computer, the claim did not constitute a technological invention” because “the presence of a general purpose computer to facilitate operations through uninventive steps does not change the fundamental character of an invention.”

Issue 3: Can The PTAB Apply A BRI Claim Construction In A CBM Proceeding?  YES

The Federal Circuit cited it decision in In re Cuozzo Speed Technologies, LLC, which upheld the PTAB’s use of BRI in Inter Partes Review (IPR) proceedings, and found “no basis for distinguishing between the two proceedings for purposes of the PTAB’s use of BRI in claim construction.” (Read more about the Cuozzo panel decision in this article on Foley’s PharmaPatentsBlog.) The court also noted that the claim construction standard likely did not make a difference in this case, and commented that the PTAB’s construction of the claims at issue appeared to be correct under the “‘court-utilized ‘one correct construction formula.”

Issue 4: Is § 101 A Basis For Invalidating A Patent In A CBM Proceeding?  YES

The Federal Circuit first considered whether it has jurisdiction to decide whether compliance with  § 101 can be a basis for instituting CBM review. Citing its analysis under Issue 1, the court determined that it does:

The authority of the PTAB under the relevant statutes to apply § 101 law to the claims under review goes to the power of the PTAB to decide the case presented to it. Thus, like the issue we discussed in Issue Number 1, supra, it engages the same analysis as did that issue. And for the same reasons set forth there, the answer must be the same. We have jurisdiction to decide the question even though it is decided, as it was in this case, initially by the PTAB at the decision to institute stage.

On the substantive issue, the Federal Circuit rejected Versata’s argument that compliance with § 101 is not an issue that can be raised in a CBM proceeding:

It would require a hyper-technical adherence to form rather than an understanding of substance to arrive at a conclusion that § 101 is not a ground available to test patents under either the PGR or § 18 [CBM] processes. Section 101 validity challenges today are a major industry, and they appear in case after case in our court and in Supreme Court cases, not to mention now in final written decisions in reviews under the AIA. ….

…. We agree with the USPTO and SAP and we so hold that, looking at the entirety of the statutory framework and considering the basic purpose of CBM reviews, the PTAB acted within the scope of its authority delineated by Congress in permitting a § 101 challenge under AIA § 18.

Did anyone do a double-take at the court’s statement that § 101 challenges “are a major industry”?

Issue 5: Is The ‘350 Patent Invalid Under § 101?  YES

The Federal Circuit opinion spends 11 pages on the ultimate issue before it, starting with a review of recent § 101 jurisprudence, and then applying “the Alice/Myriad framework” to the ‘350 patent claims at issue.

With regard to the first step of the Alice/Myriad framework, the court agreed with the PTAB’s finding that “[c]laims 17 and 26–29 of the ’350 patent are directed to the abstract idea of determining a price, using organizational and product group hierarchies, in the same way that the claims in Alice were directed to the abstract idea of intermediated settlement, and the claims in Bilski were directed to the abstract idea of risk hedging.”

With regard to the second step of the Alice/Myriad framework, the court agreed with the PTAB’s finding that “none of the claims have sufficient additional limitations to transform the nature of any claim into a patent-eligible application of an abstract idea.”

Thus, the Federal Circuit affirmed the PTAB’s final written decision that canceled claims 17 and 26–29 of the ‘350 patent as unpatentable under § 101.

Judge Hughes’ Views

Judge Hughes concurred in the majority’s decision to affirm the PTAB’s decision on the merits, but disagreed that the court has jurisdiction to review the PTAB’s “initial determination that the patent at issue is a ‘covered business method patent.'” According to Judge Hughes:

[T]he majority offers no compelling reason why its approach is desirable, other than its appetite for arrogating to the court the Board’s statutory authority to finally decide which patents are “covered business method patent[s]” suitable for review. Because the statute precludes review of the Board’s institution decision that Versata’s patent is a “covered business method patent,” I respectfully dissent-in-part.

Questions Answered, Questions Raised

Overall, the Federal Circuit decision in Versata answered three important questions regarding CBM proceedings. Although the court found that it has jurisdiction to review PTAB determinations embodied in decisions to institute, it appeared to do so with some deference. Although it is not surprising that the court determined that § 101 issues can be raised in CBM proceedings, now that district courts are invalidating patents under § 101 at the pleadings stage, it will be interesting to see how often CBM proceedings are used to bring § 101 challenges.