On Thursday, November 14, 2014, the Federal Circuit issued its latest decision in Ultramercial, Inc. v. Hulu, LLC and WildTangent, Inc., 2014 U.S. App. Lexis 21633 – a case that has been through a four-year appeal process and which sheds light on the patentability of business method software.  Specifically, the Ultramercial patent is a method of distributing copyrighted television shows over the Internet, whereby instead of paying for the product, the consumer first watches paid-advertisements (U.S. Patent No. 7,346,545).  Both prior Federal Circuit decisions, in favor of patent eligibility, were vacated by the Supreme Court without opinion except with order to consider Mayo Collaborative Services v. Prometheus Laboratories, Inc., (2012) 132 S.Ct. 1289, and most recently Alice Corp. Pty. Ltd. v. CLS Bank International, No. 13-298, 2014 U.S. Lexis 4303 (June 19, 2014).  While this decision still leaves practitioners without much guidance as to what an unpatentable abstract idea is, it does offer a strong signal that the Federal Circuit is now understanding what the Supreme Court thinks is patentable subject matter under 35 U.S.C. § 101, and at the very least begins to provide a roadmap for district courts to use going forward.

The Supreme Court, in Mayo and Alice, set out a two-step analysis that has invited courts to invalidate computerized business method patents based on the ambiguous principle that such patents are abstract ideas.  The analysis, first, asks if the claims at issue are directed to “abstract ideas,” “laws of nature,” or “natural phenomena,” each of which is categorically ineligible for patenting.  And second, if the claims are directed to one of those patent-ineligible concepts, do they contain an “inventive concept” that is sufficient to “transform the nature of the claim into patent-eligible application.”  For prior Nossaman articles discussing generic computer implementation of business method patents, see here and here.

In Ultramercial, the Federal Circuit applied the two-step analysis from Alice.  First finding that the claims were drawn to the abstract “process of receiving copyrighted media, selecting an ad, offering the media in exchange for watching the selected ad, displaying the ad, allowing the consumer access to the media, and receiving payment from the sponsor of the ad.”  Further, and most important, the Federal Circuit pronounced that, “[w]e do not agree with Ultramercial that the addition of merely novel or non-routine components to the claimed idea necessarily turns an abstraction into something concrete” because the Internet “is a[n] ubiquitous information-transmitting medium, not a novel machine. And adding a computer to otherwise conventional steps does not make an invention patent eligible. Any transformation from the use of computers or the transfer of content between computers is merely what computers do and does not change the analysis.”

In finding that no inventive concept had been described by the claims, Ultramercial followed the Supreme Court’s decision in Alice, but has taken it a step further by rejecting the argument that Alice applied only to well-known abstract ideas used in the past.  As such, the far reaching impact of this decision is double-edged.  The Federal Circuit has in fact expanded the abstract idea doctrine in the name of abating patent trolls extorting unwarranted “nuisance” settlements implemented through the threat of expansive litigation costs.  Yet, while Ultramercial, along with the decisions it relies upon, may provide more clarity in the legal world, it stands to reason that it may ultimately stifle internet-based software innovation, which has been at the fore-front of U.S. technological innovation over the past decade.