Timothy J Carroll Manny J Caixeiro Elizabeth M. Manno August 22 2022 Preparing your company for unpredictable, inconsistent and volatile IP disputes – patent eligibility, abstract inventions and software patents Venable LLP | Intellectual Property - USA Timothy J Carroll, Manny J Caixeiro, Elizabeth M. Manno Intellectual Property IntroductionSection 101 and Alice testImplications of AliceCommentIntroductionOne of the most controversial and highly litigated issues in US patent litigation is whether an invention is eligible to form the basis of a patent or whether the claimed invention is an "abstract" concept that is undeserving of patent protection. This issue is especially pronounced in the context of software patents, where precedent holds that merely performing a known process through the use of computers is abstract, and thus unpatentable, but technical improvements to computer technology may not be abstract.(1)The Supreme Court's 2014 decision in Alice Corp v CLS Bank International(2) was meant to bring clarity to this vexing issue by setting out a two-part test for patent eligibility. In practice, however, Alice has spawned dozens if not hundreds of inconsistent decisions as courts struggle to apply the Supreme Court's test for patent eligibility and, particularly, the amorphous concept of an invention being "abstract". Patent eligibility rulings, especially for software patents, tend to vary, depending on the district court where the case is being litigated, with courts in Delaware and California being more aggressive in deeming patents ineligible than courts in Texas. Even the judges on the Federal Circuit Court of Appeals – the appellate court charged with handling appeals of all patent litigation – have described the Alice framework as:"incoherent";(3)"unpredictab[le]";(4)"almost impossible to apply consistently";(5) andultimately, "destabiliz[ing] technological development in important fields of commerce".The Federal Circuit has even asked the Supreme Court to provide additional guidance, which has not been forthcoming.It is, therefore, important for technology companies – and especially software companies – to understand the concepts of patent eligibility and abstractness and how they can impact patent disputes and litigation.Section 101 and Alice testThe concept of patent eligibility is grounded in section 101 of the Patent Act (35 United States Code (USC) section 101), which provides that patents may be obtained for any useful process, machine manufacture or composition of matter. However, federal courts have created a judicial exception, pursuant to which certain inventions are not eligible for patent protection. These include inventions that claim laws of nature, natural phenomena, and abstract ideas.(6) As discussed above, the latter exception, for abstract ideas, has become a source of controversy and extensive litigation.The Supreme Court has created a test, commonly known as the "Alice test" or the "Alice two-step test", to provide guidance to courts and litigants who are faced with the question of whether a patent is eligible. In the first step of the test, the court asks whether the patent is "directed to" a judicial exception, such as abstractness. If so, the court considers the second step of the test, which asks whether "the elements of each claim both individually and as an ordered combination . . . transform the nature of the claim into a patent-eligible application". If the first step has been answered in the affirmative, it is only when the second step is also answered in the affirmative that the invention is eligible to be patented.Challenges of applying Alice step oneStep one of the Alice test (ie, whether a patent is "directed to" a judicial exception) has proved to be difficult to implement, especially if the relevant exception is "abstractness". The heart of the problem is that there is no clear and easily applied definition of what it means for an invention to be "abstract".The United States Patent and Trademark Office (USPTO) has tried to organise abstract ideas into three categories:mathematical concepts;certain modes of organising human activity; andmental processes.But other than extreme examples, such as claiming a mathematical formula as one's own, these categories tend to raise more questions than they answer. For example, when does an invented method to perform an action cross over from a patentable improvement into an unpatentable "mental process"? Where can you draw the line – particularly in the context of software – between ground-breaking improvements and mere "modes of organizing human activity"?Courts have tried to standardise the abstractness inquiry by breaking it down into a number of sub-inquiries, such as:Are the claims directed to a result, rather than a process of reaching that result?Do the claims improve the functionality of computers or networks?Are the claims specific enough to explain what the invention is, rather than just a result?But, ultimately, questions like these suffer from the same problems discussed above. They are vague and answering them involves judgment calls that can vary between the USPTO, individual judges and courts.Challenges of applying Alice step twoAt step two, the courts try to decide whether the patents transform the nature of the claim into a patent-eligible invention. Here, the courts focus on whether the claim limits "involve more than performance of well-understood, routine, and conventional activities previously known to the industry".(7) In other words, the courts assess whether there is an "inventive concept" in the patent claims.One of the biggest problems that courts face when adjudicating step two is that the analysis is sometimes conflated with questions of obviousness under 35 USC section 103. Both analyses involve comparing the claim against the status quo ante, and it can be difficult for a court to compartmentalise its view of whether the claim was "obvious" under prior art when analysing whether an invention was "well-understood, routine and conventional". Moreover, sections 101 and 103 have different purposes, tests and analyses.A second issue is whether the Alice step-two test can be resolved at the pleading stage (eg, on a pre-answer motion to dismiss the complaint) or whether it involves claim construction or factual questions that can be resolved only on a complete record after discovery. Defendants often argue that, based on the face of a patent, the prosecution history, and precedential case law, a court can resolve the Alice step-two questions early in the case. Plaintiffs, on the other hand, commonly argue that questions of what was "well-understood, routine and unconventional" raise issues of fact that should be resolved in plaintiffs' favour at the pleading stage. In practice, whether a court will consider Alice step two resolvable at the pleading stage is highly dependent on a number of variables, including:the nature of the patent;the language of the claims;the robustness of the prosecution history;the extent to which case law addressed similar patents; andin large part, the specific court's philosophy and preferences on when and how section 101 issues are best adjudicated.Implications of AliceAlice has not succeeded at providing clear guidance, or predictable outcomes, for issues of patent eligibility. It has also failed to curb the large number of lawsuits brought by non-practicing entities (NPEs) and patent trolls, as many predicted it would.Instead, Alice has begotten case law that is all over the spectrum on substantive issues (eg, which types of inventions are abstract and ineligible) and procedural issues (eg, which issues can be resolved as a matter of law, and which require factfinding). The unpredictability of whether a patent will be deemed ineligible – particularly for software patents – has real-world implications for many companies:First and most obviously, it is increasingly difficult for companies to accurately assess litigation risks and set reserves.Second, in the context of business transactions, negotiating parties need to overcome often dramatically different views of a patent's eligibility.Third, patent prosecution has become more complex and expensive in certain fields – and it often takes longer for patents to issue.Fourth, companies face uncertainty as to the degree to which key innovations are adequately protected by their patents.Accordingly, many companies are now assessing whether trade secret protection is a better method to protect their intellectual property.Many in the patent community had hoped the Supreme Court would step in and clarify the Alice test and the law of patentability. A recent, high-profile example is a petition for certiorari that was filed in American Axle & Mfg, Inc v Neapco Holdings LLC,(8) which had the backing of the solicitor general. However, toward the end of the 2022 term, the Supreme Court denied the petition, meaning that it will not take the case. As a result, there is little hope for further guidance and clarity from the Supreme Court in the near term.CommentIn the litigation context, defendants should analyse whether asserted patents can be subject to section 101 challenges. Over the past decade, NPEs have acquired many questionable patents, and it can be important to demonstrate to an NPE that their patents are subject to ineligibility findings. Defendants who can make a compelling section 101 argument can sometimes persuade NPEs to either settle for a nominal amount or to drop the case altogether when confronted with the genuine risk of invalidation of their patents.Companies pursuing patent protection should carefully draft not only their claims but also their specification. They should work with outside counsel who are deeply familiar with section 101 issues and can craft the patents in a way to improve the likelihood that the patent is deemed eligible and avoid known pitfalls. Companies should also assess whether their inventions are better candidates for trade secret protection, and they should know that there are many differences between trade secrets and patents.Litigants should also consider the significant role that the venue plays in determining section 101 challenges. The likelihood of a patent getting invalidated under section 101 – especially at the pleading stage – is largely dependent on the jurisdiction and the judge.(9) This creates a further level of uncertainty that requires advance planning.For further information on this topic please contact Timothy Carroll, Manny Caixeiro or Elizabeth Manno at Venable LLP by telephone (+202 344 4000) or email ([email protected], [email protected] or [email protected]). The Venable LLP website can be accessed at www.venable.com.Endnotes(1) This article is part of a series on IP disputes in the United States. For the first article in the series, see "Preparing your company for unpredictable, inconsistent and volatile IP disputes – potential for abuse at the ITC."(2) 573 US 208 (2014).(3) Interval Licensing v AOL (Federal Circuit 2018).(4) Yu v Apple Inc (Federal Circuit 2021).(5) Smart Sys Innovations, LLC v Chi Transit Auth (Federal Circuit 2017).(6) Diamond v Diehr, 450 US 175, 186 (1981).(7) Berkheimer v HP Inc (Federal Circuit 2018).(8) American Axle & Mfg, Inc v Neapco Holdings LLC (Federal Circuit 2020).(9) Ibid.