On July 9, 2012, the U.S. Court of Appeals for the Federal Circuit ruled in a 2-1 decision that computer-implemented methods, systems and products are not invalid under 35 U.S.C. § 101 unless it is "manifestly evident" that they cover an abstract idea. CLS Bank International v. Alice Corp. Pty. Ltd., 685 F.3d 1341 (Fed. Cir. 2012).

The Federal Circuit held that test is met when "the single most reasonable understanding is that a claim is directed to nothing more than a fundamental truth or disembodied concept, with no limitations in the claim attaching that idea to a specific application." The decision demonstrates that the Federal Circuit remains divided on the issue of patent-eligible subject matter. While the split is not new, the sweeping rule adopted by the majority, resulting in a strong dissent, is a new approach as compared to the narrower, more case-specific rulings the court has been issuing recently.

Under 35 U.S.C. § 101, "Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title." There are three judicial exclusions to the four categories of patentable subject matter: abstract ideas, natural phenomena, and laws of nature.

The four patents held by Alice Corporation included method, system, and computer program product claims and were directed to "a computerized trading platform for exchanging obligations in which a trusted third party settles obligations between a first and second party so as to eliminate 'settlement risk'. Settlement risk is the risk that only one party's obligation will be paid, leaving the other party without its principal."

CLS Bank had prevailed before the district court on summary judgment in invalidating Alice's patents as failing the machine-or-transformation test and the abstract idea exception articulated in Bilski v. Kappos, 130 S. Ct. 3218 (2010). The majority opinion in CLS Bank addressed the "abstract idea" exception, noting that the "abstractness of the 'abstract ideas' test to patent eligibility has become a serious problem." After exploring the recent history of the Federal Circuit's efforts to address the issue, including the analysis in Mayo Collaborative Services v. Prometheus Laboratories, Inc. 132 S. Ct. 1289 (2012), the majority opinion by Judge Linn found that "Where the 'addition of a machine impose[s] a meaningful limit on the scope of a claim,' and 'play[s] a significant part in permitting the claimed method to be performed, rather than function[ing] solely as an obvious mechanism for permitting a solution to be achieved more quickly, i.e., through the utilization of a computer for performing calculations,' that machine limitation renders the method patent eligible."

The majority stated further that, "It can, thus, be appreciated that a claim that is drawn to a specific way of doing something with a computer is likely to be patent eligible whereas a claim to nothing more than the idea of doing that thing on a computer may not." The asserted claims of the Alice patents required computer implementation and recited specific ways of performing the exchange of an obligation between parties, such as using a "shadow credit record and a shadow debit record." The dissent (noting that the Federal Circuit had been reversed in a §101 decision for the second time in its last three terms) argued that the majority had failed to follow the Supreme Court's instructions in Prometheus by neglecting to address whether the claims included an "inventive concept." Rather than considering the limitations added by the claim language, Judge Prost abstracted the claims to their most basic functions and emphasized the long history of the "inventive concept" of using an intermediary in financial transactions. In response, the majority cautioned that while claims can be stripped down and left with a core that could be characterized as an abstract idea, courts should not "go hunting for abstractions by ignoring the concrete, palpable, tangible, and otherwise not abstract invention the patentee actually claims."

Despite the guidance provided in recent opinions by the Supreme Court, the Federal Circuit remains divided on basic questions of what constitutes patentable subject matter under § 101. As panels debate how the Supreme Court precedents should be applied, this area of the law will continue to be unsettled. An en banc rehearing or appeal to the Supreme Court may follow — stay tuned.