In Alice Corp. Pty. Ltd. v. CLS Bank Int’l, decided June 19, 2014, the Supreme Court held that claims drawn to (i) a method for mitigating “settlement risk” (i.e., the risk that only one party to a financial transaction will pay what it owes), (ii) a computer system for carrying out that method, and (iii) computer-readable media having program code for performing the method were all directed to an abstract idea and not patent eligible under 35 U.S.C. § 101.

In 2007, CLS Bank filed suit against Alice seeking a declaratory judgment that the subject claims are invalid. The district court held all of the claims patent ineligible because they are directed to the abstract idea of “employing a neutral intermediary to facilitate simultaneous exchange of obligations in order to minimize risk.” 768 F. Supp. 2d 221, 252 (DC 2011). A divided panel of the United States Court of Appeals for the Federal Circuit reversed, holding that it is not “manifestly evident” that petitioner’s claims are directed to an abstract idea. 685 F.3d 1341, 1352, 1356 (Fed. Cir. 2012).

The Federal Circuit later vacated the panel decision and ordered a rehearing en banc. The en banc opinion consisted of a one paragraph per curiam judgment finding all claims ineligible, one concurring opinion (by a plurality of five judges), two concurrences-in-part, three dissents-in-part, one full dissent, and additional reflections by Chief Judge Rader. Seven of the ten participating judges agreed that the method and media claims were patent ineligible, and the participating judges split 5-5 as to whether the system claims were patent ineligible.

The Supreme Court began its analysis by considering competing concerns underlying 35 U.S.C. § 101, including the “‘monopolization of … tools through the grant of a patent [that] might tend to impede innovation more than it would tend to promote it,’ thereby thwarting the primary object of the patent laws.” The Court recognized, however, that “[a]t some level, ‘all inventions…embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas.’” Thus, an invention is not rendered ineligible simply because it involves an abstract concept. Rather, the Court held that the two-step framework articulated in Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289 (2012), “distinguishes patents that claim abstract ideas from those that claim patent-eligible applications of those concepts.”

The first step is to determine whether the claims are directed to a patent-ineligible concept: a law of nature, a natural phenomenon, or an abstract idea. If so, then the analysis proceeds to the second step, which the Court characterized as a search for an “inventive concept.” In the second step, the elements of each claim both individually and “as an ordered combination” are examined to determine whether they contain an “‘inventive concept’” sufficient to “transform” the claimed abstract idea into a patent-eligible application. That is, the additional elements must “ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.” These additional features must ensure “that the [claim] is more than a drafting effort designed to monopolize the [abstract idea].” Toward this end, “simply stat[ing] the [abstract idea] while adding the words ‘apply it’” is insufficient to transform the abstract idea into a patent-eligible application. In the context of computer-implemented inventions, the Court further explained that if a patent’s recitation of a computer amounts to a mere instruction to “implemen[t]” an abstract idea “on…a computer,” that addition cannot impart patent eligibility.

Evaluating Alice’s claims under Mayo’s first step, the Court explained that the use of a third-party to mitigate settlement risk is on its face drawn to the concept of intermediated settlement. And, like the risk hedging concept addressed in Bilski v. Kappos, 561 U. S. 593 (2010), the concept of intermediated settlement is “‘a fundamental economic practice long prevalent in our system of commerce.’” The Court concluded that the claimed intermediated settlement concept is an “abstract idea” and, therefore, a patent-ineligible concept beyond the scope of § 101. In reaching this conclusion, the Court expressly rejected the argument that the abstract-ideas category is confined to “preexisting, fundamental truth[s]” that “‘exis[t] in principle apart from any human action.’”

The Court then turned to the second step in Mayo’s framework; “whether the claims…do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer.” The Court found that, when considering the method claim steps separately, the function performed by the computer at each step of the process is “[p]urely conventional.” The Court documented that each claimed step did no more than require a generic computer to perform generic computer functions. Using a computer to obtain data, adjust account balances, and issue automated instructions were all computer functions that were “‘well-understood, routine, conventional activit[ies]’ previously known to the industry.” And, even when viewed “as an ordered combination,” the claimed method steps “ad[d] nothing…that is not already present when the steps are considered separately.” For example, the method claims do not, purport to improve the functioning of the computer itself or effect an improvement in any other technology or technical field. Accordingly, the Court held the claimed steps to be “not ‘enough’ to transform [the] abstract idea into a patenteligible invention.”

The Court explained that limiting the claims to tangible computers that “necessarily exist in the physical, rather than purely conceptual, realm” is beside the point. If that were the end of the § 101 inquiry, an applicant could claim any principle of the physical or social sciences by reciting a computer system configured to implement the relevant concept. The Court noted that it “has long ‘warn[ed]…against’ interpreting § 101 ‘in ways that make patent eligibility ‘depend simply on the draftsman’s art.’”

Similarly, the Court explained that computer system claims and computer readable media claims are not patent eligible for substantially the same reasons. Because the claimed hardware - a “data processing system” with a “communications controller” and “data storage unit,” - is purely functional and generic, it failed to “offer[] a meaningful limitation beyond generally linking ‘the use of the [method] to a particular technological environment,’ that is, implementation via computers.” Thus, the Court concluded that the system and media claims added nothing of substance to the underlying abstract idea. The claims must “do more than simply instruct the practitioner to implement the abstract idea…on a generic computer.”