Yesterday, the Supreme Court issued its much anticipated ruling on the patentability of software. Alice Corp. Pty. Ltd. v. CLS Bank Int'l, et al., No. 12-298. As with many of its recent decisions relating to patent law, the Court did not make any sweeping pronouncements on the general patentability of software patents. Instead, the Court addressed the narrower issue of whether abstract ideas, long held to be ineligible subject matter for patents by themselves, could become patent eligible if they were implemented on a generic computer. The Court held that they cannot.

To evaluate the patentability of the computer software claims at issue, the Court first reiterated its past pronouncements that Section 101 of the Patent Act, which defines the subject matter eligible for patent protection, implicitly excludes “[L]aws of nature, natural phenomena, and abstract ideas …” Assoc. for Molecular Pathology v. Myriad Genetics, Inc., 569 U.S. ___, ___ (2013) (slip op., at 11). However, being mindful that the exclusions are the “building blocks” of human ingenuity, the Court emphasized that there is a distinction between patents that claim the building blocks and those that integrate the building blocks into something more.

To distinguish those claims that are patent eligible from those that are not, the Court applies a two-step framework, previously set forth in Mayo Collaborative Services v. Prometheus Laboratories, Inc, 566 U.S. ____ (2012). First, it must be decided whether the claims are directed at one of the patent-ineligible concepts. If so, the additional elements in those claims are considered to determine whether they “transform the nature of the claim” into a patent-eligible application. The Court refers to this step as “a search for an inventive concept.”

The patents at issue in Alice Corp. dealt with software for mitigating “settlement risk” by using a third-party intermediary. Here, the “third-party intermediary” was a computer. Three types of claims were included in the patents: 1) method claims, directed to a method of exchanging financial obligations; 2) system claims, directed to a computer system configured to carry out the method of exchanging financial obligations; and 3) media claims, directed to computer-readable media containing program code for performing the method of exchanging financial obligations.

Applying the first step, the Court easily found that the claims were all directed to an abstract idea: “the concept of intermediated settlement, i.e., the use of a third party to mitigate settlement risk.” The Court looked to non-legal references to conclude that such an idea is “a fundamental economic practice long prevalent in our system of commerce,” and is a building block of the modern economy. The Court was unpersuaded that using a computer as the third-party  made this any less an abstract idea. Thus, the Court moved to step two to determine whether the claims contain an “inventive concept sufficient to transform the claimed abstract into a patent-eligible application.”

The Court reviewed Alice Corp.’s method claims first. Previous decisions of the Court had found ineligible method claims directed to an abstract idea with the words “apply it.” Mayo. The Court had also rejected method claims directed to an abstract idea limited to a particular technological environment. Parker v. Flook, 437 U.S. 584, 593 (1978). The Court characterized the other elements in the method claims before it as simply a combination of those steps, i.e., “apply it with a computer.” Thus, a claim that merely instructs the implementation of an abstract idea on a generic computer is not patent eligible subject matter.

The patent owner tried to distinguish its system claims by emphasizing that they recite “specific hardware” configured to perform “specific computerized function.” The Court, however, characterized the “specific hardware” – i.e., a “data processing system”, a “communications controller” and a “data storage unit – as being “purely functional and generic.” Since almost every computer contains these components, the Court found that their recitation in the claims do not offer a meaningful limitation beyond generally linking the method to a particular technological environment. The system claims, therefore, were no different from the method claims, and also were ineligible for patent protection. (The patent owner had conceded that its media claims lived or died with the method claims. Thus, they too were ineligible for patent protection.)

In Alice Corp., the Supreme Court did not do what the most vocal supporters of both sides of this issue wanted. It neither completely eliminated software as a category of patent eligible subject matter nor conferred patent eligibility merely through implementation of an idea on a computer. Thus, it will still be possible to claim patents directed to computer software. The most obvious way for a patent practitioner to prepare software claims that will avoid scrutiny under Alice Corp. will be to avoid claims directed to one of the categories excluded from patentable subject matter:  laws of nature, natural phenomena and abstract ideas. If that is not possible, then the claims must include something more than implementation on a generic computer to stand a chance of surviving analysis under Section 101.

Litigants involved in current or future litigation over software patents will want to study the claims at issue to assess their vulnerability under the framework laid out in Alice Corp. While patent eligibility of any particular software claim will remain a case-by-case, fact specific inquiry, at least now there is some guidance by which to conduct that inquiry.