Next generation automated fare collection systems (AFC) typically characterized by open architecture designs, open payment approaches, and contactless card readers, are being installed in an increasing number of public transportation systems throughout the world1. Transit agencies' traditional payment model for accessing public transit services include the use of cash or a refillable magnetic strip card that is swiped through a card reader. This traditional payment model often relies on vendor-specific solutions, which limits an agency's ability to substitute or expand existing system components with third party hardware or software, and ultimately may lead to vendor lock-in. Moreover, magnetic strip cards are often "closed-loop" in that they are only usable to pay for access to a specific transit system. In other words, a rider could not use her or his magnetic strip ticket for multiple transit agencies or in general retail.

Modern AFC systems are generally designed to avoid the above shortcomings by utilizing open architecture and open payment approaches. A system designed using an open architecture eliminates reliance on a single source by allowing for the adding, removing, and modifying of components offered by multiple vendors. Open payments allow riders to pay for access to public transportation using a variety of payment methods, such as a debit card, credit card, or mobile wallet, in lieu of an agency-issued card that has no use outside of fare payment. Moreover, a key component of AFC systems is the use of an open wireless technology called near field communication, which allows riders to simply wave a cell phone, credit card, or fare card in front of a reader to pay their fare.

Unfortunately, AFC system implementations have been somewhat impeded by Smart Systems Innovations, LLC (Smart Systems), a non-practicing entity (i.e., an entity holding a patent for a product or process but does not develop the same). Smart Systems claimed that AFC systems read on several Smart Systems-owned patents, and it demanded licensing fees or initiated litigation against entities either using or planning to use AFC systems. Smart System's demands have forced its targets to incur significant costs or otherwise not implement an AFC system.

Recently however, the Federal Circuit dealt Smart Systems a major setback in Smart Systems Innovations, LLC v. Chicago Transit Authority, 873 F.3d 1364 (Fed. Cir. 2017). In this case, Smart Systems alleged that the Chicago Transit Authority (CTA) infringed four of Smart Systems' patents. CTA moved for judgment on the pleadings, arguing that the patents' claims were ineligible under § 101 because they were directed at abstract ideas. See Alice Corp. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014). Smart Systems responded by arguing that the patents sped up processing at turnstiles, i.e. the claims were patentable because they improved a process.

Under Alice, courts must use the following two part test when analyzing a claim's patent eligibility under 35 U.S.C. § 101: (i) is the claim directed to an abstract idea, and if so, (ii) are there any claim limitations or combination of claim limitations that constitute an inventive concept? The post-Alice cases in the Federal Circuit are not the picture of clarity, and there remains a great deal of uncertainty regarding what is a patent-ineligible abstract idea. It is, however, generally understood that claiming a general-purpose computer that performs an abstract processes will be directed to an abstract idea, whereas improvements to a computer or technological process will not.

In Smart Systems, the Federal Circuit upheld the district court's invalidation of the patents. The Federal Circuit first stated under Step 1 of Alice that the patents were directed to the abstract idea of "collection, analysis, and classification of information" and did not improve an existing technological process.2 Moving to Step 2, the Court affirmed that the claims did not include any inventive concept, but rather used generic computing components in a conventional manner. As a result, Smart Systems' patents did not claim patent-eligible subject matter.

The impact of Smart Systems on agencies implementing AFC systems is significant. With many of the patents that Smart Systems claimed to read on AFC systems invalided, Smart Systems' ability to demand licensing fees or face litigation is effectively extinguished, which addresses a potentially significant risk issue and removes a major potential impediment to implementing AFC systems.