SUMMARY

In Alice Corp Pty Ltd. v. CLS Bank Int’l,1 the U.S. Supreme Court held that a computer-implemented method for mitigating risk of default in financial transactions was not eligible for patent protection. The Court reasoned that abstract ideas, including “fundamental economic practices,” are not transformed into patentable subject matter merely by implementing them on a generic, conventional computer. The Court’s decision  relies upon and extends the Court’s rejection of a similar computer-implemented  business method in Bilski v. Kappos,2  and uses the framework established by the Court to evaluate claims directed to laws of nature in Mayo Collaborative Services v. Prometheus Laboratories, Inc.3 The decision calls into question the patentability of many patents on software or computer-implemented 
business methods. 

BACKGROUND

35 U.S.C. § 101 defines the subject matter eligible for patent protection, including processes, machines, manufactures or compositions of matter. Section 101, however, has long been understood to contain an implicit exception: Laws of nature, natural phenomena and abstract ideas standing alone are not patentable. In Mayo, the Court established a two-step framework for distinguishing claims covering patent-ineligible laws of nature from claims directed to patent-eligible applications of such natural laws. Under Mayo, a court must first determine whether the claims at issue are directed to a patent-ineligible law of nature.  If so, the court must then search the claim for an “inventive concept,” i.e., an element or series of elements that is “sufficient to ensure that the patent in practice amounts to significantly more” than a patent on the law of nature itself.4

Alice Corporation (“Alice”) owns several patents that claim methods for mitigating settlement risk – “the risk that only one party to an agreed-upon financial exchange will satisfy its obligation.”5 Alice’s claimed methods use the computer as, in essence, an escrow agent. The computer creates and maintains “shadow” records that track balances in the parties’ real-world bank accounts. Per Alice’s claims, the computer only allows a transaction to settle if the computer’s shadow records establish that both parties have “sufficient resources to satisfy their mutual obligations.”6 Alice’s patents include three types of claims: method claims covering the “intermediated settlement” methodology; system claims claiming a generic computer implementing the methodology; and computer-readable media claims covering program code that permits a computer to perform the method. CLS Bank Int’l (“CLS”) operates a global computer system that facilitates the settlement of currency transactions.

CLS sued Alice in 2007, seeking a declaratory judgment that Alice’s patents are invalid, unenforceable or not infringed. Alice counterclaimed for patent infringement. The district court held that none of Alice’s claims were patent-eligible, because each was directed to the abstract idea of intermediated settlement. The Federal Circuit panel reversed. On rehearing en banc, however, the Federal Circuit held that method and computer-readable media claims were not patentable, and affirmed the district court’s rejection of the computer system claims by an equally divided court. The Supreme Court granted certiorari.

THE SUPREME COURT’S DECISION

The Supreme Court, in a unanimous decision by Justice Thomas, held that none of Alice’s patent claims were patentable under 35 U.S.C. § 101. The Court began by reviewing the “abstract idea” exception to Section 101, explaining that abstract ideas themselves are not patentable because they are “the basic tools of scientific and technological work,” and allowing “monopolization” of those tools under the patent laws would “tend to impede innovation more than it would tend to promote it.”7

Applying the first step of the Mayo analysis to an abstract idea, the Court found that Alice’s claims were clearly “directed to a patent-ineligible concept,” namely, the “fundamental economic practice” of intermediated settlement. It compared Alice’s claims to those at issue in Bilski, where the Court found claims directed to a method for hedging against the financial risk of price fluctuations to be directed to an abstract idea.   Like hedging, “the concept of intermediated settlement is ‘a fundamental economic practice long prevalent in our system of commerce.’”8   Thus, the Court found, intermediated settlement is “an ‘abstract idea’ beyond the scope of § 101.”9

In order to apply the second step of the Mayo analysis, the Court searched Alice’s claims for “additional features” that might constitute an “inventive concept” that would “transform” the otherwise unpatentable abstract idea into a patent-eligible application.10 The Court began by noting two things that are not sufficient to provide the “inventive concept” necessary to turn an abstract idea into an invention eligible for patent protection. First, under Mayo, patent eligibility requires more than simply stating the abstract idea “while adding the words ‘apply it.’”11     Second, eligibility cannot be conferred by merely “appending conventional steps, specified at a high level of generality.”12   Thus, although the Court noted that “many computer-implemented claims are formally addressed to patent-eligible subject matter,” the Court held that mere recitation of an abstract idea in conjunction with a generic computer cannot transform a patent- ineligible idea into a patent-eligible invention.13

“Viewed as a whole,” the Court held, Alice’s claims were directed to nothing more than the “concept of intermediated settlement as performed by a generic computer.”14 The functions performed by the computer in each step of Alice’s claims – maintaining accounts, obtaining data, adjusting account balances, and issuing automated instructions – were “purely conventional.” Alice’s claims did not “purport to improve the functioning of the computer itself” nor “effect any improvement in any other technology or technical field.” Instead, the claims were directed to “well-understood, routine, conventional activities previously known to the industry.” Such activities, even when carried out by a computer, are insufficient to impart patentability.15

The Court held that Alice’s computer system and computer-readable media claims failed for the same reason as its method claims, in that those claims simply recited an abstract idea implemented on generic computer hardware. In doing so, the Court reasoned that patent eligibility should not turn on whether substantively identical claims are characterized as a method, as a computer system for carrying out that method, or as software for carrying out the method.

In a concurring opinion, Justice Sotomayor, joined by Justices Ginsburg and Breyer, agreed that Alice’s claims were directed to an abstract idea, and added her view that business methods are inherently unpatentable under Section 101 (citing Justice Stevens’ concurrence in Bilski).

IMPLICATIONS

Alice Corp. reinforces a string of recent cases in both the Federal Circuit and the Supreme Court limiting the patentability of inventions implementing laws of nature and abstract ideas. Many software patents are directed to the computer implementation of abstract tasks and methods, including certain business methods and financial services. The Alice Corp. decision will make it more difficult to obtain those types of patents, and calls into question the validity of many issued patents. Those seeking to obtain patents on software or computer-implemented business methods (or defend those that have already been issued) likely will need to focus on claims for improvements in “the functioning of the computer” or “any other technology or technical field.” Those asserting, defending against, or considering the sale or purchase of such patents will want to consider carefully the impact of the decision and other recent Supreme Court pronouncements on the patentability of business methods.

On the other hand, the Court did not go as far as to declare invalid all software or business-method patents (as some commentators have demanded), and the decision itself suggests that it may constitute the outer limit for striking down patents on such claimed inventions. As noted above, the Court seemed to specifically endorse the patentability of some software and business methods by stating in dicta that “many computer-implemented claims are formally addressed to patent-eligible subject matter.”16 In addition, Justice Sotomayor’s concurrence indicates that there are now only three judges on the Court who believe that business methods are per se unpatentable under Section 101.