On November 14, 2014, in a much-anticipated decision following the U.S. Supreme Court’s decision in Alice v. CLS Bank, a unanimous U.S. Court of Appeals for the Federal Circuit held in Ultramercial, L.L.C. v. WildTangent, Inc.1 that the claims of Ultramercial’s asserted patent were invalid because they failed to describe “significantly more” than the patent-ineligible abstract idea of providing access to copyrighted content over the Internet in exchange for viewing an online advertisement. In doing so, the Court of Appeals found patent-ineligible the same claims it had twice found to be patent-eligible in earlier decisions. While the recent decision appears to be a victory for advocates of reducing patent troll litigation based on patents of questionable validity, the decision further solidifies the judiciary’s resistance to patenting certain business methods and software processes, and could open the door for future legislative action by Congress and/or administrative action by the U.S. Patent and Trademark Office (USPTO) to define what ideas may be “abstract” and provide practical guidance in examining patent applications directed to business methods and software. Should future legislative and/or administrative efforts fail to provide sufficient guidance to business method and software patent applicants, the judiciary’s recent string of adverse decisions against business methods and software patents will likely lead to diminished patent filings for industries dependent on software development as a differentiator and revenue source.  

Background of the Ultramercial Case

Ultramercial is the owner of U.S. Patent 7,346,545 (the “545 patent”), which describes systems and methods for distributing copyrighted media products over the Internet to consumers at no cost in exchange for the consumers first viewing advertisements. The advertiser whose advertisement is shown provides payment for the copyrighted media.

Ultramercial originally filed suit against WildTangent in a U.S. district court alleging infringement of the 545 patent. YouTube and Hulu, who were initially sued along with WildTangent, were later dismissed from the suit. WildTangent moved for dismissal of the case for failure to state a claim upon which relief can be granted, arguing that the 545 patent was invalid because it did not claim patent-eligible subject matter. WildTangent’s motion was granted by the district court, and Ultramercial appealed to the U.S. Court of Appeals for the Federal Circuit. 

In its first decision addressing the patent-eligibility of the claims of the 545 patent (Ultramercial I), the Court of Appeals reversed the district court’s grant of WildTangent’s motion to dismiss and found the claims to be directed to patent-eligible subject matter. WildTangent then filed a petition for a writ of certiorari, which was granted, vacated and remanded (GVR) by the U.S. Supreme Court for reconsideration in light of its decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc.2

On remand, the Court of Appeals again reversed the district court’s decision and again found the claims to be patent-eligible under the Mayo framework (Ultramercial II). WildTangent subsequently filed a second petition for a writ of certiorari, to which the Supreme Court responded with a second GVR, instructing the Court of Appeals to once again reconsider its holding, this time in light of its recent decision in Alice Corp. v. CLS Bank International.3

The Decision of the Court of Appeals for the Federal Circuit

In Ultramercial III, the Court of Appeals applied the Mayo framework to assess the patent-eligibility of the 545 patent claims, which the Supreme Court clarified inAlice was the proper test for assessing the patent-eligibility of claims that cover any of the categories of excluded subject matter including natural laws, physical phenomena or abstract ideas. The Court of Appeals noted that a Section 101 analysis first begins with a determination as to whether an invention fits into a statutorily provided category: a process, machine, article of manufacture or composition of matter. If amenable to such a classification, a determination is then made as to whether a patent claims subject matter that is not eligible for patenting, namely one of the judicially created exceptions noted above: a natural law, a physical phenomenon or an abstract idea. Under the two-pronged test initially set forth in Mayo and later clarified in Alice, a court must first determine (1) whether the claims at issue are directed to a patent-ineligible concept; and, if so, (2) whether the claims contain an element or ordered combination of elements sufficient to ensure that the patent in practice amounts to significantly more than the concept itself.

With respect to the first prong of the Mayo-Alice test, the Court of Appeals held that the claims of the 545 patent were directed to the patent-ineligible abstract idea of showing an advertisement before delivering free content.4 Referring to claim 1 of the 545 patent as an illustrative claim, the Court of Appeals found that the eleven steps of claim 1 amounted to “an abstraction – an idea, having no particular concrete or tangible form.”5 While acknowledging that certain steps, such as consulting an activity log to select an ad for display, added some particularity to the claim, the court held that the concept embodied by the claim as a whole was abstract.

Then turning to the second prong of the Mayo-Alice test, the Court of Appeals determined “whether the claims do significantly more than simply describe” the abstract idea to which they were directed.6 This involves an examination of “the limitations of the claims to determine whether the claims contain an ‘inventive concept’ to ‘transform’ the claimed abstract idea into patent-eligible subject matter.”7 The Court of Appeals further stated that the transformation of an abstract idea into patent-eligible subject matter requires more than simply stating the abstract idea with the instruction to “apply it,” and must include additional features to ensure that the claim is more than a drafting effort designed to monopolize the abstract idea, where such additional features must be more than well-understood, routine, conventional activity.8

In addressing the second prong of the Mayo-Alice test, the Court of Appeals found “that the limitations of the 545 claims do not transform the abstract idea that they recite into patent-eligible subject matter because the claims simply instruct the practitioner to implement the abstract idea with routine, conventional activity.”9 More specifically, the Court of Appeals found the claim limitations to be insignificant data-gathering or pre-solution activity, or otherwise conventional steps specified at a high level of generality that was insufficient to supply the “inventive concept” necessarily to transform the claims into a patent-eligible application of the underlying abstract idea. The Court of Appeals further held that use of the Internet in the claims failed to provide an inventive concept because it constituted nothing more than an attempt to limit the use of the abstract idea to a particular technological environment.

As part of its analysis under the second prong of the Mayo-Alice test, the Court of Appeals also invoked the machine-or-transformation test, which the Supreme Court held in Bilski v. Kappos10  can provide a useful clue as to whether a claimed process is patent-eligible. Under the machine-or-transformation test, a claimed process can be patent-eligible under Section 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. The Court of Appeals held that the 545 patent claims were not tied to a particular novel machine but rather a general-purpose computer, and in doing so, appears to have introduced a novelty requirement not present in the Supreme Court’s statement of the machine-or-transformation test in Bilski. The Court of Appeals further held that recitation of the Internet was not enough to satisfy the machine prong because the Internet is a ubiquitous information-transmitting medium, not a novel machine. Turning to the transformation prong, the Court of Appeals held that the 545 patent claims failed this prong because they do not transform any article to a different state or thing, but rather merely manipulate “public or private legal obligations or relationships, business risks, or other such abstractions … [that] are not physical objects or substances … [or] representative of physical objects or substances.”11

Certain Business Method and Software Patent Rights Could Be at Risk

In summary, the Court of Appeals’ holding in Ultramercial III provides additional, albeit limited, guidance regarding patent-eligibility of software patents. First, while finding the 545 patent claims to not be patent-eligible, the Court of Appeals noted that not all software-based patent claims are necessarily directed to abstract ideas. Second, the Court of Appeals stated that the addition of novel or non-routine components to a claim does not necessarily turn an abstraction into something concrete and cannot by itself transform a patent-ineligible concept into a patent-eligible one, but is a factor to be considered under the second prong of the Mayo-Alice analysis. Third, the Court of Appeals held that invocation of the Internet, a general-purpose computer, or routine and conventional activity within a patent claim is not sufficient to render an otherwise patent-ineligible idea patent-eligible. Fourth, the Court of Appeals stated any transformation from the use of computers, transfer of content between computers, or manipulations of public or private legal obligations or relationships, business risks, or other abstractions fail to meet the machine or the transformation prongs of the machine-or-transformation test. Thus, the Court of Appeals makes clear that the patent-eligibility of computer-implemented inventions will continue to turn for the foreseeable future on whether the patent claims include limitations that are not merely routine or conventional in nature and/or limitations directed to specialized or special-purpose machines beyond merely a general-purpose computer. Furthermore, the Court of Appeals, in a concurring opinion by Judge Mayer, who replaced former Chief Judge Rader from the prior Ultramercial panels, also appears to encourage using Section 101 to curb future patent litigation, particularly against “vexatious” infringement suits. In view of the recent flurry of adverse judicial decisions against business method and software patents, it is likely that the number of patent troll lawsuits will diminish as litigation based on relatively weak patents are quickly dismissed under Section 101. 

A Hostile Judiciary, But Can Business Method and Software Patents Be Saved? 

The Court of Appeals decision in Ultramercial III does not come as a complete surprise. The claims were susceptible to an attack under Section 101 given theAlice decision, so there is still great anticipation for a decision from the Court of Appeals upholding a business method or software patent under a Section 101 attack. Thus, it remains to be seen, in the future, what meaningful patent protection might be obtainable for business method and software innovation. Software patents continue to be examined and held patentable by the USPTO, even under the Preliminary Examination Guidelines in View of Alice. It is expected that the Final Examination Guidelines will be issued by the end of November, and in those guidelines there will be instruction as to what business method and software inventions are patentable under Section 101. There also remains the possibility that legislative action (by the U.S. Congress) could help ease the anticipated effects of Ultramercial III and other judicial decisions based on Section 101 on business method and software patent applicants.