On June 19, 2014, the U.S. Supreme Court issued its unanimous decision in Alice Corp. v. CLS Bank International, Case No.13-298, holding that a patent claim to the idea of intermediated settlement is directed to an abstract idea and that implementation of that abstract idea on a “generic computer” does not make it patent eligible under Section 101 of the U.S. Patent Act. The Court further held that system and media claims describing implementation of the same method “using a handful of generic computer components” are not patentable either. Slip Op. at pp. 15-16. (See opinion here.) The holding severely weakens, if not destroys, any business method patent that claims a demonstrably old and fundamental method with nothing more specific or “innovative” in the claims than implementation of that method on a general computer.

Specifically, the Supreme Court analogized the concept of intermediated settlement to risk hedging, already held to be unpatentable in Bilski v. Kappos, 561 U.S. 593, 130 S. Ct. 3218 (2010). Citing, among other things, an article from 1896, the Court found intermediated settlement to be “a fundamental economic practice long prevalent in our system of commerce,” and thus an abstract idea that is unpatentable, without more, under Section 101. From there, the Court examined the elements of the claim to determine whether the claim contained an “inventive concept” sufficient to “transform” the claimed abstract idea into a patent-eligible application. Slip Op. at p. 11; see Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. ___, 132 S. Ct. 1289 (2012). In a business method reformulation of its reasoning in Mayo, the Court noted that a claim that simply states an abstract idea while adding the words “apply it with a computer” is deficient. Slip Op. at p. 13. Thus, if a patent’s recitation of a computer amounts to “a mere instruction to “‘implement’ an abstract idea ‘on a computer,’… that addition cannot impart patent eligibility.” Ibid.

The Supreme Court continued its pattern of using language that is difficult to rationalize with functional concepts and conventional elements commonly recited in other subject matter contexts that are not disfavored, such as inventions involving machinery or concrete devices. But the decision appears to be a victory for businesses that have vocally opposed patents to computer-implemented business methods, and the case arguably provides some additional framework for parties to evaluate what is patent eligible subject matter in other contexts.

The parties in Alice Corp. stipulated that the Court could consider a representative claim. In the words of the Court, that representative claim was “designed to facilitate the exchange of financial obligations between two parties using a computer system as a third-party intermediary.” Slip Op. at p. 2. In analyzing patentability, the Supreme Court followed the two-step test set forth in Mayo, 566 U.S. _ , 132 S. Ct. 1289. First, the Court examined whether the claims at issue are directed to an abstract concept; and, second, upon finding that the claims are directed to an abstract concept, the Court examined whether there is an “inventive concept sufficient to transform the claims into patentable subject matter.” Slip Op. at p.7.

With respect to the first step, the issue of abstractness, the Supreme Court concluded that the claim terms “are drawn to the abstract idea of intermediated settlement.” Slip Op. p. 7. As has become common in various lower-court opinions addressing the issue of abstractness, the Court simplified and distilled the claim into a single concept or idea. The Supreme Court then cited literature, including a source from 1896, discussing the use of certain types of intermediated settlements. Based on that literature, the Court held that an intermediated third party settlement is a “fundamental economic practice long prevalent in our system of commerce,” and, therefore, an “abstract idea.” Slip Op. at p. 9. As mentioned above, the Court analogized the business method to the hedging method it found not patent eligible in Bilski.

The Supreme Court then turned to the second step of the test: determining whether the use of a computer caused the claims to contain an “inventive concept” sufficient to “transform” the claimed abstract idea into a patent-eligible application. Slip Op. at p. 11. The Court noted that the “mere recitation of a generic computer” was not enough. Slip Op. at p. 13. The Court held that, “viewed as a whole,” the method claim did nothing more than describe the intermediated settlement process performed on a “generic computer.” Slip Op. p. 15. The Court also held that the portions of the system and media claims describing the computer apparatus, which referred to a “data processing system,” “communication controller,” and “data storage unit,” were not enough to save those claims. The Court held that these computer-related terms were “purely functional and generic” and insufficient to create a meaningful limitation beyond generally linking the use of the method to a particular technological environment. Slip Op. at p. 16. As a result, none of the method, media or system claims were patent eligible in the Court’s view. Ibid.

A majority of the Court also implicitly reaffirmed that business methods remain patentable. However, Justice Sotomayor, in a concurrence in the result joined by Justices Ginsburg and Breyer noted “I adhere to the view that ‘any claim that merely describes a method of doing business does not qualify as a ‘process’ under § 101.’” Concurring Slip Op. at p. 1 (Sotomayor, J., concurring). But the six justice majority adhered to Bilski’s holding that such methods are, conceptually, patent eligible.

The business method patentability issue presented in Alice Corp. potentially affects tens of thousands of existing patents and has had a tortured litigation history since the Supreme Court decided Bilski v. Kappos, 561 U.S. 593, 130 S. Ct. 3218 (2010). In Bilski, the Supreme Court attempted to define which types of business methods are patentable. Unfortunately, the Supreme Court did not establish a bright- line rule and failed to clarify in any discernible way what is patent eligible and what is not. Bilski involved a patent on the use of hedging in energy and commodities markets. Bilski, 130 S. Ct. at 3231. The Supreme Court held that such a method was not patent eligible, but did not provide much guidance as to how future courts should evaluate similar cases. Id. at 3231, 3257. For example, in discussing prior precedents, the Supreme Court noted that an algorithm or mathematical formula is unpatentable, but that “an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection.” Lower courts and litigants were left to try to sort out Bilski’s loose and limited guidance.

The Federal Circuit, district courts, patentees and litigants have been struggling since. This struggle has left all of them without clear guidance to determine what constitutes an “abstract idea” or an unpatentable “process.” In 2012, the Supreme Court heard Mayo, which related to the discovery that a patient’s blood level of certain metabolites correlated with the effectiveness of a drug. Mayo reaffirmed that a patentee cannot base an invention on the basic tools of scientific and technological work and pre-existing natural phenomena, but the decision did little else to clarify or describe a reliable decision-making process for reaching consistent results.

The Federal Circuit’s struggle to deal with patent eligible subject matter reached its climax in its en banc decision in CLS Bank International v. Alice Corp., 717 F.3d 1269 (Fed. Cir. 2013). In that case, which of course led to the Supreme Court’s opinion, the Federal Circuit attempted, within the bounds of the Supreme Court’s muddled jurisprudence from Bilski and Mayo, to clarify the legal standards applicable to Section 101 patent eligibility for the lower courts and litigants.

Through no fault of its own, the Federal Circuit utterly failed to bring clarity to the Section 101 patent eligibility issue. To the contrary, the Federal Circuit’s en banc Alice Corp. decision put the chaos that surrounded Section 101 patent eligibility jurisprudence on full and stark display. The en banc court delivered a short per curiam opinion, five separate concurring, concurring-in-part, dissenting-in-part or dissenting opinions, and “[a]dditional reflections” by then Chief Judge Rader. While the actual per curiam opinion was well under 100 words, the five other opinions and Chief Judge Rader’s “reflections” filled over 100 pages.

In the per curiam opinion, a majority of the Federal Circuit agreed that Alice Corporation’s method and computer-readable media claims are not patent eligible, and the Federal Circuit split evenly on Alice’s systems claims, thus affirming the district court’s decision denying patent eligibility on those claims. None of the concurring opinions were supported by a majority, with the opinion by Judge Lourie garnering the most support with five judges. While the Federal Circuit had hoped to clarify the inconsistent precedent concerning section 101, as Judge Newman reflected, “This remedial effort has failed.”

It was against this backdrop that the Supreme Court granted certiorari in Alice Corp. The Supreme Court received and reviewed forty-two briefs prior to oral argument, including briefs from the Solicitor General, Google Inc., Dell Inc., Verizon Communications Inc., Microsoft Corp., the Electronic Frontier Foundation, the American Civil Liberties Union, Hewlett-Packard Co., and several interested intellectual-property organizations.

At oral argument in March 2014, certain Supreme Court Justices, most notably Justice Breyer, raised the broader issue of patent eligibility of claims involving computers or software. A few other Justices were at least exploring such a narrow ruling at oral argument. Justice Sotomayor asked the Solicitor General, “What’s the necessity for us to announce a general rule with respect to software? There is no software being patented in this case. . . . There’s a system[].” Many observers will say that it appears that the Court has implicitly held that software remains patent eligible, but no one knows which software.

Against this historical backdrop, including previous rulings, oral argument and the amici briefs filed in the case, the Supreme Court’s holding is significant as much for what it did not address as for what it did. Practically speaking:

  • The Court refused an invitation to declare all software not patent eligible, which in some commentators’ eyes leaves open the possibility that software with an innovative, transformative element remains patent eligible.
  • The Court rejected calls of certain Federal Circuit judges and some amici for a more workable standard of applying Section 101. Former Federal Circuit Chief Judge Rader, Federal Circuit Judge Moore, former Federal Circuit Chief Judge Paul Michel, the petitioner, Alice Corporation, the American Intellectual Property Law Association and others, in amici briefs, opinions, and elsewhere, have pressed in some form for the use of Section 101 as a “coarse filter” or “low threshold” for patent eligibility, allowing other sections of the Patent Act, particularly Sections 102, 103 and 112, to provide additional analytical framework with respect to patentability. Counsel for Alice Corporation pressed for this standard in oral argument, specifically mentioning the “coarse filter” phrase; in an amicus brief Chief Judge Michel pushed for a standard that would “exclude only clearly ineligible inventions, allowing the other sections of the Patent Act . . . to perform their respective functions.” The Supreme Court did not adopt such an approach, arguably foreclosing its use in future cases.
  • The Court also rejected any more detailed multi-factor test. The Solicitor General, for example, proposed a six-factor test for patentability in the United States’ amicus brief. No such test is considered or adopted.
  • The Court did not quibble with the Federal Circuit’s previous holding that patents challenged under Section 101 have a presumption of validity, and that the challenger must prove ineligible subject matter by clear and convincing evidence.
  • The Supreme Court did not address the role, or necessity of, claim construction in addressing Section 101 patent eligibility. The majority of the Federal Circuit appears to favor claim construction before addressing the section 101 issue of patent eligibility, particularly to “unambiguously” identify the abstract idea at issue: “Although not required, conducting a claim construction analysis before addressing section 101 may be especially helpful in this regard by facilitating a full understanding of what each claim entails.” Alice Corp., 717 F.3d at 1282 (Lourie, J., concurring; emphasis added). Federal Circuit Judges Linn and O’Malley were even more emphatic in the en banc Alice Corp. opinion, asserting that development of a record “in which all claim construction issues were vetted” should have occurred in the case to enable proper review of the section 101 issues. Id. at 1331 (Linn, J. and O’Malley, J., dissenting). Thus, the strategy of asserting a patent eligibility challenge under section 101 in the hope of resolving a case in its early stages may not work unless the parties stipulate to constructions of the relevant terms or, perhaps, the claim terms are very simple.