It is now a little more than a year since the Supreme Court decided Bilksi v. Kappos; however, understanding what subject matter falls outside Section 101 remains elusive. The Federal Circuit's decision in Ultamercial, LLC v. Hulu, LLC, emphasizes that Section 101 is to be interpreted broadly. Case No. 2010-1544 (Fed. Cir. September 15, 2011) (before Rader, Chief Judge, Lourie and O'Malley, Circuit Judges) (opinion by Chief Judge Rader). Indeed, in stating "as § 101 itself expresses, subject matter eligibility is merely a threshold check; claim patentability ultimately depends on 'the conditions and requirements of this title,' such as novelty, nonobviousness, and adequate disclosure", it appears that the Federal Circuit may be diminishing - at least in litigation - the significance of Section 101 as a requirement to patentability. Opinion at 6. Many in the patent bar thought Bilski might signal the death of business method patents, but perhaps, as with Mark Twain, the reports of its death were greatly exaggerated.
Ultramercial's U.S. Patent No. 7,346,545 (the "'545 patent") "claims a method for distributing copyrighted products (e.g., songs, movies, books) over the Internet where the consumer receives a copyrighted product for free in exchange for viewing an advertisement, and the advertiser pays for the copyrighted content." Opinion at 2. Claim 1 of the '545 patent consists of the following steps:
(1) receiving media products from a copyright holder, (2) selecting an advertisement to be associated with each media product, (3) providing said media products for sale on an Internet website, (4) restricting general public access to the media products, (5) offering free access to said media products on the condition that the consumer view the advertising, (6) receiving a request from a consumer to view the advertising, (7) facilitating the display of advertising and any required interaction with the advertising, (8) allowing the consumer access to the associated media product after such display and interaction, if any, (9) recording this transaction in an activity log, and (10) receiving payment from the advertiser. Opinion at 10.
Ultramercial asserted its '545 patent was infringed by the Internet content provided by Hulu, LLC ("Hulu"), YouTube, LLC ("YouTube"), and WildTangent, Inc. ("WildTangent"). The case was brought in the Central District of California (Case No. 09-CV-6918), before Judge R. Gary Klausner. WildTangent filed a motion to dismiss for failure to state a claim, arguing that the '545 patent did not claim patentable subject matter under Section 101 in view of Bilski. Judge Klausner granted Wild-Tangent's motion to dismiss, which Ultramercial appealed.
In reversing and remanding Judge Klausner's decision, the Federal Circuit made several interesting points. First, as a procedural matter, the Federal Circuit stated:
This court has never set forth a bright line rule requiring district courts to construe claims before determining subject matter eligibility. Indeed, because eligibility is a "coarse" gauge of the suitability of broad subject matter categories for patent protection ... claim construction may not always be necessary for a § 101 analysis.
Opinion at 4-5 (citations omitted). The court went on to discuss, however, that a claim construction may assist in the Section 101 analysis but concluded that "[i]n this case, the subject matter at stake and its eligibility does not require claim construction." Next, the Federal Circuit focused on the breadth of Section 101. Specifically, the court stated:
35 U.S.C. § 101 sets forth the categories of subject matter that are eligible for patent protection: "[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title" (emphasis original). In Bilski, the Supreme Court explained that "[i]n choosing such expansive terms modified by the comprehensive 'any,' Congress plainly contemplated that the patent laws would be given wide scope." After all, the purpose of the Patent Act is to encourage innovation, and the use of broadly inclusive categories of statutory subject matter ensures that "ingenuity . . . receive[s] a liberal encouragement."
Opinion at 5 (citations omitted). The court went on to state that Section 101 is "merely a threshold check" for patentability and that real test for patentability is novelty, non-obviousness and adequate disclosure under Sections 102, 103 and 112. Opinion at 6.
Although broad, Section 101 is not limitless. It does not reach laws of nature, physical phenomena or abstract ideas. Opinion at 6. The Federal Circuit acknowledged that what is, or is not, an "abstract idea" is a very difficult question particularly in the case of process claims covering business method. Id. In Bilski, the Supreme Court refused to create a bright-line rule precluding the patentability of business methods. Bilski v. Kappos, 130 S. Ct. 3218, 3228 (2010). And post-Bilski, the Federal Circuit has grappled with the patentability of business methods. See, e.g., CyberSource Corp. v. Retail Decisions, Inc., (Fed. Cir., August 16, 2011) (before Bryson, Dyk and Prost, Circuit Judges).
In CyberSource, the Federal Circuit affirmed the district court's ruling that the claims to a method for verifying the validity of a credit card transaction over the Internet, were not patentable under Section 101, because they covered abstract ideas. CyberSource Opinion at 9.
In Ultramercial, on the other hand, the Federal Circuit held that Ultramercial's claims did satisfy Section 101. In so holding, and relying heavily on the software/hardware interaction necessitated by the '545 patent, the court stated that:
Returning to the subject matter of the '545 patent, the mere idea that advertising can be used as a form of currency is abstract, just as the vague, unapplied concept of hedging proved patent-ineligible in Bilski. However, the '545 patent does not simply claim the age-old idea that advertising can serve as currency. Instead the '545 patent discloses a practical application of this idea. The '545 patent claims a particular method for monetizing copyrighted products .... Many of these steps are likely to require intricate and complex computer programming. In addition, certain of these steps clearly require specific application to the Internet and a cyber-market environment.... And, of course, if the products are offered for sale on the Internet, they must be "restricted"--step four--by complex computer programming as well. Viewing the subject matter as a whole, the invention involves an extensive computer interface. This court does not define the level of programming complexity required before a computer-implemented method can be patent-eligible. Nor does this court hold that use of an Internet website to practice such a method is either necessary or sufficient in every case to satisfy § 101. This court simply find the claims here to be patent-eligible, in part because of these factors.
In this context, this court examines as well the contention that the software programming necessary to facilitate the invention deserves no patent protection or amounts to abstract subject matter or, in the confusing terminology of machines and physical transformations, fails to satisfy the "particular machine" requirement. This court confronted that contention nearly two decades ago in the en banc case of In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994). At that time, this court observed that "programming creates a new machine, because a general purpose computer in effect becomes a special purpose computer once it is programmed to perform particular functions pursuant to instructions from program software." Id. at 1545.... In other words, a programmed computer contains circuitry unique to that computer. That "new machine" could be claimed in terms of a complex array of hardware circuits, or more efficiently, in terms of the programming that facilitates a unique function. The digital computer may be considered by some the greatest invention of the twentieth century, and both this court and the Patent Office have long acknowledged that "improvements thereof" through interchangeable software or hardware enhancements deserve patent protection. Far from abstract, advances in computer technology--both hardware and software--drive innovation in every area of scientific and technical endeavor. Opinion at 10-12.
Given the Federal Circuit's view that software transforms the hardware on which it is running, and given its view that Section 101 is a mere threshold test, it likely will be a rare patent - even one covering a business method - which fails to satisfy Section 101, at least under the standard articulated by this Federal Circuit panel.