Today the Supreme Court in Alice v. CLS Bank applied § 101 patentable subject matter requirements to invalidate patent claims directed to using a generic computer to implement the abstract idea of a conventional business practice that uses a third-party intermediary (e.g., clearing house or escrow agent) to mitigate the “settlement risk” that only one party to a financial transaction will pay what it owes.  The unanimous decision, written by Justice Thomas, is most closely aligned with the more restrictive view of § 101 patent eligibility found in Judge Lourie’s concurring decision in theen banc Federal Circuit ruling below that held all patent claims invalid without a majority consensus as to why (see our May 13, 2013 post).

As discussed below, the crux of the Court’s decision appears to be that the patent simply claimed implementing a conventional, well-known business practice using conventional, well-known generic computer functionality without any improvement to the computer functionality or any other technology.  The Court looked to some extent beyond the form of the claim–e.g, whether its a method, system, or computer-readable medium claim–so that patent eligibility is not readily avoided by artful claim drafting.  The Court’s decision today provides more incremental, than bright line, guidance on the patentability of computer-implemented inventions. 

Further, the Court conflates to some extent the issues of patentable eligibility under §101 and novelty/nonobviousness under §§102 and 103.  Specifically, given the Court’s decision today, at what point does technology become so “well-known”, “conventional” and “ubiquitous” that claim limitations directed to it not only fail to distinguish the claimed invention from the prior art, but also fail to make the claimed invention patent eligible subject matter?  In other words, can certain technology become so conventional and ubiquitous that it becomes a “basic tool” or “building-block” of innovation that is exempt from patentability under § 101 along side traditionally exempt laws of nature, natural phenomena and abstract ideas?

Background.  Our prior May 13, 2013 post provides background for this case and the hopelessly-split Federal Circuit decision below that involves method claims, computer-readable media claims, and system claims directed to using a computer to implement having a trusted third party intermediary (e.g., escrow agent or clearing house) exchange obligations that parties have under an agreement at a designated time after determining that both parties can perform their obligations at that time in order to manage “settlement risks” in financial obligations.  Using such third-party intermediaries was a common business practice and the issue was whether the claims were drafted to patent eligible subject matter under § 101 based on implementing that conventional business practice using a generic computer. 

The district court ruled they claims were invalid under § 101, which ended the case before a decision was made on traditional prior art defenses.  The Federal Circuit ruled en banc that the claims were invalid as being patent ineligible subject matter based on a majority of the judges agreeing the claims were invalid, but there was no majority as to why the claims were invalid.

Supreme Court.  The Supreme Court’s decision reviewed the history of its decisions on §101 patent eligibility, including 150 years of applying “an important implicit exception: Laws of nature, natural phenomena, and abstract ideas are not patentable.”  These exceptions arise due to concerns about patents pre-empting use of–and grant a monopoly over– laws of nature, natural phenomena and abstract ideas that are “the basic tools of scientific and technological work.”  Such a patent “might tend to impede innovation more than it would tend to promote it”, which is the Constitutional basis for patents (“to promote the useful arts”).  Importantly, this exception should not swallow all of patent law.  A patent that involves an abstract idea may be patent eligible if applying that abstract idea “to a new and useful end,” thus distinguishing claims to only the “‘building blocks’ of human ingenuity and those that integrate the building blocks into something more.”

Following its 2012  Mayo v. Prometheus decision, the Court applied a two step framework of (1) determining whether the claims are directed to a patent-ineligible concept and (2) if so, looking at the claim limitations individually and as a whole to determine “whether the additional elements ‘transform the nature of the claim’ into a patent-eligible application.”  The second step is a search for an “an ‘inventive concept’–i.e., an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.”  The Court, perhaps addressing concerns raised by various concurrences/dissents in the en banc Federal Circuit decision below, said that, “[b]ecause the approach we made explicit in Mayo considers all claim elements, both individually and in combination, it is consistent with the general rule that patent claims ‘must be considered as a whole.’”

In the first step, the Court ruled that “[t]hese claims are drawn to the abstract idea of intermediate settlement” that is a long-standing “fundamental economic practice” and “building block of the modern economy,” stating:

On their face, the claims before us are drawn to the concept of intermediated settlement, i.e., the use of a third party to mitigate settlement risks.  Like the risk hedging in Bilski, the concept of intermediate settlement is “a fundamental economic practice long prevalent in our system of commerce.”  The use of a third-party intermediary (or “clearing house”) is also a building block of the modern economy.  Thus, intermediated settlement, like hedging [in Bilski] is an “abstract idea” beyond the scope of §101.

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[W]e need not labor to delimit the precise contours of the “abstract ideas” category in this case.  It is enough to recognize that there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediate settlement at issue here.

 In the second Mayo step, the Court ruled that “the method claims, which merely require generic computer implementation, fail to transform that abstract idea into a patent eligible invention.”  The Court ruled that the claim limitations “must include ‘additional features’ to ensure ‘that the [claim] is more than a drafting effort designed to monopolize the [abstract idea]” and do more than describe an abstract idea and “add[] the words ‘apply it.’”  In reviewing prior cases, the Court summarized that “[t]hese cases demonstrate that the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention.”  The Court premised this on “the ubiquity of computers” today, stating:

[I]f a patent’s recitation of a computer amounts to a mere instruction to “implemen[t]” an abstracti idea “on … a computer,” that addition cannot impart patent eligibility.  This conclusion accords with the pre-emption concern that undergirds our §101 jurisprudence.  Given the ubiquity of computers, wholly generic computer  implementation is not generally the sort of “additional featur[e]” that provides any “practical assurance that the process is more than a drafting effort designed to monopolize the [abstract idea] itself.”

 In reviewing the “representative” method claim limitations themselves, the Court framed the question as “whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer” and held “They do not.”  The Court found that each separate claim step “does no more than require a generic computer to perform generic computer functions” without improving the computing function or any other technology:

Taking the claim elements separately, the function performed by the computer at each step of the process is “[p]urely conventional.”  Using a computer to create and maintain “shadow” accounts amounts to electronic recordkeeping–one of the most basic functions of a computer.  The same is true with respect to the use of a computer to obtain data, adjust account balances, and issue automated instructions; all of these computer functions are “well-understood, routine, conventional activit[ies] previously known to the industry. …

… “Viewed as a whole, petitioner’s method claims simply recite the concept of intermediated settlement as performed by a generic computer.  The method claims do not, for example, purport to improve the functioning of the computer itself.  Nor do they effect an improvement in any other technology or field.  Instead, the claims at issue amount to “nothing significantly more” than an instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer.

Thus the Court held the method claims invalid.  The Court ruled that the computer system and computer-readable medium claims “fail for substantially the same reasons.”  The patentee had conceded that the computer-readable medium claims  “rise or fall with its method claims.”  The system claims failed as well, because the recited “hardware” is “purely functional and generic”:

As to its system claims, petitioner emphasizes that those claims recite “specific hardware” configured to perform “specific computerized functions.”  But what petitioner characterizes as specific hardware–a “data processing system” with a “communication controller” and “data storage unit,” for example–is purely functional and generic.  Nearly every computer will include a “communications controller” and “data storage unit” capable of performing the basic calculation, storage, and transmission functions required by the method claims.  As a result, none of the hardware recited by the system claims “offers a meaningful limitation beyond generally linking ‘the use of the [method] to a particular technological environment,’ that is, implementation via computers.”

Thus the system claims were no different from the invalidated method claims “in substance,” and patent eligibility should not “depend simply on the draftsman’s art.”

Justice Sotomayor concurred (joined by Justices Ginsburg and Breyer) because claiming “a method of doing business” is not a patentable process.  Further, like in Bilski, the claims “are drawn to an abstract ideal.”