On June 19, 2014, the Supreme Court issued its highly anticipated decision in Alice Corp. Pty. Ltd. v. CLS Bank Int'l, (U.S. No. 13-298) regarding patent-ineligible abstract ideas under 35 U.S.C. § 101. Relying heavily on precedent established in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (2012), and Bilski v. Kappos, 561 U.S. 593 (2010), the Court held that Alice’s method claims were drawn to a patent-ineligible abstract idea. Further, the Court held that the system claims covering the use of a computer to implement the abstract idea did not “transform” the patent-ineligible method into a patent-eligible invention.

Alice’s patents concerned computer-implemented methods for reducing risk in financial transactions, i.e., settlement risk. Settlement risk refers to the risk that only one party to a transaction will receive payment. CLS characterized the patents as covering a two-sided escrow arrangement.

In particular, Alice’s claims concerned methods for two parties to exchange obligations using a third party called a supervisory institution. The claims basically covered four steps: (i) creating shadow credit and debit records for each party at the supervisory institution; (ii) obtaining start-of-day balances for the shadow records; (iii) adjusting the shadow records at the supervisory institution for every transaction if the parties have sufficient funds to satisfy their respective obligations; and (iv) sending an end-of-day instruction by the supervisory institution to update actual credit and debit records to the reflect permitted transactions. All of the patent claims are implemented using a computer.

The district court held that the claims were patent-ineligible on their face as being directed to an abstract idea of “employing a neutral intermediary to facilitate the simultaneous exchange of obligations” in order to mitigate the risk to the exchanging parties.

In a 2-1 decision, the Federal Circuit reversed the district court and held that all of Alice’s claims were directed to patent-eligible subject matter. After rehearing en banc, however, the Federal Circuit affirmed the district court in a one-paragraph per curiam opinion.

The Supreme Court granted Alice’s petition for a writ of certiorari. In a unanimous decision, the Court affirmed the Federal Circuit, thus invalidating Alice’s claims.

The Court acknowledged the importance of ensuring a balance between preventing monopolies over “the basic tools of scientific and technological work,” and preserving inventive stamina by recognizing that all inventions, at some level, are based on abstract ideas. Further, the Court stated that simply because patent claims may involve an abstract idea, that alone does not render the claims ineligible for patent protection. Adopting the “inventive concept” framework from its decision in Mayo, the Court determined that the proper analysis involves distinguishing between patents that claim “the building block[s] of human ingenuity and those that integrate the building blocks into something more, thereby ‘transforming’ them” into a patent-eligible invention. Thus, the Court was tasked with deciding: (1) whether the claims are directed to a patent-ineligible concept and (2) whether the elements of the claims, when viewed as a whole, contain something that “transforms” the abstract idea into something more.

Relying on its decisions in Gottschalk v. Benson, 409 U.S. 63 (1972),Parker v. Flook, 437 U.S. 584 (1978), and Bilski v. Kappos, 561 U.S. 593 (2010), the Court concluded that Alice’s claims were directed toward the patent-ineligible abstract idea of “intermediated settlement.” The Court saw no distinction between the patent-ineligible “risk hedging” concept inBilski, and Alice’s method of managing settlement risk. The Court ruled that the theory of intermediated settlement is “a fundamental economic practice long prevalent in our system of commerce.” In addition, the use of a third-party intermediary is also a staple concept in the modern economy. In deciding that the patent merely claimed these “building block” concepts, the Court held that the claims recited a patent-ineligible abstract idea under § 101.

In addressing the second prong of the Mayo test, the Court turned to its reasoning in MayoBensonFlook, and Diamond v. Diehr, (450 U.S. 175 (1981). In Mayo, the Court stated that in order to contain an “inventive concept,” the elements of the claim must include “additional features” to ensure that the claim is “more than a drafting effort designed to monopolize the [abstract idea]”. Mayo, 132 S. Ct. at 1297. In Benson, the Court noted that implementing a mathematical principle on a computer did not transform the abstract idea into a “patentable application of the principle.” Benson, 409 U.S. at 64. Further, Flook explained that implementing an abstract idea on a computer did not circumvent the issue of patent-ineligibility. Flook, 437 U.S. at 593. On the other hand, the Supreme Court held that the use of a familiar mathematical equation in a process that was “designed to solve a technological problem” in the rubber industry “transformed the process into an inventive application” of the equation. Diehr 450 U.S. at 178; Mayo, 132 S. Ct. at 1299.

Alice argued that since a computer is a physical item, and not “purely conceptual,” the use of the computer to perform the settlement risk mitigation should preclude a determination of patent ineligibility. The Court rejected this argument, noting that a mere instruction to “apply” the abstract idea on a computer, or on another piece of technology, does not turn the invention into patent-eligible subject matter. After deciding that the computer in Alice’s claims was a generic computer merely acting as an intermediary, the Court held that the claims do nothing more than “simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer.” This did not suffice “to transform an abstract idea into a patent-eligible invention.” The concurring opinion, written by Justice Sotomayor, and joined by Justices Ginsberg and Breyer, advances the view that business methods fall outside § 101 altogether (quoting Justice Steven’s concurrence in Bilski).

This opinion is just one of several recent Supreme Court cases that seemingly favor patent challenges by lowering the bar for invalidating both business-method and software patents. While the decision does not completely abrogate the ability to patent business methods or software, the Supreme Court stayed true to its precedents by making it clear that the “mere recitation” of some generic technological structure does not transform an abstract idea into patent-eligible subject matter. But the opinion provides little guidance on what exactly constitutes an “abstract idea.” Thus, it is likely that there will be further litigation in the near future to provide clarity on what constitutes an abstract idea under § 101, especially in the realm of software and business methods.