Why it matters: On September 13, 2016, the Federal Circuit in McRO, Inc. d.b.a. Planet Blue v. Bandai Namco Games America Inc. found claims for a software patent to be "not drawn to an abstract idea" and thus patent-eligible under Section 101 of the Patent Act. The decision in McRO is one of the few cases (out of approximately 50) since the Supreme Court's 2014 decision in Alice Corp. v. CLS Bank where the Federal Circuit has found claims for a computerized software process to be patent-eligible. Read on for a discussion of the Federal Circuit's reasoning in McRO as well as an overview of Alice's impact on the federal courts since it was decided two years ago (hint—invalidations of software patents continue at a consistently high rate).

Detailed discussion: On September 13, 2016, the Federal Circuit in McRO, Inc. d.b.a. Planet Blue v. Bandai Namco Games America Inc. reversed a Central District of California court and found that a software patent for a computerized process for synchronizing the lip movements and facial expressions of animated figures was not drawn to an abstract idea and thus patent-eligible under Section 101 of the Patent Act, thereby allowing the plaintiff graphics company to move forward with an infringement suit against Sega Inc., Electronic Arts Inc. and other large video game companies.

Review: Alice Corp. v. CLS Bank

We discussed the U.S. Supreme Court's landmark 2014 decision in Alice Corp. v. CLS Bank in detail in our December 2015 newsletter under "Down the Rabbit Hole: Trends in Software Patent Court Decisions Post-Alice." In Alice, the Supreme Court held that claims for a software method for reducing financial-settlement risk performed by a computer were "drawn to a patent-ineligible abstract idea" under Section 101 of the Patent Act, and that "[m]erely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention." The Court established a two-step test for ascertaining patent eligibility under Section 101: (1) first, determine whether the claims at issue are directed to one of the "patent-ineligible" concepts of abstract ideas, laws of nature or natural phenomena; and (2) if so, determine whether any of the remaining elements, either alone or in combination with the patent-ineligible elements, contain sufficient "inventive concept" to transform the claim to become patent-eligible; in this regard the Court noted that simply applying an abstract idea on a generic computer is not enough for patent eligibility.

In affirming the conclusion of patent ineligibility with respect to the specific facts before it, the Court urged the courts and agency tribunals to "tread carefully" going forward in construing inventions and innovations to be non-patent-eligible abstract ideas "lest [the exclusionary principles] swallow all of patent law." As discussed below, however, a review of federal court decisions on the second anniversary of the Alice opinion shows that courts have failed to heed the Supreme Court's words of caution and have invalidated software patents in consistently high percentages.

This includes the Federal Circuit on appeal, which has consistently upheld software patent invalidations in over 90% of the cases that have come before it. However, as discussed in our July 2016 newsletter under "Are 'Improvements' Key to Subject Matter Eligibility for Software Patents?" the Federal Circuit may be looking for ways to carve out meaningful exceptions to Alice. For example, one of the rare times prior to McRO where the Federal Circuit upheld a software patent was relatively recent—May 12, 2016—in the case of Enfish LLC v. Microsoft Corporation. In that case, the Court's holding turned on its finding that the software claims were directed to a "specific improvement in the way computers operate," rendering them non-abstract for Section 101 purposes. A week later, on May 17, 2016, the Federal Circuit in In re: TLI Communications LLC Patent Litigation reverted to norm and found the software claims before it to be directed to an abstract idea and patent-ineligible, distinguishing that case from Enfish because the claims did not sufficiently recite "a specific improvement in computer functionality." Following the Enfish and In re: TLI Communicationsholdings, the U.S. Patent and Trademark Office (PTO) issued a memo to examiners on May 19, 2016, that provided additional guidance for determining what constitutes an abstract idea in light of those cases, with specific attention given to "claims directed to improvements of existing computer technology or functionality." All of this seems to suggest that software claims will have a better chance of being found to be patent-eligible by the PTO and the Federal Circuit if they can be seen to offer specific improvements in the way a computer software program or process operates or functions. The Federal Circuit's decision in McRO bears this out.

McRO, Inc. d.b.a. Planet Blue v. Bandai Namco Games America Inc.

To briefly review the background of the case, in 2012 and 2013 plaintiff McRO, Inc., doing business as Planet Blue (McRO), filed lawsuits against Bandai Namco Games America Inc. and other video game developers and publishers (collectively, Defendants) in the U.S. District Courts for the Central District of California and for the District of Delaware (the Delaware lawsuits were subsequently transferred to the Central District of California and all the lawsuits consolidated). McRO alleged in the lawsuits that the Defendants had infringed its two patents both entitled "Method for Automatically Animating Lip Synchronization and Facial Expression of Animated Characters," which both claim a computerized process and rules for synchronizing the lip movements and facial expressions of animated figures. On September 22, 2014, the Central District of California judge granted the Defendants' motion for judgment on the pleadings after finding, relying on Alice, that McRO's asserted claims were directed to patent-ineligible abstract subject matter and therefore invalid under Section 101 of the Patent Act. McRO appealed to the Federal Circuit.

On September 13, 2016, the Federal Circuit reversed and remanded, allowing McRO's infringement lawsuit against the Defendants to go forward, holding that "the ordered combination of claimed steps, using unconventional rules that relate sub-sequences of phonemes, timings, and morph weight sets, is not directed to an abstract idea and is therefore patent-eligible subject matter under Section 101."

In a unanimous opinion written by Judge Jimmie V. Reyna, the Court began its analysis identifying the "principal dispute" between the parties as being "over the meaning and application of two Supreme Court cases in light of Alice: Parker v. Flook, 437 U.S. 584 (1978) (Flook) and Diamond v. Diehr, 450 U.S. 175 (1981) (Diehr). Both cases addressed the patentability of process claims that include steps requiring calculation (emphasis added)." The central dispute was factually complex and, to briefly summarize, focused on whether the "first set of rules," or claimed rules, evaluated sub-sequences that were directed to multiple "sequential phonemes" (McRO's position) or "individual phonemes" (Defendants' position). If the former, McRO argued that the claims were not directed to an abstract idea (relying on Diehr), and if the latter, the Defendants argued they were (relying on Flook). After reviewing both sides' arguments in support of their positions, the Court said that "the parties' dispute about whether the 'first set of rules' must evaluate sequential phonemes or can evaluate individual phonemes is resolved by the claim language" and concluded that "[w]e agree with McRO that the claims are limited to rules that evaluate sub-sequences consisting of multiple sequential phonemes" and thus the claims were not abstract for Section 101 purposes.

The Court next addressed the question of whether, under Step 1 of Alice, the claims were rendered abstract because they were based on generic technological principles and thus "preempted" (as Defendants argued) or whether they represented improvements to a technological process (citing to, in addition to Diehr and Alice, the Court's recent decision in Enfish, discussed above). The Court framed the issue as "whether the claims in these patents focus on a specific means or method that improves the relevant technology or are instead directed to a result or effect that itself is the abstract idea and merely invoke generic processes and machinery."

After specifically reviewing the claimed rules in detail, the Court rejected the Defendants' argument that "the claims simply use a computer as a tool to automate conventional activity," finding that "[t]he computer here is employed to perform a distinct process to automate a task previously performed by humans… This [human] activity, even if automated by rules, would not be within the scope of the claims because it does not evaluate sub-sequences, generate transition parameters or apply transition parameters to create a final morph weight set. It is the incorporation of the claimed rules, not the use of the computer, that 'improved [the] existing technological process' by allowing the automation of further tasks."

The Court held that claim 1 (which established the "first set of rules") in particular was not preempted because "[w]hen looked at as a whole, claim 1 is directed to a patentable, technological improvement over the existing, manual 3-D animation techniques. The claim uses the limited rules in a process specifically designed to achieve an improved technological result in conventional industry practice... Claim 1 of the '576 patent, therefore, is not directed to an abstract idea." The Court concluded, "[b]ecause we find that claim 1 is not directed to ineligible subject matter, we do not reach Alice step two."

Second anniversary of Alice, by the numbers:

The second anniversary of the Supreme Court's Alice decision was on June 19, 2016. As illustrated by the chart below, a snapshot of the federal courts through September 2016 shows that, based on Alice, while the Federal Circuit has continued to invalidate software patents at a consistently high rate, the rate of district court invalidations nationwide has dropped, leading to an overall invalidation rate below 70% for the first time since Alice was decided. While encouraging, it is too early to predict whether this downward percentage shift represents a lasting trend.

  • Nationwide (Federal Circuit and District Courts):
    • Total decisions: 363
    • Total invalid: 247
    • Percentage invalid: 68% (versus 73% as of 10/31/15)
  • Federal Circuit (appeals from district courts, PTAB, etc.):
    • Total decisions: 58
    • Total invalid: 53
    • Percentage invalid: 914% (versus 94.7% as of 10/31/15)
  • District Courts:
    • Total decisions: 305
    • Total invalid: 194
    • Percentage invalid: 63.6% (versus 70.3% as of 10/31/15)

* Statistics through 9/31/16 provided by BilskiBlog, "Alicestorm Update for Fall 2016" (10/19/16). For comparison purposes, we published federal court statistics through October 31, 2015 in our December 2015 newsletter, entitled "Down the Rabbit Hole: Trends in Software Patent Court Decisions Post-Alice."

The impact of Alice on the PTO is just as dire. As one practitioner described it, the "largely unseen, real impact" of the Alice decision is "the widespread rejection of [software] patent applications by the PTO." Statistics cited show that, two years out, over 36,000 published patent applications have been rejected by PTO examiners based on Alice, with over 5,000 published patent applications abandoned. When these statistics are factored together with the federal court statistics, the chilling effect of Alice on innovations in software and computer-based patents becomes even more evident.

See here to read the Federal Circuit's 9/13/16 opinion in McRO, Inc. d.b.a. Planet Blue v. Bandai Namco Games America Inc.

See here to read the BilskiBlog entry published on 10/19/16 entitled "Alicestorm Update for Fall 2016."

See here to read the BilskiBlog entry published on 6/20/16 entitled "Two Years After Alice: A Survey of the Impact of a 'Minor Case' (Part 2)."