CLS Bank International v. Alice Corp. PTY. LTD, and CLS Services, Ltd., No. 2011-1301 (Fed. Cir., May, 2013).

http://www.cafc.uscourts.gov/images/stories/opinions-orders/11-1301.Opinion.5-8-2013.1.PDF

“There has never been a case that could do more damage to the patent system than this one.”

-- The Honorable Kimberly A. Moore, U.S. Court of Appeals for the Federal Circuit

The U.S. Court of Appeals for the Federal Circuit, sitting en banc, recently addressed the patent eligibility of computer-implemented inventions under 35 U.S.C. § 101 in CLS Bank International v. Alice Corporation. Section 101 broadly defines the subject matter that is eligible for patenting: “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof” is patent eligible. While courts have interpreted Section 101 broadly, they have recognized a judicially created exception that excludes from the statute’s scope abstract ideas, laws of nature, and natural phenomena.

Among the questions the CLS Bank court sought to answer were: (1) what test should be applied to determine whether a computer-implemented invention is a patent-ineligible abstract idea, and (2) when, if ever, does the presence of a computer in a patent claim lend patent eligibility to an otherwise patent-ineligible idea?

The ten-judge panel was sharply divided on these issues, resulting in the filing of five separate opinions and a set of “additional reflections” by Chief Judge Rader. Though a majority of the Court agreed that the asserted method and computer-readable media claims were not directed to patent-eligible subject matter under Section 101, no majority of judges agreed on the correct approach to the patent eligibility inquiry.

CLS Bank breathes additional uncertainty into the patent eligibility of computer-implemented inventions. In the words of Judge Moore, certain of the court’s proposed approaches could lead to “the death of hundreds of thousands of patents, including all business method, financial system, and software patents as well as many computer implemented and telecommunications patents.” Thus, it will be important to keep abreast of future legal developments in this area, as federal courts and the Patent Office struggle to make sense of the current state of the law.

The District Court Proceeding

Alice Corporation’s patents generally relate to “a computerized trading platform used for conducting financial transactions in which a third party settles obligations between a first and a second party so as to eliminate ‘counterparty’ or ‘settlement’ risk.” The asserted claims include claims directed to methods of exchanging obligations, data processing systems, and computer-readable media containing program code for directing an exchange of obligations.

For purposes of summary judgment, the parties agreed that all asserted claims should be interpreted to require a computer including at least a processor and memory. The district court concluded on summary judgment that the asserted claims were invalid under Section 101. In particular, the district court held that the method claims were improperly directed to “an abstract idea of employing an intermediary to facilitate simultaneous exchange of obligations in order to minimize risk;” the system claims were ineligible because they “would preempt the use of the abstract concept … on any computer;” and the media claims were improperly “directed to the same abstract concept despite the fact they nominally recite a different category of invention.” Alice Corporation appealed.

The Federal Circuit Appeal

On appeal, a Federal Circuit panel reversed the district court decision, holding that the asserted claims were all patent eligible under Section 101. CLS Bank filed a petition for rehearing en banc, which was granted in October 2012. On May 10, 2013, the Federal Circuit issued a per curiam opinion, in which a majority of the court affirmed the district court’s holding that the method and computer-readable media claims were not directed to patent-eligible subject matter, and an equally divided court affirmed the district court’s holding that the system claims are not directed to patent-eligible subject matter.

Judge Lourie wrote a concurring opinion, in which Judges Dyk, Prost, Reyna, and Wallach joined. Judge Lourie articulated a multi-part test for determining patent eligibility. First, one must determine whether the claimed invention is a process, machine, manufacture, or composition of matter. If so, then one must determine whether the claim is drawn to a patent-ineligible abstract idea, law of nature, or natural phenomenon. To assess whether a claim raises “abstractness concerns,” one must identify and define the abstract idea that could be preempted if the claim were upheld. Once the abstract idea is identified, one must evaluate the rest of the claim to determine if it contains enough “additional substantive limitations that narrow, confine, or otherwise tie down the claim so that, in practical terms, it does not cover the full abstract idea itself.” Judge Lourie explained that “[l]imitations that … are merely tangential, routine, well-understood, or conventional, or in practice fail to narrow the claim relative to the fundamental principle therein, cannot confer patent eligibility.”

Applying these principles, Judge Lourie concluded that the balance of the asserted method claims did not represent “significantly more” than the underlying abstract idea, and failed to provide “enough” of a limitation to satisfy Section 101. Judge Lourie also concluded that the system and computer-readable media claims were similarly patent ineligible because they were nothing more than re-articulated versions of the method claim: “Abstract methods do not become patent-eligible machines by being clothed in computer language.”

Chief Judge Rader, joined by Judges Linn, Moore, and O’Malley, disagreed with the district court concerning the system claims, concluding that they were patent eligible. Chief Judge Rader, joined only by Judge Moore, agreed with the district court, however, that the method and media claims were not patent eligible.

Chief Judge Rader’s approach centered on “whether a claim includes meaningful limitations restricting it to an application [of an idea], rather than merely an abstract idea.” Chief Judge Rader explained that a claim is not meaningfully limited if it covers all practical applications of an abstract idea, or if it contains only insignificant or token activity (such as identifying a relevant audience, a category of use, field of use, or technological environment), or if its purported limitations are overly-generalized. In contrast, Chief Judge Rader explained that a claim is meaningfully limited if it requires “a particular machine implementing a process or a particular transformation of matter,” or when the claim recites, in addition to the abstract idea, other limitations that are “central to the solution itself.” “[W]hile the mere reference to a general purpose computer will not save a method claim from being deemed too abstract to be patent eligible, the fact that a claim is limited by a tie to a computer is an important indication of patent eligibility…. At bottom, where the claim is tied to a computer in such a way that the computer plays a meaningful role in the performance of the claimed invention, and the claim does not pre-empt virtually all uses of an underlying abstract idea, the claim is patent eligible.”

Chief Judge Rader analyzed the claims as a whole to see if they were practically limited such that the patentee was not claiming the entire abstract idea, but rather only an application of that idea. With respect to the system claims, Chief Judge Rader found that they were patent eligible because they provided additional structural elements that were not inherent in the abstract idea, and they were not stated at a high level of generality. Applying this same reasoning to the method and media claims produced the opposite result. Chief Judge Rader concluded that those claims recited only steps inherent in the abstract idea of using an escrow to avoid risk.

Judges Linn and O’Malley largely agreed with Chief Judge Rader’s analysis but disagreed on certain procedural issues, which led them to conclude, based on the district court record, that the method and media claims must rise and fall with the system claims because they contain the same computer-based limitations. Accordingly, Judges Linn and O’Malley concluded that the method and media claims are also patent eligible.

Judge Moore filed a separate dissenting-in-part opinion, in which Chief Judge Rader and Judges Linn and O’Malley joined, further explaining why the system claims are directed to patent eligible subject matter, and cautioning against the sweeping impact Judge Lourie’s approach could have on “hundreds of thousands of patents,” “decimat[ing] the electronics and software industries.” Judge Moore further expressed concern over the “staggering breadth” that has been applied to the narrow judicial “abstract ideas” exception, and invited the Supreme Court to weigh in on which claims “are and are not directed to patentable subject matter.”

Judge Newman wrote separately to express her view that the court is unnecessarily concerned about preemption because patented information is not barred from further study and experimentation. Thus, Judge Newman advocated that the court should “abandon its failed section 101 ventures into abstraction, preemption, and meaningfulness,” return to the plain language of the statute, and hold that “when the subject matter is within the statutory classes in section 101, eligibility is established.” According to Judge Newman, other provisions of the Patent Act, including those relating to novelty, non-obviousness, and enablement, are sufficient to “place[] inventions in the statutory framework of patentability.”

The approaches of Chief Judge Rader and Judges Lourie and Newman are all rooted in Supreme Court and Federal Circuit precedent. None of their approaches “has the weight of precedent,” however, because no single opinion garnered a majority. Until this issue is taken up by the Federal Circuit again or resolved by the Supreme Court, litigants will need to consider all three approaches and carefully note the composition and leanings of their judicial panels.