The Federal Circuit recently issued its highly anticipated decision in Ultramercial, Inc. v. Hulu, LLC, No. 2010-1544 (Fed. Cir. Nov. 14, 2014) (“Ultramercial III”). The Federal Circuit had twice previously declared Ultramercial’s claims eligible for patent protection under 35 U.S.C. § 101. Then came the Supreme Court’s decision in Alice Corp. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014), and everything changed. InUltramercial III, Judge Lourie reversed course, finding the patent ineligible for patenting. Given the posture of the case, Ultramercial III reflects a tonal shift in the Federal Circuit’s approach to patent-eligible subject matter.

Ultramercial owns U.S. Patent No. 7,346,545 (“the ’545 patent”). The patent is directed to an eleven-step process for distributing copyrighted media over the internet. Under the patented process, a consumer receives a copyrighted product at no cost in exchange for viewing an advertisement. The advertiser pays for the media and the user selects an advertisement to view. The claims also include other limitations, such as updating an activity log and restricting public access to the media.

In 2010, Ultramercial sued Hulu, YouTube, and WildTangent, alleging infringement of the ’545 patent. While Hulu and YouTube dropped out of the case, WildTangent filed a motion to dismiss the case under Rule 12(b)(6), arguing that the patent did not recite eligible subject matter. The district court granted the motion. The Federal Circuit reversed (Ultramercial I), but the Supreme Court vacated and remanded that decision in light of Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289. On remand, the Federal Circuit again reversed the district court (Ultramercial II), holding the claims patent-eligible. Most recently, and for a second time, the Supreme Court vacated and remanded the Federal Circuit’s opinion in view of Alice.

In Ultramercial III, the Federal Circuit held the claims ineligible for patenting. The Court resolved the § 101 question by employing the two-step framework introduced inMayo and first applied to computer software inventions in Alice. Under that test, a court must first determine whether the claims are directed to a patent-ineligible concept: law of nature, natural phenomena, or abstract idea. If not, the claims satisfy § 101. Second, if the claims recite an ineligible concept, a court must determine whether the claims amount to “significantly more” than the ineligible concept. See Alice, 134 S. Ct. at 2354.

As for the first step, the Federal Circuit found that the ’545 patent was directed to an ineligible abstract idea “having no particular concrete or tangible form.” Ultramercial, Inc. v. Hulu, LLC, No. 2010-1544, slip op. at *9 (Fed. Cir. Nov. 14, 2014). According to the Court, the process of receiving copyrighted media, selecting ads, offering media in exchange for watching ads, and establishing a payment scheme, describes an abstract idea “devoid of a concrete or tangible application.” Id. The Court did not articulate a test for determining whether a claim embodies an abstract idea. Instead, the Court simply reiterated its conclusion that the ’545 patent was directed to the abstract idea of “using advertising as an exchange of currency.” Id. at *10.

The Federal Circuit made three points when applying the first step of the Mayoframework. First, after acknowledging that some features of the ’545 patent added “a degree of particularity,” for instance, the Court nonetheless concluded that “the concept embodied in a majority of the limitations describes only [an] abstract idea.” Id. at *9-*10 (emphasis added). In other words, a claim embodies an abstract concept if a majority of the limitations are so directed, even if others are not. The Court did not limit this approach to conventional activities or generic components.

Second, the Federal Circuit clarified that novel and non-routine components do not, by themselves, render a claim sufficiently concrete.

Third, the Court left open the possibility that some software patents embracing sufficiently concrete subject matter might pass muster under § 101. Recognizing that all inventions use abstract ideas and laws of nature, Judge Lourie assured that “we do not purport to state that all claims in all software-based patents will necessarily be directed to an abstract idea.” Id. at *10. But despite cautioning that future cases “may turn out differently,” the Court did not detail what these types of claims may look like.Id

Turning to the second step of the Mayo framework, the Federal Circuit concluded that the ’545 patent did not claim “significantly more” than the abstract idea of “offering media content in exchange for viewing an advertisement.” Id. at *11. The Court found the inclusion of updating activity logs, permitting users to select advertisements, using of the Internet, and restricting user access are no more than routine “data-gathering” and “pre-solution” activities ineligible for patent protection. Id. at *11. This was true, the Court concluded, even if the claims contain new and nonobvious features:

In sum, each of [the] eleven steps merely instructs the practitioner to implement the abstract idea with routine, conventional activities, which is insufficient to transform the patent-ineligible subject matter into patent-eligible subject matter. That some of the eleven steps were not previously employed in this art is not enough—standing alone—to confer patent eligibility upon the claims at issue

Id. at *12 (internal quotations and citations omitted; emphasis added). 

The Court did not explain how novel features can fairly constitute a “routine” activity. Nor did the Court provide a test for determining when a feature embraces such an activity. Arguably, Ultramercial III stands for the proposition that what constitutes a “routine” or “conventional” practice under § 101 is a distinct inquiry from the novelty and nonobviousness questions of §§ 102 and 103.

Rejecting its position in Ultramercial II, the Federal Circuit here found that the claims’ recitation of the Internet did not add an inventive concept. The Court explained that reciting the Internet as the operating environment, to arguably limit the use of the abstract idea to a particular technological environment, was insufficient to save the claims.

The Court ended its discussion by applying the pre-Mayo and Alice machine-or-transformation test, explaining that the test can be a “useful clue” in the second step ofAliceId. In so doing, the Court held that the claims are not tied to a particular machine because they do not create a novel machine. Id. at *13. According to the Federal Circuit, tying a claim to a “ubiquitous” and “general purpose” machine does not make an invention patent-eligible. Id.

The Court also found that the claims did not produce a patentable transformation, for “manipulations of public or private legal obligations . . . are not physical objects or substances, and they are not representative of physical objects or substances.” Id. While some may question whether this assertion accurately characterizes the ’545 patent—or even whether it is philosophically sound—it does appear to carve out subject matter eligible for patenting.

Judge Mayer authored a concurring opinion calling for a stronger doctrinal departure from the Alice-Mayo framework. Judge Mayer rooted his opinion on three grounds. First, he argued that § 101 represents a threshold question of patentability, one that should be resolved at the outset of litigation. Id. at *1 (Mayer, J., concurring). Concerned with the daunting costs of patent litigation, he stressed that resolving § 101 questions early may provide a “bulwark against vexatious infringement suits.” Id. at *4.

Second, Judge Mayer argued that the presumption of validity afforded to each granted patent should not extend to determinations of patent eligibility. See 35 U.S.C. § 282(a) (“A patent shall be presumed valid.”). To Judge Mayer, the USPTO had applied an “insufficiently rigorous subject matter eligibility standard” to garner such a presumption. He also reframed the § 101 analysis as assessing patent eligibility—not patent validity—thereby eschewing the “presumption of validity” altogether. The Judge did not, however, appear to consider the twin facts that (1) the USPTO was applying existing case law, and (2) there is no clear statutory basis for treating patent eligibility different from the novelty, nonobviousness, or written description requirements for the purposes of § 282.

Finally, Judge Mayer reasoned that Alice created a “technological arts test for patent eligibility.” Id. at *8. The ’545 patent claims were invalid because they were directed “to an entrepreneurial objective, . . . rather than a technological one.” Id. at *9, *11. And for the Judge, all “entrepreneurial objectives” are impermissibly abstract because they do not take a scientific principle and “tie it down” in a precisely defined manner.Id. at *10. While the ’545 patent includes technological components like computers and the Internet, the “innovative aspect” of the claims was not technological, but entrepreneurial. Id. at *11. 

Ultramercial III symbolizes a change in the winds of § 101 jurisprudence at the Federal Circuit. By invalidating a patent that it had twice upheld, Ultramercial III shows that the Court is taking the pronouncements of Mayo and Alice seriously. But the case also underscores the reticence of appeals courts to fashion a workable standard for patent eligibility in a post-Alice world that companies can rely upon when making decisions to protect software inventions and to enforce software patents. And in failing to provide clearer formulations of Alice’s test, Ultramercial III ultimately creates as many questions as it answers.