Another Guidepost in the Software Patent Puzzle

In a much anticipated decision issued on June 19, 2014, the Supreme Court held that patents on a computer-implemented system and method for mitigating settlement risk using an intermediary were directed to a patent-ineligible abstract idea. Alice Corp. v. CLS Bank Int'l, 573 U.S. ___ (2014).

By its holding, the Supreme Court affirmed the en banc decision of a fractured Federal Circuit that all of the claims at issue were patent-ineligible under 35 U.S.C § 101. The Supreme Court reaffirmed its view, expressed in prior cases, that adding nothing more than "conventional steps" or "generic computer" components to what is otherwise an abstract idea will not transform the idea into patent-eligible subject matter.

Alice's Patents on Intermediated Settlement

Alice's patents covered a computerized scheme for mitigating "settlement risk" by using "shadow accounts" maintained on a computer acting as a third-party intermediary.¹ The patents contained three types of claims-method claims, computer system claims, and claims to a computer-readable medium containing program code. In general, each of Alice's claims was structured as a series of computer-implemented steps, and the parties had stipulated that all claims required a computer.

CLS Bank brought suit against Alice seeking declaratory judgment that the claims at issue were invalid, unenforceable, or not infringed. After the Supreme Court's decision in Bilski—which held that claims directed to a method for risk hedging covered a patent-ineligible abstract idea—the district court held that all of Alice's claims were patent ineligible because they were directed to the abstract idea of "employing a neutral intermediary to facilitate simultaneous exchange of obligations in order to minimize risk." Alice appealed.

A divided panel of the Federal Circuit reversed, holding that it was not "manifestly evident" that Alice's claims were directed to an abstract idea. Following the panel's decision, the Federal Circuit granted a rehearing en banc, vacated the panel opinion, and affirmed the judgment of the district court. Seven of the ten Federal Circuit judges agreed that Alice's method and media claims were patent ineligible. With respect to the system claims, the en banc Federal Circuit affirmed the district court's invalidity finding by an equally divided vote. With its patents invalidated, Alice petitioned the Supreme Court for review.

Supreme Court: This Is Just Like Bilski

The Supreme Court started from the proposition that the statute defining patent-eligible subject matter—35 U.S.C § 101—"contains an important implicit exception: Laws of nature, natural phenomena, and abstract ideas are not patentable."² "[T]he concern that drives this exclusionary principle," the Court said, "[is] one of pre-emption."³ The Court explained that laws of nature, natural phenomena, and abstracts ideas are "the basic tools of scientific and technological work," and that "[m]onopolization of those tools through the grant of a patent might tend to impede innovation more than it would tend to promote it."⁴

In analyzing Alice's claims, the Court applied a two-step framework, citing its prior decision in Mayo.⁵ First, the Court asked "whether the claims at issue are directed to one of [the] patent-ineligible concepts." The Court answered this question affirmatively, finding that Alice's "claims are drawn to the abstract idea of intermediated settlement."⁶ The Court relied on its prior decision in Bilski,⁷ in which the Court held that a method for hedging against the financial risk of price fluctuations was a patent-ineligible abstract idea.  Comparing Alice's idea of intermediated settlement with Bilski's idea of hedging risk, the Court found "no meaningful distinction" and explained that "[b]oth are squarely within the realm of 'abstract ideas.'"⁸ In relying on Bilski, the Court did not purport to articulate a new test for abstract ideas: "In any event, we need not labor to delimit the precise contours of the 'abstract ideas' category in this case."⁹ "Like the risk hedging in Bilski," the Court said, "the concept of intermediated settlement is 'a fundamental economic practice long prevalent in our system of commerce'" and "[t]he use of a third-party intermediary (or 'clearing house') is also a building block of the modern economy."¹⁰

For the second step of the Mayo framework, the Court said, "we consider the elements of each claim both individually and 'as an ordered combination' to determine whether the additional elements 'transform the nature of the claim' into a patent-eligible application." The Court described this second step of the analysis "as a search for 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."¹¹ The Court emphasized that "[a] claim that recites an abstract idea must include additional features to ensure that the claim is more than a drafting effort designed to monopolize the abstract idea."¹²

Applying this second step to Alice's claims, the Court found that "the relevant question is whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer." The Court's answer: "They do not."

Turning specifically to Alice's method claims, the Court noted that "the function performed by the computer in each step of the process is 'purely conventional.'"¹³ "Using a computer to create and maintain 'shadow' accounts," the Court said, "amounts to electronic recordkeeping—one of the most basic functions of a computer."¹⁴ When viewed as a whole, the Court said Alice's method claims "simply recite the concept of intermediated settlement as performed by a generic computer."¹⁵

The Court turned next to Alice's computer system and computer-readable medium claims, which the Court found "fail for substantially the same reasons." Despite Alice's insistence that the claims recited "specific hardware," the Court concluded that the "'data processing system' with a 'communications controller' and 'data storage unit,' for example," was "purely functional and generic."¹⁶ The Court found that "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."¹⁷ In sum, the Court said, "The method claims recite the abstract idea implemented on a generic computer; the system claims recite a handful of generic computer components configured to implement the same idea." Any other conclusion, the Court cautioned, would improperly turn patent eligibility into a "draftsman's art."

Takeaways and Looking Forward

CLS Bank represents a significant decision on patent eligibility. While the Court frames its decision in terms of its prior holdings in Bilski and Mayo, the Court in CLS Bank appears to offer a clearer path for § 101 challenges.

The Court offers the guiding principle that "an idea of itself is not patentable," and appears less concerned with how to define the limits of an "abstract idea" and instead more focused on the practical limits of a patent's claimed use of such an idea. If a patent claims an abstract idea, but the claimed method or system is merely a conventional or generic application of that idea, the claim is more likely to be a veiled attempt to monopolize the abstract idea itself, and thus be patent ineligible. Instead, the implementation itself must represent a sufficiently inventive contribution-what the Court calls an "inventive concept"-and may not merely use "well known," "routine," "purely conventional," "wholly generic," or "purely functional and generic" components or techniques. On the other hand, specific limitations on the use of an idea that themselves represent a concrete and inventive implementation are less likely to preempt all uses of the underlying abstract idea, and thus more likely to be patent eligible.

And, consistent with the decision in Bilski, CLS Bank unequivocally confirms that merely implementing an abstract idea on a computer is not a meaningful limitation on the idea, and it is not sufficient to confer patent eligibility. The CLS Bank Court emphasized, for example, that "[t]he method claims do not . . . purport to improve the functioning of the computer itself"; the Court further noted, "Nor do they effect an improvement in any other technology or technical field."¹⁸ Thus, following the Court's guidance, the patent eligibility inquiry should focus, first, on identifying the underlying abstract idea, and second, on determining whether the particular claimed technical implementation is merely routine, conventional, or generic.

CLS Bank relies heavily on prior precedent and well-established ideas, and it does not represent a sweeping change in the law or its theoretical underpinnings. Nevertheless, it is an important step in the direction of narrow patent protection for high-level, computer-implemented processes, however they are claimed.

The Supreme Court's Ruling in CLS Bank follows closely on the heels of two other significant patent decisions issued by the Court earlier this month:

• In Nautilus, Inc. v. Biosig Instruments, Inc., the Supreme Court significantly lowered the bar for showing that patent claims are invalid for indefiniteness. Read our Advisory on the Nautilus decision.
• In Limelight Networks, Inc. v. Akamai Technologies, Inc., the Supreme Court held that, in situations where multiple parties work together to perform the steps of a patented method, there can be no liability for induced infringement where there is no single, underlying direct infringer. Read our Advisory on the Akamai decision.