Alice Corp.: Are Software and Business Methods Still Patentable?

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By Nelson T. Rivera

On June 19, 2014, the Supreme Court in Alice Corp. v. CLS Bank International held that a group of patents related to mitigating settlement risk were not drawn to eligible subject matter under the Patent Act’s 35 U.S.C. § 101 (“Section 101”). In so ruling, the Court affirmed the holding of a deeply divided Federal Circuit that merely requiring generic computer implementation fails to transform abstract ideas into valid patent claims.

Alice Corporation (“Alice”) is an Australian company that is the assignee of four U.S. patents. These patents covered a computerized trading platform for exchanging obligations in which a trusted third party settles obligations between a first and second party so as to eliminate “settlement risk” relating to specified, yet unknown, future events. Alice never produced the computer system described, or used the patents in any of its business, and, as a result, the company has been called a patent troll.

CLS Bank International (“CLS”), a consortium of banks, developed and used software to facilitate transactions which featured a third-party-assurance technique similar to that described in Alice’s patents. CLS used its software to facilitate $5 trillion every day.

In 2007, CLS sued Alice, seeking a declaratory judgment from the District Court for the District of Columbia that Alice’s patents were invalid and unenforceable, and that CLS did not infringe. Alice counterclaimed and alleged patent infringement. Following the Supreme Court’s decision in Bilski v. Kappos in 2010, both parties filed cross-motions for summary judgment on whether the asserted claims were eligible for patent protection under Section 101.

Section 101 requires that patent-eligible inventions and discoveries be “new and useful” and lists four categories of patent-eligible subject matter: (1) processes, (2) machines, (3) manufactures, and (4) compositions of matter (Alice’s patents fell into three more specific categories: (1) method patents; (2) data processing system patents; and (3) computer-readable media patents). However, judicial precedent has long inferred several “implicit exceptions” to these categories, including “abstract ideas,” the exception at issue in Bilski v. Kappos.

The district court granted summary judgment for CLS, holding that Alice’s patents were invalid because they claimed the abstract idea of reducing risk using an intermediary to achieve simultaneous exchanges. A three-judge panel of the Court of Appeals for the Federal Circuit reversed, holding Alice’s claims patent-eligible under Section 101, but, on rehearing en banc, a full Federal Circuit majority held that all of Alice’s patent claims—including its method claims, data processing system claims, and computer-readable media claims—were ineligible subject matter. The Supreme Court affirmed.

From the Supreme Court’s Alice opinion, we learn that, in order to pass muster under Section 101, software and business method patents must conform to the two-step test that was promulgated in Mayo Collaborative Services v. Prometheua Laboratories, Inc., which the Court adopted as the framework governing the scope of the implicit “abstract idea” exception to Section 101. The two-step Mayo test states in pertinent part, that (1) the court must first determine whether the claim is directed to an abstract idea; and (2) if the claim is directed to an abstract idea, then the court must examine the elements of the claim in order to determine whether it contains an inventive concept sufficient to transform that claimed abstract idea into a patent-eligible application of the abstract idea.

The Supreme Court’s holding in Alice brings clarity in some contexts, while leaving the waters murky on others. Going forward, it is clear that the two-step Mayo test will govern all patent eligibility questions under Section 101. Likewise, the majority of the Supreme Court in Bilski and Alice elected to proceed cautiously and not hold all “business method” patents invalid. However, the Court clearly signaled that software and business method claims will have to do more than simply implement an abstract idea on a generic computer.

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