May 30, 2013

The Curious Case of CLS Bank v. Alice Corporation

There's an old story of three blind men who each touched a different part of an elephant and, as a result, characterize the elephant in a completely different way. In the recent en banc decision of CLS Bank v. Alice Corporation from the Court of Appeals for the Federal Circuit, prior Supreme Court decisions, particularly Mayo v. Prometheus and Parker v. Flook, play the part of the elephant. And rather than "blind," groups of Federal Circuit judges can be said to be "focused" on different aspects of those decisions such that their resulting characterizations and/or conclusions-in the form of several different opinions-are, well, completely different. To provide added intrigue, none of those characterizations are precedential. Despite these odd circumstances, some practical considerations can nonetheless be gleaned from this decision, as discussed below.

The Basic Facts

The patents at issue relate to a computerized trading platform used for conducting financial transactions in which a "trusted" third party settles obligations between a first and second party so as to eliminate "counterparty" or "settlement" risk. The third party is relied upon to ensure the exchange of either both parties' obligations or neither obligation. In particular, the third party can be used to verify each party's ability to perform before actually exchanging either of the parties' agreed-upon obligations. The asserted claims included method, computer-readable media (i.e., Beauregard) and system claims.

An en banc Federal Circuit held all asserted claims invalid for failing to recite statutory subject matter under 35 U.S.C. § 101. Ten judges participated in the decision. In addition to a per curiam (i.e., authorless) opinion of the court, there are five additional opinions and one "reflection." Only the per curiam opinion is precedential, but all it said was that a majority of the court found the method and computer-readable media claims to be invalid, and that an "evenly divided court affirms the district court's holding" that the system claims are invalid. Thus, with regard to the system claims, five judges found the system claims patent-eligible under § 101 and five did not, and therefore the tie goes to the district court (which had found them not to be patent-eligible). Consequently, the per curiam opinion provided no reasoning for any of the holding.

The remaining (non-precedential) opinions were a combination of concurring (in whole or part) and dissenting (in whole or part) opinions. A concurring opinion was filed by Judge Lourie, and joined by Judges Dyk, Prost, Reyna and Wallach. A dissenting opinion was filed by Judge Newman. The remaining opinions and one "reflection" were filed by various combinations of Judges Rader, Linn, Moore and O'Malley. Of particular interest, the judges voted as follows regarding patent eligibility under § 101:

  • Method, computer readable media and system claims ineligible: Lourie, Dyk, Prost, Reyna, and Wallach
  • System claims eligible but method and computer readable media claims ineligible: Rader and Moore
  • All claims eligible: Linn, O'Malley and Newman.

However, the reasoning for patent eligibility or ineligibility as outlined in the non-precedential opinions was significantly different among certain judges.

What The Judges Said

As mentioned above, Judge Lourie's opinion had the backing of five judges, which was more than for any other opinion. Based on Supreme Court precedent, he set forth "an integrated approach to § 101" in which he identified common themes that ran through the Supreme Court's decisions. One is that patent claims should not "preempt" a natural law, natural phenomenon or abstract idea. To avoid such preemption, the claim "must include one or more substantive limitations that…add ‘significantly more' to the basic principle…" (emphasis added). Stated differently, the claim must contain "meaningful limitations that prevent the claim as a whole from covering the concept's every practical application" (emphasis added). This begs the question of what, exactly, the scope of the "basic principle" or "concept" in a given claim is and what comprises a "meaningful" limitation.

Judge Lourie did not elaborate on how one might ascertain the scope of the "basic principle" in a § 101 analysis, though he did concede that "danger also lies in applying the judicial exceptions too aggressively because ‘all inventions at some level embody [] or apply [a basic principle].'" However, he did explain what a "meaningful limitation" might entail. Largely citing the Supreme Court decisions of Parker v. Flook and Prometheus, he noted that to avoid preemption of the "basic concept" of the claim, these additional meaningful limitations must be "inventive" and cannot be "merely tangential, routine, well-understood, or conventional, or in practice fail to narrow the claim relative to the fundamental principle therein." By "inventive," however, he believed the limitation must encompass "a genuine human contribution to the claimed subject matter" and "must be ‘a product of human ingenuity'" rather than relating to the statutory requirements of novelty and non-obviousness under § 102 and §103.

A second Supreme Court theme identified by Judge Lourie was that the Court had cautioned against approaches for evaluating claims under § 101 that "invite manipulation by patent applicants" such as "highly stylized language, hollow field-of-use of recitations or the recitation of token post-solution activity." Also, "a flexible, claim-by-claim approach to subject-matter eligibility" rather than "[b]right-line rules" is preferred.

With this "integrated approach" in hand, Judge Lourie began by first considering the asserted method claims. Using one of the method claims as being representative, the "abstract idea" therein was identified as "reducing settlement risk by affecting trades through a third party intermediary…empowered to verify that both parties can fulfill their obligations before allowing the exchange." The next step was to determine whether the claim had "significantly more" than this abstract idea, i.e., whether it recited "meaningful" limitations. To that end, he asserted that the recitation of a computer (which the parties agreed was an implicit limitation) did "not [meaningfully] limit claim scope for purposes of patent eligibility" because "essentially all practical, real world applications of the abstract idea implicated here would rely, at some level, on basic computer functions." He also broadly declared that a computer is "just a calculator capable of performing mental steps faster than a human could" and that "[u]nless the claims require a computer to perform operations that are not merely accelerated calculations, a computer does not itself confer patent eligibility."

Other limitations of the method claim such as creating and adjusting a "shadow credit record" and providing instructions to exchange institutions to reconcile accounts were also found by Judge Lourie to be "necessary" activities and "trivial limitations." "Consequently, the method claims [were believed to be] drawn to patent-ineligible subject matter and invalid under § 101."

Turning to the computer-readable media claims, Judge Lourie found that "they are merely method claims in the guise of a device and thus do not overcome the Supreme Court's warning to avoid permitting a ‘competent draftsman' to endow abstract claims with a patent-eligible status." Of note is Judge Lourie's subsequent comment that claims of different statutory classes may warrant similar treatment under § 101 when, as here, claims such as the computer-readable media claims merely present "a physical recitation of an abstract method" (i.e., they merely parallel a method claim found to be invalid under § 101).

With regard to the system claims, Judge Lourie again noted that those claims "mirror Alice's method claims." While he conceded they "recite tangible devices . . . including at least ‘a computer' and ‘a data storage unit,'" he nonetheless believed that "applying a presumptively different approach to system claims generally would reward precisely the type of clever claim drafting that the Supreme Court has repeatedly instructed us to ignore." Consequently, he found "none of the recited hardware offers a meaningful limitation…" "Therefore, as with the asserted method claims, such limitations…provide no significant ‘inventive concept.'" Elaborating on this, he stated that "merely adding existing computer technology to abstract ideas-mental steps-does not as a matter of substance convert an abstract idea into a machine."

The other opinions by the remaining federal circuit judges largely comprise rationales for differing with Judge Lourie's analysis and/or reasons for finding certain (or all) asserted claims patent-eligible. Some of the more salient points from those opinions are discussed below.

In Judge Rader's opinion, in which Judges Linn, Moore and O'Malley joined, he emphasized that a court must consider "the asserted claim as a whole when assessing eligibility," and that "a court cannot go hunting for abstractions by ignoring the concrete, palatable, tangential limitations of the invention the patentee actually claims." While he agreed the relevant inquiry must be "whether a claim includes meaningful limitations restricting it to an application rather than an abstract idea," he indicated it is meaningfully limited if, for example, "it requires a particular machine implementing a process or a particular transformation of matter." More specifically, for computer implemented claims, it requires that the claims "tie the otherwise abstract idea to a specific way of doing something with a computer, or a specific computer for doing something," citing the federal circuit case of SiRF Tech., Inc. v. International Trade Commission, noting there that a "GPS receiver was integral to each of the claims at issue."

Judge Rader interpreted Prometheus and Flook differently from Judge Lourie, strongly believing those decisions should not be read "to instill an ‘inventiveness' or ‘ingenuity' component into the inquiry." Instead, for the claim steps to be "meaningful," Judge Rader believed they should not be "inherently" required in a way "that anyone wanting to use the natural law would necessarily use [those steps]." For the asserted method and computer readable media claims, Judges Rader and Moore believed the claim limitations at issue were an "inherent" aspect of the underlying idea, and were "not enough" to instill patent eligibility into those claims. Judges Linn and O'Malley disagreed on this point, and would have found those claims to be patent eligible under § 101.

Regarding the system claims, all judges joining Judge Rader's opinion believed they were patent-eligible, finding recited limitations such as "a data storage unit coupled to a computer which has been modified by software to receive transaction, adjust records," etc., are "not inherent" to the underlying abstract idea of the pertinent claims. They thus disagreed with Judge Lourie's notion that "a computer must do something other than what a computer does before it may be considered a patent-eligible invention." Further countering Judge Lourie's position, Judge Rader asserted that "[e]verything done by a computer can be done by a human. Requiring a computer to do something that a human could not would mean that computer implementation could never produce patent eligibility. If a computer can do what a human can in a better, specifically limited way, it could be patent eligible. Indeed, even an increase in speed alone may be sufficient to result in a meaningful limitation; if a computer can perform a process that would take a human an entire lifetime, a claim covering that solution should be sufficiently limited to be patent eligible."

In Judge Moore's opinion, which was joined by Judges Rader, Linn and O'Malley, she lamented "that the current interpretation of § 101, and in particular the abstract idea exception, is causing a freefall in the patent system….Holding that all [claims at issue] are directed to no more than an abstract idea gives staggering breadth to what is meant to be a narrow judicial exception. And, let's be clear: if all of these claims, including the system claims, are not patent-eligible, this case is 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." "This would render ineligible nearly 20 percent of all the patents that actually issued in 2011." "There has never been a case which could do more damage to the patent system than this one." With particular regard to the system claims, she also emphasized that "[t]he Supreme Court has never cast doubt on the patentability of claims such as…the system claims at issue in this case."

In Judge Newman's opinion, she commented that "with today's judicial deadlock, the only assurance is that any successful innovation is likely to be challenged in opportunistic litigation, whose result will depend on the random selection of the panel." She believed that the source of the controversy surrounding patent-eligible subject matter lies in the public's misbelief that patented information is "barred from further study and experimentation in order to understand and build upon the knowledge disclosed in the patent." She consequently believes "[t]he debate involving section 101 would fade away, on clarification of the right to study and experiment with the knowledge disclosed in patents." She also asserted that "section 101 is an inclusive statement," that "[t]here is no need for an all purpose definition of ‘abstractness' or preemption,'" and that "the court [should] return to the statute, and hold that when the subject matter is within the statutory classes in section 101 [i.e., a process, machine, manufacture, or composition of matter], eligibility is established."

Judge Rader, in his "additional reflections" section, lamented, "I doubt that innovation is promoted when subjective and empty words like ‘contribution' and ‘inventiveness' are offered up by the courts to determine investment, resource allocation, and business decisions." He concluded by saying "[a]s I start my next quarter century of judicial experience, I am sure that one day I will reflect on this moment as well. I can only hope it is a brighter reflection than I encounter today."

Now What?

Barring some significant change at the Federal Circuit or "clarification" from the Supreme Court, Judge Newman's statement that the outcome of a patent eligibility challenge at the Federal Circuit will depend on the random selection of the panel will likely hold true for some time. However, as confusing and uncertain as the CLS decision may be, it nonetheless behooves us to weigh the "influential" effects its opinions/reflections may have and consider potential actions to take in light of them. Since Judge Lourie's opinion was joined by the most judges and took the harshest stance against patent-eligible subject matter, claims drafted, amended or defended with that opinion in mind may stand the best chance of standing up to scrutiny. Consequently, additional consideration is particularly (but not exclusively) given to precepts of that opinion below.

According to Judge Lourie, one should include limitations that are "meaningful" in the sense that they are "inventive" and offer "a genuine human contribution" rather than are "necessary" or "trivial" to the practical implementation of the underlying "basic concept" (e.g., abstract idea). Judge Rader further states that meaningful limitations are those not "inherently" required for the implementation of the abstract idea. Despite the fact that the key terms of these precepts are anything but clearly (or in some cases, consistently) defined, what might one do to take them into account? Certainly, one could make a concerted effort to include limitations believed not likely to be deemed "required," "inherent" or otherwise "trivial" for the application of the underlying basic concept in the view of (presumably) a person of skill in the art. For example, some limitation that wouldn't be a part of what most everyone else in the field would readily do, presumably as of the effective filing date of the application/patent (though given statements by Rader and Lourie, this aspect is not entirely clear). Of course, a challenge in doing this is to also ensure that such claims will likely be infringed.

For a more targeted approach to the idea mentioned above, of interest is Judge Lourie's discussion of Diamond v. Diehr, which was one of the few relatively recent Supreme Court decisions addressing validity under § 101 and finding the claims patent-eligible. Specifically, Judge Lourie noted that, in addition to the abstract "equation," the claim in Diehr recited a step "that was said to be new in the art," i.e., a step not previously used in conjunction with the type of technology contemplated by the claim. Since Judge Lourie held this out as an important feature distinguishing the claim in Diehr from those where patent-eligibility had not been conferred (e.g., the claims in Flook) it may well bear consideration when drafting and amending claims.

Another point to consider is there is little guidance regarding how to define the scope of the "basic concept" for a given claim. Even for a relatively "detailed" claim, one can envision how arguments could be made that, for example, the "abstract idea" is a complex one that encompasses many detailed limitations. Nonetheless, were one to include detailed and elaborate limitations in a claim, it would seem that such arguments would be more difficult to make.

That all said, one should still consider drafting claims of varying patent-eligibility scope, as there is no way to know what the landscape will look like at any given time in the future. Also, it would probably be prudent not to draft "parallel" claims of different statutory classes, e.g., avoid drafting computer readable medium or system claims that at least visually parallel a method claim.

Clearly, many of the key terms used in the CLS opinions, such as "inventive," "necessary," "trivial," "inherent," etc., are subject to considerable interpretation and, in the contexts used, few if any helpful examples or guideposts are available. Other factors contributing to the general uncertainty of the § 101 issue include the addition of new Federal Circuit judges who will have their own views on this subject. Consequently, we will have to interpret CLS and previous decisions as best we can for now and see whether future decisions provide a better sense for how (and whether) to apply the aforementioned terms and their associated precepts.

While Judge Moore's comment about the potential devastation of hundreds of thousands of patents bears serious consideration, it may still be a bit early to be sounding that degree of alarm. Hopefully, that kind of devastation is not what Judge Lourie and the other four joining judges intended. And given the disjointed nature of the opinions, it's quite possible the Supreme Court will take this case.

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