The Federal Circuit’s En Banc Opinion on Patentability Under Section 101 – It’s Splitsville!

This past Spring, in CLS Bank International, CLS Services Ltd. v. Alice Corp, Pty Ltd. 2011-1301 (Fed. Cir. May 10, 2013), a splintered en banc panel of the United States Court of Appeals for the Federal Circuit vacated its three-member panel’s reversal of the district court’s judgment and affirmed a grant of summary judgment of invalidity.

The en banc panel held that a patent claiming a computerized system and methods for eliminating settlement risk are not eligible for patent protection under 35 U.S.C. Section 101.  While the panel’s six opinions and 127 pages provide a menagerie of commentary on why subject matter may or may not be patent eligible, little guidance is offered to inventors, patent counsel or the courts on how to determine whether subject matter is patentable.

Of the ten-member panel, seven agreed that the subject method claims do not recite patentable subject matter, yet only half found that the system claims met the patentability test.  At the same time, eight of the ten judges agreed that the system and method claims should pass or fail the patentability test together.  The disparate views among the judges underscore that those attempting to navigate Section 101 do so in somewhat uncharted waters.

The District Court Action

Plaintiff CLS Bank (“CLS”) sued Alice Corporation (“Alice”) in the federal district court in Washington, D.C. for a declaration that the patents-in-suit are invalid, unenforceable, or otherwise not infringed. The four patents-in-suit claim computerized systems and methods pertaining to a financial trading platform.  Financial transactions between two parties are settled by a detached third party via the platform in order to reduce or remove the settlement risk that is inherent to such transactions.

Relatively early in the proceeding (before a claim construction hearing), the 500 pound gorilla in the room, Section 101, became the focal point of the action as the parties filed cross-motions for summary judgment on the issue.  Section 101 provides “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title.”  Laws of nature, physical phenomena, and abstract ideas are not eligible for patent protection under Section 101.

The district court found that the asserted method claims recited only the fundamental idea of using a neutral intermediary to ensure that parties to a proposed transaction honor the deal and held the system claims invalid for representing nothing more than this idea. Summary judgment was entered for CLS and the parties appealed.

The Appeal

On appeal, the Federal Circuit reversed the district court’s entry of summary judgment of invalidity, noting that the district court’s decision had ultimately turned on the narrow question of whether the claimed subject matter was an “abstract idea.” See CLS Bank Int’l v. Alice Corp., 685 F.3d 1341, 1346 (Fed. Cir. July 9, 2012). Although mere computer implementation of what may be an underlying ineligible abstract idea would not necessarily render an asserted invention patent eligible, the three member panel stressed that  almost any invention could be boiled down to an abstract idea that could be deemed patent ineligible. Id. at 1351.

After examining the subject claims holistically, the Court found that the claims went beyond the abstract and covered practical application of a business concept in a specific way.  The claims included maintaining an exchange institution in a way that enabled the business to reconcile start-of-day balances obtained from exchange institutions, where adjustments to credit records could be based only on specific allowed transactions.  In view of the specifically claimed manner in which the exchange institution created credit and debit records, the Court was not inclined to conclude that the claims failed the patentable subject matter test.

CLS petitioned for rehearing en banc and the Federal Circuit vacated its July 9, 2012 opinion.   The en banc panel ordered the parties to make submissions in two areas.  First, the parties were to advance which test the court should adopt to determine whether a computer implemented invention is patent eligible.  Second, the parties were to brief the issue of whether claiming a computer implemented invention as a method, system, or storage medium is dispositive with respect to the Section 101 test.

The En Banc Decision

On en banc review, seven members of the Federal Circuit found the asserted method claims were not eligible for patent protection under Section 101.  Judge Lourie joined by Judges Dyk, Prost, Reyna, and Wallach in a concurring opinion, did not consider the fact that an abstract or old idea lied at the heart of the claims fatal under Section 101.  According to these five judges, the key consideration is whether the claims as a whole recite “significantly more” than just the idea.

The “significantly more” test first requires a determination of whether the claim falls under one of the statutory classes of Section 101:  process, machine, manufacture, or composition of matter. If an abstract concept concern is implicated, the core abstract concept is identified. At that point, a court could properly make the determination of whether the claim recites an “inventive concept” that the court characterized as “a genuine human contribution to the claimed subject matter” or “a product of human ingenuity.”

Through this lens, Judge Lourie found that the limitations added nothing significant to the underlying abstract idea, focusing on three primary shortcomings of the claims.  First, the claim failed to recite language to describe the role of the computer.  Second, shadow credit and debit records simply reflected basic accounting details of any financial institution.   Finally, the reconciliation instructions provided at the end of each business day added little to nothing to the claims.

The Court divided evenly on the issue of whether the system claims were eligible for patent protection.  Judges Lourie, Dyk, Prost, Reyna, and Wallach concluded that those claims were ineligible because the system and method claims were not sufficiently distinct and each set of claims recited the same basic steps of performing the abstract method of third-party transaction intermediation through a computer.

The Court’s other five members, concluded that the system claims were patent eligible. In one opinion, Chief Judge Rader, joined by Judges Linn, Moore, and O’Malley, considered the system claims patent eligible as they claimed a computer and hardware specifically programmed to solve a complex problem, and the patent specification disclosed detailed algorithms for software with which the hardware was to be programmed. Accordingly, the system claims went beyond a “disembodied’ abstract idea, but were directed to an integrated system using machines to solve a problem.

Judge Moore, joined by Chief Judge Rader and Judges Linn and O’Malley, dissented separately, emphasizing that the asserted claims were true system claims directed to a specialized machine configured to perform specific functions.  In support of this stance, Judge Moore provides a detailed discussion of how the patents’ disclosed algorithms tied into the claims.  According to Judge Moore, if the system claims at issue could not pass Section 101 muster, then an “insurmountable bar” would be set in the software, financial system and business method contexts.

Judge Newman, alone in a dissenting opinion, expressed disdain towards the Court’s inability to arrive at a consensus and a usable legal standard.  Instead, the Court’s six separate opinions would only add to the cost and unreliability of the patent system.

Finally, Chief Judge Rader entered “Additional Reflections” to reminisce about his earliest cases concerning the patentable subject matter issue but also to stress that abstract terms offered by the judiciary like “contribution” and “inventiveness” are of little value when the public is faced with the decision of where and whether to invest in innovation.  Instead, the Chief Judge urged that the focus remain on the words of the statute.  The statue permits patents for both inventions and discoveries, including simple improvements on known products.

Conclusion

The Federal Circuit’s divided en banc decision in CLS Bank will likely spark further division over the patentability question for claimed software systems and methods.  Patent attorneys drafting patent claims and prosecuting pending patent applications, district courts interpreting patent claims and deciding if claimed subject matter passes Section 101 muster and future Federal Circuit panels will be charged with effectively applying the standards, preferences and reflections of the multiple opinions, none of which carried a majority.

This blog is maintained by Carstens & Cahoon, LLP to inform readers of recent developments in intellectual property. Solely informational in nature, this blog is not intended to create an attorney-client relationship or to be used as a substitute for legal advice or opinions. For more information, please visit www.cclaw.com.

by Gregory Perrone

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