Arguments Fail to Clarify Patent Eligibility Of Computerized Methods Post-'Bilski'

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The U.S. Court of Appeals for the Federal Circuit heard oral arguments during the week of May 1 in two cases that are likely to build the court's growing jurisprudence on patent-eligible subject matter, particularly as to business methods implemented on a computer and/or over the internet, in light of the U.S. Supreme Court's Bilski decision.

On May 2, Judges William C. Bryson, Timothy B. Dyk, and Sharon Prost heard oral arguments on whether manipulation of credit information is a transformation worthy of patent eligibility (CyberSource Corp. v. Retail Decisions Inc., Fed. Cir., No. 2009-1358, oral arguments 5/03/11.

Then on May 4, Dyk was joined by Judge Richard Linn and Senior Judge S. Jay Plager to hear oral arguments in a case testing patent claims on computer-aided, simultaneous distribution of a credit application to multiple lenders (DealerTrack Inc. v. Huber, Fed. Cir., No. 2009-1566, oral arguments 5/03/11).

Whether use of the internet imparts anything to patent eligibility was also at issue in both cases.

However, few answers were offered on any of the questions, as it became apparent that not only the parties, but the judges as well, were struggling with the “gap between an abstract idea and 'the machine test' ” left open by the Supreme Court in Bilski. Rather than defining criteria that would define a dividing line in that gap, counsel offered little more than to say, “Wherever the line is, the claims in this case are over it.”

Bilski Adds Nothing But Changes Everything.

The Federal Circuit initiated the recent controversy about the patent eligibility of method claims in its en banc decision in In re Bilski, 545 F.3d 943, 88 USPQ2d 1385 (Fed. Cir. 2008) (en banc) (77 PTCJ 4, 11/7/08). The court described a “machine or transformation” test, requiring a claim to meet either prong to satisfy Section 101.

The Supreme Court, in Bilski v. Kappos, 129 S.Ct. 2735, 95 USPQ2d 1001 (2010) (80 PTCJ 285, 7/2/10), said that the MoT test could be a useful tool to assess patent eligibility, but it was not an exclusive test.

The high court reaffirmed that there were three “fundamental principle” exceptions to patentability--laws of nature, physical phenomena, and abstract ideas--and that the patent claims at issue in that case failed the abstractness test. However, the court did little to define abstractness and left it to the Federal Circuit to try again.

In its first Section 101 decision after Bilski, the appeals court refused to provide a rigid formula or definition for abstractness. Research Corporation Technologies Inc. v. Microsoft Corp., 627 F.3d 859, 97 USPQ2d 1274 (Fed. Cir. 2010) (81 PTCJ 171, 12/10/10). Chief Judge Randall R. Rader, joined by Plager and Judge Pauline Newman, held that “this disqualifying characteristic should exhibit itself so manifestly as to override the broad statutory categories of eligible subject matter and the statutory context that directs primary attention on the patentability criteria of the rest of the Patent Act.”

Rader and Newman had dissented, in separate opinions but on similar grounds, to the appeals court's In re Bilski decision.

Beauregard, Method Claims at Issue in CyberSource.

CyberSource Corp. owns a patent (6,029,154) directed to detecting fraud in a credit card transaction between a consumer and a merchant. Claim 3 claims a three-step method “for verifying the validity of a credit card transaction over the Internet.”

Claim 2 is a system claim reciting “A computer readable medium containing program instructions--wherein execution of the program instructions by one or more processors of a computer system causes the one or more processors to carry out the steps of” the method described in Claim 3. This format of Claim 2 has come to be known as a “Beauregard” claim, pursuant to the holding of the Federal Circuit in In re Beauregard, 53 F.3d 1583, 35 USPQ2d 1383 (Fed. Cir. 1995) (50 PTCJ 56, 5/18/95).

Before the Supreme Court's Bilski opinion was rendered, the U.S. District Court for the Northern District of California held that Beauregard claims are not exempt from MoT test analysis and that the manipulation of credit information in the CyberSource patent failed to meet the transformation prong. 620 F. Supp. 2d 1068, 92 USPQ2d 1011 (N.D. Cal. 2009) (77 PTCJ 637, 4/10/09).

Patent Eligibility in 'Sufficiently Complex' Algorithm?

During the May 2 oral arguments, J. Michael Jakes of Finnegan, Henderson, Farabow, Garrett & Dunner, Washington, D.C., arguing for CyberSource, focused on the abstractness requirement. As to Claim 2, he said that the computer readable medium makes the claim not abstract.

Bryson asked whether encoding an abstract idea into Braille-readable format thus renders the idea patent-eligible.

Jakes, who also represented the patent applicants in the Bilski case at the Supreme Court, responded that such a claim would have problems under the “printed matter” doctrine, and he differentiated Beauregard claims. He argued that all inventions have underlying abstract ideas, and the Braille encoding was nothing more than a printed replication of the idea. But an abstract idea can become patent-eligible to the extent that what is encoded “does something,” and the software code cited in Claim 2 “has a specific function,” Jakes argued.

As to Claim 3, he said it was important that the transaction was over the internet. The fraud detection problem was created by the internet and the patent provided a solution that operated over the internet, he explained.

Scott J. Bornstein of Greenberg Traurig, New York, represented Retail Decisions. He and the judges repeatedly questioned whether the claims could be met without the use of a computer. Bornstein called the internet use “extra-solution activity,” recited in preambles to define the scope of the two claims, but “not by any means required.”

However, Dyk contended that the invention could be considered the algorithm itself, which was “sufficiently complex so as to require a computer. … If they invented a particular way of analyzing a transaction with a particular algorithm,” that might be patent-eligible.

Bornstein conceded that such a scenario might pass as not abstract, but argued, “We are far afield from that in Claims 2 and 3.”

In rebuttal, Jakes said the invention was “intrinsic to the internet,” so internet use could hardly be characterized as “extra-solution activity.” He further brought up the Research Corporation Technologies opinion, saying that “abstractness is a tough concept that must be exhibited manifestly.” That is not at all true in the case of these two claims, he contended.

'Computer-Aided,' Network at Issue in DealerTrack.

Two days later, Dyk was asking more questions on the same topic, but this time the issue was not so much the complexity of the algorithm, but the functionality argued to be available only through the use of networked computers.

DealerTrack Inc. owns patents (5,878,403; 6,587,841; and 7,181,427) directed to an automated credit application system, with an exemplary application describing getting offers from lenders to complete a car loan. Claim 1 of the '427 recites a “computer aided method” of managing a credit application with eight limitations, none of which references a computer or a computer network.

Also ruling in that case prior to the Supreme Court's Bilski decision, the U.S. District Court for the Central District of California applied the MoT test and found the claimed system wanting for failure to disclose a “particular machine.” DealerTrack Inc. v. Huber, No. 06-CV-2335, 92 USPQ2d 1685 (C.D. Cal. July 7, 2009) (78 PTCJ 341, 7/17/09).

The district court first quoted the CyberSource lower court decision in rejecting reliance on the internet to give the claims Section 101 weight: “Judge Marilyn Patel rejected the plaintiff's argument that the claim's recitation of fraud detection 'over the Internet' required the use of a particular machine, finding that the Internet instead 'is a network of millions of individual machines.' ”

The court then declared the claims of the '427 invalid under Section 101 because they were tied to “general purpose computer” systems that were not “specially programmed” to perform the steps claimed.

Does Computer, Network Impart Patentability to Idea?

At the May 4 oral arguments, Linn started the Section 101 discussion by asserting that Claim 1 represents an abstract idea--dealing through an intermediary to facilitate a loan transaction--and the court must ask “what it is that the computer imparts to give the idea patentability.”

Henry C. Dinger of Goodwin Procter, Boston, representing DealerTrack, first tried to set a line for when the addition of a computer clearly does not impart patent eligibility, when a computer “serving as a powerful calculator” merely replicates what a human being could do with sufficient time, a pad, and enough paper. In contrast, he said that the instant claims encompass “specific algorithms that disclose particular technology for achieving the idea.”

But Linn was clearly not persuaded that patent eligibility is gained by a specific implementation of the idea that “if you want to officially deal with multiple parties, do it through an intermediary.”

“It's an implementation of a technology to carry out that idea--something that was not feasible before this technology,” Dinger responded, now turning to his network-based argument. “It is making use of what was at the time novel network technology--a novel way to implement an idea, distinguished from a novel idea.”

He relied in part on the “simultaneity” feature of the invention, represented by a Claim 1 limitation for “sending at least a portion of a credit application to more than one of said remote funding sources substantially at the same time.” According to Dinger, “it's hard to imagine that simultaneity, the kind of method described in those claims, being carried out without the kind of automated network” of the invention.

Lawrence M. Hadley of Hennigan Dorman, Los Angeles, represented one of the defendants, Finance Express LLC, and spoke on the Section 101 issues.

He tried to define as not patent eligible claims in which “computer aided” is added to the preamble only, and the method steps describe an abstract idea. Hadley used the invention in the relevant Supreme Court case that did find patent eligibility, Diamond v. Diehr, 450 U.S. 175, 209 USPQ 1 (1981)(519 PTCJ AA-1, D-1, 3/5/81). In Diehr, there was use of a machine throughout the claim, he argued.

However, Linn did not see that as the principal holding of Diehr, which featured computer-based calculations that modified the process of vulcanizing rubber. He would instead look at the claim as a whole, identify “the essential underlying concept,” and then ask about the effect of adding the machine.

But What Did Bilski Say?

The DealerTrack panel, particularly Plager, spent a substantial amount of time asking counsel to help the court interpret the Bilski holding.

Plager asked Dinger and Hadley the same question: Assuming a claim fails “the machine test,” is it an abstract idea by definition?

Dinger said, “I don't know the answer to that,” insisting only that, in the instant case, the claims are clearly not abstract. Hadley contended that Bilski clearly “left open the possibility that if you fail the machine test you still have to look to see if you have an abstract idea, [but] this particular patent does not come close to falling within what has to be a fairly narrow circumstance.”

With opposite assertions and no bright line as to the claims in this case, Plager persisted, asking Hadley to identify some criteria for the “fairly narrow circumstance.”

Hadley acknowledged that it was a difficult question and said that one must look at the claims and see if they are “written so broadly as to preempt the entire concept.”

Dinger took up the question again in his rebuttal, saying, “The Supreme Court certainly did not identify what is in the gap between an abstract idea and the machine test.” He returned to his earlier attempt to set a distinguishing line. “The only help I can give you is to look at cases where [the Supreme Court] found an abstract idea even when a computer was involved. The only way I can make sense of it is, if all machine is doing is carrying out a calculation of an algorithm or formula, it's not enough to take what is ineligible subject matter to become subject matter.”

He was clearly referring to Diehr as a case where the invention was doing more than calculation, while Bilski and two opinions from the 1970s were cases where the court found nothing more than calculations being claimed. Parker v. Flook, 437 U.S. 584, 198 USPQ 193 (1978) (385 PTCJ A-1, D-1, 6/29/78); and Gottschalk v. Benson, 409 U.S. 63, 175 USPQ 673 (1972).

Two Other Cases Will Address Similar Issues.

Two other cases are on appeal to the Federal Circuit on the same issue but are still in the briefing stage and have not yet been scheduled for oral arguments. In both cases, though, the lower court's decision came after the Supreme Court's Bilski ruling.

On Aug. 13, the Central California court issued another decision denying Section 101 patent eligibility in Ultramercial Inc. v. Hulu LLC, No. 09-CV-6918 (C.D. Cal. Aug. 13, 2010), No. 2010-1544 (Fed. Cir., reply due April 29, 2011).

Ultramercial LLC owns a patent (7,346,545) on a method for allowing internet users to view copyrighted material free of charge in exchange for watching certain advertisements. The court found “that the core of the disclosed invention is an abstract principle similar to the hedging principle in Bilski,” and also “consulted the machine or transformation test” to reach its conclusion. Echoing the arguments in CyberSource, the court said, “That the disclosed invention is only used on computers or computer networks cannot alone satisfy the machine test without rendering the test completely toothless.”

The U.S. District Court for the District of Columbia then ruled March 9 that computerized methods for minimizing the “settlement risk” of two parties to a trade of stock or foreign currency are not statutory subject matter under Section 101, in CLS Bank International v. Alice Corporation Pty. Ltd., No. 1:07-cv-00974-RMC (D.D.C. March 9, 2011), No. 2011-1301 (Fed. Cir., opening brief due June 6, 2011).

Alice Corporation Pty. Ltd. owns four patents (5,970,479; 6,912,510; 7,149,720; and 7,725,375) claiming methods and systems on the formulation and trading of risk management contracts. The court concluded that both types of claims are equally subject to rejection for abstractness and the claims at issue in this case were mere electronic implementations of abstract methods.

By Tony Dutra

Oral arguments available at