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Court Seeks to Draw the Line Between Abstract Ideas, Patentable Business Methods

Wednesday, April 2, 2014

By Anandashankar Mazumdar  

March 31 --Questions by members of the Supreme Court during March 31 oral arguments did not offer a clear indication on how the court would resolve the interplay between business method patents and a bar on patentability of abstract ideas.

In particular, in addressing a case involving a computerized method for an intermediary to ensure that a party to a contract has funds in its account to fulfill a contract, Justice Stephen G. Breyer, who joined a 2010 concurring opinion advocating the elimination of all business method patents, seemed to be disappointed that the patent bar and the U.S. Court of Appeals for the Federal Circuit had not offered more assistance in helping to define the Supreme Court's concept of “abstract ideas” that are not patentable and an “inventive concept” that is key to patentability.

Some members of the bar and patent scholars who followed the arguments--those who support the idea of business method patents--told Bloomberg BNA that they came away disappointed that the justices had not more explicitly supported business method patents. But they took comfort in the observation that not much seemed to have changed since Bilski v. Kappos, 130 S. Ct. 3218, 2010 BL 146286, 95 U.S.P.Q.2d 1001 (2010) (123 PTD, 6/29/10), the decision that rejected patentability of abstract ideas but did not categorically reject patents on business methods.

Commenters on the other side--those hoping for the narrowing or even elimination of business method patents--noted that many of the amicus briefs in the case strongly criticized business method patents and that the justices seemed to show some respect for them.

Adding to the uncertainty was the addition of Justice Elena Kagan to the high court bench, replacing Justice John Paul Stevens, who wrote the concurring opinion in Bilski favoring elimination of business method patents altogether. Either way, those speaking with Bloomberg BNA were not confident in predicting an outcome when the court issues its decision in the case.

Patent on Computerized Risk Management

Alice Corp. held four patents (U.S. Patent Nos. 5,970,479, 6,912,510, 7,149,720, and 7,725,375) related to the formulation and trading of risk management contracts. It sued CLS Bank International, alleging patent infringement. Before the Federal Circuit, the method claims fell in a 7-3 decision, but the appeals court was split 5-5 on the system claims. CLS Bank Int'l v. Alice Corp., 717 F.3d 1269, 2013 BL 124940, 106 U.S.P.Q.2d 1696 (Fed. Cir. 2013) (92 PTD, 5/13/13).

The Supreme Court granted a writ of certiorari in the case in December on the following question:

Whether claims to computer-implemented inventions--including claims to systems and machines, processes, and items of manufacture--are directed to patent-eligible subject matter within the meaning of 35 U.S.C. §101 as interpreted by this Court?  

 

Patent Holder Pushes 'Fundamental Truth' Standard

In briefs, Alice Corp. argued that the abstract idea bar on patentability of methods should be interpreted as applying to “fundamental truths,” for example, a mathematical formula. On the other hand, CLS Bank argued that Alice Corp.'s claims should be found unpatentable, because they were essentially trying to patent “the basic economic concept of intermediated settlement or escrow.”

The government submitted an amicus brief supporting CLS Bank's argument. The brief stated:

Contrary to petitioner's contentions, the abstract-ideas exception is not limited to patent claims that recite a mathematical formula or a preexisting truth about the natural world. Nor is the exception limited to abstract ideas that are expressed at a high level of generality. Even when a claimed non-technological method of performing financial transactions or overseeing economic relationships is highly specific, its function still is to manipulate abstract concepts, and it is accordingly patent-ineligible.  

 

Amici curiae supported each side more or less evenly (52 PTD, 3/18/14; 24 PTD, 2/5/14).

In reply, Alice Corp. said that it would apply the abstract idea exception to “concepts akin to a law of nature or mathematical formula, in the sense that they describe a preexisting principle or relationship that holds true apart from any human action.”

Using this definition, Alice hoped to differentiate Bilski, which found the risk-hedging algorithm ineligible, and Mayo Collaborative Servs. v. Prometheus Labs. Inc., 132 S. Ct. 1289, 2012 BL 66018, 101 U.S.P.Q.2d 1961 (2012) (54 PTD, 3/21/12), which required an “inventive concept” that must be implemented through more than well-established and conventional steps.

Settled Expectations of Patentees Important

Carter G. Phillips of Sidley Austin LLP, Washington, D.C., arguing for Alice Corp., emphasized that the court should not change the settled expectations of the many holders of software patents. Furthermore, he said that with the enactment of the America Invents Act, Congress had expressed its intent with respect to weeding out bad business method patents by creating an administrative process, rather than by setting a fundamental patentability standard.

Justice Ruth J. Bader Ginsburg asked him what was the difference between the abstract idea found unpatentable in Bilski, hedging investments, and Alice's patent.

“How is intermediate settlement less abstract than hedging?” she asked.

Phillips replied that Alice was claiming “a very specific way of dealing with a problem that came into being in the early 1970s of how to try to eliminate the risk of non-settlement in these very massive multiparty problems.”

Justice Anthony M. Kennedy, however, suggested that a “second-year” computer programming student could have written the software intended to implement that idea over a weekend, and thus, the incorporation of the computer itself was “necessary to make it work, but the innovative aspect is certainly not in the creation of the program to make that work.”

Justice Stephen G. Breyer then tried to get to the root of the abstractness question through analogies:

Imagine King Tut sitting in front of the pyramid where all his gold is stored, and he has the habit of giving chits away good for the gold, which is given out at the end of the day. And he hires a man with an abacus, and [when the man] sees that he's given away more gold than he has in storage, he says, “Stop.” You see? Or my mother, who used to look at my checkbook, when she saw that, in fact, I had written more checks than I had in the account, she would grab it. “Stop.” You see? So what is it here that's less abstract when the computer says, “Stop?”  

 

“It seems to me that in some ways what you described there is a caricature of what this invention is,” Phillips replied.

“Of course it's a caricature,” Breyer said. “It's a caricature designed to suggest that there is an abstract idea here. It's called solvency.”

The question, Breyer said, was whether applying this abstract idea with a computer was enough to make it patentable.

“The concept here is not simply to say 'Stop,' ” Phillips said. ”It's also designed to ensure that at the end of the day, this transaction … will be implemented at the appropriate time in the appropriate way. And whatever else that may be, it seems to me it's difficult to say that's an abstract idea as implemented.”

Justice Sonia M. Sotomayor suggested that this arguments “sounds like you're trying to revive the patenting of a function.”

“That's all I'm seeing in this patent is the function of reconciling accounts, the function of making sure they're paid on time,” she said. “But in what particular way, other than saying 'Do it through a computer,' is this something new and not a function?”

However, Justice Antonin G. Scalia jumped to ask why implementing an idea using a computer would not be sufficient for patentability.

“I mean, was the cotton gin not an invention because it just means you're doing through a machine what people used to do by hand?” he asked.

Breyer then revisited his King Tut analogy to ask Phillips where the line was between the abacus and the cotton gin. He seemed to be asking for help in interpreting Mayo v. Prometheus, an opinion that he himself had authored.

“I couldn't figure out much in Prometheus to go beyond what I thought was an obvious case, leaving it up to you and your colleagues to figure out how to go further,” he said.

Kennedy then explored the question of whether the computer was necessary for patentability in this case and, if so, why.

Breyer asked Phillips to draw the line between genuine computer inventions on the one hand and eliminating business competition by allowing business methods to be patented on the other hand, he referred to the amicus brief filed in the case and asked “how to go between Scylla and Charybdis.”

Scalia tried to draw the line in a different way: “We have said that you can't take an abstract idea and then say 'Use a computer to implement it.' But we haven't said that you can't take an abstract idea and then say 'Here is how you use a computer to implement it,' which is basically what you're doing. And that's a little different.”

Path Between Scylla and Charybdis Already Charted

Mark A. Perry of Gibson, Dunn & Crutcher LLP, Washington, D.C., arguing for CLS Bank, started by picking up Breyer's allusion to Scylla and Charybdis, asserting that the “path between Scylla and Charybdis was charted in Bilski and Mayo”:

Bilski holds that a fundamental economic principle is an abstract idea and Mayo holds that running such a principle on a computer is, quote, “not a patentable application of that principle.” Those two propositions are sufficient to dispose of this case.  

 

Unless the court wished to overturn those two cases, Alice Corp.'s patents must be invalidated, Perry argued.

When Sotomayor asked Perry what technology, such as software, might have made the claims patentable, he replied, “They have no software, first. They've never written software. They've never programmed a computer.”

Kennedy again asked for an example of a patentable business method. Perry posited a machine that ran a new data compression algorithm.

“But that's how to make a machine work better,” Kennedy objected. “Is there any business process, any business activity that is susceptible to a patent, a pure patent, innovations that 2 deserve patents?”

Perry then suggested an encryption technology: “You could have a process for securely transmitting data, would be another computer-implemented technological solution to a business problem.”

Ginsburg noted the difficulty that the Federal Circuit was having in reaching a consensus on how to apply Bilski and Mayo.

“What is the instruction that escaped a good number of judges on the Federal Circuit?” she asked. “How would you state the rule?”

Perry's reply suggested that the Federal Circuit was being recalcitrant.

“I think there's a significant element to the Federal Circuit that disagrees with Mayo and has been resistant in applying it,” he said.

Government Seeks Hard Line on Software

Donald B. Verrilli Jr., the U.S. solicitor general, argued the government's position by advocating a test for patent eligibility that would require “technological, scientific or industrial innovations.” In its brief, the government had proposed a six-factor balancing test to determine whether a claim fell on the side of being an invention that improved computing or on the side of an unpatentable method that merely used a computer.

“An abstract idea does not become patent-eligible merely by tacking on an instruction to use a computer to carry it out,” Verrilli said. “A computer makes a difference under Section 101 when it imposes a meaningful limit on the patent claim. That occurs when the claim is directed at improvement in computing technology or an innovation that uses computing technology to improve other technological functions.”

Sotomayor then asked whether it was necessary to answer the question of patentability of software in general in order to resolve the case. Verrilli replied, “not necessarily.” He said that under Bilski the claim in question was an abstract idea.

Chief Justice John G. Roberts Jr. suggested that a non-exhaustive six-factor balancing test would please no one.

Not Clear What Lies Ahead

Even after extensive briefing in the case, some commenters seemed to be surprised that the court was looking for basic answers.

“After reading 42 briefs, we still have no idea where to draw the line,” Joshua D. Sarnoff, a law professor at DePaul University, Chicago, commented.

George C. Beck of Foley & Lardner LLP, Washington, D.C., characterized the Supreme Court's struggle with the issues. He told Bloomberg BNA that “Several of the justices appeared to question whether the court should articulate a bright-line rule for patent eligibility, and if so, how such a rule should be articulated. In this regard, Chief Justice Roberts specifically referred to the non-exhaustive six factors identified in the government's brief and suggested it was not particularly helpful.”

Beck also noted that Scalia had brought up the question of whether novelty or non-obviousness should play a role in this patentability analysis.

“Several members of the court appeared to recognize the potential impact of its ruling on thousands of granted patents that issued prior” to Bilski, Beck said.

Jennifer Lane Spaith of Dorsey & Whitney, Seattle and Palo Alto, Calif., told Bloomberg BNA that she thought that software patent holders might have to deal with continued uncertainty in the near future.

“Several justices signaled their thinking that it was necessary to articulate a broad standard for the patent eligibility of software or computer-related inventions,” she said. “If this thinking ultimately prevails in how the court decides the case, software patent holders will have to continue to wait for an accepted standard by which they can know if their existing patent estates are valid, or if it is worthwhile to continue to invest in patents in the space. In the meantime, it is difficult to make confident investments in a solid IP strategy, and the need to prepare for multiple outcomes in the fact of uncertain legal standards is costly and time consuming.”

Robert R. Sachs of Fenwick & West, San Francisco, expressed dismay at Breyer's appeal for help in defining the abstract-idea expression and the “inventive step.”

“It's a bit disconcerting to hear 'We wrote in a way for the details to be filled in.' ” he told Bloomberg BNA.

Linda J. Thayer of Finnegan, Henderson, Farabow, Garrett & Dunner LLP, Boston, said that “It was kind of like passing the buck, in a way.”

On that subject, Q. Todd Dickinson, head of the American Intellectual Property Law Association--who served as director of the Patent and Trademark Office from 1998 to 2001--told Bloomberg BNA that “The court may have seen what they have wrought.”

He noted that Ginsburg had in the oral arguments taken notice of the split at the Federal Circuit and that she had apparently “recognized the confusion that Bilski had indeed caused.”

The government's argument, Dickinson said, might have given “the court a way to punt,” meaning that it could represent a compromise between the extreme positions on business method patents.

Julie Samuels of Engine Advocacy--a group of 500 startup companies--said of the court that “It was encouraging that they seemed to understand the problem.” Given that the justices understood the key questions, Samuels expressed hope that they would reach the correct answer.

Charles Duan of Public Knowledge's Patent Reform Project said that the court seemed to “want to return to first principles,” specifically that “there's a storehouse of knowledge” that is not subject to patenting.

On the other hand, Matthew Levy of the Computer and Communications Industry Association noted that Justice Anthony M. Kennedy had unsuccessfully sought examples of business methods that would have been ineligible for patenting under Bilski but might have become patentable with computerized implementation.

Kennedy had authored the Bilski majority opinion killing the patent at issue, but preserving the idea of business method patents generally.

“The justices asked about a technological solution, to find a business method that might qualify, but no one had an answer. They're struggling to find a line,” Levy said.

Thayer also commented on Kennedy's repeated plea. She said that he “now seemed to be willing to reconsider” his stance in Bilski. “He asked four times, 'Give me an example of a business method that should be patentable.' Maybe he's switching teams,” she noted.

James T. Carmichael of Miles & Stockbridge P.C., Tyson's Corner, Va., who had served as an administrative patent judge on the Board of Patent Appeals and Interferences, said that it was unlikely that the court would significantly limit business method patents any further.

“They will follow their own precedent,” he told Bloomberg BNA. “It's not like they're writing on a clean slate. Don't underestimate the high regard with which they hold their own precedents. CLS and the government are asking them not only to do what they refused to do in Bilski,” but they were also asking the court to “contradict what Congress did” in enacting the America Invents Act.

Carmichael elaborated by asking “Why would Congress create this complicated mechanism--identifying which patents are good and which are bad--if they're all bad?”

He suggested that the court would be very careful not to disturb the historical backlog of software patents. Carmichael noted that Sotomayor had introduced the question of software patentability generally during the arguments and “the room got very quiet. It took the air out of the room.”

 

To contact the reporter on this story: Anandashankar Mazumdar in Washington at amazumdar@bna.com

To contact the editor responsible for this story: Naresh Sritharan at nsritharan@bna.com

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