Previewing CLS Bank v. Alice

Tomorrow, February 8, the full Court of Appeals for the Federal Circuit (“Federal Circuit”), who receives nearly all patent appeals, will hear oral arguments in CLS Bank v. Alice Corp.  This case could be a seminal case for the future of software patents, and so we will be doing a few posts on it.  This post covers the background of the case and why it is so important.  Another forthcoming post this afternoon will summarize the party’s briefs and briefs of certain amici, which can also be found in the CLS Bank v. Alice Corp. case entry in our Document Center.  Finally, next week we will summarize tomorrow’s oral arguments.

The Federal Circuit first reviewed CLS Bank v. Alice Corp. on July 9, 2012.  In a 2-1 decision the court reversed summary judgment by the district court and found that software patents owned by Alice Corporation were patentable under 35 U.S.C. § 101.  Section 101 defines what subject matter may be patented.  It is elegant in its simplicity, as §101 states only:

Whoever 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 therefor, subject to the conditions and requirements of this title.

Subsequent legislation and court decisions have narrowed the scope of patentable subject matter considerably.  Following Supreme Court decisions in Mayo v. Prometheus and Bilski v. Kappos, three specific phenomena remain unpatentable subject matter as a matter of law:  laws of nature, physical phenomena, and abstract ideas.  In Prometheus the Supreme Court explicitly stated that § 101 serves an important role as a threshold screen for patentability – and makes clear that the question of § 101 compliance is one that occurs as an initial step in determining patent validity.  CLS addresses the patentability of an abstract idea, and whether “the practical application of a business concept in a certain way” is sufficiently specific to satisfy the notice requirements of patentability under § 101.

Alice Corporation’s patents involve the elimination of settlement risk in trading by using a trusted third party to settle the obligations of the first and second party.  These patents are software patents in that they rely on electronic implementation and a computer to be patentable.  The DC District Court originally held that these patents are invalid because they are abstract ideas and the mere use of a computer “without any further exposition or meaningful limitation” does not make them patentable.  Alice Corporation appealed and the Federal Circuit reversed.

The court then decided to rehear the case en banc.  In granting the rehearing, the court asked two very important questions:

a    What test should the court adopt to determine whether a computer implemented invention is a patent ineligible “abstract idea”; and when, if ever, does the presence of a computer in a claim lend patent eligibility to an otherwise patent-ineligible idea?

b    In assessing patent eligibility under 35 U.S.C. § 101 of a computer-implemented invention, should it matter whether the invention is claimed as a method, system, or storage medium; and should such claims at times be considered equivalent for § 101 purposes?

These questions indicate the Federal Circuit is considering narrowing what software will be considered patentable subject-matter under § 101.  In addition, the Federal Circuit may be prepared to issue a clear bright-line rule to determine what software is and is not patentable.  A bright-line rule will be far more useful to the technology industry than if the court decided patentable software on a case-by-case basis or applies hard to define factors.  Such a rule would provide more certainty to the industry.  However, the Federal Circuit has had a hard time creating bright-line rules that survive Supreme Court scrutiny.  In Bilski v. Kappos, the Supreme Court struck down the Federal Circuit’s machine-or-transformation test as the sole test for determining § 101 patent eligibility for business method patents.  The Supreme Court gave little guidance on what the proper tests should be and left a lot of uncertainty on what a patentable business method should be.  For its part the brief of the United States as amicus curiae counsels against a bright-line rule, and instead calls for the Federal Circuit to “articulate a flexible legal inquiry to be applied…[and] articulate a non-exhaustive list of factors drawn from [the Federal Circuit’s] and the Supreme Court’s precedents and the relevant USPTO guidance…to aid district courts in resolving the § 101 inquiry on a case-by-case basis.”

Notably, the Federal Circuit invited the views of the U.S. Patent and Trademark Office (PTO).  (The government’s brief is available here).  The PTO has recently reached out to the public for comments on this very issue, indicating that it too is considering the patentability of software.  As we have highlighted here previously, CCIA filed a brief calling for the Federal Circuit to provide helpful guidance on the limits of patentable subject matter.

Alice Corporation’s patents are computer implementations of common business practices – in effect a two-sided escrow arrangement.  It would seem that the DC Circuit Court rightfully invalidated Alice Corporation’s patents on § 101 grounds.  To understand why the Federal Circuit reversed the District Court’s decision, some background is needed on § 101.  In dicta in Diamond v. Chakrabarty the Supreme Court said “Congress intended statutory subject matter to ‘include anything under the sun that is made by man.’”  This unfortunate language in fact misread the statute — an error that four Justices (Stevens, Ginsburg, Breyer, and Sotomayor) attempted to correct in their concurring opinion in Bilski.  Although non-binding, Chakrabarty’s “anything under the sun” dicta created an extremely broad definition of what is patentable subject matter.  The Supreme Court later clarified that “laws of nature, natural phenomena, and abstract ideas” fall outside the scope of § 101, and has since been gradually narrowing the scope of subject matter eligible for patents under §101.  However, the Federal Circuit is seen as a pro-patent court and the Supreme Court decisions narrowing §101 often come from overturning Federal Circuit rulings.

There are many problems we need to address in order to fix the current patent system.  Abstract software patents are a big part of the problem and a favorable outcome to CLS Bank v. Alice Corp. could go a long way in fixing this problem.  Too many patents are being issued just because they are a computer implementation of an abstract idea or law of nature.  In the hands of trolls such patents levy a heavy tax on innovation.  The courts, Congress, and the USPTO needs to provide more guidance on software patents, and as outgoing PTO director David Kappos said “we’re not done until the software industry says we got it right.”  A prudent Federal Circuit would take notice of the many briefs filed by the software industry in favor of a more predictable § 101 standard and bring certainty to software patent practice.

David Balto

David Balto

David Balto is a public interest antitrust lawyer in Washington, DC.  He has over 15 years of government antitrust experience as a trial attorney in the Antitrust Division of the Department of Justice and in several senior level positions at the Federal Trade Commission. David was the Policy Director of the Bureau of Competition of the Federal Trade Commission (1998-2001) and attorney advisor to Chairman Robert Pitofsky (1995-1997). He was a senior advisor in all aspects of the FTC’s merger and non- merger enforcement program and helped litigate the challenges to the Staples/Office Depot, Drug Wholesalers, and Heinz/Beechnut mergers, the Intel monopolization case, and the challenges to anticompetitive conduct by several pharmaceutical companies.