Patent applicants from the software and business method fields took notice after the United States Supreme Court issued its opinion in Alice Corporation Pty. Ltd. V. CLS Bank International, et al.(“Alice,” 134 S. Ct. 2347 (2014)) on June 19, 2014, and the U.S. Patent and Trademark Office (“USPTO”) followed with preliminary guidelines (“Guidelines”) issued June 25, 2014 for examining subject matter eligibility under 35 U.S.C. § 101 of claims relating to a judicially created exception to patent eligibility.  On December 15, 2014 the USPTO published a revised interim guidance on patent subject matter eligibility that supplements the Guidelines, providing a review of relevant case law and examples.  One judicially created exception bars patent eligibility for “abstract ideas.”

The Guidelines provided illustrative examples of abstract ideas, including “fundamental economic practices, certain methods of organizing human activity, ‘an idea of itself’, and mathematical relationships/formulas.”  The patent claims at issue in Alice were, in the Supreme Court’s view, presumptively directed to an abstract concept.  Alice, 134 S. Ct. at 2352.  Accordingly, the opinion did not discuss criteria for identifying whether a claimed invention is or is not directed to subject matter that is too abstract to be eligible for patent protection.  In fact, the Alice opinion explicitly states that the justices did “not labor to delimit the precise contours of the ‘abstract ideas’ category.”  Id. at 2357.  Instead, the Alice decision and subsequent Guidelines articulated ‘abstract ideas’ in terms of examples taken from cases previously devided by the Supreme Court, including such as Bilski (Bilski v. Kappos,561 U.S. 593 (2010)), Diehr (Diamond v. Diehr, 450 U.S. 175 (1981)), Benson (Gottschalk v. Benson,409 U.S. 63 (1972)), Flook (Parker v. Flook, 437 U.S. (2010)), and Mayo (Mayo v. Prometheus, 132 S. Ct. 1289 (2012)).

In the wake of Alice, the Court of Appeals for the Federal Circuit and the District Courts have issued a tidal wave of decisions finding ineligible numerous patents relating to computer-implemented technologies.  Swimming against this tide of software patent ineligibility is the U.S. District Court for the Central District of California.  In an order signed November 3, 2014, in California Institute of Technology v. Hughes Communications Inc. (“Caltech”), Judge Mariana Pfaelzer ruled that “Caltech’s patents improve a computer’s functionality by applying concepts unique to computing to solve a problem unique to computing” and concluded that the asserted claims are therefore patentable under 35 USC § 101.  See Caltech, 156 C.D. Cal. 9095 (2014). 

In discussing computer software patentability, the court stated outright that “software must be eligible under § 101” and that the Supreme Court has implicitly endorsed the patentability of software, including in Alice.  Specifically, the court reasoned that patent law must balance between encouraging creation of new computing solutions and protecting against applying established ideas through a computer environment. Caltech, 156 C.D. Cal. at 9095.  The court also interpreted Alice as acknowledging the patent eligibility of software if it improves “the functioning of the computer itself” or “any other technology.”

In Caltech, Hughes Communications, DISH Network, and other defendants were sued for infringement of four patents directed to a specific form of error correction code called an irregular repeat and accumulate (“IRA”) code.  Hughes moved for summary judgment on the grounds that the asserted claims are not patentable under 35 USC § 101.  The defendant’s motion for summary judgment was denied.  Specifically, Judge Pfaelzer concluded that, even though all asserted claims were directed to an abstract idea and novel elements in the claims were actually mathematical algorithms, the claims were nevertheless patent eligible because they include “an inventive concept that sufficiently limits the claim’s preemptive effect,” and “a specific computing solution for a computing problem.”  Id. at 9084.

In reaching this conclusion, the court reviewed the asserted Caltech patents based on the Alicedecision, using a two-part test first set forth in Mayo. Mayo, 132 S. Ct. at 1303.  Using this two-part test, a court must (1) ask if a patent claim is directed to a patent-ineligible concept – a law of nature, physical phenomenon, or abstract idea; and (2) if the claim is directed to one of these concepts, determine whether there is an inventive concept, to ensure that each of the patents amounts to “significantly more” than a patent on the ineligible concept itself.

Regarding the first step, the Caltech court determined that all asserted claims were generally directed to an abstract idea of encoding and decoding data for error correction.  Nonetheless, at step two of the two-part test, the court found that the claims contained “meaningful limitations” that represent sufficiently inventive concepts, such as the irregular repetition of message bits and the use of linear transform operations.  The court acknowledged that these limitations are mathematical algorithms, but concluded that, because these algorithms are “narrowly defined” and “tied to a specific error correction process,” (Caltech, 156 C.D. Cal. at 9086) they are therefore “unconventional steps” that sufficiently limit the claims to ensure that the claims do not preempt the field of error correction.  Id. at 9089.

In addition, in response to Hughes’ argument that calculating parity bit values as part of error correction involves “mental steps [that] can be performed by a person with pencil and paper,” the court characterized this argument as “literally wrong,” since a pencil and paper cannot actually produce parity bits and that “pencil-and-paper analysis is inappropriate at least for this area of technology.” Id. at 9087.

On an interesting note, the court stated that “[p]erhaps the patent in Alice was the improper vehicle for clarifying the law: the patent claimed the age-old business method of mitigating settlement risk by using a third party intermediary, and the role of the computer in the claims was limited to generic functions like creating electronic records and tracking multiple transactions.  Alice held only that abstract business methods do not become automatically patentable when implemented on a computer.  Alice failed to answer this: when, if ever, do computer patents survive § 101?” Id. at 9070 (internal citations omitted).  This echoes Justice Sotomayor’s questions repeatedly asked during the Supreme Court hearing in Alice, i.e., “Why do we need to reach . . . software patents at all in this case?”; “Do you think we have to reach the patentability of software to answer this case?”; “What’s the necessity for us to announce a general rule with respect to software? There is no software being patented in this case.”

The decision in Caltech is not precedential.  However, the analysis presented by the court is particularly rigorous, and the survey of past Supreme Court jurisprudence on the issue of patent eligibility under 35 U.S.C. § 101 provides a useful framework for arguments supporting the position that at least some computer-implemented inventions should be patent eligible, even in the seemingly inexorable undertow of Alice.  Furthermore, the court in Caltech eloquently expressed the sentiment that perhaps Alice is not as broadly applicable as it may have seemed to be.  Specifically, the patents in Alice are not directed to software, but rather to implementing settlement of a transaction through an intermediary using a generic computer.  Caltech, 156 C.D. Cal. at 9061.  Thus, Alice may simply be not the best case for deciding on patent eligibility of all software and computer-implemented subject matter.  The Court of Appeals for the Federal Circuit has likewise recently stated, in Ultramercial Inc. v. Hulu LLC (“Ultramercial”), that “we do not purport to state that all claims in all software-based patents will necessarily be directed to an abstract idea.  Future cases may turn out differently.”  See Ultramercial, 657 F.3d 1323 (2011).  As the courts continue to hash out a workable standard for determining patent eligibility of claims that include potentially abstract concepts, it is clear that the two-part test used in the Alice decision is here to stay.  A degree of balance may be approaching, however, as careful application of the two-part test with due consideration afforded to the intent of both Congress and the Supreme Court can result in a well-reasoned finding of patent eligibility for software and other computer-implemented subject matter.