Two recent Federal Circuit decisions in CLS Bank International v. Alice Corp.,  717 F.3d 1269 (Fed. Cir. May 10, 2013), and Ultramercial Inc. v. Hulu LLC,  2013 WL 3111303 (Fed. Cir. June 21, 2013), have muddied the waters yet have provided some clarity for the test and procedure in determining eligibility of software patents under 35 U.S.C. §! 101. While it was highly anticipated that the CLS Bank  case would clarify and provide an appropriate test, a divided en banc  Federal Circuit upheld the lower court’s determination that the asserted method, computer-readable medium, and system claims are invalid.

In doing so, however, the Federal Circuit propounded “at least three incompatible standards, devoid of consensus, serving simply to add to the unreliability and cost of the system of patents as an incentive of innovation,” according to Circuit Judge Pauline Newman, who dissented from some of the majority’s opinion. Then, a month later in the Ultramercial  case, a three-judge panel of the Federal Circuit, including the two principal judges who disagreed on this issue in the CLS Bank  case, unanimously agreed that another software invention was patentable, albeit without agreeing on the process to make that determination.

THE CLS BANK CASE

 At issue were patents directed to “a computerized trading platform used for conducting financial transactions in which a third party settles obligations between a first and a second party so as to eliminate … ‘settlement’ risk.” Certain of the asserted claims “recite methods of exchanging obligations between parties,” others “are drawn to data processing systems” and others are directed to “computer-readable media containing a program code for directing an exchange of obligations.”

CLS Bank filed suit in the U.S. District Court for the District of Columbia against patent owner Alice Corp., seeking, in pertinent part, a declaratory judgment of patent invalidity under Section 101.

The District Court granted summary judgment to CLS, ruling the asserted claims invalid because they were directed to an abstract idea, which is ineligible subject matter.

Alice Corp. appealed to the Federal Circuit, and a three-judge panel reversed the District Court, finding all of the asserted claims to be patent eligible. The Federal Circuit granted CLS Bank’s petition for a rehearing en banc. A divided majority of the en banc  panel affirmed the District Court’s holding that the asserted method and computer-readable medium claims are ineligible and invalid under Section 101, and because a majority could not be reached with respect to the asserted system claims, the District Court’s determination regarding those claims remained intact, rendering the asserted system claims ineligible and invalid under Section 101 as well.

Judge Lourie requires an inventive concept

 Circuit Judge Alan D. Lourie, joined by four panel members, advocated that a claim embodying an abstract idea is patent-eligible under Section 101 if that claim includes “additional substantive limitations,” which he called an “inventive concept” that narrows or confines the claim so that, in practical terms, it does not cover the full abstract idea itself.

In other words, if a claim includes elements embodying an abstract idea, additional elements of the claim (i.e.,  those elements not embodying the abstract idea) must include an “inventive concept” for the claim to be patent-eligible.

Regarding claims directed to computer-implemented inventions, Judge Lourie said that “appending generic computer functionality to lend speed or efficiency to the performance of an abstract concept does not meaningfully limit the claim scope for purposes of patentability fails to supply an ‘inventive concept.’”

Chief Judge Rader focuses on meaningful limitations

Chief Circuit Judge Randall R. Rader, joined in full by one panel member and in part by two other panel members, advocated that a claim embodying an abstract idea is patent-eligible under Section 101 if that claim includes “limitations that meaningfully tie that [abstract] idea to a concrete reality or actual application of that idea.”

With respect to a claim directed to a computer-implemented invention, Judge Rader said that the claim is patent eligible “where the claim is tied to a computer in such a way that the computer plays a meaningful role in the performance of the claimed invention, and the claim does not preempt virtually all uses of an underlying abstract idea.”

Applying this approach to the asserted system claims, Judge Rader found the system claims to be patent-eligible, stating that “the claim covers the use of a computer and other hardware specifically programmed to solve a complex problem.” The specific functions recited in these claims showed that they were directed to practical applications of the underlying idea and were patent-eligible, he said.

Turning to the asserted method claims, Judge Rader stated that the claims embody the abstract idea “of using a neutral intermediary in exchange transactions to reduce risk that one party will not honor the deal, i.e. , escrow management.” He found the asserted method claims to be ineligible and invalid under Section 101 because the recited steps were “inherent in an escrow and claimed at a high level of generality” and did not add any meaningful limitations to the claims.

 Judge Newman defers to the plain language of the statute

Judge Newman would abolish the judicially created exceptions to Section 101 and advocated that the Federal Circuit find that a claim is patent-eligible if the subject matter is within the statutory classes in Section 101.

In other words, according to Judge Newman, a claim is patent-eligible if that claim recites a “process, machine, manufacture, or composition of matter,” and “claims that are ‘abstract’ or ‘preemptive’“ will be “eliminate[d].”

Interestingly, Judge Rader, in his separately filed additional reflections, seemed to agree with Judge Newman’s adherence to the plain language of the statute, stating, “[W]hen all else fails, it makes sense to consult the simplicity, clarity, and directness of the statute.”

 Judge Linn calls for congressional action

In a dissenting opinion, Judge Richard Linn addressed the concerns expressed by various amici curiae regarding the proliferation and aggressive enforcement of lowquality software patents, opining that “broadening what is a narrow exception to the statutory definition of patent eligibility should not be the vehicle to address these concerns.” Rather, Judge Linn called for legislative action, asserting that Congress can, and perhaps should, develop special rules for software patents.

THE ULTRAMERCIAL CASE

At issue in the Ultramercial case was a patent claiming “a method for distributing copyrighted products … over the Internet where the consumer receives a copyrighted product for free in exchange for viewing an advertisement, and the advertiser pays for the copyrighted content.”

Ultramercial filed suit in the U.S. District Court for the Central District of California, and defendants Wildtangent Inc. and Hulu moved to dismiss the case, alleging patent invalidity under Section 101. Without performing a claim construction, the District Court granted the motion to dismiss, finding the asserted claims invalid as being directed to ineligible subject matter, an abstract idea.

Ultramercial appealed to the Federal Circuit, where a three-judge panel reversed the District Court, finding the asserted claims to be patent eligible. The Supreme Court vacated and remanded the initial Federal Circuit decision. Wildtangent Inc. v. Ultramercial LLC et al., 132 S. Ct. 2431 (May 21, 2012).

Chief Judge Rader on procedure, ‘inventive concept’

Chief Judge Rader, joined by Judge Kimberly Ann Moore, first made clear that it is rare that a patent infringement suit can be dismissed at the pleading stage for lack of patentable subject matter, because every patent is presumed to have been issued properly. In order to prove invalidity at the motion-to-dismiss stage, “the only plausible reading of the patent must be that there is clear and convincing evidence of ineligibility.”

Judge Rader next said that a claim construction will normally be required for a patent eligibility determination because of the underlying factual determinations, and if there are factual disputes, a claim construction should be required.

Next, Judge Rader further explained his positions in the CLS Bank  case and integrated those positions with the holding in Mayo Collaborative Services v. Prometheus Laboratories , 132 S. Ct. 1289 (Mar. 20, 2012), in which the Supreme Court held that patents covering a process for diagnosing autoimmune diseases were not valid because they cover abstract processes.

In setting up his explanation, he reiterated that Congress plainly contemplated that the patent laws would be given wide scope and that subject matter eligibility is merely a threshold check. Patentability of a claim ultimately depended novelty, nonobviousness, and adequate disclosure, according to Judge Rader.

Case law, not Congress, provided the three exceptions to patentability, he said, those being laws of nature, natural phenomena and abstract ideas. Since these exceptions were judicially created, they should apply narrowly, Judge Rader said.

In relation to computer-implemented inventions, Judge Rader reiterated that a process need not use a computer, or some machine, in order to avoid abstractness, while taking note of the Supreme Court’s 2010 decision in Bilski v. Kappos,  130 S. Ct. 3218 that set forth the “machine or transformation” test.

Although the test served well as a tool to evaluate the subject matter of Industrial Age processes, that test has far less application to the inventions of the Information Age, he said.

Referring to the abstract idea exception and preemption, Judge Rader said “the relevant inquiry is whether a claim, as a whole, includes meaningful limitations restricting it to an application, rather than an abstract idea,” and “preemption is only a subject matter eligibility problem when a claim preempts all practical uses of an abstract idea.”

According to Judge Rader, principles of patent eligibility must not be conflated with those of validity. Otherwise, Section 103 (the obviousness requirement) will be read out of the Patent Act. He said the Supreme Court’s Mayo  decision should be read as follows: “If, to implement the abstract concept, one must  perform the additional step, or the step is a routine and conventional aspect of the abstract idea, then the step merely separately restates an element of the abstract idea, and thus does not further limit the abstract concept to a practical application.”

Judge Rader made several points about computer implementation of an invention:

• “[T]he fact that a claim is limited by a tie to a computer is an important indication of patent eligibility.”

• The “tie to a machine moves it farther away from a claim to the abstract idea itself.”

• The tie to a machine “makes it less likely that the claims will preempt all practical applications of the idea.”

• “[T]he inquiry focuses on whether the claims tie the otherwise abstract idea to a specific way  of doing something with a computer, or a specific computer  doing something.”

• “Meaningful limitations may include the computer being part of the solution, being integral to the performance of the method, or containing an improvement in computer technology.”

 Further, “with a claim tied to a computer in a specific way, such that the computer plays a meaningful role in the performance of the claimed invention, it is not likely to pre-empt virtually all uses of an underlying abstract idea, he said.

Turning to Ultramercial’s patent, Judge Rader said the claimed invention, which was a method for monetizing and distributing copyrighted products over the Internet, used computers and applications of computer technology that were likely to require intricate and complex computer programming.

In addition, Judge Rader recognized that certain of these “steps plainly require that the method be performed through computers, on the Internet, the invention involves an extensive computer interface.

Judge Lourie’s views

Judge Lourie agreed with Judge Rader that the claim in question was patent-eligible. He also reiterated his views in the CLS Bank  case that in making a determination of whether a claim posed “any risk of preempting an abstract idea,” the court must identify and define whatever fundamental concept appears wrapped up in the claim.

In doing so, he further agreed with Judge Rader that a claim construction may be helpful in this analysis. Then, according to Judge Lourie, the balance of the claim is evaluated to determine whether “additional substantive limitations … narrow, confine, or otherwise tie down the claim so that, in practical terms, it does not cover the full abstract idea itself.”

While this is somewhat similar to Judge Rader’s “meaningful limitations” requirement, Judge Lourie said he still believes that Judge Rader is not following the Mayo  case and its “inventive concept” requirement for patent eligibility. Here, it appears that Judge Lourie simply believed there were added limitations in the claim that represent “significantly more than the underlying abstract idea of using advertising as an exchange of currency,” and as a consequence the claims “do not preempt the use of that idea in all fields.”

IMPLICATIONS

 lice Corp. will almost certainly ask the Supreme Court to hear the CLS Bank  case. The combination of the divided nature of that en banc  decision and the potential impact on the patent system of both of these decisions makes it likely that the Supreme Court will hear the case to (hopefully) provide clarity to courts, patent owners and inventors.

Judge Moore aptly summarized the potential impact of Judge Lourie’s opinion in the CLS Bank  case, saying that if adopted, it would decimate the electronics and software industries, and that “there has never been a case which could do more damage to the patent system than this one.”

During this period of uncertainty, when preparing a patent application directed to an invention incorporating software, applicants should consider including a detailed discussion of the computer hardware components used to execute the software, including how the components work together to do so, as well as a variety of flowcharts describing the sequence of operation of the software.

Given the Federal Circuit’s apparent preference for system claims, applicants should also consider at least including (if not focusing on) system claims that include the hardware components and how they interact to perform the software functions.

Additionally, a patentee asserting claims directed to software during litigation should consider only asserting system claims. Although the majority in the CLS Bank case did not agree on the reason why the asserted claims should rise or fall together (robbing the decision of any precedential effect), the majority nevertheless appears to believe that claims should rise or fall together. Since method and computer-readable medium claims are more likely to be found invalid than system claims according to this decision, a patentee may not want to risk system claims being found invalid simply because corresponding method and/or computer-readable medium claims are found invalid.

Further, defendants should think long and hard before attempting to file a motion to dismiss claiming lack of subject matter eligibility in view of the Ultramercial  case and Judge Rader’s comments on the potential need for underlying factual determinations and a claim construction. Defendants should instead attempt to obtain an early claim construction and consider a motion for summary judgment.

This article first appeared in the Westlaw Journal Intellectual Property.