Federal Circuit Rules Software Invention Unpatentable

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Editor’s note: Anthony J. Lombardi practices patent litigation and patent prosecution at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. He also provides counseling to clients on prelitigation strategy, portfolio development, patent monetization, and licensing activities.

A clear legal standard for determining patent-eligible subject matter remains elusive. On Friday, the Federal Circuit, in CLS Bank International v. Alice Corporation, ruled that an invention involving software for a computerized trading platform does not constitute patent‑eligible subject matter. The decision — which spanned 135 pages — by a 10-member en banc panel of the Court included seven separate opinions, but not the clarity many had hoped for.

Alice’s computerized trading platform patents were at issue in the case. Those patents describe a process for two parties to exchange obligations, such as stock trades, which are then settled by a trusted third party.

The focus of the legal proceedings was Alice’s patent claims. Positioned at the end of a patent, claims are numbered sentences that define the scope of protection afforded by the patent. Among other requirements, the subject matter of a claim must comply with section 101 of the patent laws.

Section 101 defines patent-eligible subject matter and reads: “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.”

Alice asserted a variety of its patent claims in the case, including claims written in method, system and computer-readable-media claim formats. However, Alice’s asserted claims generally share the same underlying premise — that of software for exchanging obligations between parties through a computerized trading platform and using a third party to handle settlement of the exchanges.

What Guidance Did the Court Provide for Software Patents?

A majority (seven of the 10 members) of the Court concluded that Alice’s method and media claims are not directed to patent-eligible subject matter. The Court split 5-5, however, on Alice’s system claims. A split means the lower district court’s ruling, which found Alice’s system claims patent-ineligible, stands. A majority (eight of the 10 members) also agreed that Alice’s method, media, and system claims should rise or fall together when determining patent eligibility.

The majority consensus ends there. A majority of the Court, however, failed to reach agreement on the reasoning behind these conclusions.

Judge Lourie, in an opinion joined by four judges (Judges Dyk, Prost, Reyna and Wallach), found all of Alice’s asserted claims drawn to patent-ineligible abstract ideas.

In his view, Alice’s method claims are directed to nothing more than the abstract idea of reducing settlement risk by effecting trades through a third-party intermediary. This, he said, is a “disembodied” concept without any real-world application. Computer-related aspects of the claims — including steps for creating records to store data, using a computer to adjust and maintain those records, and reconciling those records at the end of a trading day — in his opinion failed to add anything of substance that would save the claims.

Judge Lourie similarly grouped Alice’s media and system claims in the same boat with Alice’s method claims. He characterized the media claims — although defining physical storage media — as nothing more than the same underlying method of reducing settlement risk “in the guise of a device.”

He then questioned whether structures found in the system claims—including “a computer” and “a data storage unit” — could justify a different approach for those claims. In his opinion, they did not. He reasoned that the computer-related limitations failed to provide any “meaningful distinction” from the computer-related limitations found in the method claims.

In a separate opinion, Chief Judge Rader said he would have found the system claims patent eligible. Three judges (Judges Linn, Moore, and O’Malley) joined in that part of his opinion. In Chief Judge Rader’s view, the issue was “whether a claim includes meaningful limitations restricting it to an application, rather than merely an abstract idea.”

Applying that rationale, he reasoned that the structural limitations in Alice’s system claims (e.g. limitations drawn to “a computer” and “a data storage unit”) brought those claims into the realm of patent-eligible subject matter. However, in the remainder of his opinion (which only Judge O’Malley joined), Chief Judge Rader concluded that Alice’s method and media claims are patent-ineligible abstract ideas.

Judges Linn and O’Malley, in a separate opinion, said they would have also found Alice’s method and media claims patent-eligible for the same reasons expressed in Chief Judge Rader’s opinion regarding Alice’s system claims. Additionally, they noted that several technology companies, in amicus (friend-of-the–court) briefs, expressed concern about what they viewed as widespread proliferation and aggressive enforcement of low-quality software patents. In responding to that concern, Judges Linn and O’Malley said Congress, and not the courts, is the proper avenue for developing special rules for software patents. For example, they speculated that Congress could limit the term of software patents or devise rules for limiting their scope.

Judge Moore, in a separate opinion (in which Chief Judge Rader and Judges Linn and O’Malley joined), said she would have found the system claims drawn to patent-eligible subject matter. She also wrote that the uncertainty in court decisions over this issue is “causing a free fall in the patent system.” If all of Alice’s claims are not patent-eligible, she conjectured that “this case is the death of hundreds of thousands of patents, including all business-method, financial-system, and software patents as well as many computer implemented and telecommunications patents.”

In a separate opinion, Judge Newman shared the majority view that all of the claims stand or fall together. She would have found Alice’s system, method and media claims patent‑eligible based on the plain language of section 101.

Chief Judge Rader offered an additional opinion captioned “Additional Reflections.” There, he emphasized that the Court should focus on the language of section 101 and indicated it is unlikely that innovation is promoted by the subjective standards for evaluating patent eligibility expressed in the panel’s opinions.

What’s Next for Software Patents?

The Federal Circuit has ruled, but the dividing line between patent-eligible software and patent-ineligible abstract ideas has not come into focus. Some may say the landscape remains in a similar state as it was before the Federal Circuit’s decision: some software claims might rise to the level of patent-eligible subject matter and others may not.

The CLS Bank case is likely to undergo Supreme Court review. The Supreme Court may view the Federal Circuit’s fractured decision as an opportunity to consider software patenting again. Whether a clear dividing line will emerge remains to be seen.