bethShaw-0580editConvertedProfile-e1360002102239Featured Regular Expert Column

Beth Z. Shaw, Brake Hughes Bellermann LLP

In January, I wrote a WLF Legal Opinion Letter entitled CLS Bank Int’l v. Alice Corp.: Clearer Software Patent Guidance?, which asked if clear software patent guidance would emerge from the U.S. Court of Appeals for the Federal Circuit’s en banc review of CLS Bank (opinion). The answer is an unequivocal “no!”

Seven of the ten members (a majority) of the Federal Circuit court have agreed that the method and computer-readable medium claims in the case fail to recite patent-eligible subject matter. The court was evenly split on the patent eligibility of the system claims. No majority agreed on why, or how, system claims should be analyzed. Further, no majority agreed on the legal rationale as to why the method claims are not patent eligible. Thus, incredibly, despite 135 pages, “nothing said today beyond our judgment has the weight of precedent.”

Judge Newman, concurring in part and dissenting in part, quite accurately summarized the result of the en banc panel:

The ascendance of section 101 as an independent source of litigation, separate from the merits of patentability, is a new uncertainty for inventors. The court, now rehearing this case en banc, hoped to ameliorate this uncertainty by providing objective standards for section 101 patent-eligibility. Instead we have 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 for innovation. With today’s judicial deadlock, the only assurance is that any successful innovation is likely to be challenged in opportunistic litigation, whose result will depend on the random selection of the panel.

The majority wrote that the basic steps in a patent-eligibility analysis can be summarized as follows.

  1. Ask whether the claimed invention is a process, machine, manufacture, or composition of matter. If not, the claim is ineligible under § 101. If the invention falls within one of the statutory categories . . .
  2. Ask whether any of the three judicial exceptions nonetheless bars such a claim—is the claim drawn to a patent ineligible law of nature, natural phenomenon, or abstract idea? If so, the claim is not patent eligible.

Only claims that pass both inquiries satisfy Section 101.

The majority acknowledged this analysis—specifically the second question—is difficult to apply in practice. What is an abstract idea in a patent claim? The majority attempted to provide a workable framework for “guidance and predictability” based on the Supreme Court’s jurisprudence. Yet, the majority wrote that “the [Supreme Court’s] cases repeatedly caution against overly formalistic approaches to subject-matter eligibility that invite manipulation by patent applicants.” Further, no bright line rules are offered, because the Supreme Court’s cases urge a flexible, claim-by-claim approach to subject-matter eligibility that avoids rigid line drawing. The court is obviously once again torn. On the one hand, it wants to avoid a bright-line test for what is patent-eligible because the Supreme Court has rejected the idea of any bright-line tests. On the other hand, it wants to provide some framework which reconciles all the previous cases (obviously an impossible task).

Chief Judge Rader concurred in part and dissented in part. Judges Rader, Linn, Moore, and O’Malley all agreed with Chief Judge Rader that the system claims are patent-eligible, at least because machines are expressly eligible subject matter under Section 101. Further, analyzing each asserted system claim as a whole “demonstrates that each does not claim anything abstract in its machine embodiments.”

The representative system claim recites:

A data processing system to enable the exchange of an obligation between parties, of an obligation between parties, the system comprising:

  • a communications controller,
  • a first party device, coupled to said communications controller,
  • a data storage unit having stored therein

(a) information about a first account for a first party, independent from a second account maintained by a first exchange institution, and

(b) information about a third account for a second party, independent from a fourth account maintained by a second exchange institution; and

  • a computer, coupled to said data storage unit and said communications controller, that is configured to

(a) receive a transaction from said first party device via said communications controller;

(b) electronically adjust said first account and said third account in order to effect an exchange obligation arising from said transaction between said first party and said second party after ensuring that said first party and/or said second party have adequate value in said first account and/or said third account, respectively; and

(c) generate an instruction to said first exchange institution and/or said second exchange institution to adjust said second account and/or said fourth account in accordance with the adjustment of said first account and/or said third account, wherein said instruction being an irrevocable, time invariant obligation placed on said first exchange institution and/or said second exchange institution.

These are “traditional hardware claims and the patent discloses at least thirty-two figures which provide detailed algorithms for the software with which this hardware is to be programmed,” wrote Chief Judge Rader, adding that “labeling this system claim an abstract concept wrenches all meaning from those words, and turns a narrow exception into one which may swallow the expansive rule (and with it much of the investment and innovation in software).”

Judge Moore also dissented-in-part, joined by Judges Rader, Linn, and O’Malley, and explained why the system claims at issue are directed to patent eligible subject matter, and not an abstract idea. She also wrote that the effect of this case is extreme and that “[t]here has never been a case which could do more damage to the patent system than this one.”

Chief Judge Rader and Judge Moore, however, would affirm the district court’s conclusion that the method and media claims are patent ineligible.

Judges Linn and O’Malley wrote a separate opinion stating that they believe that as properly construed on this record and in this procedural posture, the method claims are patent eligible. Accordingly, they dissent from all aspects of the judgment. Judges Linn and O’Malley wrote that the “method, media, and system claims we review today must rise and fall together; either they are all patent eligible or they are not.” These judges opined that the record of the lower court matters in this case. In the lower court, both parties stipulated to the claim construction, which Judges Linn and O’Malley determined resulted in the claims being patent eligible.

Judges Linn and O’Malley noted that certain amici expressed concern regarding the proliferation and aggressive enforcement of low quality software patents. Judges Linn and O’Malley wrote that “Congress can, and perhaps should, develop special rules for software patents… [but] this court may not change the law to address one technological field or the concerns of a single industry.”

Judge Newman concurred in part and dissented in part, proposing that the court make clear that patent eligibility does not depend on the form of the claim.

Chief Judge Rader also wrote several pages of “Additional Reflections.” He wrote that “when all else fails, consult the statute.” The statute, 35 U.S.C. § 101, provides:

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.

Chief Judge Rader wrote that the Supreme Court long ago held that Section 101 is not a “condition of patentability” and was never intended as such. He wrote that he doubts that innovation is promoted “when subjective and empty words like ‘contribution’ or ‘inventiveness’ are offered up by the courts to determine investment, resource allocation, and business decisions.”

While the ultimate judgment is the only technical “precedent” from this case, the many conflicting opinions offer an interesting insight into the minds of the judges, and these opinions are clearly intended by the judges to set up the case for the Supreme Court’s review.