Supreme Court Upholds Invalidation of Computerized Financial Method Patent

On June 19, 2014, in Alice Corp. v. CLS Bank International, 573 U.S. ___2014, a unanimous Supreme Court held that systems and methods of exchanging financial obligations, implemented in hardware or software, did not qualify for patent protection. The Court found that the claims at issue — directed to methods of mitigating “settlement risk” between financial institutions — were invalid as failing to claim patent eligible subject matter. The Court concluded that the claims only embodied “abstract” ideas constituting a category of patent ineligible subject matter, including algorithms, mathematical concepts, chemical elements, naturally occurring biological products, and methods that can be carried out in a person’s head. Alice Corp. at 7 (“We conclude that … These claims are drawn to the abstract idea of intermediated settlement.”). Alice Corp. is the most recent Supreme Court decision addressing patent eligibility of computerized business method claims. The Supreme Court previously addressed the patent eligibility of pure business methods in Bilski v. Kappos, 561 U.S. 593 (2010), and found that hedging transaction claims were unpatentable subject matter under similar reasoning.

The decision is notable because it comes on the heels of a fractured en banc Federal Circuit decision, which left the appeals court split regarding the treatment of computer software methods, computer hardware systems, or computer readable medium (i.e., software) claims involving the same concept.

In Alice Corp., the Supreme Court grounded its decision in Section 101 of the Patent Act which 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.

35 U.S.C. § 101

However, to strike a balance between patent protection and public exploitation of basic tools of science, Section 101 has long been interpreted to exclude “laws of nature, natural phenomenon, and abstract ideas.” See Association for Molecular Pathology v. Myriad Genetics, Inc., 133 S.Ct. 2107, 2116 (2013). The Supreme Court has excluded protection for concepts such as isolated and naturally-occurring DNA sequences, computers that update alarm limits utilizing a mathematical formula, and methods of measuring metabolites in blood samples in order to adjust a drug therapy. (See e.g., Association for Molecular Pathology v. Myriad Genetics, Inc., 133 S.Ct. 2107 (2013); Parker v. Flook, 437 U.S. 584 (1978); Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S.Ct. 1289 (2012)). Although each of these concepts arguably involves ingenuity, patents on such methods have fallen for broadly claiming basic tools used in a specific field of art.

With this background, the Court utilized a test from its recent decision in Mayo Collaborative Services, which set forth a somewhat confusing and tautological framework for determining whether a claim satisfies Section 101. According to Mayo, the court first determines whether the claims are directed to patent-ineligible concepts such as formulae, chemical elements, biologically occurring products, “abstract ideas,” and the like. Step two of the analysis requires identifying an “inventive concept” and determining whether the claim amounts to anything more than just a patent upon the patent-ineligible subject matter.

In Alice Corp., writing the majority, Justice Clarence Thomas concluded that the idea of intermediated settlement fell in the realm of an “abstract idea” using Bilski v. Kappos as direct precedent for the holding. Justice Thomas reiterated, “[A]ll members of the Court agree[d] that the patent at issue in Bilski claimed an ‘abstract idea,’” drawing an analogy between methods that hedge risk in commodity trading transactions to methods in this case which involve a third party intermediating financial risk in a transaction between two institutions. Under the second analytical step, the Court found that methods of intermediated settlement, even if involving a “generic computer,” “fail to transform the abstract idea into a patent eligible invention.” The Court applied the same logic to the system and computer readable medium claims. The Court found that the generic computer components, such as “data storage unit[s]” and “communications controller[s],” simply implement the method in a computer environment and did not transform the claim into anything beyond the method claims in substance. Thus, the Court determined that the claims did not qualify for patent protection.

Although not wholly unexpected due to the subject matter relating to a financial transaction and the business method nature of the invention at issue in Alice, the decision stops short of clearly explaining how an “abstract idea” may be readily identified. Instead, the Court simply disagrees — somewhat confusingly — with the petitioner, stating that an abstract idea “cannot be described as a ‘preexisting, fundamental truth’” and analogizing to the hedging at issue in Bilski, with respect to which the Court states: “[a]lthough a longstanding commercial practice … it is a method of organizing human activity, not a ‘truth’ about the natural world ‘that has always existed.’” Thus, one narrow reading of Alice may simply be that application of any generic inventive computer, software, and Internet technology will not enable a claim to overcome the “abstract idea” exception. (The Court appears to allow for the possibility of such an exception where, for example, the claims “purport to improve the functioning of the computer itself” or to “effect an improvement in any other technology or technical field,” although, again, the Court provides no guidance on determining the scope of such possible safe harbors.) In any case, it at least appears likely that, if a patent is rooted in methods of carrying out financial transactions (a large segment of the economy), and the methods can be carried out originally on paper or in a person’s head or are closely related to longstanding practices and understandings of the industry, then the computerization of any aspect of a concept in this realm may not qualify for patent protection and will be susceptible to a § 101 attack.

Arent Fox will carefully monitor and continue to report the impact of this decision both at the patent office and in the courts. It should be noted that the views and opinions expressed in this article are those of the authors and not necessarily representative of the firm or its clients. If you have any questions, please contact the authors or the Arent Fox professional who handles your matters.