The Federal Circuit Court of Appeals has invalidated computer method patent claims, computer system claims and computer readable medium claims for a life insurance product. Bancorp Services, LLC v. SunLife Assurance Co. of Canada (U.S.), Case No. 2011-1467 (Fed Cir. July 26, 2012) (available here). Bancorp, the patentee, sued defendant Sun. The court said the claims were nothing more than abstract mathematical algorithms executed by a computer. Although complex, the algorithms could be done manually without the assistance of a computer.

The computer was not integral to the process as compared to a GPS position detector system, a computerized operation for opening a rubber mold, or a method for transforming half tone gray scale pixels for a better computer monitor display. Bancorp’s patent specifications disclosed systems and methods for administering and tracking the value of life insurance. The value of a separate account policy fluctuated with the market value of the underlying investment assets. The asserted patents disclosed a specific formula for determining the values required to manage a stable value protected life insurance policy. For example, the specification disclosed creating and initializing a fund by performing particular “calculations and comparisons” to determine an “initial unit value of the policy.” One of the patent claims is reproduced at the end of this commentary. The district court concluded that there was no meaningful distinction between the asserted “process,” “system,” and “media” claims, and that each would be analyzed as a process claim.

“To salvage an otherwise patent-ineligible process, a computer must be integral to the claimed invention, facilitating the process in a way that a person making calculations or computations could not. See SiRF Tech., Inc. v. Int’l Trade Comm’n, 601 F.3d 1319, 1333 (Fed. Cir. 2010) (‘In order for the addition of a machine to impose a meaningful limit on the scope of a claim, it must play a significant part in permitting the claimed method to be performed, rather than function solely as an obvious mechanism for permitting a solution to be achieved more quickly, i.e., through the utilization of a computer for performing calculations’).” Slip opn. p. 19-20.

The computer required by some of Bancorp’s claims was employed only for the computer’s most basic function, the performance of repetitive calculations, and as such the recitation of a computer did not impose meaningful limits on the scope of those claims. Bancorp sought to analogize its case to SiRF, contending that a computer “plays a significant part” in its claims because they require “precise and repetitive calculation.” The Court said that misses the point. It is the management of the life insurance policy that is “integral to each of [Bancorp’s] claims at issue,” not the computer machinery that may be used to accomplish it. See SiRF, 601 F.3d at 1332.

Bancorp also argued that its computer system was more akin to the one in Research Corp. Techs., Inc. v. Microsoft Corp., 627 F.3d 859, 867 (Fed. Cir. 2010). The Court stated that Research Corp. was different from the present case in two critical respects. First, the claimed processes in Research Corp. plainly represented improvements to computer technologies in the marketplace. For example, as compared to the prior art, the “inventive mask produce[d] higher quality halftone images while using less processor power and memory space.” Id. at 865. No such technological advance was evident in the present invention. Rather, the claims merely employ computers to track, reconcile, and administer a life insurance policy with a stable value component—i.e., the computer simply performs more efficiently what could otherwise be accomplished manually. Bancorp, 771 F. Supp. 2d at 1065.

Second, the method in Research Corp., which required the manipulation of computer data structures (the pixels of a digital image and the mask) and the output of a modified computer data structure (the halftoned image), was dependent upon the computer components required to perform it.

Procedurally, Bancorp and Sun Life jointly stipulated to dismiss their case due to collateral estoppel arising from the district court’s invalidity ruling in Hartford. Bancorp’s’792 patent was the subject of two prior appeals to the Court. See Metro. Life Ins. Co. v. Bancorp Servs., L.L.C., 527 F.3d 1330 (Fed. Cir. 2008) (vacating summary judgment of noninfringement); Bancorp Servs., L.L.C. v. Hartford Life Ins. Co., 359 F.3d 1367 (Fed. Cir. 2004) (reversing summary judgment of invalidity for indefiniteness). The parties agreed that if the district court’s Hartford ruling was reversed on appeal then their case would be reinstated. The district court then entered a judgment of conditional dismissal.

The Federal Circuit Court found no error in the district court’s failure to construe the patent claims prior to entering its decision. In Ultramercial, LLC v. Hulu, LLC, the Court stated that “[t]his court has never set forth a bright line rule requiring district courts to construe claims before determining subject matter eligibility.” The Court did state that it is ordinarily desirable—and often necessary— to resolve claim construction disputes prior to a § 101 analysis, for the determination of patent eligibility requires a full understanding of the basic character of the claimed subject matter.” 657 F.3d 1323, 1325 (Fed. Cir. 2011), vacated sub nom. Wild- Tangent, Inc. v. Ultramercial, LLC, No. 11-962, 2012 WL 369157 (U.S. May 21, 2012)(no bright line requiring construing claims before section 101 analysis).

However in this appeal, the Court concluded that the asserted system claims required “one or more computers,” as Bancorp asserted and as Sun conceded. The plain language of the system claims required particular computing devices, such as a “generator,” a “calculator,” and “digital storage.” Regarding the computer-readable medium claims, the specification explained that the term refers generally to a “high density removable storage means,” such as a “compact disc.” The district court’s failure to construe the claims, did not preclude the Court from making that legal determination on appeal. See Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1455 (Fed. Cir. 1998) (en banc) (concluding that claim construction is a pure issue of law). Just as a district court may construe the claims in a way that neither party advocates, Exxon Chemical Patents, Inc. v. Lubrizol Corp., 64 F.3d 1553, 1555 (Fed. Cir. 1995) (“[T]he trial judge has an independent obligation to determine the meaning of the claims, notwithstanding the views asserted by the adversary parties.”), the appellate court may depart from the district court’s decision and adopt a new construction on appeal, Praxair, Inc. v. ATMI, Inc., 543 F.3d 1306, 1323–24 (Fed. Cir. 2008) (adopting “a new claim construction on appeal.”

As for the literal fact that the computer system claims are facially different than the computer method claims, the Court held that the district court correctly treated the asserted system and computer readable medium claims as being no different from the asserted method claims for patent eligibility purposes. Under Cybersource and CLS, a machine, system, medium, or the like may in some cases be equivalent to an abstract mental process for purposes of patent ineligibility. In CyberSource Corp. v. Retail Decisions, Inc. the Court did not just look to the type of claim but also “to the underlying invention for patent-eligibility purposes.” 654 F.3d 1366, 1374 (Fed. Cir. 2011). In CLS Bank International v. Alice Corp., the Court held that the format of the various method, system, and media claims asserted in that case “d[id] not change the patent eligibility analysis under § 101.” No. 2011-1301, 2012 WL 2708400, at *10 (Fed. Cir. July 9, 2012).

Bancorp owns the ’792 and ’037 patents, both entitled “System for Managing a Stable Value Protected Investment Plan.” The patents share a specification and the priority date of September 1996. The ’792 patent has been the subject of two prior appeals to this court. See Metro. Life Ins. Co. v. Bancorp Servs., L.L.C., 527 F.3d 1330 (Fed. Cir. 2008) (vacating summary judgment of noninfringement); Bancorp Servs., L.L.C. v. Hartford Life Ins. Co., 359 F.3d 1367 (Fed. Cir. 2004) (reversing summary judgment of invalidity for indefiniteness). An example of the claim follows.

“9.A method for managing a life insurance policy on behalf of a policy holder, the method comprising the steps of: [a] generating a life insurance policy including a stable value protected investment with an initial value based on a value of underlying securities; [b] calculating fee units for members of a management group which manage the life insurance policy; [c] calculating surrender value protected investment credits for the life insurance policy; [d] determining an investment value and a value of the underlying securities for the current day; [e] calculating a policy value and a policy unit value for the current day; [f] storing the policy unit value for the current day; and [g] one of the steps of: removing the fee units for members of the management group which manage the life insurance policy, and accumulating fee units on behalf of the management group.” USPN ‘792, clm 9 (alpha designators added).

Commentary: The ruling in the Bancorp case will place many financial patents at risk. The courts are carefully scrutinizing all computer patent claims and the boundaries of patentable subject matter are being re-drawn with considerable speed. See Dealertrack, Inc. v. Huber, Case No. 2009-1566 (Fed. Cir. Jan. 20, 2012).

The Federal Circuit Court of Appeals has held that Alice’s patents that cover a computerized trading platform for exchanging obligations wherein a trusted third party settles obligations between a first and second party so as to eliminate “settlement risk,” define patentable subject matter under 35 U.S.C. § 101.  CLS Bank International v. Alice Corp. Pty. Ltd, Case No. 2011-1301 (Fed. Cir. July 9, 2012) (available  here).  The dissenting opinion by Judge Prost objected stating that the majority’s opinion uses a subjective “manifestly evident” standard which is nothing more than an escape hatch rather than a yardstick.  The majority concluded that the system, method, and media claims at issue are not drawn to mere “abstract ideas” but rather are directed to practical applications of invention falling within the categories of patent eligible subject matter defined by 35 U.S.C. § 101.

“The asserted claims appear to cover the practical application of a business concept in a specific way, which requires computer implemented steps of exchanging obligations maintained at an exchange institution by creating electronically maintained shadow credit and shadow debit records, and particularly recite that such shadow credit and debit records be held independently of the exchange institution by a supervisory institution; that start-of-the-day balances be obtained from the exchange institution; that adjustments be made to the credit records based on only certain specified allowed transactions under the ‘adjusting’ limitation; that such adjustments be made in chronological order; that at the end of the day, instructions be given to the exchange institution to reflect the adjustments made on the basis of the permitted transactions; and that such adjustments affect irrevocable, time invariant obligations placed on the exchange institution.”  Slip opn. p. 26 (“P. 26″).

CLS, who challenged Alice’s patent, agreed for purposes of the summary judgement, that all of Alice’s asserted claims require a computer system. See Phillips v. AWH Corp., 415 F.3d 1303, 1315-16 (Fed. Cir. 2005) (en banc).  Some claims in the ‘479 Patent did not contain the “electronic adjustment” limitation, but they did  contain the same “shadow credit record” and “shadow debit record” limitations as the ‘510 Patent claims. The specification of the ‘479 Patent, like the ‘510 Patent, supported an understanding that the shadow debit/credit record limitations require computer implementation.  The specification explained that the shadow debit/credit records are electronically stored in a system called “INVENTICO.”

The district court analyzed the method claims under the machine-or-transformation (MOT) test and interpreted the shadow credit and debit records require electronic implementation and a computer.  However, the district court found on summary judgment that the claims were drawn to mere abstract ideas.  The Appeals Court ruled otherwise, reversing the district court, but spilled much link on the issue of abstract ideas and preemption of such ideas.

“Notwithstanding these well intentioned efforts and the great volume of pages in the Federal Reporters treating the abstract ideas exception, the dividing line between inventions that are directed to patent ineligible abstract ideas and those that are not remains elusive. ‘’Put simply, the problem is that no one understands what makes an idea abstract.’  Mark A. Lemley et al., Life After Bilski, 63 Stan. L. Rev. 1315, 1316 (2011).” P. 14.  See also Donald S. Chisum, Weeds and Seeds in the Supreme Court’s Business Method Patent Decision: New Directions for Regulating Patent Scope, 15 Lewis & Clark L. Rev. 11, 14 (2011) (”Because of the vagueness of the concepts of an ‘idea’ and ‘abstract,’ … the Section 101 abstract idea preemption inquiry can lead to subjectively-derived, arbitrary and unpredictable results. This uncertainty does substantial harm to the effective operation of the patent system.”).

“Several decisions have looked to the notion of ‘preemption’ to further elucidate the ‘abstract idea’ exception. In Bilski, the Supreme Court explained that ‘[a]llowing petitioners to patent risk hedging would preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.’ Bilski v. Kappos, 130 S.Ct. 3218, 3231.  Previously, in O’Reilly v. Morse, 56 U.S. 62 (1853), the Supreme Court held that a claim to electromagnetism was not eligible for patent protection because the patentee ‘claim[ed] the exclusive right to every improvement where the motive power is the electric or galvanic current, and the result is the marking or printing intelligible characters, signs, or letters at a distance.’ Id. at 112-13 (emphases added). The Morse Court reasoned that the claim would effectively ‘shut[] the door against inventions of other persons . . . in the properties and powers of electro-magnetism” because “it matters not by what process or machinery the result is accomplished.’ Id. at 113 (emphasis added). Again, in Gottshalk v. Benson, 409 U.S. 64 (1972), the Supreme Court emphasized the concept of ‘preemption,’ holding that a claim directed to a mathematical formula with ‘no substantial practical application except in connection with a digital computer’ was directed to an unpatentable abstract idea because ‘’the patent would wholly preempt the mathematical formula and in practical effect would be a patent on an algorithm itself.’ Id. at 71-72. In Parker v. Flook, 437 U.S. 584 (1978), the Court again emphasized the importance of claims not ‘preempting’ the ‘basic tools of scientific and technological work,’ and further held that mere field of use limitations-there, to the oil refining and petrochemical industries-or the addition of ‘’post-solution’ activity there, adjusting an ‘alarm limit’ according to a claimed mathematical calculation–could not ‘transform an unpatentable principle into a patentable process.’ Id. at 589.”  P. 14-15.

“Thus, the essential concern is not preemption, per se, but the extent to which preemption results in the foreclosure of innovation. Claims that are directed to no more than a fundamental truth and foreclose, rather than foster, future innovation are not directed to patent eligible subject matter under § 101. No one can claim the exclusive right to all future inventions. Morse, 56 U.S. at 112-13; Benson, 409 U.S. at 68.”  P. 16-17.

“[A] claim is drawn to a specific way of doing something with a computer is likely to be patent eligible whereas a claim to nothing more than the idea of doing that thing on a computer may not.  But even with that appreciation, great uncertainty remains, and the core of that uncertainty is the meaning of the ‘abstract idea’ exception.  The claim limitations can be characterized as being integral to the method, as ‘play[ing] a significant part in permitting the method to be performed,’ and as not being token post solution activity. It is clear, moreover, that the limitations requiring specific ‘shadow’ records leave broad room for other methods of using intermediaries to help consummate exchanges, whether with the aid of a computer or otherwise, and, thus, do not appear to preempt much in the way of innovation.”  P. 27.

CLS Bank argued that all of Alice’s claims are directed to the unpatentable concept of ‘exchanging an obligation’ between parties (i.e., effectuating a legal obligation) after an intermediary ensures that there is ‘adequate value’ in independent accounts maintained for the parties to allow the exchange to go forward-in effect, a two-sided escrow arrangement.  See SiRF Tech., Inc. v. Int’l Trade Comm’n, 601 F.3d 1319, 1333 (Fed. Cir. 2010); Gottshalk v. Benson, 409 U.S. 64 (1972), and Parker v. Flook, 437 U.S. 584 (1978)’ CyberSource Corp. v. Retail Decisions, Inc., 654 F.3d 1366, 1375 (Fed. Cir. 2011); and Research Corp. v. Microsoft Corp., 627 F.3d 859, 868-69 (Fed. Cir. 2010).

The Dissent

The dissent took a very high level view of Alice’s invention.  “The basic idea behind the claimed invention is the use of an intermediary in a financial transaction. At its most basic form, in a transaction between parties ‘A’ and ‘B,’ a middle-man collects funds from ‘A’ but will not pass them to ‘B’ until ‘B’ has also performed.”  Dissent opn. p. 4.  The claims chart in the dissent’s opinion arguably greatly over-simplifies the claimed invention.

“The only hint appears where the majority points to the phrase ‘shadow records,’ as if that alone transmutes the abstract idea of the claims into patentable subject matter. Maj. Op. 27. But the claims use ‘shadow’ to simply define an account that is used to track a party’s payments (the account is a shadow of the party’s performance). That is not a limiting feature at all; any financial intermediation would in one way or another use a ‘shadow’ account.” Dissent p. 6; citing Dealertrack, Inc. v. Huber, 674 F.3d 1315, 1331-35 (Fed. Cir. 2012).

Commentary: This case highlights the difficulties in applying the machine or transformation (MOT) test and the abstract idea preemption test to computer methods and systems.  The dissent took a very broad, high level view of the patentee’s invention as noted by the highly truncated, simplified claim chart in its opinion.  The majority drilled down to the claim language and the specification found that the steps of the asserted claims appear to cover the practical application of a business concept in a specific way.  The computer implemented steps include: exchanging obligations, with an exchange institution; maintaining shadow credit and shadow debit records independently of the exchange institution; obtaining start-of-the-day balances; adjusting credit records based on specified allowed transactions; adjusting balances, in chronological order, at the end of the day; and providing instructions to the exchange institution to reflect the adjustments; wherein such adjustments affect irrevocable, time invariant obligations.  The claim limitations can be characterized as being integral to the computer, as “play[ing] a significant part in permitting the method to be performed,” and as not being token post solution activity. The court noted that the limitations requiring specific “shadow records” leave broad room for other methods of using intermediaries to help consummate exchanges, whether with the aid of a computer or otherwise, and, thus, do not appear to preempt much in the way of innovation. It is uncertain if the Supreme Court will review this Federal Circuit decision.

The Federal Circuit Court of Appeals (”Federal Circuit”) reversed the trial court’s decision that the process – a computer method claim – was not statutory subject matter under 35 U.S.C. § 101. Ultramercial, LLC v. Hulu, LLC, Case No. 2010-1544 (Fed. Cir. Sept. 15, 2011) (available here). The 11 step computer program method patent claim was held to be a machine under the “machine or transformation” (MOT) test. Earlier, the District Court had dismissed the patent owner’s case without formally construing the 11 elements in the method patent claim and this failure to properly construe the claim elements in a Markman ruling was a factor in the reversal.

“This court has never set forth a bright line rule requiring district courts to construe claims before determining subject matter eligibility. Indeed, because eligibility is a ‘coarse’ gauge of the suitability of broad subject matter categories for patent protection, Research Corp. Techs., Inc. v. Microsoft Corp., 627 F.3d 859, 869 (Fed. Cir. 2010), claim construction may not always be necessary for a § 101 analysis. See, e.g., Bilski v. Kappos, 130 S. Ct. 3218, 3231 (2010) (finding subject matter ineligible for patent protection without claim construction).” Slip opn. p. 5.

The § 101 subject matter eligibility analysis is merely a threshold check. Claim patentability ultimately depends on “the statutory conditions the patent statute such as novelty, nonobviousness, and adequate disclosure.” See Ultramercial, p. 6; Classen Immunotherapies, Inc. v. Biogen IDEC, Nos. 2006-1634, 2006-1649, 2011 WL 3835409, at *6 (Fed. Cir. Aug. 31, 2011) (pointing out the difference between “the threshold inquiry of patent-eligibility, and the substantive conditions of patentability”).

Per the Federal Circuit, the claimed invention in this case was a method for monetizing and distributing copyrighted products over the Internet. “As a method, it satisfies § 100’s definition of ‘process’ and thus falls within a § 101 category of patent-eligible subject matter. Thus, this court focuses its inquiry on the abstractness of the subject matter claimed by the ’545 patent.” p. 9.

“‘[I]nventions with specific applications or improvements to technologies in the marketplace are not likely to be so abstract that they override the statutory language and framework of the Patent Act.’ Research Corp., 627 F.3d at 869. The ’545 patent [in suit] seeks to remedy problems with prior art banner advertising, such as declining clickthrough rates, by introducing a method of product distribution that forces consumers to view and possibly even interact with advertisements before permitting access to the desired media product. By its terms, the claimed invention purports to improve existing technology in the marketplace. By its terms, the claimed invention invokes computers and applications of computer technology.” P. 9-10 (emphasis added).

The ’545 patent claims a particular method for monetizing copyrighted products, consisting of the following steps: (1) receiving media products from a copyright holder, (2) selecting an advertisement to be associated with each media product, (3) providing said media products for sale on an Internet website, (4) restricting general public access to the media products, (5) offering free access to said media products on the condition that the consumer view the advertising, (6) receiving a request from a consumer to view the advertising, (7) facilitating the display of advertising and any required interaction with the advertising, (8) allowing the consumer access to the associated media product after such display and interaction, if any, (9) recording this transaction in an activity log, and (10) receiving payment from the advertiser. ’545 patent col.8 ll.5-48. Many of these steps are likely to require intricate and complex computer programming. In addition, certain of these steps clearly require specific application to the Internet and a cyber-market environment.

In conclusion, the many claim elements, which constitute the claimed process restrictions of: viewing, restricting, limiting access, displaying and processing payments, satisfy the “machine” portion of the “machine or transformation” (MOT) test.

The Court of Appeals for the Federal Circuit which hears all patent appeals from the U.S. District Courts (the trial courts) recently ruled on whether Research Corporation Technologies’ (“RCT”) patented method of digital halftoning was patentable under 35 U.S.C. § 101 or whether the patent claims are not patentable subject matter as being “laws of nature, physical phenomena or abstract ideas.”  Research Corporation Technologies, Inc. v. Microsoft Corporation, Case No. 2010-1037 (Fed. Cir. December 8, 2010) (available here).  The Federal Circuit reversed the district court’s ruling which had earlier ruled that the patent claims defined non-patentable subject matter under Section 101 as being an abstract idea.

Since a determination of whether or not a patent claim defines non-patentable subject matter hinges on the words in the claim and the associated technology, a brief discussion of these topics is helpful.  Halftoning techniques allow computers to present many shades and color tones with a limited number of pixel colors.  One method of generating a digital halftoned image is called thresholding, which uses an array called a “mask” that is populated with predetermined threshold numbers.  The mask is laid over the image represented by pixel values.  The district court ruled that the following claim 1 in RCT’s ‘310 patent was an abstract idea:

1.  A method for the halftoning of gray scale images by utilizing a pixel-by-pixel comparison of the image against a blue noise mask in which the blue noise mask is comprised of: a random nondeterministic, non-white noise single valued function which is designed to produce visually pleasing dot profiles when thresholded at any level of said gray scale images.

Additionally, the district court held that claim 11 of RCT’s second patent, the ‘228 patent, was an abstract idea:

11. A method for the halftoning of color images, comprising the steps of: utilizing, in turn, a pixel by-pixel comparison of each of a plurality of color planes of said color image against a blue noise mask in which the blue noise mask is comprised of: a random non-deterministic, non-white noise single valued function which is designed to provide visually pleasing dot profiles when thresholded at any level of said color images, wherein a plurality of blue noise masks are separately utilized to perform said pixel-by-pixel comparison and in which at least one of said blue noise masks is independent and uncorrelated with the other blue noise masks.

After the district court ruled on various summary judgment motions, parties stipulated to the invalidity of the claims, filed a written stipulation dismissing the suit on the merits pursuant to the Federal Rules of Civil Procedure Rule 41(a)(1)(A)(ii), and the lower court subsequently granted the stipulation of dismissal.

The Federal Circuit reviews a grant of summary judgment without deference, Liebel-Flarsheim Co. v. Medrad, Inc., 481 F.3d 1371, 1377 (Fed. Cir. 2007), reviews questions about patent-eligible subject matter under 35 U.S.C. § 101 without deference, In re Ferguson, 558 F.3d 1359, 1363 (Fed. Cir. 2009), and reviews without deference whether a patent is entitled to an earlier priority date. Go Med. Indus. Pty, Ltd. v. Inmed Corp., 471 F.3d 1264, 1270 (Fed. Cir. 2006).  The priority date issue involved certain claims in other patents asserted by RCT against Microsoft with an analysis of RCT’s earlier patent and later-filed continuation-in-part (C-I-P) patents (not the subject of this blog article).

The Federal Circuit held that the district court erred in finding that the above-quoted claims of the ‘310 and ‘228 patent were non-patentable abstract ideas.  Section 101 of the Patent Statute defines patentable subject matter as follows:

“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 therefore, subject to the conditions and requirements of this title.”  35 U.S.C. § 101.

The importance of the word “any” in Section 101 was recently emphasized by the U.S. Supreme Court in  Bilski v. Kappos, 130 S. Ct. 3218, 3225 (2010).  In the RCT case, the Federal Circuit citing Bilski stated that “[t]he Supreme Court [has] recently reemphasized the significance of these broad statutory categories with the broadening double [reference to] ‘any’ exhortation” in Section 101.  See  Research Corp. Tech., Inc. v. Microsoft Corp., slip opn. 12.  The Supreme Court in Diamond v. Chakrabarty, 447 U.S. 303, 308 (1980) held that “Congress plainly contemplated that the patent laws would be given wide scope.”

More importantly, the Federal Circuit found that the “section 101 patent-eligibility inquiry is only a threshold test.”  Research Corp., slip opn. 13.   The Federal Circuit then ruled that RCT’s invention in claims 1 and 11 present functional and palpable applications in the field of computer technology.

“In this case, the subject matter is a ‘process’ for rendering a halftone image. As a process, the subject matter qualifies under both the categorical language of section 101 and the process definition in section 100.”  Id. at 14.

“These inventions address ‘a need in the art for a method of and apparatus for the halftone rendering of gray scale images in which a digital data processor is utilized in a simple and precise manner to accomplish the halftone rendering’… Indeed, this court notes that inventions with specific applications or improvements to technologies in the marketplace are not likely to be so abstract that they override the statutory language and framework of the Patent Act…. The Supreme Court has already made abundantly clear that inventions incorporating and relying upon even ‘a well known mathematical equation’ do not lose eligibility because ‘several steps of the process [use that] mathematical equation.’” Slip opn. 15, citing  Diehr, 450 U.S. at 185.

However, in a cautionary note to patent practitioners, the Federal Circuit highlighted the importance of “enablement” language in the patent claim and “particularly describing” the claimed invention as required by 35 U.S.C. § 112.

“In the context of the statute, this court notes that an invention which is not so manifestly abstract as to override the statutory language of section 101 may nonetheless lack sufficient concrete disclosure to warrant a patent. In section 112, the Patent Act provides powerful tools to weed out claims that may present a vague or indefinite disclosure of the invention. Thus, a patent that presents a process sufficient to pass the coarse eligibility filter [of § 101] may nonetheless be invalid as indefinite because the invention would ‘not provide sufficient particularity and clarity to inform skilled artisans of the bounds of the claim.’” slip opn. 16, citing Star Scientific., Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357, 1371 (Fed. Cir. 2008).

In conclusion, the analytic tools to sort out “abstract ideas,” which are not patentable subject matter from “patent eligible” subject matter, are sometimes difficult to identify.

Interim USPTO Examination Instructions For Evaluating Subject Matter Eligibility Under 35 U.S.C. 101 in Light of the Supreme Court Bilski Decision.

The Patent and Trademark Office (“USPTO”) in August 2007 released examination instructions (“Guidelines”) (available here) for patent examiners to implement the U.S. Supreme Court’s decision in Bilski v. Kappos, 130 S. Ct. 3218, 177 L. Ed. 2d 792 (2010) (available here). The Guidelines state there are two criteria for determining subject matter eligibility under the Patent Statute 35 U.S.C. 101. The statute permits an applicant to obtain a patent on “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” Id. The Guidelines state that the claimed invention (1) must be directed to one of the four statutory 101 categories, and (2) must not be wholly directed to subject matter encompassing a judicially recognized exception. The claimed invention is defined in the patent application claims at the end of the patent specification.

Many commentators recognize that the Bilski Supreme Court case did not provide any guidance to what is and what is not patentable under Section 101 (holding that the Bilski claims covered an abstract idea without explaining what are the parameters of an abstract idea). The Guidelines attempt to fill in the blanks on this issue. The Guidelines state that Section 101 is satisfied by a:

i. Process which is an act, or a series of acts or steps that are tied to a particular machine or apparatus or transform a particular article into a different state or thing.
ii. Machine which is a concrete thing, consisting of parts, or of certain devices and combination of devices. This includes every mechanical device or combination of mechanical powers and devices to perform some function and produce a certain effect or result.
iii. Manufacture which is an article produced from raw or prepared materials by giving to these materials new forms, qualities, properties, or combinations, whether by hand labor or by machinery.
iv. Composition of matter which includes all compositions of two or more substances and all composite articles, whether they be the results of chemical union, or of mechanical mixture, or whether they be gases, fluids, powders or solids.

However, certain claims are not directed to one of the statutory 101 categories. Examples of such claims are:

i. Transitory forms of signal transmission (for example, a propagating electrical or electromagnetic signal per se).
ii. A naturally occurring organism.
iii. A human per se.
iv. A legal contractual agreement between two parties.
v. A game defined as a set of rules.
vi. A computer program per se.
vii. A company.

A claim that covers both statutory and non-statutory embodiments (under the broadest interpretation of the claimed invention when read in light of the specification) is not eligible for patent protection and should be rejected under Section 101. As for process claims, when a machine or article is inherently recited in the process claims, but not explicitly recited or required by the claimed method, and the record of the prosecution as a whole does not make clear that the method involves a particular machine or a particular article, “the examiner should identify the inherent machine on the record [and] the record should also be clear as to which step (or steps) invokes the machine or article.” This guidance effectively requires the patent applicant to identify on the record in an amendment or a response to an examiner’s Office Action rejection what is the “machine or transformation” present in the claimed process.

“When a judicially recognized exception is present in the claim, [the examiner should] determine if the claim recites structural limitations for it to qualify as a practical application of the judicial exception. A manmade tangible embodiment with a real world use is evidence of a practical application.” If the claim covers substantially all practical uses of the judicial exception, the patent claim preempts the topic and is not patentable under Section 101. Judicially recognized exceptions to Section 101 are: abstract ideas, mental processes, laws of nature and natural phenomena, and are sometimes further described as physical phenomena, scientific principles, systems that depend on human intelligence alone, disembodied concepts, and disembodied mathematical algorithms and formulas. Per the USPTO, “the exceptions reflect the courts’ view that the basic tools of scientific and technological work are not patentable.”

The USPTO also adopts the machine-or-transformation test (M or T test) proposed by the Federal Circuit Court of Appeals case in Bilski (available  here). “A process claim, to be statutory under § 101, must pass the machine-or-transformation test (M or T test), which ensures that the process is limited to a particular practical application.” To pass the M or T test, the claimed process must: “(1) be tied to a particular machine or apparatus (machine implemented); or (2) particularly transform a particular article to a different state or thing.” The Guidelines include flow charts to assist the patent examiners.

In Buc International Corp. v. International Yacht Council Limited, 489 F.3d 1129 (11th Cir. 2007)(available here), the 11th Circuit Court of Appeals ruled on the scope of copyright protection for a database comprised of yacht listings. Plaintiff BUC compiled a yacht listing service similar to the MLS real estate listing services for home sales. The BUC contract established a license providing that the user-licensee must “not use, sell, distribute, display, or otherwise transfer, any information obtained from the BUC Licensed System to others for any purpose.” Further, the contract provided for the protection of the factual compilation – specifically, the selection, order, and arrangement of information about yachts listed for sale. Defendant International Yacht Council (“IYC”) built a competing yacht listing database after BUC obtained copyright registration certificates.

Interestingly, BUC caught IYC by embedding markers in the BUC yacht listings and, after searching IYC’s site, BUC discovered that IYC’s yacht-MLS presented over 4,400 listings which replicated BUC’s listings.

After losing in the trial court, IYC presented two major points on appeal. First, IYC argued that the selection of data (“headings” or field identifier labels for yacht-boat features), the arrangement of such data and the coordination of the data was not original to BUC. Second, IYC argued that the jury instructions were erroneous in that BUC should be required to prove “identicality” of the two databases, rather than meet the less stringent standard of “substantial similarity” which is the common standard for copyright infringement. The 11th Circuit Court of Appeals disagreed with defendant IYC on both grounds.

In a footnote, the 11th Circuit outlined the various theories of copyright liability, direct, vicarious and contributory, as follows:

Direct copyright infringement arises upon violation of the exclusive rights of a copyright holder under 17 U.S.C. § 501. Even though the Copyright Act does not specifically provide for secondary liability, vicarious and contributory copyright infringement are well established principles derived from common law. Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930–31, 125 S. Ct. 2764, 2776, 162 L. Ed. 2d 781 (2005). Contributory copyright infringement refers to the intentional inducement, causation or material contribution to another’s infringing conduct. Greenberg v. Nat’l Geographic Soc., 244 F.3d 1267, 1271 n.6 (11th Cir. 2001), abrogated on other grounds by, New York Times Co., Inc. v.
Tasini, 533 U.S. 483, 121 S. Ct. 2381, 150 L. Ed. 2d 500 (2001), as recognized by, Greenberg v. Nat’l Geographic Soc., 488 F.3d 1331 (11th Cir. 2007). Liability for vicarious copyright infringement arises “when the defendant profits directly from the infringement and has a right and ability to supervise the direct infringer, even if the defendant initially lacks knowledge of the infringement.” Grokster, 545 U.S. at 931 n.9.
Id. at 1138, Ftnt 19.

As for copyright coverage of databases, the 11th Circuit “held that a compiler’s selection, arrangement and coordination, if original, are the only protectable elements of a factual compilation.” Id. at 1141 (quoting BellSouth Adver. & Publ’g Corp. v. Donnelley Info. Publ’g, Inc., 999 F.2d 1436, 1440 (11th Cir. 1993)(en banc) and citing Feist, 499 U.S. at 348, 111 S. Ct. at 1289)). As for selection of data, the appeals court distinguished between “a creatively original selection of facts” and “the creative means used to discover those facts.” Bell South, 999 F. 2d at 1441. “While the former is protected as an original work of authorship, the latter, i.e., methods used to discover facts and/or collect data, are not. … [and] ‘an alphabetized list of business types, with individual businesses listed in alphabetical order under the applicable headings,’ … [is] not an original coordination and arrangement of facts.” BUC, 489 F. 3d at 1141, quoting Bell South, 999 F. 2d at 1442.

After reviewing the trial evidence, the 11th Circuit found that prior to BUC’s yacht-MLS, there was no standard headers or field identifiers for MLS yacht listings. Also, IYC was not foreclosed from using industry terms like “galley” or “hull.” IYC argued, unsuccessfully, that the idea-merger doctrine precludes copyright protection over BUC’s selection of yacht headers-field identifiers because BUC had expressed the idea of organizing a vessel listing by using standard industry terms. However, the Appeals Court found that many brokers used different headings and organized information in different formats for their vessel listings.

As for the jury instruction, “identicality” vs. “substantial similarity,” the 11th Circuit did not extend the holding in the computer program case of MiTek Holdings, Inc. v. Arce Eng’g Co., 89 F.3d 1548, 1558 n.24 (11th Cir. 1996). See also, Apple Computer v. Microsoft, 35 F.3d 1435 (9th Cir. 1994). In Mitek, the 11th Circuit held that “virtual identicality:”

applies to “claims of compilation copyright infringement of nonliteral elements of a computer program.” MiTek involved a copyright infringement claim for the “selection, coordination, and arrangement embodied in [a computer] program and its user interfaces.” We recognized that “a user interface, [such as] a screen display (itself an audiovisual work), may be entitled to copyright protection as a compilation.” Ultimately, we affirmed the district court’s decision that “virtual identicality” between the two implicated programs was lacking because, in part, one program “depict[ed] its commands as icons in the Windows environment” while the other program displayed them as words. We note that MiTek, while not elaborating on the basis for its adoption of the “virtual identicality” standard, did make clear that its application of the standard was specific to the type of compilation copyright claim in that case, i.e., “claims of compilation copyright infringement of nonliteral elements of a computer program.”
Buc at 1149-50 (citing Mitek at 1558 – 59, and quoting MiTek Holdings, Inc. v. Arce Eng’g Co., 864 F. Supp. 1568, 1584 (S. D. Fla. 1994)).

The 11th Circuit said that BUC was not claiming infringement in the selection or arrangement embodied in a screen display or some other nonliteral element of its computer program. Nor was BUC contending that IYC had copied the overall appearance of the BUC program as viewed on a computer screen. BUC presented the jury with claims for the infringement of the selection, order and arrangement of a factual compilation, not the nonliteral elements of a computer program. “Substantial similarity” was, therefore, the appropriate standard.

BUC also confirms that facts are not subject to copyright protection, only that selection, arrangement and coordination, if original, are protectable elements of a factual compilation. BUC at 1141; see also BellSouth, 999 F.2d at 1440 and Feist, 499 U.S. at 348, 111 S. Ct. at 1289.

On June 28, 2010, the U.S. Supreme Court issued its ruling in the biggest patent case in recent years, Bilski v Kappos. (See  http://www.supremecourt.gov/opinions/09pdf/08-964.pdf).  The case related to the patentability of business methods.  The Supreme Court’s decision encompassed three different opinions with shifting coalitions of Justices joining different aspects of the primary opinion of the Court.  Justice Kennedy delivered the opinion of the Court, except for parts II–B-2 and II-C-2. Justices Roberts, Thomas and Alito agreed with Kennedy’s opinion but Justice Scalia only partly agreed with Kennedy, joining the plurality opinion except for parts II-B-2 and II-C-2. Justice Stevens filed a concurring opinion which was followed by Justices Ginsburg, Breyer, and Sotomayor. Justice Breyer filed his own opinion, concurring in the Court’s judgment, and Scalia joined Breyer only for Part II of Breyer’s opinion.  It is fair to state that the Court’s thoughts on this topic are not well settled and that future guidance will be needed.

Briefly, the Court affirmed the Federal Circuit Court of Appeals decision (see http://www.cafc.uscourts.gov/opinions/07-1130.pdf) which held that the Bilski patent claims were not patentable subject matter.  Five members of the Court agreed with the following holding by Justice Kennedy:

“Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis of this Court’s decisions in Benson, Flook, and Diehr, which show that petitioners’ claims are not patentable processes because they are attempts to patent abstract ideas.” slip opn. 13.

Further study is needed to understand the full scope of the Bilski opinion.  However for the time being, it is clear that the following Bilski business method software patent claims are NOT patentable subject matter:

“[M]anaging the consumption risk costs of a commodity sold by a commodity provider at a fixed price, [which consists of] (a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity ata fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumers; (b) identifying market participants for said commodity having a counter-risk position to said consumers; and (c) initiating a series of transactions between said commodity provider and said market participants at asecond fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.” Id., J. Stevens concurring slip opn. 3.

A more through analysis will follow.