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 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.