CLS Bank v. Alice Corp: Patenting Software Ideas

By Dennis Crouch

"Settlement risk" is real in almost every transaction. When a lawyer does legal work, how does she know that she'll get paid. Conversely, if a client pays up-front, how does he know that the work will actually be performed. There is always a possibility of filing a lawsuit to demand fulfillment. However, most businesses would prefer a system that better guarantees a more immediate positive result. A trusted (and bonded) escrow agent can help relieve the problem, but even an escrow agent needs assurances. Further, in the age of electronic funding of transactions, we should be able to take advantage of features of a computer network that might not have been available in an offline world.

The recent Federal Circuit decision in CLS Bank v. Alice Corp. focuses on the subject matter eligibility of Alice's claim to a computer system for assisting with closing financial transactions in a way that avoids settlement risk. The system includes two elements: (1) data storage with various "shadow" variables stored therein; and (2) a computer that is programmed to conduct the transaction. Basically, the transaction is initially conducted in the shadow (i.e., mock) system and then, if the shadow system shows that the parties have sufficient funds to conduct the transaction, post the obligation to the real exchange institution.

The claim reads as follows:

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

a data storage unit having stored therein information about a shadow credit record and shadow debit record for a party, independent from a credit record and debit record maintained by an exchange institution; and

a computer, coupled to said data storage unit, that is configured to (a) receive a transaction; (b) electronically adjust said shadow credit record and/or said shadow debit record in order to effect an exchange obligation arising from said transaction, allowing only those transactions that do not result in a value of said shadow debit record being less than a value of said shadow credit record; and (c) generate an instruction to said exchange institution at the end of a period of time to adjust said credit record and/or said debit record in accordance with the adjustment of said shadow credit record and/or said shadow debit record, wherein said instruction being an irrevocable, time invariant obligation placed on said exchange institution.

The district court initially ruled that the patent claim lacked subject matter eligibility. I wrote about that decision in a 2011 post entitled Bilski Applied to Invalidate Computer System Claims. In 2012, a divided Court of Appeals for the Federal Circuit revered – holding that that, when considered as a whole, the claim is patent eligible. Judge Linn wrote the majority opinion that was joined by Judge O'Malley. In many ways, Judge Linn's opinion follows the advice that Professor Rob Merges and I gave in our paper titled Operating Efficiently Post-Bilski by Ordering Patent Doctrine Decision-Making. Judge Linn's approach is to only reach Section 101 issues when subject matter ineligibility is "manifestly evident". Judge Prost wrote in dissent and argued that the majority improperly ignored the Supreme Court's most recent statements on the topic found in Prometheus. Professor Jason Rantanen wrote a nice post on the Federal Circuit decision titled CLS Bank v. Alice: The "Nothing More Than" Limitation on Abstract Ideas.

When I consider this claim, a few thoughts arise:

  1. This is a system claim rather than a method claim. However, the structure of the claim is such that the system is designed around the method that it is intended to perform. This makes me think that the teaching of Bilski and Mayo v. Prometheus cannot be ignored here even though those cases were focused on the eligibility of method claims.
  2. The claim requires computer hardware as an integral portion of the invention. However, the particularly claimed computer hardware is entirely conventional and being used in an unsurprisingly conventional manner. Further, if we relax the claim requirements of a computer and "electronic" communications then this same transaction could be fully conducted offline with paper as the data storage unit and contracts creating the time invariant obligation.
  3. Use of the system does not require any physical transformation recognized by the courts (unless you interpret the claim to be limited to only include data storage units that work by physical transformation). The claim does require changes in bank account values and legal obligations, but those have not traditionally been seen as qualifying transformations in the patent eligibility context.
  4. Finally, and most importantly for me, the invention is designed to solve a particular problem in industry and claims a system that operates by performing a series of identified steps to address that particular problem.

Many of you know that, in my view, the Supreme Court precedent on subject matter eligibility has not been internally reconciled. That ongoing precedential conflict coupled with the fuzziness of boundary lines continue to fuel debate on the topic both within and outside of the courthouse. On balance, both sides of this debate have strong arguments based upon patent law history and precedent and I can understand why someone versed in Supreme Court patent eligibility precedent could end up with a conclusion on either side.

Despite the Federal Circuit opinion, this case has not gone away. In recent days, the accused infringer (CLS Bank) has filed a request for rehearing and that request is supported by three amicus briefs. CLS Bank's main point in its brief is that the CLS Bank computer system claim is unpatentable when fully analyzed against Bilski and Prometheus. The brief asks two questions:

  1. Whether the new test for patent-eligibility articulated by the panel majority is inconsistent with Bilski's and Mayo's approach to 35 U.S.C. § 101; and
  2. Whether the method, system, and media claims at issue are patent ineligible because, albeit computer-implemented, they recite no more than an abstract fundamental mechanism of financial intermediation with no inventive concept.

The CLS Bank brief was filed by Mark Perry and his team at Gibson Dunn in DC. This is a change from the Kaye Scholer firm that represented CLS Bank at the district court and in the original appeal.

An amicus brief filed on behalf of a diverse group of five companies including British Airways and LinkedIN (and who all tend to be defendants in patent cases) spelled out how the "course filter" approach used by Judge Linn went against both recent and old Supreme Court precedent. That brief asks two additional questions:

  1. Should courts enforce the patent eligibility requirement evenhandedly without imposing a "manifestly evident" or "coarse filter" hurdle on the patent challenger?
  2. Is patent eligibility a threshold requirement well suited for decision on the pleadings and on early summary judgment?

John Vandenberg of Klarquist Sparkman filed the BA/LinkedIN brief.

Daryl Joseffer of King & Spalding filed a second amicus brief on behalf of Google, HP, Red Hat and Twitter. The brief explains how Mayo identifies four "guideposts" for determining whether an invention lacks subject matter eligibility under the prohibitions of abstract ideas and laws of nature. The four clues all begin with the notion that a patentable invention must be "significantly more than an abstract idea." Thus, if you begin with an abstract idea, "(1) adding steps that are conventional or obvious is insufficient to confer patentable subject matter (Mayo at 1294, 1298, 1299); (2) adding steps that are so general and non-specific that they do not significantly limit the claim's scope is insufficient (id. at 1300, 1302); (3) limiting an idea to a particular technological environment is insufficient (id. at 1294, 1297); and (4) claims that fail the machine-or-transformation test are likewise dubious (id. at 1296, 1303). Explaining the first point, the brief argues that a claim must contain an "inventive concept" apart from the identified law of nature or abstract idea.

The EFF brief filed by Julie Samuel reminds the court of the extensive literature concluding that software patents are bad – especially when in the hands of "patent trolls."

The patentee's responsive brief is due later this month.

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At least two additional software patent cases are pending at the Federal Circuit. In Bancorp v. Sun Life, a different panel of Federal Circuit judges considered software patents similar to those in CLS Bank but found the claims ineligible under Section 101. In WildTangent v. Ultramercial, the Federal Circuit initially ruled that patented method of distributing copyrighted media was eligible. However, that case was vacated and remanded by the Supreme Court following its decision in Mayo and with instructions to reconsider the holding based upon the new Supreme Court precedent. WildTangent has also requested an en banc hearing. WildTangent's petition asks: "When does a patent's reference to the use of a general purpose computer or an Internet website transform an otherwise unpatentable abstract concept into a process that satisfies the subject-matter eligibility requirement of 35 U.S. C. § 101?" Arguing from the other side (asking for its patent to be revalidated), Bancorp identifies the conflict with CLS Bank and argues that the "manifestly abstract" standard should be applied to its case.

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Judge Linn, author of the CLS Bank decision has announced his move to Senior Status in November 2012. Senior judges ordinarily do not decide whether to hear cases en banc and do not sit en banc. The one significant exception to that rule is that a senior judge will be a part of the en banc panel if that judge was a part of the original panel that heard the case. For this particular contentious issue, Judge Linn's status may well impact the results.

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Counting votes is always difficult and may not be worthwhile, but I pulled-up seven recent software patent eligibility decisions and classified the results based upon how the various panel member voted on the eligibility question. If I leave out judges Schall and Plager (Senior judges), the result is that three of the judges sit on the "claims eligible" side (Chief Judge Rader and Judges O'Malley and Newman); five of the judges are on the "claims ineligible" side (Judges Prost, Bryson, Dyk, Moore, and Wallach); two have decisions on both sides (Judges Linn and Lourie); and one is not in my sample (Judge Reyna).

Case

Claims Eligible

Claims Ineligible

WildTangent

Rader, Lourie, O'Malley

 

CLS Bank

Linn, O'Malley

Prost

Bancorp

 

Lourie, Prost, Wallach

RCT v. Microsoft

Rader, Newman, Plager

 

Cybersource

 

Bryson, Dyk, Prost

Dealtracker*

Plager

Linn, Dyk

Fort Properties

 

Prost, Schall, Moore