Federal Circuit Creates More Uncertainty with Latest Patent Eligible Subject Matter Decision | Practical Law

Federal Circuit Creates More Uncertainty with Latest Patent Eligible Subject Matter Decision | Practical Law

On July 9, 2012, the US Court of Appeals for the Federal Circuit decided CLS Bank v. Alice Corp. This decision allows district courts to sidestep patent challenges based on patent eligible subject matter in favor of other patent validity challeges. The decision also prevents a computer related invention from being invalidated under Section 101 unless it is manifestly evident that the patent claims are directed to an abstract idea.

Federal Circuit Creates More Uncertainty with Latest Patent Eligible Subject Matter Decision

by PLC Intellectual Property and Technology
Published on 09 Jul 2012 • USA (National/Federal)
On July 9, 2012, the US Court of Appeals for the Federal Circuit decided CLS Bank v. Alice Corp. This decision allows district courts to sidestep patent challenges based on patent eligible subject matter in favor of other patent validity challeges. The decision also prevents a computer related invention from being invalidated under Section 101 unless it is manifestly evident that the patent claims are directed to an abstract idea.

Key Litigated Issue

The key litigated issue was whether a computer implemented invention was eligible for patent protection under Section 101 of the Patent Act or was an abstract idea that is not patent eligible subject matter.

Background

The patents-in-suit cover a computerized trading platform for exchanging obligations where a trusted third party settles obligations between two parties to eliminate the risk that only one party's obligations will be paid. For example, in certain financial contexts, two parties may wish to exchange large sums of currency. The parties typically agree to make the exchange but postpone the actual exchange until the price is set and the agreement is confirmed. However, at settlement time, one party may no longer have enough money to satisfy its obligations to the other party. To eliminate this risk, the third party acts as an intermediary and does not exchange the parties' obligations if one party cannot meet its obligation but will exchange both parties' obligations when the two parties can meet their obligations.
CLS Bank International and CLS Services Ltd. (CLS Bank) filed suit against Alice Corp. (Alice) seeking a declaratory judgment that the patents-in-suit are invalid, unenforceable or otherwise not infringed. Alice filed a counterclaim alleging that CLS Bank infringes certain claims of the patents-in-suit. The parties thereafter cross-moved for summary judgment. The US District Court for the District of Columbia ultimately granted CLS Bank's motion for summary judgment and denied Alice's cross-motion holding that the asserted claims are invalid for failure to claim patent eligible subject matter.

Outcome

A divided panel of the Federal Circuit reversed the district court in a decision published on July 9, 2012.

Majority Opinion

Circuit Judge Linn, writing for the majority, joined by Circuit Judge O'Malley, began the analysis by noting that:
  • District courts have great discretion in controlling the conduct of trials, including the presentation of issues and evidence and the sequence of events leading up to judgment.
  • Section 101 need not always be addressed first, especially where other patent validity challenges may resolve a dispute faster or with more clarity or predictability.
Turning to the Section 101 analysis, the majority acknowledged that:
  • Uncertainty surrounds the scope of patent eligible subject matter for computer related inventions.
  • The meaning of the abstract ideas exception to patent eligible subject matter is the basis for this uncertainty.
The majority cautioned against too broad an interpretation of the exceptions to Section 101 because at some level all inventions embody laws of nature, natural phenomena or abstract ideas. Therefore, it is improper to paraphrase a claim in overly simplistic generalities in determining whether the claims are merely abstract ideas. Instead patent eligibility must be evaluated based on the actual claim limitations.
In the context of computer related inventions, the majority noted that where the addition of a machine imposes a meaningful limit on the scope of a claim and plays a significant part in permitting the claimed method to be performed, rather than functioning solely as an obvious mechanism for permitting a solution to be achieved more quickly, the claim recites patent eligible subject matter. Furthermore, a claim drawn to a specific way of doing something with a computer is likely to be patent eligible while a clam directed to the idea of doing that thing on a computer may not.
Based on this premise, the majority held that when, after considering all of the claim limitations, it is not manifestly evident that a claim is directed to a patent ineligible abstract idea, that claim must not be deemed to be invalid under Section 101.
In applying its new rule and reversing the district court, the majority noted that it was difficult in this case to conclude either that:
  • The computer limitations in the asserted claims do not play a significant part in the performance of the invention.
  • The claims are not limited to a very specific application of the concept of using an intermediary to help consummate exchanges between parties.
As a result, the majority concluded that the asserted claims:
  • Appear to cover the practical application of a business concept in a specific way.
  • Leave room for other methods of using intermediaries to help consummate exchanges, whether with the aid of a computer or otherwise and do not appear to preempt much in the way of innovation.

Dissenting Opinion

Circuit Judge Prost dissented because the majority decision:
  • Does not apply the patentable subject matter test with vigor and in fact is contrary to the Supreme Court's directive in Mayo Collaborative Services v. Prometheus Laboratories, Inc. that an analysis under Sections 102, 103 and 112 of the Patent Act does not substitute for an inquiry into patent eligible subject matter under Section 101.
  • Is inconsistent with previous cases where the court held that certain similar computer implemented claims were not directed to patent eligible subject matter and will cause district courts and litigants to face the difficult task of deciphering the law and harmonizing precedent.

Practical Implications

This case is noteworthy because:
  • District courts may now exercise their discretion in deciding when to address validity challenges and may sidestep challenges based on patent eligible subject matter under Section 101, especially where the district court determines that other validity challenges may resolve a dispute faster or with more clarity or predictability.
  • Patent eligible subject matter is now determined by whether it is manifestly evident that the claims recite only an abstract idea.
The determination of patent eligible subject matter for computer related inventions is just as challenging today as it was before the Supreme Court's decision in Bilski v. Kappos. And, despite the Supreme Court's decision in Mayo Collaborative Services, the Federal Circuit's decision will allow district courts to sidestep a Section 101 analysis.
Update: On October 9, 2012, the Federal Circuit granted CLS Bank’s petition for rehearing en banc, vacated its July 9, 2012 opinion and reinstated the appeal.

Court Documents