Alice v CLS Bank: Are Business Methods Mere Abstract Ideas in U.S. Patent Law?
On 19th June 2014 the US Supreme Court handed down an eagerly anticipated judgment in the case of Alice Corp. v CLS Bank International (Ruling 13-298). The Alice patents, directed to a computer-implemented financial settlement system, were found to be excluded from patentability as an abstract idea. Implementing the business method on computer hardware does not avoid the exclusion. The scope of the decision is sufficiently narrow that it is unlikely to adversely impact upon software patent-eligibility where there is a genuine underlying technical innovation. However, patents for business methods in the US are likely to be more difficult to obtain and enforce following this decision, bringing the US into closer alignment with European patent law.
To date the US has been more liberal than Europe in granting patents in the field of business innovations. In Europe, there is a statutory exclusion from patentability of computer programs and of business methods “as such”. Despite these exclusions, computer programs are in fact patentable in Europe if they provide, for example: a further technical effect in the computer itself, such as an increase in speed or reliability of the computer.
By way of contrast, in the US there is no statutory exclusion from patentability of either computer programs or business methods. In the US the claimed invention must, firstly, be directed to one of the four statutory categories of 35 U.S.C. § 101, and, secondly, must not be wholly directed to subject matter encompassing a judicially recognized exception. Quoting from 35 U.S.C. § 101:
“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.”
Thus the four statutory categories are: process, machine, manufacture, or composition of matter. The recognized judicial exceptionsare: (i) laws of nature; (ii) physical phenomena; and (iii) abstract ideas. The Alice v CLS Bank Supreme Court case focuses on how the “abstract ideas” judicial exception should be implemented by the Courts and United States Patent and Trademarks Office (USPTO).
The State Street decision of the Court of Appeals for the Federal Circuit (1998), expanded the scope of patentable subject matter in the US to include business methods, by explicitly stating that, for the purposes of patentability, they should be treated the same as any other process or method provided that the business method produces “a useful, concrete and tangible result”. The tangible result did not have to be technical and could be, for example, a share price. Following State Street, the USPTO received a deluge of patent applications directed to business methods. The number of lawsuits involving software patents also rose sharply following State Street.
The Supreme Court decision in “Bilski” (2010) concerned a process for initiating a series of commodity transactions including identifying market participants with a counter risk position. The Court of Appeals for the Federal Circuit in Bilski (2008) discarded the tangible result test of State Street and decided that the “machine-or-transformation test” was the sole relevant test for determining patent eligibility of a process claim under 35 U.S.C. § 101. Under this test the applicant can demonstrate that the claim satisfies 35 U.S.C. § 101 by showing that either: (i) the claim is tied to a particular machine; or (ii) the claim transforms an article. In June 2010, the Supreme Court ruled unanimously on Bilski in reviewing the Federal Circuit’s decision, finding the patent claims ineligible under 35 U.S.C. § 101 because they related to abstract ideas. The Supreme Court held that the machine-or-transformation test is not the sole test for determining patentability of a process, but merely provides an “important clue” for determining whether or not some claimed inventions qualify as processes under 35 U.S.C. § 101. The Supreme Court decided by a narrow 5-4 majority that business method patents are not categorically excluded from the ordinary meaning of method under patent law.
The Mayo v Prometheus Supreme court decision (2012) referred back to a statement in Bilski whereby “prohibition against patenting abstract ideas cannot be circumvented by attempting to limit the use of the formula to a particular technological environment”.
Alice v CLS Bank: case-specific background
Alice, an Australian company, is the Assignee of four related patents covering a computerized trading platform used for conducting financial transactions in which a third party settles obligations between a first and a second party to eliminate “settlement” risk.
The four Alice patents comprise between them independent claims to: a method; a data processing system including a computer and a data storage unit; and computer-readable media containing program code.
The issuance of the four US patents contrasts with the prosecution of the equivalent patent applications in Europe which were refused by the EPO at first instance as relating to excluded subject-matter and representing business solutions rather than technical solutions. Appeals were filed at the EPO, but were subsequently dropped.
In the US, litigation commenced with CLS Bank challenging the validity of the Alice patents and at first instance the District Court for the District of Columbia decided that each of the asserted claims of the four Alice patents was invalid for not claiming patent-eligible subject-matter. The Court of Appeals for the Federal Circuit (CAFC) subsequently reversed the district court decision and then granted an en banc rehearing at CAFC at the request of CLS Bank.
The en banc Federal Circuit decision a majority of the court affirmed the district court’s holding that the asserted method and computer-readable media claims were not patent eligible subject-matter under 35 U.S.C. § 101, whereas the court was evenly split in affirming the district court’s holding that the asserted system claims were not directed to patent eligible subject-matter.
Alice v CLS Bank: in the Supreme Court
The Supreme Court in the Alice v CLS Bank case considered: “Whether claims to computer-implemented inventions – including claims to systems and machines, processes, and items of manufacture – are directed to patent-eligible subject matter within the meaning of 35 U.S.C. § 101 as interpreted by this Court.”
Although the case concerns claims directed to management of settlement risk, perhaps akin to hedging (like Bilski), the asserted claims include claims to a data processing system and to a computer program on a computer-readable storage medium as well as claims to a method. It is more difficult to equate a data processing system with the “abstract idea” category of judicial exception to patent-eligibility than it is to assign a method claim to this category.
In Bilski, the Supreme Court decided that hedging was an abstract idea, but Bilski dealt with method claims only whereas the Alice patents also included claims to a data processing system and a computer-readable medium.
The Alice v CLS Bank case before the Supreme Court has generated heated debate, with a barrage of briefs being filed in support of Alice, in support of CLS Bank and in support of neither party by entities including multi-national corporations, trade bodies and law professors.
The Supreme Court decided in favour of CLS Bank, concluding that the substance of the claimed invention should prevail over the form of the claim and observing that the concept of patentable subject matter under 35 U.S.C. § 101 is not “like a nose of wax which may be turned and twisted in any direction…”. Thus the method claim, the system claim and the computer-readable media claims were all considered to be patent ineligible under 35 U.S.C. § 101. The Alice method claims were found to do no more than instruct a practitioner to implement the abstract idea of “intermediated settlement” on a generic computer. The system and media claims were found to add nothing of substance to the underlying abstract idea.
Those in the technical community who have argued that software patents inhibit innovation and have called for them to be eliminated will likely be disappointed by the Supreme Court decision in Alice v CLS Bank, because the decision clearly indicates that computer-implemented inventions that have a sufficient “inventive concept” to “transform” a claimed abstract idea into a patent-eligible application will not be excluded from patentability under 35 U.S.C. § 101.
Many were looking to the Supreme Court to provide a “bright line test” for 35 U.S.C. § 101, which could be easily followed by the lower courts and the USPTO to provide more predictable outcomes. There were fears that questions concerning the patent eligibility of even the most technologically innovative software were being raised as a consequence of the unworkability of the abstract idea doctrine. The Supreme Court applied a test to the claims at issue in Alice v CLS Bank by applying the 35 U.S.C. § 101 abstract ideas exception to patentability as follows (following Mayo):
(a) Distinguish patents that claim the building blocks of human ingenuity, which are ineligible for patent protection, from those that integrate the building blocks into something more thereby transforming them into something patent eligible;
(b) If the claims at issue are directed to a patent-ineligible concept then determine whether or not the claim’s elements, considered both individually and as an ordered combination, transform the nature of the claim into a patent-eligible application.
Applying this test specifically to the Alice method claims, the Supreme Court reasoned that the claims were directed to the use of a third party to mitigate settlement risk analogous to the risk hedging in Bilski and thus related to an abstract idea. Furthermore, requiring generic computer implementation in the method claims failed to transform the abstract idea into a patent-eligible invention. Thus it would seem that the machine-or-transformation test of Bilski is still relevant as guidance for 35 U.S.C. § 101 patent eligibility.
It was noted that the Alice method claims did not “purport to improve the functioning of the computer itself….nor do they effect any improvement in any other technology or technical field”. The Supreme Court also referred specifically to the Supreme Court Diehr decision of 1981, where a computer-implemented process for curing rubber was found to be patent-eligible, not because it involved a computer, but because the well-known mathematical equation (abstract idea) was used to solve a technological problem in conventional industry practice. These lines of reasoning explaining which categories of computer-implemented inventions evade exclusion from patentability as abstract ideas seem to parallel the analysis currently applied by the European Patent Office to excluded subject-matter, where the assessment is mainly performed on the basis of inventive step.
The prevalence of so-called “patent trolls” and the high cost of patent litigation has been a source of concern in the technical community, leading to a call by some sectors for stricter criteria to be applied by the USPTO in granting patents for software in general. The smartphone “patent wars” have also drawn attention to how powerful patents can be when used offensively as weapons against competitors in the battle for increased market share. The fact that it has been easier to obtain patent protection for business methods in the US (following State Street) than in Europe and the perceived high risk of unreasonable patent infringement actions can be a disincentive to European start-ups entering the US market.
It seems likely that the Alice v CLS Bank Supreme Court decision could result in it being more difficult to obtain patent protection for business methods in the US going forward by reinforcing the position taken in Bilski whereby any claim that merely describes a method of doing business does not qualify as a process under 35 U.S.C. § 101. Alice v CLS Bank adds that method, system and medium claims rise and fall together.
Although the full implications of the Alice v CLS Bank decision for US patent practice remain to be seen, it could give rise to a restriction on grant and enforcement of business method patents. This would be good news to those calling for a drive to improve patent quality to reduce the likelihood of unduly broad patents threatening innovation. The fact that the Decision does not preclude software patents in general, but is narrowly focused on business methods leaves room for truly technologically innovative software to remain patent-eligible. Thus new and non-obvious high level functionality implemented in software products can continue to be safeguarded by the patent system against unwanted copying by competitors. This should encourage continuing corporate investment in software innovation.
Diamond v. Chakrabarty, 447 U.S. 303, 309, 206 USPQ 193, 197 (1980)
United States Supreme Court in Bilski v. Kappos, No. 08-964 (June 28, 2010)
State Street Bank and Trust Company v. Signature Financial Group, Inc., 149 F. 3d 1368 (Fed. Cir. 1998).
Diamond v. Diehr, 450 U.S. 175 (1981)
United States Supreme Court in Mayo Collaborative Svcs. v. Prometheus Labs, No. 10-1150 (2012)