The full impact of the Alice decision will be apparent after lower courts further explore the contours of patent-eligible subject matter.

On June 19, 2014, the U.S. Supreme Court issued a ruling in a prominent patent case regarding subject matter that is not eligible for patent protection. In Alice Corp. Pty. Ltd. v. CLS Bank International,¹ Justice Thomas delivered the opinion for a unanimous Court that affirmed the Federal Circuit and held that Alice Corporation's patent claims directed to a computer-implemented scheme for mitigating settlement risk are drawn to a patent-ineligible abstract idea.

The Supreme Court did not broadly declare that computer-implemented or software-directed patent claims as a general category are unpatentable. Rather, the Court applied the Mayo² test to the details of the specific claims at issue and found the claims to be patent-ineligible on that basis. In that regard, the Court's decision in Alice is not significantly different than the earlier Bilski case,³ which also found claims (directed to hedging of financial risk) to be patent-ineligible. The full impact of the Alice decision will be apparent after lower courts further explore the contours of patent-eligible subject matter. Justice Thomas' opinion in Alice yields insights into the relevant analytical framework.

The claims at issue in this case

The patent claims at issue in this case⁴ are designed to facilitate the exchange of financial obligations between parties by using a computerized intermediary. Specifically, the claims are designed to mitigate a type of risk known as settlement risk—the risk that one of the parties will not perform as it is obligated to do regarding an agreed-upon exchange. According to the patent claims in this case, at the end of a day, the settlement intermediary instructs financial institutions to perform certain financial transactions based on "shadow" records that were maintained and updated earlier in the day. Because the shadow records are used to filter out transactions for which a party does not have sufficient resources to meet its obligations, settlement risk is mitigated.

The Court noted that the parties had stipulated that the method claims at issue in this case require the use of a computer, and that the other claims expressly recite a computer. However, the requirement of using a computer did not save the claims. Rather, the Court applied the two-part Mayo test to determine if the claims are directed to patent-eligible subject matter.

Application of the two-part Mayo test

The Court recalled that the section of the patent statute that defines the subject matter eligible for patent protection, 35 U.S.C. § 101,⁵ contains an implicit exception for laws of nature, natural phenomena and abstract ideas. Applying the first part of the Mayo test, the Court considered whether the claims in this case are directed to one of those patent-ineligible concepts. The Court found that the claims are directed to the idea of intermediated settlement, which is "a fundamental economic practice long prevalent in our system of commerce” and a “building block of the modern economy."⁶ Accordingly, the Court concluded that intermediated settlement is an abstract idea.

As the second part of the analysis under the Mayo framework, the Court considered whether the elements of the claims at issue, considered both individually and as ordered combinations, transform the nature of the claims from an abstract idea into a patent-eligible application of the abstract idea. The Court analyzed a representative method claim⁷ and found that it simply involves implementing the abstract idea of intermediated settlement on a generic computer. Taking the elements of that claim separately, the Court determined that the function performed at each step of the method is "purely conventional."⁸ The Court also found that viewed as a whole, the method claims simply involve performing the concept of intermediated settlement by a generic computer, which is insufficient to transform the abstract idea into a patent-eligible invention. Thus, based on the Mayo test, the Court found that the method claims at issue are invalid under § 101.

The computer-readable medium claims and system claims

Because Alice Corporation had conceded during the litigation that its claims directed to a computer-readable medium (with program code for causing a computer to perform steps like the claimed method steps) rise or fall under § 101 with the method claims, the computer-readable medium claims fell as well. Finally, the Court found that the system claims in the patents at issue are no different in substance from the method claims because the system claims recite generic computer components configured to implement the same abstract idea. Thus, the Court affirmed the Federal Circuit's ruling and found all the claims in the patents at issue to be invalid under § 101.

Lessons from the Supreme Court's analysis

Although no cases have yet applied or cited the Alice ruling, some insights into the topic of patent-eligible subject matter may be discerned from Justice Thomas' opinion:

• The Court explained how to determine patent eligibility based on the Mayo test. Based on the Court's decision in Alice, lower courts may be inclined to scrutinize particularly carefully claims that are financially or economically oriented, such as claims directed to intermediated settlement (as in the Alice case) or hedging of financial risk (as in the Bilski case, which the Court in Alice cited regarding another example of a patent-ineligible abstract idea).
• Courts are likely to find that method claims that merely involve implementing an abstract idea on a "generic computer" run afoul of the second part of the Mayo test. Because the Supreme Court did not bar claims directed to computer-implemented or software-implemented inventions entirely⁹ but rather considered the specific details of Alice Corporation's method claims, courts may still find that claims reciting special-purpose components or hardware (e.g., specialized computer memories, graphics units, communications components, specialized mechanical tools, etc.) are patent-eligible.
• The Supreme Court's analysis of whether steps of a method claim are "purely conventional" arguably conflates the inquiry under § 101 (patent eligibility) with the inquiries under §§ 102 (novelty) and 103 (obviousness) to some extent. Lower courts will likely follow the same approach until the Supreme Court provides different guidance, which is unlikely to occur in the near future.
• In Alice, the invalidated claims at issue involve a computer performing mathematical operations such as additions and subtractions. Claims involving more complex operations and more sophisticated technology, including operations or sequences of operations that cannot arguably be performed easily by a human equipped with a pencil and paper, may receive a different outcome in the courts under § 101.
• Courts are likely to focus on substance, not form, for patent eligibility determinations. For example, courts are likely to find that a claim directed to a computer-readable medium containing instructions for performing a method rises and falls under § 101 with a corresponding claim directed to the method. Similarly, courts are likely to focus on the substance of system claims rather than the mere fact that the claims are directed to a system. The ruling in Alice recalled an earlier comment by the Supreme Court warning against "interpreting § 101 in ways that make patent eligibility depend simply on the draftsman's art."¹⁰

For Further Information

If you have any questions about this Alert, please contact Arvind Jairam, Rodney R. Sweetland III, Patrick D. McPherson, any member of the Intellectual Property Practice Group or any attorney in the firm with whom you are in regular contact.

Notes

1. Alice Corporation Pty. Ltd. v. CLS Bank International, No. 13-298 (2014) (Slip Opinion available at http://www.supremecourt.gov/opinions/13pdf/13-298_7lh8.pdf).
2. Mayo Collaborative Services v. Prometheus Laboratories, Inc., No. 10-1150 (2012) (Slip Opinion available at http://www.supremecourt.gov/opinions/11pdf/10-1150.pdf).
3. Bilski v. Kappos, 561 U.S. 593 (2010) (Supreme Court found claims directed to hedging of financial risk invalid under § 101).
4. The parties agreed that claim 33 of the '479 patent is representative of the method claims of the four patents at issue in the case (U.S. Patent Nos. 5,970,479, 6,912,510, 7149,720, and 7,725,375): Claim 33 recites:

   "33. A method of exchanging obligations as between parties, each party holding a credit record and a debit record with an exchange institution, the credit records and debit records for exchange of predetermined obligations, the method comprising the steps of:
   (a) creating a shadow credit record and a shadow debit record for each stakeholder party to be held independently by a supervisory institution from the exchange institutions;
   (b) obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;
   (c) for every transaction resulting in an exchange obligation, the supervisory institution adjusting each respective party's shadow credit record or shadow debit record, allowing only these transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order; and
   (d) at the end-of-day, the supervisory institution instructing ones of the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions."

5. 35 U.S.C. § 101 available at http://www.law.cornell.edu/uscode/text/35/101.
6. Alice, Slip Op. at 9 (internal citation omitted).
7. The Court analyzed claim 33 of U.S. Patent No. 5,970,479, which the parties agreed is representative of the method claims of the patents at issue. See Alice, Slip Op. at 2.
8. Id. at 15 (internal citation omitted).
9. Justice Sotomayor, in a concurrence joined by Justices Ginsburg and Breyer, would have disqualified under § 101 any "claim that merely describes a method of doing business," but the unanimous Court did not reach that view.
10. Alice, Slip Op. at 16.

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