Sheppard Mullin Richter & Hampton LLP: Federal Circuit Declines to Adopt Test for Patent Eligibility Set Forth in CLS Bank

By Martin Bader and Matthew M. Mueller

A three judge panel (Lourie*, Prost, Wallach) of the Federal Circuit recently handed down the Federal Circuit's second decision in a month on patent eligibility under 35 U.S.C. §101. In a unanimous decision, the court in Bancorp Services, L.L.C. v. Sun Life Assurance Company of Canada (U.S.) (No. 2011-1467) (Slip. Op.) [enhanced version available to lexis.com subscribers] upheld the district court determination that two patents using a computer to manage life insurance policies are drawn to patent ineligible subject matter. Id. at 3. Rather than following the "manifestly evident" standard set forth less than three weeks earlier by a separate panel of the Federal Circuit in CLS Bank International v. Alice Corporation (No. 2011-1301) [enhanced version available to lexis.com subscribers] (see CLS Bank: The patent eligibility of computerized trading platforms for exchanging obligations), the court relied on whether the computer used in the process was "integral" to the claimed invention in a way that a person making calculations would not be able to facilitate the process. Notably, Judge Prost in this panel was the voice of dissent in CLS Bank

The Bancorp patents have identical specifications and contain system, method, and media claims pertaining to a "computerized means for tracking the book value and market value" of life insurance policies and "calculating the credits representing the amount the stable value protected writer must guarantee and pay should the policy be paid out prematurely." The court agreed with the district court's determination that all of the claims should be analyzed in the same manner, regardless of the class of the claims. Claim 9 of U.S. Patent No. 5,926,792 is representative of the claims:

9. A method for managing a life insurance policy on behalf of a policy holder, the method comprising the steps of:

generating a life insurance policy including a stable value protected investment with an initial value based on a value of underlying securities;

calculating fee units for members of a management group which manage the life insurance policy;

calculating surrender value protected in-vestment credits for the life insurance policy;

determining an investment value and a value of the underlying securities for the current day;

calculating a policy value and a policy unit value for the current day;

storing the policy unit value for the current day; and

one of the steps of:

removing the fee units for members of the management group which manage the life insurance policy, and

accumulating fee units on behalf of the management group.

Bancorp appealed the district court's determination on summary judgment that all claims were invalid for lack of patent eligible subject matter. The district court relied on the machine-or-transformation test to determine patentability under §101. On the machine prong, the district court determined that the computer components "are no more than objects on which the claimed methods operate." Bancorp, at 9-10. The district court also noted that it is possible to complete all of the steps of the claims manually, although it would be inefficient to do so. On the transformation prong, the district court decided that there was no transformation because the claims do not transform raw data into anything other than more data that is not a representation of a physical object. Id. at 10.

The Federal Circuit restated the trilogy of exceptions to patent eligibility, as laid out by the Supreme Court in Mayo Medical Laboratories v. Prometheus Laboratories, 566 U.S. ___ (2012) ("Prometheus") [enhanced version available to lexis.com subscribers] (see Supreme Court Holds That a Law of Nature Applied Using Known and Obvious Steps Is Not Patent Eligible). The court then noted that "the use of a computer in an otherwise patent-ineligible process for no more than its most basic function-making calculations or computations-fails to circumvent the prohibition against patenting abstract ideas and mental processes." Bancorp, at 19. In order for a computer to make an abstract idea patentable, the computer "must be integral to the claimed invention, facilitating the process in a way that a person making calculations or computations could not." Id. The court held that the computer in Bancorp's patents only performs the basic function of repetitive calculations, so it is not integral to the claims.

The court continued its patent eligibility analysis by comparing this case toBilski v. Kappos, 130 S. Ct. 3218 (2010) [enhanced version available to lexis.com subscribers]. Here, as in Bilski, the patentee attempted to patent the use of an abstract idea in a particular field using well-known calculations to establish inputs into the equation. Bancorp, at 20. As noted by the district court, the patent also fails the machine-or-transformation test, which is not the sole test for patent eligibility, but is a useful tool for determining patent eligibility under §101. Id. at 21.

Next, the court used one of the approaches from Prometheus to further support its decision of patent ineligibility. The court set aside the computer limitations to determine what remained in the claims. Id. at 23. The court boiled the claims down to determining values and then storing, removing, or accumulating some of those values. The court then concluded that the values and their manipulation are "mere mathematical computation." Id.

Finally, the court took great pains to state explicitly that its decision is not inconsistent with CLS Bank, despite the court's decision not to follow the reasoning in that case.

In the wake of Bancorp and CLS Bank, there is no clear guidance in how the Federal Circuit will address patent eligibility under §101. Future panels may (1) look to the "manifestly evident" standard of CLS Bank, (2) apply the machine-or-transformation test to determine whether the use of a computer is "integral" to the claimed invention, or (3) develop yet a new approach. What seems evident is that parties and courts will need to carefully analyze individual cases in view of their factual circumstances and the facts of each Federal Circuit case. Parties and courts will have to attempt to analogize their case to the precedent that is most favorable or factually similar. Additionally, Bancorp, CLS Bank, and the cases that follow may present an opportunity for an en banc panel of the Federal Circuit to reconsider its approach to patent eligibility cases.

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