Supreme Court Hears Oral Arguments in Section 101 Patent Case

Supreme Court Hears Oral Arguments in Section 101 Patent Case

 WASHINGTON, D.C. — (Mealey’s) Chief Justice John G. Roberts Jr. today voiced skepticism that a six-factored, non-exhaustive abstract idea test as advocated by the U.S. government would bring “clarity and certainty” to the already murky question of software patentability (Alice Corporation Pty. Ltd. v. CLS Bank International and CLS Services Ltd., No. 13-298, U.S. Sup.; See 12/16/13, Page 4) (lexis.com subscribers may access Supreme Court briefs for this case).

Solicitor General Donald B. Verrilli Jr., arguing on behalf of the U.S. Patent and Trademark Office and as amicus curiae for respondents CLS Bank International and CLS Services Ltd., nonetheless appeared to find support from many of the Supreme Court justices in his assertion that none of petitioner Alice Corp. Pty. Ltd’s claims is entitled to patent protection under 35 U.S. Code Section 101.

What’s more, Verrilli stressed that the government’s approach would not render all software patents ineligible.

“Any software patent that improves the functioning of the computer technology is eligible. Any software patent that . . . is used to improve another technology is eligible,” Verrilli clarified.

Obligations Exchanged

Alice owns four U.S. patents by assignment that relate to a computerized trading platform known as “Inventco,” which is used for conducting financial transactions in which a third party settles obligations between a first and a second party so as to eliminate the risk to the first two parties that either may not pay their financial obligation when a currency trade closes at settlement. The patents contain claims that recite methods of exchanging obligations between parties and claims that are drawn to data-processing systems and computer-readable media containing a program code for directing an exchange of obligations.

CLS Bank International and CLS Services Ltd. are part of CLS Group Holdings AG, a New York-based financial institution launched in 2002 that provides settlement services to its members in the foreign exchange market. In 2007, after Alice threatened a patent infringement suit, CLS Bank and CLS Services (collectively, CLS) sued Alice in the U.S. District Court for the District of Columbia, seeking a declaratory judgment that the asserted claims of the Alice patents are invalid, unenforceable and not infringed. Alice answered and counterclaimed, alleging infringement.

In 2009, CLS moved for summary judgment, arguing in part that Alice’s asserted claims were drawn to ineligible subject matter and, therefore, invalid under 35 U.S. Code Section 101. Alice cross-moved for summary judgment. After the Supreme Court issued its decision in Bilski v. Kappos, 130 S. Ct. 3218 (2010) (See 7/2/10, Page 4) [an enhanced version of this opinion is available to lexis.com subscribers], the District Court granted summary judgment in favor of CLS, holding each of the asserted claims of Alice’s patents invalid under Section 101. The District Court found that Alice’s method claims “are directed to an abstract idea of employing an intermediary to facilitate simultaneous exchange of obligations in order to minimize risk.”  The court similarly rejected the patents’ system claims and media claims.

Divided Rulings

Alice appealed to the Federal Circuit U.S. Court of Appeals, which in a divided July 2012 panel opinion reversed the District Court's ruling, holding that the claims at issue, including claims drawn to methods, computer-readable media and systems, are all patent eligible under Section 101. CLS then won en banc rehearing (CLS Bank International v. Alice Corporation Pty. Ltd., No. 11-1301, Fed. Cir.; See 10/15/12, Page 6), at which the parties were ordered to address two questions:  “What test should the court adopt to determine whether a computer-implemented invention is a patent ineligible ‘abstract idea’ and when, if ever, does the presence of a computer in a claim lend patent eligibility to an otherwise patent-ineligible idea?” and “In assessing patent eligibility under 35 U.S.C. § 101 of a computer-implemented invention, should it matter whether the invention is claimed as a method, system, or storage medium; and should such claims at times be considered equivalent for § 101 purposes?” Twenty-five amicus curiae briefs were filed on behalf of 47 amici.

Following rehearing, the Federal Circuit issued a 135-page divided decision that included a one-paragraph per curiam opinion affirming the District Court. The decision also contained a concurring opinion of five of the 10 circuit judges participating (with one judge not participating); a concurring-in-part and dissenting-in-part opinion of four circuit judges, with some taking part in only certain sections of the opinion; a dissenting-in-part opinion of four circuit judges; a concurring-in-part and dissenting-in-part opinion filed by one circuit judge; a dissenting opinion filed by two circuit judges; and “Additional Reflections” filed by Chief Judge Randall R. Rader.

Petition Filed

The per curiam opinion states:  “Upon consideration en banc, a majority of the court affirms the district court’s holding that the asserted method and computer-readable media claims are not directed to eligible subject matter under 35 U.S.C. § 101 [an annotated version of this statute is available to lexis.com subscribers]. An equally divided court affirms the district court's holding that the asserted system claims are not directed to eligible subject matter under that statute.”  The Federal Circuit noted that while no single opinion in the decision constituted a majority, seven of the 10 members of the en banc court agreed that the method and computer-readable medium claims failed to recite patent-eligible subject matter, and eight of the judges concluded that the method, medium and system claims at issue in the case should rise or fall together in the Section 101 analysis.

Alice filed a petition for writ of certiorari with the Supreme Court that presented the question:  “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. Code § 101 as interpreted by this Court.”  The petition was granted in December 2013, and dozens of amicus curiae briefs have been filed since.

Bilski Distinguished

Justice Ruth Bader Ginsburg opened oral arguments by questioning Carter G. Phillips, representing Alice, on how the “intermediate settlement” offered by Inventco could be considered “less abstract” than the “hedging” function that was deemed abstract in Bilski.

“If our patent merely claimed intermediated settlements, although I have to say I don’t really know exactly what that means because I don't think that's the same kind of economics concept that a hedge risk treatment is. But if it claimed that, we wouldn’t have a distinction from Bilski. What we claim is a very specific way of dealing with a problem that came into being in the early 1970s of how to try to eliminate the risk of nonsettlement in these very massive multiparty problems in which you need to deal with difficulties that exist at different time zones simultaneously and to do it with a computer so that you not only take them on chronologically, deal with them sequentially, based on the kind software analysis that the patent specifically describes by function,” Phillips responded.

What’s more, the patents in suit go further by blocking specific transactions that, in a shadow account, would violate the terms of a settlement, according to Phillips. Justice Anthony M. Kennedy argued, however, that although a computer “is necessary to make it work,” the “innovative aspect is certainly not in the creation of the program.”  

“All you’re talking about is, if I can use the word, an ‘idea,’” Justice Kennedy added.

‘Good For The Gold’

Justice Stephen G. Breyer then drew an analogy between the claimed technology and an imagined scenario with King Tut, “sitting in front of the pyramid where all his gold is stored.”

“[King Tut] has the habit of giving chits away. Good for the gold, which is given at the end of the day. And he hires a man with an abacus, and when the abacus keeping track sees that he’s given away more gold than he is in storage, he says, ‘Stop.’ You see?  Or my mother, who used to look at my checkbook, when she saw that, in fact, I had written more checks than I had in the account, she would grab it. ‘Stop.’  You see?  So what is it here that’s less abstract that the computer says, stop?” Justice Breyer asked.

In response, Phillips argued that “the concept here is not simply to say stop.”  Although “stop is obviously part of the element of it,” the claimed invention “is also designed to ensure that at the end of the day, this transaction, in the midst of literally a global set of deals that are going on simultaneously, will be implemented at the appropriate time in the appropriate way,” Phillips said.

“And whatever else that may be, it seems to me it’s difficult to say that’s an abstract idea as implemented,” he added.

‘No Difference’

Mark A. Perry, representing CLS, opened his arguments by critiquing Phillips’ attempt to distinguish the hedging at issue in Bilski and the services offered by Inventco. “There is no difference,” Perry told the Supreme Court. “It is hedging against credit default rather than price fluctuation, but it is simply hedging.”  Furthermore, the additional features highlighted by Phillips are merely recited in the specifications of the patents in suit but do not appear in the patent claims as they currently exist.

“A patent that describes sufficiently how a computer does a new and useful thing, whether it’s data compression or any other technological solution to a business problem, a social problem, or a technological problem, would be within the realm of the patent laws. That is what the patent laws have always been for. This is not such a patent. And the reason for that is this is a pre-Bilski set of patents. These were prosecuted under the old State Street test, where all the applicant had to claim was a result,” Perry said, citing State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998) [enhanced version].

When asked by Justice Kennedy whether, in CLS’s view, there is any business process that could be entitled to a “pure” patent, Perry responded in the affirmative, singling out encryption technology.

“You could have a process for securely transmitting data, would be another computer implemented technological solution to a business problem. . . . In our view, if what is claimed as the inventive contribution under Mayo in other words, if we have an abstract idea, as we do here, and what is claimed is the inventive contribution for Step 2 is the computer, then the computer must be essential to that operation and represent an advancement in computer science or other technology. And we know that’s not met here,” he added, citing Mayo Collaborative Services v. Prometheus Labs Inc., 132 S. Ct. 1289, 1297 (2012); (See 4/2/12, Page 4) [enhanced version].

Marginal, Dubious, Skeptical

In closing, Perry — like Verrilli — eschewed the notion that declaring Alice’s patents ineligible under Section 101 could jeopardize the entire software industry. Noting that “there are 2 million outstanding patents in the United States,” that there were “22,000 infringement litigations” over the last four years but that, post-Bilski, there have been just “57 district court decisions on Section 101 issues,” Perry argued that “this is a very small problem.”

“We are talking about a group of patents . . . that’s way out at the tail end of distribution. Most patents never have a 101 challenge. This is not an issue with cotton gins and other things. This is a problem for the most marginal, most dubious, most skeptical patents,” Perry added.

‘Appropriate Domain’

Finally, Verrilli told the Supreme Court that “an abstract idea does not become patent eligible merely by tacking on an instruction to use a computer to carry it out.”  Instead, a computer “makes a difference” under Section 101 “when it imposes a meaningful limit on the patent claim,” according to Verrilli.

“That occurs when the claim is directed at improvement in computing technology or an innovation that uses computing technology to improve other technological functions. That’s the test that we believe is most faithful to this Court’s precedents in Bilski and Mayo. It keeps patents within their traditional and appropriate domain and it is capable of being administered consistently by Courts and by PTO examiners,” Verrilli said.

Alice is represented by Phillips and Jeffrey P. Kushan of Sidley Austin in Washington; Constantine L. Trela Jr., Tacy F. Flint and Timothy R. Hargadon of Sidley Austin in Chicago; Adam L. Perlman of Williams & Connolly in Washington; and Robert E. Sokohl of Sterne, Kessler, Goldstein & Fox in Washington. Perry, Helgi C. Walker, Brian M. Buroker and Alexander N. Harris of Gibson, Dunn & Crutcher in Washington represent CLS. Verrilli of the U.S. Department of Justice represents the PTO.

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