Patenting Business Methods After Mayo

30 July 2012 Personalized Medicine Bulletin Blog

Advances in information technology, such as high-performance computing, enables the collection, analysis and sharing of information between patients and medical providers. Computer technology makes possible the sequencing and analysis of huge data sets of genomic information. It also connects clinical and genomic information to support personalized health care. As a result, life science companies and health care providers are incorporating hardware and software into the delivery of healthcare and the management of patient information. These technologies are patentable as business methods, provided the technologies satisfy the criteria for patentability: patent-eligibility, novelty, non-obviousness and adequacy of disclosure.

As with diagnostic methods patents, the courts in recent years have struggled to determine when a business method is patent-eligible under 35 U.S.C. Section 101. The Federal Circuit, in CLS Bank International v. Alice Corp. Pty. Ltd., No. 2011-1301 (Fed. Cir. July 9, 2012), Slip opinion, recently addressed the issue in the context of an invention implemented by computers. The Federal Circuit’s analysis is interesting because it applied the U.S. Supreme Court’s Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (2012) (“Mayo”) approach to determining when an invention is a patentable business method or a patent-ineligible abstract idea.  The Federal Circuit emphasized the separateness of the statutory provisions under which a claimed invention is analyzed and noted that the determination of statutory subject matter need not be a threshold issue, but could be addressed after evaluation of the other statutory provisions.

The Patents in Suit

Alice Corporation (“Alice”) is the owner of U.S. Patent Nos. 5,970,479 (“the ‘479 Patent”), 6,912,510 (“the ‘510”), 7,149,720 (“the ‘720 Patent”), and 7,725,375 (“the ‘375 Patent”). The patents claim methods and systems for exchanging financial obligations in which a trusted third party settles obligations between a first and second party so as to eliminate “settlement risk.” Settlement risk is the risk that only one party’s obligation will be paid, leaving the other party without payment.  The trusted party eliminates the risk by either (a) exchanging both parties’ obligations or (b) exchanging neither obligation.

Claim 33 of the ‘479 Patent is representative of the method claims. It 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.

Claim 1 of the ‘720 Patent is representative of the system claims. It recites:

1.  A data processing system to enable the exchange of an obligation between parties, the system comprising: a data storage unit having stored therein information about a shadow credit record and shadow debit record for a party, independent from a credit record and debit record maintained by an exchange institution; and a computer, coupled to said data storage unit, that is configured to (a) receive a transaction; (b) electronically adjust said shadow credit record and/or said shadow debit record in order to effect an exchange obligation arising from said transaction, allowing only those transactions that do not result in a value of said shadow debit record being less than a value of said shadow credit record; and (c) generate an instruction to said exchange institution at the end of a period of time to adjust said credit record and/or said debit record in accordance with the adjustment of said shadow credit record and/or said shadow debit record, wherein said instruction being an irrevocable, time invariant obligation placed on said exchange institution.

The District Court Held the Claims Not Patent-Eligible

In May of 2007, CLS filed suit against Alice seeking a declaratory judgment that the ‘479, ‘510, and ‘720 were invalid, unenforceable, or otherwise not infringed. Soon thereafter, Alice filed a counterclaim alleging that CLS Bank infringed these patents. The ‘375 Patent subsequently issued to Alice and Alice amended its counterclaims to add infringement of the ‘375 Patent. The parties cross-motioned for summary judgment. CLS additionally asserted that the ‘375 Patent was invalid under 35 U.S.C. Section 101. The district court granted CLS Bank’s motion for summary judgment and denied Alice’s cross-motion, holding each asserted claim of Alice’s four patents invalid for failing to claim patent-eligible subject matter.

The district court analyzed the method claims under the machine-or-transformation test and the abstract idea exception. The claims were held to be invalid under the machine-or-transformation test because the use of a general purpose computer in the claims did not tie the claims to a particular machine or apparatus. Under the abstract idea exception, the claims were held invalid for being directed to the “fundamental idea of employing a neutral intermediary to ensure that parties to an exchange can honor a proposed transaction, to consummate the exchange simultaneously to minimize the risk that one party does not gain the fruits of the exchange, and then irrevocably to direct the parties, or their value holders, to adjust their accounts or records to reflect the concluded transaction.”

For the computer system claims, the district court assumed that these claims were directed to machines or manufactures, and thus analyzed these claims only to see whether they nonetheless represented nothing more than an abstract idea. The court determined that because the system claims represent the incarnation of the abstract ideas embodied in the method claims; they were similarly directed to abstract concepts despite the fact that they nominally recite a different category of invention under Section 101 than the method claims. These claims thus were held to fail to recite patent-eligible subject matter.

The Federal Circuit’s Analysis

On appeal, the Federal Circuit reversed, holding that Alice’s patents did claim patentable subject matter and thus were valid.  Judge Linn authored the opinion for the majority, joined by Judge O’Malley. Judge Prost authored a dissenting opinion.

The court began its analysis by noting Supreme Court precedent that Section 101 is a dynamic provision designed to encompass new and unforeseen inventions, citing J.E.M. Ag. Supply, Inc v. Pioneer HiBred Int’l, Inc., 534 U.S. 124, 135 (2001), and that it has likewise recognized that Congress intended statutory subject matter to include anything under the sun that is made by man, citing Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980). The reach of statutory subject matter is not, however, without limits.  Laws of nature, physical phenomena, and abstract ideas are implicit in the statute and fall outside the scope of Section 101. Citing the recent Mayo decision, the Federal Circuit acknowledged that these discoveries are free to all men and reserved exclusively to none. Slip op. at 11.

The court then noted that the question of whether an invention is novel is separate from whether the claimed invention is directed to statutory subject matter.  The court explained that in contrast to Section 101, which sets forth the type of subject matter that is patent-eligible, Sections 102 (novelty) and 103 (obviousness) broadly ensure that the public remains free to use that which is known, and obvious variants thereof. Slip Op. at 12. Section 112 (enablement and written description) protects the public from patents that do not full disclose, enable or describe with particularity, the claimed invention.  Each Section of the patent statute serves a different purpose and “no one section is more important than the other.” Slip op. at 12. The court also emphasized that district courts have great discretion to control the conduct of proceedings before them, including the order in which the provisions of patentability are addressed. Section 101 is not a threshold issue, the court explained, and indeed, in some instances, it need not always be addressed first, especially when other sections might resolve the dispute more expeditiously or with more clarity and predictability. Slip op. at 13.

The court then analyzed prior opinions regarding when a patent claim is directed to an abstract idea that preemptively forecloses every future innovation. The Federal Circuit determined that such preemption was not evident in the challenged claims because the claims, when read as a whole including all elements or limitations, require computer implementation. Although computer implementation indicates that the claims would satisfy the “machine” prong of the machine-or-transformation test, the mere fact that a computer is implemented alone does not resolve the patent-eligibility question. Here, the court explained, the claims cover the practical application of a business concept in a specific way. Slip op. at 26. Thus, the method, system and product claims all claimed patentable subject matter. Slip op. at 27.

Judge Prost Dissents

Judge Prost issued a strong dissent, criticizing the majority’s analysis stating that the majority failed to apply the Supreme Court’s unanimous directive to apply the patentable subject matter test with more vigor and its permission to analyze Section 101 issues after a review of other statutory provisions.

The dissent cautioned that the Supreme Court in Mayo stated that it is not sufficient to put an abstract idea into use with purely conventional or obvious pre-solution activities. The dissent also criticized the majority’s failure to follow the Supreme Court’s instructions in Mayo to analyze the claims for “inventive concept.” Using the “inventive concept analysis, the dissent opined that when one puts aside computer implementation of the claimed method, there is nothing remaining in the claims to constitute patentable subject matter.

With respect to the system claims, the dissent also disagreed with the majority on patent-eligibility. The dissent first noted that the fact that a system, and not a method, is claimed does not change the analysis. The dissent interpreted Mayo as requiring courts to inquire whether claim limitations that are added to an abstract idea are inventive. The dissent looked to the specification to determine whether the elements of the computer system satisfy this test. Failing to find description in the patent specification beyond general computation systems for implementation of the method, the dissent would hold the system claims invalid for failing to satisfy Section 101 as well.

Business Method Patent-Eligibility After Mayo

The Federal Circuit’s thoughtful review and analysis of what is and is not patentable in technologies involving computer-implemented methods and systems certainly underscores the difficulties in determining what is and is not patent-eligible. The majority and dissent provide two disparate viewpoints on application of the Supreme Court’s Mayo decision, providing little certainty for those who seek to patent computer-implemented technologies. While the patent community and inventors wait for the further clarification from the courts, the cautious patent drafter should draft their claims and supporting disclosures with a view toward intense and divergent analysis by the courts.

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