CLS Bank v. Alice Corporation Reveals “A House Divided”
|Written by: Paul Cole
Lucas & Co.
Posted: July 15, 2012 @ 7:30 am
The decision of the Supreme Court in Prometheus has been predicted to have implications for business method patentability, but the decision in what will surely become known as the Alice case provides an early indication that the CAFC may endeavour to limit its scope. Whether the claimed subject matter lies in the reality of patent-eligible subject-matter or is more correctly located in the Wonderland of abstract ideas is an issue that has been debated on both sides of the Pond, and on which the Dodo or the King of Hearts in his judicial capacity would surely have had an opinion if it had been brought to their attention. In the US there appears to be ample scope for further debate.
The patentees Alice Corporation are based in Australia and are a joint venture between a private company and National Australia Bank Limited. Their website  explains that they were established in Melbourne in 1995 and have applied for and obtained patents on their financial market innovations worldwide, including in the US, UK and other major financial centres. The patented innovations cover the trading of risk, investment, lending, exchanging and similar products. Alice exploits its inventions by licensing selected entities. Neither Alice nor Ian Shepherd who was the inventor has a significant web presence, and in contrast to the situation in Prometheus there appears to be no back-story that throws light on the merits or otherwise of the alleged invention.
In Europe, applications corresponding to the patents in issue were refused at first instance and appeals, though filed, were not pursued. The following passages from a communication accompanying a summons to oral proceedings in one of the European applications  encapsulate the views of the EPO examining division:
3.2 The claims of the present application are considered to relate to subject matter excluded from patentability under Art. 52(2) and (3) EPC and, although not completely devoid of technical character, are formulated to merely specify commonplace features relating to a technological implementation of such matter without inventive step (Article 56 EPC). The examiner could not, and still cannot, determine any technical solution defined in response to a problem within the content of the application as originally filed. Any problems which are addressed do not appear to require a technical, but rather an administrative, i.e. business solution. Whilst the implementation of such a solution may include the use of generic technical features these merely serve their well-known functions as would be recognised by the skilled person in the technical field under consideration.
3.3 The subject matter claimed in this application relates to a computer apparatus for the formulation and trading of multi-party investment contracts. The problem to be solved is how to obtain, for an ordering party and in the scope of phenomena with uncertain outcomes, an investment contract from potential counterparties which best meets the requirements of said ordering party. The solution proposed is to take into account the uncertainty of said outcomes by having both the ordering party and the potential counterparties define a set of probabilities of occurrence for each outcome. Said sets of probabilities are used to compare the potential counterparties’ offers to the ordering party’s requirements and to select the best counterparty. This is a mere administrative mechanism for providing a business solution to a non-technical problem. No technical problem has been convincingly laid out and none is apparent to the person skilled in the art from reading the current application. The only technical aspect that is present is the implementation of this business scheme on a computer system. However, said implementation does not go beyond the basic computer functions of inputting, outputting, exchanging or processing financial data according to a business algorithm. Such implementation stands on the use of a standard computer system with normal data input, output, process and storage capabilities and a standard network for transmitting data. These elements were part of the common knowledge in computer system design at the priority date of the application (07.07.1995). It is thus considered that the skilled person – a computer programmer – when given the requirements of the business scheme would implement said computer-based solution without having to exercise any inventive activity, the technical features and any considerations of the implementation following directly from said requirements (T0172/03 Order management/RICOH ). It is also noted that no further technical effect can be seen in the implementation of this business method.
In the US the patents in issue were 5,970,479, 6,912,510, 7,149,720 and 7,725,375. The following claim which is not limited to involvement of digital records and apparently also covers conventional paper records is representative of the asserted method claims and is as follows:
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 [sic] 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 one 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.
For the systems aspect the following claim is representative:
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 present appeal focused on whether the opinion at first instance (District Court for the District of Columbia, Judge Rosemary M. Collyer) that each asserted claim of Alice’s four patents was invalid for failure to claim patent-eligible subject matter should be affirmed.
The majority view (Judges Linn and O’Malley) favoured reversal. The different roles played by the various sections of 35 USC lies at the heart of their opinion:
It should be self-evident that each of these four statutory provisions—§§101, 102, 103, and 112—serves a different purpose and plays a distinctly different role. No one section is more important than any other. Together, they evince the intent of Congress in furthering the constitutional objective of promoting the progress of the useful arts. Because each of these sections serves a different purpose and plays a different role, invalidity, patentability, and patent eligibility challenges under these sections present distinctly different questions.
Although there is an abstract idea exception under §101, the dividing line between inventions that were directed to patent-ineligible abstract ideas and those that were not remained elusive. The mere implementation on a computer of an otherwise ineligible abstract idea would not render the asserted “invention” patent-eligible and it had never been suggested that simply reciting the use of a computer to execute an algorithm that could be performed entirely in the human mind was is sufficient to render a claim patent-eligible. But where the machine played a significant part in permitting the claimed method to be performed, rather than functioning solely as an obvious mechanism for permitting a solution to be achieved more quickly, that machine limitation renders the method patent-eligible. It could therefore be appreciated that a claim that was drawn to a specific way of doing something with a computer was likely to be patent eligible whereas a claim to nothing more than the idea of doing that thing on a computer might not. The core of the present uncertainty was the meaning of the abstract ideas exception which should be given a narrow interpretation:
As the Supreme Court has recently acknowledged, “too broad an interpretation of [the exceptions to § 101] could eviscerate patent law. For all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas.” Prometheus, 132 S. Ct. at 1293. Any claim can be stripped down, or simplified, removing all of its concrete limitations, until at its core, something that could be characterized as an abstract idea is revealed. But nothing in the Supreme Court’s precedent, nor in ours, allows a court to go hunting for abstractions by ignoring the concrete, palpable, tangible, and otherwise not abstract invention the patentee actually claims. It is fundamentally improper to paraphrase a claim in overly simplistic generalities in assessing whether the claim falls under the limited “abstract ideas” exception to patent eligibility under 35 U.S.C. § 101. Patent eligibility must be evaluated based on what the claims recite, not merely on the ideas upon which they are premised. In assessing patent eligibility, a court must consider the asserted claim as a whole…
In light of the foregoing, this court holds that when—after taking all of the claim recitations into consideration—it is not manifestly evident that a claim is directed to a patent ineligible abstract idea, that claim must not be deemed for that reason to be inadequate under § 101. It would undermine the intent of Congress to extend a judicially-crafted exception to the unqualified statutory eligibility criteria of § 101 beyond that which is “implicitly” excluded as a “fundamental truth” that is “free to all men and reserved exclusively to none” …
Unless the single most reasonable understanding is that a claim is directed to nothing more than a fundamental truth or disembodied concept, with no limitations in the claim attaching that idea to a specific application, it is inappropriate to hold that the claim is directed to a patent ineligible “abstract idea” under 35 U.S.C. § 101.
Judge Prost, in her dissenting opinion, objected that the unanimous directive of the Supreme Court to apply the §101 test with more vigor was being rejected. The CAFC was not writing on a blank slate because it had been reversed twice in the last three terms, see Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289 (2012) and Bilski v. Kappos, 130 S. Ct. 3218 (2010). In essence:
The majority has failed to follow the Supreme Court’s instructions—not just in its holding, but more importantly in its approach. The majority does not inquire whether the asserted claims include an inventive concept. Even more fundamentally, the majority questions whether the Supreme Court’s abstract idea test is workable at all. Maj. Op. 13-14. Based on this apprehension, I take it, the majority devises a new approach to subject matter patentability. We must now avoid deciding a § 101 case unless unpatentability is “manifestly evident.” Maj. Op. 20.
I would be more empathetic if the majority’s approach was based on a case-specific determination, made upon the application of the Supreme Court’s abstract idea test to the asserted claims. As mentioned, however, the majority does not even attempt to inquire whether the claims disclose anything inventive. The bulk of the analysis focuses on the fact that the claims require “computer implementation,” which the majority itself deems insufficient to pass muster under §101. Maj. Op. 21-25. Nor is there any explanation for why the specific computer implementation in this case brings the claims within patentable subject matter.
The majority was sufficiently stung to footnote a rebuttal. It asserted that it had indeed enquired whether the claims disclosed anything inventive by examining the claim language and by criticising the district court for ignoring the inventions actually claimed. Applying all the relevant Supreme Court and other precedents, if the court was not wholly convinced that the subject matter of the claims was abstract, then the claims in question must be held patent-eligible.
On the facts, the majority holding was in favour of the patentability of the claimed subject matter, including the method claim which implicitly required a computer for its implementation:
Unlike the Bilski line of cases, however, it is difficult to conclude that the computer limitations here do not play a significant part in the performance of the invention or that the claims are not limited to a very specific application of the concept of using an intermediary to help consummate exchanges between parties. The dissent criticizes the majority for failing to explain “why the specific computer implementation in this case brings the claims within patentable subject matter,” but this criticism is misplaced. The limitations of the claims as a whole, not just the computer implementation standing alone, are what place meaningful boundaries on the meaning of the claims in this case…
The claim limitations can be characterized as being integral to the method, as “play[ing] a significant part in permitting the method to be performed,” and as not being token post-solution activity. It is clear, moreover, that the limitations requiring specific “shadow” records leave broad room for other methods of using intermediaries to help consummate exchanges, whether with the aid of a computer or otherwise, and, thus, do not appear to preempt much in the way of innovation.
While the use of a machine in these limitations is less substantial or limiting than the industrial uses examined in Diehr (curing rubber) or Alappat (a rasterizer), the presence of these limitations prevents us from finding it manifestly evident that the claims are patent ineligible under § 101. See Research Corp., 627 F.3d at 868. In such circumstances, we must leave the question of validity to the other provisions of Title 35.
Following a tabulated listing of the recited steps in their original language and in a “plain English Translation”, Judge Prost held that these findings were incorrect and witheringly observed:
The majority objects that “[i]t is impermissible for the court to rewrite claims as it sees them.”. But that is precisely what courts do in claim construction everyday. Perhaps what the majority actually means is that the plain§ English translation in Table 1 somehow glosses over a limitation that would otherwise narrow the claims to something that is non-abstract. One would wish that the majority had not kept that limitation a secret.
Her concluding test as applied to the system claims seems decidedly European in its approach:
That is, we must look beyond the non-inventive aspect of the claims and ask whether the remaining portion is an abstract idea.
However, the above test as boldly stated runs into the difficulty that this manner of looking at things was suggested by the Government in Prometheus but was decisively rejected by the Supreme Court.
If the parties decide to devote resources to further litigation, it is difficult to see how this decision can escape further review, whether en banc or via certiorari. There is room for sympathy with the view that §§101, 102 and 103 are distinct objections, but also with the view that they should not be interpreted with the rigidity formerly applicable to the forms of action at common law which in the UK were abolished in 1832 and which in the US were abolished progressively in the period 1850-1938. In Europe business method objections are mainly dealt with under the inventive step provisions of a.56 EPC, but strongly influenced by the exclusions of a. 52(2). In any event, it is apparent that the word abstract in the US can create just as much trouble and difficulty as the word technical does in the UK and before the EPC.