Quantcast

A Software Patent Setback: Alice v. CLS Bank

By Gene Quinn on January 9, 2015

This is part 7 of a multi-part series exploring the history of software patents in America. To start reading from the beginning please see The History of Software Patents in the United States. For all of our articles in this series please visit History of Software Patents

_______________

The Federal Circuit in Alice

When the United States Court of Appeals for the Federal Circuit decided CLS Bank v. Alice Corporation, all the important questions that we thought might be answered remained completely and totally unanswered. There were only 10 judges who sat on the en banc tribunal and no more than 5 judges signed on to any one opinion.

The only thing we learned was this — the Federal Circuit issued an extraordinarily brief per curiam decision, which stated:

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 equally divided court affirms the district court’s holding that the asserted system claims are not directed to eligible subject matter under that statute.

Thus, all of the asserted claims were deemed to be patent ineligible.

Let’s take a look at one particular representative asserted claim, Claim 33 of U.S. Patent No. 5,970,479:

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.

The 5 judge concurring opinion written by Judge Lourie found that there is “nothing in the asserted method claims represent significantly more than the underlying abstract idea for purposes of § 101.” Chief Judge Rader and Judge Moore agreed that the method and media claims are patent ineligible.  Therefore, there is a majority of thought (although not opinion) with respect to the above representative method and media claims. The other claims in the asserted patents are patent ineligible because that is what the district court held and there was a 5 to 5 split. Judges Linn, O’Malley and Newman would have found all of the asserted claims patent eligible.

But let’s look at several representative claims on which there is no Federal Circuit decision — starting with claim 1 of U.S. Patent No. 7,725,375, which recites:

A data processing system to enable the exchange of an obligation between parties, the system comprising:

a first party device,

a data storage unit having stored therein

(a) information about a first account for a first party, independent from a second account maintained by a first exchange institution, and

(b) information about a third account for a second party, independent from a fourth account maintained by a second exchange institution;

and a computer, coupled to said data storage unit, that is configured to

(a) receive a transaction from said first party device;

(b) electronically adjust said first account and said third account in order to effect an exchange obligation arising from said transaction between said first party and said second party after ensuring that said first party and/or said second party have adequate value in said first account and/or said third account, respectively; and

(c) generate an instruction to said first exchange institution and/or said second exchange institution to adjust said second account and/or said fourth account in accordance with the adjustment of said first account and/or said third account, wherein said instruction being an irrevocable, time invariant obligation placed on said first exchange institution and/or said second exchange institution.

Here is claim 26 of the ‘375 patent:

A data processing system to enable the exchange of an obligation between parties, the system comprising:

a communications controller,

a first party device, coupled to said communications controller,

a data storage unit having stored therein

(a) information about a first account for a first party, independent from a second ac- count maintained by a first exchange institution, and

(b) information about a third account for a second party, independent from a fourth account maintained by a second exchange institution; and

a computer, coupled to said data storage unit and said communications controller, that is configured to

(a) receive a transaction from said first party device via said communications controller;

(b) electronically adjust said first account and said third account in order to effect an exchange obligation arising from said transaction between said first party and said second party after ensuring that said first party and/or said second party have adequate value in said first account and/or said third account, respectively; and

(c) generate an instruction to said first ex- change institution and/or said second ex- change institution to adjust said second account and/or said fourth account in accordance with the adjustment of said first account and/or said third account, wherein said instruction being an irrevocable, time invariant obligation placed on said first exchange institution and/or said second exchange institution.

Emphasis has been added to point out all of the specifically recited structure and tangible components, which unequivocally show that this claim is tethered to a machine. Notice how the computer is also recited as specifically configured.

Then Chief Judge Rader and Judge Moore would write: “Looking at these hardware and software elements, it is impossible to conclude that this claim is merely an abstract idea.” They are, of course, correct. Rader correctly pointed out in his dissent, which was joined by Judge Moore, that if all of the asserted patents in this case are invalid that will mean that hundreds of thousands of patents are now lost. He wrote:

[I]f all of these claims, including the system claims, are not patent-eligible, this case is the death of hundreds of thousands of patents, including all business method, financial system, and software patents as well as many computer implemented and telecommunications patents.

It is difficult to understand why it is fair to be judging these patents based on the disclosure standards and patent eligibility standards that have evolved over the past several years anyway. These patent applications were written 15 years ago or more when far less was required. Judging innovations based on a moving target is fundamentally unfair to start with, but coming up with a tie is unconscionable. If patents really are property changing rules would not be applied retroactively. People and corporations order their affairs based on the present understanding of the law and stripping property rights by applying a different legal standard 15 years later is not only fundamentally unfair but is hardly in keeping with legal norms associated with property rights. You would NEVER see this with respect to real property. Property rights need to be certain to maximize value and incentive.

Everyone would do well to seriously what Judge Newman wrote. She points out the obvious: “[T]he en banc court undertook to remedy distortions flowing from inconsistent precedent on section 101. This remedial effort has failed.”

Judge Newman also wrote:

Reliable application of legal principles underlies the economic incentive purpose of patent law, in turn implementing the benefits to the public of technology-based advances, and the benefits to the nation of industrial activity, employment, and economic growth. Today’s irresolution concerning section 101 affects not only this court and the trial courts, but also the PTO examiners and agency tribunals, and all who invent and invest in new technology. The uncertainty of administrative and judicial outcome and the high cost of resolution are a disincentive to both innovators and competitors.

 

SCOTUS in Alice

On Thursday, June 19, 2014, the United States Supreme Court issued its much anticipated decision in Alice v. CLS Bank. In a unanimous decision authored by Justice Thomas the Supreme Court held that because the claims are drawn to a patent-ineligible abstract idea, they are not eligible for a patent under Section 101.

The Supreme Court, using what they called the Mayo frameworkwhich is ironic given how the Court so famously butchered U.S. patent law in the Mayo case, said that there are two considerations that must be taken into account. The first Mayo step is to determine whether the claims at issue are directed to one of those patent-ineligible concepts. The second Mayo step is to examine the elements of the claim to determine whether it contains an inventive concept sufficient to transform the claimed abstract idea into a patent-eligible application.

The petitioner principally contended that the claims were patent eligible because these steps “require a substantial and meaningful role for the computer.” As stipulated, the claimed method requires the use of a computer to create electronic records, track multiple transactions, and issue simultaneous instructions; in other words, “[t]he computer is itself the intermediary.”

The Supreme Court explained that the relevant question was whether the claims do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer. The Supreme Court said they did not.

The systems claims at issue in the case faired no better. The Supreme Court explained:

[T]he system claims are no different from the method claims in substance. The method claims recite the abstract idea implemented on a generic computer; the system claims recite a handful of generic computer components configured to implement the same idea.

Truthfully, the Supreme Court decision in Alice can only be described as an intellectually bankrupt. The Supreme Court never once used the word “software” in its decision. The failure to mention software a single time is breathtaking given that the Supreme Court decision in Alice will render many hundreds of thousands of software patents completely useless. While the Supreme Court obviously didn’t want to make this decision about software, the holding does make it about software because each of the ways software has been traditionally claimed were ruled to result in patent ineligible claims.

Based on this decision it is hard to see how any software patent claims written in method form can survive challenge. This is extremely problematic because there are revolutionary software innovations covered by patents with substantial numbers of method claims. For example, some of the claims to IBM’s Watson computer, which is really akin to the first generation omnipotent Star Trek computer, seem to be quite clearly patent ineligible based on the Alice decision of the Supreme Court. It is impossible to see how the Watson claims structurally differ. See Is Watson still patent eligible? The only potential solace for IBM and others would be if the Federal Circuit narrowly interprets this decision noticing that the Supreme Court seemed almost preoccupied by the fact that the patent claims covered a financial process. As yet we have not seen that narrow interpretation from the Supreme Court, but the Federal Circuit has provided a ray of hope in DDR Holdings

Most troubling about the Alice decision is how the Supreme Court could issue a decision that doesn’t even use the word software, or recognize that software is patent eligible. Software is clearly patent eligible, at least if you concern yourself with the patent statute, which is supposed to govern on the matter. Software is mentioned throughout Title 35. It was specifically mentioned in the America Invents Act in 2011. For example, tax strategies are now deemed to be within the prior art and not patentable in and of themselves, but the AIA specifically says that software can still be patented even if it incorporates a tax strategy. [1] This is the type of analysis the Supreme Court engaged in the Bilski decision finding that business methods are patentable. So why did the Court not similarly recognize that at least some software must be patent eligible?

Ironically, at the end of the day, software patent claims written in typical, industry standard format will result in patent ineligible claims. Yet, at the same time, business methods are patentable. To call this bizarre and inconsistent doesn’t begin to scratch the surface.

In years to come this decision will no doubt be ridiculed for many legitimate reasons. In the meantime patent attorneys and clients will need to figure out how to proceed with pending patent applications and with applications that have not yet been filed.

TO BE CONTINUED… We will next look at how the USPTO has interpreted Alice v. CLS Bank and then ultimately conclude this series with a look at recent Federal Court cases interpreting Alice.

_________________

[1] The section of the AIA that makes tax strategies unpatentable has not been codified. See AIA § 14, Public Law 112-29, sec. 14, 125 Stat. 284 (Sept. 16, 2011).

The Author

Gene Quinn

Gene Quinn is a patent attorney and the founder of IPWatchdog.com. He is also a principal lecturer in the PLI Patent Bar Review Course, which helps aspiring patent attorneys and patent agents prepare themselves to pass the patent bar exam.

Gene’s particular specialty as a patent attorney is in the area of strategic patent consulting, patent application drafting and patent prosecution. He has worked with independent inventors and start-up businesses in a variety of different technology fields, but specializes in software, systems and electronics.

is admitted to practice law in New Hampshire, is a Registered Patent Attorney licensed to practice before the United States Patent Office and is also admitted to practice before the United States Court of Appeals for the Federal Circuit.

Gene is a graduate of Franklin Pierce Law Center and holds both a J.D. and an LL.M. Prior to law school he graduated from Rutgers University with a B.S. in Electrical Engineering.

You can contact Gene via e-mail.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 14 Comments comments. Join the discussion.

  1. step backs January 10, 2015 2:01 am

    What about the US Constitution?
    SCOTUS shall make no law ….

    Well. OK. It says the legislative power shall vest exclusively in the Congress. Same thing.

  2. Anon January 10, 2015 8:00 am

    The Court, to my view, has long engaged in a rather surreptitious tendency not to speak clearly in current decisions when it comes to its own precedents.

    This has the rather plain effect of creating precedents that simply cannot be squared one with another.

    Even Justice White had noted that Section 101 of the patent act had been treated as a “nose of wax,” as he himself treated that section as a nose of wax.

    To my mind, it is high time that Congress sharply rebuke the Court for the Court’s forays into policy driven law writing, and to do so for both implicit law writing and explicit law writing.

    If Congress wanted to be explicit and say “no business method patents” or to say “no software patents” they would have done so (see for example, the words related to no tax strategy patents, as Gene points out)

    Further on that regard, and as may be covered in the continued article, Congress explicitly did not use the “atom bomb” of patent eligibility for tax strategy patents, but instead used the finer tool of “considered to be in the prior art.” Perhaps non-lawyers will find this point too subtle to grasp, but there is indeed a clear difference between Congress saying an entire category is not eligible per se, and Congress removing a category by saying “consider these things prior art.” Things considered prior art are not ruled out per se as a category, maintaining the intent of Congress to treat 101 as a wide open gate, and decidedly NOT as the Court is using 101 to strike out wide swaths of innovation.

    The Court needs to be much more forcibly reminded of this.

  3. step back January 10, 2015 8:37 am

    Anon,

    Good points.

    Recent international events make me wonder if some members of SCOTUS and the CAFC are simply anarchist terrorists when it comes to inventors and inventions. Basically they are saying, we don’t care for the laws passed by Congress. We are Supreme. We are above Congress. We are above science and rationality. If we say a man-isolated organic molecule that doesn’t exist in nature is a natural phenomenon then so be it. If we say abstract ideas and generic computers exist (along side with Santa Claus and the Easter Bunny) then so be it. Who cares if Congress wrote a law saying Whoever invents or discovers “any” new and useful … They are no longer the law. They are merely an ornamental vestige of the past. Like the Queen of England. WE are the new world and federal order. WE say what is and isn’t true. WE declare final decisions without evidence, due process or adherence to the constitution (now spelled with a little “c”). WE WE WE

  4. Ashok January 10, 2015 8:55 am

    If you are surprised that the Supreme Court never used the word Software, I think you will be amazed to see that none of the claims in the patents use that word also.

    Both the patentees and the judges are very clever at hiding what they want!

  5. Benny January 11, 2015 7:40 am

    Step back,
    Quote “We are Supreme. We are above Congress. We are above science and rationality”
    You missed “we are above criticism”.
    Reminds me of some other (tax free) organizations I can’t mention here. (tongue firmly in cheek)

  6. step back January 12, 2015 6:26 am

    Benny,
    There lies the rub.
    “we” (little w) are afraid.

    http://patentu.blogspot.com/2015/01/on-fear-itself.html

  7. Gene, but not Gene Q January 12, 2015 10:47 am

    the problem to my mind in but one of the preceding claim examples (and in thousands upon thousands of issued software patents) is the abstract recitation of structure and/or method. when i read such claims i do not understand the boundaries of what is being claimed. contrary to what is argued here often, it DOES NOT take voluminous description and details to correct these deficiencies. you cannot claim patent eligibility by sprinkling the claim with hardware labels. i highlight the deficiencies below in brackets:

    (a) information about a first account [what information in the data storage unit about what account in the data storage unit in what form in the data storage unit?] for a first party [how is the first party incarnated in the data storage unit?], independent from a second account maintained by a first exchange institution [same questions], and

    (b) information about a third account for a second party, independent from a fourth account maintained by a second exchange institution [repeat];

    and a computer, coupled to said data storage unit, that is configured to

    (a) receive a transaction [a transaction for what, what is the structure of the “transaction”] from said first party device [“first party” is just a label, how is “first party” distinguished electronically from any other “party”];

    (b) electronically adjust said first account and said third account [adjust what] in order to effect an exchange obligation [how is that done electronically] arising [does this something “arise” electronically or economically or morally?] from said transaction between said first party and said second party after ensuring that said first party and/or said second party have adequate value in said first account and/or said third account [ensuring how? is there a comparator (comparing step?) used?], respectively; and

    (c) generate an instruction to said first exchange institution and/or said second exchange institution to adjust said second account and/or said fourth account in accordance with the adjustment of said first account and/or said third account, wherein said instruction being an irrevocable, time invariant obligation placed on said first exchange institution and/or said second exchange institution [i give up already, this is ridiculous].

  8. Kevin January 12, 2015 11:45 am

    I was immensely upset that SCOTUS–during a year of opinions where policy decisions were addressed as seemingly primary concerns (e.g., Hobby Lobby, Riley, even Aereo)–issued a patent decision that affects the entirety of software development and sales in the U.S. without looking at any potential economic downsides or chilling effects on the industry. If the Court is going to come through and knock out/de-value 50% of the software patents, at least have the courtesy of acknowledging it and discussing it at a practical level.

  9. Joachim Martillo January 12, 2015 11:04 pm

    In re: Gene, but not Gene Q January 12, 2015 10:47 am

    I understand the comment ‘375, but even if the details are added, are we really looking at more than the computerization of a business method that has been done by white and pink collar workers forever?

    Is mere computerization really comparable to inventing a better mousetrap, which is a machine, and therefore statutory and patentable as long as it meets the requirements of 102, 103, and 112?

    I wish some of the HFT and algorithmic trading systems that I have reviewed had been the basis of patent applications, for they seem to be fundamentally different in that they really are not computerizing a business method that has been executed by humans since time immemorial and in that the business methods could not possibly be executed by humans (rather like vulcanization procedure specified in Diehr ‘142).

    I will try to think of some hypothetical cases that I can describe without breaking an NDA.

  10. Benny January 13, 2015 2:06 am

    Kevin at 8 –
    Quote ” without looking at any potential economic downsides…” Genuine question – is it the job of the courts to take the economic effects into account? The courts decision on the validity or otherwise of a patent could bankrupt a competitor resulting in the loss of 100 or more jobs – is that something the court should take into account when reaching a decision?

  11. Anon January 13, 2015 7:34 am

    Benny,

    Good question. There are in fact times that Congress has provided the courts with authority to reach out and consider such equitable things. Notably, the deliberations concerning hard core requirements of 101/102/103/112 are not such a time. Quite in fact, the emergence of the 101/103 formation in the 1952 Act references the removal of authority from the courts concerning the defining of “invention” that the courts had power to engage in from the grant of authority in 1793.

  12. Tim January 16, 2015 9:05 am

    I believe it’s time that these companies file lawsuits against the U.S. Government for running a scam. They have paid through the Patent Office to protect their inventions. At this point, this insurance is now nothing but a scam. Corruption is the word.

  13. Inside3DP January 25, 2015 6:42 am

    “Alice lets some software patent holders live to fight another day. While many questions about the patentability of software remain, some 3D printing software will satisfy the Alice test. To be one that does, the 3D printing software patent holder will need to understand Alice and—at the very least—be able to explain why their invention has the “inventive concept” Alice demands.”

    http://www.inside3dp.com/software-supreme-court-3d-printing-care-alice-v-cls-bank/

  14. Robert Cole April 18, 2015 4:22 pm

    I’m an inventor, not an attorney. It’s becoming clear that Alice v CLS Bank is the single most destructive SCOTUS decision in U.S. patent history. It is in fact an abstract idea! It’s a PSYOP victory for Silicon Valley mega infringers such as Google that lobby Washington with their, “don’t be evil,” evil ways. Infringers are emboldened by the decision while the true innovators who spent the time and money to leverage the patent system, and to play by the rules of society, are crushed.

    Today, software claim owners can’t discuss licensing with violators for fear of DJ action, they can’t litigate due to insane costs and unnecessary risk as law changes like the wind. Many are forced to sell their IP, typically for pennies on the dollar. The anti-Troll mindset would have us believe that such IP is somehow sub-par and yet many infringers are found guilty. Claims stand on their own, or they don’t. This is for the courts to decide. If they stand, violators must pay. Attempts to classify and regulate owners that can, or cannot enforce property rights is not a free market concept. It is a situation born by corporate interests, which are making a mockery of our patent system. The real “Trolls” are the violators.

    A suggestion to end the insanity: Issued claims should remain eligible under 35 U.S.C. § 101 post allowance no matter how laws change with regard to patent eligibility. If so, focus would shift towards improving patent examination, and away from the whims of our politically charged judicial system. It would preserve claims drafted long ago no matter how construction standards change post allowance. Claims would become a true extension of the arm of the law at the time of issuance, which is in fact the promise that the PTO makes to each claim owner. I for one am tired of false promises.

Post a Comment

Respectfully add to the discussion.

Name *
Email *
Website