Smart Systems decision a sad reminder of deleterious state of U.S. patent eligibility law

By Steve Brachmann & Gene Quinn
November 9, 2017

On Wednesday, October 18th, a judicial panel in the Court of Appeals for the Federal Circuit decided a case which affirmed a lower court’s holding that a series of four patents covering mass transit technologies are invalid under 35 U.S.C. § 101, the basic statute regarding the patentability of an invention. The case, Smart Systems Innovations, LLC v. Chicago Transit Authority et. al., is proof that the federal judiciary’s interpretation of patent eligibility is still being informed by a U.S. Supreme Court standard which is deleterious to the property of patent owners.

This matter stems from a case filed by New York City-based Smart Systems Innovations against the Chicago Transit Authority in the Northern District of Illinois back in October of 2014. In July 2015, Judge Edmond E. Chang entered a memorandum order and opinion declaring four patents asserted by Smart Systems against the Chicago Transit Authority’s use of the Ventra contactless fare payment system were invalid under Section 101.

Smart Systems’ first amended complaint filed in January 2015 noted that the firm was an early player in the development of open payments technologies for transit systems after seeing the success of such systems in Seoul, South Korea. As the technology became more acceptable among U.S. consumers, various transit agencies, including the Chicago Transit Authority, began issuing requests for proposals to implement such open payment systems. Chicago Transit partnered with San Diego, CA-based transportation systems firm Cubic Corporation in November 2011. Cubic was allegedly informed by Smart Systems of its infringement of the asserted patents starting in 2005 yet Cubic worked with Chicago Transit to implement the Ventra open payment system.

Applying the patentability standard set down by the Supreme Court in Alice Corp. v. CLS Bank International, which was decided in 2014, Judge Chang determined that the asserted patents failed the threshold set by Section 101. “Stripped of the technical jargon that broadly describe non-inventive elements (e.g., the “interfaces” and “processing systems”), and further shorn of the typically obtuse syntax of patents, the patents here really only cover an abstract concept: paying for a subway or bus ride with a credit card,” Judge Chang’s order reads. Although the patents did teach the collection of bankcard data stored in memory to solve a problem in the amount of time required to process transactions, “recent case law has reiterated that whatever bells and whistles may be added, when reduced to their core, ‘claims directed to the performance of certain financial transactions’—and paying a fare is a financial transaction—must be categorized ‘as involving abstract ideas.’” Judge Chang also found that there was no inventive step covered by the patent claims. Smart Systems had argued that the Federal Circuit’s 2014 decision in DDR Holdings, LLC v. Hotels.com but the district court found that DDR Holdings upheld claims covering a solution to a “particular internet-centric problem’”; by contrast, the patents held by Smart Systems covered a methodological, and not a technological, breakthrough.

The majority opinion in the Federal Circuit was authored by Circuit Judge Evan Wallach with Circuit Judge Richard Taranto concurring. In its appeal, Smart Systems had argued that the asserted patents cover inventions that “operate in the tangible world” to satisfy a consumer demand that did not exist in the prior art, both in terms of speed of transaction and overcoming storage limitations on conventional bankcards. “[Smart Systems]’s arguments are unavailing,” the Federal Circuit panel found, determining that the asserted patent claims, when taken together, are directed to financial transactions in the field of mass transit and not directed to a new type of bankcard, turnstile, database or methods for processing data that which improve existing technological processes. The Federal Circuit panel found similarly as to Smart Systems’ argument on solving the time of transaction issue at turnstiles.

The Federal Circuit’s holding in Smart Systems is a microcosm of the tremendous ills currently plaguing a patent system which once was an international gold standard but is turning into more of a horror story with each passing day. These patents were presumed valid when issued by the U.S. Patent and Trademark Office after many months of examination and this lengthy examination process against a prior art record should afford a patent owner a right to enforce in district court. And these patents were enforceable, until an infringing party decided not to respect the enforcement of Smart System’s intellectual property right. Smart Systems takes Cubic to court nearly a decade after they began informing them of the likely infringement. And the court doesn’t enter a judgment that Cubic and Chicago Transit don’t infringe the patent or practice around what the patent covers. They just nix the asserted claims entirely and the patent owner is left holding patents with no value, patents which they spent a good deal of money to get in the first place because they were presumed valid.

The Federal Circuit evidences a great deal of myopia to declare that these patents are not directed to a technological advance, even if they can string together citations that seem to support their sterilized findings. 

Shouldn’t it seem self evident in 2017 that an open payment system for processing fares on a mass transit system is a technological advance? Shouldn’t it also be equally self evident that there is nothing abstract about the tangible device used by a person who is admitted to a subway through an open payment system? And it’s hard to miss the financial reality that the funds actually do change hands and the fare is paid, isn’t it? And while the app itself may be intangible (i.e., not touchable), but the effects on commerce are very real and extremely valuable, in fact one could argue that the effects on commerce are so significant that they are enabling. By and through this innovation commerce is enabled in an efficient and transparent manner through an immediate arms length negotiation in real time. Of course it should be self evident in the digital age we find ourselves in in this 21st century economy that such an immediately enabled commercial transaction is anything but abstract, such transactions make the entire marketplace work.  Indeed, so significant was this technology that Chicago Transit is paying an infringer for the service.

An important conversation is going to have to happen in Washington, D.C. if we want to stand any hope of keeping the U.S. patent system from declining even further from its current 10th-place ranking internationally. A technological advance can be intangible and its intangibility is no good reason for the advance to be found unpatentable. The European Union understands this and has adopted a technical standard, which while not perfect is a far cry better than anything the U.S. courts have been creating as they go along, which is exactly what they do — make it up as they go along as evidenced by the fact that the so-called judicial exceptions to patent eligibility are where these innovations are failing. The Supreme Court and Federal Circuit at their direction are applying extra-statutory tests not envisioned by the Patent Act because these activist judges believe they know better what should be patent eligible. Sadly, this judicial activism is eroding the once mighty U.S. patent system and driving patent and innovation activity to Europe and China.

U.S. patent law has long understood the patentability of processes; the first patent issued in the U.S. was for a process of making potash. But because Smart Systems’ process involves a financial transaction, it somehow suddenly seems to become unpatentable as failing to satisfy the subjectivity of the standards created by judicial activists that do not find the laws of Congress sufficient.

What if the patents covered a system of admitting people to a mass transit system in such a way that money didn’t change hands, are they still valid then? Given the trajectory of the U.S. patent system and the decisions of the federal courts, which seem for some reason to be nearly allergic to financial service related patents, a system that would allow free access to a mass transit system would absolutely stand a much better chance to be found to be patent eligible under the judicial exceptions to the patent eligibility statute. What a sad commentary, as true as it unfortunately is. The U.S. supposedly is a capitalist nation that believes in markets and business, but patents on innovations that deal with transacting and payments that enable business to participate in the capitalist economy are frowned upon and ultimately invalidated as being improvidently granted. Something is very seriously wrong with U.S. patent policy indeed.

A real policy conversation is going to have to happen if we as a nation want any chance in maintaining an innovation based economy that can be competitive with China, a nation which seems to have a much better grasp on how to build a successful innovation economy. China is stepping up its rhetoric against IP infringers. China is relaxing barriers to software and business method patents. China is streamlining the examination process for Internet and big data patents. While plaintiffs in patent cases are being consistently derided as “patent trolls,” even by leaders in Washington who should have a much more principled view on the subject, China’s special IP courts are proving to be venues where foreign plaintiffs are seeing success. Even American tech giants like Qualcomm are going to China to assert infringement claims. And though it may tickle the funny bone of efficient infringer ally and patent troll Rep. Darrell Issa (R-CA), chair of the House IP Subcommittee, it’s true that the current incarnation of Chinese patent law is a framework that the U.S. may want to consider if it wants to remain internationally competitive as an economic power.

The Author

Steve Brachmann

Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He has become a regular contributor to IPWatchdog.com, writing about technology, innovation and is the primary author of the Companies We Follow series. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients.

Steve Brachmann

Gene Quinn is a Patent Attorney and Editor and founder of IPWatchdog.com. Gene is also a principal lecturer in the PLI Patent Bar Review Course and an attorney with Widerman Malek. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

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 6 Comments comments. Join the discussion.

  1. Greg DeLassus November 9, 2017 12:49 pm

    “The majority opinion in the Federal Circuit was authored by Circuit Judge Evan Wallach with Circuit Judge Richard Taranto concurring.”

    Judge Taranto was not on this panel. The concurrence/dissent was by Judge Linn. Intriguingly, this is *exactly* the same panel composition as Ariosa v. Sequenom, in which Judge Linn also wrote a very perceptive concurrence, explaining how badly out of whack the §101 test has been allowed to drift.

  2. Greg DeLassus November 9, 2017 12:53 pm

    “Even American tech giants like Qualcomm are going to China to assert infringement claims.”

    I am not sure why that “even” is in there, or what this assertion is meant to illustrate/demonstrate. Patent law is necessarily territorial in scope. If the infringement occurs in China, where else could they sue on it but in China? You cannot sue for infringement of a U.S. patent based on activity that occurs in China, just as you cannot sue for infringement of a Chinese patent based on activity that occurs in the United States.

  3. Greg DeLassus November 9, 2017 1:05 pm

    “[J]udicial activism is eroding the once mighty U.S. patent system and driving patent and innovation activity to Europe and China… A real policy conversation is going to have to happen if we as a nation want any chance in maintaining an innovation based economy that can be competitive with China, a nation which seems to have a much better grasp on how to build a successful innovation economy.”

    I am entirely sympathetic to the main point of this essay (viz., that Smart Systems is an elegant example of how badly messed up §101 law has become), but many of the alleged lines of evidence to support the main conclusion consist of misunderstandings of how the law works, as illustrated by the quoted portion above. It is not *possible*, even if the U.S. were to efface Title 35 from the books, to damage patent law in a manner that uniquely detracts from U.S. competitiveness.

    A research lab located in China can get U.S. patents, just as a research lab located in the U.S. can get Chinese patents. Therefore, no sane company makes decisions about where to locate its R&D facilities based on patent law. It is nonsensical to suggest that “innovation activity [might be driven] to Europe and China” based on patent considerations. If innovation really is moving to China and/or Europe (one would like to see actual evidence on this point), it has to do with supply chains or tax law or the like, not patent law.

    Meanwhile, U.S. patent law spurs Chinese companies to invest in R&D as just as much as U.S. patent law spurs U.S. companies to invest in R&D. The necessary implication, then, is that if U.S. patent law becomes as less meaningful incentive for R&D investment, the resulting loss of innovation incentives will be just as much a drag on Chinese innovation as on U.S. innovation.

    I think that innovation is good, and patents are therefore good because they encourage innovation. The idea, however, that there is some sort of competitiveness advantage that U.S. patent law might provide to U.S. firms is just totally at odds with the reality of the actual law that actually prevails in any major jurisdiction. It has been more than a century since the U.S. has confined U.S. patents to only U.S. citizens. The effect of any changes in U.S. patent law will necessarily be global, not parochially confined to the U.S.

  4. Gene November 9, 2017 1:51 pm

    “Shouldn’t it seem self evident in 2017 that an open payment system for processing fares on a mass transit system is a technological advance? Shouldn’t it also be equally self evident that there is nothing abstract about the tangible device used by a person who is admitted to a subway through an open payment system?”

    shouldn’t it be self-evident that claim language shorn of any technological advance and any non-generic tangible device limitations are invalid? when will critics start focusing on the claim language and specifically cite non-generic words in the claim that satisfy minimal requirements under 101? critics too often focus on the red herring fabulous RESULTS of a non-claimed invention (how tiresome is it to keep reading “an MRI machine is NOT patentable???”). the older patent attorneys among us get it, you never heard of faber or landis, and that is your loss.

    From Openet’s SCOTUS petition:
    To be patent eligible, a patent must claim “the means or method of producing a certain result, or effect, and not [the] result or effect produced.” Corning v. Burden, 56 U.S. 252, 267-68 (1854). This principle has driven this Court’s patentable subject matter jurisprudence for over 150 years, including most recently the “search for an inventive concept” described in the second step of the Alice/Mayo framework. Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347, 2355 (2014) (quoting Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. 66, 72 (2012)). Because a patent’s claims define the scope of the invention, this Court stated in both Alice and Mayo that this second step of the eligibility analysis turns on what is “in the claims.”

  5. Night Writer November 11, 2017 6:40 am

    There is simply no way to make sense of 101 other than as a replacement to the Patent Act. The new patent act is based on Alice. The question is if Congress passed laws like Alice, would they be Constitutional? I think the answer is clearly no.

    The SCOTUS would say that you cannot have an evidentiary standard based on a judge using whatever he or she believes was the case many years ago.

  6. Anon November 11, 2017 8:53 am

    Night Writer @5,

    Your post mirrors concerns that I have long put forth:

    Separation of Powers
    Void for Vagueness

    Most attorneys (outside of the Commonwealth of Massachusetts) contain within their state attorney oath the distinction of loyalty to the Constitution above the loyalty to the judicial branch organized under that Constitution.

    While patent law does not occupy the minds of the vast numbers of attorneys who practice in other areas of law, the fundamental transgressions by the government in our little neck of the woods should send shivers down the spines of any attorney worth their salt.

    HOW this has occurred may be debated separately (my view on the capture is that decisions like Citizens United has created a larger voice for the monied jurisitic persons).

    THAT this has occurred (and continues to occur) has gone beyond the point of debate.

    Those that do choose to debate reveal an underlying animus against innovation and are either t001s or philosophical zealots seeking something other than why patent law made it into its position in our Constitution in the first place.

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