CLS Bank International: A Fractured Landscape of Patent Eligibility for Business Methods and Systems*

After the Supreme Court ruled in Bilski v. Kappos that a claimed method for managing (hedging) the risks associated with trading commodities at a fixed price was patent-ineligible under 35 U.S.C. § 101, the Federal Circuit has gone “hither and yonder” in trying to determine when other business methods and systems reach (or don’t reach) the patent-eligibility zone.  At the patent-ineligible end is CyberSource Corporations v. Retail Decisions, Inc. where Judge Dyk (joined by Judges Bryson and Prost) ruled that a method and system for detecting credit card fraud in Internet transactions was patent-ineligible under 35 U.S.C. § 101.  At the patent-eligible end is Ultramercial, LLC v. Hulu, LLC (recently vacated and remanded by the Supreme Court for reconsideration by the Federal Circuit) where Chief Judge Rader (joined by Judges Lourie and O’Malley) ruled that a claimed method for monetizing and distributing copyrighted products over the Internet was patent-eligible.  See Throwing Down the Gauntlet: Rader Rules in Utramercial that Breadth and Lack Specificity Does Not Make Claimed Method Impermissibly Abstract.

These polar opposite decisions in CyberSource and Ultramercial illustrate how fractured the Federal Circuit’s patent-eligibility landscape has now become for business methods and systems.  The most recent split decision in CLS Bank International v. Alice Corp. Pty. Ltd. where a claimed trading platform for exchanging business obligations survived a validity challenge under 35 U.S.C. § 101 epitomizes this problem.  As CLS Bank International unfortunately shows, an objective standard for judging the patent-eligibility of business methods and systems remains elusive, subject to an ever growing “tug-of-war” between the “inclusive” and “restrictive” patent-eligibility factions of the Federal Circuit.  In particular, after CLS Bank International, we are no closer to having a judicially accepted definition of what is (or is not) an “abstract idea” when it comes to claiming business methods and systems.

The CLS Bank International case started out as a declaratory judgment action by CLS Bank International against Alice Corporation, the owner of U.S. Pat Nos. 5,970,479 (the ‘479 patent), 6,912,510 (the ‘510 patent), 7,149,720 (the ‘720 patent), and 7,725,375 (the “375 patent), asserting that these patents were invalid, unenforceable, or otherwise not infringed.  All of these patents essentially related to a computerized trading platform for exchanging obligations in which a trusted (independent) third party settled those obligations between a first and second party so as to eliminate “settlement risk.”  CLS Bank International moved for summary judgment of invalidity under 35 U.S.C. § 101 with respect to asserted claims 33 and 34 of the ‘479 patent, all claims of the ‘510 and ‘720 patents, and later, all claims of the ‘375 patent after it issued.

The district court granted CLS Bank International’s summary judgment motion that the asserted claims of these four patents were invalid under 35 U.S.C. § 101.  Applying the almost moribund “machine or transformation” (MOT) test, the district court ruled that the nominal recitation of a general purpose computer in the method claims did not tie them to a particular machine or apparatus.  With respect to the “abstract idea” exception, the district further ruled that the method claims were invalid under 35 U.S.C. § 101 as 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.”  Regarding the computer system and media claims (the media claims were in the so-called “Beauregard” format), the district court essentially concluded that, because the method claims were directed to an “abstract concept,” the computer system and media claims were likewise directed to that “abstract concept,” and therefore patent-ineligible under 35 U.S.C. § 101.

Judge Linn, writing for the majority of the Federal Circuit panel (Judge O’Malley joining), reversed the district court, holding that the method, computer system, and media claims were “all directed to patent eligible subject matter” under 35 U.S.C. § 101.  Judge Linn’s opinion initially juxtaposes 35 U.S.C. § 101, with 35 U.S.C. §§ 102, 103, and 112 which Linn characterized as doing “the substantive work of disqualifying those patent eligible invention that are ‘not worth of a patent,’” citing the 2010 Federal Circuit decision of Research Corp. v. Microsoft Corp. (which suggests the latter three patent statutes should have primacy in validity determinations).  Even so, Judge Linn characterized these four sections as being equal, but also as serving different purposes and playing distinctly different roles in determining validity.  Somewhat surprisingly in view of what Justice Breyer said in Mayo Collaborative Services v. Prometheus Labs (which appears to virtually mandate 35 U.S.C. § 101 as the “threshold” validity inquiry), Judge Linn also said it was within the discretion of the district court to decide “when to address the diverse statutory challenges to validity.”  In other words, while the district court appropriately exercised its discretion to first address the patent eligibility challenge under 35 U.S.C. § 101, the district court could have, instead, (appropriately in Linn’s view) addressed the other validity challenges first.

Somewhat “tongue in cheek,” Judge Linn observed (correctly in my view) that, while Mayo Collaborative Services reiterated the three exceptions to patent eligibility (laws of nature, physical phenomena, and abstract ideas), “it did not directly address how to determine whether a claim is drawn to an abstract idea in the first instance.”  In fact, Linn’s further observation (the “abstractness of the ‘abstract ideas’ test to patent eligibility has become a serious problem, leading to great uncertainty and to the devaluing of inventions of practical utility and economic potential”) doesn’t understate how useless the Supreme Court’s “abstract idea” test currently is.  Indeed, I must applaud Judge Linn when says that the “dividing line between inventions that are directed to patent ineligible abstract ideas and those that are not remains elusive.”  Never were truer words said about what is very wrong with the Supreme Court’s “abstract idea” test.  (Linn even quotes, of all people, Professor Lemley as saying:  “Put simply, the problem is that no one understands what makes an idea ‘abstract.’”)

Not too surprisingly, Judge Linn’s opinion in CLS Bank International also addresses the doctrine of “preemption” as “further elucidate[ing] the ‘abstract idea’ exception.”  After a fairly lengthy discussion of the “preemption” doctrine as it has evolved in the case law, Judge Linn observes that the “essential concern is not preemption, per se, but the extent to which preemption results in the foreclosure of innovation.”  Accordingly, in Judge Linn’s view, for the “preemption” doctrine to apply, the claims must be “directed to no more than a fundamental truth [that] forecloses, rather than foster[s], future innovation.”  (I’ll come back later as to why I believe the “preemption” doctrine has been misstated and miscited in the patent-eligibility context.)

Judge Linn also acknowledged that the “mere implementation on a computer of an otherwise ineligible abstract idea will not render the asserted ‘invention’ patent eligible,” citing CyberSource, the 2012 decision of Fort Properties, Inc. v. American Master Lease LLC (investment tool for buying-selling properties patent-ineligible), and his 2012 opinion in Dealertrack, Inc. v. Huber (computer-aided method for processing credit applications over electronic networks patent ineligible).  But Linn also observed that a “claim that is drawn to a specific way of doing something with a computer is likely to be patent eligible whereas a claim to nothing more than the idea of doing that thing on a computer may not.”  Even so, Linn noted (quite correctly) that “great uncertainty remains, and the core of that uncertainty is the meaning of the ‘abstract ideas’ exception.”

The most poignant statement in Judge Linn’s opinion about how claim language is all too often mistreated in applying the “abstract idea” test is the following:

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 (citing Diamond v. Diehr).  (Emphasis added.)

Wow!  I can also almost hear in Linn’s statement above the resurrection of the discarded “useful, concrete, and tangible result” (UCT) test of State Street Bank & Trust Co. v. Signature Financial Group, Inc. which, in my opinion, is the only objective test for determining whether the claimed invention is (or is not) merely an “abstract idea.”  If nothing else, Linn’s statement refocuses appropriate attention on the key principle in Diehr that the claimed invention must be considered “as a whole” in determining patent eligibility under 35 U.S.C. § 101; that key principle was unfortunately completely glossed over in Mayo Collaborative Services.

Judge Linn follows this key principle from Diehr with yet another key principle:  “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 [35 U.S.C.] § 101.”  That essentially restates another “truism” from Ultramercial that the claimed invention should be “manifestly abstract” before 35 U.S.C. § 101 should come into play.  Indeed, Judge Linn later concludes this “manifestly abstract” thought by stating that “it is inappropriate to hold that the claim is directed to a patent ineligible ‘abstract idea’ under 35 U.S.C. § 101” 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.”

Where Judge Linn’s opinion runs into trouble is in applying these “key principles” he enunciates to the specific method claims in CLS Bank International.  Based on what the district concluded, one key assumption that Linn’s opinion relies upon is that each of the method claims “requires computer implementation.”  That’s certainly true of the method claims of the ‘510 patent which specifically recited an “electronic adjustment limitation” and which even CLS Bank International agreed “require[ed] the use of a computer.”  Unfortunately, method Claim 33 of the ‘479 patent (which was deemed to be “representative” of the asserted method claims) does not recite any sort of “computer implementation.”  In fact, method Claim 33 of the ‘479 patent could, conceivably (if with some difficulty), be carried out entirely without the use of a computer.

An even greater problem with Judge Linn’s opinion is reconciling how this supposed “computer implementation” of the claimed methods in CLS Bank International is a “practical application of a business concept in a specific way” which is different from the claimed methods held to be patent ineligible in CyberSource, Fort Properties and even his own opinion in Dealertrack.  Unfortunately, Linn’s opinion does not directly address how the claimed methods in CLS Bank International are distinguishable from what appear to be similar claimed methods (at least in general concept of the business methods involved) from those deemed patent ineligible in these three cases.  That weakness in Linn’s majority opinion was not lost on dissenting Judge Prost:  “These authorities [including Dealertrack and Fort Properties] should have compelled us to hold that the asserted method claims in this case are abstract.”  And if the claimed methods in CLS Bank International cannot be distinguished from those in CyberSource, Fort Properties and Dealertrack in terms of patent eligibility, it’s also hard to see how the claimed systems and media in CLS Bank International make it to the patent eligibility zone.  (I’ll also come back later to how Linn’s ruling in CLS Bank International might be reconciled with his ruling in Dealertrack.)

Judge Prost’s dissenting opinion makes the snide remark that the Supreme Court in Mayo Collaborative Services “hint[ed] (not so tacitly) that our subject matter patentability test is not sufficiently exacting.”  But the holding in Mayo Collaborative Services was also based on the claimed drug dosage calibration method there essentially covering a “law of nature,” not an “abstract idea.”  Even worse, Judge Prost’s dissent simply states that the “asserted patent claims are abstract ideas repackaged as methods and systems.”  While stating that the “majority questions whether the Supreme Court’s abstract idea test is workable at all,” nowhere does Judge Prost’s dissenting opinion say or define exactly what the Supreme Court’s “abstract idea” test is, other than “I know it when I see it.”  And as Judge Linn’s majority opinion correctly observes in footnote 4, Judge Prost’s dissent “engages in the same flawed analysis as the district court by allegedly ‘[s]tripp[ing the claims] of jargon’ and creating a table of the ‘plain English translation’ for each claim element.”

Another troublesome view expressed in Judge Prost’s dissent is that patent-eligibility of the claims under 35 U.S.C. § 101 must now be based on the “inventive concept.”  (This “inventive concept” view is apparently based on a couple of passing references in Mayo Collaborative Services which discuss where Prometheus’ claimed drug dosage calibration method fell relative to the claimed inventions in Parker v. Flook and Diehr.)  In fact, Judge Prost’s dissent criticizes the Judge Linn’s opinion for “not inquir[ing] whether the asserted claims include an inventive concept.”  But in rebuttal, Judge Linn states in footnote 2 of his majority opinion:  “that is precisely what the majority has done [i.e., considered the inventive concept] in examining the language of the claims themselves and in criticizing the district court for ignoring the invention the patentee actually claims.”  As correctly observed by Judge Linn in footnote 2, the reference to “inventive concept” in Mayo Collaborative Services also cannot (and should not) “be read to endorse overlooking the actual terms of the claims or the distillation of claim language to mere generalities.”  Otherwise, the “inventive concept” would impose a “novelty” or “nonobviousness” requirement in the patent-eligibility analysis under 35 U.S.C. § 101 in violation of Diehr.

Judge Prost’s dissent is correct in observing that “[w]hen it comes subject matter patentability, we do not write on a blank slate.”  Unfortunately, as Judge Linn’s majority opinion and Judge Prost’s dissenting opinion in CLS Bank International painfully show, that “slate” is now so muddled that we are without any workable objective definition of what is an “abstract idea” for evaluating when business methods and systems reach the patent-eligibility zone.  The Federal Circuit panels continue to bounce back and forth between the “restrictive” patent-eligibility approach exemplified by CyberSource (which Judges Dyk, Prost, Bryson, and Moore appear to subscribe to) and the “inclusive” patent-eligibility approach exemplified by Ultramercial (which Chief Judge Rader, as well as Judges Linn, O’Malley, Newman, and Lourie appear to subscribe to).  Even more alarming (and exasperating) is that each decision on patent-eligibility appears to hinge completely on the “luck of the draw” as to which Federal Circuit judges make up the respective panel.  That virtually “screams out” for an en banc decision by the Federal Circuit to resolve these conflicting patent-eligibility approaches and to define a workable (and objective) “abstract idea” test.  (In my opinion, after Bilski, expecting the Supreme Court to develop a workable (and objective) version its “abstract idea” test for the patent-eligibility business methods and systems is a “pipe dream.”)

I’m also of the view that the current “slate” for determining patent-eligibility of business methods and systems under 35 U.S.C. § 101 requires at least some “rewriting” in certain respects.  First, as Judge Linn’s majority opinion in CLS Bank International suggests, more credence should be given to claimed business methods and systems that are truly “electronically” (e.g., computer) or machine implemented as being presumptively in the patent-eligibility zone.  If one (and especially more) of the steps clearly specify or recite electronic/computer/machine implementation, the more likely it is that the claimed business method is patent-eligible under 35 U.S.C. § 101.  In other words, electronic/computer/machine implementation should be viewed as taking the claimed business (or system) out of being merely an “abstract idea,” and into a “safe harbor” for patent-eligibility.  That’s also how the holding in CLS Bank International can be reconciled with Dealertrack.  The problem in Dealertrack is that the claimed method there simply said “computer-aided” in the preamble (in my opinion, always a problematical spot in the claim for establishing validity value) without ever stating specifically how any of the recited steps were computer-implemented.  In fact, by specifying/reciting that the steps are implemented electronically/by computer/by machine, that should also avoid the charge often made that certain claimed business methods merely involve “mental steps.”

Second, the “preemption” doctrine should not be treated as a patent-eligibility issue under 35 U.S.C. § 101, but instead as “enablement” issue under 35 U.S.C. § 112, first paragraph.  One of the real problems in patent-eligibility jurisprudence is that O’Reilly v. Morse is frequently (mis)cited as a patent-eligibility case.  In fact, O’Reilly v. Morse is not a patent-eligibility case, but is instead what we would now call a “is the claim scope fully enabled?” case.  What Samuel Morse tried to claim was “electro-magnetism, however developed for marking or printing intelligible characters, signs, or letters, at any distance” when all he could exemplify was his specific telegraph system.  The Supreme Court was unwilling (rightly so) to give Morse such broad claim scope which he had failed to fully exemplify and “enable.”

Third, using Judge Linn’s words in CLS Bank International, unless the claimed business method or system is found to be “directed to nothing more than a fundamental truth or disembodied concept” (i.e., is “manifestly abstract”), further judicial resources should not be squandered on patent-eligibility under 35 U.S.C. § 101.  Instead those judicial resources should be directed towards the primary validity statutes, namely 35 U.S.C. §§ 102, 103, and 112.  What is particularly ironic about Judge Prost’s dissenting opinion is it “squanders” much of its judicial energy railing against the Judge Linn’s majority opinion on the patent-eligibility issue under 35 U.S.C. § 101, yet later suggests the claimed business method and system in CLS Bank International is highly vulnerable to attack for “lack of novelty” or “obviousness under 35 U.S.C. §§ 102 and 103.  In characterizing the “basic idea” of the claimed business method and system as being “use of an intermediary in a financial transaction), Judge Prost makes the following statement:  “this basic idea of ‘credit intermediation’ is not just abstract; it is also literally ancient” (citing a 2002 paper exploring the use financial intermediaries in the Early Roman Empire).

Fourth, I would suggest trying to resurrect the “useful, concrete, and tangible results” (UCT) test of State Street too hastily discarded by the Federal Circuit in its en banc Bilski ruling.  I know the UCT test has its critics and is problematical in view of Supreme Court’s own Bilski ruling.  But all other proposed standards for judging patent-eligibility under 35 U.S.C. § 101, especially the Supreme Court’s “I know it when I see it” test for “abstract ideas,” have paled to subjectivity, and have simply led to conflicting, inconsistent, and irreconcilable rulings by the various Federal Circuit panels.  Put it this way, the UCT test at least tries to judge objectively what is an “abstract idea” which the Supreme Court’s current “I know it when I set it” test does not.  If nothing else, readopting the UCT test might get the Supreme Court to “put up or shut up” on what it means by an “abstract idea.”

I realize that my proposed modifications/alteration to the currently fractured patent-eligibility landscape are heretical and certainly controversial.  But I also believe we must IMMEDIATELY challenge (and hopefully change) the current chaotic “slate” for judging the patent-eligibility of business methods and systems under 35 U.S.C. § 101, rather than continuing to endure the judicial pendulum that swings between the poles of CyberSource and Ultramercial.  If ever there was a case for mending this fracture patent-eligibility landscape, the split decision in CLS Bank International is as good a candidate as any.

*© 2012 Eric W. Guttag.  Posted July 12, 2012 on IPWatchdog.com