No, 'Alice' Wasn't a 'Death Knell' for Software Patents

September 8, 2014

James H. Morris

(as published in The National Law Journal)

Since the U.S. Supreme Court issued its highly anticipated Alice Corp. v. CLS Bank International decision in June, the popular legal press has been wringing its hands over this supposed "death knell" for software patents. Worried inventors, companies and investors have been reconsidering business and intellectual property strategies for fear that computer-implemented inventions are no longer eligible for patents. But such concerns are largely misplaced, as the court solidly upheld the patent eligibility of computer-implemented inventions and continued to refuse to recognize a separate exception for business methods.

What some consider good news is that the Alice decision gives lower courts and the U.S. Patent and Trademark Office more discretion to invalidate overly broad patents that have been the bread-and-butter of patent "trolls" for years. However, this added discretion may lead to uncertainty and self-censorship that might leave valuable intellectual property unprotected.

The Alice decision clarifies the law in two important ways. First, the court announced that the analytical framework set forth in its Mayo v. Prometheus decision in 2012 is now a single, unified test for all judicially created exceptions, including the abstract-idea exception at issue in Alice. Second, the court confirmed that patent eligibility does not depend on the statutory form of a claim (e.g., method, system or computer-readable medium).

This article examines the court's guidance on applying the Mayo analysis in the context of the abstract-idea exception and highlights issues that attorneys and applicants should consider when preparing and prosecuting patent applications directed to computer-implemented inventions.

Under the U.S. Constitution, Congress is granted the power to "promote the Progress of Science and useful Arts." Exercising this power, Congress determined that patent-eligible subject matter includes "any new and useful process, machine, manufacture or composition of matter, or any new and useful improvement thereof." However, courts have long refused to grant patents when a monopoly may tend to impede, rather than promote, innovation.

Updating Principles

There are three well-established exclusions to patent-eligible subject matter: laws of nature, natural phenomena and abstract ideas. The Alice decision is among the Supreme Court's recent attempts at updating the contours of these exceptions in view of modern technological, social and political developments, such as the rise of lawsuits by nonpracticing entities widely believed to stifle innovation.

The patents in Alice relate to a computer-implemented scheme for mitigating risk in financial transactions. The invention uses a computer system as a third-party intermediary and maintains, for each transacting party, records that mirror the balances in the party's real-world accounts. For each proposed transaction, the third-party computer system checks whether any party would become insolvent as a result of the transaction. If so, it does not allow the transaction.

Three types of claims were at issue in Alice: computer-implemented methods, data processing systems and computer-readable media (e.g., storage disks) containing program code. All parties in suit agreed that a programmed computer is a necessary component of the claimed invention.

Seven of 10 judges of the U.S. Court of Appeals for the Federal Circuit agreed that the computer-implemented method and computer-readable media claims were patent ineligible, although for different reasons. The judges were divided with respect to the system claims. In all, the court issued six different decisions, none of which garnered majority support, leaving the jurisprudence around subject-matter eligibility in complete chaos.

What Alice Tells Us

At the outset, the Supreme Court reiterated that patent law should not impede further invention by preventing the potential use of basic tools of scientific and technological work. The court cautioned that the judicial exceptions are to be applied to differentiate between patents seen as the "building blocks" of human ingenuity and those that use the building blocks to construct something more.

The court then applied the two-step analysis of Mayo: "[f]irst, we determine whether the claims at issue are directed to one of those patent-ineligible concepts" (i.e., laws of nature, natural phenomena and abstract ideas) and, "If so, we then ask, 'What else is there in the claims before us." The court explained that the second step involves a search for an "inventive concept" that would confirm the patent at issue was significantly more than a patent on an ineligible concept.

Notably, the court made clear that the same analysis applies regardless of the specific judicial exception at issue. This represents a significant simplification to prior jurisprudence, leading the Patent Office to issue updated instructions to its examining corps to apply the Mayo framework across the board, rather than just in cases involving laws of nature and natural phenomena.

In step one of the Mayo analysis, the court found that the concept of using a third party to mitigate risk in financial transactions was unequivocally within the sphere of "abstract ideas."

In so holding, the court identified several distinct subcategories of abstract ideas, such as: "preexisting, fundamental truth[s]" like the Pythagorean Theorem; mathematical algorithms per se; and "fundamental economic practice[s]." There is also some suggestion that a "method of organizing human activity" may be considered an abstract idea.

For step two of the Mayo analysis, the court made clear that "the relevant question is whether the claims [in Alice] do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer." The court found that the claims do not and are thus patent ineligible.

Examining its own precedents, the court noted first that adding conventional steps does not amount to the creation of an "inventive concept." It then explained that a purely conventional computer implementation (e.g., on a standard digital computer) is insufficient to transform an abstract idea into a practical application. Lastly, the court affirmed that limiting the use of an abstract idea to a particular technological environment does not convert it into an "inventive concept" sufficient to pass muster.

By contrast, the use of a well-known mathematical equation to "improve an existing technological process" may be sufficient. For instance, in Diamond v. Diehr, the claimed method for curing rubber included a step of constantly measuring the rubber mold's temperature, which the industry had not previously accomplished.

In sum, the claimed invention must improve either the computer's function or some other technology, or otherwise amount to "significantly more" than the abstract idea itself.

What Alice Does Not Tell Us

Since the court determined that using a third party to mitigate financial transaction risk is definitely an abstract idea, it did not attempt to "delimit the precise contours of the 'abstract idea' category." It remains to be seen what the Federal Circuit will call "abstract" in future cases.

Moreover, the Federal Circuit is left to further develop step two of the Mayo test. Of particular interest is whether the abstract idea identified in step one can be treated as prior art in determining whether the claim recites an "inventive concept."

Lastly, a popular criticism is that Mayo injects novelty and inventiveness, traditionally the subjects of other sections of the patent statute, into the subject-matter eligibility inquiry. The Federal Circuit will need to calibrate the standards of novelty and inventiveness to avoid rendering the other sections superfluous.