Federal Circuit Fails to Provide Certainty on Patentability of Software Inventions in CLS Bank

May 10, 2013

Executive Summary

On Friday, May 10, the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) handed down its en banc decision in CLS Bank International v. Alice Corporation Pty. Ltd., relating to what type of software related inventions are “eligible” for patenting.

The only binding portion of the Court’s decision consisted of a single paragraph, affirming without explanation the ruling of the trial court that the patent claims (numbered statements defining the scope of protection) in the case covered merely an “abstract idea” which, under Supreme Court precedent, is ineligible for patent protection.

However, not all of the court’s ten judges agreed with that result. Those that did agree to affirm could not agree, among themselves, as to a common rationale. Thus, the Court did not follow the usual practice of issuing a “majority opinion” to which district courts and future appellate panels could refer for guidance.

Due to the lack of guidance, we expect the decision and its six accompanying opinions to generate great controversy. One of those opinions, in which four judges joined, predicted that the reasoning underlying the affirmance of the district court would be “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,” nearly 20% of all patents currently issued.

But it is too soon to tell if the sky is really falling. The U.S. Supreme Court may well take up the case and have the final word on this controversy. That decision, if one comes, would be at least a year away. And if the Supreme Court does not act, there may yet be several years of additional litigation over all the implications of CLS Bank.

Background

The patents in this case covered a computerized trading platform used to reduce settlement risk in financial transactions by effecting those transactions through a third-party intermediary that would act essentially as an escrow agent. The patents contained three types of claims: 1) method claims, which recite the steps that a computer implements; 2) claims to computer-readable media, such as hard disks, that contain programs that would implement those steps; and 3) data processing system claims, in which the system includes the computer and related hardware programmed to implement those steps. The district court had ruled all three types of claims ineligible for patenting.

As the law does not allow the patenting of an abstract idea, many accused infringers have argued that certain patented software inventions represent abstract ideas and should not be patent-eligible. Previous court decisions had reached widely differing results as to what types of programs were patent-eligible. Court watchers had expected that a full Federal Circuit decision in this case would resolve these inconsistent precedents and provide objective standards as to the patent eligibility of software-related inventions. It did not.

Federal Circuit Decision

Instead of issuing a majority opinion, the Federal Circuit issued six different opinions, each written and joined in by various of the judges, expressing widely diverging viewpoints. In one of those opinions, four of the judges noted that “nothing said today beyond our [one-paragraph] judgment has the weight of precedent,” suggesting that they do not, nor should district courts, feel bound by any statements in the opinions of the other judges.

The Federal Circuit seemed to regard reducing settlement risk by using an escrow agent as an abstract idea. Seven of the ten judges found the method and computer readable medium claims ineligible for patenting as covering only that abstract idea, without adding “significantly more” to the basic principle.

Eligibility of the system claims, however, sharply divided the judges. Five of the ten judges agreed with the district court that the system claims were not patent-eligible because they viewed the claimed system as simply implementing the abstract idea on a computer. The other five believed that particular limitations of the claims to the computer and other hardware, together with specific steps not inherent in the process of using an escrow, made those claims eligible for patent protection. (Since only a majority can overrule the district court, the even split on this issue had the effect of affirming the ineligibility of the system claims.)

Takeaways

Whatever the rationale underlying the split decision to treat a programmed computer as an abstract idea, this result raises concerns for any owner of a patent in which the claims, like those here, describe the steps a computer is programmed to perform. In one of the opinions, four of the ten judges warn that the reasoning of another opinion finding those claims ineligible would also render ineligible all patents that cover inventions directed to computer software or to hardware that implements software, an outcome which, they warn, could “decimate the electronics and software industries.”

While we await the Supreme Court’s decision whether to take the case, various Federal Circuit panels will soon begin issuing opinions in cases that have been held up, awaiting this case’s outcome. It would seem that those decisions, like those that preceded this one, will depend on the composition of the three-judge panel deciding each case.

It also seems likely that defendants in district court cases involving computer-related patents will now flood those courts with motions to dismiss, arguing that the patents there, like those struck down in CLS Bank, claim nothing more than an abstract idea. Given the failure of the en banc court to agree on objective standards to decide this question, the lower court decisions may end up all over the map.

As Judge Newman’s opinion in CLS Bank put it, “the en banc court undertook to remedy distortions flowing from inconsistent precedent on section 101. This remedial effort has failed.” Clarity as to whether and when software and system patents are patent-eligible—and where the dividing line lies between the unpatentable “abstract idea” and a patentable “practical application” of such an idea—remains tantalizingly distant.

Moreover, this decision has the potential to inject greater uncertainty into the patent procurement process, as it is currently unclear how the U.S. Patent and Trademark Office will react. Patent applicants will want to be mindful of this changing area of the law when drafting and prosecuting applications. They should also consider filing continuations for patents which grant in the near future, to leave open the option of adapting to any clarifying guidance the courts offer in the coming months and years.