Alice Corporation Pty. Ltd. v. CLS Bank International

Issues: 

Are claims to computer-implemented inventions—including claims to systems and machines, processes, and items of manufacture—patent-eligible subject matter?

Oral argument: 
March 31, 2014

Alice Corporation was granted patents on several processes and systems relating to the use of computer software to facilitate securities trading and reduce risks of parties not fulfilling contractual obligations. CLS Bank developed software for its own use in similar transactions. CLS brought an action for declaratory judgment, asserting that Alice’s patents were subject-matter ineligible because they did no more than recite abstract ideas regarding fundamental economic concepts. Alice counterclaimed, asserting that CLS infringed Alice’s patents. The district court found the Alice patents invalid, but the Federal Circuit reversed, holding that Alice’s patents fell within the “abstract ideas” exception to the generally broad policy of patent eligibility. Alice argues that the abstract ideas exception is meant to be read narrowly and apply to fundamental truths such as facts of nature. CLS counters that Alice’s patents merely cover fundamental economic concepts and that these should fall within the exception. At issue is a basic question about the scope of patent-eligible subject matter, and the breadth of the abstract ideas exception. The Court’s decision could fundamentally alter the scope of what is patentable.  The decision may encourage innovation in the software and other industries by rewarding those who expend resources to bring about a useful product to the public.

Questions as Framed for the Court by the Parties: 

Whether claims to computer-implemented inventions—including claims to systems and machines, processes, and items of manufacture—are directed to patent-eligible subject matter within the meaning of 35 U.S.C. § 101 as interpreted by this Court? 

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Facts

In securities trading, when two parties agree to a trade there is often a time lapse between when the parties enter into the agreement and when the actual trade is performed. See CLS Bank Int’l v. Alice Corp., 717 F.3d 1269, 1274 (Fed Cir. 2013). To reduce the risk of one party being left “holding the bag” after performing their end of the bargain, contracting parties often use a trusted third party to verify the parties’ ability to perform. See id.

Alice Corporation (Alice) is an Australian company that owns several patents with essentially the same function: to manage risks in computerized trading in which a third party settles obligations between the two primary parties. See id.CLS Bank International (CLS) uses similar software to facilitate transactions like the third-party assurance that Alice provides. In 2007, CLS sued Alice, seeking a declaratory judgment from the District Court for the District of Columbia that Alice’s patents were invalid and enforceable, and that CLS did not infringe. See id.Alice counterclaimed and alleged patent infringement. See id. 

The Intellectual Property Clause of the Constitution gives Congress the power to legislate in the area of patent and copyright “[t]o promote the progress of science and useful arts . . . ” See U.S. Const. art. I, § 8.  In turn, 35 U.S.C. § 101, the patent statute defining patentable subject matter, requires that inventions and discoveries be “new and useful.” There are four categories of patent-eligible subject matter: processes, machines, manufactures, and compositions of matter. See Alice Corp., 717 F.3d at 1276. The Supreme Court has stated that these categories should be read broadly to encourage innovation, consistent with the purpose of the patent system outlined in the Constitution. See id.  

Alice’s patents fall into three more specific categories: (1) method patents; (2) data processing system patents; and (3) computer-readable media patents. See id.at 1275–76. The specific patents include patents reciting methods of parties’ obligations in the exchange, patents regarding data processing systems, and patents that claim computer-readable media (such as DVDs and CDs) containing program code for directing these securities exchanges. See id.

The district court granted summary judgment for CLS, holding that Alice’s method patents were invalid because they claimed the abstract idea of reducing risk using an intermediary to achieve simultaneous exchanges. See id. at 1275.The data processing system patents were also held subject-matter ineligible because recognizing their validity would prevent others from using abstract concepts like the use of a neutral third party to minimize risk. See id. Likewise, the computer-readable media patent claims failed because they were directed to the same abstract concept even though the claims related to software, a nominally different invention. See id.A panel of the Court of Appeals for the Federal Circuit reversed, holding that the claims for methods, computer-readable media, and systems were all patent eligible under § 101. See id.at 1273.On rehearing en banc, in several different opinions, a majority of Federal Circuit judges found that all the patents were not patent-eligible because they merely stated abstract methods coupled with normal computer hardware adapted to perform the methods. See id.at 1292. The United States Supreme Court granted certiorari on the question of whether claims to computer-implemented systems and processes were patent eligible under § 101.

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Discussion

CLS claims that Alice’s patents merely recite abstract ideas related to the fundamental economic concept of using an intermediary in settlement, and thus are ineligible under § 101. See Brief for Respondents, CLS Bank Int’l and CLS Services Ltd. at 24. Alice counters that the abstract ideas exception to otherwise patentable processes is narrow and restricted to cases where patents only restate fundamental truths equivalent to laws of nature. See Brief for Petitioner, Alice Corp. Pty. Ltd. at 19. 

ENCOURAGING INNOVATION AND THE ABSTRACT IDEA EXCEPTION 

A group of technology-based companies led by Trading Technologies International argues that the abstract ideas exception should be read narrowly. See Brief of Amici Curiae Trading Technologies, et al. (“Trading Technologies”) in Support of Petitioner at 15–16. Trading Technologies argues that to properly use the patent system to “promote the Progress of Science and the useful Arts,” as stated in the Constitution, a broad conception of patent-eligible subject matter is necessary. See id.at 16–17. IEEE-USA, although supporting neither party, argues that if inventions implemented through software cannot be patented, it will discourage investment at the initial stages of invention and discovery. See Brief of Amicus Curiae IEEE-USA in Support of Neither Party, at 25–26. Because the most important and innovative ideas are often the most risky, IEEE-USA claims there is a need to patent these ideas and process at an early stage so that software-based companies can solicit more investments to continue operating. See id.at 25. 

CLS argues that allowing patents like Alice’s would not encourage innovation because it would not reward the party who actually spends resources making a useful product. See Brief for Respondents at 54–55. CLS claims that patents like Alice’s compensate companies for simply imagining what a website or computer program is capable of, while leaving to other companies the more difficult task of developing the application of the idea. See id. at 54. CLS continues that exclusive rights should be allocated to those expending the resources to bring the idea to fruition. See id. at 55. CLS contends that patents like Alice’s seek to hold the idea hostage and force companies like CLS to forfeit million-dollar investments on its emerging products that incorporate these abstract concepts. See id. 

THE NEED FOR CLARITY IN APPLYING THE ABSTRACT IDEAS EXCEPTION 

The American Intellectual Property Law Association (AIPLA), writing in support of neither party, states that the current law gives lower courts an uncertain framework for applying the abstract ideas exception, and that this uncertainty has resulted in courts throwing out too many patents because the subject matter appears too vague, too broad, or already invented. See Brief of Amicus Curiae American Intellectual Property Law Association in Support of Neither Party at 11–12. Trading Technologies agrees and argues that unlike other exceptions to patent eligibility such as scientific truths and laws of nature, “abstract ideas” is too flimsy a term to be applied by lower courts in a consistent manner. See Brief of Trading Technologies at 20–22. Trading Technologies claims that because all inventions involve abstract ideas, using abstract ideas as a broad discretionary exception invites constant litigation. See id. at 21–22. Moreover, because the exception is judicially drawn, broad administration could contravene the Constitution’s assignment of Congress as the determining body of patent eligibility. See id.To cure these problems, Trading Technologies asks the Court to not conflate scientific truths and abstract ideas and asks that the latter be broadly considered patent eligible to avoid excessive § 101 challenges and prevent courts from infringing on congressional responsibilities. See id.

The American Antitrust Institute (AAI), which supports CLS, agrees that the uncertainty of the abstract ideas exception is undesirable, but maintains that the Court can reemphasize its long-standing method and means test to aid lower courts in determining whether a patent falls within the exception. Brief of Amicus Curiae American Antitrust Institute in Support of Respondent at 8. The method or means test states that a patent should be granted for the method or means of producing a beneficial effect but not for the effect itself. See id.AAI uses the Pythagorean Theorem as an example of an unpatentable abstract idea under the method and means test. See id.at 10. As AAI points, out, the theorem explains why the square of the hypotenuse of a right triangle is equal to the sum of the squares of the other two sides, but the theorem does not cause this to be so. See id.AAI claims that emphasizing the method and means test would not only give clearer guidance to lower courts applying the abstract ideas exception but also serve the overall goal of the exception: preventing unnecessary constraints on competition and innovation. See id.at 4, 8. 

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Analysis

The Court will determine whether computer-implemented inventions are patent eligible within the meaning of 35 U.S.C. § 101. In Bilski v. Kappos, the Supreme Court stated three exceptions to patentable subject matter under §101: “laws of nature, physical phenomena, and abstract ideas.” 130 S. Ct. 3218, 3225 (2010). Petitioner Alice Corporation argues that its claims are patentable subject matter and do not fall under any of the exceptions. See Brief for Petitionerat 18. Additionally, Alice argues that its claims do not recite a fundamental truth, and therefore cannot be considered an abstract idea. Seeid.Respondent CLS Bank argues that Alice’s claims fall squarely within the abstract ideas exception because the risk-management principle proposed by Alice is an abstract idea. See Brief for Respondents at 9. Furthermore, CLS argues that Alice’s claims do not assert “significantly more” than the idea of intermediated settlement, and therefore are not patent-eligible. See id. at 10 

DEFINING THE ABSTRACT IDEAS EXCEPTION 

Alice argues that the abstract idea exception is limited to patents that claim preexisting fundamental truths. See Brief for Petitioner at 22.Alice asserts that the Court has interpreted “abstract ideas” to be ideas that are the same as a law of nature, such as a mathematical formula. See id. Alice argues that the Court’s cases concerning the exceptions to § 101 make clear that the exception is specifically limited only to preexisting fundamental truths. See id.at 23–24. Using this framework, Alice asserts that claims to computer-implemented inventions are patentable unless they state only a fundamental truth and instructions to apply the truth through a computer program. See id.at 35.

CLS argues that the abstract ideas exception is aimed at making sure the patent system cannot take away from the public the necessary and foundational tools for innovation. See Brief for Respondents at 17. CLS contends that, in addition to mathematical formulas and fundamental truths, the Court has recognized that abstract ideas also include fundamental economic principles. See id.CLS asserts that, in Bilski, the Court held that hedging is a fundamental economic principle that cannot be patented. See id.CLS contends that in order to avoid the holding in Bilski, Alice seeks to redefine the abstract idea doctrine to only include mathematical principles or those principles that are wholly separate from any human action. See id. at 19. CLS argues that the hedging concept in Bilski did not exist without any human action, and yet the Court still found it to be an abstract idea because it has been a longstanding principle of commerce. See id.at 20. 

Alice contends that because its claims set up a specific configuration of computer hardware to provide a unique computer program, it cannot be considered a fundamental truth and is therefore patentable. See id.at 44. Alice asserts that nowhere in the language of the claims does it recite a fundamental economic principle and the claims are not reducible to a mathematical formula. See id. Alice argues that the lower court confused the meaning of the abstract ideas exception, and the court’s interpretation wrongly found Alice’s claims ineligible for patenting because the claims were based on a “disembodied concept.” See id. at 46. Alice asserts that every process claim can be framed as being based on a disembodied concept, and a claim is only ineligible when a disembodied concept is the sole thing the claim is asserting. See id.Alice contends that in order for a claim to be considered an abstract idea it must exist apart from any human action, and Alice’s claims require human action. See id. at 44.

CLS responds that because Alice’s claims are fundamental economic principles of intermediated settlement, the claims represent abstract ideas. See Brief for Respondents at 24. CLS asserts that the concept of addressing settlement risk through intermediation is “fundamental and ancient” and Alice’s claims only describe these principles. See id.CLS finds that intermediated settlement is also usually referred to as an escrow agreement, and many definitions of the escrow practice are similar to Alice’s claims. See id.at 26. Therefore, CLS contends that the lower courts correctly held that Alice’s claims are essentially a form of escrow. See id. at 27. CLS argues there is no difference between Alice’s claims concerning intermediated settlement and the concepts the Supreme Court dealt with in Bilski involving risk management, and therefore the Court should find that Alice’s claims are abstract ideas and unpatentable. See id. at 28.   

DO ALICE’S CLAIMS ADD “SIGNIFICANTLY MORE”?

Alice argues that its patent claims present a very substantial role for the computer, which must perform a specific series of steps that reach beyond simple computations. See Brief for Petitioner at 48. Alice contends that the claims cannot be interpreted as doing nothing more than stating generally the idea of third-party intermediation. See id. at 49. Alice asserts that the claims state particular ways of accomplishing third-party intermediation, and that there are several other ways that are available. See id.As an example, Alice argues that the claims require the computer to create two shadow accounts, and that this is not the only way to implement exchanges. See id.Thus, Alice contends that its claims are different from cases in which the Court held that the claims had very insignificant “post-solution activity.” See id. at 50. Alice specifically points out that in Bilski the Court found no post-solution activity, and in Mayo Collaborative Services v. Prometheus Labs, Inc., the post-solution activity was only the act of applying the particular natural law to the patient. See id.Alice contends that the claims require steps that are beyond the principle of third-party intermediation. See id. Alice likens the situation in this case to the case of Diamond v. Diehr, where the claim was held patent-eligible because, although the process did employ a mathematical formula, the patent was not meant to cover just the use of the formula but rather the use of the formula combined with each step in a process. See id. at 41. Therefore, Alice argues that its claims include much more than the use of a common formula.See id.at 50–51.

CLS argues that the Court has consistently held that merely implementing an “abstract idea” through a computer is not a patentable application of the idea. See Brief for Respondents at 35. CLS asserts that the claims in Diehr were held eligible because they added a new and inventive application of an existing formula, and not because the ideas could be implemented through a computer. See id. at 37. CLS contends that the issue here centers on whether in the specific context of this claim computer implementation of the idea is significant enough to create patent eligibility. See id.at 38. CLS asserts that if an abstract idea is not patentable, the machine implementing that idea must contain a new and inventive concept in order to be patent-eligible. See id.at 39. CLS argues that like the ineligible claims in Mayo, Alice’s claims only state an abstract idea along with the words “compute it.” See id. at 40. CLS contends that Alice’s use of a computer to create shadow accounts is a conventional idea, that electronic recordkeeping is a very basic computer function, and that Alice’s claims do not do more than this. See id. Therefore, CLS argues that Alice’s claims are not sufficiently inventive to fall outside the abstract ideas exception. See id.

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Conclusion

Whether Alice’s patents are determined to be subject matter eligible under 35 U.S.C. § 101 will depend on the narrowness or breadth the Court gives to the term “abstract idea.” Alice argues for a narrow reading of the abstract ideas exception to apply only to fundamental truths such as laws of nature. CLS argues that fundamental economic concepts should fall within the exception. The outcome of the case may affect how companies invest in innovative ideas, because patent eligibility may determine how profitable a project is and the unavailability of patents may prevent companies from investing in the long-term projects for implementation of ideas into concrete products. 

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