(Originally published in Los Angeles Daily Journal 6/19/2014)
Should patents be issued on business ideas that are implemented using conventional software and hardware techniques? The U.S. Supreme Court answered that question “no” Thursday in its long-awaited decision in CLS Bank International v. Alice Corp., 13-298. The case involved a patented computerized system for reducing “settlement risk” — the risk that only one party to a financial transaction will pay what it owes. Using a computer as an intermediary, the system creates “shadow” credit and debit records that mirror the balances in the parties’ real-world bank accounts. The intermediary updates the shadow records in real time as transactions are entered, and it only allows transactions to be completed when both sides have sufficient resources to satisfy their mutual obligations.
The court reviewed the case after an en banc panel of the U.S. Court of Appeals for the Federal Circuit found itself bitterly divided and unable to reach a majority decision. Several judges decried what they saw as dangers posed to the patent system by application of recent Supreme Court precedent on patent eligibility under 35 U.S.C. Section 101. The statute provides that patents can be issued on “any new and useful process, machine, manufacture or composition of matter.” It has long been interpreted to include an implicit exception: Laws of nature, natural phenomena, and abstract ideas are not patentable.
In its 2010 decision in Bilski v. Kappos, the Supreme Court held that “abstract” ideas — there the idea of hedging investment risks — should not be preempted by process patent claims.Bilski did not define the boundaries of an “abstract” idea, and the Federal Circuit could not decide whether the abstract-idea exception to patent eligibility should bar computerized system from being patented. Some of the claims at issue in CLS Bank recited details of the system, including processors, storage devices and other hardware, which were long thought by patent lawyers to be patentable subject matter. Federal Circuit Judge Kimberly Moore warned that if all of Alice Corp.’s system claims were declared invalid, “this case is 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.”
The Supreme Court was not swayed by such concerns. Writing for a unanimous court, Justice Clarence Thomas held that every one of petitioner’s Alice Corp.’s patent claims was invalid, regardless of the form in which they were written or how much detail they included on the computer implementation. At their heart, the claims were drawn to an abstract idea. That idea was the use of “intermediated settlement” — reducing the risk that one party would welsh on a deal by having an intermediary ensure that both would carry out their obligations. As Thomas explained, citing the court’s recent patent-eligibility decision in Association for Molecular Pathology v. Myriad Genetics, granting monopolies on laws of nature, natural phenomena and abstract ideas would impede innovation more than it would foster it, which is the main goal of the patent system.
The court used a two-step analysis to determine if a patent is invalid because it seeks to preempt an abstract idea or concept. First, a court must determine if the claims are directed to an abstract idea or concept. Without trying to determine “the precise contours” of “abstract ideas,” the courteasily found that using an intermediary to reduce settlement risk was abstract, just like the concept of risk-hedging in Bilski. Second, the court must satisfy itself that the claims recite an “inventive concept,” because they add a combination of elements that is “significantly more than a patent upon the [ineligible concept] itself.”
In 2012, the court used this same two-step framework in Mayo Collaborative Services v. Prometheus Laboratories to invalidate a method of administering the right amount of a drug to a patient. In that case, the patent was held invalid because it had preempted a scientific discovery about how effective the drug would be at different concentrations. The patent essentially described the discovery and told doctors to apply it using conventional drug delivery and blood-testing techniques. The court had no difficulty in Mayo disregarding these conventional techniques to conclude that the inventor had not done “significantly more” than try to preempt use of a basic discovery by combining it with conventional techniques.
In CLS Bank, the court similarly had no difficulty disregarding conventional computer and software techniques described by Alice Corp. in its patent. Alice Corp. had identified an “abstract idea” and tried to preempt it using conventional software and hardware techniques. As Thomas explained, “mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention.”
Justice Sonia Sotomayor wrote a separate concurrence in which Justices Ruth Bader Ginsburg and Stephen Breyer joined. The three justices would have held more directly that all business-method patents are invalid under Section 101. The court did not go that far in its decision, but it may not have needed to. After CLS Bank, striking upon a basic idea or concept of doing business no longer justifies patenting its use through conventional computer technology.