Less than two years ago, in Return Mail, Inc. v. U.S. Postal Service, 139 S. Ct. 1853 (2018), the Supreme Court held that a government entity -- in that case, the U.S. Postal Service -- is not a "person" under the America Invents Act, and therefore unable to avail itself of the AIA's post-issuance review proceedings.  But the Court did not resolve whether quasi-governmental entities would be barred from post-issuance proceedings as well.  Here, the twelve regional Federal Reserve Banks brought covered business method (CBM) review proceedings seeking to invalidate two Bozeman Financial patents.  And the Federal Circuit found, contrary to the Supreme Court, that they are "persons," entitled to do so under the AIA.

Bozeman Financial is the assignee of U.S. Patent Nos. 6,754,640 and 8,768,840; the '840 patent issued from a continuation of a divisional of a continuation-in-part of the application that issued as the '640 patent.  The patents relate to the detection of fraud in financial transactions during payment authorization and clearing.  Claim 1 of the '840 patent, which is representative of all of the claims, covers:

A computer implemented method for detecting fraud in financial transactions during a payment clearing process, said method comprising:
    receiving through one of a payer bank and a third party, a first record of an electronic financial transaction from at least one of the following group: a payer, a point-of-sale terminal, an online account and a portable electronic device;
    storing in a database accessible by each party to said payment clearing process of said electronic financial transaction, said first record of said electronic financial transaction, said first record comprising more than one parameter;
    receiving at said database at least a second record of said electronic financial transaction from one or more of a payee bank and any other party to said payment clearing process as said transaction moves along said payment clearing process, wherein said second record comprises at least one parameter which is the same as said more than one parameter of said first record;
    each of said first and second records received at said database comprise at least two of the same said more than one parameters;
    determining by a computer when there is a match between at least two of said parameters of said second record of said first financial transaction received at said database and the same parameters of said first record of said financial transaction stored in said database, and wherein any party to said payment clearing process is capable of verifying said parameters at each point along said financial transaction payment clearing process;
    sending a notification to said payee bank participant with authorization to process said electronic financial transaction when said parameters match; and
    sending a notification to said payee bank participant to not process said electronic financial transaction when said parameters do not match.

The Federal Reserve Banks filed petitions for CBM review, challenging all 26 claims of the '640 patent and all 20 claims of the '840 patent.  Bozeman Financial filed a fulsome response to the Federal Reserve Banks' arguments in relation to the '840 patent, but sought to incorporate those rejoinders by reference in relation to the '640 patent rather than making the arguments independently.  The Patent Trial and Appeal Board rejected that attempted incorporation and found all of the claims of each patent invalid as drawn to ineligible subject matter under 35 U.S.C. § 101.  The Board also found 22 of the 26 claims of the '640 patent invalid under § 112.

Bozeman Financial appealed the Board's decisions to the U.S. Court of Appeals for the Federal Circuit.  In doing so, it raised only the substantive grounds for the Board's subject matter eligibility decisions; it did not raise the Federal Reserve Banks' personalty.  Instead, after the Return Mail decision was issued, Bozeman Financial filed a supplemental brief raising the argument that the Federal Reserve Banks are not "persons" under the AIA, and therefore the CBM reviews were void ab initio.  In addition to disputing the merits of Bozeman Financial's argument, the Federal Reserve Banks argued that Bozeman Financial waived the issue by not raising it below or in its opening brief.

Judge Moore, writing for the Federal Circuit, started from the proposition that a federal appellate court generally does not consider any issue not decided below.  Nor does it generally consider arguments that are not raised in an appellant's (or cross-appellant's) opening brief.  There are, however, exceptional circumstances in which an appellate court will consider issues nonetheless, and the Federal Circuit found that this was one of those circumstances.

The Federal Reserve Banks have some characteristics that would suggest that they are part of the government (and therefore not empowered to bring post-issuance proceedings) and some that would suggest otherwise.  They were established by statute (in this case, 12 U.S.C. § 221 et seq.), implement the monetary and fiscal policies of the United States, and transfer profits to the United States Treasury.  However, the enabling statute establishes them each as a "body corporate," they have a board of directors, and the board enacts bylaws and governs the business of each bank.  They are therefore not directly supervised by government officials.  Most importantly, the Federal Reserve Banks can sue or be sued in "any court of law or equity."

It is that last characteristic, especially potential liability in any court, that was most influential in determining that the Federal Reserve Banks are "persons" under the AIA.  In Return Mail, one of the bases for the holding that the U.S. Postal Service was the government was that it could only be sued in the U.S. Court of Claims for a taking if it were accused of patent infringement.  But with one exception -- in which the Federal Circuit expressly declined to determine whether the Federal Reserve Banks were considered government agencies -- patent infringement proceedings against them did not need to be brought in the Court of Claims under 28 U.S.C. § 1498(a).[1]  Thus, the Federal Circuit found that the Federal Reserve Banks were not part of the government for purposes of the AIA, and could properly bring CBM proceedings.

From there, the Federal Circuit addressed the merits of the case.  Because Bozeman Financial had not challenged below the merits of the § 112 invalidation of 22 claims of the '640 patent, it could not do so now.  Furthermore, because it did not raise any separate arguments with regard to the '640 patent below, it could not do so now.  Thus, the four remaining claims of the '640 patent rose or fell with the claims of the '840 patent.  In the end, they fell.

The Court applied the Alice test and, in the first step, found that the Board had correctly found the claims were directed to the abstract idea of "collecting and analyzing information for financial transaction fraud or error detection."  Essentially, the claims of the '840 patent call for the review and verification of documents to reduce transactional fraud.  The Federal Circuit has repeatedly found such claims to be directed to abstract ideas.  That is true even though the claims involve physical steps; prior cases have held that physical steps relating to processing checks did not transform an abstract idea into patent-eligible subject matter.

Having found the claims directed to an abstract idea, the Court proceeded to the second step of the Alice test.  Even the specification of the '840 patent indicated that methods for preventing check fraud and verifying financial transactions were well known.  Bozeman Financial argued that the ordered combination of the elements in the claims was a specific implementation of the invention that was not itself routine or conventional, but failed to provide any evidence that was so.  Bozeman Financial also argued that the claims met the machine-or-transformation test of Alice's step two, but that alone would not be sufficient and the Federal Circuit rejected the argument in any event.  Thus, all of the claims were found to lack patent-eligible subject matter.

The Bozeman Financial case adds little to Alice jurisprudence, but does help clarify where the line between "governmental" and "non-governmental" entities lies with regard to personalty under the AIA.  The Federal Circuit has made it clear that even entities with some indicia of being the federal government can bring post-issuance proceedings, so long as they themselves can be sued for patent infringement in federal court.  There may be some exceptions -- entities that can be sued in court but are closely enough tied to the federal government that they cannot bring petitions or those that cannot be haled into court but lack such strong ties -- but for now, the line appears to be drawn between parties subject to suits for patent infringement under 35 U.S.C. § 271 and those subject only for takings under 28 U.S.C. § 1498(a).

[1] See Software Design Corp. v. Fed. Reserve Bank of St. Louis, 583 F.3d 1371, 1379 (Fed. Cir. 2009), distinguished at Slip Op., p. 6-7 n. 3.

Bozeman Financial LLC v. Federal Reserve Bank (Fed. Cir. 2020)
Panel: Circuit Judges Lourie, Dyk, and Moore
Opinion by Circuit Judge Moore