Software Patents Are Still Very Useful Despite Alice, But Are Business Method Patents?

by McDonnell Boehnen Hulbert & Berghoff LLP
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Patents generally describe new inventions in terms of a unique structure, function, or combination of structure and function. Those patents that focus on functions of computers or computer-implemented functionality are often referred to as “software patents” since no new structure has been invented. It is often the case that the novelty resides in new functionality that may be executed by any conventional computing device. Another category of patents referred to as “business method patents” are similar in that they do not attempt to cover any new structure of an invention, but rather purport to describe new methods of doing business, including hedging, financial investments, e-commerce, etc.

The recent interpretation of patent eligible subject matter under 35 U.S.C. § 101 by the Supreme Court in Alice v. CLS Bank in June 2014 has caused confusion in the patent world regarding the validity and practicality of software and business method patents.[1] In Alice, the Supreme Court held that claims directed towards a computer-implemented means of mitigating settlement risk by using a third-party intermediary did not qualify as eligible subject matter.[2]

Overview of Section § 101 Analysis

In their analysis of the claims at issue, the Supreme Court in Alice extended a two-part test originally presented in Mayo to determine the patent eligibility of the claims at issue.[3] The Mayo/Alice test requires a court to first determine whether a claimed invention is directed to a patent-ineligible concept. Abstract ideas, laws of nature, and mathematical equations have been held to fall under the ineligible concept category.[4] Second, if a claim is directed to a patent-ineligible concept, the claim can still satisfy Section 101 if it does “significantly more” than merely describe and apply an abstract idea.[5]

During the application of the Mayo/Alice test, a court must discount “‘well-understood, routine, conventional activities previously known to the industry,” and should consider whether a claim unduly preempts too broad a category of innovation given the degree of detail within the claims since specific limitations may demonstrate a limited application of the concept.[6] Further, the court should consider if the claims improve technology by using the abstract idea (or another patent-ineligible concept such as a mathematical formula) in a tangible and useful way.[7] Ultimately, the Alice Court held that the claims directed to merely implementing an abstract idea on a generic computer failed to “transform that abstract idea into a patent-eligible invention.”[8] The Court, however, did also offer that “many computer-implemented claims are formally addressed to patent-eligible subject matter” including claims which “improve the functioning of the computer itself” or “any other technology.”[9]

Post-Alice Software Claims Analysis

In the relatively short time since the holding of Alice, many decisions by the Federal Circuit have resulted in the invalidation of software patents for failure to recite eligible subject matter under Section 101. For instance, claims directed towards methods for conducting reliable transactions in an e-commerce environment were found to recite ineligible subject matter under Section 101.[10] Similarly, claims providing a “method for distributing copyrighted media products over the Internet where the consumer receives a copyrighted media product at no cost in exchange for viewing an advertisement, and the advertiser pays for the copyrighted content” were found to be directed to the abstract idea of using “an advertisement as an exchange or currency” without further limitations in the claims that would transform the abstract idea into patent-eligible subject matter.[11] The Federal Circuit held that adding “routine additional steps” such as “updating an activity log, requiring a request from the consumer to view the ad, restrictions on public access, and use of the Internet” to the abstract idea did not transform the claims into patentable subject matter.[12]

Conversely, there are some success stories. Application of the Mayo/Alice test has resulted in the Federal Circuit finding some software patents valid under Section 101. In DDR Holdings, the Federal Circuit found that claims directed towards a system and method of generating a composite web page that combined certain visual elements of a “host” website with content of a third-party merchant “clear[ed] the 101 hurdle.”[13] The Federal Circuit reasoned that the claims “do not recite a mathematical algorithm… [nor do they] recite a fundamental economic or longstanding commercial practice.”[14] Instead, “the claims address a business challenge (retaining website visitors)… [that is] particular to the Internet” and is “necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.”[15] As such, the Federal Circuit concluded that regardless of the claims reciting an abstract idea, here the claims also recited significantly more than just the abstract idea itself as required by the second prong of the Mayo/Alice test.[16]

Overall, as shown in the cases above, the application of the Mayo/Alice test does not yield predictable results. The Federal Circuit will soon have additional opportunities to further refine its guidance for lower courts to follow when applying the Mayo/Alice test to determine eligibility of software claims under Section 101. In a likely appeal coming from the Eastern District of Texas, the Federal Circuit may have a chance to review a judgment against Apple, Inc. (“Apple”) for over $500 million in damages to Smartflash LLC (“Smartflash”) for infringing multiple software patents owned and asserted by Smartflash.[17] An important aspect of the appeal would require the Federal Circuit to review whether the asserted patents claim eligible subject matter according to the Section 101 interpretation in Alice.

The software patents at the center of this Apple litigation “relate generally to data storage and access systems for paying for and downloading digital content such as audio, video, text, software, games, and other types of data.”[18] As an example of the asserted claims, claim 32 from U.S. Patent No. 8,118,221 claims a data access terminal configured to receive data from a supplier and provide the data to a carrier via allegedly novel software features, including “code to read payment data from the data carrier and to forward the payment data to a payment validation system,” and “code responsive to the payment validation . . . specifying at least one condition for accessing the retrieved data . . . [with] the at least one condition being dependent upon the amount of payment.”[19] Smartflash asserted the patents contending that Apple’s iTunes, the App Store, and any Apple device having access to iTunes or the App Store infringed multiple claims of the asserted patents.    

Initially, Apple moved for summary judgment contending that the patent claims were directed to abstract ideas for “long-familiar commercial transactions” and relationships that are not eligible subject matter under Section 101.[20] Among other arguments, Apple contended that limiting the claims to the ideas of payment for data and controlling access to data are field of use limitations that fail to transform the abstract ideas into patent eligible inventions.[21] Apple further submitted that the claimed functional hardware failed to add anything significant to the abstract idea and that the claims fail the machine-or-transformation test.[22]

Smartflash responded by arguing that the claimed inventions are not directed towards abstract ideas, but rather towards particular devices with payment capabilities for digital content, access control capabilities for stored digital content, and in some claims, to particular control access capabilities based on particular payment.[23] Smartflash also pointed out that preemption does not exist since non-infringing alternatives are practiced by others, and that the claims are tied to a particular machine that does in fact transform data.[24] Additionally, Smartflash indicated that the data-storage limitations are not generic computer limitations due to specific capabilities that ensure digital content is appropriately distinguished from other generic data, and the claims recite patent-eligible subject matter when analyzed as a whole.[25] Smartflash also distinguished their patents from the asserted patents in Alice and Bilski by arguing that their claims solve a computer-specific problem rather than simply implementing a business method on a computer.[26]

In brief, the district court denied Apple’s motion by applying the Mayo/Alice test.[27] The court rejected Apple’s argument indicating that Apple over-generalized the claims into “payment for something” and “controlling access to something” generalizations without pointing out the flaws within the actual claims.[28] Comparing the case to DDR Holdings, the court reasoned that Smartflash’s patents do not simply apply a known business practice from the pre-Internet world to computers or the Internet, but aim to prevent piracy, unauthorized reproduction and access to digital media while also allowing access to be nearly instantaneous and the storage to be permanent.[29] The court further held that “[t]he patents also address the unique problem of controlling a user's access to data that the user already possesses by tracking use data and restricting access according to use rules.”[30] Nonetheless, the Federal Circuit will have an opportunity to confirm or correct the district court’s application of the Mayo/Alice test. 

In another potential opportunity to provide guidance for applying the Mayo/Alice test, the Federal Circuit will also review an appeal of the McRO, Inc., v. Activision Publishing, Inc case decided by the Central District of California.[31] At the district level, McRO asserted software patents having technology directed towards “automated ruler-based use of morph targets and delta sets for lip-synchronized three-dimensional animation.”[32] At a high level, the technology generally involves creating rules to define weights for configuring animated lips based on timed phonemes, automatically determining a sequencing of the new phonemes based on an audio sequence, and applying the rules to the determined sequence to create the animated lips.[33] During its application of the Mayo/Alice test, the district court stated that “[f]acially, these claims do not seem directed to an abstract idea. They are tangible, each covering an approach to automated three-dimensional computer animation, which is a specific technological process.”[34] However, despite the narrow patent scope, the court failed to find the claims valid under Section 101 and insisted that the claims need to be viewed outside a vacuum. As a result, the court determined that the novel aspect of the claims, the application of rules to the determined phonemes, qualifies as an abstract idea.[35] In particular, the court found that “while tangible, the steps of (1) using a timed phoneme transcript, (2) setting morph weight sets at keyframes, or (3) interpolating between keyframes, are not ‘inventive steps’ that could transform the claims herein into patent eligible subject matter, if those claims are directed to an abstract idea.”[36]

Holding the claims invalid under Section 101, the court concluded that “while the patents do not preempt the field of automatic lip synchronization for computer-generated 3D animation, they do preempt the field of such lip synchronization using a rules-based morph target approach.”[37] On appeal, it will be interesting to see if the Federal Circuit reaches a different conclusion than the district court finding that the claims are directed to a tangible concept rather than only an abstract idea and not continuing its analysis under the second prong of Mayo/Alice as a result.

While the predictability of application of Alice to software patents is confusing at best, seeing a $500+ million judgement based on software patents is great incentive for continuing pursuit of software patent portfolios. Keys for successful claim drafting are being developed in real time as each new Federal Circuit decision is made. An overwhelming trend seems to be that some specific limitation, other than what is considered well-understood, routine and conventional in the field, is required to survive a Section 101 challenge. Such trends are seen within the guidance recently offered by the U.S. Patent Office,[38] in which the USPTO offered suggestions on limitations that may be enough to qualify as “significantly more” when recited in a claim directed to a judicial exception.

Post-Alice Business Method Claims Analysis

Business method claims have had less luck than software claims after the Supreme Court’s Alice decision. Most business method claims reviewed by the Federal Circuit are found invalid under Section 101 for merely reciting an abstract idea. As an example of business method claims found valid under Section 101 post-Alice, we have to turn to the Patent Trial and Appeal Board (“PTAB”), which recently found valid business method claims directed towards a method for processing paper checks in U.S. Bancrop v. Solutran, Inc.[39] During the review, the PTAB examined each claim as a whole finding that the method for processing paper checks “is more akin to a physical process than an abstract idea.”[40] The PTAB reasoned that limitations, such as “receiving said paper checks and scanning said checks with a digital scanner,” and “comparing by a computer said digital images,” cause the claim as a whole to recite patent-eligible subject matter rather than merely an attempt to claim “fundamental economic practices, mathematical algorithms, or basic tools of scientific and technological work.”[41] Reasoning that the claims were not directed towards an abstract idea, the PTAB did not analyze the claims under the second prong of the Alice/Mayo test.

Here, the claims at issue are more akin to “hybrid business method claims” in that physical components (e.g., a digital scanner) are recited. Thus, the claims are not pure business method claims reciting only techniques for doing business conceptually. This provided support for the PTAB to conclude that the method is “more akin to a physical process.”[42] Whether such claims would survive a Section 101 challenge in a federal court is a separate issue. But, seeing that we do not have a recent (post-Alice) ideal example from the Federal Circuit of a true business method patent claim that satisfies Section 101, nor has the U.S. Patent Office offered any specific guidance (the Interim Guidance on Subject Matter Eligibility is devoid of any business method patent claim examples), the future of business method patents seems bleak, at best. In fact, the America Invents Act (AIA) set up a provision specifically for challenging such so-called business method patents, which is one of the few places that some guidance is given, albeit, for invalidating a business method patent.[43] There is no guidance, however, for how a business method patent can satisfy § 101, and so the general guidance above given for software patents is likely to be applied.

The Future?

Seeing as the law is changing as each new decision is handed down by the Federal Circuit, it is probably best to avoid making dramatic changes in claiming strategies or patent portfolio assessment, since such changes may become inconsistent or contradictory to positions of the courts down the road. Over time, we can expect the courts (and patent examiners) to provide further decisions useful for concrete guidance on software and business method strategies.

[1] Alice Corp. Pty. Ltd. v. CLS Bank Intern., 134 S.Ct. 2347 (2014); 35 U.S.C. § 101 (“Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title”).

[2] See Id. at 2352.

[3] See Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289, 1293 (2014).

[4] See id. at 1293 (“[l]aws of nature, natural phenomena, and abstract ideas” are not patent eligible “to prevent the ‘monopolization’ of the ‘basic tools of scientific and technological work,’ which ‘might tend to impede innovation more than it would tend to promote it.’”).

[5] Alice Corp., 134 S. Ct. at 2357.

[6] Id. at 2359-60.

[8] Id. at 2358-60 (“[M]ere recitation of a generic computer cannot transform a patent ineligible abstract idea into a patent-eligible invention”).

[9] Id. at 2359.   

[10] See Interim Guidance on Subject Matter Eligibility Examples, available at www.uspto.gov/patents/law/exam/abstract_idea_examples.pdf (noting that in buySAFE, Inc. v. Google Inc., 765 F.3d 1350 (Fed. Cir. 2014), the court found that “the steps of creating a contract, including receiving a request for a performance guaranty (contract), processing the request by underwriting to provide a performance guaranty and offering the performance guaranty” encompass an abstract idea with further limitations of a computer failing to amount to more than the abstract idea itself).

[11] Ultramerical Inc. v. Hulu, LLC., 772 F.3d 1335 at 712, 712-715 (Fed. Cir. 2013).

[13] DDR Holdings, LLC v. Hotels.com, L.P., 773 F.3d 1245, 1255 (Fed. Cir. 2014).

[17] See Smartflash LLC v. Apple Inc., 6:13CV447-JRG-KNM, 2015 WL 661174, at *1 (E.D. Tex. Feb. 13, 2015).

[18] Id.; (U.S. Patent No. 7,334,720; U.S. Patent No. 7,942,317; U.S. Patent No. 8,033,458; U.S. Patent No. 8,061,598; U.S. Patent No. 8,118,221; and U.S. Patent No. 8,336,772).

[19] Smartflash LLC, 2015 WL 661174 at *2; U.S. Patent No. 8,118,221.

[20] Smartflash LLC, 2015 WL 661174 at *6.

[25] Id.; see Diamond v. Diehr, 450 U.S. 175, 191 (1981) (an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection).

[26] Smartflash LLC, 2015 WL 661174 at *6; see also Bilski v. Kappos, 561 U.S. 593, 614 (2010) (implementing a known business method by executing the method on a generic computer does not qualify as patentable subject matter).

[27] Smartflash LLC, 2015 WL 661174 at *9 (finding that the inventions’ general purposes of “conditioning and controlling access to data based on payment” is an abstract and fundamental building block of the economy in the digital age, but did determine that the claims recite meaningful limitations (e.g., specific ways of using distinct memories, data types, and use rules) that transform the abstract idea into a patent-eligible invention). 

[31] McRO, Inc. v. Activision Pub., Inc., 2014 WL 4759953 (C.D. Cal. Sept. 22, 2014).

[32] Id. at *10; U.S. Patent No. 6,307,575, U.S. Patent No. 6,611,278.

[33] McRO, Inc., 2014 WL 4759953 at *10.

[38] See Interim Guidance on Subject Matter Eligibility Examples, supra note 10.

[39] U.S. Bancorp, Petr., CBM2014-00076, 2014 WL 3943913, at *8 (Patent Tr. & App. Bd. Aug. 7, 2014).

[43] See AIA § 18(d)(1) (a transitional post-grant review proceeding for review of the validity of covered business method patent in which a “covered business method patent” is a patent that “claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions”).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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