Supreme Court Sets Framework for Determining Software Patent Eligibility

The U.S. Supreme Court recently issued an important opinion in Alice Corp. v. CLS Bank International regarding the patent eligibility of basic business methods covered in computer software patents. Writing for the unanimous Court, Justice Clarence Thomas used prior precedent to set out a clear, two-part test for patent eligibility under 35 U.S.C. §101 and found the claims at issue to be patent-ineligible because they were “drawn to the abstract idea” of intermediated settlement. The ruling deals a blow to patent trolls and those who seek to enforce overbroad software patents drawn to abstract concepts.

Alice Corp.’s patents were directed to a computerized scheme for mitigating the risk that only one party to a transaction will perform. The computerized intermediary would act as a kind of escrow, creating and adjusting on a real-time basis “shadow” credit and debt records that mirrored the parties’ real-world accounts, and instructing financial institutions to carry out “permitted” transactions in accordance with the shadow records.

The Supreme Court took review of the case to resolve a fractured Federal Circuit en banc decision in which several judges provided differing approaches for determining patentability of computer software. The Court ruled that using a generic computer or generic computer components to perform conventional tasks does not make an abstract idea patentable.

Incorporating the two-step test espoused in its recent decision in Mayo v. Prometheus, the Court describes a first inquiry into whether the patent claims at issue are directed to a patent-ineligible concept. If so, the Court requires a second inquiry regarding whether the elements of the claims, either individually or as an ordered combination, “transform” the nature of the claims into a patent-eligible invention.

Applying this test to the software patent at issue in Alice Corp., the high court held that the company’s patent claims were drawn to an abstract idea of intermediated settlement—which, like the method for hedging risk at issue in Bilski v. Kappos, the Court described as “a fundamental economic practice long prevalent in our system of commerce.” The Court further called the use of a third-party intermediary “a building block of the modern economy,” language that should prove helpful to financial institutions defending against patent claims drawn to basic economic practices.

In applying the second step, the Court held that the abstract idea was not transformed into a patent-eligible invention because all of the claims, including the method, system, and computer program claims, merely added a generic computer or generic computer components to implement the abstract notion of intermediated settlement.

This decision will inform the federal courts and the Patent Office alike in deciding the patent eligibility of basic business methods that constitute “abstract concepts”; such concepts may not be patentable even if computer software or systems are employed to implement them.

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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