In a recent decision, Alice Corp. v. CLS Bank Int’l, the U.S. Supreme Court clarified the test for determining whether a patent falls within one of the exceptions to patent eligibility under Section 101 of the Patent Act. The decision has implications for patent eligibility of every type of patent, but provides the most specific guidance on the patent eligibility of software and business methods.
At Issue in Alice Corp.
The patents at issue relate to a computer-implemented scheme for mitigating settlement risk in financial transactions. The district court found that the claims were directed to an abstract idea and therefore were patent-ineligible. In attempting to formulate a test for patent eligibility under Section 101, the Federal Circuit wrote a fractured decision with five different opinions, none of which garnered the support of the majority of the court.
Supreme Court Applies Two-Step Test for Patent Eligibility
The U.S. Supreme Court clarified the standard it had set out in Bilski v. Kappos and Mayo v. Prometheus by announcing a two-step test. In the first step, the Court asked whether the claims were directed to a patent-ineligible concept (e.g., a law of nature, a natural phenomenon, or an abstract idea). In the second step, the Court asked whether there was enough else in the claims to transform them into patent-eligible claims.
The Court analyzed the first step without providing any general guidelines on how it should be applied. Indeed, the Court refused to delimit the precise contours of the abstract ideas category. The Court determined that intermediated settlement, like hedging in Bilski, was “a fundamental economic practice long prevalent in our system of commerce” and “a building block of the modern economy.” Alice Corp., slip op. at 9. Thus, intermediated settlement was an abstract idea. Until this step is clarified, there will be leeway for most patents to distinguish away from the “fundamental practice” and “building block” language. But uncertainty over what is patent-eligible will remain while the contours of the abstract ideas category are defined.
For the second step, the Court held that the elements of each claim must be considered both individually and as an ordered combination to determine whether the additional elements transform the nature of the claim. The Court cited Mayo for the principle that a claim must do more than simply recite an abstract idea while adding the words “apply it.” The Court ruled that including a general-purpose computer in a claim is no more than saying “apply it with a computer” and will not make an otherwise ineligible claim eligible. In contrast, the Court cited Diamond v. Diehr as supporting the proposition that “a process designed to solve a technological problem in ‘conventional industry practice’” is patentable. Slip op. at 12.
Turning to the method claims, the Court found that the elements of the claims, as an ordered combination, added nothing that was not present when the steps were considered separately. The Court ruled that the claims did not purport to improve the functioning of the computer itself, nor did they effect an improvement in any other technology or technical field. Rather, the Court found that the claims amounted to no more than instructions to apply the abstract idea of intermediated settlement using an unspecified, generic computer. Finally, the Court ruled that patent eligibility should not depend on the draftsman’s art and invalidated the system and computer-readable medium claims. The Court held that the addition of generic computer components did not impart patent eligibility to the system claims.
Although some commentators are suggesting that Alice Corp. represents a major shift in Section 101 jurisprudence, the practical effects for most applicants are likely to be less profound. The Supreme Court cautioned that, at some level, all inventions involve laws of nature, natural phenomena, and abstract ideas, and the exclusionary principle should not be interpreted too broadly lest it swallow all of patent law. Thus, it does not appear that the Supreme Court intended to invalidate most or all software patents.
The Supreme Court appears to be mainly concerned about patents that attempt to claim “the building blocks of ingenuity” and “the basic tools of scientific and technological work.” Slip op. at 6. Applications that do not arouse these concerns and that are not wholly directed to basic concepts or formulas in a particular field may be able to survive step one of the test. Applicants who can persuasively identify a technological problem in conventional industry practice that is solved by the claims will likely be able to survive the second step of the test. There will be uncertainty while the two steps are further defined by the lower courts, but most software patents will survive unless the lower courts adopt a drastic interpretation of the decision.