The Evolving Hurdle of Patentable Subject Matter

, New York Law Journal

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Last spring, in the much publicized and much criticized case, CLS Bank International v. Alice,1 the Court of Appeals for the Federal Circuit set out to resolve how to apply the standard of patentable subject matter to claims that were directed to certain methods for conducting business, and computer-readable media and systems that implement these methods.

However, rather than providing clarity, the Federal Circuit introduced more uncertainty into what was already a murky area of patent law, rendering five separate opinions, none of which were signed by a majority of judges. When read is combination, the five opinions suggest that inventors and practitioners who counsel them should be prepared for there to be a hurdle of increased height with respect to the patent eligibility requirement of the patent law.

Shortly after deciding CLS, the Federal Circuit issued Ultramercial v. Hulu,2 in which it appeared to shrink the shadow cast by CLS, adopting the reasoning of a minority opinion from that case. However, refusing to embrace the precedent of Ultramercial, this fall the Federal Circuit perpetuated the ambiguity in this area of the law, when in its decision, Accenture Global Services v. Guidewire Software,3 it embraced the sentiments of a different opinion from CLS than the Ultramercial panel did. These three cases form a trilogy that highlights the degree to which the patent system was ill-prepared to confront inventions of the Information Age, and unfortunately have left innovators, particularly those within the financial services, software and data processing industries with challenges when trying to protect their creativity.

Background

The heyday of the Information Age began in the 1990s. Consistent with society's celebration of innovation relating to ways by which to process and analyze data, in a pair of now abrogated cases, State Street Bank & Trust v. Signature Financial Group4 and AT&T v. Excel Communications,5 the Federal Circuit fully embraced a policy in which there was in effect almost no limit to the types of inventions that were patent eligible. In the decade that ensued, applicants increased the rate at which they filed for patent protection with the U.S. Patent and Trademark Office (USPTO), and the USPTO continued to issue patents that were directed to methods for processing data, as well as to systems and the media on which they were processed.

As the number of these types of patents increased, so too did the number of parties that could infringe them, and this gave rise to the increased prominence of the non-practicing entities, who more pejoratively have been referred to as patent trolls. Non-practicing entities possess patent rights, but they themselves typically do not engage in any business other than licensing patents and enforcing them. Not long after State Street and AT&T were decided, and while the non-practicing entities industry was growing, both the USPTO and the courts began to question whether the scope of inventions that were patent eligible went too far. Consequently, they began to formulate and to reformulate rubrics under which to determine the bounds of what is patentable subject matter.

The combination of: (1) the changing standards under which to determine whether inventions relating to the processing of information and methods of conducting business were patent eligible; (2) the public's perception that the USPTO was issuing too many patents related to the processing of information and methods of conducting business; and (3) the increased dissatisfaction of the success of NPEs set the stage for Bilski v. Kappos,6 which was the U.S. Supreme Court's first time visiting the issue of patentable subject matter in approximately 40 years.

'Bilski'

Bilski provided the opportunity for the court to introduce clarity into how to apply the patent law to inventions created in the Information Age. The court recognized the challenge before it, noting that the Information Age allowed more people to become inventors thereby requiring society to reevaluate how it strikes the balance between protecting inventors and not granting monopolies over procedures that other inventors would discover by independent creative application of general principles.7 Unfortunately, the court did nothing to assist in determining how this balance should be struck.

The invention at issue was directed to how buyers and sellers of commodities in the energy market could protect or hedge against the risk of price changes. In deciding Bilski, the court repeated long-standing maxims of patent law, including a perfunctory acknowledgement that Congress intended that the patent laws would be given wide scope, and that the patent statute intentionally recited that patent rights were available for any new and useful process, machine, manufacture or composition of matter, because it wanted ingenuity to receive liberal encouragement. The court then reiterated the three exceptions to patent eligibility that it had previously recognized: laws of nature, physical phenomena and abstract ideas. The third exception is the one that is of most importance to industries that rely primarily on technologies of the Information Age.

Throughout the opinion, the court reemphasized the policy of a broad scope of what is eligible for patent protection. However, the court also implied not so subtly that it seeks to usher in a new era in which fewer inventions related to the processing of information and methods of conducting business would receive broad if any patent protection. For example, it wrote: "[W]hile [35 U.S.C.] §273 appears to leave open the possibility of some business method patents, it does not suggest broad patentability of such claimed invention."8 The court, also paraded what it believed would be the parade of horrors should too many business method patents be issued, including issues of vagueness, suspect validity, and inundation of the USPTO and courts, thereby chilling creative endeavors and dynamic change.

In searching for a solution to the problem that it identified, the court focused on the exception to patentability of abstract ideas. Under this exception, the court concluded that the claimed processes explained the basic concept of hedging or protecting against risk, and that to allow the petitioners to patent risk hedging would preempt uses of the approach in all fields, thereby granting a monopoly over an abstract idea.

The only guidance that the Bilski court provided in determining when an invention related to the processing of information and methods of conducting business is an abstract idea, was: (1) it cannot preempt a field; (2) neither limitations to a particular technological environment nor post-solution activity will alone transform an abstract idea into patent eligible subject matter; and (3) an application of an abstract idea might be patent eligible. In the wake of Bilski, the Federal Circuit, the USPTO, inventors and investors were no more informed as to what degree their inventions were patent eligible than before the case was decided. In 2013, the Federal Circuit applied Bilski in a trilogy of cases and introduced even more confusion.

'CLS Bank International'

CLS was heard by an en banc panel of the Federal Circuit. The patents at issue related to a computerized trading platform for conducting financial transactions in which a third party settles obligations between a first and a second party, thereby eliminating counterparty or settlement risk. The court issued five different opinions, and on no individual opinion did a majority of judges agree on the analytic framework under which to analyze the issues of patent eligibility.

The judges agreed in large part with the guiding principles as set forth by the Supreme Court. Unfortunately, they could not reach a consensus as to how to apply these guiding principles or how to set up a framework in which to apply the abstract idea exception to the patent eligibility requirement of 35 U.S.C. §101. Consequently, CLS does not have precedential value. Instead, it merely outlined the degree of disagreement among the judges and set the stage for different groupings of three judge panels to apply whichever portions of CLS that they wanted in future cases. As a practical matter, inventors and patent holders were and continue to be left with the possibility that the broadest exception will become the standard that is adopted by the USPTO and the courts.

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