Alice Kills: Is Alice v. CLS the Destruction of Software and Business Method Patents as We Know Them?

Author: Ashley Clever, Contributing Member, University of Cincinnati Law Review

This is a question many practicing patent attorneys are wondering in the wake of the recent U.S. Supreme Court decision in Alice Corporation PTY. LTD. v. CLS Bank International on June 19, 2014.[1] In Alice v. CLS, the Supreme Court invalidated four patents owned by Alice Corporation relating to a system for mitigating settlement risk by using a third-party intermediary computer system to exchange financial obligations, ensuring the parties in the settlement agreement completed the transaction.[2] The Court held that the patents claimed an abstract idea that was not sufficiently transformed in order to render the subject matter eligible for patent protection.[3]

While the Supreme Court does not typically grant certiorari on many patent law cases, in recent years there have been numerous questions on what inventions are entitled to receive patent protection, particularly regarding what is patentable subject matter under 35 U.S.C. § 101.[4]

The Birth of Alice

            This case began in 2007 when CLS filed suit against Australian company Alice Corporation seeking a declaratory judgment of patent invalidity, unenforceability, or non-infringement. Alice counterclaimed, alleging patent infringement by CLS.[5] The four Alice patents at issue claimed a method for exchanging financial obligations to mitigate settlement risks, along with a computer system configured to carry out the method and a computer-readable storage medium containing program code to perform the method on a computer.[6] The business method consisted essentially of creating shadow records for each party in the settlement transaction, obtaining start-of-day balances based on the real-world accounts of the parties, adjusting the shadow records as the transactions were entered, and issuing irrevocable end-of-day instructions to the exchange institutions (usually banks) to carry out the permitted transactions.[7]

The district court found that Alice’s four patents were invalid because they were directed to the abstract idea of employing a neutral intermediary to facilitate the simultaneous exchange of obligations to minimize risk.[8] The Court of Appeals for the Federal Circuit reversed, holding that it was not manifestly evident that the Alice’s claims were directed to an abstract idea.[9] Because patent eligibility has been a hotly contested subject, the Federal Circuit granted en banc review, and a five-member plurality vacated the panel’s opinion and affirmed the district court’s holding that the patent was invalid.[10] The Federal Circuit showcased the controversy behind patent eligibility and the topic of patentable subject matter with seven different written opinions. Judge Lourie wrote for the five-member plurality; Chief Judge Rader, Judge Moore, and Judge Newman wrote opinions concurring in part and dissenting in part; and Judges Linn and O’Malley both dissented. Chief Judge Rader also filed additional reflections.

Through the Looking Glass: Alice Reaches SCOTUS

            While the Supreme Court’s decision was unanimous, it too was wrought with confusion and disagreement.[11] Justice Thomas delivered the opinion, affirming the Court of Appeals for the Federal Circuit’s finding that the claims were ineligible for patent protection as an abstract idea.[12] The Court, however, declined to provide clear guidelines for determining patent eligible subject matter and instead created a new and confusing terminology for the lower courts to interpret. Since the Alice decision, lower courts have invalidated eleven computer-related patents in less than three months.[13]

The Supreme Court used the two-step framework analysis for patentability set forth in Mayo v. Prometheus.[14] To decide if an invention constitutes patentable subject matter, first the court must determine whether the claims at issue were directed to a patent-ineligible concept (such as an abstract idea), and if so, whether the claimed elements, when considered individually and as a whole, transform the nature of the claim into a patent-eligible application.[15] The Court did not discuss in detail what exactly would qualify as an abstract idea or a sufficient transformation, but articulated that (1) the concept must do more than simply instruct implementing abstract ideas on a generic computer; (2) the functions performed cannot be purely conventional or add nothing more than what is already present when the steps are considered separately; (3) the concept must do more than purport to improve the functioning of the computer itself but rather must add substance to the underlying abstract idea; and (4) it cannot merely require generic computer implementation that fails to transform the abstract idea into a patent eligible invention.[16]

To help shed some light on these guidelines, the USPTO produced a memo immediately following Alice to clarify the patent examination process. The memo detailed that for all computer software and business method claims following Alice, examiners will follow this framework: (1) determine whether the claim at issue is directed toward an abstract idea, and if so, (2) determine whether any element or combination of the elements in the claim is sufficient to ensure the claim amounts to significantly more than the abstract idea itself; then, regardless of whether the examiner makes a rejection of the claim under § 101 for patent-ineligible subject matter, (3) the examiner will proceed with the examination to determine the patentability in accordance with the other statutory requirements of novelty, utility, non-obviousness, and written description.[17] The invention must contribute “significantly more” than just an abstract idea. The memo stipulates that this could include improvements to another technology or technical field, improvements to the functioning of the computer itself, and meaningful limitations beyond generally linking the use of an abstract idea to a particular technological environment.[18] The invention must do more than merely adding the words “apply it” or their equivalent to an abstract idea, providing instructions to implement an abstract idea on a computer, or requiring no more than generic computer functions that are well-understood, routine, and conventional activities previously known to the industry.[19] The USPTO also stated that an abstract idea includes, but is not limited to, fundamental economic practices, certain methods of organizing human activities, an idea itself, and mathematical relationships and formulas.[20]

Redundancy and Confusion

            While the Supreme Court and USPTO attempted to clarify patent-eligible subject matter, they simply muddied the water with redundant and confusing language. An abstract idea has long been held to be ineligible for patent protection, yet the court has now apparently instructed that the analysis does not to stop there.[21] The Court, along with the USPTO, appear to conclude that an abstract idea may be eligible for patent protection if the idea is sufficiently transformed so as to be an improvement to the existing technology. These limitations on patentability however, are already codified in 35 U.S.C. §§ 101, 102, and 103, which require all inventions (not just software and business method patents) to display the requisite utility, novelty, and non-obviousness.[22] The USPTO further confused the analysis of patent eligible subject matter by stating that the examiners will continue to determine patentability under U.S.C. §§ 101, 102, 103, and 112 despite the claims being rejected as ineligible for patent protection. Usually once a patent is deemed ineligible for protection, the analysis would stop and the patent would be rejected. By continuing the analysis despite patent ineligibility, the USPTO suggests that the recent guidance in Alice may be overturned or changed in the future.

Under the doctrine of stare decisis, it would normally be considered almost blasphemous to suggest that a recent Supreme Court decision will soon be changed or overturned. However, the Alice standard is so unworkable as to demand change.[23] These guidelines suggest that software and business methods are categorically abstract ideas that require transformation to render them patent eligible. One of the fundamental principles is the presumption of patent protection, enumerated by Congress in the Patent Act which begins, “[a] person shall be entitled a patent unless…” (emphasis added).[24] The Supreme Court appears to contradict this notion by requiring a showing of adequate transformation before considering software and business methods to be patentable subject matter.

Requiring such a high burden might extinguish patent protection for software and business methods all together. Without patent protection, software would fall into the public domain and could be sold, produced, and used without the owner’s permission or compensation. Without a commercial application, software engineers would have almost no incentive to write complex computer codes, because anyone would be able to use and profit off of the inventor’s hard work. Computer software companies would likely go bankrupt as their patents are infringed and invalidated one by one until they have no way to protect their technology.

It is unclear how courts will interpret Alice’s muddled guidance either to invalidate or uphold future software and business method patents. The USPTO’s published memo may give software and business companies hope. As USPTO Deputy Commissioner Andrew Hirshfeld stated, “[n]otably, Alice Corp. neither creates a per se excluded category of subject matter, such as software or business methods, nor imposes any special requirements for eligibility of software or business methods.”[25] Are these empty words proclaiming a false hope, or will software and business methods continue to receive some limited patent protection? It seems only time (and subsequent court decisions) will tell. For now, the only hope for software companies is to lobby for legislative change to eradicate the high patentability bar set in Alice, or to face a slow and certain demise.

 

[1] Alice Corporation PTY. LTD. v. CLS Bank International, 573 U.S. ___, 134 S. Ct. 1537 (2014) (hereinafter “Alice”).

[2] Id. Alice patents at issue include: 5,970,479, 6,912,510, 7,149,720 and 7,725,375. The patents claim a business method and computer software program to enable users to who have entered into a financial transaction such as a settlement agreement to be ensured that the other party will fulfill their obligation through the use of shadow records and end-of-day banking commands run by the program. Id.

[3] Id. Patent eligible subject matter is defined under 35 U.S.C. §101 as “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.”

Under the Manual of Patent Examining Procedure (“MPEP”), a manual of guidelines for patent examiners produced by the United States Patent and Trademark Office (“USPTO”), a claim must be directed to one of four statutory categories of invention to be patentable: a process, machine, manufacture, or composition of matter. See MPEP 2106(I). Judicial exceptions to patentable claims based on case law precedent that are typically not eligible for protection include laws of nature, natural phenomena, and abstract ideas. Id.

[4] Patent protection is mandated by the Constitution, which provides that, “Congress shall have the Power to . . . promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” U.S. Const. art. 1 § 1 cl. 8.

Patents seek to reward and incentivize innovation by granting a limited monopoly in exchange for full disclosure of the technology, furthering the public policy of dissemination of knowledge. Patent protection is only granted to new, useful, and non-obvious contributions of subject matter deemed as “patent eligible” by Congress.

See 35 U.S.C. §§ 101, 102 and 103:

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.”

35 USC § 102(a) “A person shall be entitled to a patent unless— (1)the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention; or (2)the claimed invention was described in a patent issued under section 151, or in an application for patent published or deemed published under section 122(b), in which the patent or application, as the case may be, names another inventor and was effectively filed before the effective filing date of the claimed invention.”

35 U.S.C. §103 “A patent for a claimed invention may not be obtained, notwithstanding that the claimed invention is not identically disclosed as set forth in section 102, if the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which the claimed invention pertains. Patentability shall not be negated by the manner in which the invention was made.”

[5] Alice, 573 U.S ____.

[6] Id.; see also supra note 2.

[7] Id.

[8] CLS Bank Int’l v. Alice Corp. Pty, Ltd., 768 F. Supp. 2d 221, 252 (DC 2011).

[9] CLS Bank Int’l v. Alice Corp. Pty., 685 F. 3d 1341, 1352, 1356 (CAFC, 2012).

[10] CLS Bank Int’l v. Alice Corp. Pty., 717 F. 3d 1273 (2013).

[11] Alice, 573 U.S ____.

[12] Id.

[13] Timothy Lee, Software Patents Are Crumbling, Thanks to the Supreme Court,” Vox (Sept. 12, 2014, 3:50 PM), http://www.vox.com/2014/9/12/6138483/software-patents-are-crumbling-thanks-to-the-supreme-court?utm_medium=social&utm_source=facebook&utm_campaign=voxdotcom&utm_content=friday. Invalidated patents include:

1) A Comcast patent claiming computerized telecommunication systems invalidated on July 6th by a Delaware trial court;

2) A computerized diet-system to help users plan healthy meals invalidated on July 8th by a New York court;

3) A patent claiming protection of color-synchronized profiles across multiple devices invalidated July 17th by the Court of Appeals for the Federal Circuit;

4) A patent relating to a computerized Bingo game invalidated on August 26th by the Federal Circuit;

5) A business method patent relating to a mortgage line of credit to checking accounts invalidated on August 29th by a California court.

6) A computer program designed to convert rewards points from one store to another, invalidated September 3rd by a Texas trial court;

7) A patent relating to an intermediary that selectively reveals information to third parties invalidated September 3rd by a Delaware trial court;

8) A software patent relating to upselling customers based on products they have purchased from various websites invalidated again on September 3rd by a Delaware trial court;

9) A patent relating to using surety bonds to guarantee an online transaction invalidated September 3rd by the Federal Circuit;

10) A patent relating to using computer networks to ask individuals to perform tasks, invalidated September 4th by a California trial court; and

11) A software patent relating to subtracting a small amount of money from payments to accumulate larger sums invalidated September 11th by a Florida court.

[14] Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. ___ (2012).

[15] Alice, 573 U.S ____. See also Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. ___ (2012).

[16] Id.

[17] United States Patent and Trademark Office, Preliminary Examination Instructions in view of the Supreme Court Decision in Alice Corporation Pty. Ltd. v. CLS Bank International, et al. (2014), available at http://www.uspto.gov/patents/announce/alice_pec_25jun2014.pdf.

[18] Id. at 3.

[19] Id.

[20] Id.

[21] See Gottschalk v. Benson, 409 U.S. 63 (1972)(holding an algorithm for converting binary-coded decimal numerals into pure binary form ineligible as a mathematical formula is considered an abstract idea merely ‘discovered’ by the inventor rather than created).

[22] Alice, 573 U.S ____.

[23] Stare Decisis is Latin for “to stand by that which is decided,” referring to the strong reliance on precedent court decisions and potential unwillingness to reverse prior holdings.

[24] See 35 U.S.C. §102, also see generally 35 U.S.C., also known as “The Patent Act.”

[25] United States Patent and Trademark Office, supra note 17.

Go Ahead, Scream Obscenities at Your Boss

­Author: Erin Alderson, Notes and Comments Chair, University of Cincinnati  Law Review

Before the Plaza Auto Center[1] decision, one could probably assume that calling your boss a “f—— m—— f——” would fall into the category of egregious conduct. In its Plaza Auto Center decision, however, the National Labor Relations Board (the NRLB) determined that even when an employee screams obscenities at his boss, he does not fall outside of the scope of protection of the National Labor Relations Act.

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The Curious Case of Douglas Prade: How an Appellate Court Reversed a Finding of “Actual Innocence”

Author: Cameron Downer, Associate Member, University of Cincinnati Law 

On the morning of November 26, 1997, Dr. Margo Prade was brutally murdered in the parking lot of her medical office. At some point during the murder, the assailant bit Margo through her blouse and lab coat. Her husband, Akron Police Captain Douglas Prade, was indicted for the murder. At trial, the key piece of physical evidence was the bite mark. However, the limitations of then-existing DNA technology could only conclusively identify Margo’s own DNA on the bite mark. The remaining evidence at trial was inconclusive. At the end of the trial, Prade was convicted and sentenced to life in prison.[1]

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The Burden of Applying Casey’s “Undue Burden” Standard

­Author: Ryan Goellner, Blog Editor, University of Cincinnati Law Review

After expedited consideration of an injunction of Texas’s now (in)famous House Bill 2 (H.B. 2),[1] in late March the Fifth Circuit Court of Appeals upheld the law’s regulation of abortion providers as comporting with the constitutional protections of a woman’s right to have an abortion.[2] In its strongly-worded order reversing the district court’s permanent injunction of the law in Planned Parenthood v. Abbott, the Fifth Circuit meticulously applied two familiar Supreme Court abortion cases, Planned Parenthood v. Casey[3] and Gonzales v. Carhart,[4] concluding that the Texas law was rationally based and did not impose an undue burden on women seeking abortions in Texas. Although appellate review has settled the Texas case for now, the Fifth Circuit’s intense scrutiny of H.B. 2, applying the reasoning of Casey and Gonzales to the trial court’s findings, reveals the new judicial frontier of the abortion battleground: using constitutional case law to evaluate the validity of detailed regulations of abortion providers that push at the outer limits of Roe v. Wade’s original abortion protections.[5]

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Protection in Leasing: Pennsylvania’s GMRA Forces Lessees to Get Creative

Author: Brad Dunkle, Associate Member, University of Cincinnati Law Review

Last year, a Pennsylvania Superior Court ruled that including a provision in an oil and gas lease assigning a portion of the royalty back to the company violated the Guaranteed Minimum Royalty Act (GMRA).[1]  In Southwestern Energy Prod. Co. v. Forest Res., LLC, an oil and gas company attempted to have a lessor “assign-back” half of its royalty for marketing purposes.  Pennsylvania’s GMRA guarantees that mineral owners leasing their land for oil and gas production receive a minimum of one-eighth royalty on oil and gas produced from property.[2] Although the court held that its ruling in no way affects a lessor from assigning or conveying its royalty independent of the lease, this holding alters the way oil and gas leases are constructed in Pennsylvania and may have an impact on current leases assigning royalties.

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Obergefell, Bourke, and “Fundamental Rights”: Gradually Bringing Same-Sex Marriage to Ohio and Kentucky

­Author: Ryan Goellner, AssociateMember, University of Cincinnati Law Review

With recent narrow decisions in two federal lawsuits[1] challenging state constitutional bans on same-sex marriage, federal judges in Ohio and Kentucky have propelled the Sixth Circuit to the vanguard of interpreting the Supreme Court’s recent decision in United States v. Windsor.[2] The two district court judges not only utilized the constitutional momentum generated by Windsor to chip away at and severely curtail those amendments prohibiting same-sex marriage, but also essentially invited the Sixth Circuit to review their respective decisions and to reexamine its own jurisprudence on sexual orientation in light of Windsor. In one respect, the results in these lawsuits mirror many federal courts’ recent decisions in similar cases.[3] More importantly, however, these cases illustrate the struggle to wade through Windsor’s unclear standard of review, the intricate legal hoops through which district courts are jumping in post-Windsor lawsuits, and the building bottoms-up pressure for the Federal Courts of Appeals to assist in Windsor’s interpretation and application.

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Will Aereo Kill the TV Star?

Author: Matthew Byrnes, Associate Member, University of Cincinnati Law Review

In late April, the Supreme Court heard oral arguments on a case that has the potential to drastically change how Americans watch broadcast programming. The case, American Broadcasting Companies, Inc. v. Aereo, Inc., (“Aereo”) involves the online television subscription service Aereo.[i] Founded in 2012, Aereo allows its users to view or record local network broadcasts on their computer or web-enabled devices starting at $8 a month, plus tax.[ii] Unlike a cable television provider however, Aereo does not pay licensing fees to carry these over-the-air transmissions. Broadcasters fear this will undercut more than $3 billion in annual revenues that they receive from retransmission fees.[iii] In light of the “cut-the-cord” trend, this fear is warranted. If Aereo’s business model is upheld amidst copyright infringement claims, it will rock the traditional cable provider structure. However, when looking to the history of the Copyright Act and its treatment of the broadcasting industry, the Supreme Court is right to pull the plug on Aereo’s system unless it starts paying royalties.

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Experimenting with Death: Baze v. Rees, the Execution of Dennis McGuire, and the Constitutionality of Experimenting with Lethal Injection Drugs

Author: Johnny Holschuh, Contributing Member, University of Cincinnati Law Review

The “horrific” execution of Dennis McGuire by the state of Ohio in January 2014 has aroused international attention regarding the death penalty. The decision by the Southern District of Ohio denying McGuire’s federal petition challenging Ohio’s use of a new drug combination in his execution demonstrates the inability of the U.S. Supreme Court’s Baze v. Rees test to ensure that rapidly changing execution protocols utilizing new drugs and dosages to kill condemned inmates do not violate the Eighth Amendment. With both international and domestic law prohibiting non-consensual scientific experimentation on humans, the legitimacy of the Baze test and the legality of experimenting with lethal injection drugs must be reconsidered.

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Criminal Forfeiture is Taking the “Just” out of Justice: Kaley v. United States

Author: Cameron Downer, Associate Member, University of Cincinnati Law Review

On February 25, 2014, the United States Supreme Court in Kaley v. United States held that defendants are not constitutionally entitled to a pre-trial hearing to challenge a grand jury’s probable cause determination that they committed a crime. This decision means a grand jury determination is an appropriate trigger to allow forfeiture of the defendant’s property under 21 U.S.C. §853(e).[1] Justice Kagan, in her majority opinion, reasoned that since a grand jury indictment may lead to the pre-trial restraining of persons, it similarly has the power to deprive a person of his assets. Therefore, the grand jury may deprive someone of both liberty and property, even if that property is used to pay for the person’s attorney.

Although the Supreme Court hopes to prevent pitting judges against grand juries, the majority’s opinion in Kaley opens the door for prosecutorial abuse. Pre-trial forfeiture can now be used as a weapon by the prosecution to deprive a defendant of his counsel, without challenge. Considering a grand jury indictment is a mere “rubber stamp” in the perspective of the prosecution, the prosecution now has unfettered discretion to deprive a defendant of counsel, thus unfairly increasing the chances of successful prosecution.[2]

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Disclosing a “Butt-Dial”: A Funny (but Important) Crack in Title III

Author: Matthew Byrnes, Associate Member, University of Cincinnati Law Review

Although many people have suffered from the potentially humiliating consequences of a so-called “butt-dial” or “pocket-dial,” it is likely that few, if any, have ever sought civil damages against the recipient. That is, until Jim Huff, chairman of the Kenton County Airport Board and his wife, Bertha, filed suit against Carol Spaw, a secretary at the airport, for receiving, recording and disclosing conversations she overheard when Mr. Huff placed a pocket-dial to her desk phone. U.S. District Court Judge David L. Bunning dismissed the lawsuit on the grounds that the Huffs lacked an objectively reasonable expectation of privacy and the Huffs have filed an appeal.[i] The case is likely one of first impression with ramifications that extend well beyond the civil context. For example, many individuals have been arrested after placing pocket-dials to 911 while discussing or in the commission of criminal acts.[ii] If an objectively reasonable expectation of privacy were to be found, this evidence would have to be suppressed under Title III’s exclusionary rule.[iii] But despite the novelty of the issue and circumstances, the history of Title III and its application in both civil and criminal contexts support dismissal of pocket-dial based claims.

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