Alice Corporation Pty. Ltd. v. CLS Bank International

Facts

In securities trading, when two parties agree to a trade there is often a time lapse between when the parties enter into the agreement and when the actual trade is performed. To reduce the risk of one party being left “holding the bag” after performing their end of the bargain, contracting parties often use a trusted third party to verify the parties’ ability to perform.

Alice Corporation (Alice) is an Australian company that owns several patents with essentially the same function: to manage risks in computerized trading in which a third party settles obligations between the two primary parties. CLS Bank International (CLS) uses similar software to facilitate transactions like the third-party assurance that Alice provides. In 2007, CLS sued Alice, seeking a declaratory judgment from the District Court for the District of Columbia that Alice’s patents were invalid and enforceable, and that CLS did not infringe. Alice counterclaimed and alleged patent infringement.

The Intellectual Property Clause of the Constitution gives Congress the power to legislate in the area of patent and copyright “[t]o promote the progress of science and useful arts . . . ” In turn, 35 U.S.C. § 101, the patent statute defining patentable subject matter, requires that inventions and discoveries be “new and useful.” There are four categories of patent-eligible subject matter: processes, machines, manufactures, and compositions of matter. The Supreme Court has stated that these categories should be read broadly to encourage innovation, consistent with the purpose of the patent system outlined in the Constitution.

Alice’s patents fall into three more specific categories: (1) method patents; (2) data processing system patents; and (3) computer-readable media patents. The specific patents include patents reciting methods of parties’ obligations in the exchange, patents regarding data processing systems, and patents that claim computer-readable media (such as DVDs and CDs) containing program code for directing these securities exchanges.

The district court granted summary judgment for CLS, holding that Alice’s method patents were invalid because they claimed the abstract idea of reducing risk using an intermediary to achieve simultaneous exchanges. The data processing system patents were also held subject-matter ineligible because recognizing their validity would prevent others from using abstract concepts like the use of a neutral third party to minimize risk. Likewise, the computer-readable media patent claims failed because they were directed to the same abstract concept even though the claims related to software, a nominally different invention. A panel of the Court of Appeals for the Federal Circuit reversed, holding that the claims for methods, computer-readable media, and systems were all patent eligible under § 101. On rehearing en banc, in several different opinions, a majority of Federal Circuit judges found that all the patents were not patent-eligible because they merely stated abstract methods coupled with normal computer hardware adapted to perform the methods. The United States Supreme Court granted certiorari on the question of whether claims to computer-implemented systems and processes were patent eligible under § 101.

top

Discussion

CLS claims that Alice’s patents merely recite abstract ideas related to the fundamental economic concept of using an intermediary in settlement, and thus are ineligible under § 101. Alice counters that the abstract ideas exception to otherwise patentable processes is narrow and restricted to cases where patents only restate fundamental truths equivalent to laws of nature.

ENCOURAGING INNOVATION AND THE ABSTRACT IDEA EXCEPTION

A group of technology-based companies led by Trading Technologies International argues that the abstract ideas exception should be read narrowly. Trading Technologies argues that to properly use the patent system to “promote the Progress of Science and the useful Arts,” as stated in the Constitution, a broad conception of patent-eligible subject matter is necessary. IEEE-USA, although supporting neither party, argues that if inventions implemented through software cannot be patented, it will discourage investment at the initial stages of invention and discovery. Because the most important and innovative ideas are often the most risky, IEEE-USA claims there is a need to patent these ideas and process at an early stage so that software-based companies can solicit more investments to continue operating.

CLS argues that allowing patents like Alice’s would not encourage innovation because it would not reward the party who actually spends resources making a useful product. CLS claims that patents like Alice’s compensate companies for simply imagining what a website or computer program is capable of, while leaving to other companies the more difficult task of developing the application of the idea. CLS continues that exclusive rights should be allocated to those expending the resources to bring the idea to fruition. CLS contends that patents like Alice’s seek to hold the idea hostage and force companies like CLS to forfeit million-dollar investments on its emerging products that incorporate these abstract concepts.

THE NEED FOR CLARITY IN APPLYING THE ABSTRACT IDEAS EXCEPTION

The American Intellectual Property Law Association (AIPLA), writing in support of neither party, states that the current law gives lower courts an uncertain framework for applying the abstract ideas exception, and that this uncertainty has resulted in courts throwing out too many patents because the subject matter appears too vague, too broad, or already invented. Trading Technologies agrees and argues that unlike other exceptions to patent eligibility such as scientific truths and laws of nature, “abstract ideas” is too flimsy a term to be applied by lower courts in a consistent manner. Trading Technologies claims that because all inventions involve abstract ideas, using abstract ideas as a broad discretionary exception invites constant litigation. Moreover, because the exception is judicially drawn, broad administration could contravene the Constitution’s assignment of Congress as the determining body of patent eligibility. To cure these problems, Trading Technologies asks the Court to not conflate scientific truths and abstract ideas and asks that the latter be broadly considered patent eligible to avoid excessive § 101 challenges and prevent courts from infringing on congressional responsibilities.

The American Antitrust Institute (AAI), which supports CLS, agrees that the uncertainty of the abstract ideas exception is undesirable, but maintains that the Court can reemphasize its long-standing method and means test to aid lower courts in determining whether a patent falls within the exception. The method or means test states that a patent should be granted for the method or means of producing a beneficial effect but not for the effect itself. AAI uses the Pythagorean Theorem as an example of an unpatentable abstract idea under the method and means test. As AAI points, out, the theorem explains why the square of the hypotenuse of a right triangle is equal to the sum of the squares of the other two sides, but the theorem does not cause this to be so. AAI claims that emphasizing the method and means test would not only give clearer guidance to lower courts applying the abstract ideas exception but also serve the overall goal of the exception: preventing unnecessary constraints on competition and innovation.

top

Analysis

The Court will determine whether computer-implemented inventions are patent eligible within the meaning of 35 U.S.C. § 101. In Bilski v. Kappos, the Supreme Court stated three exceptions to patentable subject matter under §101: “laws of nature, physical phenomena, and abstract ideas.” Petitioner Alice Corporation argues that its claims are patentable subject matter and do not fall under any of the exceptions. Additionally, Alice argues that its claims do not recite a fundamental truth, and therefore cannot be considered an abstract idea. Respondent CLS Bank argues that Alice’s claims fall squarely within the abstract ideas exception because the risk-management principle proposed by Alice is an abstract idea. Furthermore, CLS argues that Alice’s claims do not assert “significantly more” than the idea of intermediated settlement, and therefore are not patent-eligible.

DEFINING THE ABSTRACT IDEAS EXCEPTION

Alice argues that the abstract idea exception is limited to patents that claim preexisting fundamental truths. Alice asserts that the Court has interpreted “abstract ideas” to be ideas that are the same as a law of nature, such as a mathematical formula. Alice argues that the Court’s cases concerning the exceptions to § 101 make clear that the exception is specifically limited only to preexisting fundamental truths. Using this framework, Alice asserts that claims to computer-implemented inventions are patentable unless they state only a fundamental truth and instructions to apply the truth through a computer program.

CLS argues that the abstract ideas exception is aimed at making sure the patent system cannot take away from the public the necessary and foundational tools for innovation. CLS contends that, in addition to mathematical formulas and fundamental truths, the Court has recognized that abstract ideas also include fundamental economic principles. CLS asserts that, in Bilski, the Court held that hedging is a fundamental economic principle that cannot be patented. CLS contends that in order to avoid the holding in Bilski, Alice seeks to redefine the abstract idea doctrine to only include mathematical principles or those principles that are wholly separate from any human action. CLS argues that the hedging concept in Bilski did not exist without any human action, and yet the Court still found it to be an abstract idea because it has been a longstanding principle of commerce.

Alice contends that because its claims set up a specific configuration of computer hardware to provide a unique computer program, it cannot be considered a fundamental truth and is therefore patentable. Alice asserts that nowhere in the language of the claims does it recite a fundamental economic principle and the claims are not reducible to a mathematical formula. Alice argues that the lower court confused the meaning of the abstract ideas exception, and the court’s interpretation wrongly found Alice’s claims ineligible for patenting because the claims were based on a “disembodied concept.” Alice asserts that every process claim can be framed as being based on a disembodied concept, and a claim is only ineligible when a disembodied concept is the sole thing the claim is asserting. Alice contends that in order for a claim to be considered an abstract idea it must exist apart from any human action, and Alice’s claims require human action.

CLS responds that because Alice’s claims are fundamental economic principles of intermediated settlement, the claims represent abstract ideas. CLS asserts that the concept of addressing settlement risk through intermediation is “fundamental and ancient” and Alice’s claims only describe these principles. CLS finds that intermediated settlement is also usually referred to as an escrow agreement, and many definitions of the escrow practice are similar to Alice’s claims. Therefore, CLS contends that the lower courts correctly held that Alice’s claims are essentially a form of escrow. CLS argues there is no difference between Alice’s claims concerning intermediated settlement and the concepts the Supreme Court dealt with in Bilski involving risk management, and therefore the Court should find that Alice’s claims are abstract ideas and unpatentable.

DO ALICE’S CLAIMS ADD “SIGNIFICANTLY MORE”?

Alice argues that its patent claims present a very substantial role for the computer, which must perform a specific series of steps that reach beyond simple computations. Alice contends that the claims cannot be interpreted as doing nothing more than stating generally the idea of third-party intermediation.Alice asserts that the claims state particular ways of accomplishing third-party intermediation, and that there are several other ways that are available. As an example, Alice argues that the claims require the computer to create two shadow accounts, and that this is not the only way to implement exchanges. Thus, Alice contends that its claims are different from cases in which the Court held that the claims had very insignificant “post-solution activity.” Alice specifically points out that in Bilski the Court found no post-solution activity, and in Mayo Collaborative Services v. Prometheus Labs, Inc., the post-solution activity was only the act of applying the particular natural law to the patient. Alice contends that the claims require steps that are beyond the principle of third-party intermediation. Alice likens the situation in this case to the case of Diamond v. Diehr, where the claim was held patent-eligible because, although the process did employ a mathematical formula, the patent was not meant to cover just the use of the formula but rather the use of the formula combined with each step in a process. Therefore, Alice argues that its claims include much more than the use of a common formula.

CLS argues that the Court has consistently held that merely implementing an “abstract idea” through a computer is not a patentable application of the idea. CLS asserts that the claims in Diehr were held eligible because they added a new and inventive application of an existing formula, and not because the ideas could be implemented through a computer. CLS contends that the issue here centers on whether in the specific context of this claim computer implementation of the idea is significant enough to create patent eligibility. CLS asserts that if an abstract idea is not patentable, the machine implementing that idea must contain a new and inventive concept in order to be patent-eligible. CLS argues that like the ineligible claims in Mayo, Alice’s claims only state an abstract idea along with the words “compute it.” CLS contends that Alice’s use of a computer to create shadow accounts is a conventional idea, that electronic recordkeeping is a very basic computer function, and that Alice’s claims do not do more than this. Therefore, CLS argues that Alice’s claims are not sufficiently inventive to fall outside the abstract ideas exception.

top

Conclusion

Whether Alice’s patents are determined to be subject matter eligible under 35 U.S.C. § 101 will depend on the narrowness or breadth the Court gives to the term “abstract idea.” Alice argues for a narrow reading of the abstract ideas exception to apply only to fundamental truths such as laws of nature. CLS argues that fundamental economic concepts should fall within the exception. The outcome of the case may affect how companies invest in innovative ideas, because patent eligibility may determine how profitable a project is and the unavailability of patents may prevent companies from investing in the long-term projects for implementation of ideas into concrete products.

top