What to know after the latest patent ruling by the U.S. Supreme Court

The <i>Alice</i> ruling clarifies patent-eligible software processes

In June, the U.S. Supreme Court unanimously affirmed its earlier ruling on patent claims involving computers and software. In light of that decision, companies and inventors that have business methods patents, software patents or financial methods-based patents should review their portfolios to ensure that their patents are enforceable and not subject to invalidity attacks.

In essence, the Supreme Court ruled that the software patents at issue were ineligible subject matter, not because they were implemented on a computer, but because they were not novel. Therefore, if you have invented something new that is not simply a programming of an existing business practice on computer hardware, then a patent is still likely available to you. If you are on the other side of this issue, with a business that regularly gets cease and desist letters or license requests from companies that hold these types of patents, you may now have some additional leverage to address these inquiries in your favor.

The Alice ruling

The Supreme Court decided in Alice Corporation v. CLS Bank International that "[b]ecause the claims are drawn to a patent-ineligible abstract idea, they are not patent eligible under Sect. 101." The Supreme Court reiterated the test it developed earlier in the Mayo decision ( Mayo Collaborative Services v. Prometheus Laboratories, Inc.) for these types of patent claims: 1) are the claims directed to a patent-eligible concept or idea, and if not, 2) do the claims merely require generic computer implementation?

In Alice, the claims covered a method, system and computer-readable medium for mitigating settlement risk, such that both sides of a financial exchange are more likely to comply with their obligations before one side initiates a transfer (think escrow agent). The claims required electronic shadow credit and debit records updated in real time from the respective financial institutions, and permitted the transaction only if the shadow records indicated sufficient resources of the parties to satisfy their mutual obligations. The Court summarized the claims as a method "to facilitate the exchange of financial obligations between two parties by using a computer system as a third-party intermediary." The Court ruled that the claims were directed to an abstract idea, since the facilitation through a third-party intermediary was "a fundamental economic practice long prevalent in our system of commerce" and therefore, was not directed to a patent-eligible concept or idea. The addition of a generic computer to facilitate the exchange did not supply a new and useful application that would make the claims patent eligible.

Result on patentability

In essence, the Court is not making any revolutionary rulings here. Under Sect. 101, a person must invent a new and useful process, machine, manufacture or composition of matter, or improvement thereof. Laws of nature, natural phenomena and abstract ideas are implicitly excluded as not patentable.

Therefore, for software patents, the first step is to determine whether you have an abstract idea. An abstract idea includes a fundamental truth, an original cause, a motive, a mathematical formula or a fundamental economic practice. If the idea is abstract, then the hardware components and other limitations recited by the claims are considered to determine if there is anything new to the invention. If all that is left is a general-purpose computer, with memory, processors, controllers, etc., then the mere presence of the computer does not make the abstract idea patentable. The real question is: Looking at the claim as a whole or in the individual steps, is there something new? Some things to consider are: 1) whether the functioning of the computer itself is improved, (2) whether there are any improvements in any other technology or technological field, or 3) whether there is specific hardware separate from what a general computer would have? It appears that the novelty question can be affirmative if there is anything new about the claimed method or hardware.

The example of the Court of what is patent-eligible is instructive. The Court looked to Diehr, in which a computer-implemented process for curing rubber was patent-eligible not because the claims were implemented on a computer, but because they improved an existing technological process. Namely, the Diehr invention used a recorded temperature measurement inside a rubber mold, something the industry had not been able to do previously. Even though a thermocouple to obtain temperature was known, and the mathematical equation used to determine the cure time was well known, the industry had never put the two together. Therefore, the presence of the thermocouple to obtain a real-time temperature measurement was sufficiently novel to transform the abstract idea into patentable subject matter.

"In short, [if] each step does no more than require a generic computer to perform generic computer functions," then the abstract idea does not become patentable.

Result on prosecution

Although the Court used a novelty type of approach for determining subject matter eligibility, that approach is not articulated in the same way as the separate novelty requirement under Sect. 102 is generally understood. To determine novelty under Sect. 102, an examiner must make a search of each limitation of the claim and find it expressly or inherently in a single location. The examiner is generally not permitted to reduce the invention down to its gist. However, the question of subject matter novelty under Sect. 101 appears to require just that: Take the invention down to the gist and then determine if there is anything new.

It is likely that examiners will use this general approach to start rejecting software patents out of hand without much analysis or basis for the rejection. This will require additional cost to argue and persuade the examiner, and essentially shifts the burden to the patentee to show that there is a point of novelty in the claim, versus the burden on the examiner to prove the absence of novelty by specifically identifying each limitation within a reference. However, if the patentee can show an improvement or novelty in the program itself or the hardware associated with the program, the patentee should prevail.

We have already seen this effect in action. The USPTO issued a memorandum to Examiners providing preliminary instructions in view of Alice. In practice, we are already receiving rejections of software applications with a new form paragraph based on the Alice decision. A supplemental rejection under Sect. 101 may even be issued in cases with an outstanding office action that previously did not include a subject matter rejection. Therefore, it does look like more of these cases will have to be argued under this new framework.

If you have a pending patent application that may be considered covered by the Alice decision, you should consider contacting your patent attorney to discuss these options and whether this decision affects your patent application.

Result on litigation

The major implication of the decision on the litigation front is who gets to decide patent validity and when. Subject matter eligibility is a question of law for a judge to decide, and can be brought earlier in a proceeding. Deciding novelty is a question of fact that should be tried by a jury, and only decided by a court if there are no disputed facts to make the decision. The decision on novelty will occur generally after claim construction, discovery and expert testimony, either at the summary judgment stage or after, whereas subject matter eligibility can be decided whenever the judge determines there is sufficient information to decide the question of law. This may help reduce litigation costs and liability for patents that truly encompass known business practices that are merely implemented on a computer. Because these cases may be decided earlier in the litigation process, defendants may be provided a real option to defend themselves against a patent suit instead of simply acquiescing to a license to avoid litigation costs.

Kari Barnes is senior counsel in the Orange County, Calif., office of Buchalter Nemer. She is a member of the firm's Intellectual Property Practice Group and focuses her practice on intellectual property prosecution and associated transactional endeavors. She can be reached at (949) 224-6436 or kbarnes@buchalter.com.

Sandra P. Thompson, J.D., Ph.D., is a shareholder in the Orange County office of Buchalter Nemer. Her practice focuses on intellectual property, specifically, patents and trademarks. She can be reached at (949) 224-6282 or sthompson@buchalter.com.

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