The CLS Bank Case

Evolving Standards for Protecting Computer-Implemented Inventions with Patents

Section 101 of the U.S. patent laws (35 U.S.C. §101) provides that “[w]hoever 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 therefore, subject to the conditions and requirements of this title.” U.S. Supreme Court precedent, however, carves out three specific exceptions to Section 101’s broad patent-eligibility principles — specifically, “laws of nature, natural phenomena, and abstract ideas” are not patentable. Diamond v. Diehr. The U.S. Court of Appeals for the Federal Circuit, which is the federal court that hears all appeals relating to patents, has faced challenges to patents directed to computer-implemented inventions on each ground of the above judicially created exceptions to Section 101, although it has experienced more difficultly in addressing challenges to computer-implemented inventions as abstract ideas. This is likely due to the fact that, while laws of nature and natural phenomena are objectively identifiable and definable, abstract ideas are not; what constitutes an abstract idea is inherently subjective in nature.

In Bilski v. Kappos, the Supreme Court in 2010 held that while there is no definitive test for determining whether a process is patentable, the so-called “machine or transformation” test set forth by the Federal Circuit is a useful starting point. The “machine or transformation” test essentially states that to be patentable, a process either must be implemented with a particular machine, or must transform an article from one state to another.

Since Bilski, whose claims were deemed to be patent ineligible because they defined merely abstract investment strategy techniques, many of the claims in challenged patents bear similarity to the claims in Bilski, yet some have been considered patent eligible and others patent ineligible abstract ideas. For example, in Cybersource v. Retail Decisions, the Federal Circuit considered a patent claiming a “method for verifying the validity of a credit card transaction over the Internet.” The Federal Circuit affirmed summary judgment; because “[a]ll of claim 3’s method steps can be performed in the human mind, or by a human using a pen and paper,” the patent merely covered a patent-ineligible abstract idea. In contrast, the Federal Circuit ruled, in Research Corp. Technologies, Inc. v. Microsoft Corp., that a claim can only be found un-patentable under Section 101 if its abstractness “should exhibit itself so manifestly as to override the broad statutory categories of eligible subject matter.”

This inconsistency has left the law unsettled on how to approach close questions regarding the patent eligibility of computer implemented inventions that appear to involve what may be considered an abstract idea. What is needed is a balanced view of the patent eligibility standards set forth by 35 U.S.C. § 101 and the  judicially created “abstract idea” exception — particularly as they relate to the patenting of computer-implemented inventions, such as those implemented in software. In an apparent desire to provide greater clarity on this score, the Federal Circuit conducted an “en banc” review (a full review where all of the judges of the court participate) of CLS Bank International v. Alice Corp. Pty., to decide the appropriate application of 35 U.S.C. § 101, particularly as it relates to the patenting of computer-implemented inventions.

The patents at issue in CLS Bank, which are owned by Alice Corporation, cover a computerized trading platform for exchanging obligations in which a trusted third party settles obligations between a first and second party so as to eliminate “settlement risk.” Settlement risk is the risk that only one party’s obligation will be paid, leaving the other party without its principal. According to the claimed invention, the trusted third party eliminates this risk by either (a) exchanging both parties’ obligations or (b) exchanging neither obligation.

Some of the claims at issue were directed to a system, others to a method and yet others to a computer program product. The district court ruled that the claims at issue, regardless of whether they were for a method, a system or a computer program product, were drawn to mere abstract ideas. In a three-judge panel review, the Federal Circuit reversed the district court’s ruling and held that the system, method and computer program product claims at issue were not drawn to mere “abstract ideas,” but rather were directed to practical applications of invention falling within the categories of patent-eligible subject matter defined by 35 U.S.C. § 101.

On May 10, 2013, a divided en banc Federal Circuit affirmed the district court’s holding that the asserted system, method and computer-readable media claims are not directed to eligible subject matter under 35 U.S.C. § 101. The court’s holding demonstrates the need to carefully draft patent claims that not only constitute a process, machine, manufacture, or composition of matter, but also are not likely to preempt a fundamental concept.

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