Ever since the 1998 decision of the Federal Circuit in State Street Bank,1 the question of whether business methods and related software are eligible for patent protection has bedeviled the courts. Although the United States Patent Office has granted thousands of patents in the field since then and the courts have issued numerous decisions on the validity of those patents, clear guidance remains elusive.
Section 101 of the Patent Act provides that a patent may be issued for any "new and useful process, machine, manufacture, or composition of matter." Long before State Street Bank, however, the courts had ruled that three categories of subject matter were unpatentable, despite the broad language of Section 101, namely, "laws of nature, natural phenomena, and abstract ideas."2
In State Street Bank, the patent claimed a system for using a computer to monitor and calculate the value of shares held by partners in a common investment fund. The District Court held that the system was not eligible for patent protection because it claimed only an abstract idea, and the court cited a series of cases expressing the widely-held belief that business methods are unpatentable abstract ideas.3
The Federal Circuit reversed, rejecting the notion of a business method exception, holding that business methods are not a special kind of process ineligible for patent protection, and that they should be treated for patent purposes like any other process under Section 101.4 The court also held that while a mere abstract idea, standing alone, could not be patentable, a patent could be issued for a practical application of the idea that produced a "useful, concrete and tangible result."5
Although the United States Patent Office has granted thousands of patents in the field since then and the courts have issued numerous decisions on the validity of those patents, clear guidance remains elusive.
In the years following State Street Bank, the patent office issued literally thousands of patents claiming various business and financial methods and products and related software.
In 2008, the Federal Circuit revisited the subject and attempted to "clarify the standards applicable in determining whether a claimed method constitutes a statutory 'process' under §101."6 In Bilski, the Patent Office had rejected claims to a system for hedging risks associated with commodity trading in energy markets on the ground that the application claimed only abstract ideas that did not produce a "useful, concrete and tangible" result. The applicant appealed to the Federal Circuit. After the appeal had been argued to a panel of the court, but before decision, the Federal Circuit sua sponte ordered an en banc review, which resulted in five separate opinions.
The majority opinion, joined by nine judges of the court, ultimately agreed with the Patent Office in holding that the claims were not directed to a patentable process. In doing so, however, the Federal Circuit rejected its own "useful, concrete and tangible" test and held that "[a] claimed process is surely patent-eligible under §101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing."7 The Federal Circuit concluded that this "machine-ortransformation test" was the only one supported by the case law, and the only one that should be used to determine patent eligibility under §101.8
In affirming the holding of the Federal Circuit that the Bilski system did not amount to a patentable process, the Supreme Court discussed the alleged business methods exception at some length, asserting that "Section 101 . . . precludes the broad contention that the term 'process' categorically excludes business methods."9 The Court also relied on Section 273 of the Patent Act, which, the Court noted, would be rendered meaningless if business methods were not patentable under any circumstances,10 but it cautioned that "[w]hile § 273 appears to leave open the possibility of some business method patents, it does not suggest broad patentability of such claimed inventions."11
Although the Supreme Court agreed with the Federal Circuit's view that there is no blanket exception for business methods, the Court rejected the idea that the "machine-or-transformation" test was the sole test governing patent eligibility under Section 101. Instead, the Court described the "machine-or-transformation" test as a "useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under Section 101.12
In 2012, two years after its decision in Bilski, the Supreme Court again disagreed with the Federal Circuit's reliance on the "machine-or-transformation" test. In Mayo Collaborative Services v. Prometheus Laboratories, Inc.,13 the invention did not relate to a business method, but to a process for monitoring drug metabolites in a patient's bloodstream in order to determine the proper dosage of a drug.
The Federal Circuit, applying the "machine-or transformation" test as an "important and useful tool," found that the patent was valid and that it did not simply claim an unpatentable law of nature. The Supreme Court disagreed, stating: "[t]he question before us is whether the claims do significantly more than simply describe these natural relations. To put the matter more precisely, do the patent claims add enough to their statements of the correlations to allow the processes they describe to qualify as patent-eligible processes that apply natural laws. We believe that the answer to this question is no."14
The Mayo decision set out a two part inquiry: first, do the patent claims describe a law of nature or abstract idea; second, if so, do the claims add something more, some "other elements or combination of elements, sometimes referred to as an 'inventive concept,' sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the natural law itself?"15 It is not surprising that courts and practitioners struggled to understand how much more would be "significantly more" or how much would be "enough."
Two years after Mayo, the Supreme Court applied its two-step test in Alice Corp. Pty. Ltd. v. CLS Bank Intern.,16 where the patent describes a system for mitigating financial settlement risks through the use of a third-party intermediary, with the transactions monitored and directed by a computer program. Applying the first step of the Mayo analysis, the Court held that the claims were drawn to an abstract idea— the idea of an intermediated settlement.17 Applying the second step, the Court concluded that the claims failed to transform the abstract idea into a patent-eligible invention.18 The Court emphasized that: "[t]he mere recitation of a generic computer cannot transform a patent-eligible abstract idea into a patent-eligible invention. Stating an abstract idea 'while adding the words "apply it"' is not enough for patent eligibility…. Nor is limiting the use of an abstract idea 'to a particular technological environment.' … Stating an abstract idea while adding the words 'apply it with a computer' simply combines those two steps with the same deficient result. Thus if a patent's recitation of a computer amounts to a mere instruction to 'implemen[t]' an abstract idea on… a computer'… that addition cannot impart patent eligibility."19
While the Court's Alice decision is helpful in making it clear that adding a generic computer to a process is not "enough" to convert an abstract idea into a patentable invention, the question of what is "enough" or "significantly more" remains indefinite at best.
Three recent software patent decisions from the Federal Circuit illustrate how the lower courts have worked to apply the two-step Alice analysis in their search for what constitutes an "inventive concept." In Enfish, LLC v. Microsoft Corporation,20 the patent claims were directed to a "self-referential table for a computer database." The court stated: "[t]he Supreme Court has suggested that claims 'purport[ing] to improve the functioning of the computer itself,' or 'improv[ing] an existing technological process' might not succumb to the abstract idea exception,"21 and it concluded, "[a] ccordingly, we find that the claims at issue in this appeal are not directed to an abstract idea within the meaning of Alice. Rather, they are directed to a specific improvement to the way computers operate, embodied in the self-referential table."22
While the Supreme Court's Alice decision is helpful in making it clear that adding a generic computer to a process is not "enough" to convert an abstract idea into a patentable invention, the question of what is "enough" or "significantly more" remains indefinite at best.
In TLI Communications LLC v. AV Automotive, L.L.C.,23 the Federal Circuit held that the claims covered only an abstract idea, a system for taking, transmitting and organizing digital images. Referring to its decision in Enfish, the court stated: "We contrasted claims 'directed to an improvement in the functioning of a computer' with claims 'simply adding conventional computer components to well-known business practices,' or claims reciting 'use of an abstract mathematical formula on any general purpose computer,' or 'a purely conventional computer implementation of a mathematical formula,' or 'generalized steps to be performed on a computer using conventional computer activity.' …. Contrary to TLI's arguments on appeal, the claims here are not directed to a specific improvement to computer functionality."24
Finally, in Bascom Global Internet Services, Inc. v. AT&T Mobility LLC,25 the Federal Circuit reversed the District Court's grant of a motion to dismiss under Rule 12(b)(6) and held that there was nothing in the record to refute the allegation, as a matter of law, that the claims of the patent in suit contained an "inventive concept" sufficient to satisfy the second step of the Alice test.
The courts have left open the possibility of "some" business method patents, but it is unlikely that they will achieve "broad patentability."
The claims related to a system for filtering Internet content. The court agreed that the idea of filtering content retrieved from an Internet computer network is an "abstract idea because it is a longstanding, well-known method of organizing human behavior, similar to concepts previously found to be abstract."26 In applying the second step of the Alice test, however, the court found that the patent described an inventive concept consisting of "the installation of a filtering tool at a specific location, remote from the end-users, with customizable filtering features specific to each end user. This design gives the filtering tool both the benefits of a filter on a local computer and the benefits of a filter on the ISP server."27 The court concluded that "[t]he claims do not merely recite the abstract idea of filtering content along with the requirement to perform it on the Internet, or to perform it on a set of generic computer components. Such claims would not contain an inventive concept…. Instead, the claims may be read to 'improve an existing technological process.'"28
When Congress enacted the America Invents Act, it provided for an expedited review process for "covered business method patents,"29 which were defined to include patents that claim "a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions."30
It is interesting to note that the three cases just described did not involve "business method patents" under this definition, and that the two patents sustained by the Federal Circuit provided a specific improvement to a computer function or a technological solution to a technical problem. While the Supreme Court has rejected the idea of a "business method" exception to Section 101, the Alice test may make it extremely hard to obtain valid business method patents, while continuing to allow for software patents that solve technical, not business or financial, problems. To paraphrase the Supreme Court's statement in Bilski, the courts have left open the possibility of "some" business method patents, but it is unlikely that they will achieve "broad patentability."
1 State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998)
2 Diamond v. Diehr, 450 U.S. 175, 185 (1981).
3 State Street Bank & Trust Co. v. Signature Financial Group, 927 F.Supp. 502, 515-16 (D. Mass. 1996), reversed, 149 F. 3d 1368 (Fed. Cir. 1998).
4 149 F.3d at 1375 et seq.
5 149 F.3d at 1373, adopting the formulation used in In re Alappat, 33 F.3d 1526, 1544 (Fed. Cir. 1994).
6 In re Bilski, 545 F.3d 943, 949 (Fed. Cir. 2008), aff'd sub nom. Bilski v. Kappos, 130 S.Ct. 3218 (2010).
7 545 F.3d 943 at 954.
8 545 F.3d 943 at 956.
9 130 S.Ct. 3218 at 3228.
10 Section 273 provides, in part, that where an infringement charge is based on a method claim, the alleged infringer can assert a defense of prior use. For purposes of this defense, the statute defines "method" as a "method of doing or conducting business."
11 130 S.Ct. 3218 at 3229.
12 130 S.Ct. 3218 at 3227.
13 132 S.Ct. 1289 (2012).
14 132 S.Ct. 1289 at 1297 (emphasis by the Court).
15 132 S.Ct. 1289 at 1294.
16 134 S.Ct. 2347 (2014).
17 134 S.Ct. 2347 at 2355.
18 134 S.Ct. 2347 at 2357.
19 134 S.Ct. 2347 at 2358 (internal citations omitted).
20 No. 15-1244 (Fed. Cir. May 12, 2016).
21 Enfish, Slip. Opn. at 10.
22 Enfish, Slip. Opn. at 12.
23 No. 15-1372 (Fed. Cir. May 17, 2016).
24 TLI Communciations, Slip. Opn. at 8.
25 No. 15-1763 (Fed. Cir. June 27, 2016).
26 Bascom, Slip. Opn. at 12.
27 Bascom, Slip. Opn. at 15.
28 Bascom, Slip. Opn. at 16-17.
29 America Invents Act, § 18.
30 Definitions, 37 C.F.R. § 42.301(a) (2014).