Supreme Court Unanimously Holds That Computer-Implemented Economic Concepts Are Not Patent-Eligible

June 20, 2014

On June 19, 2014, the United States Supreme Court decided a closely watched case addressing the patent-eligibility under 35 U.S.C. § 101 of computer-implemented inventions.  The Court ruled in favor of Gibson Dunn clients CLS Bank and CLS Services, conclusively ending a protracted patent lawsuit against non-practicing entity Alice Corporation.  The Court held that Section 101 requires courts to assess first whether the patent is drawn to an abstract idea, such as a fundamental economic practice, and, if so, then ask whether the patent nonetheless has an inventive concept sufficient to render it eligible.  Because Alice’s patents failed both steps, the Court held them ineligible.

A.   Patent-Eligibility

Section 101 of the Patent Act states:  "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."  The Supreme Court has long held that this language contains an "exception" under which "abstract ideas," "laws of nature," and "natural phenomena" are not eligible for a patent.  E.g., Bilski v. Kappos, 561 U.S. 593 (2010); Diamond v. Diehr, 450 U.S. 175 (1981); Parker v. Flook, 437 U.S. 584 (1978); Gottschalk v. Benson, 409 U.S. 63 (1972); Rubber-Tip Pencil Co. v. Howard, 87 U.S. 498 (1874).

Under the abstract idea exception, the Court had previously rejected attempts to patent an algorithm for converting binary-coded decimal numbers into pure binary form (in Benson), an algorithm for updating an alarm limit using a computer (in Flook), and the economic concept of hedging (in Bilski).  But the Court held eligible a method for more accurate rubber-curing that involved continuously measuring the temperature inside of the rubber-curing press and feeding those measurements into a computer that used an algorithm to calculate when to open the press (in Diehr).

The Court’s abstract idea precedents, however, had not articulated a general framework for evaluating patent-eligibility challenges.  Then, in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (2012), the Court held that a patent drawn to a law of nature may not be eligible even if the patent recites additional elements beyond the law of nature itself, unless those elements represent "an ‘inventive concept,’ sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the natural law itself."

The Federal Circuit, in this case and others, nevertheless struggled to apply the Supreme Court’s eligibility jurisprudence to patents on computer-implemented inventions, with judges disagreeing about whether and how the Mayo framework applies to cases involving abstract ideas rather than laws of nature.

B.   The Alice Litigation

Alice, an Australian patent-holding company, asserted that CLS, which operates a global network that processes trillions of dollars of foreign-currency transactions per day, had infringed Alice’s patents.  Those patents described the economic concept of intermediated settlement, and (as construed favorably to Alice) provided that a computer would implement the settlement by creating "shadow" records that it adjusts to reflect transactions as they are performed, then directing an exchange.  Alice claimed the settlement concept in three different ways:  as a method for settling transactions (method claims), as a computer programmed to settle those transactions (system claims), and as computer storage media containing that programming (media claims).

CLS brought an action in the United States District Court for the District of Columbia, seeking a declaratory judgment that Alice’s patents were ineligible for claiming an abstract idea.  CLS argued that the computer the patents recited was generic–a set of functionally defined components found in any computer that would be used in financial transactions today–and that the patents disclosed no computer programming.  The district court agreed with CLS and declared the patents ineligible.  On appeal, a 2-1 panel of the Federal Circuit initially reversed, but the Federal Circuit reheard the case en banc and affirmed the district court’s judgment in a decision that divided the judges 7-3 on Alice’s method and media claims and 5-5 on the system claims. 

Alice sought Supreme Court review to resolve the division within the Federal Circuit.  After the Court granted review, Alice argued that the concept of intermediated settlement was not an abstract idea because it was not "a preexisting fundamental truth akin to a mathematical formula or law of nature."  Alice also contended that its patents did not claim the entire concept of intermediated settlement, principally because they required a computer.  CLS responded that intermediated settlement was a "fundamental economic practice" and therefore an abstract idea under Bilski.  Further, CLS maintained that the use of a computer in financial transactions was "conventional" and therefore could not supply the "inventive concept" necessary to transform an abstract idea into a patent-eligible claim under Mayo, even if the patents did not cover every application of intermediated settlement. 

C.   The Supreme Court’s Decision in Alice

In a unanimous decision authored by Justice Thomas, the Supreme Court rejected Alice’s arguments, adopted CLS’s, affirmed the judgments below, and held Alice’s patents ineligible.  See Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 573 U.S. ___ (2014) (No. 13-298).  The Court "h[e]ld that the claims at issue are drawn to the abstract idea of intermediated settlement, and that merely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention."  But it stopped short of declaring that all computer-implemented, or "software," patents are ineligible, pointedly noting that Alice’s "claims do not, for example, purport to improve the functioning of the computer itself."

Some of the key points from the Supreme Court’s decision, particularly as it will affect future patent litigation, are:

• The Court held that Mayo‘s two-step "framework" applies to all eligibility challenges.  Under Mayo, a court first determines whether the patent is directed to a law of nature, natural phenomenon, or abstract idea.  "If so, we then ask, ‘[w]hat else is there in the claims before us?’"  The patent will be eligible if it contains "an ‘inventive concept’–i.e., an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself."
• Applying that test, the Court first concluded that Alice’s patents were drawn to an abstract idea, rejecting Alice’s argument that an "abstract idea" must exist "apart from any human action," and that it must be reducible to a mathematical formula.  The Court explained that "Bilski belies petitioner’s assertion," as the hedging idea at issue in Bilski was "a method of organizing human activity."
• The Court next held that "generic computer implementation" cannot "transform" an "abstract idea into a patent-eligible invention."  "Given the ubiquity of computers," adding computer implementation does not meaningfully limit the scope of what the patent preempts.  And, under Mayo, conventional steps do not supply an "inventive concept." 
• Although Diehr had upheld a computer-based claim, it did so not because a computer was present but because the invention "improved an existing technological process."  Unlike the invention in Diehr, Alice’s patents do not "purport to improve the functioning of the computer itself" or "effect an improvement in any other technology or technical field." 
• The Court further explained that the tangibility of a computer "is beside the point":  "if that were the end of the § 101 inquiry, an applicant could claim any principle of the physical or social sciences by reciting a computer system configured to implement the relevant concept," and the Court’s cases warn against making eligibility "depend simply on the draftsman’s art." 

Three Justices who joined the opinion of the Court in full also wrote a brief separate concurrence.  Justice Sotomayor, joined by Justices Ginsburg and Breyer, reiterated their view (which Justice Stevens had expressed in Bilski) that business methods were categorically patent-ineligible.

The Supreme Court’s decision in Alice reinforces the point, made in Bilski, that business method patents–particularly in the financial services sector–are suspect under Section 101 even if they are not categorically ineligible.  The decision also makes clear that the mere involvement or inclusion of a computer does not immunize a patent from scrutiny under Section 101; on the contrary, such claims (like Alice’s) may be ineligible if they claim an abstract idea with merely conventional activity, rather than an inventive concept.  Reciting generic computer functionality is not sufficient to ensure that a patent will pass eligibility scrutiny, whether claimed as a method or as a product or system.  The bottom line is that basic economic concepts are not patent-eligible, even if performed on a computer.

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Gibson Dunn partners Mark A. Perry, Brian M. Buroker, and Helgi C. Walker, along with a team of talented associates including Alex Harris, proudly represented CLS before the en banc Federal Circuit and in the Supreme Court.

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