The “death of hundreds of thousands of patents?” How the CLS Bank decision could affect the future of software patents.

What does the Federal Circuit’s recent decision in CLS Bank Int’l v. Alice Corporation Pty Ltd. mean for software patents? Is it the “death of hundreds of thousands of patents” as one judge stated, or just a bump in the road? In a per curiam opinion published May 10, 2013, the Court ruled that the method and computer-readable medium claims of four patents were not directed to patent-eligible subject matter. The patents at issue were U.S. patents 5,970,479; 6,912,510; 7,149,720; and 7,725,375. In broad terms, the patents covered methods and systems for managing risk, such as the risk that may arise from one party failing to perform an obligation (such as pay a debt or honor a warranty) to another party. The Court’s five-judge panel opinion determined that the claims merely covered an “abstract idea.”  In support of this determination, the panel’s opinion noted:

The concept of reducing settlement risk by facilitating a trade through third-party intermediation is an abstract idea because it is a “disembodied” concept . . . a basic building block of human ingenuity, untethered from any real-world application. Standing alone, that abstract idea is not patent-eligible subject matter.

Many of the claims required more than just facilitating a trade. Specifically, the claims also required discrete processing steps such as limitations requiring creating shadow records, using a computer to adjust and maintain those shadow records, and reconciling shadow records and corresponding exchange institution accounts through end-of-day transactions. Nonetheless, the panel’s opinion stated:

None of those limitations adds anything of substance to the claim. . . With the term “shadow record,” the claim uses extravagant language to recite a basic  function required of any financial intermediary in an escrow arrangement — tracking each party’s obligations and performance.

In dissent, Judge Moore noted:

If all of these claims, including the system claims, are patent-ineligible, this case is the death of hundreds of thousands of  patents, including all business method, financial system and software patents as well as many computer-implemented and telecommunications patents.

While the five-judge panel’s opinion parsed the specific language of the claims at hand, it provided few bright-line rules to guide future decisions. The panel stated that “adding generic computer functions to facilitate performance provides no substantial limitation and therefore is not “enough” to satisfy § 101,” but it did not generally state what types of functions should be considered “generic” and what functions would add enough technical substance to make a claim cover more than an abstract idea. Many of the Court’s judges disagreed with not only the result, but also with the reasoning of the five-judge panel. Ten judges participated in a total of seven different opinions in the case. While seven judges agreed that the method and computer-readable medium claims were not patent-eligible, only five of them adopted the specific reasoning of the lead opinion. Half of the judges specifically found the system claims to be patent-eligible. In dissent, three of the judges asserted that all of the claims were patent-eligible.   Recognizing this fracture, Judge Newman noted that the Court’s decision was supposed to remedy the Court’s inconsistent precedent regarding Section 101, but that “[t]his remedial effort has failed.” It is difficult to find concrete guidance within the Court’s fractured decision for patent applicants, patent holders, and defendants in future cases. However, the following observations may help patent applicants in future cases:

  • In view of the court’s split regarding system claims, software and business method patent applicants should consider ensuring that the application includes at least one system claim.
  • When drafting claims for automated processes, applicants should include at least one claim element that is not inherent in any existing concept. For example, in a concurring-in-part opinion joined by two other judges, Judge Rader found that steps such as creating “shadow records,” obtaining values of previously created accounts, adjusting balances and issuing credits were steps inherent in the concept of an escrow.” To the extent that a claim merely automates previous manual processes, the Court may be more likely to find the claim not patent-eligible.

To be sure, the CLS Bank decision will be front and center in future court actions involving software and business method patents. It’s also likely that the decision will be appealed to the Supreme Court. This blog will closely monitor future developments and court decisions that relating to the opinion.

[UPDATE:  On June 19, 2014, the Supreme Court upheld the decision that the claims at issue were patent-ineligible. For details, click here.]

One response to “The “death of hundreds of thousands of patents?” How the CLS Bank decision could affect the future of software patents.

  1. There is no question that this decision indicative of a growing movement against what Senator “Chuck” Schumer would define as a “non-technological invention.” This sort of fits in with the CLS Bank decision, a decision that hints at defining such inventions as “abstract.” Many have been calling for a solid definition of “abstract” and the dicta of CLS that an idea is abstract “because it is a ‘disembodied’ concept” and “untethered from any real-world application” may be the future.

    Remember, however, that this is a split decision, 5-5. That’s just a “push” at the Blackjack table. The Supreme Court will decide who gets the ten and the Ace on the next deal.

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