Alice, Abstract Ideas, and Software-Related Patents

Those “who sweat in the clammy gymnasia of patent law” were impatiently waiting for the Alice decision. They thought they would get an answer to the question of whether or not software is patentable. In its June 19, 2014 ruling, the Supreme Court held that the patentability turned on a two-prong test: (i) resolving whether the claim is directed to an abstract concept; and, if so, (ii) examining the elements of the claim in order to determine whether it contains an inventive concept necessary to transform the claimed abstract idea into a patent-eligible application.

Despite this test, uncertainty remains as to the protection of intellectual property rights in computer software. As Berkeley Law Professor Robert P. Merges notes, “When looking at software patents, after the decision in Alice the Court only cares about two things. Yet we still don’t really know what they are.” Because it is not clear whether a new piece of software would be eligible for a patent, some worry that investors will be less likely to fund these innovations. Indeed, cases decided post-Alice suggest that this result is likely.

 Alice v. CLS Bank

Alice Corporation is an Australian company that owns patents to trading platforms where a third party settles obligations between two parties in a financial transaction. This model attempts to eliminate the settlement risk that only one party will pay its obligation by utilizing a third party as a guarantor. CLS Bank International sued Alice, alleging the invalidity of its patents because, it argued, Alice’s patent claims arise from ineligible subject matter. Alice countersued alleging infringement.

By way of background, Section 101 of the Patent Act establishes four categories of patentable subject matter: process, machine, manufacture and composition of matter. It also creates three exceptions: laws of nature, physical phenomena, and abstract ideas. In Alice, the Federal Circuit affirmed the District Court’s ruling that the patents were invalid because they amounted to an abstract idea. Using a neutral intermediary to facilitate financial exchanges is an abstract idea, even when applied to a particular piece of software, the Federal Circuit held.

The Supreme Court affirmed. Delivering the opinion for a unanimous Court, Justice Clarence Thomas wrote that patent law could not restrain abstract ideas that are considered to be “building blocks of human ingenuity.” The court reasoned use of a third person to eliminate settlement risks is an important and common practice. The Court thus adopted a two-step framework, which was previously announced in the case of Mayo v. Prometheus. Concerning “abstract ideas,” the test first examines the invention to see if it is an abstract idea. If so, the second step examines whether the claim adds new, non-generic, unconventional material to the abstract idea in a way that transforms the claim into an application of an abstract idea rather than the pure idea. Alice’s use of a third party intermediary, according to the Supreme Court, was insufficient to transform an abstract idea into a patentable invention.

After Alice 

Once Alice was decided, several courts and the Patent Trial and Appeal Board (PTAB) began to consistently apply the two-prong test. Invalidation rates were overwhelming: PTAB upheld 18 patent applications and invalidated 178; district courts upheld 40 patents and invalidated 92 patents; and Federal Circuit upheld 1 patent and invalidated 16 patents. These findings resulted in invalidation rates of 90.8%, 69.7% and 94.1%, respectively.

In practical terms, approximately 240,000 of the 2.5 million U.S. patents in existence in 2015 were related to computer-implemented inventions. Applying the average invalidation rate of 82.9%, 199,000 of these patents would be found invalid if challenged, and the remaining only 41,000 would be found to be valid, enforceable patents.

As we might imagine, on February 8, 2016 the Federal Circuit upheld a decision invalidating Wireless Media Innovations LLC’s patents. The Court ruled that they were directed to the abstract idea of monitoring shipping containers by sharing this information through generic computer functions. As in Alice, the Court found that the claims were simple instructions to the practitioner to implement the abstract idea with routine conventional activity. Such claims were not sufficiently transformative.

Only one patent has been upheld by the Federal Circuit for a software invention after Alice. In DDR Holdings, LLC v., L.P., patent in question covered systems and methods of generating a hybrid web page combining visual elements of a “host” website with a third party merchant web site. The majority found that the claims were not just reciting the performance of a business practice but, instead, were necessary solutions to resolve a particular Internet-centric problem. In other words, the technical disclosure in their patent specification, “recite an invention that is not merely the routine or conventional use of the Internet.” Therefore, even though the patent claims were related to business challenges, they were not just directed to an abstract idea according to the Alice framework.

In order to clarify what is patentable post-Alice, the United States Patent and Trademark Office issued the Interim Guidance on Subject Matter Eligibility. Together with the examples for patent eligible subject matter, these guides aim to shed some light to applicants, patent prosecutors and patent examiners on how the USPTO is interpreting the law in this area. In the opinion of some patent attorneys, “[W]hile the guidelines leave open as many questions as they answer, they do provide several useful guideposts upon which savvy applicants can hitch their wagons.”