CLS Bank v. Alice Corp., Federal Circuit 2013

The Federal Circuit reviewed an appeal by Alice Corp. of a district court (U.S. District Court for District of Columbia) holding that Alice’s asserted
method claims, computer readable media claims, and systems claims were not directed to eligible subject matter under 35 U.S.C. §101.

The ten-member en banc panel released seven different decisions. None of the opinions garnered majority support. Seven of the ten judges agreed that the method and computer-readable medium claims lack subject matter eligibility. Eight of the ten concluded that the software patent claims should rise and fall together regardless of their claim type.

The software patents concern “the management of risk relating to specified, yet unknown, future events.” In particular, the patents relate to a computerized trading platform used for conducting
financial transactions in which a third party settles obligations between a first and a second party so as to eliminate “counter party” or “settlement” risk. Settlement risk refers to the risk to each party in an exchange that only one of the two
parties will actually pay its obligation, leaving the paying party without its principal or the benefit of the counter-party’s performance. Alice’s patents address that risk by
relying on a trusted third party to ensure the exchange of either both parties’ obligations or neither obligation. For example, when two parties agree to perform a
trade, in certain contexts there may be a delay between the time that the parties enter
a contractual agreement obligating themselves to the trade and the time of settlement when the agreed trade is actually executed. Ordinarily, the parties would consummate the trade by paying or exchanging their mutual obligations after the intervening period, but in some cases one party might become unable to pay during that time and fail to notify the other
before settlement. As disclosed in Alice’s patents, a trusted third party can be used to verify each party’s ability to perform before actually exchanging either of the parties’ agreed-upon obligations.

The claims before the court recited methods of exchanging obligations
between parties, data processing systems, and computer-
readable media containing a program code for directing
an exchange of obligations.

A representative method claim is as follows:
          33. A method of exchanging obligations as between parties, each party holding a credit record
and a debit record with an exchange institution,
the credit records and debit records for exchange
of predetermined obligations, the method comprising the steps of:
          (a) creating a shadow credit record and a shadow
debit record for each stakeholder party to be
held independently by a supervisory institution from the exchange institutions;
          (b) obtaining from each exchange institution a start-of-day balance for each shadow credit
record and shadow debit record;
          (c) for every transaction resulting in an exchange
obligation, the supervisory institution adjusting each respective party’s shadow credit record or shadow debit record, allowing only
these transactions that do not result in the
value of the shadow debit record being less
than the value of the shadow credit record at
any time, each said adjustment taking place
in chronological order; and
          (d) at the end-of-day, the supervisory institution
instructing ones of the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties
in accordance with the adjustments of the said
permitted transactions, the credits and debits
being irrevocable, time invariant obligations
placed on the exchange institutions.

A representative apparatus claim is as follows:
          1. A data processing system to enable the exchange of
an obligation between parties, the system comprising:
          a data storage unit
having stored therein information about a shadow credit record and
shadow debit record for a party, independent
from a credit record and debit record maintained by an exchange institution; and
          a computer, coupled to said data storage unit, that
is configured to (a) receive a transaction;
(b)
electronically adjust said shadow credit
record and/or said shadow debit record in order to effect an exchange obligation arising
from said trans
action, allowing only those
transactions that do not result in a value of
said shadow debit record being less than a
value of said shadow credit record; and
(c)
generate an instruction to said exchange
institution at the end of a period of time to adjust said credit record and/or said debit record
in accordance with the adjustment of said
shadow credit record and/or said shadow debit
record, wherein said instruction being an irrevocable, time invariant obligation placed on
said exchange institution.

The district court granted summary judgment in favor of CLS, holding each of the asserted claims of Alice’s software patents invalid under §101.

The district court concluded that Alice’s method claims “are directed to an abstract idea of employing an intermediary to facilitate simultaneous exchange of obligations in order to minimize risk.”

Further, the district court held the asserted system claims similarly ineligible, as those claims “would preempt the use of the abstract concept of employing a neutral intermediary to facilitate simultaneous exchange of obligations in order to minimize risk on any computer, which is, as a practical matter, how these processes are likely to be
applied.”

The asserted media claims failed on the same ground as “directed to the same abstract concept
despite the fact they nominally recite a different category of invention.” The invalidation of the system claims and media claims are disconcerting. One would think that systems and media pass the “machine or transformation” test that was accepted by the Supreme Court as an indication of patent eligibility.

The leading five-member opinion written by Judge Lourie noted that the patent statute sets forth four broadly stated categories of patent-eligible subject matter: processes, machines,
manufactures, and compositions of matter. As the Supreme Court has explained, Congress intended that the statutory categories would be broad and inclusive to best serve the patent system’s constitutional objective of encouraging innovation.
See Diamond v. Chakrabarty, 447 U.S. 303, 308-09 (1980).

While the categories of patent-eligible subject matter recited in §101 are broad, their scope is limited by three important judicially created exceptions.
“[L]aws of nature, natural phenomena, and abstract ideas” are excluded from patent eligibility,
because such fundamental discoveries represent “the basic tools of
scientific and technological work,” Gottschalk v. Benson,
409 U.S. 63, 67 (1972). Thus, even inventions that fit within one or more of the statutory categories are not patent eligible if drawn to a law of nature, a natural phenomenon, or an abstract idea. The underlying concern is that patents covering such elemental concepts would
reach too far and claim too much, on balance obstructing rather than catalyzing innovation. But danger also lies in applying the judicial exceptions too aggressively because “all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas.”
Mayo Collaborative Servs. v. Prometheus
Labs., Inc., 132 S. Ct. 1289, 1293 (2012). Taken too far, the exceptions could swallow patent law entirely.

The opinion continued on to say that, accordingly, the basic steps in a patent-eligibility
analysis can be summarized as follows. We must first ask whether the claimed invention is a process, machine, manufacture, or composition of matter. If not, the claim is ineligible under §101. If the invention falls within one of the statutory categories, we must then determine
whether any of the three judicial exceptions nonetheless bars such a claim is the claim drawn to a patent ineligible law of nature, natural phenomenon, or abstract
idea? If so, the claim is not patent eligible. Only claims that pass both inquiries satisfy §101. While simple enough to state, the patent-eligibility test has proven quite difficult to apply.

The opinion discussed several Supreme Court cases and noted that several common themes that run through the Supreme Court’s decisions that should frame the analysis in this and other §101 cases.

First and foremost is an abiding concern that patents
should not be allowed to preempt the fundamental tools of
discovery.

Next, the cases repeatedly caution against overly formalistic approaches to subject-matter eligibility that invite manipulation by patent applicants such as
claim drafting strategies that attempt to circumvent the
basic exceptions to §101 using, for example, highly stylized language, hollow field-of-use limitations, or the recitation of token post-solution activity should not be
credited.

Finally, the cases urge a flexible, claim-by-claim approach to subject-matter eligibility that avoids rigid line drawing. Bright-line rules may be simple to apply, but they are often impractical and counterproductive when applied to §101. Such rules risk becoming outdated in
the face of continual advances in technology.

In this software patent, claim 33 plainly recites a process. The issue presented then becomes whether that process amounts to no more than a patent-ineligible abstract idea. As described,
the first step in that analysis requires identifying the
abstract idea represented in the claim. The methods
claimed here draw on the abstract idea of reducing settlement risk by effecting trades through a third-party intermediary (here, the supervisory institution) empowered to verify that both parties can fulfill their obligations before allowing the exchange—i.e., a form of escrow. CLS describes that concept as “fundamental and ancient,”
but
the latter is not determinative of the question of abstractness. Even venerable concepts, such as risk hedging in
commodity transactions, were once unfamiliar, just like the concepts inventors are
unlocking at the leading edges of technology today. But
whether long in use or just recognized, abstract ideas
remain abstract. 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.

The analysis therefore turns to whether the balance of
the claim of the software patent adds “significantly more.” Apart from the idea
of third-party intermediation, the claim’s substantive
limitations require 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. None of those limitations adds anything of
substance to the claim.

The opinion states that the requirement for computer implementation
could scarcely be introduced with less specificity; the
claim lacks
any
express language to define the computer’s
participation. In a claimed method comprising an abstract idea, generic computer automation of one or more
steps evinces little human contribution. There is no
specific or limiting recitation of essential, or improved computer technology, and no reason to view the computer limitation as anything but “insignificant post-solution activity” relative to the abstract idea.
Furthermore, simply appending generic computer functionality to lend speed or efficiency to the performance of an otherwise abstract
concept does not meaningfully limit claim scope for purposes of patent eligibility.  That is particularly apparent in this case. Because of the efficiency and
ubiquity of computers, essentially all practical, real-world
applications of the abstract idea implicated here would
rely, at some level, on basic computer functions
—
for
example, to quickly and reliably calculate balances or
exchange data among financial institutions. At its most
basic, a computer is just a calculator capable of performing mental steps faster than a human could. Unless the
claims require a computer to perform operations that are
not merely accelerated calculations, a computer does not
itself confer patent eligibility. In short, the requirement
for computer participation in these claims fails to supply
an “inventive concept” that represents a nontrivial, non-conventional human contribution or materially narrows
the claims relative to the abstract idea they embrace.

Considering the computer readable storage medium claims of the software patent, the opinion noted that although the claim’s preamble appears to invoke a physical object, the claim term “computer readable storage
medium” is stated in broad and functional terms
—
incidental to the claim
—
and every substantive limitation
presented in the body of the claim pertains to the method steps of the
program code “embodied in the medium.” Therefore,
the claim is not “truly drawn to a specific computer readable medium, rather than to the underlying method” of
reducing settlement risk using a third
–
party intermediary. Despite their
Beauregard
format, Alice’s “computer readable medium claims” are thus
equivalent to the methods they recite for §
101 purposes.

Considering the software patent’s apparatus claims, the opinion states that the representative apparatus claim recites a computerized system configured to carry out a series of steps that mirror Alice’s
method claims
—
maintaining shadow records, allowing
only those transactions supported by adequate
value in
the shadow records, adjusting the shadow records pursuant to such transactions, and later instructing exchange institutions to execute the allowed transactions. Indeed,
Alice’s method and system claims use similar and often
identical language to
describe those actions. The
system claims are different, however, in that they also
recite tangible devices as system components, including at
least “a computer” and “a data storage unit.” Other
claims specify additional components, such as a “first
party device” and a “communications controller.”

Similar to the computer
readable medium claims, the system claims are formally
drawn to physical objects and therefore raise a question
whether they deserve to be evaluated differently under
the abstract ideas exception from the accompanying
method claims discussed above. Careful analysis shows
that they do not.
The computer-based limitations recited in the
system
claims here cannot support any meaningful distinction
from the computer-based limitations that failed to supply
an “inventive concept” to the related method claims.

The
shadow record and transaction limitations in Alice’s
method claims require “a computer,” evidently capable of calculation, storage,
and data exchange. The system claims are little different.
They set forth the same steps for performing third-party
intermediation and provide for computer implementation
at an incrementally reduced, though still striking level of
generality. Instead of wholly implied computer limitations, the system claims recite a handful of computer
components in generic, functional terms that would
encompass any device capable of performing the same
ubiquitous calculation, storage, and connectivity functions
required by the method claims. Though the
system claims associate certain computer components
with some of the method steps, none of the recited hardware offers a meaningful limitation beyond generally
linking “the use of the [method] to a particular technological environment,” that is, implementation via computers.

For all practical purposes,
every
general-purpose computer will include “a computer,” “a data
storage unit,” and “a communications controller” that
would be capable of performing the same generalized
functions required of the claimed systems to carry out the
otherwise abstract methods recited therein.

Therefore, as with the asserted method claims, such
limitations are not actually limiting in the sense required
under §
101; they provide no significant “inventive concept.” The system claims are instead akin to stating the
abstract idea of third
–
party
intermediation and adding
the words: “apply it” on a computer. That is not sufficient for patent eligibility, and
the system claims before us fail to define patent
–
eligible
subject matter under §
101, just as do the method and
computer-readable medium claims.

The opinion notes that one of the separate opinions (one with which Malhotra Law Firm, PLLC agrees) in this case takes aim at this opinion, asserting that the system claims here are simply claims to a
patent-eligible machine, a tangible item one can put
on
one’s desk.   Machines are unquestionably eligible for patenting, states the opinion, although the system claims
here clearly track the method claims that the separate
opinion concedes are not patent eligible.
That conclusion is surely correct as an abstract proposition. A particular computer system, composed of wires,
plastic, and silicon, is no doubt a tangible machine. But
that is not the question. The question we must consider is
whether a
patent claim
that ostensibly describes such a
system on its
face represents something more than an
abstract idea in legal substance.  Claims to computers
were, and still are, eligible for patent. No question should
have arisen concerning the eligibility of claims to basic
computer hardware under §
101 when such devices were
first invented. But we are living and judging now
(or at
least as of the patents’ priority dates), and have before us
not the patent eligibility of specific types of computers or
computer components, but computers that
have
routinely
been
adapted by software consisting of abstract ideas, and
claimed as such, to do all sorts of tasks that formerly were
performed by humans. And the Supreme Court has told
us that, while avoiding confusion between §
101 and
§§
102 and 103, merely adding existing computer technology to abstract ideas
—
mental steps
—
does not as a matter
of substance convert an abstract idea into a machine.

Malhotra Law Firm, PLLC (patentsusa.com) takes the position that apparatus claims reciting computer components clearly pass the machine-or-transformation test.

That is what we face when we have a series of claims
to abstract methods and computers fitted to carry out
those methods. We are not here faced with a computer
per
se
. Such are surely patent
–
eligible machines. We are
faced with abstract methods coupled with computers
adapted to perform those methods. And that is the fallacy
of relying on
Alappat
, as the concurrence in part does.
Not only has the world of technology changed, but the
legal world has changed. The Supreme Court has spoken
since
Alappat
on the question of patent eligibility, and we
must take note of that change. Abstract methods do not become patent-eligible machines
by being clothed in
computer language.

In view of this decision, Malhotra Law Firm, PLLC recommends reciting hardware as possible in patent claims, and integrating that hardware into the software method as much as possible.  There has been much lobbying against patenting of financial methods so it is possible that other software methods will be received more favorably.  This decision seems to be contrary to the machine-or-transformation test accepted by the Supreme Court in Bilski as one possible test, at least in my opinion.  Perhaps the Supreme Court will shed more light on the matter some day.  Until then, we have muddy guidance from our Federal Circuit.  They caution against bright line tests and with this decision have certainly not provided any bright lines.  After 20 years we still do not have any clear guidance on what sort of software should be patent-eligible.

In re Alappat, 1994

This case went a long way towards making it possible to obtain patents on software-related inventions, at least for apparatus claims drafted in means-plus-function format, and if digital hardware equivalents were disclosed in the specification. Specific hardware structures were disclosed in the specification, but the Federal Circuit held that the claim could also read on a general purpose computer programmed to carry out the invention, without a 35 U.S.C. 101 problem.

Alappat’s invention related generally to a means for creating a smooth waveform display in a digital oscilloscope. The screen of an oscilloscope was the front of a cathode-ray tube (CRT), whose screen presented an array (or raster) of pixels arranged at intersections of vertical columns and horizontal rows. Each column in the array represented a different time period, and each row represented a different magnitude. An input signal to the oscilloscope was sampled and digitized to provide a waveform data sequence (vector list), wherein each successive element of the sequence represented the magnitude of the waveform at a successively later time. The waveform data sequence was then processed to provide a bit map, which was a stored data array indicating which pixels are to be illuminated. The waveform ultimately displayed was formed by a group of vectors, wherein each vector has a straight line trajectory between two points on the screen at elevations representing the magnitudes of two successive input signal samples and at horizontal positions representing the timing of the two samples. Because a CRT screen contains a finite number of pixels, rapidly rising and falling portions of a waveform can appear discontinuous or jagged. In addition, the presence of “noise” in an input signal can cause portions of the waveform to oscillate between contiguous pixel rows when the magnitude of the input signal lies between values represented by the elevations of the two rows. Moreover, the vertical resolution of the display may be limited by the number of rows of pixels on the screen. The noticeability and appearance of these effects is known as aliasing. To overcome these effects, Alappat’s invention employed an anti-aliasing system wherein each vector making up the waveform is represented by modulating the illumination intensity of pixels having center points bounding the trajectory of the vector. The intensity at which each of the pixels was illuminated depended upon the distance of the center point of each pixel from the trajectory of the vector. Pixels lying squarely on the waveform trace received maximum illumination, whereas pixels lying along an edge of the trace received illumination decreasing in intensity proportional to the increase in the distance of the center point of the pixel from the vector trajectory. Employing this anti-aliasing technique eliminates any apparent discontinuity, jaggedness, or oscillation in the waveform, thus giving the visual appearance of a smooth continuous waveform.

Claim 15, the only independent claim in issue at the Federal Circuit, read:
A rasterizer for converting vector list data representing sample magnitudes of an input waveform into anti-aliased pixel illumination intensity data to be displayed on a display means comprising:
(a) means for determining the vertical distance between the endpoints of each of the vectors in the data list;
(b) means for determining the elevation of a row of pixels that is spanned by the vector;
(c) means for normalizing the vertical distance and elevation; and
(d) means for outputting illumination intensity data as a predetermined function of the normalized vertical distance and elevation.

The USPTO Examiner finally rejected claims under 35 U.S.C. Section 101 as being directed to non-statutory subject matter. Alappat appealed this rejection to the Board, and a three-member panel reversed the Examiner’s non-statutory subject matter rejection. The Examiner then requested reconsideration of this decision, stating that the panel’s decision conflicted with PTO policy. The Examiner further requested that such reconsideration be carried out by an expanded panel.

An expanded panel reconsidered the decision. The expanded panel was made up of eight members including the PTO Commissioner, the PTO Deputy Commissioner, the PTO Assistant Commissioner, the Board Chairman, the Board Vice-Chairman, and the three members of the original panel. This seemed like “board stacking.” The expanded eight-member panel affirmed the Examiner’s Section 101 rejection, ruling contrary to the decision of the original three-member panel. The expanded panel had held that the independent apparatus claim, which was written in “means-plus-function” language, was merely a process claim wherein each element represented a step in that process. The panel reasoned that the claim was broad enough to cover an appropriately programmed general purpose computer and, therefore, held that the claimed process was a “mathematical algorithm” which was not eligible for patent protection. The three members of the original panel dissented.

The Federal Circuit first considered the following question: When a three-member panel of the Board has rendered its decision, does the Commissioner have the authority to constitute a new panel for purposes of reconsideration? The Federal Circuit held that the answer to this first question was Yes. The Federal Circuit noted that 35 U.S.C. Section 7 (a) plainly and unambiguously provides that the Commissioner, the Deputy Commissioner, and the Assistant Commissioners are members of the Board. Section 7(b) plainly and unambiguously requires that the Commissioner designate “at least three” Board members to hear each appeal. By use of the language “at least three,” Congress expressly granted the Commissioner the authority to designate expanded Board panels made up of more than three Board members. There was no evidence in the legislative history of Section 7, or Title 35 as a whole, clearly indicating that Congress intended to impose any statutory limitations regarding which Board members the Commissioner may appoint to an expanded panel or when the Commissioner may convene such a panel. The last sentence of Section 7(b) provided: “Only the Board of Patent Appeals and Interferences has the authority to grant rehearings.” The Commissioner contended that the reconsideration action taken in this case constituted a type of “rehearing” as mentioned in the last sentence of Section 7(b). The Federal Circuit found the Commissioner’s interpretation of Section 7 to have been a reasonable one entitled to deference, given that neither the statute itself nor the legislative history thereof indicated Congressional intent to the contrary. The fact that Section 7 referred to “rehearings” whereas 37 C.F.R. 1.197 (PTO Rule 197) referred to “reconsideration” was of no significance. The differing terminology appeared to be nothing more than the result of imprecise regulation drafting.

The Federal Circuit then turned to the merits of the case.

The majority opinion, by Judge Rich, joined by Judges Newman, Lourie, Michel, Plager and Rader, reversed the expanded panel’s decision.

The majority stated that the reconsideration panel erred by refusing to interpret the means-for-function clauses properly. These clauses related to specific structures disclosed in the specification – two ALUs, two barrel shifters, and a ROM – and their equivalents, and that the original panel was correct in its construction of claim 15. Thus, pursuant to Section 112, Para. 6, and in view of the specification, the claims did recite specific digital circuitry structures. The majority concluded that because the claim recites connected structures, the claim “unquestionably recites a machine.”

The majority went further and stated that Finally, the court concludes that if the claimed “rasterizer” were equivalent to a “general purpose digital computer” programmed to perform the calculations performed by the rasterizer, such programmed computer would be the invention of a “new machine” within Section 101.

A dissent by Chief Judge Archer, joined by Judge Nies, characterized Alappat’s invention as “newly discovered mathematics and not the invention or discovery of a process or product applying it.”

Judge Newman, concurring, noted that:
Old law is often adapted to new needs: “If Congress has made a choice of language which fairly brings a given situation within a statute, it is unimportant that the particular application may not have been contemplated by the legislators.” Barr v. United States, 324 U.S. 83, 90 (1945). In Diamond v. Chakrabarty, 447 U.S. 303, 206 USPQ 193 (1980) the Court emphasized that the patent system is available to serve all fruits of human ingenuity.

In an address before the Economic Club of Detroit, Irving S. Shapiro, Chairman, E.I. duPont de Nemours & Co., discussing “Technology’s Decline”, stated:
What seems to be missing in our country is an understanding that, no matter how much money we spend on research and development, the findings are not going to benefit the public unless there are suitable incentives to invest in commercialization. That means a chance of reasonable profits from risk taking and a chance to hold onto one’s original ideas once they are created.
XLV Vital Speeches of the Day, 360, 364 (1979). To bar such inventions as Alappat’s rasterizer from access to the patent system is to eliminate the incentive provided by this law, disserving not only technological industry, but the public benefit of improved technology. One must have a powerful reason to exclude technology from the scope of Title 35. Indeed, the importance of the patent incentive in industrial innovation was the principal factor in the formation of the Federal Circuit. It is thus appropriate constructively to apply statute, precedent, and policy to the variety of inventions that the information age has generated, and to remove the cloud on whether these inventions may participate in the benefits and obligations of the patent system.