Fort Properties, Inc. v. American Master Lease LLC

By Zi Wang

In Fort Properties, Inc. v. American Master Lease LLC, 2012 WL 603969 (Fed. Cir. 2012), the Federal Circuit affirmed the district court’s holding that a method patent for creating real estate investment instrument adapted for performing tax-deferred exchanges is invalid because it is directed at an unpatentable abstract idea, even though the claim language of the patent at issue recited a computer in certain operations.

American Master Lease LLC (“AML”) holds the ‘788 patent at issue.  The ‘788 patent discloses an investment tool designed to enable property owners to buy and sell properties without incurring tax liability pursuant to a tax law provision that exempts certain investment property exchanges when an owner of investment property exchanges one property for another of like kind and certain conditions are met.

Specifically, the claims require the aggregation of a number of properties into a “real estate portfolio.”  The property interests in this portfolio are then divided into shares, called “deedshares”, and are sold to investors much in the same way that a company sells stock.  Each deedshare can be encumbered by its own mortgage debt, which provides flexibility to real estate investors attempting to structure their debts in a way that complies with the exemption provision of tax law.

All claims in the ‘788 patent are method claims.  Claim 1 discloses:

  1. A method of creating a real estate investment instrument adapted for performing tax-deferred exchanges comprising:

aggregating real property to form a real estate portfolio;

encumbering the property in the real estate portfolio with a master agreements; and

creating a plurality of deedshares by dividing title in the real estate portfolio into a plurality of tenant-in-common deeds of at least one predetermined denomination, each of the plurality of deedshares subject to a provision in the master agreement for reaggregating the plurality of tenant-in-common deeds after a specified interval.

Two of the other independent claims, claims 22 and 32, are nearly identical to claim 1—though claim 32 contains an additional limitation requiring a computer to “generate a plurality of deedshares.”  The only other independent claim, claim 11, discloses a method of transferring ownership of deedshares in a manner consistent with the tax law provision discussed above.

Fort Properties, Inc. brought action against AML and moved for summary judgment of invalidity in the district court.  The district court invalidated all claims in the ‘788 patent for failing to claim patent-eligible subject matter under 35 U.S.C. § 101.  In reaching its decision, the district court relied on In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) and applied the machine-or-transformation test.  The court held that the patent failed both prongs of the test and accordingly invalidated the whole patent.  AML appealed the decision to the Federal Circuit.

In its opinion, The Federal Circuit cited to four seminal Supreme Court cases that deal with the question of when an invention qualifies as a patent-eligible process as opposed to an abstract idea, namely, Bilski v. Kappos, 130 S.Ct. 3218 (2010); Diamond v. Diehr, 450 U.S. 175 (1985); Parker v. Flook, 437 U.S. 584 (1978); and Gottschalk v. Benson, 409 U.S. 63 (1972).  The Federal Circuit analogized the invention in the ‘788 patent to the invention in Bilski, which is an investment tool not requiring the use of a computer.

AML argued that claims 1-31 constitute a patentable process and not an abstract idea because they require a series of steps to take place in the real world that involve real property, deeds, and contracts.  More specifically, AML contended that the deeds remove the invention from the realm of the abstract because they are physical legal documents signifying real property ownership.  Fort Properties, on the other hand, argued that the claimed method of aggregating property, making it subject to an agreement, and then issuing ownership interests to multiple parties consists entirely of mental processes and abstract intellectual concepts.  Fort Properties pointed out that the Bilski invention’s intertwinement with deeds, contracts, and real property does not transform the abstract method into a patentable process.

The Federal Circuit sided with Fort Properties and drew extensive similarities between the invention at issue and the Bilski invention.  The Federal Circuit further stated that its reasoning is in accord with its own precedent in In re Comiskey, 554 F.3d 967 (Fed. Cir. 2009), and in In re Schrader, 22 F.3d 290 (Fed. Cir. 1994).

The court then turned to the question of how claim limitations involving computers apply in the § 101 analysis.  The court relied on three of its own 2011 and 2012 cases: Cybersource v. Retail Decisions, Inc., 654 F.3d 1366 (Fed. Cir. 2011); Ultramercial, LLC v. Hulu, LLC, 657 F.3d 1323 (Fed. Cir. 2011); and Dealertrack, Inc. v. Huber, 2012 WL 164439 (Fed. Cir. 2012).  The court opined that the basic character of a process claim drawn to an abstract idea is not changed by claiming only its performance by computers, or by claiming the process embodied in program instructions on a computer readable medium.  Instead, to impart patent-eligibility to an otherwise unpatentable process under the theory that the process is linked to a machine, the use of the machine must impose meaningful limits on the claim’s scope.  As a positive example, the court pointed to the claimed invention in Ultramercial, which “required intricate and complex computer programming” and “specific application to the Internet and a cybermarket environment.”  The addition of the computer to the claims was not merely insignificant post-solution activity; rather, the invention
itself involved “advances in computer technology,” and it was thus sufficient to qualify the claims for patent eligibility under § 101.

The court then held that the computer limitation in the patent at issue is akin to that in Dealertrack, and does not play a significant part in permitting the claimed method to be performed.  The computer limitation here is a broad and general limitation that does not impose meaningful limits on the claim’s scope.  AML simply added a computer limitation to claims covering an abstract concept—that is, the computer limitation is simply insignificant post-solution activity.  Therefore the computer limitation cannot impart patent-eligiblity here.

In this case the Federal Circuit once again took on the task of drawing the line between patentable process claims and patent-ineligible abstract ideas after Supreme Court’s Bilski v. Kappos decision.  Together with patents in Cybersource and Dealertrack, the patent in the present case was struck down for covering unpatentable abstract ideas, recitation to computers notwithstanding.  In the most likely scenario, method patent claims that are otherwise unpatentable under § 101 will not be upheld by the court if the recitation to a computer is simply post-solution activity.  To put it in another way, if a computer merely facilitates practice of an invention, rather than enables it, the recitation to a computer in patent claims is superfluous for § 101 purposes.  On the other hand, if an invention has a complicated-enough interface with computerization that it can be described as an advance in computer technology, then Ultramercial should control and it is possible for the patent to be upheld.

Federal Circuit Says § 101 Requires “Concrete Steps” In Software Methods

By Chris Reaves

Dealertrack, Inc. v. Huber, No. 2009-1566, Fed. Cir. Jan. 20 2012

The Federal Circuit on January 20 once again addressed the question of 35 U.S.C. § 101 eligibility for a software method.   The court found the patent at issue closer to CyberSource than Ultramercial, drawing a distinction between “a practical application with concrete steps” and a mere declaration that the method is “computer-aided.”  It also looked to the interpretation of claims, expanding the rule of Phillips v. AWH to cover exemplary lists.

Background

Plaintiff Dealertrack, Inc. owns three patents related to the same concept: the use of a computer system as a loan intermediary, converting one generalized application for a car loan into several bank-specific applications and processing said applications with their respective banks.  The original patent, U.S. Patent No. 5,878,403 (‘403), was filed in 1995.  Later, 7,181,427 (‘427), patenting the computer system, was filed as a continuation-in-part, and 6,587,841 (‘841), patenting the method, was filed as a divisional application.  All three patents issued, with the latter two claiming priority to ‘403.

Dealertrack sued the defendants, Finance Express, LLC (with its president David Huber) and RouteOne, in the Central District of California, claiming their respective loan management systems infringed on all three patents.  The defendants filed motions for summary judgment on four grounds: that ‘841 was not infringed given its proper interpretation, that certain means-plus-function claims in ‘841 were invalid as indefinite under § 112, that all applicable claims of ‘427 were abstract and ineligible for patent protection under § 101, and that ‘427 did not properly claim priority to ‘403.

The district court found for Dealertrack on indefiniteness and priority but for the defendants on non-infringement and ineligibility, and dismissed the case.  Dealertrack appealed the dismissal to the Federal Circuit and the defendants cross-appealed on the indefiniteness and priority findings.  Judges Linn and Dyk, with Senior Judge Plager, heard the appeal.

Claim Interpretation: Multiple Examples Are Not Always Exhaustive

The preamble of ‘841’s independent claim 7 reads:

“A computer based method of operating a credit application and routing system, the system including a central processor coupled to a communications medium for communicating with remote application entry and display devices, remote credit bureau terminal devices, and remote funding source terminal devices . . .”  (Emphasis added.)

“A communications medium” is also one of the elements of independent claims 12 and 14.  Exemplary mediums are listed in the description as follows:

“Although illustrated as a wide area network, it should be appreciated that the communications medium could take a variety of other forms, for example, a local area network, a satellite communications network, a commercial value added network (VAN) ordinary telephone lines, or private leased lines…  The communications medium used need only provide fast reliable data communication between its users…”

During prosecution of the parent ‘403 patent, the examiner allowed “the Internet” to be added explicitly to a corresponding exemplary list, and ‘841 incorporated ‘403 by reference.  However, in its interpretation of ‘841, the district court interpreted “communications medium” to exclude the Internet, finding its omission in ‘841, in an otherwise thorough list, to be a waiver of its inclusion regardless of ‘403.  Therefore, because both the defendants’ systems used only the Internet for communication, neither had infringed.

The Federal Circuit disagreed, finding that the district court had ascribed too much importance to the list’s contents.  “The disclosure of multiple examples,” it ruled, “does not necessarily mean that such list is exhaustive or that non-enumerated examples should be excluded.”  Rather, it found the case similar to Phillips v. AWH Corp., where a single embodiment listed in a description had not necessarily limited the meaning of the corresponding claims.  Multiple examples did not change the Phillips rule, especially as the context of the ‘841 list – leading with “for example” and closing with “The communication medium used need only provide…” – indicated that it was not meant to be exhaustive.

The district court also found waiver of the term in that the “the Internet” had also been named in ‘841 but the examiner had removed the reference post-allowance.  However, the examiner had given no reason for this removal, and there was no prosecution history suggesting that Dealertrack had deliberately surrendered the term.   The Federal Circuit therefore attached no importance to this removal.  And although the defendants argued that, in 1995, the Internet would not have been seen as “reliable” or “secure” as the description required, the court found they had not presented sufficient evidence on this point.

The court also rejected arguments by the defendants to narrow the meaning of other terms in the patent, noting that explicit embodiments of the claims fell outside the supposed interpretation. It did, however, use the rule of WMS Gaming to apply disclosed software algorithms, not a computer itself, as the structure for claim 12 and 14’s “central processing means” element.  Because claim 14 also stated that the central processing means “further provides for tracking pending credit applications,” without disclosing a tracking algorithm, the court invalidated claim 14 and its dependent claims as indefinite under § 112 ¶ 6.

§ 101: Computer-Aided Methods Require “Practical Application With Concrete Steps”

Claim 1 of ‘427 reads, in total:

1. A computer aided method of managing a credit application, the method comprising the steps of:

[A] receiving credit application data from a remote application entry and display device;

[B] selectively forwarding the credit application data to remote funding source terminal devices;

[C] forwarding funding decision data from at least one of the remote funding source terminal devices to the remote application entry and display device;

[D] wherein the selectively forwarding the credit application data step further comprises:

[D1] sending at least a portion of a credit application to more than one of said remote funding sources substantially at the same time;

[D2] sending at least a portion of a credit application to more than one of said remote funding sources sequentially until a finding [sic, funding] source returns a positive funding decision;

[D3] sending at least a portion of a credit application to a first one of said remote funding sources, and then, after a predetermined time, sending to at least one other remote funding source, until one of the finding [sic, funding] sources returns a positive funding decision or until all funding sources have been exhausted; or,

[D4] sending the credit application from a first remote funding source to a second remote finding [sic, funding] source if the first funding source declines to approve the credit application.

When the district court examined ‘427 for § 101 ineligibility, the Supreme Court had yet to rule in Bilski, and the “machine or transformation” test was still definitive.  Dealertrack had conceded lack of transformation and the district court had found that a “general purpose computer” was not a “particular machine” under the existing test.

The Federal Circuit examined the case under the new standard but came to the same conclusion.  While recognizing that, as in Research Corp., abstractness must “exhibit itself so manifestly as to override the broad statutory categories of eligible subject matter,” the court found that ‘427 crossed this line.  Namely, it claimed “the basic concept of processing information through a clearing-house…”   The court found the “computer aided” limitation in the preamble equally abstract and insufficient to save the patent “without specifying any level of involvement or detail,” and distinguished ‘427 from the patent in Ultramercial, which also described “a practical application with concrete steps requiring an extensive computer interface…”  (Perhaps foolishly, Dealertrack conceded in oral arguments that ‘427 would not be § 101 eligible had “computer aided” been omitted.)

Dealertrack argued that disclosed algorithms in the description made the patent less abstract, but the court noted that the claims themselves were not limited to any algorithm, under an interpretation to which Dealertrack itself had already conceded.  The court also found irrelevant that the method was limited to car loan applications, comparing it to that of Bilski, where a method of hedging was no less abstract for being limited to the energy market.  The court therefore invalidated the applicable ‘427 claims as ineligibly abstract.

On this point alone, Senior Judge Plager dissented.  Without commenting on the thrust of the panel’s argument, he proposed that courts should “not foray into the jurisprudential morass of § 101 unless absolutely necessary” instead looking first to whether they can invalidate under other sections of the Patent Act before the court.  But the majority, while calling Plager’s goal “laudable,” noted that the Supreme Court had called § 101 a “threshold test” in Bilski.  They further noted that no other argument for ‘427’s invalidity was presented in the initial motions for summary judgment; although Dealertrack had argued that ‘427 was clearly valid under § 103, the defendants had been happy to leave that question to the jury.

Because it invalidated ‘427 under § 101, the panel did not address whether the same patent failed to claim priority to ‘403.

Post-Case Analysis: Tell Us Why You Need A Computer

The gray area between eligible and ineligible methods narrows again, albeit slower than anyone would like.  As previously noted on this blog, Ultramercial suggested three applicable factors in the analysis.  This case emphasized two: the software must be specialized and well-described in the claims, and the claim must explain why the software is necessary to the claimed method.  Had the claims in this case restricted their scope to the algorithms in the description, they might have survived the panel’s analysis.  Unfortunately, as the defendants noted in oral arguments, Dealertrack had been arguing the opposite.  Existing patent owners might be wise to concede to a narrower interpretation of their own software patents, and future drafters should include a more elaborate disclosure of the software, algorithms, and computer configurations involved.  Most importantly, the computer should be explicitly necessary, not merely helpful, to the claimed method.

Many commenters (including both Chief Judge Randall Rader and Professor Dennis Crouch of the University of Missouri) have argued, like Plager, that § 101’s jurisprudence is unpredictable and overused, and that public policy should encourage its disuse.  A few have gone farther and proposed that § 101 should be reinterpreted by the courts or rewritten by Congress to allow truly “anything under the sun,” leaving the rest of the Act in place to catch the existing, obvious, or abstract.  To both groups, the majority’s response to Plager will be a serious disappointment, and a step back from the direction suggested in Classen and Ultramercial (albeit in apparent dicta).  If § 101 is indeed a threshold in the sense of “it must be considered,” and if its borders remain vague, defendants will have little reason not to include an ineligibility argument against method claims and hope for the best.  We can hope that the Supreme Court itself will clarify the standard in Mayo Collaborative Services v. Prometheus Labs, but with its past pattern of insisting on a case-by-case analysis, it is more likely to leave the Federal Circuit buried in § 101 cases.

Less vogue a topic but still important is the ruling on ‘841’s interpretation.  Exemplary but non-exhaustive lists of embodiments are common practice, and the court’s opinion protects the resulting patents from unintended limitations.  However, Dealertrack was in part protected by the Internet’s mention in the issuing parent patent; other patents are unlikely to have this extra safety net.  Therefore, a good patent drafter should still make it absolutely clear in context that such lists are indeed non-exhaustive, with phrases such as “for example”, “include but is not limited to”, “many other embodiments and modifications should be apparent”, and “need only [do X] to meet the needs of the invention”.

For software patent prosecutors, this case is also a good reminder of the WMG Gaming rule: means-plus-function claims cannot be satisfied with disclosure of “a computer” or similar.  Only a computer with specific algorithms or software for the job will do.  Any good draft should therefore either avoid means-plus-function language or be as exhaustive as possible in the description.

The opinion is available at: http://www.cafc.uscourts.gov/images/stories/opinions-orders/09-1566.pdf

Oral arguments may be heard at: http://oralarguments.cafc.uscourts.gov/default.aspx?fl=2009-1566.mp3

For Rader’s comments on § 101, see Classen Immunotherapies Inc. v. Biogen IDEC, 100 USPQ2d 1492, 1505-07 (Fed. Cir. 2011).  For Crouch’s, see Operating Efficiently Post-Bilski by Ordering Patent Doctrine Decision-Making, 25 Berkeley Tech. L.J. 1673 (2010).

Federal Circuit Clarified Abstractness in the Context of Software

Court Finds Software Patentable Unless Unmistakably Abstract

In Research Corp. Technologies, Inc. v. Microsoft Corp., Civ. Case. No. 10-1037 (Fed. Cir. December 8, 2010), Research Corporation Technologies, Inc. (“RCT”) owns six related patents: U.S. Patent Nos. 5,111,310 (“’310 patent”); 5,341,228 (“’228 patent”); 5,477,305 (“’305 patent”); 5,543,941 (“’941 patent”); 5,708,518 (“’518 patent”); and 5,726,772 (“’772 patent”).  The six related patents relate to digital image half toning which allows a computer to create more colors than otherwise possible with the limited number of pixel colors available in a typical printer.  In order to measure the quality of the half toning, the inventors created a method of detecting a power spectrum which measures the frequency of the dots used to create the half tone and compares this power spectrum to an ideal spectrum stored in a mask.  By comparing the stored mask and detected power spectrum, the method determines half tone quality. Continue reading

Supreme Court Confirms Broad Standard for Patentability

Supreme Court Rejects Precluding Business Method from Patentability

In Bilski et al. v. Kappos, 561 U.S. ____ (2010) June 29th, 2010, appellant, Bernard L. Bilski seeks a patent on a procedure for instructing buyers and sellers on protection against price fluctuations in a certain subsection of the economy.  The application consisted of two key claims: the description of a series of steps instructing how to hedge risk; and reducing the procedure to a mathematical formula.

The application was rejected by the examiner, the Board of Patent Appeals and Interferences, and the United States Court of Appeals for the Federal Circuit.  The Court of Appeals used the “machine or transformation test” as the sole test for section 101 of the Patent Act analysis in rejecting the application.  It stated 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.” In re Bilski, 545 F. 3d 943, 954.

The Supreme Court said the Court of Appeals incorrectly used “machine or transformation” test as the sole test for section 101.  Relying on a series of past Court precedent, the court held that the “machine or transformative test is a useful tool, but not the sole test for deciding patent eligibility.  The Court was also concerned that a strict reliance on this test would “create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.” Bilski, 561 U.S.______ (2010).

The Court also looked at the language of 35 U.S.C. 273, in particular the phrase, “a method in [a] patent.”  From this language, and interpretation of case history, the court stated that there are at least some circumstances where a business method may be eligible for patenting under 101.  The Court however warned that a high standard needed to be set when dealing with such applications, in order to have the proper balance between flooding patent examiners and courts with frivolous applications, and protecting valid applications.  Unfortunately, the Court declined to delineate the balance.

After stating that Bilski’s application was not necessarily outside the principles stated above, the Court then held that the application was not patentable because all that was being claimed were two things: the concept of hedging, which is well-known, and an algorithm, which is an abstract idea.

Filing a patent application for an algorithm alone is not valid, as the Court showed in case precedent.  In Benson, 409 U.S., at 64-67, the Court held that an algorithm to convert binary-coded decimal numerals into binary was not a process, but an unpatentable abstract idea.  Building on this, in Flook, 437 U.S., there was an application for a procedure to monitor conditions during the catalytic conversion process in the petrochemical and oil-refining industries.  Note that the catalytic conversion process was well known in the industry.  The only innovation here was the mathematical algorithm describing the procedure.  The Court held because the key mathematical algorithm “was assumed to be within the prior art, the application, considered as a whole, contained no patentable invention.”  Id., at 594.

 

The Court differentiated those two rejections with the different  result held in Diehr, 450 U.S.  Here, an application was filed for a previously unknown way of curing synthetic rubber into new products using a mathematical formula to complete some of its several steps by way of a computer.  Diehr, 450 U.S. at 177.  That court found that the patent in Diehr was for an application of a law of nature or mathematical formula, not a patent for the mathematical formula itself.

“Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.” D. Chorafas, Introduction to Derivative Financial Instruments 75-94 (2008).  Because hedging is essentially prior art, the only thing trying to be patented in the case at bar is the algorithm, which is just an abstract idea.

Stevens Concurrence

Justice Stevens presented the case as one key issue: “whether the machine or transformation test is the exclusive test for what constitutes a patentable “process” under 35 U.S.C. 101.”  While Stevens agrees that the machine or transformation test is not the sole test, he diverges from the majority by saying that Bilski’s application is not a “process” because it describes only a general method of engaging in business transaction, which isn’t patentable.

Stevens believes that although the majority came to the correct conclusion, their process of reasoning was incorrect.  He thinks that the majority incorrectly narrowed Bilski’s claims to hedging, and then came to the conclusion that the claims were abstract ideas.  Stevens believes that it would be more accurate to say that the hedging is a term that describes a “category of processes.”

Steven’s first argument is textual.  He first attempts to define a “process.”  He rejects the lay meaning of the word “process” in the context of patents.  Instead, Stevens starts by looking at terms adjacent to “process” in 101.  He concludes from the placement of words that a patentable “process” was not likely meant to cover any series of steps.

Next, Stevens sets up the groundwork to his conclusion by making a grand appeal to the entire history of patents.  The result of much of the history was enshrined into the Patent Act of 1952.  He notes that in pre-Colonial times that one can infer from the Statute of Monopolies that patents on business methods didn’t qualify with the very narrow exception of discoveries that were considered “state privileges.”  Then, at the time of the crafting of the Constitution, he notes that the Founders gave Congress the power to “promote the Progress of… useful arts.”  He then tries to give another textual analysis of the term “art.”  Oddly enough, while Stevens rejected using the lay meaning of the term “process,” he references Webster’s first dictionary for authority on the term “art.”  From this, he assumes that the “useful arts” at the time were the technological arts and not the business and finance fields.

Stevens then looks through cases for the next 160 years after the country’s founding, and notes that courts consistently rejected patents on methods of doing business.

Looking into the 20th century, he notes that courts began using the terms “art,” “method,” “process,” and “system” interchangeably.  By 1952, Congress changed the operative language in 101 of the Patent Act, replacing the word “art” with “process.”  However, he notes that the intent of the court had never changed; arts still excluded methods of doing business.  Then, from looking at the Committee Reports, Stevens comes to the conclusion that the Act of 1952 codified the generally understood practice that business practices were to remain not patentable.

As we looked to the end of the 20th century, Stevens notes a federal court decision implying that business methods could be patented. State Street, 149 F. 3d 1368.  Congress then passed the Act of 1999, which included 35 U.S.C. 273, which expanded defenses to patent infringement claims for “method[s] of doing or conducting business.  Thus, it appears that Congress’s intent was to reinforce the Act of 1952’s limitation of patents on business methods.

Stevens then makes more practical concerns about business methods patents.  He notes that the lack of patent protection for business methods hasn’t stifled innovation in that area; companies will always be trying to develop business methods to one-up their competition.  Furthermore, giving patent protection in that area would lead to businesses to over obsess over litigation.  After all, “if business methods could be patented, then many business decisions, no matter how small, could be potential patent violations.” Long, Information Costs in Patent and Copyright, 90 Va. L. Rev. 465, 487-488 (2004).

By the end, Stevens says that “in the absence of clear guidance from Congress, we only have limited textual, historical, and functional clues on which to rely.  Those clues all point toward the same conclusion: that petitioners’ claim is not a “process” within the meaning of 101 because methods of doing business are not, themselves, covered by the statute.”

Significance for Patent Owners and Applicants

While the issuance of the Bilski et al. v. Kappos, the resulting decision has done little to add certainty to the true definition of what constitutes a patentable process under 35 U.S.C. §101.  At the very least, the Supreme Court has confirmed that 35 U.S.C. §101 has broadly defined patentable subject matter, and is limited only when the invention is too abstract.  In applying this abstractness test in the context of a process, 35 U.S.C. §101 encompasses at least those processes which are tied to a machine or transform data.  Thus, while the Supreme Court has indicated that the test is broader than this specific test, the lack of guidance as to what constitutes an abstract versus non-abstract invention means that applicants should ensure that their claims and specifications meet the machine or transformation test by setting for specific machinery being used in the processes or how a transformation between states is being achieved.

Central District of California Extends Bilski Holding to Find Computer Aided Method Not Tied To A Particular Machine If Merely Tied to Computer

In Dealertrack, Inc. v. Huber et al., CV 06-2335 AG (C. D. Calif. July 7, 2009), the patent at issue, U.S. Patent No. 7,181,427 (the ‘427 patent), is directed toward an automated credit application system.  Dealertrack at 2.  The independent claim at issue, claim 1, recites a “computer aided method” of managing a credit application.  The method consists of steps of receiving credit application data and forwarding the application and subsequent funding decisions to remote devices. Id. at 2.  The only issue in the case was the validity of the claims under 35 U.S.C. § 101.

Since Dealertrack did not argue the “transformation” prong of the test outlined in In re Bilski, 545 F. 943 (Fed. Cir. 2008) (en banc), the court considered only the “particular machine” prong of the Bilski test – whether the claimed process was tied to a particular machine.  Dealertrack at 5.  However, the Bilski decision provided no guidance as to the nature of the “particular machine”, leaving such consideration to future cases.  Id. at 5 (citing In re Bilski, 545 F. 943, 962 (Fed. Cir. 2008)).  The court therefore turned to several recent non-precedential decisions from the Board of Patent Appeals and Interferences, which held that general purpose computers were not “particular machines”.  In Ex Parte Gutta, which was decided before Bilski, the Board held that a process claim “for use in a recommender” was not tied to a particular machine because the body of the claim recited a mathematical algorithm and the only recitation of a machine in the claim was an intended use clause in the preamble.  Ex Parte Gutta, 84 USPQ.2d 1536 (B.P.A.I. 2007).  In Ex Parte Nawathe, the Board found that a claim to a “computerized method” was not tied to a particular machine because the specification discussed only a general-purpose computer.  Ex Parte Nawathe, No. 2007-3360 (B.P.A.I.  Feb. 9, 2009).  Finally, in Ex Parte Cornea-Hasegan, the Board held that a method including steps performed by a “processor” recited merely a general purpose computer.

In light of these Board decisions, the district court found that the ‘427 patent’s claims were not tied to a particular machine.  Although the claims referred to a remote application entry and display device and remote funding source terminal devices, the specification did not indicate how these devices were to be programmed.  Furthermore, during claim construction, the district court interpreted the terms as indicating any device, including a dumb terminal.  Since the devices did not require special programming, and the specification provided no guidance as to the nature of the devices, the district court found that the method was not tied to a particular machine.  The court accordingly ruled that the claims at issue, not being tied to a particular machine or transforming an article into a different state or thing, were invalid under 35 U.S.C. § 101.

Significance for Patent Applicants and Owners

While this case is on appeal, Dealertrack gives further evidence as to the confused state of computer software based inventions due to the Federal Circuit’s en banc opinion In re Bilski, 545 F. 943 (Fed. Cir. 2008).  While the Federal Circuit expressly limited its decision to methods, the United States Patent and Trademark Office and the District Courts are taking opposite approaches as to whether In re Bilski should be extended to all forms of machines and apparatuses to effectively render software unpatentable in any form.  Until the Supreme Court renders its decision In re Bilski, applicants will be unable to determine whether their software-based inventions can be patented, and exactly how much detail needs to included in an application in order to transform the computer into the type of “particular machine” which the District Court in Dealertrack found was required for purposes of determining patent-eligible subject matter under 35 U.S.C. §101.

 

Federal Circuit Revises Comiskey Decision in light of Bilski

In En Banc Ruling, Federal Circuit Orders New Decision to Address Whether Arbitration Methods and System Comply with Machine-or-Transformation Test  

In In re Comiskey, 89 USPQ2d 1641 (Fed. Cir. 2009) (en banc), the Court of Appeals for the Federal Circuit, sitting en banc, issued an order allowing the merits panel to issue a revised opinion found at In re Comiskey, 89 USPQ2d 1655 (Fed. Cir. 2009) and vacating the prior opinion found at In re Comiskey, 499 F.3d 1365; 84 USPQ2d 1670 (Fed. Cir. 2007).   The revised decision removes the portion of the opinion discussing claims 17 and 42, which were directed to a “system”.  Previously, the court had ruled that these claims satisfied the patentability test of 35 U.S.C. § 101, but were prima facie obvious under 35 U.S.C. § 103(a).  The revised decision instead remands the case to the Board of Patent Appeals and Interferences to determine, in the first instance and in light of the Federal Circuit’s recent decision in In re Bilski, 88 U.S.P.Q.2d 1385 (Fed. Cir. 2008) (en banc), whether these claims are patent-eligible under 35 U.S.C. § 101 but did not include the language arguably making such claims prima facie obvious.

By way of background, Stephen Comiskey filed an application for a method and system of mandatory arbitration.  Claim 1, a method claim, includes steps of enrolling a person in a mandatory arbitration system, incorporating arbitration language into a unilateral contract, requiring the complainant to submit a request for arbitration, conducting and providing support for the arbitration, and determining an award or decision in the arbitration.  Claims 17 and 42 recite a system having modules to carry out these steps; and depending claims 15, 30, 44, and 58 depend from the system or method and recite that “access to the mandatory arbitration is established through the Internet, intranet, World Wide Web, software applications, telephone, television, cable, video [or radio], magnetic, electronic communication, or other communication means.”

The Examiner rejected all claims as obvious under 35 U.S.C. § 103(a).  Throughout the prosecution of the case, the Examiner did not reject the claims on any other grounds.  Comiskey appealed the Examiner’s rejection to the Board, and the Board affirmed the obviousness rejections.  Comiskey appealed to the Federal Circuit.

The Federal Circuit did not reach the Board’s obviousness determination.  Rather, the Federal Circuit found that the claims were “barred at the threshold by [35 U.S.C.] § 101″.  In re Comiskey, 89 USPQ2d at 1659.  The Federal Circuit held that Comiskey’s method claims were not patentable subject matter under 35 U.S.C. § 101, and, in the revised portion of the opinion, remanded to the Board to determine the patentability of the system claims and the method claims explicitly reciting the use of a computer. 

In reaching the decision regarding the method claims, the Federal Circuit first reviewed Supreme Court case law regarding algorithms and business methods.  Citing a long line of Supreme Court precedent, the Federal Circuit concluded that claims reciting an abstract idea per se are not patentable.  However, a claim directed to an abstract idea may be patentable if the claim recites a practical application of the abstract idea.  Such a claim is statutory only if, as employed in the process, the idea is embodied in, operates on, transforms, or otherwise involves a class of statutory 

 

subject matter.  Thus, a mental process standing alone, untied to any other category of statutory subject matter, does not recite patentable subject matter.

The Federal Circuit then turned to Comiskey’s method claims, finding that the exceptions to the “abstract idea” rule did not apply to these claims.  The claims did not require a machine, as Comiskey conceded.  Nor did the claims operate on or transform another class of statutory subject matter: they were not “a process of manufacture” or “a process for the alteration of a composition of matter”.  The claims merely described the steps of arbitration by a human arbitrator.  As such, the claims recited only mental steps, and were therefore not patentable.      The Court treated the system claims separately.  Unlike the independent method claims, the system claims recited limitations that, in their broadest reasonable interpretation, could be interpreted as requiring the use of a machine.  Claim 17 recited, among other limitations, “a registration module”, “an arbitration module”, and “a means for selecting an arbitrator from an arbitrator database.”  The system claims would thus be patentable, since they would be “embodied in” another class of statutory subject matter: machines.  The Federal Circuit did not, however, rule on this point.  Instead, the Federal Circuit remanded the case to the Board to determine, in the first instance, whether the system claims, as well as certain dependent method claims directed toward establishing access to arbitration over the Internet or other media, were patentable under 35 U.S.C. § 101. 

The difference between the 2007 opinion and the revised 2009 opinion lies in the treatment of the system claims.  In the original 2007 opinion, the Federal Circuit in fact ruled that the system claims recited patentable subject matter because, under the broadest reasonable interpretation, the claims could be directed to a machine.  In re Comiskey, 84 U.S.P.Q.2d 1670, 1680 (Fed. Cir. 2007)(withdrawn).  The Federal Circuit remanded these claims to the Board not to determine their patentability under 35 U.S.C. § 101, but to determine whether the mere addition of general purpose computers was obvious under 35 U.S.C. § 103(a).  In the revised opinion, the Federal Circuit retreated from its prior holding of patentability, instead remanding the case to the Board to determine the § 101 issue in the first instance, without reaching the obviousness issue.

The Federal Circuit justified the limited remand to the Board with respect to the system claims in part because, had the Board relied on 35 U.S.C.  § 101 to reject the new claims, Comiskey would have had an opportunity to amend the claims under 37 C.F.R. § 41.50(b).  The different treatment of the system claims and the method claims is curious in that Comiskey would have had the same opportunity to amend the method claims had the Board rejected those under 35 U.S.C. § 101.  The panel may have felt that the method claims presented a clear case of unpatentable subject matter, while the system claims did not.  This position would be consistent with the Federal Circuit’s subsequent In re Bilski decision.  88 U.S.P.Q.2d 1385 (Fed. Cir. 2008) (en banc).  In In re Bilski, the Federal Circuit limited the issue to “what the term ‘process’ means”, subsequently ruling the method claims at issue to be unpatentable subject matter because the method did not transform an article to a different state or thing or was not tied to a particular machine.  Id. at 1389.

Significance for Patent Owners

The Comiskey decision joins the Bilski decision as part of the Federal Circuit’s attempt to define the limits of patentable processes.  The original 2007 decision pointed the way to Bilski, and the 2009 revised decision stands as an application of the Bilski principles.  The Supreme Court, however, may soon have an opportunity to return to this area of the law for the first time since Diamond v. Diehr; Bilski recently filed a petition for certiorari with the Supreme Court.  Unless the Supreme Court weighs in, the principles of Bilski and Comiskey remain the law: a method cannot be patentable unless the method transforms an article to a different state or thing, or is tied to a particular machine.  Purely mental processes, such as Comiskey’s arbitration method, are barred by 35 U.S.C. § 101.  As such, applicants should ensure that methods, both in the specification and claims, specifically recite the processors and machines with which they interact in order to better assure compliance with the Federal Circuit’s new machine or transformation test.

Federal Circuit Limits Which Methods Can be Patented

In En Banc Ruling, Federal Circuit Requires Methods to Comply with Machine-or-Transformation Test

In In re Bilski, 545 F.3d 943, 88 USPQ2d 1385 (Fed. Cir. 2008), the Federal Circuit upheld the final decision of the Board of Patent Appeals and Interferences (hereinafter, “the Board”) in rejecting all eleven claims of U.S. Patent Application No. 08/833,892 (hereinafter, “the ‘892 application”).  As will be explained below, the Federal Circuit held that, for purposes of defining patentable subject matter for method claims, claims must meet the “machine-or-transformation” test for subject matter eligibility and expressly rejected the “useful, concrete, and tangible result” test spelled out in State Street Bank & Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).

As background, Bernard L. Bilski and Rand A. Warsaw (hereinafter, “the Applicants”) filed the ‘892 application on April 10, 1997.  Claim 1 of the ‘892 application reads:

A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

That is, taking claim 1 as representative, the ‘892 application claims a method of hedging risk in commodities trading.  During prosecution, the Examiner ultimately rejected claims 1-11 under 35 U.S.C. §101 because “the invention is not implemented on a specific apparatus and merely manipulates [an] abstract idea and solves a purely mathematical problem without any limitation to a practical application.”  On appeal, the Board affirmed the rejection of claims 1-11, while also holding that the Examiner erred in requiring implementation on a specific apparatus.  That is, the claims may still be statutory if “there is a transformation of physical subject matter from one state to another.”

In response, the Applicants appealed to the Federal Circuit on the question of whether the claims are drawn to statutory subject matter under 35 U.S.C. §101.  The Federal Circuit decided sua sponte to hear the case en banc in order to decide a standard to determine whether a given claim recites a “new and useful” process so as to be statutory subject matter under 35 U.S.C. §101.

The Federal Circuit noted that 35 U.S.C. §101 reads as follows:

“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.”

While recognizing that the term “process” has a broad ordinary meaning which the claims otherwise would meet, the Federal Circuit held that the Supreme Court has more narrowly defined the term “process.”  Specifically, the Federal Circuit found that the Supreme Court has already established that a process claim is not statutory if it claims “laws of nature, natural phenomena, [or] abstract ideas,” Diamond v. Diehr, 450 U.S. 175, 185 (1981).  Diehr emphasized a pre-emption test that held a process claim unpatentable if the effect of allowing it would allow the patentee to pre-empt substantially all uses of that fundamental principle.  The Federal Circuit noted that Diamond relied upon an earlier Supreme Court case, Gottschalk v. Benson, 409 U.S. 63, 70 (1972) for the proposition that processes drawn only to a fundamental principle are not patentable as fundamental principles are exclusive to no one.  Thus, the Federal Circuit found that patentability of process claims under 35 U.S.C. §101 was dependant on whether the ‘892 claims recite a fundamental principle and, if so, whether they would pre-empt substantially all uses of that fundamental principle if allowed.  In so doing, the Federal Circuit definitively articulated a standard of review to determine whether a process claim pre-empts all uses of a fundamental principle in contravention of 35 U.S.C. §101.

In order to determine this standard, the Federal Circuit contrasted Diehr and Benson.  The Federal Circuit noted that the Supreme Court held in Diehr that an automated process of curing rubber using an algorithm was patentable as it did not preempt all uses of that particular algorithm since the claim was tied to a specific application and process and could be used for other substances or with other process steps.  In contrast, in Benson, a binary conversion technique using an algorithm could only be used on a computer and therefore allowing the claimed process would preempt all uses of that algorithm.  Thus, the Federal Circuit held that the Supreme Court requires that, for a process to be patentable, the process must be directed to an application of a principle, but cannot be directed to all applications of the principle which would pre-empt substantially all uses of the principle.

The Federal Circuit further found that the Supreme Court, in Parker v. Flook, 437 U.S. 584, 589 n. 9 (1978), additionally held that processes which are tied to a particular apparatus are also patentable since it does not preempt substantially all uses of the principle behind the claimed process.

After reviewing these cases, the Federal Circuit held that such a test had been collectively articulated by the Supreme Court in Benson, 409 U.S. at 70, Diehr, 450 U.S. at 192, and Parker, 437 U.S. at 589 n. 9.  The Federal Circuit named this test the machine-or-transformation test, which is as follows:

“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.”

The Federal Circuit, in explaining the machine-or-transformation test, noted two corollaries to the test.  For the first corollary, the Federal Circuit explained that field of use limitations did not render non-statutory process claims statutory.  Specifically, the Federal Circuit noted that the Supreme Court in Diehr found that patent ineligibility “cannot be circumvented by attempting to limit the use of the formula to a particular technological environment.” Diehr, 450 U.S. at 191-92.  While recognizing that there is tension between preemption and whether a field of use limitation provides sufficient limitation to be compliant with 35 U.S.C. §101, the Federal Circuit found that such field of use limitations are not effective in limiting claims to a particular application of a fundamental principle.  Specifically, the Federal Circuit held that “[p]re-emption of all uses of a fundamental principle in all fields and pre-emption of all uses of the principle in only one field both indicate that the claim is not limited to a particular application of the principle.”  As such, field of use limitations still retain the characteristic of improper claiming of a fundamental principle and do not convert an unpatentable process into a patentable process.

For the second corollary, the Federal Circuit stated that insignificant post-solution activity does not render a non-statutory process claim compliant with 35 U.S.C. §101.  Diehr at 191-92.  The Federal Circuit thus stated that even in situations where a process is nominally tied to a specific machine or transformation, if such a tie is insignificant, the process remains non-statutory.

Relying on this analysis, the Federal Circuit held that whether a process is statutory is now exclusively determined by the machine-or-transformation test, and found that its prior tests were incorrect.  Thus, in addition to establishing the machine-or-transformation test, the Federal Circuit dismissed its prior tests: the Walter-Abele test and the State Street test.

Specifically, the Federal Circuit found that the Walter-Abele test has two steps: (1) determining whether a claim recites an algorithm, then (2) determining whether the algorithm is applied in any manner to physical elements or process steps.  In re Walter, 618 F.2d 758 (CCPA 1980) and In re Abele, 684 F.2d 902 (CCPA 1982).  Citing other cases that had already recognized a claim’s patentability despite failing that test (In re Grams, 888 F.2d 835 (Fed. Cir. 1989)), the Federal Circuit held the Walter-Abele test inadequate.

Under State Street, a method claim is found patentable if it produces a “useful, concrete, and tangible result.”  While recognizing that this test may provide guidance in determining whether a claim is drawn to a fundamental principle or a practical application thereof, the Federal Circuit unequivocally found this test to be “insufficient,” “inadequate,” and “never intended to supplant the Supreme Court’s test” (i.e., the machine-or-transformation test).  However, the court did evoke State Street’s rejection of categorical exclusions beyond fundamental principles to reaffirm that all process claims (including business method claims) are subject to the same legal requirements (i.e., the machine-or-transformation test), and specifically declined, in footnote 23, to extend such a categorical exclusion to software claims.

In applying the machine-or-transformation test to claim 1 at issue, rather than provide guidance, the Federal Circuit noted that there was no machine at issue and claim 1 did not attempt to be tied to a particular machine.  Instead, the Federal Circuit specifically held that they “leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.”  Thus, as claim 1 was not tied to a machine, it could only be patentable if the recited process was compliant with the transformation prong of the machine-or-transformation test.

In applying the transformation prong, the Federal Circuit addressed the types of things that constitute an “article” such that their transformation is sufficient to be compliant with 35 U.S.C. §101.  The Federal Circuit held that chemicals and physical objects and substances are articles for purposes of the machine-or-transformation test.  On the more difficult questions of electronic signals and electronically-manipulated data, the court turned to prior case law to convey some benchmarks.

The Federal Circuit began by noting that electronic signals and electronically-manipulated data are the “raw material-age processes.”  Thus, data and signals can be transformed by a process for purposes of statutory process claims.  Specifically, where a claim does not specify a particular type or nature of data, or how or from where the data is obtained, such data is not an article for purposes of transformation.  Abele, 684 F.2d at 909.  However, where data clearly represents physical and tangible objects (for example, X-ray attenuation data represents the structure of bones, organs, and other body tissues), the data is an article.  Id. at 908-909.  Accordingly, an electronic transformation of said data into a visual form does constitute a transformation and there is no requirement that the underlying physical objects be transformed.

In contrast, a data-gathering step added to an algorithm does not convert that algorithm into a patent eligible process.  In re Grams, 888 F.2d 835, 840 (Fed. Cir. 1989).  That is, gathering data (for example, by performing a clinical test) does not constitute a transformation of an article.  Moreover, such operations may be inherently required in the recited process such that the extra step does not restrict the scope of the claim and preempts substantially all uses of the fundamental principle of the recited algorithm. The court, though, did indicate that by specifying how the data is gathered or on what medium data is recorded after a process is performed on the gathered information, some relevance may be imputed onto such data gathering or recording such that it is not an insignificant extra-solution activity.

On the facts of the case at hand, the court dismissed the Applicants’ reliance on the State Street test, and asserted the machine-or-transformation test as exclusively dispositive.  Applying this test, the court holds that the ‘892 application seeks to “claim a non-transformative process that encompasses a purely mental process of performing requisite mathematical calculations without the aid of a computer or any other device, mentally identifying those transactions that the calculations have revealed would hedge each other’s risks, and performing the post-solution step of consummating those transactions” (emphasis added).  Thus, because the claimed process does not involve transforming an article into a different state or thing and, as admitted by the Applicants, does not involve a machine implementation, the ‘892 claims are not drawn to patent-eligible subject matter under 35 U.S.C. §101.

Significance for Patent Owners

Bilksi represents a significant retrenchment of the prior interpretations as to the scope of patentable inventions under 35 U.S.C. §101.  While the decision itself focused on preventing pure business methods from qualifying as patentable subject matter and even specifically noted that software patents themselves are not categorically unpatentable, it is very likely that this analysis will be broadly used by the United States Patent and Trademark Office to reject method claims involving software.  That being said, the decision is limited to method claims, and does not affect apparatus or recording medium claims.  Moreover, of significance for software method claims, Bilksi specifically noted that certain types of data transformation methods are patentable, as well as methods which are tied to a particular machine in more than a nominal way.  As such, while it is likely that Examiners will aggressively apply Bilksi against all kinds of method claims, the extent to which Bilksi will represent a long-term hurdle to patenting non-business-method inventions has yet to be seen.