Supreme Court’s Alice Decision Strikes a Blow Against Patent Trolls in Confirming that Adding the Words “Apply It With A Computer” Does Not Make an Abstract Idea Patentable

A unanimous Supreme Court today ruled that software patents based on abstract ideas that merely require generic computer implementation are ineligible for patent protection, affirming the U.S. Court of Appeals for the Federal Circuit’s recent en banc decision in Alice Corp. v. CLS Bank Int’l. This ruling does not render all software-related inventions ineligible for patent protection, but does call into question the validity of countless number of patents asserted by so called patent “trolls” against U.S. and foreign businesses.

Alice Corporation’s business method patents called for a way to mitigate settlement risk, i.e., the risk that only one party to an agreed-upon financial exchange will satisfy its obligation. The patent claims called for the exchange of financial obligations between two parties by using a computer system as a third-party intermediary. Specifically, the patents claimed (1) a method for exchanging financial obligations, (2) a computer system configured to carry out the method for exchanging obligations, and (3) a computer-readable medium containing program code for performing the method of exchanging obligations. Alice Corp accused CLS Bank of infringement based on operation of a global network that facilitated currency transactions.

Both a federal district court and the Court of Appeals for the Federal Circuit concluded that Alice Corp.’s claims were invalid under 35 U. S. C. §101 because they were directed to an abstract idea. Alice Corp. petitioned the Supreme Court to consider whether its claims to computer-implemented inventions are directed to patent-eligible subject matter within the meaning of 35 U.S.C. § 101.

The Court considered a similar set of facts four years ago in Bilski v Kappos, where it held that Bilski’s risk-management method was invalid as an abstract idea. In Bilski, the Supreme Court declined to categorically exclude business methods from patent protection. Since Bilski, though, there has admittedly been confusion over what is needed to demonstrate patent eligibility for business methods, including certain types of computer software.

In Alice Corp., the Court acknowledged that the Patent Act excludes from patent protection “[l]aws of nature, natural phenomena, and abstract ideas.” In applying this exception, the Court stated that it must distinguish patents that claim the “buildin[g] block[s]” of human ingenuity, which are ineligible for patent protection, from those that integrate the building blocks into something more, . . . thereby “transform[ing]” them into a patent-eligible invention, quoting its earlier decision in Mayo Collaborative Services v. Prometheus Labs., 566 U.S. ___ (2012).

Using this framework, the Court held that as an initial matter it must first determine whether the claims at issue are directed to a patent-ineligible concept and, if so, whether the claim’s elements, considered both individually and “as an ordered combination,” “transform the nature of the claim” into a patent-eligible application. The Court found that Alice Corp.’s claims were directed to a patent-ineligible concept: the abstract idea of intermediated settlement.

Writing for the Court, Justice Thomas stated that, on their face, Alice Corp’s claims are drawn to the concept of intermediated settlement, and that “[l]ike the risk hedging in Bilski, the concept of intermediated settlement is “a fundamental economic practice long prevalent in our system of commerce,” and that the use of a third-party intermediary (or “clearing house”) is a building block of the modern economy.” While the Court did not clearly define the exact boundaries of the abstract idea category, the Court noted the lack of a “meaningful distinction” between Alice Corp’s concept of intermediated settlement and Bilski’s risk hedging. Thus, answering the first prong, the Court found that intermediated settlement, like hedging, is an “abstract idea.”

Under the second prong of the inquiry, the Court held that Alice Corp’s method claims, which merely required generic computer implementation, failed to transform that abstract idea into a patent-eligible invention. According to the Court, the representative method claim did no more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer. Specifically, the Court found that the function performed by the computer at each step—creating and maintaining “shadow” accounts, obtaining data, adjusting account balances, and issuing automated instructions—was well known. In the Court’s view, these computer implemented steps added “nothing . . . that is not already present when the steps are considered separately.”

As the Court noted, the claims did not, for example, purport to improve the functioning of the computer itself or effect an improvement in any other technology or technical field. In the end, it held that an instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer is not enough to transform the abstract idea into a patent-eligible invention, and the claims were ineligible for patent protection under §101.

Turning to the next category of claims, the Court noted that, substantively, the method claims and the system claims are identical. Citing a warning from Mayo against interpreting 35 U.S.C. § 101 “in ways that make patent eligibility ‘depend simply on a draftsman’s art,’” the Court concluded that Alice Corp’s system and media claims, too, were ineligible for patent protection.

While the Court’s ruling offers some guidance as to why certain business software ideas may be ineligible for patent protection, it does not provide a bright line test. At the very least, though, this decision may provide businesses facing infringement claims by so called “patent trolls” an opportunity to obtain early summary judgment rulings, or even dismissal on the pleadings on the issue of patent eligibility.