CLS v. Alice: The Federal Circuit at a Jurisprudential Deadlock

By: Robert R. Sachs

dead·lock [ded-lok]


1. a state in which progress is impossible, as in a dispute, produced by the counteraction of opposing forces; standstill; stalemate: The Federal Circuit has reached complete deadlock in its Section 101 jurisprudence.

The Federal Circuit’s decision to take CLS Bank v. Alice Corp., (No. 2011-1301, May 10, 2013), en banc was expected by many to result in a significant decision on eligibility of software for patent protection, setting forth some objective standard for evaluating whether claims for software-implemented inventions are abstract ideas. Instead, we have a court that is radically and perhaps hopelessly split in “judicial deadlock.” As Judge Newman laments “In deciding to rehear the patent dispute between CLS Bank and Alice Corporation, the en banc court undertook to remedy distortions flowing from inconsistent precedent on section 101. This remedial effort has failed.” “With today’s judicial deadlock, the only assurance is that any successful innovation is likely to be challenged in opportunistic litigation, whose result will depend on the random selection of the panel.” Newman, dissent at 2.

While seven judges agreed that the method claims in suit were not patent eligible, they did so for conflicting and incompatible reasons. And the court was evenly split (5-5) on whether the claims for a computer system implementing the method were patent eligible. Judge Lourie, joined by Judges Dyk, Wallach, Reyna and Prost, attempts to set forth an “integrated approach” to Section 101 that synthesizes all of the Supreme Court’s decisions into a nice complete package. As expected, the decision is seen by some as undermining the legitimacy of software patents, and a nightmare for patentees.

But a closer examination reveals that the complex of decisions, and Judge Lourie’s in particular, is a cloud with a silver lining for patentees. Judge Lourie made two very important points, with which a majority (at least 9 judges) of the court agrees.

First, Judge Lourie states that the presumption of validity applies to Section 101. “And, as with obviousness and enablement, that presumption applies when § 101 is raised as a basis for invalidity in district court proceedings.” Lourie, concur. at 23. Chief Judge Rader’s opinion, joined by Judges Linn, Moore and O’Malley, agrees with this statement: “[w]e find that any attack on an issued patent based on a challenge to the eligibility of the subject matter must be proven by clear and convincing evidence.” Rader, concur. at 26. These statements should put an end to the recent trend of district court decisions that have granted motions to dismiss on the basis of Section 101 invalidity. Given that the claims of a patent must be presumed patent-eligible, and that the facts pled are true, any motion to dismiss on Section 101 grounds must necessarily be denied.

Second, a district court can decide to focus a patent litigation on the issue of infringement, for example, and if the jury finds no infringement, dispense with the question of Section 101 entirely. “District courts may exercise their discretion to begin elsewhere when they perceive that another section of the Patent Act might provide a clearer and more expeditious path to resolving a dispute.” Lourie, concur. at 22.

Procedurally, together these statements mean that defendants cannot obtain an easy kill on software patent cases by filing a motion to dismiss, or even for summary judgment. Instead, defendants have the burden to prove patent ineligibility with facts, not attorney arguments about the claims being simply abstract ideas, etc.

Substantively, even Judge Lourie’s opinion is useful to patentees. Judge Lourie’s test for patent eligibility, which is presumably the one that defendants will adopt, focuses on preemption:

“What matters is whether a claim threatens to subsume the full scope of a fundamental concept, and when those concerns arise, we must look for meaningful limitations that prevent the claim as a whole from covering the concept’s every practical application.” Id., at 16.

“The § 101 preemption analysis centers on the practical, real-world effects of the claim.” Id. at 20.

This statement of the preemption analysis, coupled with the presumption of validity, is very beneficial to patentees. Why? Because it means that the defendant has the burden to prove, by clear and convincing evidence, that the “practical, real world effect” of the claim is that it covers “every practical application” of the alleged abstract idea (however defined). Or put another way, the defendant essentially has to prove that there is no practical implementation of the abstract idea that does not infringe. In short, this means that the defendant must provide expert testimony that there is no way to design around the claim, and therefore that every practical implementation would fall within the scope of the claim. Attorney arguments about abstract ideas, or that the claim in suit is more like Flook and less like Diehr are nice, but not compelling. The patentee by contrast, need only show that there is some way to design around the patent claim and still practice the abstract idea—it’s just that the defendants did not do that. That's good news for patentees.

Judge Lourie defines (without support) the “abstract idea” here to be “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.” Id., at 25. The opinion then walks through the claim limitations regarding the creation and adjustment of shadow records, and tosses these out as being nothing more than “generic computer automation,” which do nothing more than “than the necessary tracking activities of a supervisory institution.”

Unfortunately for Alice, Judge Lourie did not strictly apply his preemption test, and whether CLS could have designed around the Alice patent claims. For example, one claim limitation that Judge Lourie did not address is that the adjustments to the shadow records are done in “chronological order” to determine which transactions to permit and which to deny. Arguably, this is not a necessary activity of an escrow agent to “verify that both parties can fulfill their obligations before allowing the exchange.” Indeed, in many contexts, such as banking, transactions are cleared in order from largest to smallest, not chronologically (this practice, “transaction re-ordering,” has been heavily criticized as leading to excessive overdraft fees). Since the transactions could have been ordered by largest to smallest for example, the chronological order of adjustments is one specific way of “verifying that both parties can fulfill their obligations,” and as such the claimed method would not preempt all “practical applications” of the concept of reducing settlement risk using a third party intermediary.

There are some deep problems with Judge Lourie’s analysis. The first is the view that computers do just what humans do mentally: “At its most basic, a computer is just a calculator capable of performing mental steps faster than a human could.” Id., at 27. Judge Lourie made a similar (mis)statement in his opinion in Bancorp Services v. Sun Life Assurance Co. of Canada, No. 2011-1467 (Fed. Cir. July 26, 2012) (“[a] digital computer . . . operates on data expressed in digits, solving a problem by doing arithmetic as a person would do it by head and hand.” Benson, 409 U.S. at 65. Indeed, prior to the information age, a “computer” was not a machine at all; rather, it was a job title: “a person employed to make calculations.” Oxford English Dictionary, supra. Those meanings conveniently illustrate the interchangeability of certain mental processes and basic digital computation”).

This view of computers is both highly simplistic and wrong. A digital computer certainly does not “do arithmetic” as a person would by “head and hand.” As an example, computers don’t do long division--the bane of every 4th grader’s existence--by repeatedly factoring the divisor into the dividend, subtracting the result, etc., for a number of structural reasons—not the least of which is that the computers have memory registers and logic gates and the brain, well, does not. A neuroscientist would likely lose tenure today if she asserted that “mental processes and basic digital computation” were “interchangeable.” For a Federal Circuit judge to ground fundamental patent policy on this erroneous view of computers risks leading the development of patent law towards incorrect rules and standards.

The second problem arises from this belief, and forms a basis for what I call the “Normativist” view of Section 101 as defining what inventions and claims “ought” to be patent eligible. If you believe that computers do nothing more than make repetitive calculations faster, then it makes sense that you also believe that using a computer to do something does not provide "human ingenuity.” And this is precisely what Judge Lourie holds: “In short, the requirement for computer participation in these claims fails to supply an “inventive concept” that represents a nontrivial, nonconventional human contribution.” Id., at 27.

This point of view imposes an extrinsic value judgment, that the use of computers to deliver useful functionality has no inherent inventive value per se. Judge Lourie offers no explanation for this bias against the use of computers. Would Judge Lourie, a chemist by training, deny patent eligibility to a chemical process simply because it used conventional lab equipment, which would hardly be an “inventive” contribution? Why then deny patent eligibility to the use of a computer? And if the use of a computer—as a machine—does not impart patent eligibility, then it logically follows that the use of nuts, bolts, levers, pulleys, springs, integrated circuits, transistors, amplifiers, antennas, etc., cannot impart eligibility either. That is, if it is acceptable to ignore the fact that a computer method claim is inherently executed on a computer, and distill it down to some “abstract idea,” then it is equally proper—indeed required—to ignore the presence of physical elements in every method claim, and distill it down to its abstract concept. A typical chemical process claim would become nothing more than the abstract idea of forming a chemical composition by combining certain agents under certain conditions.

Judge Lourie’s persistent model that computers simply do calculations more quickly bleeds into his preemption analysis: “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 or exchange data among financial institutions.” Id. But the question is not whether the computer is being used merely to make the claimed process more efficient. The question is whether “all practical, real world applications of the abstract idea” must be implemented using shadow records in the manner claimed. If not, then the claim does not improperly preempt use of the “abstract idea.” As I’ve shown above, Judge Lourie did not accurately assess this question.

Judge Lourie also misunderstands the nature of software, stating that “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.” Id. at 37. Software does not “consist” of “abstract ideas,” anymore than your car “consists” of the abstract idea of a vehicle. Software is interpretable instructions that control the operation of a machine. That software implementations are based on abstractions and perform functional operation does not make the “abstract ideas.” See, The Confusion between Abstractions and Abstract Intellectual Ideas.

A third problem with Judge Lourie’s decision is that it fails to provide any guidance on how to define an abstract idea. As mentioned above, Judge Lourie offers up a definition of the abstract idea in Alice’s claims, but does not provide a methodology of how this should be done in the general case. The admonitions regarding disregarding clever claim drafting, post solution activity, etc. are applied as part of the preemption analysis only after the abstract idea is defined, not as part of the definitional process. See Id., at 25-26. As such, district courts are still without any specific set of rules for figuring out what is the abstract idea in some given claim.

Patentees may benefit as well from the fact that the Federal Circuit is as seriously fractured as it is. As Judge Newman notes, the outcome of any particular appeal on Section 101 will depend on the panel drawn for the decision. To a district court judge, this means that there’s about a 50% probability of being reversed. Given that the district court has the discretion to decide a patent litigation on other more expeditious grounds, a court may well decide to put off any decision on Section 101 eligibility until after a finding on infringement. The Federal Circuit is deferential to the fact finder in patent cases, and thus an infringement decision is ostensibly less likely to be reversed.

The view that CLS signals the death knell of software patents is mistaken. For companies and entrepreneurs seeking patent protection, the calculus as to whether to file on a software-based invention is only slightly more nuanced than it was previously. Generally, the more technical inventions in software—such as specific improvements in the operation of computer processors, memory, storage, networking, etc.—should be readily patent-eligible. Inventions that are directed to the use of computers in human affairs—social networking, advertising, financial systems, games, etc.—are still patent-eligible as a class. For the time being, companies should still consider patent protection where these types of inventions are central to their competitive advantages. CLS does not and will not change how the U.S. Patent & Trademark Office examines such patents. Further, by the time such patents are issued and litigated, at least 5 to 7 years from now, there will be considerably more development in the caselaw.

Whether this caselaw includes a Supreme Court review of CLS remains a key question. The Court has demonstrated significant interest in addressing Section 101 cases, in its Bilski, Prometheus, and Myriad decisions. With the Federal Circuit hopelessly divided, the Court may well see this as the right case in which to finally bring order to the universe of patent eligibility. If so, the Court is very likely to adopt Judge Lourie’s approach, as it provides a rationalization of their precedent and avoids bright line tests that can be easily surmounted by “clever drafting,” the apparent primary concern of the Supreme Court.

*The perspectives expressed in the Bilski Blog, as well as in various sources cited therein from time to time, are those of the respective authors and do not necessarily represent the views of Fenwick & West LLP or its clients.