Rader’s Olive Branch: Ultramercial II Resolves the Judicial Deadlock of CLS Bank

By: Robert R. Sachs

The Federal Circuit’s en banc decision in CLS Bank Int’l v. Alice Corp., __ F.3d __, No. 2011-1301, 2013 WL 1920941 (Fed. Cir. May 10, 2013) was roundly criticized as a “nightmare,” further cementing the impression that the court was confused and in conflict over the requirements of patent eligibility under 35 U.S.C § 101. The six non-precedential opinions were seen as leaving patent applicants and owners alike without guidance, let alone predictability, as to whether their patents were valid. Alice Corp.’s patents covered computer-implemented methods and systems for a third-party intermediary to ensure real-time settlement of currency exchange transactions between counterparties. Judges Lourie, Dyk, Wallach, Reyna and Prost appeared to take a hard stand against such software-based financial inventions, finding that neither the method nor system claims were patent-eligible. Under Lourie’s “integrated approach,” the patent claims lacked any “meaningful limitations” and thereby preempted all “practical applications” of the abstract idea of third-party settlement. Taking a middle position, Judges Rader, Moore, Linn and O’Malley agreed that the method claims were not patent-eligible, but argued that the system claims were patent-eligible because they contained limitations that were not necessary and inherent in the abstract idea. At the other end of the bench, Judges Linn and O’Malley argued that the method claims were indeed patent-eligible because they included limitations that prevented the claims from being “unduly preemptive.”

Not long after CLS issued, the Federal Circuit issued its second opinion on patent eligibility in the case of Ultramercial v. Hulu, __ F.3d __, No. 2010-1544, 2013 U.S. App. LEXIS 12715 (Fed. Cir. June 21, 2013) (“Ultramercial II”). The Ultramercial patent had been before the Federal Circuit back in 2011, Ultramercial, LLC v. Hulu, LLC, 657 F.3rd 1323 (Fed. Cir. 2011) (“Ultramercial I”). Then, Rader, Lourie and O’Malley agreed that the method claims were patent-eligible—but they had no guiding theory, just a bundle of notions regarding the expansive scope of Section 101, its role as a “coarse eligibility filter,” and an I-know-it-when-I see-it test that the abstractness of the claim “should exhibit itself so manifestly as to override the broad statutory categories of eligible subject matter.” Ultramercial I, 657 F.3d at 1327. There was no discussion of preemption or meaningful limitations, or whether limitations were inherent or necessary. After its decision in Mayo v. Prometheus, 566 U.S. ___, 132 S.Ct. 1289 (2012),the Supreme Court vacated the panel’s decision and remanded.

One way to resolve an argumentative deadlock is for one party to show that its own approach is consistent with that of its putative opponent. Thus, while the Ultramerical II decision was ostensibly for the purpose of conforming with the Supreme Court’s guidance in Mayo, Rader took the opportunity to extend a judicial olive branch by more explicitly adopting Lourie’s “integrated approach” to Section 101. First, the most striking feature of Rader’s opinion is how it synthesizes Lourie’s views with his own. Rader’s opinion cites Lourie’s CLS opinion for the framework of 101 analysis—but then follows that with text that is almost entirely taken from his own CLS opinion. Thus, in his first paragraph devoted to the § 101 analysis, Rader cites Lourie’s opinion five times:

Second, as is shown more fully below, the analysis under § 101, while ultimately a legal determination, is rife with underlying factual issues. For example, while members of this court have used varying formulations for the precise test, there is no doubt the § 101 inquiry requires a search for limitations in the claims that narrow or tie the claims to specific applications of an otherwise abstract concept. CLS Bank, __ F.3d at __, 2013 WL 1920941, at *27-30 (meaningful limitations); Id. at *10 (opinion of Lourie, J.). Further, factual issues may underlie determining whether the patent embraces a scientific principle or abstract idea. Id. (opinion of Lourie, J.) (“The underlying notion is that a scientific principle . . . reveals a relationship that has always existed.”) (quoting Parker v. Flook, 437 U.S. 584, 593 n.15 (1978)). If the question is whether “genuine human contribution” is required, and that requires “more than a trivial appendix to the underlying abstract idea,” and were not at the time of filing “routine, well-understood, or conventional,” factual inquiries likely abound. Id. at *11-12. Almost by definition, analyzing whether something was “conventional” or “routine” involves analyzing facts. Id. at *12. Ultramercial II, 2013 U.S. App LEXIS 12715, at *6-7(emphasis added).

As seen here, Rader clearly adopts the primary facets of Lourie’s “integrated approach”: 1) that preemption is the core concern; 2) that one must identify limitations in the claim that meaningfully limit the claim to a “practical application” of the abstract idea; and 3) that what counts as a meaningful limitation is a question of fact, including determining whether claimed limitations were in fact conventional, routine or well understood.

Second, notice that Rader introduces this paragraph with “as is shown more fully below”. And what follows is a long analysis taken almost verbatim from Rader’s opinion in CLS. In short, Rader is saying that he agrees with Lourie, and the details of his analysis are entirely consistent with Lourie’s overall framework. Rader is not offering up an alternative or contrary theory of patent eligibility, but simply a “formulation” of a “precise test” that implements Lourie’s theory.

To be clear, Lourie either did not see, or rejected, this attempt at judicial détente. His concurrence practically chides Rader: “I concur in the result reached by the majority, but I write separately because I believe that we should concisely and faithfully follow” the Supreme Court and “and should track the plurality opinion of five judges from this court in CLS Bank”; “It is our obligation to attempt to follow the Supreme Court’s guidance in Mayo rather than to set forth our own independent views, however valid we may consider them to be.” Ultramercial II, 2013 U.S. App. LEXIS 12715, at *46-47.

Perhaps the problem was that Rader did not explicitly implement the first two steps of Lourie’s approach: “First, a court must identify whether the claimed invention fits within one of the four statutory classes set out in § 101” and “[s]econd, one must assess whether any of the judicial exceptions to subject-matter eligibility apply, including whether the claims are to patent-ineligible abstract ideas.” Ultramercial II, 2013 U.S. App. LEXIS 12715, at *48. But Rader did in fact touch these bases. In Section III.A, he provides a detailed analysis of § 101’s use of the term “process,” and in Section III.B he reviews the exceptions to § 101, including the abstract idea exception, followed by a detailed discussion of “abstractness” in Section IV.A. In Section VI, Rader applies his analysis and states “The claimed invention is a method for monetizing and distributing copyrighted products over the Internet. As a method, it easily satisfies § 100’s definition of ‘process’ and thus falls within a § 101 category of patent-eligible subject matter.” Id. at *38. Addressing the ‘abstractness’ question, Rader sets forth the 10 steps of the claim in a concise prose form and states:

Even at this general level, it wrenches meaning from the word to label the claimed invention “abstract.” The claim does not cover the use of advertising as currency disassociated with any specific application of that activity. It was error for the district court to strip away these limitations and instead imagine some “core” of the invention. Id. at *40.

At least textually, it seems that at worst Rader’s opinion was not “concise” enough for Lourie: It took Rader nineteen pages to set forth his § 101 analysis before applying it the claims; by contrast, Lourie did it in two paragraphs on a single page.

But the textual explanation is not sufficient. Rather, the explanation lies in the profound difference in stances Lourie and Rader take toward technology in general and computer technology in particular. Judge Lourie, along with Judges Dyk, Prost and Mayer, are "Normativists," who see § 101 as defining what inventions "ought" to be patent-eligible. The Normative approach imposes an extrinsic value judgment—from a source unspecified—as to what kinds of innovations count as "inventive" and what kinds do not. In particular, the Normativists believe that the use of computers to deliver useful functionality has no inherent inventive value per se, that there is no "human ingenuity" in designing computerized solutions. This view is based in part on the view that computers are so common, so woven in the modern life, using them to do something useful is not inventive:

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. CLS Bank, 2013 WL 1920941, at *14.

Because of this view, Lourie and other Normativists approach the patent eligibility question by stripping computer implemented claims of the "jargon" to create "plain English" renderings. To the Normativists, using computers to perform functional task is merely “generic computer automation,” evincing no “human contribution.” This is odd because without the “human contribution” of programming, a computer is a simply an expensive brick.

Rader, O’Malley, Linn, Moore, and Newman are Positivists: They view §101 as asking whether invention as claimed is of a particular kind—a process, a machine, composition of matter, etc. Thus, they strongly respect the claim language, and criticize Lourie’s approach of stripping down the claims and identifying "abstract ideas" as "hunting for abstractions by ignoring the concrete, palpable, tangible limitations of the invention the patentee actually claims." Ultramercial II, 2013 U.S. App. LEXIS 12715, at *22.

The Normativist view also reflects an "industrial" view of innovation and invention. In the Industrial Age, innovation was primarily achieved through structural transformation of raw materials in order to achieve the desired function. Hence, the statement in Cochrane v. Deener, 94 U.S. 780, 788 (1877) that "A process is a mode of treatment of certain materials to produce a given result. It is an act, or a series of acts, performed upon the subject matter to be transformed and reduced to a different state or thing." In this framework, invention is the essentially the creation of new things rather than new functions.

By contrast, for the Positivists there is invention in the manipulation of a computer toward a functional goal. This is significant because in the Information Age, there is value in the creation of new functions, new ways of doing things, as well as in the creation of information itself. More specifically, the ability to create functional transformation apart from structural transformation by the configuring (programming) of a computer is itself an innovation and can be an invention. Judge Plager was perhaps the first to note that the broad rule of functional transformation applies to the use of computers as well: "[t]hus, it is apparent that changes to intangible subject matter representative of or constituting physical activity or objects are included in the definition [of patentable subject matter]." In re Schrader, 22 F.3d 290, 296 fn. 12 (Fed. Cir. 1994).

But Lourie’s superficial view of computer technology leads him to reject this point of view. In In re Alappat, 33 F.3d 1526, 1542 (Fed. Cir. 1994) (en banc), the Federal Circuit, Lourie included, held that “programming creates a new machine, because a general purpose computer in effect becomes a special purpose computer once it is programmed to perform particular functions pursuant to instructions from program software.” Id. at 1545. Now, 19 years later Lourie rejects this view, stating that Rader’s reliance on Alappat is a “fallacy,” because “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.” CLS Bank, 2013 WL 1920941, at *20. The problem with Lourie’s reasoning is that the technology has not changed. It is universally accepted by computer scientists that anything that can be done in hardware by a special purpose computer can be equivalently performed by general purpose computer running software. Indeed, the overwhelming majority of complex hardware devices—computers, cameras, smartphones, Blu-ray players, etc.—are designed first in software, and then implemented by hardware circuits. Nothing the Supreme Court has ruled—or could ever rule—can alter these technological facts.

Prof. Mark Lemley has commented that there are “two Federal Circuits.” I think this is too simple a view. As Rader has attempted to show, the majority of the court agrees on the fundamental legal theory and implementation of § 101. In my view, the furor in the patent bar over CLS opinion results from a myopic focus on the non-precedential status of the individual opinions and the verbal battle engaged in by the justices. However, if we view the overall complex of CLS opinions and Ultramercial II as a window into the working theories of the Federal Circuit judges, then out of discord can arise harmony. First, 10 members of the court agree that the presumption of validity applies to Section 101 and that a challenge to the eligibility of the subject matter must be proven by clear and convincing evidence. Second, these judges agree that, contrary to the Supreme Court’s suggestion, patent eligibility is not a “gateway” issue that must be addressed in patent litigation; instead, a district court can decide to focus on the issue of infringement, for example, and if the jury finds no infringement, dispense with the question of Section 101 entirely. Finally, the judges also agree that § 101 ultimately requires resolution of questions of facts, not merely attorney arguments about the claims being simply abstract ideas, laws of nature, or other legal fictions. Where they differ is in their value judgments of what constitutes invention generally and their appreciation (or lack thereof) for the nature of computers and software in particular.

*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.