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CLS Bank v. Alice Corp.

Intellectual Property Law Alert Nicole A. Bashor, Joshua P. Smith

On June 19, 2014, in CLS Bank v. Alice Corp. the Supreme Court addressed the issue of patentability of software and business method patents and held that “[t]he mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention.” CLS Bank, therefore, will likely provide an additional tool to defendants accused of infringing broad software and business method patents covering abstract ideas. However, the decision continues to allow software companies to protect inventions that are not directed to abstract ideas, or inventions that “improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field.”

In reaching its decision, the Court reiterated that, in a software context, a two-part test is to be applied to determine whether claims in a patent application are directed to patent-eligible subject matter: (1) A court must determine if the claims are directed to a patent-ineligible concept (including laws of nature, natural phenomena, and abstract ideas). If so, then (2) the court must determine if the claims include an “inventive concept” that “transforms the nature of the claims into a patent-eligible one.”

The claims of the patent at issue in this case were primarily directed to a scheme of mitigating settlement risk in a financial exchange setting. The claims included method claims, system claims, and computer-readable medium (data storage system) claims, all of which positively recited or otherwise required the use of computers and/or data processing systems.

In reaching the decision that the claims were invalid, the Court applied the two-part test for determining patent eligibility that was put forth in a recent case dealing with a similar issue applied to biotechnology — Mayo Collaborative Services v. Prometheus Laboratories, Inc.. As to the first part of the Mayo test, the Court held that the claims are directed to an abstract idea of intermediated settlement. The Court expressly rejected Alice Corp’s argument that the abstract ideas category is confined to “preexisting, fundamental truths that exist in principle apart from any human action;” instead, the opinion relied heavily on the Court’s opinion that the concept of intermediated settlement is a “fundamental economic practice long prevalent in our system of commerce.”

As to the second Mayo step, the Court stated that “the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention.” With respect to the method claims, the Court found that they recited only generic computers to implement the abstract idea and are patent-ineligible. Further, the claims did not improve the functionality of the computers themselves or effect an improvement in any other technology field.

In what is possibly the most important portion of this opinion (as well as the shortest), the Supreme Court unanimously found the system claims to be patent-ineligible. The Court determined that the recited computer hardware elements in the system claims were “purely functional and generic” and concluded that they did not “offer a meaningful limitation.” Ultimately, the Court found that “the system claims are no different from the method claims in substance” and in turn imputed the patent-ineligibility of the method claims onto the system claims.

Some are praising the Supreme Court for providing a clear framework to determine the patent-eligibility of computer-implemented claims. However, the Court left open the important question of what exactly constitutes an abstract idea. While acknowledging that “[a]t some level, all inventions embody, use, reflect, rest up, or apply laws of nature, natural phenomena, or abstract ideas,” the Court declined to define “the precise contours of the ‘abstract ideas’ category.” As before, the meaning of “abstract ideas” will continue to evolve with the development of technology and inventors’ attempts to patent those developments.

This decision appears to be a victory for those defending against broad software and business method patents directed to abstract ideas. However, innovative software patents will continue to be pursued, licensed, and enforced.

For more information on this Supreme Court decision or other patent issues, contact Nicole Bashor at (312) 715-5104 / nicole.bashor@quarles.com, Joshua Smith at (312) 715-5196 / joshua.smith@quarles.com, or your Quarles & Brady attorney.