Software Patentability- The Federal Circuit Giveth . . . and Taketh Away

In a recent newsletter, we discussed CLS Bank Int’l, et al. v. Alice Corp. Pty. Ltd. (Case No. 2011-1301)(Fed. Cir. 2012) and the Federal Circuit’s efforts to provide guidance as to the patentability of software in the wake of the Supreme Court’s decisions in Bilski and Prometheus. The CLS decision sought to soften the blow of Prometheus and also to articulate the extent to which the recitation of computer implementation in patent claims can impart patentability to software claims and save them from being condemned as an unpatentable “abstract idea.”

Whatever clarity or guidance may have been discernible from CLS has been upended in Bancorp Services, L.L.C. v. Sun Assur. Co. of Canada. Both cases purport to apply the same standard in determining the circumstances under which the recitation of computer related features in patent claims will be enough to render what is otherwise an algorithm claim patentable. The CLS court held that “where the addition of a machine imposes a meaningful limit on the scope of a claim and plays a significant part in permitting the claimed method to be performed, rather than functioning solely as an obvious mechanism for permitting a solution to be achieved more quickly, i.e., through the utilization of a computer for performing calculations, that machine limitation renders the method patent eligible.” CLS at 18. In CLS the Federal Circuit held that claims directed to a computerized trading platform for exchanging obligations so as to eliminate “settlement risk” were patent eligible. In contrast, the Bancorp Services court held that claims directed to a computer-implemented method of administering and tracking the value of life insurance policies in separate accounts were not patent eligible.

A comparison of the claims at issue in CLS and in Bancorp reveals the difficulty in determining whether the addition of a computer imposes a “meaningful limit” on the scope of claims rather than simply allowing a claimed set of calculations to be achieved more quickly:

CLS – Patent Eligible

1. A data processing system to enable the exchange of an obligation between parties, the system comprising:

a data storage unit having stored therein information about a shadow credit record and shadow debit record for a party, independent from a credit record and debit record maintained by an exchange institution; and

a computer, coupled to said data storage unit, that is configured to

(a) receive a transaction;

(b) electronically adjust said shadow credit record and/or said shadow debit record in order to effect an exchange obligation arising from said transaction, allowing only those transactions that do not result in a value of said shadow debit record being less than a value of said shadow credit record; and

(c) generate an instruction to said exchange institution at the end of a period of time to adjust said credit record and/or said debit record in accordance with the adjustment of said shadow credit record and/or said shadow debit record, wherein said instruction being an irrevocable, time invariant obligation placed on said exchange institution.

Bancorp – Not Patent Eligible

1. A life insurance policy management system comprising:

a policy generator for generating a life insurance policy including a stable value protected investment with an initial value based on a value of underlying securities of the stable value protected investment;

a fee calculator for calculating fees for members of a management group which manage the life insurance policy;

 a credit calculator for calculating credits for the stable value protected investment of the life insurance policy; an investment calculator for determining an investment value and a value of the underlying securities of the stable value protected investment for the current day;

a policy calculator for calculating a policy value and a policy unit value for the current day; digital storage for storing the policy unit value for the current day; and

a debitor for removing a value of the fees for members of the management group which manages the life insurance policy.

At a superficial, cosmetic level there are some noticeable differences in the claims.  The Bancorp claims essentially convert the verbs associated with method steps into nouns such as “policy generator,” “fee calculator,” etc.  In contrast, the CLS claims recite hardware elements in a more traditional form, such as a “data processing system, “a data storage unit,” and a “computer.”  In both cases, the Federal Circuit held that the claims required computer implementation.  However, in CLS the Court held that “it is difficult to conclude that the computer limitations here do not play a significant part in the performance of the invention or that the claims are not limited to a very specific application of the concept of using an intermediary to help consummate exchanges between parties.”  CLS at 26. The CLS court further held that “The claim limitations can be characterized as being integral to the method, as playing a significant part in permitting the method to be performed, and as not being token post-solution activity.”  CLS at 27.

In contrast, the Federal Circuit held that “The computer required by some of Bancorp’s claims is employed only for its most basic function, the performance of repetitive calculations, and as such, does not impose meaningful limits on the scope of those claims.”  Bancorp at 20.

Do CLS and Bancorp reflect a principled distinction between computer limitations that impose meaningful limits on the scope of the claims versus those that are used only as an obvious mechanism for permitting a solution to be achieved more quickly?   The computer functions required to implement the CLS claims would presumably include providing a hard drive or other storage medium with certain credit records, receiving information about a transaction, performing calculations to adjust credits, and issuing instructions to an exchange institution.  These functions would all seem to be the well known functions of receiving, manipulating, and transmitting data that are common to all computers.

It is worth nothing that the CLS decision was a 2-1 decision of Judges Linn, Prost, and O’Malley, with Prost dissenting.  In contrast, the Bancorp decision was a 3-0 decision of Judges Lourie, Prost, and Wallach. Thus, the different outcomes are perhaps better explained by the difference in the panels rather than the differences in the claims at issue.  Well-known Patently-O blogger Professor Dennis Crouch suggests that the different outcomes may be explained by how we think of the “invention.”  Professor Crouch suggests that the CLS court focused on the language of the claims, while the Bancorp court focused on the “core inventive concept” as they understood it.  In any event, it appears that the struggle to provide clarity in determining whether software claims are patent eligible continues.