Software Patents Continue to Take a Beating in 2014

This has not been a good year for software patents in the United States. Since the Supreme Court issued its decision in June in Alice Corp. v. CLS Bank, 134 S.Ct. 2347 (2014), the Patent Office has been aggressively rejecting software patent applications and the courts have been invalidating issued software patents for lack of statutory subject matter.

Two important conclusions jump out from this year’s developments:

1.  Although the court opinions continue to treat “business method patents” as if they are viable, it is difficult to see how any true “business method patent” could survive subject matter scrutiny unless its claims have novel technological features that go well beyond the business method itself;

2.  It is difficult to see how software patents could survive subject matter scrutiny unless the software can somehow be linked to a technical improvement in the functioning of the computer or some other device (e.g., a piece of equipment operated by the software).

 Ultramercial, Inc., v. Hulu, LLC

The most recent development in this saga occurred in November with the Federal Circuit’s decision in Ultramercial, Inc. v. Hulu, LLC, 2014 U.S. App. LEXIS 21633 (Fed. Cir. 2014). For a copy of the opinion click hereAfter surviving two trips to the Federal Circuit, in this most recent decision, Ultramercial’s patent was invalidated for lack of statutory subject matter based on the principles set forth in Alice Corp. The Ultramercial claims covered a method of distributing copyrighted materials over the Internet. The main independent claim recited eleven different steps, each of which involved taking specific actions via the Internet. More specifically, the claims described a method by which people could receive copyrighted materials over the internet in exchange for viewing advertisements.

What is interesting about Ultramercial is the extent to which computer implementation is involved in the claims. Under the framework set forth in Alice Corp., it is clear that merely computerizing an otherwise “abstract” idea is not eligible for patent protection. However, the Alice Corp. decision states that if a patent claim is directed to an “abstract” concept, it may still be patent eligible if it includes “additional features to ensure that the claim is more than a drafting effort designed to monopolize the abstract idea.” Alice Corp. 134 S.Ct. at 2357. The Supreme Court characterized this analysis as a determination of whether the claim contains an “inventive concept,” which sounds very similar to the requirements of novelty and non-obviousness. Id.

The Alice Corp. decision could be read to mean that novel and non-obvious algorithm steps could confer patent eligibility on a claim directed to an otherwise abstract idea. Ultramercial argued that “abstract ideas remain patentable under § 101 as long as they are new ideas, not previously well known, and not routine activity.” Ultramercial, 2014 U.S. App. LEXIS 21633 at *8. The Federal Circuit rejected this argument.

Many of the claims that have been invalidated in other cases thus far involved methods that could theoretically be performed by hand or using a pen and paper, and the attempt to add generic computer limitations to such methods was deemed insufficient to render the claims patent eligible. However, that was not the case in Ultramercial. The Ultramercial claims recite specific steps which by their own terms, at least arguably, cannot be separated from the Internet. In one of its pre- Alice Corp., Ultramercial decisions–Ultramercial, Inc. v. Hulu, LLC, 722 F.3d 1335 (Fed. Cir. 2013)–the Federal Circuit distinguished claims that make a “mere reference to a general purpose computer” from those in which “the computer [is] part of the solution” or “integral to the performance of the method,” or those in which “contain[] an improvement in computer technology.” Id. at 1348. The Court also held that because the Ultramercial claims recited so many specific steps, they “limit[ed] any abstract concept within the scope of the invention” such that the abstract idea could be carried out in “myriad ways” without infringing Ultramercial’s claims. Id.

Despite these original holdings, the Federal Circuit read Alice Corp. as compelling a conclusion that Ultramercial’s claims do not constitute statutory subject matter. This time, instead of focusing on the specificity of Ultramercial’s claims, the Court described the steps of the claims as an “ordered combination of steps [that] recites an abstraction – an idea, having no particular concrete or tangible form.” Ultramercial, 2014 U.S. App. LEXIS 21633 at * 11 (emphasis added). The Court specifically rejected the contention that novel and non-obvious algorithm steps were sufficient to render the claims non-abstract:

We do not agree with Ultramercial that the addition of merely novel or non-routine components to the claimed idea necessarily turns an abstraction into   something concrete. In any event, any novelty in implementation of the idea is a factor to be considered only in the second step of the Alice analysis.

The Court then applied the second prong of the Alice Corp. test which looks at whether the claims cover an “inventive concept.” In applying this test, however, the Federal Circuit ignored the Internet/computerization aspects of the various steps and held that “the claimed sequence of steps comprises only conventional steps specified at a high level of generality, which is insufficient.” Ultramercial, 2014 U.S. App. LEXIS 21633 at *13. Even though the Supreme Court held that the “machine or transformation” test is not the “sole test” governing statutory subject matter determinations, the Ultramercial court used the test to support its decision to invalidate the claims. Id. at * 15.

Impact of Alice Corp. and Ultramercial on NPE Litigation

Judge Mayer authored a concurrence in Ultramercial which includes several notable points. Not only does he state that subject matter jurisdiction must be decided at the outset of a case, but he states that there should be no presumption that issued patent claims are patent eligible. He notes that deciding statutory subject matter issues at the outset of a case will provide a “bulwark against vexatious infringement suits” based on “vague and overbroad business method patents” and that an early adjudication will diminish the leverage a patent holder can obtain from the burdensome and costly discovery process.

Although not part of the majority opinion, these points raised by Judge Mayer may give defendants ammunition for quickly disposing of meritless cases they may otherwise have to settle in order to avoid the inevitable costs of discovery. He specifically notes that owners of vague and overbroad business method patents will often file “nearly identical patent infringement complaints against a plethora of diverse defendants, and then demand a quick settlement at a price far lower than the cost to defend the litigation.” Id. at *21 (Mayer, J., concurring). The described tactics are those often employed by non-practicing entities (NPEs) or “patent trolls.” Thus, Judge Mayer appears to consider an early adjudication of statutory subject matter issues as an important means to combat meritless NPE lawsuits.

Judge Mayer also advocates for a “technological arts test” that would preclude patent protection claims “directed to an entrepreneurial objective . . . rather than a technological one.” Id. at 27-28.

Software Patents Abroad

Other countries are facing the same issues as the U.S. with respect to the patent eligibility of software. In Research Affiliates LLC v. Commissioner of Patents [2014] FCAFC 150, the Federal Court of Australia held that claims directed to a computer-implemented method of generating a securities index were not patent eligible. The Australian court discussed Alice Corp. and relevant decisions in Europe and stated that its opinion was consistent with the principles in Alice Corp. For a copy of the Research Affiliates opinion click here.