—By Chris Agrawal and James Carpenter, Bookoff McAndrews PLLC

Law360, New York (March 31, 2014, 6:29 PM ET) — On Monday, March 31, 2014, the U.S. Supreme Court heard oral arguments in Alice Corporation Pty. Ltd. v. CLS Bank International et al. (No. 13-298), the highly anticipated case expected to add clarity to the patent-eligibility standard for software and business method inventions. The court received more than 40 amicus curiae briefs, including those submitted by the solicitor general, many of the country’s largest technology companies, and former Federal Circuit Chief Judge Paul R. Michel.

The high court’s hearing occurred in the wake of a recent presidential State of the Union address calling for patent reform, plodding but widely expected congressional action to rein in so-called patent trolls, and a growing clamor of technology and business journalists calling for an end to business method and software patents. The proposed reform also has sparked a strong reaction from many of the nation’s largest technology companies, most urging for restraint and the ineligibility of only the most abstract ideas and disembodied concepts.

Monday’s arguments reflected a continuation of the long-running misconceptions and vexation surrounding the patent eligibility of business method and software processes, and Title 35, Section 101, which prescribes them. In general, the justices appeared genuinely uncertain regarding the scope of the judicially created exception barring “abstract ideas” from the statutory provision for patenting “any new and useful process.”

Several of the justices implored the parties’ counsel to provide their sincere opinions on defining what is abstract, and for sailing “between Scylla and Charybdis,” as Justice Stephen Breyer described the chasm between the opposing sides and amici. As reflected in the arguments quoted below, the precise outcome of this case remains quite unclear. However, the Supreme Court appears unlikely to overturn Mayo or Bilski, or to entirely prohibit business method or software patents.

This case arrived at the Supreme Court after an en banc hearing before the Court of Appeals for the Federal Circuit that resulted in a fragmented split. While seven of the 10 Federal Circuit judges had agreed that the method and medium claims were unpatentable subject matter, no majority rationale emerged. Additionally, eight judges indicated that the method, computer-readable medium, and system claims must rise or fall together.

The Supreme Court last took up these issues in 2010, in the case of Bilski v. Kappos, when it de-emphasized the “machine-or-transformation test” long advanced by the Federal Circuit. That test had been applied to hold that inventions for software and business methods were eligible for patents if they were either tied to a particular machine or apparatus, or operated to change articles or materials to a “different state or thing.”

During Monday’s oral arguments, Justices Breyer, Anthony Kennedy and Ruth Bader Ginsberg were among the bench’s most verbal participants, setting forth numerous proposed hypotheticals and questions. Justice Ginsberg asked to hear why Alice’s claimed methods for reducing settlement risk were any less abstract than those for hedging risk, as claimed in Bilski v. Kappos. Justice Breyer followed-up with a series of hypotheticals, equating Alice’s settlement method with that of “a man with an abacus” accounting for King Tut’s distribution of chits for gold stored in his pyramid, and of Justice Kennedy’s own mother grabbing his checkbook and saying, “Stop!” when he is within risk of overdrafting.

Justice Kennedy piled on, hypothesizing that, while a computer might have been necessary to make Alice’s invention work, such a computer system could have been “fairly easily” programmed by second-year engineering students. Justice Kennedy noted that Alice could not have patented the method without the claimed computer steps and components, and he stated that “the innovative aspect is certainly not in the creation of the program to make that work.”

Justice Ginsberg cautioned Alice that four justices in Bilski disagreed with Alice’s reading of legislative intent to favor an administrative process and existing standards over judicial process. Justice Ginsberg also stated that the court’s holding in Mayo v. Prometheus made clear that novelty can in some cases overlap Section 101 analysis.

In later conversation with CLS, Justice Ginsberg asked, “[t]he Federal Circuit in this case split in many ways, and it had our decisions to deal with. You said, given Bilski and Mayo, this is an easy case. What is the instruction that escaped a good number of judges on the Federal Circuit? How would you state the rule?” Even as the accused infringer, counsel for CLS replied, “[t]his [case] is not the death of software patents. The software industry is all before this Court saying, ‘this is fine with us.’ Every company in the United States practically except IBM is saying, ‘go ahead.’ This will not affect software patents. [T]his Court’s precedents are clear. They are unanimous. They just need to be applied.”

In his few remarks, Justice Antonin Scalia sounded notably positive toward Alice and to business method and software patents. He favorably analogized Alice’s computerized settlement methods to an earlier breakthrough, probing “was the cotton gin not an invention because it just means you’re doing through a machine what people used to do by hand?” He also lobbed to Alice the observation that, “we have said that you can’t take an abstract idea and then say ‘use a computer to implement it.’ But we haven’t said that you can’t take an abstract idea and then say ‘here is how you use a computer to implement it.’”

However, Justice Elena Kagan expressed her perception that Alice’s patents “really did just say ‘do this on a computer,’ as opposed to saying anything substantive about how to do it on a computer.” Justice Kagan also put forth a hypothetical of someone 30 years ago realizing that ordering products from a catalog by mail could be performed using a computer. Alice argued that such a system could very well be patentable subject matter depending on the claims.

Justice Kagan also initiated an interesting line of questioning regarding whether Alice invented something even “putting the computer stuff aside completely.” Alice replied that “it’s difficult to do that because you absolutely need the computer in order to implement this. But the key to the invention is the notion of being able simultaneously, dealing with it on a chronological basis[,] to stop transactions that will otherwise interfere with the ability to settle on time and under the appropriate circumstances. And the only way you can do that in a real-time basis when you’re dealing with a global economy is to use a computer. It is necessary to the efficacy of this.”

As in the oral arguments in Bilski, several of the justices expressed concern over novelty of the inventions at issue. Justice Scalia stated that “I’m not saying the use of a computer is much of a novelty … [b]ut if you come up with a serious program that does [the invention], then [] that may be novel.” Justice Sotomayor sounded particularly unconvinced by Alice’s arguments, asking why Alice should be permitted to patent a “function of reconciling accounts,” and what particular way of doing so made Alice’s claims “new and not function.”

Justice Sonia Sotomayor inquired into which of the seven Federal Circuit opinions below tracked closest to Alice’s position. In response, Alice identified Judge Kimberly Moore’s opinion. Alice also replied to Justice Sotomayor that Alice’s system and method claims need not necessarily stand or fall together, as stated in several Federal Circuit opinions.

In the face of this questioning, counsel for Alice continued to emphasize the expansive language of Section 101, the limited judicial exception intended for “abstract ideas,” and the fact that CLS and the justices were attacking “caricatures” of Alice’s inventions, as opposed to the claims themselves. Alice urged the court to apply a liberal interpretation of Section 101, as only a coarse filter, and to let Sections 112, 102 and 103 weed out unpatentable inventions.

Counsel for CLS, in turn, argued that “Bilski holds that a fundamental economic principle is an abstract idea and Mayo holds that running such a principle on a computer is ‘not a patentable application of that principle.’ Those two propositions are sufficient to dispose of this case. If Bilski and Mayo stand, Alice’s patents fail.” CLS reasoned that the U.S. Patent and Trademark Office identified economic, legal, financial, and teaching concepts, and dating and interpersonal relationships, as examples of things that are likely abstract. CLS further argued that Congress, in the America Invents Act, confirmed the PTO’s reading by dictating that covered business methods of data processing in the financial services industry “do not offer a technological solution” and are “subject to special scrutiny.”

CLS conceded, however, that business method and software patents are not per se ineligible. CLS stated that, “a patent that describes sufficiently how a computer does a new and useful thing, whether it’s data compression or any other technological solution to a business problem, a social problem, or a technological problem, would be within the realm of the patent laws. This is what the patent laws have always been for. This is not such a patent.”

The Supreme Court also heard arguments from Solicitor General Donald Verrilli Jr., who argued for the government in favor of a particularly expansive definition of abstract ideas. The government argued that “[a]n abstract idea does not become patent-eligible merely by tacking on an instruction to use a computer to carry it out. A computer makes a difference under Section 101 when it imposes a meaningful limitation on the patent claim. That occurs when the claim is directed at improvement in computing technology or an innovation that uses computing technology to improve other technological functions.”

On several occasions, Justice Breyer, among others, asked counsel for Alice, CLS and the government for examples of business methods that would be patent-eligible. Throughout the duration of the argument, the justices never seemed to receive a satisfactory answer to that request. Nevertheless, the justices did not appear overly eager to wholesale exclude either business methods or software patents from eligibility under Section 101.

Chief Justice John Roberts at one point told Solicitor General Verrilli, “You mentioned a while ago the need for greater clarity and certainty in this area. And I’m just wondering, in your brief, you’ve got a non-exhaustive [list] of factors to consider, and there are six different ones. And I’m just doubtful that that’s going to bring about greater clarity and certainty.”

Solicitor General Verrilli concluded with a response on the definition of an abstract concept for Justice Ginsberg: “We would define … an abstract concept as a claim that is not directed to a concrete innovation in technology, science, or the industrial arts. So it’s abstract in the sense that it is not a concrete innovation in the traditional realm of patent law.”

The Supreme Court is expected to issue its written opinion before adjourning for its summer recess. While Monday’s oral arguments provided some insight into the justices’ reasons for confusion and hesitation, the ultimate result, and any potential new test for patent eligibility, remain unclear. Indeed, as Justice Breyer confessed: “Look, there are forty-two briefs in this case. I actually read them and I found them very, very helpful, up to the point where I have to make a decision.”

Chris Agrawal and James Carpenter are patent attorneys with Bookoff McAndrews in Washington, D.C.

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