Software and Business Method Inventions After <i>Alice</i>

Inventions related to software and business methods have faced enormous challenges since Alice. Software refers to programs or applications that run on computers or mobile devices, such as for antivirus detection, contact management, social media, gaming and mobile navigation. Business methods refer to methods of doing business, including new types of e-commerce, insurance, banking, etc., often implemented as software in computers and involving the Internet. There has been a sharp increase in the number of so-called “Alice” motions filed in the federal courts against these types of inventions. The motions challenge the validity of patents asserted in infringement lawsuits, and have an overall success rate of about 65% for software patents and 78% for business method patents. Likewise, the United States Patent Office (UPTO), through a procedure called Covered Business Method Review (CBM), has invalidated more than 80% of business method patents challenged under Alice. There has also been a sharp increase in patent eligibility rejections during patent prosecution before the USPTO, and a sharp decrease in issued patents for software and business method inventions since Alice. Inventions related to electronic commerce have been hit the hardest. For example, in the division of the USPTO responsible for electronic commerce technology, the average number of patents issued per month after Alice dropped by 95%.

The Alice Patent Eligibility Test

Under Alice, determining whether a patent is directed to eligible subject matter involves two steps. First, one must determine whether claims of a patent are directed to an abstract idea. If the answer is “no,” the claims are patent-eligible. If the answer is “yes,” then one must determine whether the claims recite that result in substantially more than the abstract idea being claimed. That is to say: Does the claim include additional elements that transform the claim into a patent eligible application of the abstract concept? It is not always easy to apply Alice's two-step test, especially since the Supreme Court has not clearly defined what constitutes an “abstract idea” or stated how to identify an abstract idea in a claim.

Those challenging the validity of a patent often try to define the abstract idea as broadly as possible to inflate the preemption concern, whereas patent owners try to define it as narrowly as possible to minimize this concern. The challengers also often argue that the claim at issue is directed to a concept similar to concepts previously held to be abstract by the Supreme Court, such as, for example, fundamental economic practices, methods of organizing human activity, and mathematical relationships and formulas. Examples of these abstract concepts include: 1) converting binary-coded decimal numbers into pure binary numbers in Gottschalk v. Benson, 409 U.S. 63 (1972); 2) calculating alarm limits using “a smoothing algorithm” in Parker v. Flook, 437 U.S. 584 (1978); 3) hedging the seasonal risk of buying energy in Bilski v. Kapos, 545 F.3d 943 (2008); and 4) mitigation of settlement risk in Alice. Beyond these Supreme Court cases, the challengers also rely on more than 40 post-Alice Federal Circuit cases that upheld lower courts' patent illegibility findings.

On other hand, the Supreme Court and Federal Circuit decisions finding patents eligible have been extremely limited until recently. The only pro-patentee Supreme Court patent eligibility case to date is Diamond v. Diehr, 450 U.S. 175 (1981). In Diehr, the Court held that claims directed to digital control of a rubber molding process using the “Arrhenius” equation were patent eligible because the invention involves “transforming or reducing an article to a different state or thing,” namely, “molding raw, uncured synthetic rubber into cured precision products.” The only post-Alice Federal Circuit case that upheld the validity of a software/business method patent until recently was DDR Holdings v. Hotels.com, 773 F.3d 1245 (Dec. 4, 2014), where the Federal Circuit upheld the validity of patent claims addressing the problem of retaining website visitors who could otherwise be lured away from a host website by clicking on an advertisement. The Federal Circuit held that the claims are patent eligible because, despite the fact that they are drawn to a method of doing business (i.e., e-commerce), the invention was “necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.”

After Alice

Against this historical landscape, in three recent 2016 decisions the Federal Circuit upheld the validity of software patent claims. First, in Enfish, LLC v. Microsoft Corporation, No. 2015-1244 (May 12, 2016), the Federal Circuit held that patent claims directed to a fast searching of data in a computer database are “not directed to an abstract idea within the meaning of Alice … because they are directed to a specific improvement to the way computers operate ….” Thus, the Federal Circuit decided that the invention was patent eligible under the first step in Alice. The Enfish case therefore tells us that a software invention may be patent eligible if it improves the way a computer operates. Under this reasoning, software inventions, for example, for optimizing a computer memory or detecting a computer virus, are likely to survive Alice challenges.

Second, in Bascom Global Internet Services, Inc. v. AT&T Mobility LLC, No. 2015-1763 (June 27, 2016), the Federal Circuit held that patent claims directed to filtering Internet content were patent eligible. Although the claims are directed to the abstract idea of filtering content, they are nevertheless patent eligible under the second step of Alice because they recite the inventive concept of the “installation of a filtering tool at a specific location, remote from the end-users, with customizable filtering features specific to each end user.” The court also rejected the notion that a claim is not patent eligible if all elements of the claim were known in the art. As the court explained, “an inventive concept can be found in the non-conventional and non-generic arrangement of known, conventional pieces.” Under this reasoning, merely showing that all elements of a claim were known in the art is not enough to prove patent ineligibility under the second Alice test.

Third, in McRO Inc. v. Bandai Namco Games America Inc., Nos. 2015-1080-1101 (Sept. 13, 2016), the Federal Circuit held that patent claims directed to generating automated lip synchronization and associated facial expression of 3D animated characters were patent eligible. The Federal Circuit decided the issue under the first step in Alice, even though the claimed invention did not result in an improvement in the way a computer operates, as was the case in Enfish. The court observed that the claims are “limited to rules that evaluate subsequences consisting of multiple sequential phonemes,” and “[i]t is the incorporation of these claimed rules, not the use of the computer, that improved the existing technological process.” The court also noted that there is “no suggestion that animators were previously employing the types of rules” required by the claims and there had “been no showing that any rules-based synchronization process must use the rules with the specifically claimed characteristics.” Under this reasoning, a software or business method claim reciting unconventional rules for performing a technology process can be patent eligible under the first Alice test if the rules (as opposed to the use of the computer) produce an improvement in the existing process and are sufficiently specific such that the claim does not preempt the use of all rules for performing the process.

Software and business method inventions have faced significant patent eligibility challenges in both courts and the Patent Office. These three recent Federal Circuit decisions provide much-needed additional guidance on what does and does not constitute an “abstract idea,” and also add to the arsenal of cases that can be used by owners of software and business method patents facing Alice challenges. This area of the law is still developing. It remains to be seen what effect these decisions will have on software and business method patents and patent applications facing patent eligibility challenges in courts and the Patent Office, and whether the Supreme Court agrees with the Federal Circuit's emerging view on what does and does not constitute an abstract idea under Alice.

***** Nam Kim is a senior associate in the Intellectual Property Practice Group in Sheppard Mullin's San Diego (Del Mar) office. Nam's practice focuses on patent litigation, patent preparation and prosecution, ex parte reexamination, AIA post-grant review proceedings, and IP counseling. He is involved in patent litigation matters to defend clients' IP rights against infringers and defend clients against alleged infringements. He also has extensive experience in preparing and prosecuting patent applications and provides strategic IP counseling. Nam also represents clients in reexamination and inter partes review proceedings.