Abstraction, Patents, and the Latest Alice Ruling: A Scorecard

Regulatory 16 May 2013

Whew. This one’s confusing.

The Federal Circuit Court of Appeals, in a badly split decision issued May 10th, has affirmed a holding of the district court below in a controversial patent-law case, one involving four patent claims by Alice Corporation (a technology company owned in part by National Australia Bank Ltd.) The decision takes up 135 pages, and my head is still spinning after my recent efforts to absorb them.

Ten judges took part in the decision. Of these, five argued that the district court was right on the law, when it rejected Alice’s attempt to patent a fairly commonplace hedge against settlement risk. Five out of ten isn’t a majority, but since there is no majority for a contrary proposition, either that the district court was wrong or that the matter needs to go back there for a remand, the district court’s judgment stands. As they say in baseball, the tie goes to the runner.

What to Remand

The five judges who didn’t want to affirm, for various reasons, thought that at least some of the issues within this litigation should be remanded to the district court for further proceedings. Yet of those five would-be remanders, two split the difference, contending for a remand of the district court’s holding on the “systems claims” but treating the district court’s decision on the  “method claims” as correct.

Instead of meditating today on the implications of all this (though I believe they may be profound for the whole of the asset management industry, traditional and alternative), I’ll confine myself to straightening out how this court broke down.  You can’t follow this game without a scorecard.

Unless the Supreme Court takes up the matter, this case ends in a win for CLS Bank. This entails rejection by the court en banc of what a three-judge panel of the same court said last summer, when the panel held that the claims at issue were patent eligible.

The patents all relate to the management of counterparty/settlement risk through a trusted third party intermediary.  That seems like a very abstract idea, something akin to the idea of hedging energy commodity price swings that had been at stake in the Bilski case.

The District Court was Right

The five judges who agreed with the district court were: Alan D. Lourie, Timothy Dyk, Sharon Prost, Jimmy V. Reyna, and Evan Wallach. Lourie wrote for the group.

One of the important (though judge-made) exceptions to the broad concept of patent eligibility set out in section 101 is: abstract ideas cannot be patented. A mathematical formula or algorithm is an abstract idea. Hence, such a formula cannot be patented. Likewise, a broad conception such as the management of settlement risk is not patent eligible.

This also means, the five-judge plurality added, that the use of a digital computer to solve a particular formula or carry out an algorithm cannot be patented either, because to allow that would in effect be to allow the patenting of the formula or algorithm itself.  To allow for concreteness and thus patentability, there must be a “human contribution” that will “represent more than a trivial appendix to the underlying abstract idea.”

Nothing in the patent claims of Alice represents significantly more than the “underlying abstract idea” that a third party intermediary should track each trading counter-party’s obligations and performance through settlement.

The Flow-Chart is Impressive

Another opinion gathered four votes, those of Chief Judge Randall Rader, and Judges Richard Linn, Kimberly Moore, and Kathleen O’Malley.  These four disagreed among themselves on substantive points, but they agreed that the case ought to have been remanded to the district court for additional proceedings.  They contended that “the fact that a claim is limited by a tie to a computer is an important indication of patent eligibility.” They would have remanded the instant case to the district court, apparently for further inquiry into the nature of the connection between the use of computers and the fundamental (abstract) idea expressed above.

They seem to have been impressed by the complexity of some of the flow charts included in the patent

application, such as that reproduced here.

Surely there must be some concreteness in there somewhere, no?

Judge Newman wrote for himself.  As near as I can tell, his central point is that he disagrees with the whole idea of a judicial inquiry into what is or isn’t abstract. He would have remanded the matter to the district court not for any further discussion of abstractness or the relationship of the use of a computer to the human component but for “determination of patentability under the substantive provisions of the statute,” such as novelty and non-obviousness.

So there are at least three contending principles in this flurry of decisions:

1)      Abstract ideas are not eligible for patentability, and using a computer to instantiate those abstract ideas does nothing toward making them eligible;

2)      Abstract ideas are not eligible for patentability, but using a computer (and complicated flow charts) may well help prove the concreteness of the ideas involved, making them eligible;

3)      Judges shouldn’t discuss abstractness at all.

Melancholy Reflections

The Chief Judge, Rader, capped it all with a five page essay not labeled here an “opinion” but, rather, a “reflection.” What he reflects upon there is the sorry state to which patent law as a body of precedent has fallen, a condition in which subject matter eligibility has become a plaything for judges, and in which the “simplicity, clarity, and directness of the statute” have been set aside.

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