WHERE ARE SOFTWARE & BUSINESS METHOD PATENTS HEADED AFTER ALICE v. CLS BANK?

In Alice, the US Supreme Court found invalid patent claims to reducing the risk that only one party to a financial transaction will perform. The claims were deemed to be nothing beyond an abstract idea. An exemplary patent claim stated the following:

(a) creating a shadow credit record and a shadow debit record for each stakeholder party; (b) obtaining from each exchange institution a start-of-day balance; (c) the supervisory institution allowing only these transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, and (d) at the end-of-day, the supervisory institution instructing the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties.

Alice was decided in June 2014. Lex Machina has reported interesting statistics since then:

• In September 2014, there was a 40% decrease over September 2013 in new patent infringement cases filed – down to 329 new cases.

• New patent infringement cases fell from a high of 675 in April 2014 down to 329 in September 2014.

Michael Shimokaji www.shimokaji.com

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Page 1 of 5 © Michael A. Shimokaji, 2014 The contents of this article represent the opinions of the author and not those of the author’s law firm or clients.

• Since 2011, patent infringement cases increased near the end of the year, but the same has not occurred for 2014 – at least as of September.

Lex Machina believes there is a correlation between Alice and the number of new patent infringement cases – patent owners have less confidence in software and business method patents. But in addition to Alice, Federal Circuit decisions have likely had an impact on the filing of new patent infringement cases. Most decisions – post Alice – have not been favorable to patent owners.

• Content Extraction v. Wells Fargo (December 2014) – invalid - ATM recognized information on a scanned check

• In re BRCA-1 (December 2014) – invalid – comparison of genes found in humans and genes found in patient

• DDR v. Hotels.com (December 2014) – valid - web page combines visual elements of a "host" website with content of a third-party merchant

• Ultramercial v. Hulu (November 2014) – invalid - consumer receives free copyrighted content in exchange for viewing an advertisement

• BuySAFE v. Google (September 2014) – invalid - guaranteeing a party's performance of its online transaction

• Planet Bingo v. VKGS (August 2014) – invalid – computer-aided management of bingo games

• Digitech v. Electronics (July 2014) – invalid – a device profile that comprises "first data for describing" color information and "second data for describing" spatial information

The USPTO, in response to Alice, issued in December 2014 proposed guidelines that examiners are to use in determining whether patent claims include patent eligible subject matter. The guidelines supersede the March 2014 guidelines (which addressed Mayo and Myriad) and supplement the June 2014 guidelines (which addressed Alice). They are intended to be “comprehensive”.

Page 2 of 5 © Michael A. Shimokaji, 2014 The contents of this article represent the opinions of the author and not those of the author’s law firm or clients.

The December 2014 guidelines include a decision flowchart (a copy is attached at the end of this article). The flow chart reiterates a two-step analysis articulated in Alice. The first step asks whether the claim is a process, machine, article of manufacture, or composition of matter. If "no", then there is no patent eligible subject matter. If "yes", then the second step must be answered.

The second step is the focus of the new guidelines. The second step (sub-step one) asks whether the claim is “directed to” a judicial exception - a law of nature, natural phenomenon, or abstract idea. If "no", then there is patent eligible subject matter. If "yes", then sub-step two must be answered.

The second step (sub-step two) asks whether the claim recites elements that are “significantly more” than the judicial exception. If "no", then there is no patent eligible subject matter. If "yes", there is patent eligible subject matter.

"Directed To" - some of the points in the guidelines state:

• the judicial exceptions can fall under multiple exceptions, but the analysis need only include one exception

• a claim that recites a nature-based product limitation that does not exhibit markedly different characteristics from its naturally occurring counterpart is a product of nature exception

• when a nature-based product is produced by multiple components, the marked different characteristics analysis should be applied to the whole product, not the individual components.

"Significantly More" - the guidelines seem to merely provide examples of what the courts have found to be and not be significant. Examples of a "claim as a whole" being significantly more include:

• improvements to the functioning of a computer • adding unconventional steps that confine the claim to particular

application • limitations that go beyond just linking them to a particular technology

environment

The guidelines state that, if rejected, the examiner needs to explain why the added limitations do not amount to "significantly more."

Page 3 of 5 © Michael A. Shimokaji, 2014 The contents of this article represent the opinions of the author and not those of the author’s law firm or clients.

COMMENT:

So where are software and business method patents headed? From the Federal Circuit decisions following Alice, it is apparent that holders of software and business method patents will have an uphill battle in convincing the USPTO and judges that their patents are valid. This can be expected to take place in post-issuance proceedings before the USPTO and in infringement litigation in the district courts. We have already seen, and we can expect to see more, patent eligible subject matter challenges by infringement defendants at an early stage of a lawsuit. No more will defendants (or judges) wait for a later stage summary judgment where a record is more fully developed. The issue of patent eligible subject matter will be determined at the beginning of a lawsuit before discovery commences. Will fewer software and business method patent applications be filed? It seems so. Patent practitioners will likely scrutinize to a greater degree whether a potential invention can meet the December 2014 USPTO guidelines and the continuing Federal Circuit decisions.

Page 4 of 5 © Michael A. Shimokaji, 2014 The contents of this article represent the opinions of the author and not those of the author’s law firm or clients.

Page 5 of 5 © Michael A. Shimokaji, 2014 The contents of this article represent the opinions of the author and not those of the author’s law firm or clients.