Patent Protection for Software and Business Methods: Is Alice Killing the Trolls?

June 2, 2015

Charlie MooreSenior AttorneyAHMRT, LLP

Bob WassonVP and Assoc. General CounselHewlett-Packard Company

Roadmap

• The Alice Decision

• Patent Office Response – Uncertainty Rules

• Post-Alice Prosecution and Drafting

• U.S. Companies’ Response

• Covered Business Methods

• Litigation Effects

• Legislative Fixes

• Q&A

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A reminder:

The opinions expressed are those of the presenters and do not necessarily reflect the views of AHMRT, LLP, its clients, Hewlett-Packard Company or any of its affiliates.

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“The idea was, when the Court took the case, that we would finally have an answer to the question whether software can be patented under U.S. law. To say we did not get an answer is to miss the depth of the non-answer we did get.”

- Prof. Robert Merges, Berkeley Center for Law & Technology

“A majority of the software patents being litigated right now, I think, are invalid under Alice.”

- Prof. Mark Lemley, Stanford University, Sept. 2014

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What can you patent after Alice?

Judicial decisions

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Gottschalk v. Benson (1972) (BCD number to binary – preempt formula)

Parker v. Flook (1978) (alarm limits – insig. post solution activity)

Diamond v. Diehr (1981) (curing rubber)

Bilski v. Kappos (2010)(risk hedging)

Alice v. CLS Bank (2014)(Intermediated settlement)

Ultramercial (Fed. Cir. 2014)(view ads for content)

DDR Holdings (Fed. Cir. 2014)

Mayo v. Prometheus (2012)(drug amount effectiveness)

Alice v. CLS Bank (2014)

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- Alice Corporation - Australian company established by former McKinsey manager - 11 U.S. patents

- Alice patents broadly cover ways in which parties can contract electronically and anonymously with one another in real time and secure environment to:

- Hedge known risks; - Invest in known risks for profit; - Lend/borrow from one another; and - Exchange value between one another

- Approached CLS Bank in 2002- CLS filed DJ in 2007

Alice v. CLS Bank (2014)

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Method of Performing Electronic Escrow

Track Multiple

Transactions

Create Electronic Records

Issue Simultaneous Instructions

Claim 33 of U.S. Patent No. 5,970,479:33. A method of exchanging obligations as between parties, each party holding a credit record and a debit record with an exchange institution, the credit records and debit records for exchange of predetermined obligations, the method comprising the steps of:

(a) creating a shadow credit record and a shadow debit record for each stakeholder party to be held independently by a supervisory institution from the exchange institutions;

(b) obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;

(c) for every transaction resulting in an exchange obligation, the supervisory institution adjusting each respective party’s shadow credit record or shadow debit record, 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, each said adjustment taking place in chronological order; and

(d) at the end-of-day, the supervisory institution instructing ones of the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions.

Alice v. CLS Bank (2014)

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Issue: Are computer-implemented inventions patent-eligible under 35 U.S.C. § 101?• Parties stipulated claims are “computer-

implemented”• Several claims do not recite a computer or

any form of computer implementation

• District Court: All claims are patent-ineligible• Federal Circuit: No majority opinion

• Method and CRM claims are patent-ineligible; split on system claims, so lower court ruling maintained

Computer-Implemented Escrow

Judge(s) Test Rise and Fall Together?

Method Claims CRM Claims System Claims

Lourie (Dyk, Prost, Reyna, Wallach)

Significantly more (consider “inventive concept”)

Yes Ineligible Ineligible Ineligible

Rader (Moore) Meaningful limitations to a specific application of an abstract idea

No Ineligible Ineligible Eligible

Linn (O’Malley) Meaningful limitations (joined Rader on test)

Yes Eligible Eligible Eligible

Newman Back to Basics Yes Eligible Eligible Eligible

Are computer-implemented inventions patent-eligible?

Always eligible

Limited eligibility

Always patent eligible: Computer-implemented inventions always fall outside abstract idea exception

No principled reason to draw distinctions between hardware and software •Technological functions carried out by software could be implemented through computer hardware

Computer implementation, however minimal the effort, definitively separates technological implementation from idea itself

Newman

Always patent eligible: Computer-implemented inventions always fall outside abstract idea exception

Computer implementation, however minimal the effort, definitively separates technological implementation from idea itself

Newman

Lourie+

Specific Implementation:Claim must be limited to a specific way of implementing an idea with a computer

Claim must have inventive concept (elements) to ensure patent in practice amounts to significantly more than patent on the abstract idea

Lourie+

Rader

Additional Limitations: Claim needs additional limitations that direct claim to specific practical application

Use of computer must be integral to claimed invention

Rader

Meaningful Limits: Computer implementation must limit scope of claim and contribute to achieving intended result

Test: (1) whether computer implementation claimed with sufficient particularity & specificity to ensure meaningful limits on claim scope; and (2) computer implementation must be significant contributor to achieve intended result

Claims rise & fall togetherConsider all combined claim elements as inventive concept

Rader Rader

Specific Implementation:Claim must be limited to a specific way of implementing an idea with a computer

Test: Claim must have inventive concept (elements) to ensure patent in practice amounts to significantly more than patent on the abstract idea•Conventional or obvious steps insufficient•General non-specific steps that do not significantly limit claims scope insufficient•Limiting to particular technological environment insufficient

Additional Limitations: Claim needs additional limitations that direct claim to specific practical application

Test: whether use of computer is integral to claimed invention or, alternatively, whether recited use of computer is “insignificant post-solution activity” tacked on to steps of business method

Consider claim as a wholeClaims rise & fall togetherMeaningful Limits: Computer

implementation must be claims with sufficient particularity and specificity to ensure meaningful limits on scope of claim and significantly contribute to achieving intended result

Alice v. CLS Bank (2014)

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Holding: Two-part test:

1.Are the claims directed to a patent-ineligible concept?

2.Is there an inventive concept in the claim? i.e., an element or combination of elements that in practice amounts to significantly more than a patent upon the ineligible concept itself.

Test for Abstract Ideas•Examples of abstract ideas – fundamental economic practices (Bilski), certain methods of organizing human activities, “an idea of itself”, mathematical relationships and formulas (Benson, Flook)•No clear standard provided – “we need not labor to delimit the precise contours of the ‘abstract ideas’ category”

Alice v. CLS Bank (2014)Part 1:

Application of the Test•Claims recite an abstract idea – no meaningful distinction between risk hedging in Bilski and intermediated settlement in this case.

Alice v. CLS Bank (2014)Part 2: Significantly More

Insufficient May Be Sufficient• Appending conventional steps at a high

level of generality (Mayo)• Stating the idea + “apply it” (Mayo)• Mere recitation of a generic computer

(Benson)• Merely limiting to a “particular

technological environment” (Flook)

• Improvements to an existing technology or technical field (Diehr)

• Improvements to the functioning of the computer itself

Application of the Test•Alice’s claims are unpatentable, as they simply recite the concept of intermediated settlement as performed by a generic computer

Part 2:

DDR Holdings v. Hotels.com (Fed. Cir. 2014)Post Alice: Software and even E-Commerce patents are viable

- Patent addressed problem of retaining website visitors- Held – Patent eligible subject matter- The claims “do not merely recite the performance of some business practice known

from the pre-Internet world along with the requirement to perform it on the Internet. Instead, the claimed solution is necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.”

- “The claims “do not broadly and generically claim ‘use of the Internet’ to perform an abstract business practice (with insignificant added activity…the claims at issue here specify how interactions with the Internet are manipulated to yield a desired result—a result that overrides the routine and conventional sequence of events ordinarily triggered by the click of a hyperlink.”

- “It is also clear that he claims at issue do not attempt to preempt every application of the idea of increasing sales by making two web pages look the same, or of any other variant suggested by NLG. Rather, they recite a specific way to automate the creation of a composite web page by an “outsource provider” that incorporates elements from multiple sources in order to solve a problem faced by websites on the Internet.”

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DDR Holdings v. Hotels.com (Fed. Cir. 2014)

Claim 19 of U.S. Patent No. 7,818,399:19. A system useful in an outsource provider serving web pages offering commercial opportunities, the system comprising:

(a) a computer store containing data, for each of a plurality of first web pages, defining a plurality of visually perceptible elements, which visually perceptible elements correspond to the plurality of first web pages;

(i) wherein each of the first web pages belongs to one of a plurality of web page owners;

(ii) wherein each of the first web pages displays at least one active link associated with a commerce object associated with a buying opportunity of a selected one of a plurality of merchants; and

(iii) wherein the selected merchant, the outsource provider, and the owner of the first web page displaying the associated link are each third parties with respect to one other;

(b) a computer server at the outsource provider, which computer server is coupled to the com- puter store and programmed to:

(i) receive from the web browser of a computer user a signal indicating activation of one of the links displayed by one of the first web pages;

(ii) automatically identify as the source page the one of the first web pages on which the link has been activated;

(iii) in response to identification of the source page, automatically retrieve the stored data corresponding to the source page; and

(iv) using the data retrieved, automatically generate and transmit to the web browser a second web page that displays:

(A) information associated with the commerce object associated with the link that has been activated, and

(B) the plurality of visually perceptible elements visually corresponding to the source page.

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Patent Office Response

• In Fall 2014 up to 75% rejection rate based on Alice in ecommerce-related Art Units

• Other art units (e.g., automobiles) see 5-7% rejection rates

• Examiner’s afraid to allow applications, as they face high scrutiny

• Applicants and Examiners are both searching to figure out (1) what is abstract under Alice, and (2) how much “something more” it takes to render subject matter eligible under 101

• Both sides are confused, have higher work burden

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Post-Alice Prosecution• Use Alice 2 part frame work

– Part 1 - Argue claim as whole (all elements) not abstract– Part 2 - Argue claim has “something more”

• Rely upon Diamond v. Diehr – Real world input– Transformative processing– Real world output– That achieves an advantage over the prior art

• Rely upon Gottshalk– Doesn’t remove a generic technology from the public domain

• Add harmless detail, such as available hardware - sensors receiving input, input/output ports, etc.

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Post-Alice Drafting

• Avoid claims to:– Fundamental economic activity (Bilski, etc.)– Mathematical formulas (Benson)– Signals (In re Nuitjen)– Device Profiles (Digitech (with respect to the claims

directed to the “device profile”)– Pure Data Structures

• In re Warmerdam - data structure not patent eligible• In re Lowry - functional data structure on a memory is patent

eligible

– Games (Planet Bingo)17

Post-Alice Drafting

• Direct claims and description to specific, practical applications• Avoid e-commerce words like game, order, commerce, auction, etc.• Avoid overly broad or abstract characterizations of the invention in

the description and arguments• Avoid buzzwords like “formula”, “equation”, and “algorithm” in

the description• Use caution when reciting mathematical equations in the claims

• Explain how the invention solves a technical problem in the description

• Use language from the cases in your description or arguments – e.g., “embodiments improve the functioning of a computer by …”

• Draft for an uncertain future: Recognize that patents have 20-year term and patent-eligibility law may well change during this time

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U.S. Companies’ Response

• On legal/policy question US companies see this differently:– High tech companies that get sued a lot on software patents

– Pharma companies

– Companies who assert software patents (e.g., operating companies, NPEs, Universities, defunct businesses with valuable patent portfolios)

• In portfolio development:– Improve technical character of patents, particularly software patents

– Perhaps file fewer patent applications on items that could be regarded as mental steps, financial algorithms, or methods of organizing human activity

– Recognize that patents have a 20 year term from priority and that legal standards concerning patentable subject matter will likely change during this time

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U.S. Companies’ Response•In Litigation:

– As a defendant

• Increasing use of 101 invalidity arguments early in litigation.

• CBM (Covered Business Method Review)

– As a plaintiff

• Consider alternative forums

• ITC and Germany gaining in popularity

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Covered Business Method (CBM) Review

- Potentially powerful

- CBM patent claims “a method, apparatus, or operation used in the practice, administration, or management of a financial product or service”

- Only party charged with infringement of a CBM patent can initiate CBM challenge (receiving cease and desist letter likely to be considered charge of infringement)

- May assert any grounds for invalidity

- May be filed only when post-grant review unavailable (e.g., nine months after issuance).

- Estoppel provisions less extensive than post-grant review (extends only to grounds actually asserted, not to grounds that reasonably could have been asserted)

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Litigation Effects – Curbing Trolls?• PwC study reports number of patent lawsuits in 2014 decreased by 13%1

• But data collected Oct. 31, 2013 – Sept. 30, 2014; Alice decision issued June 2014.• Also, new patent lawsuits decreased 8% Jan – May 2014 (before Alice) as compared to same period in

20132

• Number of patents invalidated by District Courts under § 101 July – Dec. 2014 was more than double in all of 2013.

• Other newly available procedures (IPR, CBM) to attack patents• Impact on NPE business model? Many believe Yes

– More difficult to obtain venture funding of NPE suits– Vague/overly-broad patents have been critical to ensnare many defendants– “Nuisance value” model less viable

1 “2015 Patent Litigation Study”, May 2015, PricewaterhouseCoopers LLP2“Patent Case Trends and the Business of Litigation”, February 5, 2015, Lex Machina

1 “2015 Patent Litigation Study”, May 2015, PricewaterhouseCoopers LLP

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Legislative Fixes

- Unlikely to improve at Supreme Court- PTO probably lacks authority- Professional organizations, including Intellectual Property

Owners and AIPLA, are working on a proposed amendment to section 101 to address these issues.

- One proposal amends 101 to exclude considerations found in 102, 103, and 112.

- Another proposal seeks to amend 101 in line with European standards such as:

- Susceptible of industrial application and - Invention must be of a “technical character” (i.e, “a technical

solution to a technical problem”)

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THANK YOU

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