CLS Bank v. Alice Corp ? Application Drafting Lessons

Case No. 2011-1301 (Linn, Prost, O?Malley)

Following Prometheus, questions abounded as to how the Supreme Court?s patentable subject matter jurisprudence would be applied beyond that case. Would Prometheus be limited to medical assaying or biological technologies? Does its reasoning apply to any judicial exception or only claims involving laws of nature? Should ? 101 arbiters now look at novelty in the application of a judicial exception? Where is the line between impermissible preemption and sufficiently narrow application of a judicial exception? The Federal Circuit tackles these questions in CLS Bank v. Alice Corp., albeit with a majority and dissent that appear to come down on opposite sides on some of these questions. Set against the Federal Circuit?s post-Bilski subject matter jurisprudence, including another Judge Linn?s opinion in Dealertrack v. Huber, we are maybe seeing some idea of where subject matter eligibility best practices are headed.

The case involved several patents owned by Alice ? 5,970,479; 6,912,510; 7,149,720; and 7,725,375 ? drawn to financial methods not wholly unlike that seen in Dealertrack or Bilski, computerized monetary exchange between parties to minimize risk of settlement loss by a non-performing party. The patents claimed methods, computer systems, and computer-readable media for performing these methods. Here?s a look at one of the method claims:

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 [sic] 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 one 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.

CLS Bank prevailed before the district court, getting the patents invalidated on summary judgment as failing the machine-or-transformation (M-o-T) test and Bilski?s abstract idea exception. The case was appealed and heard well before Prometheus, leaving Alice the argument that the claims were tied to a specially-configured machine under M-o-T and Alappat and were not manifestly abstract under Research Corp. CLS Bank, for their part, argued that any computer required by the claims did not impose a meaningful limitation on the claims and that the recited method effectively preempted, under Benson and Flook, the abstract idea of escrowed obligation exchange.

After summarizing the parties? positions, the majority spent no fewer than 10 pages cranking out the familiar Diehr-Flook-Benson sausage in its new Bilski-Prometheus casing, and then saucing that with cites to most of the Federal Circuit post-Bilski ? 101 cases: SiRF, Research Corp., CyberSource, MySpace, DealerTrack, and Fort Props. (only the nonprecedential Fuzzysharp was wholly excluded; Ultramercial, even though GVR?ed, was cited elsewhere in the opinion.) The majority certainly viewed the Prometheus analysis as applicable here but was cool to a ?preemption? versus ?specific and novel application? binary test for patentable subject matter. Instead, the majority measured patent eligibility by the degree that recited subject matter requires / is limited by a specific machine, regardless of novelty. Ultimately, the requisite degree of limitation looked very much like that from Research Corp:

In light of the foregoing, this court holds that when?after taking all of the claim recitations into consideration?it is not manifestly evident that a claim is directed to a patent ineligible abstract idea, that claim must not be deemed for that reason to be inadequate under ? 101. . . . Unless the single most reasonable understanding is that a claim is directed to nothing more than a fundamental truth or disembodied concept, with no limitations in the claim attaching that idea to a specific application, it is inappropriate to hold that the claim is directed to a patent ineligible ?abstract idea? under 35 U.S.C. ? 101.

The majority was especially at pains to point out that the necessary involvement of a specific machine did not have to be at or create a point of novelty or non-obviousness in the claim. In the context of computer-based subject matter, it would be enough for a claim to recite a specific way of applying an abstract idea on a computer to satisfy ? 101, while reciting a plain abstract idea, using a computer or not, would fail it. The majority favorably cited CyberSource?s caution that a claim to a algorithm that could be performed in the human mind will not become patent-eligible simply by reciting the bare algorithm in connection with a computer.

Getting to the application of this rule, the majority specifically warned that abstracting the claims to ?employing an intermediary to facilitate simultaneous exchange of obligations in order to minimize risk? was improper, because such gisting ignored limiting applications recited or required by the claims. Specifically, the majority looked to specific recitations of an ?electronic adjustment? as well as ?shadow credit? and ?shadow debit? records that necessarily required a computer. In this analysis, the majority did not hesitate to look to the specification and even extrinsic expert testimony that reflected the adjustment and shadow elements required a configured computer system to store and manage them in accordance with the recited method. Citing SiRF, the majority found the degree of entanglement with a computer here was beyond merely ?permitting a solution to be achieved more quickly? but instead was more of a sine qua non of the recited methods. Coupled with the fact that the specific shadow crediting / debiting would permit others to practice the concept of two-way escrowed or low-risk obligation settlement in other ways, the majority thought the abstract idea exception was cleared:

The asserted claims appear to cover the practical application of a business concept in a specific way, which requires computer implemented steps of exchanging obligations maintained at an exchange institution by creating electronically maintained shadow credit and shadow debit records, and particularly recite that such shadow credit and debit records be held independently of the exchange institution by a supervisory institution; that start-of-the-day balances be obtained from the exchange institution; that adjustments be made to the credit records based on only certain specified allowed transactions under the ?adjusting? limitation; that such adjustments be made in chronological order; that at the end of the day, instructions be given to the exchange institution to reflect the adjustments made on the basis of the permitted transactions; and that such adjustments affect irrevocable, time invariant obligations placed on the exchange institution. ?479 Patent col.65 ll.28-50. 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? are not permitted under the ?adjusting? limitation, and do not result in any ultimate exchange of obligations in the INVENTICO system. Id. col.65 ll.36-43, col.24 l.59-col.25 l.2. The claim limitations can be characterized as being integral to the method, as ?play[ing] a significant part in permitting the method to be performed,? and as not being token post-solution activity. It is clear, moreover, that the limitations requiring specific ?shadow? records leave broad room for other methods of using intermediaries to help consummate exchanges, whether with the aid of a computer or otherwise, and, thus, do not appear to preempt much in the way of innovation.

Judge Prost, writing in dissent, found the majority?s resurrection of the ?manifestly abstract? standard too lenient and not in accordance with Prometheus. Here especially the dissent found the claims embraced, and were reducible to, an old and abstract idea ? basic obligation exchange with a risk-of-loss reducing intermediary (the dissent produced a table mapping the claim elements to basic parameters of such an exchange, along with an article discussing how ancient Romans used such an exchange). Although the majority faulted the dissent for stripping the claims down in this manner, the dissent thought such reduction was exactly correct here because the removed computer-based elements did nothing to transform or narrow the claim to something non-abstract and could be implemented in non-novel and obvious ways. Comparing the facts here to Judge Linn?s opinion in Dealertack, Judge Prost saw the same irrelevant computer implementation of an otherwise abstract idea:

More recently, we evaluated the patentability of a claim for ?[a] computer aided method of managing a credit application? that recited a ?display device? and ?terminal devices,? which the district court correctly construed as some form of computer implementation. Dealertrack, Inc. v. Huber, 674 F.3d 1315, 1331-35 (Fed. Cir. 2012). We nonetheless looked beyond the computer implementation to the inventive concept of the patent and held that the claim disclosed an abstract idea. Id. at 1333 (?Dealertrack?s claimed process in its simplest form includes three steps: receiving data from one source (step A), selectively forwarding the data (step B, performed according to step D), and forwarding reply data to the first source (step C). The claim ?explain[s] the basic concept? of processing information through a clearinghouse [and is therefore abstract].?)

The majority and dissent did agree that ? 101 concerns and Prometheus-style analysis monitoring apply wherever a judicial exception is at stake, and regardless of technological field or even claim format: ?While the method, system, and media claims fall within different statutory categories, the form of the claim in this case does not change the patent eligibility analysis under ? 101. CyberSource.? For the dissent, the use of system and computer-readable media claims merely made the ? 101 question closer. Because the specifications emphasized the intangible concept of risk-minimized financial settlement and cursorily posited that any networked computer system could be used for the recited apparatuses, the system and media claims were still abstract ideas ensconced in an obvious structural format:

Apart from the abstract idea of avoiding transaction risk by using financial intermediaries, representative system claim 1 of the ?720 patent recites 1) a computer memory that contains account balance information, and 2) a computer that can track the account balance. ?720 patent col.65 ll.42-61. One need not be a computer scientist to suspect that this level of computer implementation is not inventive. But intuition is not our only guide; we also have the patent specification. The ?disclosure of the invention? section of the ?720 patent almost exclusively discusses the concept of risk minimization in financial transactions. Although it summarily states that ?[t]he invention also encompasses apparatus . . . dealing with the handling of contracts,? it does not mention what aspect of the apparatus is an advancement in the art. Id. col.5 ll.27-29. Quite the opposite: it explains that the object of the invention can be ?achieved by a computing/telecommunications infrastructure that is capable of being accessed worldwide by any enterprise/individual having access to a computer and a telephone network.? Id. col.5 ll.47-50. The rest of the 65-column-long specification is similarly devoid of any teaching for how one must implement computer systems. For example, there is no instruction for connecting various components of the system and no discussion of how existing systems need be modified or improved in order to implement the one that is claimed. Indeed, even the ?preferred embodiment? is not limited to a single system: According to the specification, the best mode of the invention may be implemented with ?[a] large range of communication hardware products,? ?[o]ne amongst many of [which] are personal computers and associated printers.? Id. col.7 l.65?col.8 l.3. Other options include ?a mini or mainframe computer,? ?a tone dialing telephone,? or even ?a voice connection via an operator.? Id. col.8 ll.6-12. As far as an actual system is concerned, therefore, implementation is irrelevant?anything goes. Instead, the specification discusses at length and in painful detail various forms of transactions, contracts, order processing, order authorization, risk management, and other financial concepts. Even a quick glance at the ?720 patent reveals that the claimed invention is not about physical systems; it is the abstract idea of risk-management in financial transactions carried out on an already known infrastructure. That invention, even if new, is an unpatentable abstract idea.

In sum, if we are to assess system claims for subject matter patentability?and I believe that we are currently so obligated?we must also follow the Supreme Court?s instructions on how the abstract idea test should be applied. That is, we must look beyond the non-inventive aspect of the claims and ask whether the remaining portion is an abstract idea. Following that approach, in my view, unavoidably leads to the conclusion that similar to the method claims, the asserted system claims are not patentable. Perhaps, the Supreme Court will reconsider its broad instructions in Prometheus once it considers system claims, but until then we would only add confusion and uncertainty by creating our own ad-hoc approach. I respectfully dissent.

Lessons: To the degree that they are followed, recent subject matter eligibility jurisprudence and CLS Bank adumbrate a two-step approach to satisfying ? 101 in application and claim drafting: 1) scrutinize the written description and claims for abstract ideas, laws of nature, or natural phenomena, regardless of statutory class, and 2) bury them in specific implementations, such as those that require more than a general purpose computer and can?t be performed wholly in the human mind.

As for the first step, the guidance from Prometheus and the recent USPTO guidelines (August 2012 guidelines here) offer decent lessons for identifying laws of nature ? almost any natural correlation, no matter how contrived, will qualify. Identifying abstract ideas under Bilski and the August 2012 guidelines is trickier, but looking at Fort Props., DealerTrack, and CyberSource, financial and legal transactions or organization seem to stick out as sore thumbs in this arena. It may also be useful to follow the approach in these cases and see how easily one can summarize a sample claim into a basic, existing concept, like ?clearinghouse,? ?reverse-bidding auction,? ?government structure,? ?lavatory queuing,? ?escrowed settlement? etc. as indicative of an abstract idea problem.

In the second step, care should be taken to recite something that clearly requires a specifically-programed computer or other specific device for any claimed judicial exceptions to work, or that plies the exception to a clear and useful physical, external transformation ? not just rearrangement of data or identification of a condition. Lessons to this effect were offered in connection with DealerTrack, FuzzySharp, and CyberSource. Strongly consider example embodiments that illustrate how the invented subject matter requires a particular structure or physical interaction to flat-out work. For both the majority and dissent in CLS Bank, a description of how the computer would need to be specially programmed and physically networked to carry-out the settlement would have gone a long way to satisfying ? 101, whereas blanket statements of ?this can be done with any computer? did not. Recognize that this may require some additional thought (or even invention) from an applicant on how a method would actually configure and/or work in physical or computational environments. Some examples in computer-implemented methods might include disclosure that results of a calculation are useful only in real-time achievable only by computer, coupled with a claim to real-time computer-implemented calculation, or that a process depends on information remotely input or gathered from several sources simultaneously, coupled with a claim reciting a computer specially networked to the various remote sources. The willingness of the Federal Circuit to look at the specification means one need not have mile-long or unduly narrow claims in order to show a specific application under ? 101; discussion of sufficiently specific applications in the specification appear enough to give a claim step of ?performing, with a processor configured to . . .? or ?calculating, via a computer system networked between . . .? enough meat for both the majority and dissent here. If anything, the split in CLS Bank is on whether the computer?s necessity must also be a point of novelty of the claim. I do not think this really requires much new care or guidance, as patentees have long known the obvious addition of a computer to a known method would not confer ? 103 patentability under Leapfrog.

Perhaps less traditionally, also consider in the specification at first over-simplifying any identified abstract idea; this may create room later to explain how only limited applications of the abstract idea are claimed. For example, in CLS Bank, the patentee might have stated that the application subject matter dealt with ?low risk-of-loss settlements? and then in example embodiments introduced the shadow credit / debit tracking as a specific way to implement such settlements, while having the claims track this use of shadow elements. As I said in analyzing Prometheus, subject matter gatekeepers will typically be in a poor position to accurately determine how unspecific or abstract any distilled exception is against the universe of laws of nature and abstract ideas. Giving a basis in the specification that the abstract idea at issue is very broad and that you?re just claiming a narrow species of it might offer some footing against preemption.

Comment: I actually don?t have a lot to say, and a lot has already been said by others on this case. Contrary to some commentary, I very much think the contention between the majority and dissent is only the degree of specific application that a claim must possess to pass ? 101: for the majority, anything more than ?manifest abstractness? will do; for the dissent, the applicant must demonstrate some limited and inventive (novel) application (computational or otherwise) that cannot be omitted from a workable generalization of the claim. Both sides offer oracular cites from Prometheus to their ends (the majority in footnote 2 and the dissent on page 3), and my reading of the case is that both sides were more than willing to consider the specification in searching for (non-)abstraction. I would guess the dissent has the more defensible position following Prometheus in light of the skinny specifications here. Moreover, I have real trouble reconciling the facts here with Dealertrack, where Judge Linn was more than confident in omitting computer hardware aspects from a claim to abstract the claim to preempting an entire ?clearinghouse? concept, failing ? 101.

Tagged as: application drafting, claim drafting, Patentable subject matter, prosecution

Source: http://alleylegal.com/2012/07/cls-bank-v-alice-corp-application-drafting-lessons/

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