Software Patentability Revisited

On May 12, 2016, the Court of Appeals for the Federal Circuit (“CAFC”) issued an opinion Enfish LLC. v. Microsoft Corporation upholding validity of software patent claims on  35 U.S.C. § 101 grounds.  The patents at issue, U.S. Patents Nos. 6,151,604 and 6,163,775, cover a self-referential table for a computer database.  Compared to traditional relational tables, where each entity modeled is provided in a separate table, in the self-referential model, all data entities are in a single table, with column definitions provided by rows in that same table.  The specification of the patents at issue recited advantages of the self-referential model compared to the relational model, including faster searching of data, more effective storage of data, and more flexibility in configuring the database.

While the District Court of Central District of California ruled the claims of these patents too abstract to be valid, CAFC reached a different conclusion.  CAFC held that the claims are not directed to an abstract idea within the meaning of Alice Corp., but are rather directed to a specific improvement to the way computers operate.  CAFC further clarified how the analysis of software claim validity under the two-step Alice Corp. test should take place.  In particular, the court ruled that not all claims directed to improvements in software are directed to an abstract idea, and thus may not need to be analyzed under the step of Alice Corp. test covering whether the claims amount to significantly more than the abstract ideaFurther, the court ruled that an invention’s ability to run on a general-purpose computer does not preclude patentability of the claims covering the invention and neither does the improvement not being defined by reference to physical components.

The Enfish decision is the second CAFC decision since Alice Corp. that upheld patentability of software patent claims under the 35 U.S.C. § 101.  While the decision may still be overturned either by an en banc CAFC decision or a Supreme Court decision, for now, the decision provides a ray of hope for software patent and patent application owners.

Free Speech and Publicity Rights

While protection of free speech under the First Amendment remains one of the foundations of American society, the First Amendment is not always a defense against suits for violation of intellectual property, such as the rights to a person’s likeness (publicity rights), as the Ninth Circuit Court of Appeals recently illustrated in the Davis v. Electronic Arts case.  Electronic Arts (“EA”) makes the “NFL Madden” football videogame, which allows a player to control virtual likenesses of past and present NFL players. While EA pays significant royalties to NFL for the use of current player’s likenesses, EA does not have a license to use the likenesses of former NFL players.  When the former players sued EA for violation of their publicity rights, EA attempted to raise defenses based on the First Amendment, which the court rejected.

One of the defenses was that the use of the players’ likenesses was “transformative,” adding significant creative elements that transform the game into something more than a celebrity imitation; however, as the game replicates physical characteristics of the players and shows the players doing what they are famous for (playing football), the court rejected this defense.  Likewise, the court also rejected EA’s statutory and common law “public interest” defenses, which are based on the protection of publishing information in the interest of the public, because “NFL Madden” is not a reference source or a collection of facts about football but rather a game.  Likewise, the court rejected EA’s argument that the Roger’s test, a test that limits trademark rights when First Amendment rights are involved, should be extended to publicity rights.  Finally, the court rejected EA’s argument that the use of the players’ likenesses was protected as being “incidental” because accurate depictions of the players are central to the game.

Interestingly enough, EA previously brought up most of these arguments, and lost, in a similar case that involved NCAA Football games.  EA recycled these arguments to preserve them for a rehearing by the Ninth Circuit Court of Appeals en banc or by the Supreme Court, and whether the arguments gain any traction further in the appeal process remains to be seen.

Method inducement requires all steps

On June 2, 2014, in Limelight Networks, Inc. v. Akamai Technologies, Inc., et al., No. 12-768 (2014), the U.S. Supreme Court held that liability for inducement of infringement of a patented method must be predicated on direct infringement. Akamai maintains a global network of content delivery servers that invisibly redirects users of their customer’s Web sites to content cached on Akamai’s servers. Limelight is a competitor whom Akamai sued for direct infringement of U.S. Patent No. 6,108,703 (‘703) for a “Global Hosting System” under 35 U.S.C. § 271(a) and for inducement of infringement under 35 U.S.C. § 271(b). The method claims in the ‘703 patent recite tagging content in a customer’s Web site and serving the tagged content from caching servers. Limelight, however, requires their customers to do their own tagging.

The jury found direct infringement and awarded Akamai $41.5M in damages. Upon motion for reconsideration, the district court granted Limelight’s previously-denied JMOL in light of the Federal Circuit’s holding in Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318 (C.A.F.C. 2008). In Muniauction, the Federal Circuit held that a defendant that does not perform all claimed steps is only liable for direct infringement when either an agency relationship or a contractual obligation exists with a third party who performs the claimed steps. A panel of the Federal Circuit initially affirmed the district court’s granting of the JMOL that Muniauction precluded a finding of direct infringement, but upon rehearing en banc, the Federal Circuit reversed and found that liability for induced infringement can arise when a defendant carries out some steps of a claimed method and “encourages” others to carry out the remaining steps.

A unanimous Supreme Court sharply rejected the en banc Federal Circuit’s holding, stating that “inducement liability may arise ‘if, but only if, [there is] . . . direct infringement.’” Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336, 341 (1961), accompanied by the terse observation that, “[o]ne might think that this simple truth is enough to dispose of this appeal.” They went on to blankly explain that, “[a] method patent claims a number of steps; . . . The patent is not infringed unless all of the steps are carried out. . . .There has simply been no infringement of the method in which respondents have staked out an interest, because the performance of all the patent’s steps is not attributable to any one person.” (emphasis added).

Patentability under three standards

In the last five years, we have seen multiple decisions Supreme Court decisions impacting patentability of software under section 101 and a recent Court of Appeals for the Federal Circuit (CAFC) case of Ultramercial v. Hulu is a good illustration of how the standards set by these decisions differ. The case concerns U.S. patent no. 7,346,545, which covers a method of distributing copyrighted media to consumers over the Internet in exchange for having the consumers view advertisements. CAFC had to consider the validity of this patent on section 101 grounds for a total of three times, in 2011, 2013, and 2014, with the Supreme Court vacating CAFC decisions and remanding the case for reconsideration as additional Supreme Court cases were decided. Initially, CAFC decided the case under the law as set by Bilski v. Kappos, and held the patent valid due to the patent claims requiring an extensive computer interface and complex computer programming. CAFC reconsidered and again upheld the patent for similar reasons under the standard set by the Supreme Court decision of Mayo v. Prometheus, concluding that the claims of the patent were not abstract enough as to be patent ineligible. When faced with the patent for the third time, now under the law set by Alice Corp., CAFC struck down the patent as invalid, ruling that the claims were directed towards an abstract idea and did not have additional elements necessary to transform the claims into a patent eligible application of the idea. CAFC also held that the claim did not satisfy the machine-or-transformation due to not being tied to a novel machine or apparatus and not covering a transformation of a physical matter or something that represents the physical matter.

Court decisions shape patent examination policies and as this case illustrates, the law guiding such policies can change within a few years, and a patent application written with one standard in mind may be examined under a different set of rules. Accordingly, one writing a patent application would be wise to attempt to anticipate a possible tightening of section 101 examination standard and put sufficient support into the specification to allow for claim amendments necessary in light of such a tightening.

Breaking the Trend: Software Patent Survives Challenge

While many post-Alice Corp. decisions regarding patentability of software were grim news for patent owners, a recent case from the U.S. District Court for the Northern District of Illinois goes against this trend. In Card Verification Solutions, LLC. v. Citigroup Inc., the court considered a motion to dismiss a patent infringement lawsuit complaint for failure to state a claim. The motion was based on the patent at issue, U.S. Patent No. 5,826,245, being allegedly directed to an abstract idea and thus being invalid. The claims of the patent cover a method for verification of information in a transaction between two parties, such as between a merchant and a customer.

The court applied a two-pronged test to evaluate patentability of the claims. First, the court asked whether the claims are directed towards an abstract idea, and concluded that verifying transaction information is a fundamental economic practice and indeed an abstract idea. The court then asked whether additional elements transform the nature of the claims into a patent-eligible application of the abstract idea and found that such a transformation is present for several reasons. First, the court reasoned that while the claims do not specifically recite any machinery, a plausible interpretation of the patent suggests that computer hardware would be necessary to use the invention, and invalidating the claims for lack of specific recitation of the hardware would be overly formalistic. The court also noted that while deciding whether the method could be performed by a human with a pen and paper was premature at this stage of the litigation, a reasonable inference could be drawn that a human could not perform the method due to the method including steps of generating pseudorandom numerical tags. Finally, the court applied the machine-or-transformation test and found that the method was transformative due to including steps of adding the pseudorandom tags to other information involved in the transaction. Accordingly, the court upheld the validity of the patent and denied the motion.

While the legal standard based upon which the motion was decided heavily favored the patent owner, the decision nevertheless remains significant for upholding the validity of a software patent in the post-Alice Corp. world. The decision may still eventually be overturned in higher courts, but, for now, software patent owners may take hope that the decision represents a new trend in evaluating software patentability.

The Aftermath of Alice Corp.

On June 25, 2014, the USPTO issued preliminary examination instructions to address the Supreme Court’s recent decision in Alice Corp. Pty. Ltd. V. CLS Bank Int’l et al. (“Alice Corp.”), which held that the patent claims at issue were not subject matter eligible under 35 U.S.C. § 101. When the notice first came out, we wondered how the instructions might affect the actual examination of patent applications.

This situation reminded me of the time when the Bilski v. Kappos decision was handed down in 2010. There, as here, the USPTO issued interim guidance for determining subject matter eligibility for process claims. Many of us were concerned about how the machine-or-transformation test would affect claim allowance and what amendments would be needed to place the claims in a condition for allowance. After months of working with examiners, we found that standard language regarding inclusion of a “suitably-programmed computer” or “a processor to execute method steps” could place process claims in compliance with the USPTO’s interpretation of Bilski.

Less than two weeks after having been decided, the Alice Corp. decision is already influencing the examination of software claims by throwing a metaphorical wrench into the familiar interpretation of statutory subject matter under the Bilski guidance. Now, under the new Alice Corp. instructions, statutory subject matter interpretation seems to suggest that: 1) a general computer is not enough to make a software claim statutory and the standard language used to comply with the requirements of Bilski under the former guidance will likely not make the software claim statutory; and 2) the steps of a method claim should be steps that cannot be performed by a human or alternatively, are known to be performed only by a computer and not a person, such as encryption.

My concern that the United States is moving closer to a view of software patents similar to that held by the European Patent Office appears to be validated. Currently, examiners and practitioners are struggling to interpret the Alice Corp. instructions; the examining corps has not yet been trained under the new instructions. Perhaps, once training has been provided and examiners have had an opportunity to work through a few cases, the actual implementation of the guidelines will be less stringently interpreted than appears to be the case today.

Patentability of computer software

On June 19, 2014, the U.S. Supreme Court revisited the question of the patentability of computer software in Alice Corp. PTY. LTD. v. CLS Bank Int’l et al. The patent in suit covered a scheme of mitigating settlement risks in a financial transaction, as implemented on a computer. The Court analyzed whether the recitation of a computer to perform the scheme made the claims patent-eligible and concluded that the invention neither improved the functioning of the computer nor any other technology or technological field. The Court found that the scheme was a non-statutory abstract idea, a fundamental practice in commerce, and “a building block of modern economy.” Relying on earlier precedent, the Court held that the claims merely recited a generic computer implementation of an abstract idea, which failed to transform that abstract idea into a patent-eligible invention.

Although the Court did not establish a bright-line test for the patentability of computer software, the Court has signaled that computer software may now be required to improve the functioning of the computer involved in the execution of the software to qualify as patentable subject matter. The decision also appears to be a step towards European patent practice, where an advantageous technical effect may be necessary to support the showing of an inventive step.

In light of Alice Corp., claims should recite improvements to avoid being construed as “a generic computer to perform generic computer functions” that are “well-understood, routine, [and] conventional.” Improvements either to the computer proper or to “any other technology or technological field” ought to be clearly set forth in the specification to ensure ample support to the claims.