Alice Corp. v. CLS Bank International. 573 U. S. 208 (2014)

1. The Alice Corp Patents

The Alice Corporation is the owner of several patents that disclose schemes to manage certain forms of financial risk. According to the specification largely shared by the patents, the invention relates to methods and apparatus, including electrical computers and data processing systems applied to financial matters and risk management. Alice Corp. v. CLS Bank International, 573 U.S. ____ , 2 (2014)

The claims at issue relate to a computerized scheme for mitigating settlement risk. That is the risk that only one party to an agreed-upon financial exchange will satisfy its obligation. In particular, the claims are designed to facilitate the exchange of financial obligations between two parties by using a computer system as a third-party intermediary. The parties agree that claim 33 of the ’479 patent is representative of the method claims.

^{2. Claim 33}

Claim 33 recites:

“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 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.”

The intermediary creates “shadow” credit and debit records (account ledgers) that mirror the balances in the parties’ real-world accounts at exchange institutions (banks). The intermediary updates the shadow records in real time as transactions are entered. The intermediary only permits those transactions for which the parties’ updated shadow records indicate sufficient resources to satisfy their mutual obligations. Alice Corp. v. CLS Bank International, 573 U.S. ____ , 3 (2014) 

The intermediary instructs the relevant financial institutions to carry out the “permitted” transactions in accordance with the updated shadow records. In this way the risk that only one party will perform the agreed-upon exchange is mitigated.

In summary, the patent claim:

(1) the foregoing method for exchanging obligations (the method claims),

(2) a computer system configured to carry out the method for exchanging obligations (the system claims), and

(3) a computer-readable medium containing program code for performing the method of exchanging obligations (the media claims).

All of the claims are implemented using a computer; the system and media claims expressly recite a computer, and the parties have stipulated that the method claims require a computer as well. Alice Corp. v. CLS Bank International, 573 U.S. ____ , 3 (2014).

3. Subject Matter Eligible for Patent Protection

The Honorable Judge Thomas starts by reciting Section 101 of the Patent Act. It defines the subject matter eligible for patent protection. It states:

“Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U. S. C. §101. 

4. Exception To Section 101 of the Patents Act

The Supreme Court have long held that this provision contains an important implicit exception. The laws of nature, natural phenomena, and abstract ideas are not patentable. The concern that drives this exclusionary principle is one of pre-emption. Granting the patent would pre-empt use of this approach in all fields. This would effectively grant a monopoly over an abstract idea. The laws of nature, natural phenomena, and abstract ideas are the basic tools of scientific and technological work. Monopolization of those tools through the grant of a patent might tend to impede innovation more than it would tend to promote innovation. That would be contrary to the United States Constitution. U. S. Const., Art. I, §8, cl. 8 states that Congress shall have the power to promote the progress of science and useful arts. Patent law may not inhibit further discovery by improperly tying up the future use of the building blocks of human ingenuity. Alice Corp. v. CLS Bank International, 573 U.S. ____, 6 (2014).

5. All Inventions Embody, Use, Reflect, Rest Upon, or Apply Laws of Nature, Natural Phenomena, or Abstract Ideas

At some level, all inventions embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas. An invention is not rendered ineligible for patent simply because it involves an abstract concept. Applications of such concepts to a new and useful end, remain eligible for patent protection. In applying the §101 exception, we must distinguish between patents that claim the building blocks of human ingenuity and those that integrate the building blocks into something more. If the building blocks is integrated into something more they transform them into a patent-eligible invention. Patenting the building blocks of human ingenuity would risk disproportionately tying up the use of the underlying ideas. They are therefore ineligible for patent protection. Integrating the building blocks into something more pose no comparable risk of pre-emption. They remain eligible for the monopoly granted under the patent laws. Alice Corp. v. CLS Bank International, 573 U.S. ____, 6 (2014).

6. Distinguishing Patents That Claim Laws of Nature, Natural Phenomena, and Abstract Ideas From Those That Claim Patent-Eligible Applications of Those Concepts.

The Honorable Judge Thomas refers to Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U. S. ___ (2012), were the Supreme Court set forth a framework for distinguishing patents that claim laws of nature, natural phenomena, and abstract ideas from those that claim patent-eligible applications of those concepts. This should be done using a two step approach.
First, step 1, is to determine whether the claims at issue are directed to one of those patent-ineligible concepts. If so, then we move on secondly to step 2. In step 2 it is asked:
“What else is there in the claims before us?”
To answer that question, consider the elements of each claim both individually and as an ordered combination. It is considered to determine whether the additional elements transform the nature of the claim into a patent-eligible application. This step 2 of the analysis is described as a search for an inventive concept. It is an element or combination of elements that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept. Alice Corp. v. CLS Bank International, 573 U.S. ____, 7 (2014).

7. Step 1: The Alice Corp Patents Are Directed To A Patent-Ineligible Concept

The Honorable Judge Thomas states that first it must be determined whether the claims at issue are directed to a patent-ineligible concept. He concludes that they are. These claims are directed to the abstract idea of intermediated settlement.

8. Bilski v. Kappos, 561 U. S. 593 (2010).

The Honorable Judge Thomas refers to Bilski v. Kappos, 561 U. S. 593 (2010). The claims in Bilski described a method for hedging against the financial risk of price fluctuations. Claim 1 recited a series of steps for hedging risk, including:

(1) initiating a series of financial transactions between providers and consumers of a commodity;

(2) identifying market participants that have a counter risk for the same commodity; and

(3) initiating a series of transactions between those market participants and the commodity provider to balance the risk position of the first series of consumer transactions.

Claim 4 put the concept articulated in claim 1 into a simple mathematical formula. The remaining claims were drawn to examples of hedging in commodities and energy markets.

The Honorable Judge Thomas states that all members in Bilski agreed that the patent in Bilski claimed an abstract idea. This is because, the claims described the basic concept of hedging, or protecting against risk. It was found that hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class. Alice Corp. v. CLS Bank International, 573 U.S. ____, 8 (2014).

9. Applying Bilski To The Alice Patent

As mentioned the Honorable Judge Thomas concluded that the claims of Alice Corp. describes the concept of intermediated settlement. Use is made of a third party to mitigate settlement risk. Like the risk hedging in Bilski, the concept of intermediated settlement is a fundamental economic practice long prevalent in our system of commerce. The use of a third-party intermediary (or clearinghouse) is also a building block of the modern economy. Thus, intermediated settlement, like hedging, is an abstract idea and beyond the scope of §101. Alice Corp. v. CLS Bank International, 573 U.S. ____, 9 (2014).

10. Applying Step 2

The Honorable Judge Thomas stated that because the claims at issue are directed to the abstract idea of intermediated settlement, the second step in Mayo’s framework has to be applied. The Court concluded that the method claims, which merely require generic computer implementation, fail to transform that abstract idea into a patent-eligible invention. Alice Corp. v. CLS Bank International, 573 U.S. ____, 10 (2014).

11. Using Mayo In Step 2

The Honorable Judge Thomas states that at Mayo Collaborative Services v. Prometheus Laboratories, Inc.566 U. S. _____ (2012), 132 S. Ct. 1289 (2012) in step two, we must examine the elements of the claim to determine whether it contains an “inventive concept” sufficient to “transform” the claimed abstract idea into a patent-eligible application. A claim that recites an abstract idea must include additional features to ensure that the claim is more than a drafting effort designed to monopolize the abstract idea. The Mayo case made it clear that transformation into a patent-eligible application requires more than simply stating the abstract idea while adding the words ‘apply it
The Honorable Judge Thomas finds Mayo itself is instructive. The patents at issue in Mayo claimed a method for measuring metabolites in the blood-stream in order to calibrate the appropriate dosage of thiopurine drugs in the treatment of autoimmune diseases. The respondent in that case contended that the claimed method was a patent-eligible application of natural laws that describe the relationship between the concentration of certain metabolites and the likelihood that the drug dosage will be harmful or ineffective. Methods for determining metabolite levels were already well known in the art. The process at issue amounted to nothing significantly more than an instruction to doctors to apply the applicable laws when treating their patients. Simply appending conventional steps, specified at a high level of generality, was not enough to supply an inventive concept. The introduction of a computer into the claims does not alter the analysis at Mayo step two. Alice Corp. v. CLS Bank International, 573 U.S. ____, 11 (2014).

12 Mere Recitation of a Generic Computer Cannot Transform a Patent-Ineligible Abstract Idea Into a Patent-Eligible Invention

The Honorable Judge Thomas concludes these cases demonstrate that the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention. Stating an abstract idea while adding the words “apply it” is not enough for patent eligibility. Nor is limiting the use of an abstract idea to a particular technological environment. Stating an abstract idea while adding the words “apply it” with a computer simply combines those two steps, with the same deficient result. Thus, if a patent’s recitation of a computer amounts to a mere instruction to implement an abstract idea on a computer, that addition cannot impart patent eligibility. This conclusion accords with the preemption concern that undergirds the §101 jurisprudence. Given the ubiquity of computers, wholly generic computer implementation is not generally the sort of additional feature that provides any practical assurance that the process is more than a drafting effort designed to monopolize the abstract idea itself. Alice Corp. v. CLS Bank International, 573 U.S. ____, 13 (2014).

13. Do the Claims Do More Than Simply Instruct To Implement the Abstract Idea of Intermediated Settlement On a Generic Computer?

The representative method claim, in this case, recites the following steps:
(1) “creating” shadow records for each counterparty to a transaction;
(2) “obtaining” start-of-day balances based on the parties’ real-world accounts at exchange institutions;
(3) “adjusting” the shadow records as transactions are entered, allowing only those transactions for which the parties have sufficient resources; and
(4) ”issuing” irrevocable end-of-day instructions to the exchange institutions to carry out the permitted transactions. It was contended that the claims are patent eligible because these steps require a substantial and meaningful role for the computer. As stipulated, the claimed method requires the use of a computer to create electronic records, track multiple transactions, and issue simultaneous instructions. The computer is itself the intermediary.
The Honorable Judge Thomas asks the question whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer. He concludes that they do not. Alice Corp. v. CLS Bank International, 573 U.S. ____, 14 (2014).
The Honorable Judge Thomas states taking the claim elements separately, the function performed by the computer at each step of the process is purely conventional. Using a computer to create and maintain shadow accounts amounts to electronic record keeping. It is one of the most basic functions of a computer. The same is true with respect to the use of a computer to obtain data, adjust account balances, and issue automated instructions. All of these computer functions are well-understood, routine, conventional activities previously known to the industry. In short, each step does no more than require a generic computer to perform generic computer functions. 

The Honorable Judge Thomas continues and considered as an ordered combination, the computer components of the petitioner’s method. He found it added nothing that is not already present when the steps are considered separately. The method claim lacks any express language to define the computer’s participation. The method claims do not purport to improve the functioning of the computer itself. There is no specific or limiting recitation of improved computer technology. The claims do not claim an improvement in any other technology or technical field. The claims at issue amount to nothing significantly more than an instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer. Under the precedents that are not enough to transform an abstract idea into a patent-eligible invention. Alice Corp. v. CLS Bank International, 573 U.S. ____, 16 (2014).

14. Claims To a Computer System and a Computerreadable Medium

As to its system claims, it was emphasized on behalf of Alice Corp. that those claims recite “specific hardware” configured to perform “specific computerized functions.” But what was characterized as specific hardware: a “data processing system” with a “communications controller” and “data storage unit,” for example, is purely functional and generic. Nearly every computer will include a “communications controller” and “data storage unit” capable of performing the basic calculation, storage, and transmission functions required by the method claims. As a result, none of the hardware recited by the system claims offers a meaningful limitation beyond generally linking the use of the method to a particular technological environment, that is, implementation via computers. Alice’s system and media claims add nothing of substance to the underlying abstract idea. It is therefore held that they too are patent-ineligible under §101. Alice Corp. v. CLS Bank International, 573 U.S. ____, 17 (2014).

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