En Banc Federal Circuit Affirms That Computer-Implemented Escrow Method Is Not Patent Eligible, But Splits On Applicable Test: Majority Holds That Claims to Escrow Method Are Not Patentable; Equally Divided Court Affirms District Court Holding That Computer System Programmed to Carry Out Method Also Is Not Patent Eligible

Sullivan & Cromwell LLP - May 14, 2013

The patentability of computer-implemented business methods recently has been called into question by a number of decisions regarding the nature of patentable subject matter under 35 U.S.C. § 101. Last Friday, the en banc Federal Circuit Court of Appeals issued its long-awaited decision in CLS Bank v. Alice Corp., addressing the patentability of certain method, computer system and computer-readable media claims directed to an escrow methodology for reducing transaction risk. At issue were the interpretation and application of the judicially-created exceptions that bar patenting subject matter that would otherwise be patentable under Section 101—specifically, the exception that bars patenting “abstract ideas.” Unfortunately, the five separate opinions issued by the Court do not provide greater clarity in an area of patent law that many already viewed as uncertain and confused. Because only a minority of active judges on the court agreed on a single rationale for the result, the lower courts are left without clear guidance. A majority of the court held that the asserted method and computer-readable media claims were not directed to patent eligible subject matter, but split on the reasoning for that result. The district court’s ruling that the system claims also were not patent eligible was affirmed by equally divided court.

In the lead opinion written by Judge Lourie, five judges held that both the method and computer-readable media claims were not patent eligible because they did not add sufficient substance—“human ingenuity”—to the abstract escrow concept. Two other judges agreed that those claims were directed to an unpatentable abstract idea, but disagreed with the legal analysis in the five-judge opinion. This second concurring opinion ruled that the claims were unpatentable only because the claims added nothing other than a means to implement the unpatentable abstract idea.

An equally divided court affirmed the district court’s holding that the asserted system claims were not patent eligible. The five-judge lead opinion held that generic hardware (“computer” and “data storage system”) limitations in the system claims of the patents did not sufficiently limit the unpatentable abstract idea. Chief Judge Rader, writing for himself and three other judges, found the system claims were patent eligible, and not abstract, because they were directed to a computer and other hardware specifically programmed to solve a complex problem. Finally, Judge Newman, adding a fifth vote in favor of the patent owner, found that the system claims (as well as the method and computer-readable media claims) were patent eligible under the express language of Section 101 and suggested that the court reject altogether the judicially-created “abstract idea” exception to statutory subject matter patentability.