Patent Eligibility After Alice v. CLS:

The Good, The Bad, and the Trends to Watch

Marc J. Pernick, Mauriel Kapouytian Woods LLP Robert R. Sachs, Fenwick & West LLP

August 13, 2014

LeRoy v. Tatham, 1852

O'Reilly v. Morse, 1853

Tilghman v. Proctor, 1880

Mckay Radio v. Radio Corp., 1939

Gottschalk v. Benson, 1972

Parker v. Flook, 1978

Diamond v. Diehr, 1981

Corning v. Burden, 1853

Bilski v. Kappos, 2010

Mayo v. Prometheus, 2012

Funk Brothers Seed v. Kalo Inoculant, 1948

Diamond v. Chakrabarty, 1980

J.E.M. AG Supply v. Pioneer Hi-Bred, 2001

The Telephone Cases, 1888

AMP v Myriad, 2013

Alice v. CLS, 2014

3

§101 Disputes in Litigation (2000-2014)

4

Alice Background • Alice patents (priority 1992) cover trading

system that reduces settlement risk using a 3rd party intermediary and real time settlement verification – Alice's patents cover using “shadow

records” to track and control transactions in real time currency trading.

• CLS Bank (formed 2002) is a consortium that provides currency trading settlement services for its members. – This is big business: CLS is an

international consortium of banks that clear $5 billion in trades per day.

5

Ian Shepard

& a Troll

Alice at SCOTUS

6

• Certiorari granted on: – Whether claims to computer-implemented

inventions—including claims to systems and machines, processes, and items of manufacture—are directed to patent-eligible subject matter within the meaning of 35 U.S.C. § 101 as interpreted by this Court?

Core Holding in Alice • Two-part test: from Mayo Collaborative

Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289 (2012) – Are the claims at issue directed to a patent-

ineligible concept (e.g., abstract idea)? – Is there an “inventive concept” – sufficient to

“transform” the claimed abstract idea into a patent-eligible application?

• Mayo test is used for all judicial exceptions, not limited to laws of nature

7

Alice: Some Positive Effects

• Not death of software patents

• Business method patents hang on

• Life sciences & tech patents handled same way

8

Alice: Some Positive Effects

• One more data point on “abstractness”

• We have a framework – sort of…..

9

Alice: The Problems Basic issue: “we must distinguish between patents that claim 'buildin[g] block[s]' of human ingenuity and those that integrate building blocks into something more….”

•Unclear test = ad hoc + subjective •Result = unpredictability + costs

10

Problems With First Part of Alice Test

“We must first determine whether claims at issue are directed to patent-ineligible concept [i.e. an abstract idea].”

•Two big problems: – Substantive – Procedural

11

“Abstractness:” Substantive Ambiguity

• When is subject matter “abstract?”

– Fundamental practice

– Basic concept

– Building block

– Long prevalent

12

“Abstractness:” Substantive Ambiguity

• What is the test? No definition! – SCOTUS will “not labor to delimit the

precise contours” of it

• Data points based on precedent

• “Know it when I see it?”

13

Abstract Ideas for the Court are Big Ideas

The core concern is “preemption” of “fundamental building blocks”

• “We have "repeatedly emphasized this . . . concern that patent law not inhibit further discovery by improperly tying up the future use of " these building blocks of human ingenuity.” slip op. at 5

These are not just any abstract idea, but “fundamental ones”:

• “Thus, an invention is not rendered ineligible for patent simply because it involves an abstract concept.” Id.

• “Accordingly, in applying the §101 exception, we must distinguish between patents that claim the " 'buildin[g] block[s]' " of human ingenuity and those that integrate the building blocks into something more”

14

“Abstractness:” Procedural Ambiguity

• Where is idea that might be “abstract?”

• Judge Lourie (en banc):

– Need to “identify and define whatever fundamental concept appears wrapped up in the claim!”

15

“Abstractness:” Procedural Ambiguity

• Think about § 102, § 103, § 112 – Every limitation!

• For § 101, where do we look for “abstract” idea?

• Does claim “recite” abstract idea vs. “involve”/“drawn to” abstract idea?

16

“Abstractness:” Procedural Ambiguity

• Distillation/extraction on claim – Squeeze out some principle

– Lurking in claim

• How is this done?

• Different people will do it differently 17

Problems With Second Part of Alice Test

“We examine…claim to determine whether it contains 'inventive concept' sufficient to 'transform' abstract idea into patent-eligible application.”

18

Alice Prong 2: “Inventive Concept”

• How figure this out?

• Use precedents – Mayo, Benson, Flook, Bilski, Alice: not

enough – Diehr: sufficient

19

Alice Prong 2: “Inventive Concept”

• Improvements in computer operation of other technology

• Insufficient if added elements are: – Well known in art – Conventional – Well understood and routine – Generic computer technology

20

“Generic” Use of Computer • “Using a computer to create and maintain

"shadow" accounts amounts to electronic recordkeeping--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 activit[ies]" previously known to the industry.”

21

Summary Judgment: Can “Issues of Fact” Prevent It?

§ 101 = ultimately question of law

•Since Bilski, lots of cases grant S/J

– Usually ineligible, sometimes eligible

•But still a role for jury? •Can there be factual disputes?

22

Impact of Alice on Rule 12(b)(6) Motions

• Motions to dismiss previously unheard of

• Possible now post-Bilski

– Endorsed by CAFC – Ultramercial v. Hulu

• Trend likely to continue

23

Claim Construction Necessary?

• Courts now decide § 101 without claim construction – Not necessary – Or, assume best one for patentee

• Alice unlikely to change this

• But look ahead to Teva v. Sandoz

24

Post-Alice Developments • Other Supreme Court 101 Actions

– Bancorp v Sunlife, and Accenture v Guidewire: both cert denied

– Ultramercial v. Hulu: remanded to Federal Circuit to decide in light of Alice

– ABL v Smartgene: SCOTUS requested Smartgene's response

• Motions for reconsideration – District courts have accepted new briefing in existing

proceedings on §101 invalidity in light of Alice – Apple v. Samsung: Samsung argues two Apple patent

claims are now invalid under “new standard” for patent eligibility

• Federal Court decisions

25

Digitech v. Electronics for Imaging, 2013-1600 (Fed. Cir.)

• July 11, 2014: Federal Circuit holds Digitech patent ineligible under §101

• “the device profile claims of the '415 patent do not require any physical embodiment, much less a non-transitory one. The device profile, as claimed, is a collection of intangible color and spatial information.

• Method “claims an abstract idea because it describes a process of organizing information through mathematical correlations and is not tied to a specific structure or machine”

• Quotes Flook: “If a claim is directed essentially to a method of calculating, using a mathematical formula, even if the solution is for a specific purpose, the claimed method is non-statutory.”

• “Without additional limitations, a process that employs mathematical algorithms to manipulate existing information to generate additional information is not patent eligible.” 26

1. First determine whether the claim is directed to one of the four statutory categories of invention, i.e., process, machine, manufacture, or composition of matter.

2. If the claim does not fall within one of the categories, reject the claim as being directed to non-statutory subject matter.

3. Next, if the claim does fall within one of the statutory categories, determine whether the claim is directed to a judicial exception (i.e., law of nature, natural phenomenon, and abstract idea) using Part I of the two-part analysis detailed below, and, if so, determine whether the claim is a patent-eligible application of an exception using Part 2. This two-part analysis supersedes MPEP 21 06(1I)(A) and 2106(11)(8).

27

Robert R. Sachs Tel: 415.875.2410 email: rsachs@fenwick.com

Robert Sachs is an intellectual property partner at Fenwick & West, LLP. He concentrates his practice on strategic patent counseling and prosecution for software technologies. Bob has extensive experience in developing patent portfolios for companies of all sizes, from startups to multinationals. He is the primary evaluator for standards essential patents on today's most important audio, video, and communications technologies, and conducts and supervises patent evaluations in US, as well as Europe, Japan, China, South Korea, Mexico and Canada.

One of Bob’s areas of expertise is patentable subject matter: the question of what kinds of inventions are eligible for patent protection, and particularly whether software and life sciences related inventions are patentable. This issue has become the new battleground in the development of the patent law, with several important cases having been recently decided by the Supreme Court and the Court of Appeals for the Federal Circuit. While most authors and scholars take a results-oriented approach to this question, Bob instead starts with the first principles of creativity and innovation that drive humans to solve functional problems. From that understanding, software and life sciences inventions are squarely in the domain of what the patent law is designed to protect.

Follow Bob’s commentary on patent eligibility and related patent issues on Bilski Blog (www.bilskiblog.com).

28

Marc J. Pernick Tel: 415.992.3424 email: mpernick@mkwllp.com

Marc Pernick is an intellectual property litigator at Mauriel Kapouytian Woods LLP. He has over 20 years of experience working on technology matters. Marc’s experience spans a broad spectrum of technologies and industries. He has represented clients in patent litigation concerning smart-phones and tablet computers, computer graphic chips, semiconductors, DVRs, e-commerce, document fraud detection, wireless communication, ultrasound contrast agents, DNA microarrays, and water filtration. Marc’s expertise extends beyond patent litigation. He has represented clients in several trade secret cases, patent licensing disputes, and litigation concerning copyright ownership and infringement. He has also developed winning strategies for reexaminations in the PTO. Marc has achieved success for his clients in all phases of litigation, including trial, pre- and post-trial motions, summary judgment motions and arguments, Markman briefing and hearings, technology tutorials, expert reports and depositions, pre-suit analysis, depositions and discovery strategy, and mediation and settlement. Before joining Mauriel Kapouytian Woods, Marc spent 20 years at the international law firm Morrison & Foerster. As a Litigation Partner there, he worked on high-stakes intellectual property cases for Fortune 500 companies and start-ups alike.