Federal Circuit Strikes Down Business Method Patent Based on Early-Stage Motion to Dismiss

11/17/2014

Judicial rulings on the patent-eligibility of software and business method patents under section 101 of the U.S. Patent Act have run heavily against patent owners since the U.S. Supreme Court’s June 19, 2014 ruling in Alice Corp. v. CLS Bank International, 573 U.S. ___, 134 S. Ct. 2347 (2014). (See Client Update here.) On Friday, November 14, 2014, the United States Court of Appeals for the Federal Circuit continued that trend by confirming the viability of a very early-stage challenge to a business method patent in district court litigation. In Ultramercial, Inc. v. Hulu, LLC (Fed. Cir. November 14, 2014) (“Ultramercial III”), a three-judge panel of Circuit Judges Lourie, Mayer and O’Malley affirmed the California district court’s grant of a motion to dismiss, as to defendant Wildtangent, a complaint asserting a business method patent involving the use of advertisements in connection with Internet media. Wildtangent made the successful motion to dismiss for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Rule 12(b)(6) provides a vehicle for a very early challenge of the existence of patent-eligible subject matter in a patent case in district court, and thus provides an opportunity for a defendant to dismiss a case efficiently without the need for claim construction or discovery. Success of Wildtangent’s challenge in Ultramercial III suggests that, for a challenge on section 101 grounds, an early dispositive motion attacking the pleadings could be preferable, at least as an initial gambit, to a petition for Covered Business Method (“CBM”) review before the Patent Trial and Appeal Board.

In the district court below, plaintiff Ultramercial had asserted a single patent directed to a method for distributing copyrighted media products over the Internet where the consumer receives such a product at no cost in exchange for viewing the advertisement, and the advertiser pays for the content. (Slip Op., p. 3.) Excluding the preamble, Claim 1 of the patent contained eleven steps. (Id. at pp. 3-4.) The district court had granted Wildtangent’s Rule 12(b)(6) motion, finding that the patent did not claim patentable subject matter because it claimed an abstract idea. (Slip Op. p. 5.) The district court did not construe the claims of the patent before dismissing the case. (Id.)

Prior to its decision in Ultramercial III, the Federal Circuit twice decided, in panel opinions written by former Chief Judge Rader, to reverse the district court’s dismissal of Ultramercial’s case. The first such decision was in 2011. Wildtangent sought U.S. Supreme Court review of that first decision via a petition for a writ of certiorari. The Supreme Court granted the petition and vacated the first Federal Circuit decision, with directions to the Federal Circuit to reconsider its decision in light of the Supreme Court’s then recent holding in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. 10, 132 S. Ct. 1289 (2012). (Slip Op., pp. 5-6.) When the Federal Circuit again reversed the district court’s decision in its second decision, Wildtangent again sought Supreme Court review. The Supreme Court again granted Wildtangent’s petition for writ of certiorari, vacated the Federal Circuit’s decision, and remanded to the Federal Circuit for consideration in light of the Court’s further precedent in Alice Corp.

Apparently the third time was, indeed, the charm - at least for Wildtangent. In Ultramercial III, in addition to approving an early section 101-based challenge without claim construction, the Federal Circuit continued the judicial trend of distilling a multi-step claim into a single-sentence “concept” and deeming that distilled concept abstract. In this instance, the court held that the claim at issue was directed to the abstract idea of “using advertising as an exchange for currency.” (Slip Op. at pp. 9, 10.) Having “distilled” the eleven steps of the claim into this “abstraction,” the court held that the abstract idea described was devoid of a concrete or tangible application. (Slip Op. at p. 9.) The Court then turned to the issue of whether any additional limitations of the claim “transform” the abstract idea into patent-eligible subject matter. (Ibid.) The court held that “[A]dding routine additional steps such as updating an activity log, requiring a request from the consumer to view the ad, restrictions on public access,” and other elements did not transform the abstract idea into something that was patent-eligible. (Id. at p. 11.) Importantly, the court stated: “That some of the eleven steps were not previously employed in this art is not enough - standing alone - to confer patent eligibility upon the claims at issue.” (Slip Op. at p. 12.)

In a concurring opinion, Judge Mayer opined that whether claims meet section 101 requirements is a “threshold question . . . that must be addressed at the outset of litigation,” that no presumption of validity is involved in the section 101 analysis, and that “entrepreneurial” claims, by definition, do not contain patent-eligible subject matter. (Concurring Slip Op. at p. 1; see also Slip Op. at pp. 9-12.). It remains to be seen whether Judge Mayer’s (re)interpretation of Alice Corp. as establishing a “technological arts test” or his view that claims having innovative aspects that are “entrepreneurial” in character, rather than technological, are not patent-eligible takes hold with the rest of the court.

The panel of Judges Lourie, Mayer and O’Malley did not seem concerned with the absence of claim construction in Ultramercial III, noting relative to its paraphrasing and simplification of claim terms that it was not “purporting to construe the claims.” (Slip Op. at p. 9.) And the Supreme Court has not explicitly addressed the role, or necessity of, claim construction in addressing section 101 patent eligibility. But the panel’s lack of concern with claim construction in Ultramercial III is significant, because it may indicate a softening of positions among certain Federal Circuit judges as to the necessity of claim construction prior to conducting a section 101 analysis. In the Federal Circuit’s en banc decision in CLS Bank International v. Alice Corp, 717 F.3d 1269 (Fed. Cir. 2013) (en banc), affirmed, 573 U.S. ___, 134 S. Ct. 2347 (2014), Judge Lourie wrote in favor of claim construction before addressing the section 101 issue of patent eligibility, particularly to “unambiguously” identify the abstract idea at issue: “Although not required, conducting a claim construction analysis before addressing section 101 may be especially helpful in this regard by facilitating a full understanding of what each claim entails.” Id. at 1282 (Lourie, J., concurring; emphasis added). And Judge O’Malley, joined by Judge Linn, was even more emphatic in the en banc Alice Corp. opinion, asserting that development of a record “in which all claim construction issues were vetted” should have occurred in the case to enable proper review of the section 101 issues. Id. at 1331 (Linn, J. and O’Malley, J., dissenting).

Here are some of our key takeaways from Ultramercial III, as well as other section 101-related decisions in 2014:

  • Although early Rule 12(b)(6) challenges were not unheard of before Ultramercial III, this holding is a clear indication that such challenges ought to be more strongly considered in most cases. By the same token, any plaintiff asserting a patent vulnerable to a section 101-based attack should think carefully about whether it may need to proffer claim construction positions early on to potentially stave off such an early challenge.
  • Success of Wildtangent’s challenge may suggest to some defendants that, for section 101 grounds, an early dispositive motion attacking the pleadings could be preferable, at least as an initial gambit, to a petition for CBM review or an IPR before the Patent Trial and Appeal Board. Surprisingly, it may turn out to be patent owners that would prefer to have a 101 challenge decided before the technically trained PTAB.
  • Although the Supreme Court has refused an invitation to declare all software to be patent-ineligible, it is very challenging in the current environment to evade the “abstract idea” distillation of the first step of the Alice Corp./Mayo analysis with respect to any software or business method patent.
  • Although the Supreme Court in Alice Corp. did not quibble with the Federal Circuit’s previous holding that patents challenged under section 101 have a presumption of validity and that the challenger must prove ineligible subject matter by clear and convincing evidence, this presumption appears to be under attack by one or more Federal Circuit judges; moreover, the practical value of the presumption remains unclear given that whether a patent covers patent-eligible subject matter under section 101 is an issue of law.

If you have any questions regarding these matters, please contact us.

Email Disclaimer