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CLS Bank and Bancorp: Back to Back Federal Circuit Decisions Offer Different Conclusions on Patentability
08/03/2012
Richard D. Rochford, Casey H. Kempner

The issue of whether particular inventions include “patent eligible” subject matter under § 101 of the patent statute has become highly controversial in recent years, raising questions with high economic stakes and profound legal and philosophical implications. Twice the Supreme Court has entered the fray, first in Bilski v. Kappos in 2010, and earlier this year in Mayo Collaborative Services v. Prometheus Laboratories, Inc. Those cases seek to find the appropriate balance between fostering innovation through the constitutional mandate “(t)o promote the Progress of Science and Useful Arts…”, U.S. Const. art I, § 8, cl. 8, and declining patent protection to applications that claim laws of nature, physical phenomenon and abstract ideas.

In the wake of Prometheus, the federal circuit has issued two decisions in the past three weeks which demonstrate that clear guidance on patentability issues remains elusive. The patents at issue in CLS Bank International v. Alice Corporation PTY. LTD., 2012 WL 2708400 at *1 (Fed Cir. July 9, 2012), cover “a computerized trading platform for exchanging obligations in which a trusted third party settles obligations between a first and second party so as to eliminate ‘settlement risk’.” Id. at 2. In Bancorp Services, L.L.C. v. Sunlife Assurance Company of Canada (U.S.), 2012 WL 3037176.

(Fed. Cir. July 26, 2012), the patents at issue cover using a computer to administer and track the value of life insurance policies in separate accounts. In both cases, the district court judges agreed with the defendants that the patents contained unpatentable abstract ideas.

The federal circuit decisions diverge. The federal circuit panel in Bancorp affirmed the district court holding; however, the majority of the CLS panel reversed the district court and held that patentable subject matter exists in that case. The majority of the CLS panel (Judges Linn and O’Malley) held that the claims of the patents sufficiently tied the “trusted third party” concept to a specific application to constitute patentable subject matter. That holding was based on a new test created by the majority:

“[W]hen – after taking all of the claim recitations into consideration – it is not manifestly evident that a claim is directed to a patent ineligible abstract idea, that claim must not be deemed for that reason to be inadequate under § 101…. Unless the single most reasonable understanding is that a claim is directed to nothing more than a fundamental truth or disembodied concept, with no limitations in the claim attaching that idea to a specific application, it is inappropriate to hold that the claim is directed to a patent ineligible “abstract idea” under 35 U.S.C. § 101.”

Id. at 20-21 (emphasis supplied). The majority opinion’s holding and test is based on two articulated viewpoints: (1) the “abstract idea” and other exceptions to patent eligible subject matter are intended to be very narrow – otherwise those exceptions “could eviscerate patent law”; and (2) it is appropriate to limit challenges under § 101, as § 101 is but one of the four statutory sections available to attack patent validity.

In her dissent in CLS, Judge Prost agreed with the district court’s holding that the patents in question reflect abstract ideas not subject to patent protection. She criticizes the majority for ignoring the guidance provided by the Supreme Court in Prometheus and Bilski, and for failing to analyze whether the patents contain an “inventive step.” Judge Prost characterizes the majority’s “manifestly evident” test as unsupported by the patent statute or recent Supreme Court decisions and as “more of an escape hatch than a yardstick.”

The panel in Bancorp (Judges Lourie, Prost and Wallach), in an opinion written by Judge Lourie, asserts that the opposite results in Bancorp and CLS are “not inconsistent,” because the claims in CLS were directed to a “very specific application” of the inventive concept of using a trusted third party to settle obligations, while the Bancorp patents seek to “broadly claim the unpatentable abstract concept of managing a stable value protected life insurance policy.” Id. at 25. Nonetheless, litigants and district court judges will likely have a difficult time applying that supposed distinction in future cases, particularly because the Bancorp panel never even mentions the “manifestly evident” or “single most reasonable understanding” standards articulated by the CLS majority. Perhaps the Bancorp decision reflects that panel’s attempt to partially (and implicitly) close the “escape hatch” Judge Prost believes the CLS majority created.

Who knows whether future federal circuit panels will use the CLS majority’s “manifestly evident” and “single most reasonable understanding” language as yardsticks to evaluate the patent eligibility of claims, or further close the escape hatch (perhaps with help from the Supreme Court), or create another ad hoc approach. For now, challenging patents under § 101 remains an uncertain and fact-intensive exercise.

For more information, please contact one of the attorneys listed below.

Kenneth G. Parker
949.202.3014
 

Phillip B. Philbin
214.651.5684

David H. Harper
214.651.5247