Business Method Patents Live! – Federal Circuit Finds First Patent That Survives Post-Alice Analysis

DDR Holdings, LLC. v. Hotels.com, L.P., et al.,

No. 2013-1505 (December 5, 2014) (Wallach, Mayer, and Chen)

Since the Supreme Court issued its June 2014 decision in Alice Corp. v. CLS Bank International,[1] federal district courts, the Court of Appeals for the Federal Circuit, and the United States Patent & Trademark Office have been invalidating patent claims under 35 U.S.C. § 101 at an unprecedented rate. But on December 5, 2014, the Federal Circuit bucked the recent trend, ruling for the first time that a challenged claim is patent-eligible under the analysis set forth in Alice.

The patentee, DDR Holdings, LLC (“DDR”), is the assignee of U.S. Patent Nos. 6,993,572 (“the ‘572 patent”) and 7,818,399 (“the ‘399 patent”), which relate to generating a composite web page that combines a host website with content of a third-party merchant. Many web pages include advertisements from third-party merchants that, when clicked on by a customer, re-direct the customer to the merchant’s website, and away from the host website. In order to eliminate the host website’s lost web traffic, DDR’s patents disclose a system that generates a composite webpage that displays product information from the third-party merchant but retains the host website’s “look and feel.” Slip Op. at 3-4. At the trial court, the defendants argued that DDR’s patents are invalid for, among other reasons, claiming patent-ineligible subject matter under 35 U.S.C. § 101. The lower court denied the motion, and a split panel of the Federal Circuit affirmed.

Writing for the majority, Judge Chen applied the two-step analysis set forth in Alice to determine that DDR’s claims are patent-eligible. Under the first step–whether the claims are directed to a patent-ineligible abstract idea–the majority did not explicitly answer the question, but instead noted that under any of the alleged underlying abstract ideas proposed by the defendants and the dissent, the claims are patent-eligible because they satisfy the second step of the test. In particular, the defendants argued that the claims were directed to the abstract ideas of “making two web pages look the same,” “syndicated commerce on the computer using the Internet,” and “making two e-commerce web pages look alike by using licensed trademarks, logos, color schemes, and layouts.” Slip Op. at 19. Dissenting Judge Mayer described the claims as directed to the business goal “that an online merchant’s sales can be increased if two web pages have the same ‘look and feel.’” Dissenting Op. at 2. The majority found that regardless of which definition of the abstract idea is adopted, the claims are patent-eligible under the second step of the analysis.

Applying the second step of the analysis–whether the claim includes elements that transform the nature of the claim into a patent-eligible application of the abstract idea–the majority first noted that the claims at issue are “necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks,” and do not “merely recite the performance of some business practice known from the pre-Internet world along with the requirement to perform it on the Internet,” like the claims in Alice. Slip Op. at 20. The majority also disagreed with the dissent’s position that the claims were merely an Internet implementation of the well-known “store within a store” abstract concept. Id. at 21. In the well-known “brick and mortar” context, a physical warehouse store may include a kiosk selling third-party products. However, unlike what happens when an online customer clicks on a third-party advertisement, a customer in the physical warehouse store is not transported out of the store to a separate physical location associated with the third-party simply by walking up to the third-party kiosk. Id. at 22. According to the majority, the distinction is that in the cyberspace context, the customer is able to purchase the third-party product without any indication that they were previously at the host website, and is not required to return to the host website. The majority therefore concluded that the claims are not merely directed to a computer implementation of a well-known abstract concept, but address a problem specific to the Internet.

The majority was however careful to note that “not all claims purporting to address Internet-centric challenges are eligible for patent.” Id. Unlike the patent-ineligible claims in Ultramercial, Inc. v. Hulu, LLC,[2] which used the Internet in its conventional fashion to implement a method of offering media content in exchange for viewing an advertisement, DDR’s claims change the normal operation of the Internet that occurs when a user clicks on a third-party advertisement. Id. at 22-23. The majority further noted that the claims also do not attempt to preempt every application of the idea of increasing sales by making two web pages look the same, instead reciting a specific way to automate the generation of a composite website by an outsource provider. Id. at 23.

While this case hardly re-opens the flood gates for business method and software-related patents, it should at least provide some hope to patent owners and applicants that Alice has not killed off this entire segment of patents. As articulated in Alice, this case confirms that patents related to improving the functionality of a computer or the Internet–as opposed to improving a preexisting concept by implementing the concept using computers or the Internet–may have a chance at surviving a § 101 challenge. However, given the split panel decision, this case may be headed for en banc review by the full Federal Circuit, so the glimmer of hope may be short-lived.

 

[1] 134 S. Ct. 2347 (2014).

[2] __ F.3d __, 2014 WL 5904902 (Fed. Cir. Nov. 14, 2014).

Federal Circuit Reverses Course, Affirms Patent Ineligibility Ruling in View of Surpreme Court Alice Decision

Ultramercial, Inc. et al. v. Hulu, LLC, et al.,

No. 2010-1544 (November 14, 2014) (Lourie, Mayer, and O’Malley)

On November 14, 2014, after twice before reversing the lower court’s dismissal of Ultramercial’s complaint for failing to claim statutory subject matter, the Federal Circuit agreed with the lower court that Ultramercial’s patent claims are ineligible under 35 U.S.C. § 101. Applying the new test set forth in the Supreme Court’s recent decision in Alice Corp. v. CLS Bank International, 134 S. Ct. 2347 (2014). the Federal Circuit found that Ultramercial’s claims directed to distributing copyrighted media over the Internet at no charge in exchange for viewing an advertisement, claimed nothing more than an ineligible abstract idea.

According to the two-step test, the court first determines whether the claims are directed to one of the three exceptions to patent-eligible subject matter: laws of nature, natural phenomena, and abstract ideas. If so, it is then determined whether the claim contains “an element or combination of elements that is sufficient to ensure that the patent practice amounts to significantly more than a patent upon the [ineligible concept] itself.” Alice, 134 S. Ct. at 2355. The additional elements must be more than “well-understood, routine, conventional activity” in order to transform the abstract idea into patent-eligible subject matter. Slip. Op. at 10 (quoting Mayo Collaborative Services. v. Prometheus Laboratories, Inc., 132 S. Ct. 1289, 1298 (2012)). The Federal Circuit found that Ultramercial’s claims are directed to the abstract idea of “showing an advertisement before delivering free content.” Slip. Op. at 10. Although the claims included limitations such as the user selecting the advertisement to view, and recording the transaction in an activity log, the Court found that these limitations merely add a degree of particularity but the claim as a whole is still devoid of a concrete or tangible application. The Court was careful to note that not all software-based patent claims are directed to abstract ideas, but agreed with the lower court in this case that the claims are directed to the abstract idea of “using advertising as an exchange or currency.” Id.

Moving to the second step of the analysis, the Federal Circuit examined the remaining claim limitations to determine whether they constitute an “inventive concept” that renders the claim patent-eligible. The Court found that the majority of the eleven claimed steps are merely incidental to the abstract concept of offering media content in exchange for viewing an advertisement (e.g., receiving the media content, selecting the advertisement, making the content available subject to the condition that the consumer views the advertisement, displaying the advertisement, allowing access to the content, and receiving payment from the advertiser). The additional steps of updating an activity log, requiring a request from the user to view the advertisement, restricting public access, and using the Internet, are merely conventional steps that are “insufficient to supply an inventive concept.” Slip. Op. at 11. Although not necessary to finding the claims patent-ineligible, the Court also noted that the claims fail the machine-or-transformation test because the claims are not tied to particular machine or apparatus and do not transform a particular article into a different state or thing.

Writing in concurrence, Judge Mayer made several interesting points with respect to patent eligibility. First, Judge Mayer encouraged lower courts to address patent eligibility at the outset of litigation–like the trial court in this case did–to conserve judicial resources, reduce vexatious litigation by resolving disputes before engaging in expensive discovery, and to free the public from innovation-stifling patents. Second, Judge Mayer argues that no presumption of validity should attach when conducting a section 101 analysis, unlike the presumption of validity for prior art challenges. Third, Judge Mayer interprets Alice as essentially implementing a “technological arts” test. Judge Mayer’s interpretation relies on the Supreme Court’s finding claims ineligible where they did not “improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field.” Alice, 134 S. Ct. at 2359. Under this interpretation advances in non-technical disciplines such as business, law, or the social sciences––seemingly, any business method patent–– would be patent-ineligible.

The Ultramercial decision is not surprising given the Supreme Court’s decision in Alice, and the recent flood of decisions invalidating patent claims on patent-eligibility grounds. The most interesting aspects of the case come from Judge Mayer’s concurrence arguing that there is no presumption of patent-eligibility and that the issue of patent-eligibility should be determined at the outset of litigation. Over the last several months, district courts have decided the patent-eligibility issue at the pleadings stage with increased frequency, as opposed to on summary judgment. Judge Mayer’s concurrence further encouraging this practice should result in even more trial courts addressing the issue earlier in litigation.