The U.S. Supreme Court on Patent Law – 2014

Published in the September 2014 Issue of Intellectual Property Today

The Supreme Court issued decisions in five important patent cases in 2014, repeatedly speaking from a unanimous opinion and overturning the Federal Circuit.  The patent community has followed these cases closely and the decisions did not disappoint.  The Supreme Court has confirmed that software patents which are not abstract may be subject matter eligible, clarified that induced infringement requires direct infringement by a defendant, looked with disfavor on vague claims, and opened the door for district courts to award attorney fees more frequently and be reviewed with increased deference.  This article summarizes the Supreme Court’s decisions and looks forward at the impacts on patent prosecution and litigation.

The Supreme Court Speaks on Subject Matter Eligibility

The U.S. Supreme Court unanimously affirmed the Federal Circuit’s en banc ruling in Alice Corp. Pty. Ltd. V. CLS Bank Int’l, finding that claims directed to an abstract idea are ineligible for patent protection under 35 U. S. C. §101.  The Court refrained from making any broad, categorical exclusions of business methods and software from patent eligibility.

Justice Thomas opined for the Court and extended the two-step framework for determining patent eligibility of diagnostic methods, which the Court articulated in the 2012 decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc..  Under this test, patent eligibility is determined by first examining “whether the claims at issue are directed to a patent-ineligible concept”—a natural phenomena, natural law or abstract idea.[1]  “If so, the Court then asks whether the claim’s elements, considered both individually and ‘as an ordered combination,’ ‘transform the nature of the claim’ into a patent-eligible application.”[2]  Importantly, the Court reiterated that “an invention is not rendered ineligible for patent simply because it involves an abstract concept,” noting that applications “of such concepts ‘to a new and useful end’ . . .  remain eligible for patent protection.”[3]

Applying the first step of the Mayo analysis to Alice’s claims, the Court concluded that all of the claims “are drawn to the abstract idea of intermediated settlement.”[4]  Specifically, the Court notes that “[a] principle, in the abstract, is a fundamental truth; an original cause; a motive; these cannot be patented, as no one can claim in either of them an exclusive right.”[5]  The Court explained that the basic concept of intermediated settlement (escrow), “[l]ike the risk hedging in Bilski  . . . is a fundamental economic principle long prevalent in our system of commerce” and, “like hedging, is an ‘abstract idea’ beyond the scope of §101.”[6]

Next, the Court turns to the second step where it “must examine the elements of the claim to determine whether it contains an ‘inventive concept’ sufficient to ‘transform’ the claimed abstract idea into a patent-eligible application.”[7]  According to Mayo, “[a] claim that recites an abstract idea must include ‘additional features’ to ensure ‘that the [claim] is more than a drafting effort designed to monopolize the [abstract idea].”[8]  Moreover,“'[s]imply appending conventional steps, specified at a high level of generality,’ [is] not ‘enough’ to supply an ‘inventive concept.’”[9]  Although Mayo did not involve the use of a computer, “[t]he introduction of a computer into the claims does not alter the analysis at Mayo step two.”[10]  Citing from earlier precedent established in Benson and Flook, in which “computer implementation did not supply the necessary inventive concept,” the Court reiterated that “’simply implementing a mathematical principle on a physical machine, namely a computer, [i]s not a patentable application of that principle.’”[11]  “Given the ubiquity of computers . . . wholly generic computer implementation is not generally the sort of ‘additional feature’ that provides any ‘practical assurance that the process is more than a drafting effort designed to monopolize the abstract idea itself.’”[12]

Applying these principles to Alice’s method claims (which the parties stipulated to require a computer), Justice Thomas notes that “the function performed by the computer at each step of the process is purely conventional” and that “each step does no more than require a generic computer to perform generic computer functions.”[13]  Thus, “the [method] claims at issue amount to ‘nothing significantly more’ than an instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer,” which is “not enough to transform an abstract idea into a patent-eligible invention.”

Addressing the system and media claims, the Court holds that “the system claims are no different from the method claims in substance.”  That is, “[t]he method claims recite the abstract idea implemented on a generic computer; the system claims recite a handful of generic computer components configured to implement the same idea.”[14]  In affirming the ineligibility of the system and media claims (which the court acknowledges as being “tangible” in the sense that they “necessarily exist in the physical, rather than purely conceptual, realm”), the Court reiterates its reluctance to “interpret[] §101in ways that make patent eligibility ‘depend simply on the draftsman’s art.’”[15]  “Holding that the system claims are patent eligible would have exactly that result.”[16]

Interestingly, in a one-paragraph concurrence, Justice Sotomayor (joined by Justices Ginsburg and Breyer), advocated the view that “any ‘claim that merely describes a method of doing business does not qualify as a ‘process’ under § 101.”[17]  According to Justice Sotomayor (citing Judge Dyk’s concurring opinion in In re Bilski, (545 F.3d 943 (Fed. Cir. 2008)), “'[t]here is no suggestion in any of the early English consideration of process patents that processes for organizing human activity were or ever had been patentable.’”[18]

As expected, the Court’s decision chooses not to articulate a bright-line rule for determining subject-matter eligibility under 35 U.S.C. § 101.  The Court’s decision does, however, provide some helpful clues for determining whether a claim drawn to computer-implemented process or system contains an “inventive concept” sufficient to transform an abstract idea into a patent-eligible application.  For example, citing Diehr, in which a computer‑implemented process for curing rubber was held to be patent-eligible, Justice Thomas notes that a claim that employs “a well-known mathematical equation” can nonetheless be patent eligible when “used . . . in a process designed to solve a technological problem in conventional industry practice.”[19]  “In other words, the claims in Diehr were patent eligible because they improved an existing technological process, not because they were implemented on a computer.”[20]

While the Court’s opinion provides guidance on the analytical framework for the judicial exceptions to patent-eligibility, it expressly refrains from providing a test for determining whether an invention is directed to an “abstract idea.” Thus, practitioners can expect future litigation to address whether inventions are directed to abstract ideas in the first place.

Induced Infringement Requires Direct Infringement by a Defendant

In Limelight v. Akamai, the Supreme Court unanimously reversed the en banc Federal Circuit’s interpretation of § 271(b) in view of § 271(a).  As a result, defendants will not be liable under § 271(b) for induced infringement when no one has directly infringed the method patent under § 271(a).  Opining for the unanimous Court, Justice Alito held that “[a] method patent claims a number of steps; under this Court’s case law, the patent is not infringed unless all the steps are carried out.”[21]

The Court assumes as correct (without separately deciding) the Federal Circuit’s holding in Muniauction that a method is not infringed “unless [executing all of the method steps is] attributable to the same defendant, either because the defendant actually performed those steps or because he directed or controlled others who performed them.”[22]  Applied in Limelight, “there has simply been no infringement of the method . . . because the performance of all the patent’s steps is not attributable to any one person.”[23]

The Federal Circuit’s contrary view would “deprive § 271(b) of ascertainable standards” since a “defendant can be held liable under §271(b) for inducing conduct that does not constitute infringement.”[24]  Doing so would essentially “require the courts to develop two parallel bodies of infringement law: one for liability for direct infringement, and one for liability for inducement.”[25]  The Court also rejects the Federal Circuit’s expansion of inducement liability based on a comparison with §271(f)(1). “[W]hen Congress wishes to impose liability for inducing activity that does not itself constitute direct infringement, it knows precisely how to do so.”[26]  “[C]ourts should not create liability for inducement of non-infringing conduct where Congress has elected not to extend that concept.” [27]

Interestingly, the Court avoided investigating the merits of the “single-entity” requirement, noting:

[R]espondents, like the Federal Circuit, criticize our interpretation of §271(b) as permitting a would-be infringer to evade liability by dividing performance of a method patent’s steps with another whom the defendant neither directs nor controls.  We acknowledge this concern.  Any such anomaly, however, would result from the Federal Circuit’s interpretation of §271(a) in Muniauction.  A desire to avoid Muniauction’s natural consequences does not justify fundamentally altering the rules of inducement liability that the text and structure of the Patent Act clearly require—an alteration that would result in its own serious and problematic consequences, namely, creating for §271(b) purposes some free-floating concept of “infringement” both untethered to the statutory text and difficult for the lower courts to apply consistently.[28]

The Court places the onus of correcting any perceived injustice with the Federal Circuit, stating that “[o]ur decision on the §271(b) question necessitates a remand to the Federal Circuit, and on remand, the Federal Circuit will have the opportunity to revisit the §271(a) question if it so chooses.”[29]  The Supreme Court will likely take this issue up again in the future.

The Supreme Court Leans Toward More Certainty, Disfavors Vague Claims

In Nautilus v. Biosig, the unanimous Court rejected the Federal Circuit’s standard for evaluating definiteness.  “[A]lthough this Court does not ‘micromanage the Federal Circuit’s particular word choice’ in applying patent-law doctrines, we must ensure that the Federal Circuit’s test is at least ‘probative of the essential inquiry.’  Falling short in that regard, the expressions ‘insolubly ambiguous’ and ‘amenable to construction’ permeate the Federal Circuit’s recent decisions . . . .”[30]  Those terms no longer bear on the inquiry.  Going forward, the test for indefiniteness is whether the claims, in light of the specification and prosecution history, “fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention.”[31]  This test must be conducted from the viewpoint of a person skilled in the art “at the time the patent was filed” and “not that of a court viewing matters post hoc.”[32]

The Supreme Court noted that the public notice function of patents “tug[s] in [an] opposite direction” from the fact that “absolute precision is unattainable.”[33]  Tolerating imprecision just short of insoluble ambiguity, however, does not serve the statutory mandate for clarity.  Instead, the insolubly ambiguous standard “foster[s] the innovation‑discouraging ‘zone of uncertainty’”.[34]

The new test based on reasonable certainty should be viewed as eliminating any temptation to purposefully draft ambiguous claims.  While “[s]ome modicum of uncertainty” will still be tolerated, we anticipate more successful challenges based on indefiniteness following this decision.[35]

The Supreme Court Clears the Path for Attorney Fees

The Supreme Court also issued two opinions relating to the award of attorney fees in patent cases:  Octane Fitness v. Icon Health and Highmark v. AllCare.  Together, these two decisions provide sweeping reform to the award of attorney’s fees in patent cases.  Going forward, it will be much more likely that district courts will grant fees in patent cases and be upheld on appeal.

In Octane Fitness v. Icon Health, the Supreme Court rejected the “unduly rigid” test that “impermissibly encumbers the statutory grant of discretion to district courts.”[36]  The Court found that the plain language of the statute is “patently clear.  It imposes one and only one constraint on district courts’ discretion to award attorney’s fees in patent litigation:  The power is reserved for ‘exceptional’ cases.”[37]  An “exceptional case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”[38]  District courts going forward will simply look at the totality of the circumstances.

The Supreme Court separately rejected the bases underlying Federal Circuit precedent.  First, it said the Federal Circuit’s overly restrictive standard for awarding fees “appears to extend largely to independently sanctionable conduct” under rule 11.[39]  “But sanctionable conduct is not the appropriate benchmark.”[40]  Second, the two-part test of requiring a suit be both objectively baseless and brought in subjective bad faith has been rejected.  This test is “too restrictive.”[41]  From this, we can see that the Supreme Court clearly envisions increased awards of attorney fees under the new formulation.  Third, the Supreme Court said the Federal Circuit’s test is “so demanding that it would appear to render § 285 largely superfluous.”[42]  In other words, it is so complicated and demanding that it raises the bar for finding a case to be “exceptional” beyond what Congress intended.  Fourth, the Supreme Court rejected the notion that entitlement to fees must be established with clear and convincing evidence.  “[N]othing in section 285 justifies such a high standard of proof.  Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.”[43]  The proper evidentiary threshold is therefore a preponderance of evidence.  Octane Fitness therefore rejected the entirety of the Federal Circuit’s complicated test, leaving the determination as to when to award fees within the discretion of a district court considering the circumstances of each case.

In HighMark v. Allcare, the Supreme Court unanimously rejected the Federal Circuit’s de novo review of determinations relating to attorney fees.[44]  Appellate review going forward will give deference under an abuse of discretion standard.[45]  In doing so, the Supreme Court has rejected the argument the Federal Circuit has specialized experience as to the award of attorney fees in patent cases.  The decision rests its logic on the fact that “the district court ‘is better positioned’ to decide whether a case is exceptional, because it lives with the case over a prolonged period of time.”[46]  All aspects of a district court’s attorney fee determination are to be reviewed for an abuse of discretion, even though “questions of law may in some cases be relevant” because “that inquiry

Taken together, Octane Fitness and Highmark are likely to lead to more awards of attorney’s fees by district courts, and more frequent affirmance of those awards by the Federal Circuit.

Conclusion

The Supreme Court accepted an active patent docket last term.  Many of the decisions relate to issues that have frequently been in the media over the last several years.  The debate of patent eligibility of software will likely continue, but now with the framework that there is no per se bar to software patents.  Many companies will find relief in the increased likelihood of receiving attorney fees, which will provide another sword in defending against the many patent troll lawsuits that have filled federal courts.  Companies will also find relief knowing that a single actor cannot be liable for induced infringement absent a finding of direct infringement.  And patent prosecutors should take care to draft claims with clarity rather than intentionally leaving a claim vague and subject to a validity challenge for indefiniteness.