Federal Circuit Ruling Is Another Step in the Evolving Standard for Patentability of Computer Software

Skadden, Arps, Slate Meagher & Flom LLP

Douglas R. Nemec P. Anthony Sammi Daniel A. DeVito David W. Hansen

On August 16, 2011, in the second Federal Circuit decision addressing the patentability of software claims after the U.S. Supreme Court’s decision in Bilski v. Kappos, the Federal Circuit in Cybersource Corp. v. Retail Decisions, Inc., No. 2009-1358, affirmed the district court’s summary judgment of invalidity due to lack of subject matter patentability under 35 U.S.C. § 101. The patent’s claims in Cybersource were directed toward detecting fraudulent credit card transactions over the Internet. The district court had concluded that the claims were directed to “‘an unpatentable mental process for collecting data and weighing values,’ which did ‘not become patentable by tossing in references to Internet commerce.’” The Federal Circuit agreed, holding that both claims directed toward a fraud detection method, and a physical medium holding software instructions for performing the method, were unpatentable. Demonstrating the recent changing landscape as to the patentability of software, the Cybersource decision is notable for several reasons, including: (1) its description and application of a framework for analyzing the subject matter patentability of software claims, (2) its approach toward software claims in the Beauregard claim format, which claim computer-readable media containing software instructions for performing a method, and (3) its treatment of the Federal Circuit’s prior decision in Research Corp. Techs. v. Microsoft Corp., 627 F.3d 859 (Fed. Cir. 2010).

The Cybersource decision provides one of the first glimpses of how future courts will apply the criteria for subject matter patentability after Bilski v. Kappos. First, the Cybersource court applied the machine-or-transformation test. This test examines whether a claimed invention “is tied to a particular machine or apparatus” or “transforms a particular article into a different state or thing” and was set forth as the sole test for patentability by the Federal Circuit in its en banc decision in In re Bilski. Although the Supreme Court in Bilski v. Kappos held that the Federal Circuit had erred by making the machine-or-transformation test the exclusive test for determining patentability under Section 101, the Supreme Court did reaffirm that the test remains a useful clue for determining subject matter patentability. The Cybersource court agreed with the district court’s conclusion that the fraud detection method failed the machine-or-transformation test because the claim only required one to “obtain and compare intangible data pertinent to business risks” and did “not require the method to be performed by a particular machine.” The court also rejected the patent owner’s argument that the word “Internet” in the claim rendered the claim patentable, holding that even if the Internet was a machine, it was merely the source of the data used by the fraud detection method, rather than the means for performing the method, and therefore it could not render the claims patentable.

After concluding that the fraud detection method failed the machine-or-transformation test, the Cybersource court noted that the “analysis does not end there,” and continued to evaluate the claims under prior Supreme Court case law. In particular, the Cybersource court applied the exclusion of “[p]henomena of nature, … mental processes, and abstract intellectual concepts” announced by the Supreme Court in Gottschalk v. Benson, 409 U.S. 63, 67 (1972). The court noted that Gottschalk suggested “that methods which can be performed mentally, or which are the equivalent of human mental work, are unpatentable abstract ideas.” Turning to the fraud detection method at issue, the court held that the steps “can be performed by a human who simply reads records of Internet credit card transactions from a preexisting database,” “writ[es] down a list of credit card transactions made from a particular [Internet] address” and “identif[ies] a likely instance of fraud based on [] simple observation.” Because the method’s “steps can be performed in the human mind, or by a human using a pen and paper,” the court concluded that the claim was an unpatentable mental process.

Turning to the claim directed to a computer-readable medium containing software instructions for performing the fraud detection method on a computer — a Beauregard claim — the Cybersource court also found that claim invalid, holding that merely reciting the same method in the form of instructions on a computer-readable medium added nothing to the patentability of the method. Importantly, rejecting the patent owner’s argument as form over substance, the court held that “[r]egardless of what statutory category (‘process, machine, manufacture, or composition of matter,’ 35 U.S.C. § 101) a claim’s language is crafted to literally invoke, we look to the underlying invention for patent-eligibility purposes.” Although the court appeared to leave the door open for some types of software claims, the court held “that simply reciting the use of a computer to execute an algorithm that can be performed entirely in the human mind” was insufficient to render the claims patentable. In particular, the court noted that, to satisfy the machine-or-transformation test, “the machine ‘must impose meaningful limits on the claim’s scope’” and that “the incidental use of a computer to perform the mental process of [the claimed fraud detection method] does not impose a sufficiently meaningful limit on the claim’s scope.” The Cybersource court distinguished the claims from cases “where, as a practical matter, the use of a computer is required to perform the claimed method,” giving the example of “calculating an absolute position of a GPS receiver and an absolute time of reception of satellite signals.”

The Cybersource decision is also notable for its treatment of the Federal Circuit’s prior decision in Research Corp. Techs. v. Microsoft Corp., 627 F.3d 859 (Fed. Cir. 2010), which was decided shortly after the Supreme Court’s decision in Bilski v. Kappos. The Research Corp. case was controversial for its seemingly broad statements of subject matter patentability, such as its claim that unpatentable abstractness “should exhibit itself so manifestly as to override the broad statutory categories of eligible subject matter” and “that inventions with specific applications or improvements to technologies in the marketplace are not likely to be” unpatenably abstract. The Cybersource decision did not address this language from Research Corp., instead holding that Research Corp. was distinguishable because the method at issue in that case “required the manipulation of computer data structures … and the output of a modified computer data structure” and therefore “the method could not, as a practical matter, be performed entirely in a human’s mind.”

It is apparent from Cybersource and Research Corp. that the standards of patentability for software claims will continue to evolve going forward. It remains to be seen whether future courts will embrace the broad statements of patentability from Research Corp. or the more structured approach of Cybersource. Furthermore, as the dividing line between patentable and unpatentable software patents continues to develop, it is unclear where the majority of existent software patents will fall.

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