By Michael Borella --
Section 18 of the Leahy-Smith America Invents Act (AIA) established a transitional program through which the USPTO conducts post-grant reviews of covered business method (CBM) patents. For the most part, § 18 incorporates the procedural aspects of 35 U.S.C. §§ 321–329, which codifies post grant reviews. The CBM review process is an attempt by Congress to address perceived litigation abuses involving business method patents.
In April 2007, Versata sued SAP for infringement of U.S. Patent No. 6,553,350 in the District Court for the Eastern District of Texas. Versata prevailed at trial. SAP appealed to the Federal Circuit, which affirmed the verdict. In September 2012, during these proceedings, SAP petitioned the USPTO's Patent Trial and Appeal Board (PTAB) for a CBM review of the '350 patent. SAP challenged the patent's validity under 35 U.S.C. §§ 101, 102, and 112. In June 2013, the PTAB ruled, finding claims 17 and 26-29 invalid under § 101.
Versata appealed this decision to the Federal Circuit, raising both procedural and substantive issues with respect to the PTAB's handling of the case. In a lengthy opinion by Judge Plager, the Court affirmed the PTAB's decision. Judge Newman joined the opinion, while Judge Hughes concurred in part and dissented in part. The majority opinion will be discussed herein.
Claim 17 of the '350 patent recites (formatted for readability):
A method for determining a price of a product offered to a purchasing organization comprising:
arranging a hierarchy of organizational groups comprising a plurality of branches such that an organizational group below a higher organizational group in each of the branches is a subset of the higher organizational group;
arranging a hierarchy of product groups comprising a plurality of branches such that a product group below a higher product group in each of the branches in a subset of the higher product group;
storing pricing information in a data source, wherein the pricing information is associated with (i) a pricing type, (ii) the organizational groups, and (iii) the product groups;
retrieving applicable pricing information corresponding to the product, the purchasing organization, each product group above the product group in each branch of the hierarchy of product groups in which the product is a member, and each organizational group above the purchasing organization in each branch of the hierarchy of organizational groups in which the purchasing organization is a member;
sorting the pricing information according to the pricing types, the product, the purchasing organization, the hierarchy of product groups, and the hierarchy of organizational groups;
eliminating any of the pricing information that is less restrictive; and
determining the product price using the sorted pricing information.
Put in simpler terms, the '350 patent is directed to creating hierarchies of customer groups and product groups, then assigning prices to products based on these hierarchies. For instance, "[s]pecial pricing adjustments may be defined as applying to all members of a specific customer group or a specific product group." According to the patent, the prior art required a very large table to provide this function. By consolidating the information in the table into the claimed hierarchy, the invention overcomes "the prior art's difficulty in storing, maintaining, and retrieving the large amounts of data required to apply pricing adjustments to determine prices for various products."
On appeal, Versata raised the following issues:
• if the PTAB makes an initial determination under §18 of the AIA that the patented invention qualifies for "covered business method" treatment under §18, may a court review that issue when reviewing as part of a final written decision the invalidation of claims under the authority of §18?
• if the answer is yes, for purposes of post-grant review by the USPTO how is the term "covered business method patent" to be understood, and does the patent at issue here qualify as a CBM patent?
• if the PTAB correctly determines that under §18 of the AIA a patent comes within the definition of a CBM patent, what are the criteria for determining whether the patent is excluded from review under §18 because the patent falls within the statutorily-excepted category of "technological invention," and how do those criteria apply to the '350 patent?
• if, in deciding the merits of the case—the validity of the challenged claims in the patent—the PTAB is called upon to engage in claim construction, does the PTAB apply the USPTO's general rule of the 'broadest reasonable interpretation,' or does it apply the judicial standard of the 'one correct construction'?
• finally, on appeal at the final written decision stage to this court, during which [the Federal Circuit] must decide whether the PTAB applied the substantive tests for validity correctly, may a court determine whether as an initial matter the PTAB chose the correct substantive tests to apply, and did the PTAB apply them correctly here?
After the Court addressed these issues, it then turned to the merits of the PTAB analysis regarding the subject-matter-eligibility of the '350 patent.
Issue 1: Judicial Review of CBM Review Institution
In order for CBM review of a patent to be instituted in the PTAB, the patent in question must be a "covered business method patent," not a "technological invention," and it must be "more likely than not that at least 1 of the claims challenged in the petition is unpatentable." If review is instituted, a trial is held before the PTAB, and eventually the proceeding ends with a final written decision of the PTAB. Such a decision can be appealed to the Federal Circuit.
35 U.S.C. §324(e), which applies to both post-grant review and CBM proceedings, states that "[t]he determination by the Director [of the USPTO] whether to institute a post-grant review under this section shall be final and nonappealable." Before the Federal Circuit, Versata challenged the institution of the CBM proceeding for the '350 patent, contending that "[t]he PTAB does not have authority to review CBM patents for subject-matter eligibility under 35 U.S.C. §101." SAP countered by asserting that the Federal Circuit does not have "authority to review any questions decided by the PTAB in the course of making its initial decision to institute review, including whether ineligibility under §101 is a permissible ground for invalidation under the CBM authority invoked by the PTAB."
The Court addressed this point by analyzing the language of the statute, noting that this language "does not by its terms apply to limits on the authority to enter a 'final written decision' invalidating a patent . . . [i]nstitution and invalidation are two distinct actions by the PTAB." The Court further stated that barring judicial review of whether a patent can be invalidated under § 101 "would also run counter to our long tradition of judicial review of government actions that alter the legal rights of an affected person, a hallmark of the distinction between (generally reviewable) final agency action and (generally unreviewable) agency action that merely initiates a process." Additionally, the Court invoked a line of Supreme Court cases which held that "judicial review of a final agency action by an aggrieved person will not be cut off unless there is persuasive reason to believe that such was the purpose of Congress."
Thus, the Court concluded that nothing "argues against this court, in an appeal of a final written decision, deciding contested questions regarding premises necessary to the agency's ultimate relied-on authority to take the action on appeal . . . just because the agency first addressed those premises at the initiation stage of the proceeding."
Issue 2: Is the '350 Patent a CBM Patent, and if so, is it a Technological Invention?
Section 18 defines a CBM patent as "a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service." But CBM patents do not include "patents for technological inventions." Versata and SAP disagreed on how these provisions should be interpreted.
Particularly, Versata disagreed with the PTAB's conclusion that the '350 patent was a CBM patent. According to the PTAB, "the definition [of CBM patent should] be broadly interpreted to encompass patents claiming activities that are financial in nature, incidental to a financial activity or complementary to a financial activity" (emphasis added). Thus, "[t]he PTAB . . . declined to interpret the statute as requiring that the patent's invention literally comprehend a financial product or service." Instead, the PTAB found that Versata's claims, which relate to monetary matters, were directed to financial products and services under § 18.
The Court determined that, as a matter of statutory interpretation, the definition of CBM patent "covers a wide range of finance-related activities," including those claimed by the '350 patent. The Court further noted that Congress broadly delegated rule-making authority to the USPTO with respect to CBM review, and that "the expertise of the USPTO entitles the agency to substantial deference in how it defines its mission." Consequently, the '350 patent falls within the definition of a CBM patent.
Section 18 also states that CBM patents do not include patents for "technological inventions." The statute does not define this term. In 37 C.F.R. § 42.301(b), the USPTO provided a definition stating that, in a technological invention, "the claimed subject matter as a whole recites a technological feature that is novel and unobvious over the prior art; and solves a technical problem using a technical solution."
The Court expressed displeasure with the USPTO's definition. It first noted that the requirement of novelty and non-obviousness seemed to be tautological, since the USPTO would have already found that the claimed invention met these requirements when the patent under review was issued. The Court further criticized the rest of the definition as being circular, and not offering "anything very useful in understanding the meaning of the term."
Nonetheless, the USPTO has published its Patent Trial Practice Guide, which stated that the following characteristics, when present in a claimed invention, did not support the position that the invention is technological: "recitation of known technologies"; "reciting the use of known prior art technology"; and "combining prior art structures to achieve the normal, expected, or predictable result of that combination." In light of this definition, as well as the Supreme Court's holding in Alice Corp. v. CLS Bank Int'l that recitation of a general purpose computer to perform otherwise abstract steps "does not change the fundamental character of an invention," the Court agreed with the PTAB. In particular, the Court found that the '350 patent claimed a non-technical procedure "akin to creating organizational management charts."
As a result, the Court affirmed the PTAB's conclusion that the '350 patent is a CBM patent, and that it is not a technological invention.
Issue 3 – Claim Construction Standards
The USPTO adopted the "broadest reasonable interpretation" (BRI) standard for claim construction for AIA post-grant proceedings, including CBM reviews. This is the same standard used by examiners when analyzing claims in office actions for patent applications, but different from the narrower construction used by courts when reviewing the claims of issued patents. Naturally, Versata disagreed with the use of BRI.
The Court cut to the chase, invoking its recently-decided In re Cuozzo Speed Technologies, in which the majority approved the USPTO using BRI for PTAB inter partes review (IPR) claim construction proceedings. The Court noted that it was bound by its own precedent, and even though Cuozzo did not directly apply to CBM proceedings, it saw "no basis for distinguishing between the two proceedings for purposes of the PTAB's use of BRI in claim construction here."
Additionally, the Court found that even if a narrower claim construction standard had been used, "it is less than clear that the outcome in this case would be different." According to the Court, use of the "one correct construction" standard would result in the same interpretation of the claims.
Therefore, the Court affirmed the PTAB's claim construction.
Issue 4 – The Merits
Turning to the patent-eligiblity issues, the Court reviewed Versata's challenge to the PTAB's use of § 101 to invalidate the claims. First, the Court addressed whether the PTAB is permitted to use this section when determining the validity of claims in a CBM review, as well as whether the Federal Circuit can review such use.
With regard to appellate review, the Court noted that, for the same reasons discussed with respect to Issue 1 above, it has jurisdiction to review the PTAB's use of § 101 even though this use occurred when the PTAB made its decision to institute CBM review.
Turning to whether the PTAB was within its authority to apply § 101 as it did, the Court referred to § 328(a) of the statute, which states that the PTAB "shall issue a final written decision with respect to the patentability of any patent claim challenged." Meanwhile, § 321(b) states that a petitioner in a PGR proceeding "may request to cancel as unpatentable 1 or more claims of a patent on any ground that could be raised under paragraph (2) or (3) of section 282(b)." These paragraphs of § 282(b) specify that the validity of a patent can be challenged under "any ground specified in part II as a condition for patentability," § 112, or § 251. Part II of 35 U.S.C. lists only § 102 and § 103, but not § 101, as a "condition for patentability."
Versata latched on to this apparent discrepancy as a rationale for concluding that the PTAB was not authorized to use § 101 to invalidate patents in CBM proceedings. SAP countered that § 101 is generally understood to be an invalidity defense. The Court conceded that Versata's reading of the statute was arguably correct, but asserted that "both our opinions and the Supreme Court's opinions over the years have established that §101 challenges constitute validity and patentability challenges." The Court went on to state that Versata's reasoning was a "hyper-technical adherence" to form over substance, and that "[e]xcluding §101 considerations from the ameliorative processes in the AIA would be a substantial change in the law as it is understood, and requires something more than some inconsistent section headings in a statute's codification."
Moving on to the substantive issues, the Court applied the two-step Alice test. The first step is whether the claims incorporate a patent-ineligible concept (e.g., an abstract idea, law of nature, or natural phenomenon). The second step is whether the claims also supply an inventive concept that renders the claims patentable, despite the inclusion of the patent-ineligible concept. According to this test, an inventive concept is "an element or combination of elements that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept itself."
In discussing the contours of § 101, the Court contrasted the claims found to be unpatentable in cases such as Alice, Bilski v. Kappos, Ultramercial v. Hulu, and others with the only two cases involving claims that are still clearly patent-eligible post-Alice: Diamond v. Diehr and DDR Holdings v. Hotels.com. Regarding the latter case, the Court wrote "[w]e drew a distinction between the patent-eligible claims at issue and patent-ineligible claims in the past that had merely recited commonplace business methods aimed at processing business information, applying known business processes to particular technological environments."
Applying the first step of Alice, the Court held that the '350 patent involved "the abstract idea of determining a price, using organizational and product group hierarchies." The Court's reasoning here is a bit thin, as it merely concluded that the claims of the '350 patent were similar to those in Alice and Bilski, and that the claimed invention "is an abstract idea that has no particular concrete or tangible form or application."
Applying the second step, the Court found that each individual limitation was purely conventional, inherent in the abstract idea itself, or a well-known computer function (such as storing information). Considering the claim as an ordered combination led the Court to the same result, as "the components of each claim add nothing that is not already present when the steps are considered separately." Continuing to apply its walks-like-a-duck analysis, the Court justified its position by comparing the claimed invention to the patent-ineligible claims in Content Extraction & Transmission v. Wells Fargo Bank and OIP Techs. v. Amazon.com, while distinguishing the invention from Diehr and DDR Holdings.
Versata argued that its invention provides a "desired benefit for the computing environment: fewer software tables and searches, leading to improvements in computer performance and ease of maintenance." The Court, however, quickly shot down this line of reasoning by pointing out that the claims do not recite such an improvement, and that Verasta had admitted as such. Versata also challenged the PTAB's failure to consider the purported commercial success of the invention. But the Court stated that "[c]ommercial success is not necessarily a proxy for an improvement in a technology nor does it necessarily indicate that claims were drawn to patent eligible subject matter."
With a final caveat that "any given analysis in a §101 abstract idea case is hardly a clear guidepost for future cases arising under § 101," the Court affirmed the PTAB holding that Versata's claims are invalid.
Versata Development Group, Inc. v. SAP America, Inc. (Fed. Cir. 2015)
Panel: Circuit Judges Newman, Plager, and Hughes
Opinion by Circuit Judge Plager; opinion concurring in part and dissenting in part by Circuit Judge Hughes