Financial Services Patent Claims Invalid
By Joseph Herndon --
On January 20, 2016, the Federal Circuit issued an opinion in the case captioned Mortgage Grader, Inc. v. First Choice Loan Services Inc., NYLX, Inc. This case involves patent claims directed to systems and methods for assisting borrowers to obtain loans. Mortgage Grader appealed the District Court's finding that the asserted claims are patent-ineligible on summary judgment. Here, the Federal Circuit affirmed that finding. This decision by the Federal Circuit stays in line with the Alice decision and the Federal Circuit decisions following Alice, and provides a large roadblock to any patent owner looking to assert any type of financial or economic practice-based patent claims.
Turning to the patents and substance of the patent-ineligibility challenge under § 101, the patents-in-suit, U.S. Patent Nos. 7,366,694 and 7,680,728, relate to financial transactions including a method for a borrower to evaluate and/or obtain financing, e.g., a loan. Claim 1 of the ‘694 patent is representative and reproduced here:
1. A computer-implemented system for enabling borrowers to anonymously shop for loan packages offered by a plurality of lenders, the system comprising:
a database that stores loan package data specifying loan packages for home loans offered by the lenders, the loan package data specifying, for each of the loan packages, at least a loan type, an interest rate, and a required borrower credit grading; and
a computer system that provides:
a first interface that allows the lenders to securely upload at least some of the loan package data for their respective loan packages to the database over a computer network; and
a second interface that prompts a borrower to enter personal loan evaluation information, and invokes, on a computer, a borrower grading module which uses at least the entered personal loan evaluation information to calculate a credit grading for the borrower, said credit grading being distinct from a credit score of the borrower, and being based on underwriting criteria used by at least some of said lenders;
wherein the second interface provides functionality for the borrower to search the database to identify a set of loan packages for which the borrower qualifies based on the credit grading, and to compare the loan packages within the set, including loan type and interest rate, while remaining anonymous to each of the lenders and without having to post a request to any of the lenders, said second interface configured to display to the borrower an indication of a total cost of each loan package in the set, said total cost including costs of closing services not provided by corresponding lenders.
The District Court concluded that all of the asserted claims are directed to the abstract idea of "anonymous loan shopping" and that they include no "inventive concept."
On Appeal, the Federal Circuit followed the two-step framework for distinguishing patents that claim laws of nature, natural phenomena, and abstract ideas from those that claim patent-eligible applications of those concepts. First, the court determines if the claims at issue are directed to a patent-ineligible concept. If not, the inquiry ends, as the claims are patent-eligible. But if so, the next step is to look for an "inventive concept" -- i.e., 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.
1. Are the claims directed to a patent-ineligible concept?
Regarding step 1, the Federal Circuit agreed with the District Court that the asserted claims are directed to the abstract idea of "anonymous loan shopping."
The claim limitations recite nothing more than the collection of information to generate a "credit grading" and to facilitate anonymous loan shopping. As the District Court explained, the claims specify that "the borrower is anonymous to the lender until the borrower has been informed of the cost of the loan based on the borrower's credit grading, and the borrower then chooses to expose its identity to a lender."
The Federal Circuit simplified the series of steps covered by the asserted claims to be a borrower applies for a loan, a third party calculates the borrower's credit grading, lenders provide loan pricing information to the third party based on the borrower's credit grading, and only thereafter (at the election of the borrower) the borrower discloses its identity to a lender. These simplified steps were found to be capable of being performed by humans without a computer. This reasoning further supported the Federal Circuit's finding that the claims are directed to an "abstract idea".
2. Do the claims include an "inventive concept"?
The Federal Circuit found that no inventive concept was recited in the claims that could save the claims from being found invalid under § 101. Instead, the claims add only generic computer components such as an "interface," "network," and "database."
It is well known now that generic computer components do not satisfy the inventive concept requirement.
The Federal Circuit noted that the two common reasons found in prior cases for supporting "inventive concepts" were lacking in the instant case. First, because nothing in the asserted claims purports to improve the functioning of the computer itself or effect an improvement in any other technology or technical field, there can be no inventive concept due to recitation of the generic computer components. Second, the Federal Circuit further noted that the claims also do not solve any problem unique to the Internet of computer technical field. For completeness, the Federal Circuit noted that the claims further are not adequately tied to "a particular machine or apparatus", which could have provided supported for patentability under Bilski.
Thus, because the asserted claims are directed to an abstract idea and nothing in the claims adds an inventive concept, the claims are not patent-eligible under § 101.
3. Do §101 inquiries require resolution of underlying factual issues?
Mortgage Grader argued that the District Court improperly resolved material factual disputes in connection with granting First Choice Loan's summary judgment motion of patent ineligibility. The Federal Circuit disagreed, and noted that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment.
The § 101 inquiry may contain underlying factual issues, but here, the Federal Circuit performed the § 101 analysis without resolving fact issues. Since the issues were not considered to be directed to a material fact, summary judgment was still appropriate.
The Federal Circuit noted that the parties submitted expert declarations, and the District Court acknowledged these materials were in the record. But the District Court did not rely on them in its § 101 analysis. Instead, in making its patent-eligibility determination, the District Court looked only to the claims and specifications of the patents-in-suit.
The Federal Circuit noted that the mere existence in the record of dueling expert testimony does not necessarily raise a genuine issue of material fact. However, the Federal Circuit did review the expert opinions, and disposed of them in turn.
For instance, the Federal Circuit noted that First Choice Loan's experts simply provided non-material historical information about how people obtained mortgages in the period before the Internet, and this was considered by the Federal Circuit to add little if anything to the '694 patent's specification, which observed that "[t]here are newspaper or Internet referral sites which publish interest rates for one or more lenders."
Further, Mortgage Grader's expert stated, neither of First Choice Loan's experts "reference[d] the asserted claims, but instead merely explain[ed] the existence of mortgage rate tables published in newspapers during the 1980s and 1990s." Mortgage Grader's expert opined that the patents-in-suit solved the problem of information asymmetry between borrowers and lenders, which had previously permitted lenders to "steer" borrowers to predatory loans. But that assertion about problem solving does not by its terms identify claimed process steps.
In any event, the claims expressly encompass so-called "independent" third-parties who, in addition to determining a borrower's credit grading, may be "full time employee[s] of an entity providing the desired financial services" and may "receive a percentage commission from an affiliated company based on the loans funded through the program." Plainly speaking, the Federal Circuit stated, conflicts-of-interest and predatory lending are still possible when practicing the claims, and thus, the Federal Circuit did not believe Mortgage Grader's expert opinions had any effect on the patent ineligibility analysis.
Mortgage Grader's expert also provided an opinion that the patents-in-suit require use of a computer. But, the Federal Circuit noted that use of a generic computer to implement a "fundamental economic practice" cannot provide an inventive concept sufficient to save claims from patent ineligibility, and thus, this opinion does not create a genuine dispute of material fact.
The Federal Circuit having reviewed the expert reports found that no reasonable factfinder could find, based on the expert reports, that the asserted claims are directed to patent-eligible subject matter.
Thus, the Federal Circuit found the patent claims to be directed to patent-ineligible subject matter, and that the District Court's granting of summary judgment, even with dueling expert opinions alleging factual disputes, was proper. It seems that patent owners attempting to survive a summary judgment challenge under § 101 should consider submitting expert reports from patent specialists, to tie any alleged improvement described in the specification to the asserted claims, as well as to offer expert opinion regarding how the asserted claims constitute "significantly more" so as to recite an "inventive concept". Some genuine issue of material fact seems to be present in this case, but such issue was not presented in a detailed way that satisfied the Federal Circuit.
That being said, it's hard to find some "inventive concept" in these claims. Once the generic computer components are removed (none of which are asserted as new), what remains are a recitation of basic manual steps to find a loan. Mortgage Grader was unable to show that these steps solved some problem, provided some improvement in the banking field, or improved operation of computers used for banking services that could give rise to any inventive concept.
Mortgage Grader, Inc. v. First Choice Loan Services Inc. (Fed. Cir. 2016)
Panel: Circuit Judges O'Malley and Taranto, and Chief District Judge Stark (sitting by designation)
Opinion by Chief District Judge Stark