Smart Systems Innovations, LLC v. Chicago Transit Authority (Fed. Cir. 2017)

By Michael Borella --

Three years ago, the Supreme Court's Alice Corp. v. CLS Bank Int'l case set forth a two-part test to determine whether claims are directed to patent-eligible subject matter under 35 U.S.C. § 101.  One must first decide whether the claim at hand is directed to a judicially-excluded law of nature, a natural phenomenon, or an abstract idea.  If so, then one must further decide whether any element or combination of elements in the claim is sufficient to ensure that the claim amounts to significantly more than the judicial exclusion.  But generic computer implementation of an otherwise abstract process does not qualify as "significantly more."  On the other hand, a claimed improvement to a computer or technological process is typically patent-eligible.

Since then, there has been much confusion and debate regarding the exact contours of patent eligibility.  Of late, however, clarity has been emerging, but not enough to disambiguate the Alice test.  Instead, it only helps us understand why different individuals can use the same test to come to radically different conclusions.  Particularly, when applying the test, the outcome is largely determined by (i) the level of abstraction at which one views the claims under part one, and (ii) whether one considers any improvements provided by the claimed invention under part two.  The present case illustrates how even Federal Circuit judges vary with respect to these points.

Smart Systems brought an action against the Chicago Transit Authority (CTA) in the Northern District of Illinois, alleging infringement of its U.S. Patents Nos. 7,566,003, 7,568,617, 8,505,816, and 8,662,390.  The CTA moved for judgment on the pleadings, taking the position that all of the patents were ineligible under § 101 for being directed to an abstract idea and not claiming significantly more.  The District Court granted the motion.  Smart Systems appealed.

The Federal Circuit panel unanimously agreed with the District Court that the '816 and '390 patents were invalid.  However, Judge Linn dissented from Judge Wallach's majority opinion regarding the '003 and '617 patents.  For sake of brevity, we will focus on where the panel disagreed.

As described by Judge Linn:

In conventional transit systems, access is rapidly provided through a turnstile by directly depositing the required fare using cash, tokens or some form of proprietary fare card.  Such systems generally do not use conventional bankcards.  Conventional bankcard transactions use a card reader in contact with the card's magnetic strip or imbedded chip to read the card number and other data at a merchant's location.  The read data is then transmitted over a telephone line or network to a merchant bank for verification of card validity and fund availability.  The merchant bank processes the received data and returns to the merchant an approval or disapproval message.

According to Smart Systems, the latency in such conventional bankcard transactions and the lack of network connectivity in some transit control points render conventional bankcards impractical for point-of-access use in a transit system that requires rapid fare processing.

[The Smart Systems patents] claim systems and methods for using a bank card directly at a physical gate or terminal to enter a mass transit system.  [They] disclose the use of a bankcard reader to scan a credit or bankcard and a processor to compare the scanned data against a locally-stored "white list" of approved transit accounts.  If the card owner is listed as an account-holder, access is granted without immediately having to establish network connectivity to process and charge the account, which can be done at a later time.  If the card owner is not listed as an account-holder, access is denied.

Claim 14 of the '003 patent was considered representative:

A method for validating entry into a first transit system using a bankcard terminal, the method comprising:
    downloading, from a processing system associated with a set of transit systems including the first transit system, a set of bankcard records comprising, for each bankcard record in the set, an identifier of a bankcard previously registered with the processing system, and wherein the set of bankcard records identifies bankcards from a plurality of issuers;
    receiving, from a bankcard reader, bankcard data comprising data from a bankcard currently presented by a holder of the bankcard, wherein the bankcard comprises one of a credit card and a debit card;
    determining an identifier based on at least part of the bankcard data from the currently presented bankcard;
    determining whether the currently presented bankcard is contained in the set of bankcard records;
    verifying the currently presented bankcard with a bankcard verification system, if the bankcard was not contained in the set of bankcard records; and
    denying access, if the act of verifying the currently presented bankcard with the bankcard verification system results in a determination of an invalid bankcard.

Similarly, claim 13 of the '617 patent was also considered representative:

A method for validating entry into a first transit system using a bankcard terminal, the method comprising:
    downloading, from a processing system associated with a set of transit systems including the first transit system, a list of bankcards comprising, for each bankcard in the list, a hash identifier of a bankcard previously presented, by a respective holder of the bankcard, to the processing system, wherein the bankcard comprises one of a credit card and a debit card;
    receiving, from a bankcard reader, bankcard data comprising data from a bankcard currently presented by a holder of the bankcard;
    determining an identifier based on at least part of the bankcard data from the currently presented bankcard;
    determining whether the currently presented bankcard is contained in the set of bankcard records;
    verifying the currently presented bankcard with a bankcard verification system, if the bankcard was not contained in the set of bankcard records; and
    denying access, if the act of verifying the currently presented bankcard with the bankcard verification system results in a determination of an invalid bankcard.

Applying part one of the Alice test, the Court rapidly concluded that the claims were directed to an abstract idea.  Particularly, the Court found that the "patents involve acquiring identification data from a bankcard, using the data to verify the validity of the bankcard, and denying access to a transit system if the bankcard is invalid."  In the Court's view, the claimed inventions were no more than financial transactions applied to mass transmit.  Furthermore, the Court held that the claims merely involved the "collection, storage, and recognition of data," and did not improve an existing technological process.

While Smart Systems argued that the claims embodied an improvement because they sped up processing at turnstiles, the Court disagreed.  The Court reasoned that precedents such as Enfish v. Microsoft, and DDR Holdings v. Hotels.com require that the patentee establish that the claimed invention is an improvement to computer technology, while McRO v. Bandai Namco Games requires that the patentee establish that the claimed invention is "directed to specific rules that improve a technological process."  The Court's narrow view of these cases -- ones that ultimately found claims to be eligible under § 101 -- appear to render them limited to their facts.  In contrast, the Court took a more expansive reading of cases finding claims involving financial transactions ineligible under § 101.  The Court noted that "regardless of whether the claims teach a financial transaction, when properly considered, it is evident that the claims are directed to the collection, analysis, and classification of information, and not access alone."

Turning to part two of the Alice test, the Court focused on the additional elements of a processor, an interface, memory, and a hash identifier ("data extracted from a bankcard to create a digital fingerprint of the card that a bankcard terminal processor uses to identify the card in question").  The Court viewed these aspects as nothing more than generic computing elements.  Once more reading precedent that would otherwise help Smart Systems as being, for all intents and purposes, limited to its facts, the Court stated that the holdings of Diamond v. Diehr and DDR Holdings did not apply.  Diehr involved more than generic computer components and DDR Holdings was solving a problem particular to the Internet.

Thus, Judge Wallach, joined by Judge Reyna, declared all claims invalid.

Writing in dissent with respect to only the '003 and '617 patents, Judge Linn disagreed.  Notably, he began by observing that "[t]he majority commits the same error as the district court in engaging in a reductionist exercise of ignoring the limitations of the claims in question."  Judge Linn goes on to state that "the abstract idea exception is almost impossible to apply consistently and coherently," and that the Alice test is "indeterminate and often leads to arbitrary results."  As a consequence, "it can strike down claims covering meritorious inventions not because they attempt to appropriate a basic building block of scientific or technological work, but simply because they seemingly fail the Supreme Court's test."

Judge Linn goes further, addressing one of the fundamental issues that makes the Alice test ambiguous.  He notes that recent Federal Circuit § 101 opinions state that, under part one, we are to both "examine the claims' character as a whole," and "look to capture the 'basic thrust' of the Asserted Claims."  These contradictory directives can lead to disparate outcomes based on who is evaluating the claims and what precedent they happen to be looking to for guidance.

Judge Linn posed a series of questions: "But if we are not to re-characterize the claims, what are we supposed to do?  Are we not to ignore any limitations?  May we ignore some?  If so, which ones?  Which limitations matter and which do not?  What exactly is the task at hand under step one?"  Ultimately, he took the position that "[a] determination of what the claims are directed to is often aided by a consideration of the specification and its description of the problem to be solved and the discovered solution to that problem."

Judge Linn's criticism of the majority is based on how its "determination turns wholly on the level of generality with which it describes the focus of the claims and is at such a high level of abstraction as to overlook and misstate what the inventors considered to be their invention."  To that point, Judge Linn found that the claims are directed to an access system rather than a financial transaction, and therefore are neither directed to a fundamental economic practice nor abstract.

Regarding part two of the Alice test, Judge Linn chided the majority for ignoring the advancement reflected in the claims, noting that "facilitating use of conventional bankcards to access mass transit is at the heart of the invention, much like the challenge of curing rubber was at the heart of the invention in Diehr."  He also found that the claimed "combination of a bankcard reader, a white list, and transit system access control" was "a different way of accessing a transit system by using a conventional bankcard without the need for immediate network connectivity and without the latency previously considered an inherent limitation on the use of ordinary bankcards."

For these reasons, Judge Linn would have ruled claims of the '003 and '617 patents to be patent-eligible.

The problems inherent in the Alice test are plain to see.  While the responsibility lies with the Supreme Court for setting forth an abstruse test that frequently produces contradictory outcomes, the burden is now on the Federal Circuit to agree within itself how the test is to be used in practice.  Are we to consider all claim elements in part one, or boil the language of the claim down to its gist or main idea?  If the answer is the latter, how do we prevent different evaluators from finding different main ideas in the same claim, as was the case here?  And, during the part two analysis, are we to consider evidence from the specification that the claimed invention is a technical improvement, or are we limited to finding such an improvement literally recited by the claims?

Until these questions are answered definitively, the black mark of Alice will continue to stain patent law.

Smart Systems Innovations, LLC v. Chicago Transit Authority (Fed. Cir. 2017)
Panel: Circuit Judges Reyna, Linn, and Wallach
Opinion by Circuit Judge Wallach; opinion dissenting in part and concurring in part by Circuit Judge Linn

Comments

[Paul Cole]

While supporting the constructive views of Judge Linn, one wonders whether a representative claim positively including a turnstile and opening/restricting the turnstile as a physical device would have been less prone to objection.

It is an unavoidable truth that the words "directed to" and "focus" are unacceptably indefinite and lead to exuberant disregard to the "all elements" rule.

[EG]

Hey Michael,

As I've said before, I could do better predicting patent-eligibility with a Ouija board than with the nonsensical and broken Mayo/Alice framework. Smart Systems is just another example of SCOTUS creating an utter mess in patent law, one they refuse to clean up, and one which, unfortunately, the Federal Circuit, with the exception a few judges like Linn in this case, refuses to push back at this contrived "out of thin air" Mayo/Alice framework.

[Greg DeLassus]

"Of late, however, clarity has been emerging..."

I really cannot agree with this. What we have seen emerging is a faction of the CAFC who *want* to save the patent system by cabinning and redirecting Alice, which has resulted in a variety of claims surviving an Alice challenge. These precedents, however, do not make the law any more *clear*. They just make the law *less* deleterious to a well-functioning patent system (although, probably not by a large enough factor to prevent overall deterioration).

In fact, I would say that the law becomes successively *less* clear. Claims that *surely* should be 101 eligible (Sequenom) are cut down, while claims that are *much* more marginal (Enfish) survive.

One is left with the very distinct impression that the distinction between these two cases lies not in their facts or procedural postures, but rather in the fact that one of them (Enfish) wound up in front of Judges Moore & Taranto (two Alice-skeptical judges), while the other (Sequenom) ended up in front of Judge Wallach (perhaps the most Alice-bullish judge on the bench, alongside Judge Dyk).

That is the *opposite* of the law being clear. The law is clear when one can look at the facts and predict the outcome before one knows the judge(s). By contrast, right now, one can have very little confidence about the outcome---regardless of the facts---until one knows which judge(s) will hear one's case.

[Skeptical]

Will somebody wake up Congress?

[Mike Borella]

Greg,

I'm not disagreeing with you. Please note the entire sentence: "Of late, however, clarity has been emerging, but not enough to disambiguate the Alice test. Instead, it only helps us understand why different individuals can use the same test to come to radically different conclusions."

Mike

[skeptical]

Mike,

If I were to paraphrase then, what is becoming clear is the LACK of clarity...

A law that is so "clear" as to allow within its gambit "different individuals can use the same test to come to radically different conclusions" fails under the Void for Vagueness doctrine.

That doctrine is not just for criminal law maters (as has been shown in other forums) and the linchpin of its application in the patent arena may very well come from Oil States (if you believe the government brief that patents really are not property and all).

[Jim Demers]

If you think the Fed. Cir. judges are inconsistent, you ought to try dealing with the PTO's examiners. They seem to have extracted one important lesson from all the confusion: there's no penalty for sending an applicant away empty-handed.