In this Ropes & Gray podcast, Washington, D.C.-based IP litigators Scott McKeown and Matt Rizzolo address recent developments in the field of patentable subject matter under Section 101, including how Federal Circuit cases such as Berkheimer v. HP and Aatrix v. Green Shades are having an effect on patent litigation. Matt and Scott also discuss the USPTO's recent guidance on Section 101 issues, as well as whether legislation relating to patent eligibility may be on the horizon.
Transcript:
Scott McKeown: Hello, and thank you for joining us on this Ropes & Gray podcast. I'm Scott McKeown, chair of the firm's Patent Trial and Appeal Board, or PTAB practice, based in our Washington, D.C. office. I'm joined today by Matt Rizzolo, an IP litigation partner, also based in our Washington, D.C. office. Today we'll be discussing everyone's favorite topic, at least in the patent world, that is the state of law surrounding Section 101 of the Patent Act, which governs what is patentable subject matter. And just to cut through some of the legalese, what we're talking about here is the types of things that you can patent. So the Patent Act embraces a process, a machine, an article of manufacture, a composition of matter – so these are the types of things you can patent as compared to whether or not your individual invention is new or non-obvious, for example. So we're talking about the types of things that are contemplated by the Patent Act, which would seem to be a pretty straightforward process in terms of distilling out what is proper and improper at the very outset of the patenting process. But we found, over the past couple years, that the courts are very interested in the types of inventions that are coming out of the patent office and whether or not they are, in fact, the types of things that should be patentable. So Matt, could you tell us a little bit about what's been going on in the courts with respect to patentable subject matter?
Matt Rizzolo: Sure. So I'd note that you said "everyone's favorite topic" – I'm not sure it's everyone's favorite topic really, but it's a noteworthy one for sure. So ever since the Supreme Court's 2014 ruling in Alice v. CLS Bank, litigants as well as the courts themselves have grappled with Section 101 issues, as you just mentioned. Many defendants have been able to use early Section 101-related motions as a means to quickly and cost-effectively dispose of infringement claims that are made against them in court.
Scott McKeown: When you say early, what are we talking about here in terms of savings?
Matt Rizzolo: Sure. So I mean, a patent litigation can be very expensive running through trial, running into multiple millions of dollars. But if you're able to bring an early motion for judgment on the pleadings, or a motion to dismiss under Federal Rule 12(b)(6), or even a summary judgment motion after some discovery has taken place, that can result in hundreds of thousands or even millions of dollars of savings for patent litigation defendants.
Scott McKeown: So this has been a great development for alleged infringers?
Matt Rizzolo: Yes. The guidance provided in Alice has allowed district courts to rule on these motions earlier on. However, the pendulum may be swinging a bit. Last year, the Federal Circuit issued a pair of decisions in a couple of cases called Berkheimer and Aatrix that have seemingly made it more difficult for courts to decide one-on-one issues on a motion to dismiss or a motion for summary judgment. And just a couple weeks ago, the USPTO released for comment from the public, new guidelines for its examiners and administrative patent judges to utilize in evaluating patents for compliance with Section 101. There seems to be a widely-held view that these guidelines take a more permissible view of what is patentable subject matter.
Scott McKeown: Right. And we'll to those guidelines in a moment. They're certainly impactful for not only patent procurement or patent prosecution as it's known, but also for PTAB challenges such as covered business methods, CBMs, PGRs, where those 101 issues can be raised. Matt, why don't you set the stage with a quick discussion of what's happened recently, last year for example, in the Berkheimer and Aatrix decision and perhaps how that's rolled back some of these defendant advantages in such technologies as computer implemented software, user interfaces, AI, Blockchain. What is happening to these patents or these types of patents that have been vulnerable to 101 summary judgment motions? What have these decisions meant for litigation strategy?
Matt Rizzolo: Sure. So by way of refresher, the Supreme Court's test under Alice, as well as some of its other 101 cases, is a two part one. So first the question is, are the claims directed to an abstract idea? If so, then the claims are ineligible unless, at the second step of the test, they are found to involve more than the performance of "well-understood, routine and conventional activities that are previously known to the industry." Is there significantly more to the claims such that they had an inventive concept beyond the unpatentable, abstract idea? So a little less than a year ago, the Federal Circuit issued its opinion in Berkheimer v. HP Inc. – it's the Berkheimer case that I referred to earlier. So in that case, the district court had found on ruling on a summary judgment motion, that certain of the asserted claims were ineligible under Section 101 – they were directed to unpatentable subject matter. In an opinion for the Federal Circuit, Judge Moore held that the question of whether a claim element or a combination of elements is well-understood, routine or conventional to a person of ordinary skill in the art, is a question of fact that must be proven by clear and convincing evidence – so that's that second step of the Alice test that I just talked about. She said that while not every Section 101 determination may contain disputes over underlying facts that must be proven by clear and convincing evidence, this one did, and that precluded summary judgment in this case, so the Federal Circuit reversed and remanded on some of the claims that were an issue there.
Scott McKeown: Before you get to the next case, getting back to your last point – so this idea that some fact finding has to be done, what it does is kick the can down the road, I would guess, and keep defendants from getting out of these cases quickly and cost-effectively. Is that correct?
Matt Rizzolo: That's exactly right. So then a week later after the Berkheimer case, the Federal Circuit issued another opinion from Judge Moore in Aatrix v. Green Shades, and there, in that case, a similar issue popped up. The defendant had prevailed on a Rule 12(b)(6) motion to dismiss on 101 grounds. As I mentioned, this is a very typical path in the wake of the Alice case. And the district court had denied the plaintiff's motion to amend its complaint to add more factual allegations regarding the patentability of the claims. The Federal Circuit again reversed and found that accepting all the factual allegations and the complaint as true, and viewing them in light most favorable to the plaintiff, which is the standard required for motions to dismiss, the district court should not have found the patents ineligible under 101. It didn't preclude the district court from ultimately reaching that conclusion down the road in the case, but at the pleading stage, the Federal Circuit found that that was improper. Now again, Judge Moore did provide a caveat and said that the decision here doesn't mean that Section 101 issues can never be resolved on a motion to dismiss or that any of the Federal Circuit decisions in the past were incorrect on that point, just that in this case, that was improper. So unsurprisingly, both defendants, in the Berkheimer case and in the Aatrix case, filed petitions for en banc re-hearing, but last May, the Federal Circuit issued a concurrent per curiam orders as a full court denying en banc review. Only Judge Reyna dissented from the denial of en banc re-hearing – in his view, these two cases changed the law on 101 issues and warranted en banc review. Now interestingly, Judge Lourie also penned a concurrence where he expressed his view that the Federal Circuit alone couldn't solve the 101 morass. So I want to read a quote from him here because I think it's really interesting. He said, "The law needs clarification by a higher authority, perhaps by Congress, to work its way out of what so many in the innovation field consider are Section 101 problems. Individual cases, whether heard by this court or the Supreme Court, are imperfect vehicles for enunciating broad principles because they are limited to the facts presented. Section 101 issues certainly require attention beyond the power of this court." Now, there are a lot of others who share Judge Lourie's view and many have expressed concerns about sort of the case-by-case comparison by analogies, tests that have been applied by the Federal Circuit in district courts in evaluating whether patents are unpatentable, abstract ideas.
Scott McKeown: So in terms of challenging what I guess I'll call the Berkheimer line of cases, that would be the end of the road, right? The Federal Circuit has spoken – they've said that the second step of the Alice test may, at least in some circumstances, require a factual inquiry – full stop. And the en banc requests have been denied. So now at least, in some cases, district courts are denying motions to dismiss on summary judgment motions on 101 issues, finding that the disputed facts are precluding early resolution.
Matt Rizzolo: Well, you're certainly right about the consequences, but it's not quite the end of it. In September, HP filed a petition for a writ of certiorari asking the Supreme Court to decide whether patent eligibility is a question of law for the court to decide or whether it's a question of fact for the jury based on the state of the art at the time of the patent. Then earlier this month, just after the turn of the new year, the Supreme Court issued what's called a "CVSG" – it called for the views of the Solicitor General on this issue. That's often a signal that the Court considers the question to be potentially cert-worthy, so this is something to keep an eye on as 2019 rolls forward.
Scott McKeown: Interesting. Before we switch to sort of the PTO perspective, I'm wondering since this change, if you've noticed differences in the content of complaints. How are plaintiffs trying to adapt to this to ensure that they don't get that summary judgment motion or trying to force these factual disputes before the court?
Matt Rizzolo: Sure. So in a lot of cases you'll see some complaints that contain a lot more factual allegation regarding the non-conventionality, if you will, of the claim elements or their ordered combination. Sometimes you've even seen expert declarations attached to the complaints, so they could be considered in connection with a motion to dismiss on 101 grounds. Some courts have actually rejected some of these factual allegations made in the complaint as mere boiler plate. So in some cases it's move the needle, but in other cases it hasn't.
Scott McKeown: Well, let's switch now to the patent office perspective. As we mentioned earlier, another issue to look out for in 2019 relates to the PTO's new Section 101 guidance it issued in January for its examiners and administrative patent judges. And this is something that relatively new Director Iancu has been hinting at for at least several months since he's taken the position last year and was long awaited by those who practiced in the PTO space.
Matt Rizzolo: Yes, that's right. I recall we were both sitting in the audience several months back at a conference when the Director gave a speech about the need for a more predictable, reliable patent system, particularly as it relates to patentable subject matter. So is that what these guidelines are designed to do?
Scott McKeown: Yes and no. I think that is the stated goal, but it's interesting that you raise Judge Lourie's statement because I think the patent office has a similar perspective, in that enunciating broad principles in case law when they're very fact specific is the problem. And when you have patent examiners that are not trained lawyers, they're engineers, they're scientists, they're looking for common facts because that's what they do. When they search the prior art, they're looking for very similar technologies and I think they fall into that habit when they're considering these 101 questions. So what they end up doing, is if they have a software claim, they start to grab the software cases and of course the facts are very different, the technologies can be very different, but they try to distill these cases down into some singular proposition and it doesn't always work. So what's been happening at the patent office, to the frustration of patent owners, is you're getting very inconsistent treatment across hundreds, if not thousands, of examiners. So it's not uncommon to have a certain technology in front of one examiner, not see a 101 rejection, and then a different examiner in the same art unit digging in and finding the claims outside of patentable subject matter. So there's this frustration because a 101 rejection coming from an examiner is a very legal issue, it's not a technical issue. And once the examiner sort of digs in and finds a case that he or she believes is analogous, you're almost left with, "Well, I guess I need to appeal this," which will then cost you upward of a year or two to get that final determination. So I think the goals are twofold. Number one is to make the examination consistent, to provide some kind of framework that the examiners can easily understand without having to dig into the case law. And then I think secondarily, and Director Iancu has made this clear that I think he believes that there should be a more liberal view of what is patentable. and to the extent that the courts disagree with it, he seems to be comfortable in sort of erring on the side of letting claims that might be in a gray area out of the office for the courts to sort of decide.
Matt Rizzolo: So I remember in the wake of Berkheimer and Aatrix, the patent office did issue some revised guidance on 101 issues where it said that examiners need to provide a factual basis for whether claim elements were well-understood, routine or conventional – effectively following what the Federal Circuits said in those cases. So how does the guidance promulgated by the PTO here differ from that? What else did it add?
Scott McKeown: I think the guidance is in more, for lack of a better term, bite-sized portions for examiners to follow consistent with what else they see in documents such as the Manual of Patent Examination Procedure, the MPEP. So there's a flow chart. The first question to ask is, "Is this claim – does it fall into one of the noted exceptions that come out of the case law?" So they've tried to distill down the case law from all of this discussion of Alice steps to a list of exceptions. Is it a law of nature? Is it applying a law of nature? Is it software, per se? And if it's not, that's your exit ramp out of the world of 101. If it does seem to fall into an exception, there's an additional question you can ask as well: "Does the claim require a practical application?" And so if the answer is, "Yes, there's a practical application," that's another exit ramp out of the 101 realm for patent examiners. So it sort of condenses all of the case law and the two-step analysis of Alice into really one step. And the PTO goes out of their way to make it clear there's still the two steps of Alice, but I think the way that this will be applied and practiced and the way that examiners will view this as well as administrative patent judges at the PTAB, is this is really one step with two sub-steps in it. Is it an identified exception? No, you're out. Yes, is it a practical application? Yes, then you're out. So you have these two exit ramps to get out of the world of 101 and that's just a much simpler way to run the railroad rather than having, especially examiners that don't have legal training trying to digest and synthesize all of these dissimilar, or seemingly dissimilar, holdings.
Matt Rizzolo: So that practical application step, it sounds an awful lot like the sort of search for an inventive concept or analyzing whether something is well-understood, routine or conventional, but the PTO is saying that that's how you evaluate it at step one under the case law, right? They're looking at whether the claims are directed to an abstract idea and how to analyze that – that's something that courts have generally been loathed to do, right? I'm not aware of any court that's defined what an abstract idea is or how to define an abstract idea. So could the PTO's guidance here sort of effectively force the Federal Circuit's hand?
Scott McKeown: I agree that that's what they've done. They've taken this, "Is it an abstract idea," question, which then causes you to run to case law, and they've broken it down into these digestible steps. So is it a judicial exception? Is it a practical application? And as you note, Alice sort of has this technological innovation prong which sometimes bleeds over into step one, sometimes into step two, depending upon the decision. And the PTO's guidance has made clear that that test is still there, but that technological innovation question should really wait for step two, which, in my opinion, you probably won't get to in most cases at the USPTO because the practical application is a somewhat lower threshold, I would submit, than what you see in Alice. So the practical application almost rolls things back at the patent office to what they were doing prior to Alice, which is, "Is there some technology in the claim? Is there a computer in the claim?" And the guidelines make clear that, "Well, if it's just a general purpose computer, it's not enough." But I wonder, especially for those examiners that have been at the agency for some time, if they will revert to their old habits of, "Well, I see a computer. This seems like it's narrow. It's specific to a certain field." I think that that is what's going to happen.
Matt Rizzolo: So moving from practical applications to practical consequences, what are the consequences of this, both for patent owners and those who might challenge a patent on 101 grounds, whether in a CBM or PGR?
Scott McKeown: I mean, I think the short answer for 101 challenges in a PGR or CBM is simply don't file them. You know, given these new guidelines, there's going to be some learning curve here by the examiners, by the judges. I think given the leadership at the PTO, there's definitely a sentiment to err on the side of protecting patent owners. So for my purposes, and at least until I see some examples of the patent office applying this consistent with what the courts would do in an Alice context, I'm not very enthusiastic about challenging 101 at the patent office right now. On the prosecution side, I think for patent owners, the consequences are you will have compact prosecution – you will have less 101 problems. Now when you get outside and start asserting these patents, what will the Federal Circuit think of these guidelines? Of course the guidelines are not the law, they can't change the law, but I don't know that the Federal Circuit will look at these guidelines and say, "Well, they don't make sense or they're inconsistent." It's a framework for doing something very similar to what's done by the courts. Whether or not it makes sense might hinge on that practical application analysis or whether the individual facts of that case somehow end up with a different result when applied under Alice. So I think it will be very fact specific, which is what we end up coming back to time and time again with these questions.
Matt Rizzolo: Do you have any thoughts on whether the PTO guidance might somehow be challenged in the courts as beyond the scope of its authority or contrary to law?
Scott McKeown: I think it's a difficult challenge to make because you'd have to be somebody that's on the wrong side of it. So if you think of it in the CBM or PGR context, that negative decision against you probably comes at institution, in which case you don't have the appeal. So do you file mandamus, arguing that somehow that the Board is operating outside of the law? Certainly the agency has the authority to issue guidelines – as I said, they can't change the law, but that would seem to be an uphill battle. Like I say, I think it's hard to point to one aspect of these guidelines and say they're clearly at odds with the case law. It's a different perspective. Some of the sharp edges are rounded, but does that rise to the level that you could get a challenge heard and overturned at the Federal Circuit? I don't see it, but we'll have to wait and see.
Matt Rizzolo: So I know we're running low on time, but I think I'd be remiss if we didn't mention that the courts and the PTO aren't the only ones diving into the patentable subject matter debate. So the statute itself has been the same since 1952, but lately several organizations such as the IPO, the ABA and AIPLA have all proposed amendments to Section 101. And then in December, a number of interested parties, organizations and companies from the tech and farm industries, for example, met with some law makers on Capitol Hill to discuss some legislative reform on 101 issues. So Congress does have a little bit on their plate right now, but who knows, maybe there'll be some proposed legislation on the horizon as well.
Scott McKeown: That's right. I think with the groundswell of activity, both in the courts and at the patent office, there's certainly some interest in, as Judge Lourie said, going to a higher authority. So thank you, Matt and thanks everyone for listening. Stay tuned for future podcasts on the latest developments in this space. We'll see if the Supreme Court grants cert in Berkheimer or if the PTO's new guidelines are subject of challenges in court. For more information on notable IP-related issues, please visit our website ropesgray.com and you can also check out my blog, patentspostgrant.com for the latest in PTAB developments. Of course, if we can help you navigate any of these changes, please don't hesitate to get in touch. In the meantime, we look forward to speaking to you on our next podcast.
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