On July 9, 2015, the Federal Circuit issued its first opinion from an appeal of a final decision in a USPTO Covered Business Method (“CBM”) review proceeding, addressing several issues related to CBM proceedings and providing its opinion as to whether the USPTO Patent Trial and Appeal Board’s (“PTAB”) decision was correct that Versata’s patent, directed to determining a price using organizational and product group hierarchies, is invalid under 35 U.S.C. § 101 as being directed to “abstract ideas.” Versata Development Group, Inc. v. SAP America, Inc., No. 2014-1194 (Fed. Cir. July 9, 2015).
Quoting 35 U.S.C. § 324(e), which provides that “[t]he determination by the Director whether to institute a post-grant review . . . shall be final and nonappealable,” the Court made clear that it was not going to review the determination by the PTAB whether to institute a CBM review, but rather the merits of the final written decision that were appealed. The Court, however, did hold that it has the power to review on appeal the PTAB’s decision in a CBM proceeding of whether the challenged patent is a “covered business method.”
The Federal Circuit did not disturb its prior decision that the “broadest reasonable interpretation” standard for construing claim language used by the USPTO is appropriate, as opposed to the stricter standard used by district courts.
The Federal Circuit next responded to Versata’s challenge to whether the PTAB is authorized to invoke 35 U.S.C. § 101 as basis for a finding of invalidity, and the USPTO’s challenge to whether the Court could review this issue on appeal. The Court answered both questions in the affirmative.
Having resolved those threshold issues, the Court affirmed the USPTO on the merits of the CBM challenge, ruling that the patent was a covered business method subject to CBM review; that the USPTO properly construed the disputed claim terms; and that the claims were unpatentable under § 101 as directed to ineligible subject matter.
Senior Judge Plager wrote the majority opinion, joined by Judge Newman, while Judge Hughes wrote an opinion concurring in part and dissenting in part. Judge Hughes agreed that the patent claims were ineligible under § 101, but asserted that the Federal Circuit was not empowered to review the PTAB’s decision of whether the patent is directed to a covered business method.
The Leahy-Smith America Invents Act (“AIA”) establishes new proceedings in the USPTO to enable challenges to granted patents, one of which is CBM review. CBM proceedings are available only for a “covered business method patent,” which the AIA defines 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 . . . .” “Patents for technological inventions” are excepted from CBM review under the statute. The USPTO has defined a technological invention as one in which “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.”
When a challenger files a petition for CBM review, the review proceeds in two phases. First, the PTAB determines whether to grant the petition and institute review. As part of this institution decision, the PTAB considers whether the requirements for CBM review are met, including whether the claims are directed to a “covered business method patent” rather than a “technological invention.” If those requirements are met, and the PTAB determines that at least one challenged claim is more likely than not unpatentable, the PTAB institutes the CBM review. Second, after the CBM review is instituted, the PTAB proceeds to consider the merits and renders a final decision on whether the challenged claims are patentable over the grounds stated in the petition.
As part of the AIA, Congress hoped to streamline post-grant proceedings including CBM review and decided that only certain aspects of the proceedings should be appealable. As such, 35 U.S.C. § 324(e) provides that “[t]he determination . . . whether to institute a postgrant review under this section shall be final and nonappealable.”
Versata Development Group, Inc. (“Versata”) owns U.S. Patent No. 6,553,350 (“’350 patent”), which is generally directed to pricing products in multi-level product and organizational groups. SAP America, Inc. and SAP AG (“SAP”) filed a petition for CBM review of claims 17 and 26-29 of the ’350 patent on September 16, 2012 (the first day CBM procedures took effect). The PTAB granted the petition and instituted CBM review on January 9, 2013. On June 11, 2013, the PTAB issued a final written decision cancelling the challenged claims as unpatentable under 35 U.S.C. § 101 as being directed to “abstract ideas.” Versata appealed.
Federal Circuit Opinion
On appeal, the Federal Circuit addressed the following four issues:
Issue 1—Scope of Appellate Review. The Court held that § 324(e)’s prohibition of appellate review of CBM institution decisions does not prevent the Court from reviewing issues that the PTAB considers during the institution phase, and that serve as limitations on the PTAB’s authority to issue a final written decision. Thus, while the Court could not review the PTAB’s institution decision per se, the Court held that it nevertheless could—as part of its review of the PTAB’s final written decision—determine whether the challenged patent constituted a “covered business method patent.”
Issue 2—Definition of “Covered Business Method Patent.” The Court agreed with the PTAB that the statutory definition of “covered business method patent” is broad and covers a range of finance-related activities. The Court rejected Versata’s contention that the phrase “financial product or service” limited a covered business method to products or services of the financial services industry, or to patents owned by or directly affecting financial institutions. The Court next considered the “technological invention” exception. While criticizing the USPTO’s definition as circular and unhelpful, the Court nevertheless agreed with the PTAB’s determination that the challenged patent (specifically, representative claim 17) did not solve a technical problem using a technical solution.
Issue 3—Claim Construction Standard. The Versata Court approved the PTAB’s use of the “broadest reasonable interpretation” claim construction standard for CBM review.
Issue 4—The Merits Determination. Similar to Issue 1, the Court first questioned whether it could review whether the PTAB is authorized to invoke § 101 as a test of validity in CBM proceedings. For the same reasons as in Issue 1, the Court answered in the affirmative: the PTAB’s authority to apply § 101 speaks to a limitation on the PTAB’s authority to invalidate a patent. Having decided it was allowed to answer the question, the Court next turned to the answer itself, holding that failure to comply with § 101 is a proper ground of invalidity in a CBM review. The Court held that, despite language in 35 U.S.C. § 321(b) that seemed to exclude § 101 from the scope of CBM proceedings, the Court drew on broader language in § 328(a), the case law surrounding § 101, and legislative intent to conclude that § 101 may also be applied in CBM reviews.
Finally, the Court reached the merits of the PTAB’s invalidity finding using the Supreme Court’s so-called Alice/Mayo framework for determining whether claimed subject matter is patent-eligible. Under that framework, first, a determination is made as to whether the claims at issue are directed to a patent-ineligible concept; second, if the claims are directed to such a patent-ineligible concept, a determination is made as to whether the claim includes a limitation or combination of limitations that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the patent-ineligible concept itself. Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347, 2355 (2014). Applying the Alice/Mayo Framework, the Court first held that the challenged ’350 patent claims were not directed to patent-eligible subject matter, and instead covered the “abstract idea” of determining a price using organizational and product group hierarchies, which the Court deemed a basic conceptual framework for organizing information. Next, the Court found that none of the claims included sufficient additional limitations that would have transformed their nature into a patent-eligible application of that abstract idea.
Judge Hughes dissented in part by noting that the plain language of § 324(e), as well as the distinct institution and merits phases of CBM proceedings, barred appellate review of the PTAB’s threshold decision of whether the challenged patent is directed to a covered business method. He also asserted that such review was contrary to Congress’s intention that CBM proceedings provide quick and cost-effective alternatives to district court litigation.