For companies whose core technology is software – and here this certainly means, among others, companies developing video games – the Federal Circuit's decision this fall in McRO, Inc. v. Bandai Namco Games America, is welcome news. The Federal Circuit provided guidance regarding what constitutes an abstract idea in the context of video game software in light of the now infamous Alice Corporation Pty. Ltd. v. CLS Bank Int'l, which some might think was designed to kill software patents.
However, defendants in McRO have recently filed a petition for rehearing en banc raising a number of challenges to the appellate court's ruling. McRO provides support for those seeking patent protection for software, especially in the context of innovative video game software. An en banc rehearing from the Federal Circuit panel would likely diminish the value of McRO for software developers, but could provide clarity regarding the Alice test and the patent eligibility of software (and video game technology) more generally.
The Alice Court set forth a two-part test to determine whether software claims were patentable. In the first step, a court asks whether patent claims are directed to patent-ineligible subject matter, such as laws of nature or abstract ideas. If so, in the second step, a court then determines whether the claim "contain[s] an 'inventive concept' sufficient to 'transform' the claimed abstract idea into a patent-eligible application." (citing Mayo Collaborative Services v. Prometheus Laboratories, Inc.). The Alice test, as announced by the Court, left developers questioning whether software patents had a viable future.
In particular, Alice left the door wide open for video game companies employing innovative technology to create a great game with less fear of patent infringement. And many companies protecting their assets have turned to trade secret protection to secure their core assets, even if such protection was not an ideal fit for their business model. McRO, whether affirmed or reversed, may change these IP protection strategies yet again.
McRO v. Bandai
In McRO, plaintiff developed a method of automating 3-D facial modeling for video game development. The previous art required animators to manually manipulate each minute change in a model's facial expression in order to produce realistic facial modeling animation. Using a "keyframe" approach, animators determined the correct output for each frame of animation, a long and tedious process. The relevant patent claim involved the application of limited and specific rule sets that improved on the prior art by automating the keyframe process, eliminating the numerous subjective decisions that animators had previously implemented manually.
In 2012 and 2013, plaintiff filed suit for patent infringement against various video game developers and publishers. Most of the cases were transferred and heard in Federal Court in the Central District of California. After the district court held a claim construction hearing, defendants moved jointly for a judgment on the pleadings on the basis that plaintiff's patent was directed to an abstract idea and thus patent ineligible. While acknowledging that the patent improved upon the prior art, the lower court held the claim patent ineligible because it was directed to an abstract idea and broadly preemptive. On appeal, plaintiff argued that the patent was not directed to an abstract idea because it produced a tangible product, the 3-D animation. Alternatively, plaintiff argued, even if the claim was directed to an abstract idea, it was patent eligible because the claim involved a specific and limited rule set that was used in a specific way. Defendants countered by arguing that the claims were merely algorithms that could be performed without a computer. Further, defendants contended that plaintiff's process was merely an abstract idea, describing the main claim as a generic concept involving the use of mathematical algorithms in a particular order to bring about a desired result.
Appellate Panel Opinion
Applying Alice step one, the Federal Circuit held the plaintiff's patent was not directed to an abstract idea. The patent was not directed to an abstract idea because it included specific limitations and only encompassed a limited rule set. Continuing, the Federal Circuit explained that the "claimed rules…are limited to rules with certain common characteristics, i.e., a genus." Importantly, the court likened plaintiff's rule set to a genus of an invention, as opposed to a species. Genus patent claims raise preemption concerns but had been recognized as patentable. Because of the limited and specific nature of the claim the patent was directed to patent eligible subject matter.
Next, the court addressed preemption concerns. The court determined that the claim would not be broadly preemptive because it employed specific methods to accomplish a desired result. While the claim was preemptive to a certain extent, the claim did not monopolize the resulting 3-D animation, nor did the claim preempt the use of other rule based 3-D animation methods for facial modeling because of the specific structure of the claim. The claim was an improvement upon the previous art and not simply the embodiment of the previous art in a new technological form. Alice, Parker v. Flook, and Bilski v. Kappos were inapplicable because those cases involved patent claims "where the claimed computer-automated process and the prior method were carried out in the same way." Deciding the case at Alice step one, the court never reached Alice step two. Plaintiff's claim was directed to patent eligible subject matter and not broadly preemptive.
Petition for Rehearing En Banc
The recent joint petition for rehearing en banc may yield a different outcome. In the petition, defendants maintained, among other arguments, that the appellate opinion further confused important issues regarding patent eligibility. Defendants reiterated that the patent claim at issue was merely an abstract idea. Appellees' Joint Petition For Rehearing En Banc at 5-6, McRO, Inc. v. Bandai Namco Games America No. 2015-1080, (Fed. Cir. Oct. 13, 2016). As an abstract idea, the appellate court should have applied Alice and Flook, but instead applied a so-called safe harbor for patent claims involving technological improvements. While acknowledging that some other courts have applied this safe harbor for technological improvements, the defendant requested a determination from an en banc panel to determine whether that safe harbor should be applied to abstract ideas. A ruling from an en banc panel approving the appellate court's analysis regarding this issue could establish a safe harbor for technological improvement. A ruling to the contrary, however, could undermine much of the appellate court's rationale for finding that the relevant claim was patent eligible subject matter.
Defendants also questioned the relevance of preemption in Alice step one. Defendants characterized the appellate panel's preemption analysis as an "all-or-nothing proposition" inconsistent with existent case law. Further, while preemption underlies the concerns in Alice, preemption was not part of the Alice test. A ruling from an en banc panel could clarify what role, if any, preemption plays in the Alice test.
If affirmed, McRO will likely change the way video game companies think about their intellectual property. It can be an important opinion for video game companies using innovative software technology to develop their games if the holding remains intact. Companies with the kind of industry-transformative technology at issue in McRO may be more inclined to pursue patent protection, rather than keeping their innovations as trade secrets. For others who have not invested in a patent portfolio, for instance in response to Alice, McRO may require a re-assessment of their strategies.
As high employee turnover rate becomes more ubiquitous in the game development industry, so too does the turnover of core intellectual property. It is important for video game developers to evaluate how they create value in their companies and how they secure their software. Whatever the outcome of the petition for rehearing in McRO, now may be a good time to think carefully about whether to pursue trade secret or patent protection to secure core software assets.