The Death Of Internet Patents: Federal Circuit ruling will have major impact on Internet patents.

(Originally published in Los Angeles Daily Journal 11/20/2014)
Should patents be used to monopolize abstract ideas of doing business on the Internet using conventional programming techniques? After a four-year appeal process, that question was finally answered “no” by the U.S. Court of Appeals for the Federal Circuit on Nov. 14 in Ultramercial Inc. v. Hulu LLC, 2014 U.S. App. LEXIS 21633 (Fed. Cir. 2014).

The case involved Los Angeles-based Ultramercial Inc., which had patented a method for letting consumers “pay” for viewing copyrighted television shows on the Internet by first watching a commercial. In August 2010, one defendant in the case, Wildtangent Inc., persuaded the U.S. District Court for the Central District of California to dismiss Ultramercial’s complaint. The district court held that Ultramercial’s patent did not claim patent-eligible subject matter under U.S. Supreme Court case law that put a judicial gloss on 35 U.S.C. Section 101. The patented method, the district court held, was directed to an “abstract” idea of paying for programming by watching a commercial. That the idea was implemented on the Internet did not save the patent because the Internet is itself “an abstraction.”

During the next four years, the Federal Circuit twice reversed the district court’s decision, but was twice told by the Supreme Court to reconsider its own analysis based on evolving Supreme Court precedent on subject-matter eligibility under Section 101.

The first remand to the Federal Circuit from the Supreme Court came in 2012, when the Supreme Court decided Mayo Collaborative Services v. Prometheus Laboratories Inc. That case involved a very different patent-eligibility problem concerning isolated human DNA, but it foreshadowed a fundamental shift in patent law. The Supreme Court held in Prometheus that a patent must do more than simply state a law of nature while adding the words “apply it.” To describe a patent-eligible invention, a patent “must limit its reach to a particular, inventive application of the law.”

Notwithstanding the Supreme Court’s guidance in Prometheus, the Federal Circuit, in an opinion penned by now-retired Chief Judge Randall Rader, upheld the validity of the Ultramercial patent. In a June 2013 decision, the Federal Circuit held that “[a] court cannot go hunting for abstractions by ignoring the concrete, palpable, tangible limitations of the invention the patentee actually claims.”

That Federal Circuit analysis was short-lived. In June 2014, the Supreme Court made its landmark software patent decision in Alice Corp. v. CLS Bank. In Alice, the Supreme Court struck down a computer-implemented system of using an intermediary to reduce settlement risk of a financial transaction between two companies. The court found that using a computerized system to ensure that both sides to the transaction could carry out their obligations at the appointed time was an abstract idea. That idea could not be monopolized merely by saying “apply it” using conventional computer programming techniques and hardware. During oral argument, Justice Stephen Breyer expressed a concern that “if you simply say, take an idea that’s abstract and implement it on a computer … there is a risk that … instead of having competition on price, service and better production methods, we’ll have competition on who has the best patent lawyer.”

Following Alice, the Supreme Court required the Federal Circuit to reconsider its decision in Ultramercial based on the new guidance it had provided.

In its third look at the Ultramercial patent, the Federal Circuit finally decided that the district court had been right all along to dismiss the complaint. This time, the Federal Circuit was bound to apply the Supreme Court’s two-step analysis in Alice. This test first asks whether the claims were directed to a patent-ineligible abstract idea; the second asks, if they are, whether the claims recite a sufficient inventive concept so it has done “significantly more” than patent the abstract idea itself.

Applying the first step of the Alice analysis, the Federal Circuit held that the claims were drawn to the abstract “process of receiving copyrighted media, selecting an ad, offering the media in exchange for watching the selected ad, displaying the ad, allowing the consumer access to the media, and receiving payment from the sponsor of the ad.” The patent claims added certain additional limitations, such as consulting an activity log, but the “the majority of the limitations” described only the abstract idea of showing an advertisement before delivering free content.

Applying the second step of the analysis in Alice, the Federal Circuit asked whether the claims “do significantly more than simply describe that abstract method.” As the Supreme Court required in Alice, the Federal Circuit searched for an “inventive concept” in the claims that could “transform” the claimed abstract idea into patent-eligible subject matter based on features that are more than “well-understood, routine, conventional activity.”

In the Ultramercial patent, no inventive concept had been described by the claims. Ultramercial had simply used conventional Internet programming techniques to carry out its novel – albeit abstract – idea. Like the district court, the Federal Circuit held that the claims’ invocation of the Internet adds no inventive concept. The Internet, the Federal Circuit recognized, “is a ubiquitous information-transmitting medium, not a novel machine.” Any transformation of data “from the use of computers or the transfer of content between computers is merely what computers do and does not change the analysis.”

The ultimate decision in Ultramercial may not be surprising in light of the Supreme Court’s decision in Alice. But it has far reaching consequences for Internet patents that relied, even in part, on the “novelty” of the business idea they had described for their purported novelty. The Federal Circuit rejected Ultramercial’s argument that Alice applied only to well-known abstract ideas used in the past. Ultramercial had used ingenuity in thinking of a new way to distribute content on the Internet. Being the first to think of that idea, however, and applying it using well-known programming techniques did not entitle Ultramercial to a patent.

A concurring opinion by Federal Circuit Judge Haldane Robert Mayer – who replaced retired Judge Rader on the panel – explains the true promise of Ultramercial in software patent litigation. Mayer explained in stark terms how patent litigation can take on “the indicia of extortion” when patent owners use the cost of litigation to extract “nuisance value” settlements from accused infringers. In his 2013 decision, Rader had held that district courts must first go through the arduous process of claim construction before deciding patent eligibility. Mayer, however, noted that one accused infringer had paid $600,000 in attorney fees and costs just to get through a claim construction of the patent. By granting a motion to dismiss based on patent eligibility, the district court spared defendant Wildtangent from those costs and settlement pressures. Ultramercial therefore allows accused infringers with a valid Section 101 defense to raise it before having to make the Hobson’s choice of either paying a sizable “nuisance value” settlement or enduring the costs of patent litigation.