Patent Eligibility and Collateral Estoppel

I previously wrote about a Middle District of Florida Court invalidating one FairWarning IP's patents at the pleading stage.  There, the Court determined the asserted patent (U.S. Patent 8,578,500) was invalid because it was directed only an abstract idea.  FairWarning has appealed that decision.

FairWarning had also sued Cynergistek for alleged infringement of the '500 Patent.  That case was reassigned to Judge Merryday (who decided the case above) as it shared common issues.  Cynergistek also moved for judgment on the pleadings based on the alleged invalidity of the '500 Patent, but also argued that FairWarning was now collaterally estopped from asserting the '500 Patent because of Judge Merryday's prior finding.

The Court explained the standard:

Blonder–Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971), holds that, if a previous action invalidated a patent after the patent-holder had a full and fair opportunity to litigate, collateral estoppel prevents the patent-holder from enforcing the patent against an unrelated party in another action.

FairWarning argued that it lacked a full and fair opportunity to present its case in the prior decision because that decision "was one of those relatively rare instances where the courts wholly failed to grasp the technical subject matter and issues in suit."  The Court was not persuaded:

A review of Iatric System confirms (1) that FairWarning responded (without requesting a hearing) to Iatric Systems's motion to dismiss, which challenged the '500 patent's validity, and (2) that the order dismissing the action both considered and rejected FairWarning's arguments.

The Court then avoided the collateral estoppel question and ruled on the merits:

Regardless of collateral estoppel, for the same reasons explained in Iatric Systems, FairWarning fails to state a claim for infringement of the ‘500 patent, which is “directed to” nothing more than a patent-ineligible abstract idea. FairWarning asserts neither a fact nor an argument that warrants a different conclusion in this action.

The Court then dismissed as moot defendant's counterclaims seeking declarations of invalidity and non-infringement.

Motion for judgment on the pleadings, granted in part.

FairWarning IP, LLC v. Cynergistek, Inc., Case No. 8:15-CV-100 (M.D. Fla. Sept. 14, 2015) (J. Merryday)

  

Fraud Detection in Patient Records Patent -- Is it Patent-Eligible?

"In other words, Claim 1 comprises..." Perhaps the most dangerous words in a court opinion directed to the patent eligibility of a challenged patent. I say dangerous because essentially any patent claim can be presented "in other words" in order to describe them broadly directed to some abstract idea and doing so avoids careful analysis of the particular meaning of all words in a challenged claim. 

Fairwarning IP, LLC sued Iatric Systems for infringement of U.S. Patent 8,578,500 directed to a method and system for detecting fraud and misuse in connection with electronic patient data.  The defendant asked the Court to dismiss the claim, arguing the patent was directed to an ineligible abstract idea.

The Court went through the basic framework for making such a determination: (1) Is the claim directed to an abstract idea; and (2) if so, look at the claims to determine whether the elements of the claim transform the nature of the claim into patent-eligible subject matter.  See Alice Corp. v. CLS Bank International, 134 S. Ct. 2347, 2355 (2014).

The Federal Circuit has sought to clarify this test, particularly in connection with computer inventions.  See DDR Holdings LLC. v. Hotels.com, L.P., 773 F.3d 1245, 1247 (Fed. Cir. 2014) (upholding claims which are "necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.")

Claim 1 of the '500 patent requires the following elements:

1. A method of detecting improper access of a patient’s protected health information (PHI) in a computer environment, the method comprising: 

generating a rule for monitoring audit log data representing at least one of [the] transactions or activities that are executed in the computer environment, which are associated with the patient’s PHI, the rule comprising at least one criterion related to accesses in excess of a specific volume, accesses during a pre-determined time interval, accesses by a specific user, that is indicative of improper access of the patient’s PHI by an authorized user wherein the improper access is an indication of potential snooping or identity theft of the patient’s PHI, the authorized user having a pre-defined role comprising authorized computer access to the patient’s PHI;  

applying the rule to the audit log data to determine if an event has occurred, the event occurring if the at least one criterion has been met;  

storing, in a memory, a hit if the event has occurred; and providing notification if the event has occurred. 

Here, the defendant argued the claims were directed to the abstract idea of "analyzing records of human activity to detect suspicious behavior."  The Court agreed:

[T]he ’500 patent is “directed to” or “drawn to” the concept of “analyzing records of human activity to detect suspicious behavior.” (Doc. 50 at 2) Reviewing activity to detect suspicious behavior is not unique to the context of private health information, and binding precedent has invalidated patents “directed to” similar concepts. E.g., CyberSource Corp. v. Retail Decisions, Inc., 654 F.3d 1366, 1367 (Fed. Cir. 2011) (invalidating a patent that claimed a “method and system for detecting fraud in a credit card transaction between [a] consumer and a merchant over the Internet”); accord Intellectual Ventures II LLC v. JP Morgan Chase & Co., 2015 WL 1941331, *3 (S.D.N.Y. April 28, 2015) (Hellerstein, J.) (invalidating a patent that claimed a “method for monitoring multiple computer hosts within a network for anomalies, and alerting the various hosts of possible intrusion”); Wireless Media Innovations, LLC v. Maher Terminals, LLC, 2015 WL 1810378, *8 (D.N.J. April 20, 2015) (Linares, J.) (invalidating patents “directed to the . . . abstract idea[ of] monitoring locations, movement, and load status of shipping containers within a container-receiving yard, and storing, reporting and communicating this information in various forms through generic computer functions”). Reviewing activity to detect suspicious behavior is a basic and well-established abstract idea 

[EDITOR'S NOTE: The Court referred to "binding precedent," yet only cited a 2011 (i.e. pre-Alice and pre-DDR) decision.]

FairWarning argued the claims were necessarily rooted in computer technology (per DDR Holdings) because the claims "provide[] a solution to a technological problem, namely identifying potential snooping and identify theft by authorized users."  The Court was not persuaded.

Finding the patent directed to an abstract idea, the Court turned to the second step -- do the claim elements transform the patent into something more.  The Court begins the discussion as follows:

In other words, Claim 1 comprises (1) generating a rule “related to” the number of accesses, the timing of accesses, and the specific users in order to review “transactions or activities that are executed in a computer environment”; (2) applying the rule; (3) storing the result; and (4) announcing the result.

[EDITOR'S NOTE: The Court looked at the individual elements of the claim, but then merely paraphrased what those elements might be.  And the Court did so without considering what one of skill in the art would understand the terms to mean.]

The Court conducted the analysis as follows:

None of the steps in Claim 1’s method transforms the abstract idea into a patentable concept. Although the first step of the method requires “generating a rule for monitoring audit log data,” Claim 1 neither states a rule nor instructs a computer to generate a rule. Instead, in at least one embodiment of the invention, “the rule is created by the user and/or a third party, such as a consultant with particular knowledge as to fraud or misuse of the particular type of data.” ’500 patent, col. 13, ll. 11–13. Also, the function performed by the computer in each remaining step of Claim 1’s method is “purely conventional.” Alice, 134 S. Ct. at 2358 

[EDITOR'S NOTE:  The Court appears to have limited its analysis to a single embodiment disclosed in the specification.  And it's not clear the Court addressed Claim 1's limitation that the rule at issue must be "indicative of improper access of the patient's PHI by an authorized user wherein the improper access is an indication of potential snooping or identify theft of the patient's PHI, the authorized user having a pre-defined role comprising authorized computer access to the patient's PHI"]

The Court went on to find the patent directed to ineligible subject matter, and to dismiss plaintiff's complaint without prejudice, allowing "FairWarning [to] amend the complaint to assert a claim that is independent of the '500 patent's validity."

Motion to dismiss, granted.

FairWarning IP, LLC v. Iatric Systems, Inc., Case No. 8:14-CV-2685 (M.D. Fla. June 24, 2015) (J. Merryday)

Patent Eligibility Attack On the Pleadings?

Not where you need to rely on evidence outside the pleadings...

Stoneeagle Services has sued Pay-Plus Solutions and Premier Healthcare Exchange for infringement of U.S. Patent RE 43,904 and RE 44,748 relating to healthcare provider reimbursement systems and methods.  Defendants, as has become all too common, moved for judgment on the pleadings early in the case, arguing that the patents are not patent eligible.  They challenged "representative" claim 2:

2. A method of facilitating payment of adjudicated health care benefits to a health care provider comprising:
identifying the health care provider that renders medical services in anticipation of payment;
identifying a payer that has agreed to pay the health care provider on behalf of a patient subject to preselected conditions;
identifying an administrator that determines whether the medical services conducted by the service provider meet the preselected conditions by the payer, generates an explanation of benefits, and authorizes payment of the service provider for an authorized amount;
intercepting the explanation of benefits and payment information transmitted from the administrator to the health care provider;
acquiring a single-use, stored-value card account number and loading it with funds equal to the authorized amount;
merging the stored-value card account number, the authorized amount, a card verification value code, and an expiration date with the explanation of benefits into a computer-generated image file; and
transmitting the image file to the health care provider via a computer-implemented transmission.

Defendants argued that the claim was directed to the abstract idea of "paying a service provider by transmitting a payment combined with an explanation of the payment."  Plaintiff disagreed, arguing that the claim was narrowly directed at "(1) the use of stored-value cards; (2) by third-party payors; (3) to pay healthcare benefits; (4) via a computer-generated file, which couples the payment with an explanation of benefits."  Plaintiff also offered expert testimony in support of its position.

The Court recognized the logistical issue with entertaining such a motion at such an early stage in the proceedings.  Specifically, regardless of the parties' arguments, the Court must analyze whether the claims (not just a "representative" claim) are directed to an "abstract idea" and if so, whether the elements of the claims (considered individually and in combination) contain an "inventive step." How a Court can properly do this without looking beyond a patent and its specification is not clear.

Upon careful consideration of the parties' filings, Defendant's Motion for Judgment on the Pleadings is denied, as premature.  As an initial matter, both Defendants and Plaintiff cite to matters outside of the pleadings, in support of their respective positions, including the prosecution history of a "parent" patent, an expert report prepared by Robert Allen (Plaintiff's Chairman and CEO), and a declaration submitted by Mr. Allen.  However, discovery is still ongoing, and the record is thus not "fully developed."  Jozwiak [v. Stryker], 2010 WL 743834 at *4.  Due to the deficiency of the available record, the Court declines to convert Defendant's Rule 12(c) motion into a motion for summary judgment.
* * *
In this case, the parties dispute the basic character of the claimed subject matter. ... At the very least, proper construction of the term "stored-value card" is necessary prior to an assessment of whether the claims implicate a fundamental economic practice, and whether the claims comprise a sufficiently inventive process.

The Court was not also inclined to address claims as "representative" without a stipulation:

Finally, Defendant's Motion unilaterally designates certain claims as "representative." ...
"[A] party challenging the validity of a claim, absent a pretrial agreement or stipulation, must submit evidence supporting a conclusion of invalidity of each claim the challenger seeks to destroy."  Shelcore, Inc. v. Durham Indus., Inc., 745 F.2d 621, 625 (Fed. Cir. 1984) (underlined emphasis added); see, e.g., Alice Corp. Pty. Ltd., 134 S. Ct. at 2352 (noting that the parties agreed on representative claims); cf. Content Extraction & Transmission LLC v. Wells Fargo Bank, Nat'l Ass'n, Nos 2013-1588, et al., ___ F.3d ___, 2014 WL 7272219 at *4 (Fed. Cir. Dec. 23, 2014) (affirming district court's designation of claims as representative where patentee did not object).

Defendants' Motion fails to meaningfully address the claims not designated as "representative."  In order to narrow the issues, and to conserve both the Court's and the parties' resources, the parties are encouraged to stipulate to representative claims.  Absent a stipulation, Defendants will be required to address the challenged claims individually in any subsequent motion.

(emphasis provided by Court).  

Motion for judgment on the pleadings, denied as premature.

Stoneeagle Services, Inc. v. Pay-Plus Solutions, Inc., Case No. 8:13-CV-2240 (M.D. Fla. Feb. 9, 20150) (J. Covington)

Patent eligible subject matter for a method of managing financial instruments?

Digitech Information Systems sued BMW Financial Services NA, LLC for infringement of U.S. Patent 7,739,180 directed to a method of managing financial instruments, equipment lease derivatives, and other collateral instruments, data architecture, application and process program.  Claim 1 recites:

A method for selecting leases to optimize an investment portfolio comprising
the steps of:
     receiving data regarding an equipment purchase price, an equipment sales price, a number of units, a lease purchase price, a life of lease, a lease acquisition fee, an accelerated depreciation of change, and a yearly payment;
     calculating by computer a total purchase price by adding the lease purchase price to the lease acquisition fee;
     calculating by computer an accelerated depreciation result by multiplying the equipment purchase price by the number of units;
     calculating by computer a rate of return by subtracting from the yearly payment the total purchase price and the accelerated depreciation result and dividing by the lease purchase price; and
     selecting a lease based on the rate of return being greater or equal to a predetermined value and using the selected lease to create lease backed financial instrument derivatives and optimize the investment portfolio.

Months ago, BMW sought and was awarded summary judgment that the '180 Patent is invalid for not being directed to patent eligible subject matter under 35 U.S.C. § 101.  Digitech sought to undo that damage by asking the Court to reconsider.

Motions for reconsideration are tough.  Three main grounds can justify reconsideration: (1) change in the law; (2) new evidence; or (3) a need to correct clear error or prevent manifest injustice.   Digitech argued that all three applied here.  As to a change in the law, a few recent Federal Circuit decisions (CLS Bank Int'l. v. Alice Corp, 103 U.S.P.A.2d 1297 (Fed. Cir. 2012) and Bancorp Services, LLC v. Sun Life Assur. Co. of Canada (U.S.), ___ F.3d ___ (Fed. Cir. 2012)) and  have addressed patent eligibility under § 101.  As to new facts, Digitech brought up some deposition testimony.  As to clear error, Digitech raised some challenges to how the Court had construed the claims.

The Court was not persuaded by any of these arguments.  Regarding the new law, the Court recognized that the test for patent eligibility under § 101 - the abstract idea test -- is not well defined:

This so-called "abstract idea test" is not a concrete test but rather a set of guidelines promulgated in various Supreme Court and Federal Circuit opinions.

True enough.  This has created the unfortunate result that the test for abstractness still works out as "I know it when I see it" reasoning and logic.  Dennis Crouch (a.k.a. Patently-O) recently posted on the CLS Bank and Bancorp decisions.  CLS Bank found computerized stock trading claims patent eligible, while Bancorp found computer related financial claims patent ineligible.  Prof. Crouch aptly concluded his post as follows:

It is simply ridiculous that after 40 years of debate, we still do not have an answer to the simple question of whether (or when) software is patentable.

I would rephrase that comment slightly, as we know that software is patent eligible, but we still have a great lack of clarity as to when.  And it has less to do with the software itself and more to do with how that software is claimed.

The Digitech decision is another example of this theme.  Judge Antoon analyzed the CLS Bank and Bancorp decisions and found Digitech's claims closer-in-kind to Bancorp's.  Accordingly, the '180 patent remains invalid.  We'll have to see what happens on appeal.

Motion for Reconsideration Denied.
Digitech Information Systems, Inc. v. BMW Financial Services NA, LLC, Case No. 6:10-cv-1373 (M.D. Fla. July 30, 2012) (J. Antoon)

Bilski (part 2) - Machine or transformation test is an important and useful clue

Yesterday, the Supreme Court issued its long-awaited decision in Bilski v. Kappos. I briefly posted on this yesterday here. The Court rejected the Federal Circuit's Machine or Transformation test as the sole mechanism for determining whether a process is patent-eligible:

This Court’s precedents establish that the machine-or-transformation test is a useful and important clue, aninvestigative tool, for determining whether some claimed inventions are processes under §101. The machine-or-transformation test is not the sole test for decidingwhether an invention is a patent-eligible “process.”

So what does that mean, and how did we get here? Keep reading.

Bilski's invention

Bernard Bilski and Rand Warsaw invented an "Energy Risk Management Method." This was a method to hedge against the risk of price changes in buying and selling commodities in the energy market. Claim 1 included the following steps:

(a) initiating a series of transactions between said commodity provider and consumers of said commoditywherein said consumers purchase said commodity at afixed rate based upon historical averages, said fixedrate corresponding to a risk position of said consumers;

(b) identifying market participants for said com-modity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market par-ticipant transactions balances the risk position of said series of consumer transactions.

This patent application sought to protect a method of doing business. The Patent Office rejected it, saying it was not a patent-eligible invention.

Patent-eligibility vs. Patentability

There are 2 main questions to ask when considering a patent on an invention: (1) is the type of invention eligible for patent protection; and (2) is the invention an invention at all? This second part, whether or not the invention is an invention at all, addresses whether the invention is new, useful and non-obvious. If someone else invented what you've claimed to invent, well then you haven't invented something that's new, useful or nonobvious. But before you get to that question, we must address the first consideration -- is the invention the type of thing that deserves patent protection.

Patent-eligiblity -What is patentable subject matter?

The U.S. statute that defines patent-eligible subject matter states:

Whoever invents or discovers any new and useful process, machine, manufacture, or composition ofmatter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.

Thus, there are 4 patent-eligible inventions: processes, machines, manufacturers, and compositions of matter.

Over the years, the Supreme Court has carved out three specific exceptions to this patent-eligibility requirement. Laws of nature, abstract ideas, and physical phenomenon are not eligible for patent protection. Galileo could not patent gravity. Pythagoras could not patent his theoreom. Nobody gets to own the Northern Lights. But everything else under the sun made by man? Well, that's a different beast.

Machine or Transformation Test

The Federal Circuit had used a test for deciding whether or not a particular process was patent-eligibilty. The test analyzed whether the claimed process (1) was tied to a particular machine or apparatus, or (2) transformed a particular article into a different state or thing. This so-called machine-or-transformation test was the basis for rejecting Bilski's claimed invention, and was considered the "sole test" for determining patent-eligibilty for a process.

As you can see above, the Supreme Court rejected this approach, holding that the machine-or-transformation test is a useful tool for considering patent-eligibity, but it is not the sole test. This was a statutory construction case. The patent laws say they protect processes, and they even define what a process is. Congress did not put the machine-or-transformation test into the statute, and so that test can not be the only test for determining patent-eligibility.

Software inventions, business methods, diagnostic medicine techniques, ...

This case drew attention from innovators on all sides of the spectrum. Many argued that all business method patents are bad and we shouldn't have any of them. Others argued that software patents are also bad because they're simply business method patents and we shouldn't have them. The medical diagnostic community was also concerned as their methods of diagnosing could also fall into a business method analysis resulting in a loss of patent rights.

The Supreme Court addressed these concerns essentially head on, and explained that it wasn't drawing any bright-rules excluding anything from patent protection that Congress didn't put into the patent laws. The Court explained that the machine-or-transformation test was probably excellent for the Industrial Age, but the Information Age presents new types of inventions worthy of our patent laws:

The machine-or-transformation test may well provide a sufficient basis for evaluating processes similar to those inthe Industrial Age—for example, inventions grounded in aphysical or other tangible form. But there are reasons to doubt whether the test should be the sole criterion for determining the patentability of inventions in the Information Age.

But we should not forget what Thomas Jefferson felt at the beginning -- "ingenuity should receive a liberal encouragement." New technologies call for new tests. The Court did not hold that any of the above technologies are or are not patent-eligible. Of course, that's too broad a statement or question. The Court left that issue to another day:

This Age puts the possibility of innovation in the hands of more people and raisesnew difficulties for the patent law. With ever more people trying to innovate and thus seeking patent protections fortheir inventions, the patent law faces a great challenge instriking the balance between protecting inventors and not granting monopolies over procedures that others would discover by independent, creative application of generalprinciples. Nothing in this opinion should be read to takea position on where that balance ought to be struck.

Bilski still loses

After explaining that machine-or-transformation is not the only test, the Court affirmed the rejections of Bilski's patent application because it was an attempt to claim an abstract idea. As discussed above, abstract ideas are not patent eligible, and thus no patent for Bilski.

The Concurring Opinions

Each Justice agreed with the result of the decision -- Bilski was not entitled to a patent on his method of hedging risk. Justice Scalia did not join with the Court's discussion of software and diagnostic patent-eligibility or the discussion relating to the Industrial Age vs. Information Age. Two other Justices authored opinions concurring in the result.

Justice Stevens, joined by Justices Ginsburg, Breyer and Sotomayor

This opinion advocates restoring patent law to its historical and constitutional moorings and excluding business methods from patent protection. Justice Stevens attacks the Court's opinion ("The opinion is less than pellucid in more than one respect, and, if misunderstood, could result in confusion or upset settled areas of the law."), and at times calls it absurd.

Under the Court's view, processes (like any other invention) must satisfy the two questions I discuss above: (1) is the process eligible for patent protection; and (2) is the process an invention (i.e. is it new, useful and nonobvious). Justice Stevens believes this approach renders the patent-eligibility question "comical."

A process for training a dog, a series of dance steps, a method of shooting a basketball, maybe even words, stories, or songs if framed as the steps of typing letters or uttering sounds—all would be patent-eligible. I am confident that the term “process” in §101 isnot nearly so capacious.

Justice Stevens does go on to note (in a footnote) that the patentability questions (is the method of walking a dog new, useful, and nonobvious) would still preclude these "comical" ideas from patent protection. He does not explain, however, why letting the patentability question protect against these "absurd" inventions is not sufficient.

Justice Stevens then traces our patent laws back to the English patent practice prior to our nation's founding. He tries to explain that business methods were never part of the picture, even though he does identify at least one "business method" patent issued in 1778 on a "Plan for assurances on lives of persons from 10 to 80 years of Age." Justice Stevens writes this off as little more than the whim or error of a single patent clerk.

So, we were one vote away from adding business methods as a fourth judicial exception to patent-eligibility.

Justice Breyer, joined by Justice Scalia

"I agree with Justice Stevens that a 'general method of engaging in business transactions' is not a patentable 'process' within the meaning of 35 U.S.C. §101." By joining this opinion, has Justice Scalia cast the 5th vote and excepted business methods from patent protection? I don't know the answer to that, and I trust we'll see plenty of litigation directed to that point.

Justice Breyer's opinion is that the Court has not changed anything, and the machine-or-transformation test was never the "sole" test used.

In sum, it is my view that, in reemphasizing that the“machine-or-transformation” test is not necessarily the sole test of patentability, the Court intends neither to de-emphasize the test’s usefulness nor to suggest that many patentable processes lie beyond its reach.

Bilski v. Kappos, No. 08-964 (June 28, 2010)