In a much awaited decision, the U.S. Supreme Court, on June 19, unanimously ruled that four financial services patents owned by the Australian company, Alice Corporation, are patent ineligible because they are drawn to the “abstract idea” of intermediated settlement (the use of a third party to mitigate settlement risk in financial transactions).  Because they are drawn to an abstract idea, the Court found that they are not patent eligible under the long-standing judicial doctrine that, “laws of nature, natural phenomena, and abstract ideas,” are not eligible for patenting.  The Court found that even though some of the patent claims recited computer equipment, the recited equipment was “generic” and therefore, “fail[ed] to transform the abstract idea into a patent-eligible invention.”

While many commentators had expected the Supreme Court to use the case as an opportunity to rule on the general eligibility of software patents and business method patents, the Court did not set forth any such rule.  Instead, the Supreme Court outlined a two-step test that courts may use to analyze whether a patent claim is eligible for patenting:

Step 1:  Is the patent claim directed to a patent-ineligible concept (e.g. an abstract idea, a law of nature, or a natural phenomenon).

If yes – then go to Step 2.

If no – then the patent claim is patent-eligible.

Step 2:   Is there “an element or combination of elements in the claim that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.”

If yes – then the patent claim is patent-eligible.

If no – then the patent claim is not patent-eligible.

Notably, under the patent laws, even if a patent claim survives the patent eligibility test, the claim may still be found invalid if it fails to satisfy other patent requirements, such as the requirement that the claim be directed to subject matter that is novel and non-obvious.

This two-step test likely will mean more litigation, as patent lawyers will no doubt find creative ways to argue both sides of the coin, in favor of their clients.  And adding to the complexity of the analysis is that, on the facts before it, the Alice Court seemed persuaded of the patent’s ineligibility because it found that the concept of intermediated settlement is, “a fundamental economic practice long prevalent in our system of commerce.”  This suggests that expert testimony will become particularly important for this inquiry going forward.

Proskauer’s client alert discussing the details of this case may be found here.