In its first substantive application of Alice v. CLS Bank in 2015, the Federal Circuit has once again shot down claims for not meeting the patent-eligibility requirements of 35 U.S.C. § 101.

In 2012, OIP sued Amazon in the Northern District of California, alleging infringement of U.S. Patent No. 7,970,713.  The District Court granted Amazon's motion for judgment on the pleadings, finding that the '713 patent is not directed to patent-eligible subject matter, as the claims "merely use a general-purpose computer to implement the abstract idea of price optimization."  Judges Taranto, Mayer, and Hughes heard the appeal.

Claim 1 of the '713 patent recites:

A method of pricing a product for sale, the method comprising:
    testing each price of a plurality of prices by sending a first set of electronic messages over a network to devices;
    wherein said electronic messages include offers of said product;
    wherein said offers are to be presented to potential customers of said product to allow said potential customers to purchase said product for the prices included in said offers;
    wherein the devices are programmed to communicate offer terms, including the prices contained in the messages received by the devices;
    wherein the devices are programmed to receive offers for the product based on the offer terms;
    wherein the devices are not configured to fulfill orders by providing the product;
    wherein each price of said plurality of prices is used in the offer associated with at least one electronic message in said first set of electronic messages;
    gathering, within a machine-readable medium, statistics generated during said testing about how the potential customers responded to the offers, wherein the statistics include number of sales of the product made at each of the plurality of prices;
    using a computerized system to read said statistics from said machine-readable medium and to automatically determine, based on said statistics, an estimated outcome of using each of the plurality of prices for the product;
    selecting a price at which to sell said product based on the estimated outcome determined by said computerized system; and
    sending a second set of electronic messages over the network, wherein the second set of electronic messages include offers, to be presented to potential customers, of said product at said selected price.

In short, the '713 patent claims a computer-implemented method for testing the uptake of various different prices for a product, determining which of these prices resulted in a desirable outcome (e.g., highest number of sales or highest profitability), and then using this price for future sales of the product.

According to the '713 patent, "traditionally merchandisers manually determine prices based on their qualitative knowledge of the items, pricing experience, and other business policies . . . [i]n setting the price of a particular good, the merchandiser estimates the shape of a demand curve for a particular product based on, for example, the good itself, the brand strength, market conditions, seasons, and past sales."  But, "the merchandiser is slow to react to changing market conditions, resulting in an imperfect pricing model where the merchandiser often is not charging an optimal price that maximizes profit."  A purported advantage of the invention is that it "helps vendors automatically reach better pricing decisions through automatic estimation and measurement of actual demand to select prices."

After noting that § 101 issues are matters of law reviewed de novo, the Federal Circuit set forth the two-prong patent-eligibility test of Alice.  The first prong is to determine whether the claims are directed to a patent-ineligible law of nature, natural phenomenon, or abstract idea.  If so, the second prong is to determine whether any additional claim elements transform the claim into a patent-eligible application that amounts to significantly more than the ineligible concept itself.

The Court noted that "[c]laim 1 broadly recites a method of pricing a product for sale," and that "[t]his concept of offer based pricing is similar to other fundamental economic concepts found to be abstract ideas by the Supreme Court and this court."  Further, "that the claims do not preempt all price optimization or may be limited to price optimization in the e-commerce setting do not make them any less abstract."

Turning to the second prong, the Court found that, beyond this abstract idea, "the claims merely recite well-understood, routine conventional activities, either by requiring conventional computer activities or routine data-gathering steps."  Additionally, the Court indicated that "the claims are exceptionally broad and the computer implementation limitations do little to limit their scope" and that "the specification makes clear that this programming and the related computer hardware refers to any sequence of instructions designed for execution on a computer system."  Also swaying the Court's opinion was its belief that "relying on a computer to perform routine tasks more quickly or more accurately is insufficient to render a claim patent eligible."

On this basis, the Court concluded that the claims did not meet the requirements of § 101, and affirmed the District Court.

Judge Mayer wrote separately to reiterate his previously-expressed view (see I/P Engine, Inc. v. AOL Inc. (Aug 2014) and Ultramercial Inc. v. Hulu LLC (Nov. 2014)) that patent-eligibility should be addressed at the outset of a case, for example, in the pleadings as was done by Amazon.  Particularly, he contended that doing so "not only conserves scarce judicial resources and spares litigants the staggering costs associated with discovery and protracted claim construction litigation, it also works to stem the tide of vexatious suits brought by the owners of vague and overbroad business method patents."  But then he went on to state that the Supreme Court has instructed that § 101 is to be resolved at the first opportunity.

As we have noted previously, Judge Mayer is taking liberties with his interpretation of the Supreme Court's position.  No Supreme Court cases (or Federal Circuit cases for that matter) actually go as far as stating that § 101 determinations must be made early in litigation.  These cases may suggest the § 101 inquiry should take place before §§ 102 and 103 examination, but they do not state that this is a requirement.

And for good reason.  Unfortunately, the Alice test is often decided on vague notions of whether a claim is "too abstract," "too broad," or whether it resembles those reviewed in Alice and Bilski v. Kappos.  Use of this "walks like a duck" criteria allows courts, as well as the Patent and Trademark Office, to strip patentees of their property rights without discovery, claim construction, or determination of ordinary skill in the art.  No doubt, Judge Mayer's proposal would reduce the size of courts' dockets, and probably result in some "bad" patents being invalidated.  All patents challenged under § 101, however, would be at risk of being thrown out with the bathwater.

OIP Technologies, Inc. v. Amazon.com, Inc. (Fed. Cir. 2015)
Panel: Circuit Judges Taranto, Mayer, and Hughes
Opinion by Circuit Judge Hughes; concurring opinion by Circuit Judge Mayer