Federal Circuit Adopts USPTO Positions in Clarifying Ground Rules For CBM Review, Holds Versata Pricing Patent Invalid

Monday, August 03, 2015

The Leahy-Smith America Invents Act (AIA) introduced post-grant administrative proceedings as a new mechanism for challenging the validity of issued patents without the need to resort to federal court litigation. In a recent decision, the U.S. Court of Appeals for the Federal Circuit considered several procedural issues arising in one form of post-grant proceedings, the so-called “transitional program for covered business method patents” (CBM). See 125 Stat. 329-31. Versata Development Group, Inc. v. SAP America, Inc., No. 2014-1194 (Fed. Cir. July 9, 2015).

In establishing the AIA’s post-grant proceedings, Congress intended a streamlined process protected from expensive and time-consuming collateral challenges in the courts. The first step of the review process, which is common to AIA inter partes review, post-grant review, and CBM reviews, is that the USPTO’s Patent Trial and Appeal Board (PTAB), acting as a designee of the Director of the USPTO, determines whether to grant the petition seeking review. Under the AIA, CBM review is available for patents that claim a method or corresponding apparatus for performing data processing or other operations involving a financial product or service, but excludes patents for technological inventions.

The Federal Circuit’s Versata decision addressed several previously-unresolved procedural issues:

  1. Review of the PTAB’s Decision to Initiate CBM Review. In Versata, the Federal Circuit considered whether it could review the PTAB’s decision to institute a CBM review. The AIA bars judicial review of the PTAB’s decision to institute by stating that, “The determination by the Director whether to institute a post-grant review under this section shall be final and nonappealable.” 35 U.S.C. §324(e). In earlier cases, the Federal Circuit held that a court cannot review a decision to institute (or not) through an interlocutory appeal or a petition for a writ of mandamus. See St. Jude Medical, Cardiology Division, Inc. v. Volcano Corp., 749 F.3d 1373, 1376 (Fed. Cir. 2014) (decision not to institute not appealable); In re Dominion Dealer Solutions, LLC, 749 F.3d 1379 (Fed. Cir. 2014) (decision not to institute review not subject to challenge through mandamus).

The USPTO, which intervened in the Versata case, argued that the Federal Circuit could not review the decision to institute due to a “jurisdictional bar.” The Federal Circuit drew a distinction between institution and invalidation, and held that the § 324(e) judicial review bar only applied to institution and did not affect the court’s review of the PTAB’s final decision in a CBM review. The court analyzed whether the statutory mandate, that § 18 review is limited to CBM patents, was a limit on the PTABs invalidation authority. Answering in the affirmative, the court held “that we have the authority to review whether the ‘350 patent is within the PTAB’s § 18 authority” Slip op. at 30. “The distinct agency actions [institution and invalidation] do not become the same just because the agency decides certain issues at both stages of the process.” Slip op. at 23.

Coupled with a strong governmental policy in favor of judicial review of agency decisions—especially those affecting property rights—the court held that it could review the decision to institute review in the context of an appeal from the PTAB’s final decision. It concluded:

In short, we do not find that the Government’s arguments approach meeting the “heavy burden” of persuasion needed to overcome the “strong presumption” of judicial review. Congress, by limiting the scope of the review bar in § 324 as we have described, struck a balance between Congress’s desire for a prompt and efficient review process at the USPTO, on the one hand, and, on the other, the necessary recognition of the traditional role of judicial review of final agency action. We find that balance carefully crafted and consistent with the roles the Constitution assigns to the Judicial and Executive Branches.

Slip op. at 28.

  1. Covered Business Method Patent Review Is Not Limited to Patents Involving Banks and Other Financial Institutions. Under the AIA, CBM review is available for patents “that claim[] a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service,” but excludes patents for “technological inventions.”AIA § 18(d)(1).Versata argued on appeal that the ‘350 patent, claiming a computer implemented method for using hierarchical data structures to set prices for multiple products, did not satisfy this requirement because it did not relate to activities in the financial sector, such as banking, brokerages, and insurance companies. The Federal Circuit rejected this definition as too limited, and adopted the USPTO’s broader definition:

We agree with the USPTO that, as a matter of statutory construction, the definition of “covered business method patent” is not limited to products and services of only the financial industry[.] . . .  The plain text of the statutory definition contained in §18(d)(1)—“performing . . operations used in the practice, administration, or management of a financial product or service”— on its face covers a wide range of finance-related activities. The statutory definition makes no reference to financial institutions as such, and does not limit itself only to those institutions. To limit the definition as Versata argues would require reading limitations into the statute that are not there. This understanding of the text is reinforced by the scope of the entire [CBM] program, and the general concern, including within the halls of Congress, regarding litigation abuse over business method patents. These concerns caused Congress to create a special program for these patents in the first place.

Slip op. at 35. In addition, despite skepticism about the USPTO’s somewhat circular interpretation of “technological invention,” the court agreed that term did not fit the ‘350 patent method:

[C]ontrary to Versata’s argument that the invention “leveraged the hierarchal data structures used by large companies to organize pricing information,” we agree with the PTAB that this is not a technical solution but more akin to creating organizational management charts. Like the PTAB, and for many of the same reasons, we conclude that whatever may be the full sweep of the term “technological invention,” the invention that comprises the ’350 patent is essentially not a technological one as that term ordinarily would be understood.

Slip op. at 39 (citation omitted).

  1. Federal Circuit Endorses PTAB Use of “Broadest Reasonable Interpretation” Standard to Construe Claims in CBM Proceedings. Versata challenged the PTAB’s policy of interpreting claims in CBM proceedings by applying the “broadest reasonable interpretation” consistent with the claims and specification, the standard applied in USPTO examination proceedings. See MPEP § 2111. The Federal Circuit noted that in the recent case, In re Cuozzo Speed Technologies, LLC, No. 14-1301 (Fed. Cir. July 8, 2015), a different panel of the Federal Circuit approved the USPTO’s use of the standard in PTAB inter partes review proceedings, and that decision was binding, since there was “no basis for distinguishing between the two proceedings for purposes of the PTAB’s use of BRI in claim construction here.” Slip op. at 41.
  1. Federal Circuit Rules that Eligibility Is a Proper Ground for CBM Review. Next, the Federal Circuit addressed Versata’s argument that the AIA does not identify 35 U.S.C. §101 as a ground for invalidating a claim during CBM review, because the AIA identifies as grounds only “any ground that could be raised under paragraph (2) or (3) of [35 U.S.C. § 282(b)],” and that provision does not include §101. The Federal Circuit admitted that under a strict reading of the statute, § 101 is not an available ground for invalidation, but noted that patent eligibility under §101 long has been considered a validity issue, and the goals of the CBM support the PTAB’s review of compliance with that requirement:

[B]oth our opinions and the Supreme Court’s opinions over the years have established that §101 challenges constitute validity and patentability challenges. It would require a hyper-technical adherence to form rather than an understanding of substance to arrive at a conclusion that §101 is not a ground available to test patents under either the PGR or §18 processes. Section 101 validity challenges today are a major industry, and they appear in case after case in our court and in Supreme Court cases, not to mention now in final written decisions in reviews under the AIA. . . .  It is often said, whether accurate or not, that Congress is presumed to know the background against which it is legislating. Excluding §101 considerations from the ameliorative processes in the AIA would be a substantial change in the law as it is understood, and requires something more than some inconsistent section headings in a statute’s codification. We agree with the USPTO and SAP and we so hold that, looking at the entirety of the statutory framework and considering the basic purpose of CBM reviews, the PTAB acted within the scope of its authority delineated by Congress in permitting a §101 challenge under AIA §18.

Slip op. at 45 (citations omitted).

  1. Federal Circuit Affirms PTAB Ruling that ‘350 Patent Claims Are Ineligible Abstract Ideas. Finally, the Federal Circuit reached the principal issue in the appeal—whether the PTAB was correct to rule that the ‘350 patent claims were invalid as merely abstract ideas. The Court applied the two-step Mayo/Alice analysis. First, it agreed that the ‘350 patent claims involved the use of an abstract idea—“determining a price using organization and product group hierarchies, which are akin to management organizational charts.” Id. at 46. Second, it concluded that the claims lacked an “inventive concept” to limit the claimed subject matter to something significantly less than the abstract idea. Notably, the court observed that the claims failed the “machine-or-transformation test,” which it described as a “useful clue in determining the eligibility of patent claims.” Id. at 54. It distinguished the court’s recent decision inDDR Holdings, LLC v. Hotels.com, L.P., 773 F.3d 1245 (Fed. Cir. 2014), which found a method for manipulating information in Internet webpages to be eligible as “necessarily rooted in computer technology to overcome a problem specifically arising in the realm of computer networks[.]” In contrast, the court ruled, the ‘350 patent claims were not directed to improving computer performance. Moreover, the court concluded that “The steps in Versata’s claims (e.g., arranging, storing, retrieving, sorting, eliminating, determining) are conventional, routine, and well-known. They involve the normal, basic functions of a computer.” Slip op. at 54. As a result, the claims were not directed to eligible subject matter, and thus were invalid.