The Federal Circuit Introduces Uncertainty into Early Invalidity Challenges Based on Patent Elgibility

In a pair of decisions issued in close succession, and both authored by Judge Moore, the Federal Circuit appears to have opened the door for patent owners to prevent (or delay) grant of summary judgment or Rule 12(b)(6) motions that seek to invalidate patents as being directed to patent ineligible subject matter under 35 U.S.C. § 101. In Berkheimer v. HP Inc. the Federal Circuit held that district court erred in granting summary judgment of invalidity as to certain claims because the patent owner had raised genuine issues of material fact as to whether “the invention describes well-understood, routine, and conventional activities.” Slip Op. at 15. In Aatrix Software, Inc. v. Green Shades Software, Inc., a divided panel held that the district court erred in denying a motion for leave to file a second amended complaint and in granting a motion to dismiss under Rule 12(b)(6) because that complaint raised claim construction questions that the court would have to address before deciding the question of patent eligible subject matter. Although both decisions acknowledge prior Federal Circuit decisions that held that patent eligibility can be decided on summary judgment or motions to dismiss, as Judge Reyna notes in his dissent-in-part in Aatrix Software, the majority’s approach to factual disputes in motions to dismiss appears to open the door wide to Rule 12(b)(6) and summary judgment motions to becoming “full blown factual inquir[ies] on the level of § 102, § 103, and § 112 inquiries.” Dissent-in-Part at 2-3.

In Berkheimer, following a claim construction hearing, the district court held claims 10-19 of United States Patent No. 7,447,713 invalid as indefinite and claims 1-7 and 9 ineligible under 35 U.S.C. § 101. Slip Op. at 2-3. The Federal Circuit affirmed the court’s indefiniteness ruling, but reversed its decisions based on § 101. As a preliminary issue, the Federal Circuit addressed the argument that the patent owner had “waived his ability to argue that the dependent claims are separately patent eligible” because the district court treated claim 1 (the independent claim) representative. Slip Op. at 6-7. Because the patent owner had not agreed to make claim 1 representative, and had presented arguments as to patent eligibility specific to some of the dependent claims, the Federal Circuit held that he had not waived his ability to challenge the district court’s decision as to the dependent claims. Id. at 7-8.

Turning to the merits of the Alice analysis, the Federal Circuit held that each of the claims was directed to an abstract idea. In particular, “claims 1-3 and 9 are directed to the abstract idea of parsing and comparing data; claim 4 is directed to the abstract idea of parsing, comparing, and storing data; and claims 5-7 are directed to the abstract idea of parsing, comparing, storing, and editing data.” Slip Op. at 10. Thus, the Federal Circuit had to turn to the second step of the Alice/Mayo test and “consider the elements of each claim both individually and ‘as an ordered combination’ to determine whether the additional elements ‘transform the nature of the claim’ into a patent eligible application.” Slip Op. at 11-12 (citing Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347, 2355 (2014)). In other words, the Federal Circuit had to decide whether the claims “involve more than performance of ‘well-understood, routine, [and] conventional activities previously known to the industry.’” Slip Op. at 12 (citing Content Extraction & Transmission LLC v. Wells Fargo Bank, N.A., 776 F.3d 1343, 1347-48 (Fed. Cir. 2014)). Because this question is a factual question, the challenger has to prove that the claims involve well-understood, routine, and conventional activities by clear and convincing evidence. Slip Op. at 12.

Before turning to this factual inquiry, the Federal Circuit emphasized that “[p]atent eligibility has in many cases been resolved on motions to dismiss or summary judgment. Nothing in this decision should be viewed as casting doubt on the propriety of those cases.” Indeed, “[w]hen there is no genuine issue of material fact regarding whether the claim element or claimed combination is well-understood, routine, conventional to a skilled artisan in the relevant field,” summary judgment is appropriate. Slip Op. at 13. The Federal Circuit also admonished the district court for not recognizing that although patent eligibility is a question of law it can involve underlying factual questions. Id. at 14 (“Whether a particular technology is well-understood, routine, and conventional goes beyond what was simply known in the prior art. The mere fact that something is disclosed in a piece of prior art, for example, does not mean it was well-understood, routine, and conventional.”).

Turning to the patent owner’s substantive arguments, the Berkheimer court found that the “specification describes an inventive feature that stores parsed data in a purportedly unconventional manner.” Slip Op. at 15. These improvements, if captured in the claims, “create a factual dispute regarding whether the invention describes well-understood, routing, and conventional activities.” Id. In analyzing the claims, the court found that claims 1-3 and 9 did not capture the improvements identified in the specification and thus affirmed the district court’s finding of patent ineligibility. The court found, however, that claims 4-7 “contain limitations directed to arguably unconventional inventive concept described in the specification.” Id. at 16-17. The court did not decide that those claims were patent eligible, but held only that summary judgment was inappropriate “given the fact questions created by the specification’s disclosure.” Id. at 17.

The Berkheimer decision is not particularly revolutionary as it simply reemphasizes the factual underpinnings of claim construction and patent eligibility that has been part of the case law ever since Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996) (as reemphasized in Teva Pharms. USA, Inc. v. Sandoz, Inc., 135 S. Ct. 831 (2015)). The Aatrix Software decision on the other hand may well lead to significant changes in how patent owners defend against Alice challenges – especially those arising in the context of a Rule 12(b)(6) motion to dismiss.

In contrast to Berkheimer (in which the court reached its decision on patent eligibility after a Markman hearing and in the context of a summary judgment motion), the trial court in Aatrix Software held that claims 1, 2, and 22 of U.S. Patent No. 7,171,615 and claims 1, 13, and 17 of U.S. Patent No. 8,984,393 (a continuation of the ’615 patent) not eligible under § 101 in the course of a Rule 12(b)(6) motion to dismiss. Slip Op. at 2. The two patents-in-suit are “directed to systems and methods for designing, creating, and importing data into a viewable form on a computer so that a user can manipulate the form data and create viewable forms and reports.” Id. After the district court granted the defendant’s motion to dismiss, the patent owner moved to vacate the judgment and for leave to file a second amended complaint “that it argued supplied additional allegations and evidence that would have precluded a dismissal under § 101 at the Rule 12(b)(6) stage.” Slip Op. at 4. The district court denied these motions.

As an initial matter, the Federal Circuit (Judge Reyna joined the majority on this issue) found the district court’s holding that claim 1 of the ’615 patent was not directed to a tangible embodiment erroneous (an argument that neither party had made). Claim 1 “claims a data processing system which clearly requires a computer operating software, a means for viewing and changing data, and a means for viewing forms and reports. This is very much a tangible system.” Slip Op. at 6-7.

Applying Eleventh Circuit law, the majority also held that the district court erred in denying the motion to amend because “[t]he proposed second amended complaint contains allegations that, taken as true, would directly affect the district court’s patent eligibility analysis.” In particular, those “allegations at a minimum raise factual disputes underlying the § 101 analysis, such as whether the claim term ‘data file’ constitutes an inventive concept, alone or in combination with other elements, sufficient to survive an Alice/Mayo analysis at the Rule 12(b)(6) stage.” Slip Op. at 8-9. According to the majority, the allegations in the second amended complaint “suggest that the claimed invention is directed to an improvement in the computer technology itself and not directed to generic components performing conventional activities.” Id. at 10. As evidenced in a line of cases, the Federal Circuit has found such claims not directed to an abstract idea and hence not patent ineligible under step on of the Alice/Mayo two-step test.

In probably the most controversial portion of its opinion, the portion to which Judge Reyna objected, the majority held that because there were “concrete allegations in the second amended complaint that individual elements and the claimed combination are not well-understood, routine, or conventional activity” it was improper for the trial court to deny the motion for leave to file the second amended complaint. Slip Op. at 12. The majority held that it “need not decide whether it was proper on that record for the court to grant the motion to dismiss without claim construction: the need for claim construction might be apparent just from the claim terms themselves, to arrive at ‘a full understanding of the basic character of the claimed subject matter.’” Id. (quoting Bancorp Servs., L.L.C. v. Sun Life Assur. Co. of Canada (U.S.), 687 F.3d 1266, 1273–74 (Fed. Cir. 2012)). The majority also held that “[t]he briefing and argument on appeal demonstrate a need for claim construction, to be conducted on remand after the amended complaint is filed.” Slip Op. at 12. Because the allegations in the second amended complaint, especially the allegations regarding the “data file” limitation “may reflect, as Aatrix argues, an improvement in the importation of data from third-party software applications,” the district court “could not conclude at the Rule 12(b)(6) stage that the claimed elements were well-understood, routine, or conventional.” Id. at 14.

Perhaps recognizing the effect that this opinion may have (and likely to counter Judge Reyna’s dissent-in-part), the majority emphasized that “[n]othing in this opinion should be viewed as going beyond the Rule 12(b)(6) stage. Summary judgment, for example, involves different standards than Rule 12(b)(6).” Slip Op. at 15. In his dissent, Judge Reyna found this position untenable.

As an initial matter, he argued that the majority’s approach “attempts to shift the character of the § 101 inquiry from a legal question to a predominately factual inquiry.” Dissent-in-Part at 2. He identified a couple of potential shortcomings on such a shift. First, “it opens the door in both steps of the Alice inquiry for the introduction of an inexhaustible array of extrinsic evidence, such as prior art, publications, other patents, and expert opinion.” Id. Second, “the majority opinion strongly suggests that the district court must require claim construction where the meaning of a claim term is placed in controversy, even where, as here, proposed claim constructions are not presented to the court.” Id.

Judge Reyna was concerned that “a plaintiff facing a 12(b)(6) motion may simply amend its complaint to allege extrinsic facts that, once alleged, must be taken as true, regardless of its consistency with the intrinsic record.” Dissent-in-Part at 2. He was also concerned that “despite the majority’s attempt to cabin its opinion to 12(b)(6), I see little to prevent argument that these notions extend also to summary judgment proceedings.” Id. at 3.

It is too early to tell whether the “parade of horribles” that Judge Reyna contemplates will come to pass, but it is undoubtedly the case that the Berkheimer decision and the Aatrix Software decisions taken together (which will almost certainly will happen in light of their close chronological proximity) introduces significant uncertainty into early disposition of challenges under 35 U.S.C. § 101 (whether through a Rule 12(b)(6) motion or a motion for summary judgment). One suspects that one, if not both, decisions will lead to petitions for en banc review. It is likely that the two decisions coming in such close proximity may lead to one (or both) such petitions being granted to allow the Federal Circuit to reconcile its opinions in Genetic Techs. Ltd. v. Merial L.L.C., 818 F.3d 1369, 1373 (Fed. Cir. 2016) (patent eligibility can be addressed at a Rule 12(b)(6) stage) with these two opinions.