On September 2, 2014, the District Court for the Eastern District of Texas ruled in the case of Loyalty Conversion Systems Corporation v. American Airlines, Inc. that the plaintiff's business method patents concerning customer loyalty rewards programs were invalid, based in part upon the recent Supreme Court ruling in Alice Corporation v. CLS Bank International.
The U.S. Supreme Court ruled in Alice that business method patents that claim abstract ideas are invalid for failing to recite patentable subject matter under 35 U.S.C. § 101, even when those ideas are implemented on tangible technology such as computers. The Supreme Court found that the claims at issue in Alice disclosed the abstract concept of using a third party to mitigate settlement risk. Significantly, the Supreme Court found that the use of generic computers in the claims at issue did not render the abstract concept patentable.
The patents-at-issue in Loyalty Conversion claimed a method by which credits earned in an awards program (such as airline frequent flyer miles or hotel loyalty award points) can be converted into credits that can be used for purchases from a vendor other than the entity that issued the credits. The court found that the patents "claimed the unpatentable concept of currency exchange, as applied to the exchange of currencies in the form of loyalty award credits of different vendors." The court further noted that the exchange of one vendor's credits for another vendor's credits "is an established form of the familiar business practice of converting a non-negotiable currency into a negotiable one."
Following the principles set forth in Alice, the court found that the plaintiff's application of the abstract idea of currency exchange to generic computers in the claims at issue did not render them patentable.
The Loyalty Conversion ruling is part of an increasing trend towards invalidation of business method patents under 35 U.S.C. § 101 and the principles set forth in Alice. See, e.g., BuySAFE, Inc. v. Google, Inc., No. 2012-1575 (Fed. Cir. Sept. 3, 2014) (business method patent concerning third party guarantee of sales transactions found invalid); Genetic Techs. Ltd. v. Lab. Corp. of America, No. 12-1736-LPS-CJB (D. Del. Sept. 3, 2014) (magistrate judge report and recommendation to invalidate business method patent for predicting human performance based upon genetic testing); Walker Digital, LLC v. Google, Inc., No. 11-318-LPS (D. Del. Sept. 3, 2014) (invalidating patent concerning computerized information exchange between anonymous parties).
The Loyalty Conversion court alluded to this increasing trend in noting that there is a "broader point to be made about the particular type of 'business method' patents of which the patents in this case are examples." The court identified three features that these types of patents (which are invalid under 35 U.S.C. § 101) have in common: "(1) they recite methods for performing a commonplace function . . . typically by using a computer system or computer components to perform those methods; (2) they are aspirational in nature in that they describe the business function, but do not describe any novel manner of performing that function other than referring to the use of routine operations performed by a specifically programmed computer; and (3) the recitations referring to the use of a computer do not include any inventive measure that purports to improve the functioning of the computer itself."
The U.S. Patent and Trademark Office has already issued new instructions concerning the principles set forth in Alice. The Loyalty Conversion case and other post-Alice decisions should caution litigants to re-evaluate any pending actions involving inventions that could be characterized as long-standing business practices or methods that are implemented by commonplace technology.
1 - Loyalty Conversion Sys. Corp. v. American Airlines, Inc., No. 2:13-CV-655 (E.D. Tex. Sept. 2, 2014).
2 - Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S.Ct. 2347 (2014).
3 - Id. at 2360.
4 - Id.
5 - Id.
(slip op. at 10) ("[The patent claims] merely require generic computer implementation [and] fail to transform that abstract idea into a patent-eligible invention.").
6 - Loyalty Conversion, No. 2:13-CV-655, slip op. at 2.
7 - Id., slip op. at 12.
8 - Id., slip op. at 27.
9 - Id., slip op. at 26-27.
10 - Id., slip op. at 25-26.
11 - Id., slip op. at 26 (citing Alice, 134 S. Ct. at 2359).
12 - See Memorandum from Andrew H. Hirshfeld, Deputy Commissioner for the U.S. Patent and Trademark Office, Memorandum to Patent Examining Corps re: "Preliminary Examination Instructions in view of the Supreme Court Decision in Alice Corporation Ply. Ltd. v. CLS Bank International, et al." (June 25, 2014).
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