Ultramercial v Hulu (No 2) is the latest engagement in the long-running battle between the US CAFC and the USSC over the subject-matter exclusion of “laws of nature, physical phenomena, and abstract ideas.” The outcome of this round is that business methods remain patentable in the US, and the key to the validity of such patents will be the level of generality at which the basic idea underpinning the invention is described.
As I have explained in various articles and posts (here and here), starting with the 1948 Funk Brothers decision, the USSC has understood the rule against patenting abstract ideas and laws of nature as an exclusion of claims for inventions in which the inventive contribution lies in the discovery of a law of nature. So, as Breyer J put it Prometheus,
the claims inform a relevant audience about certain laws of nature; any additional steps consist of well understood, routine, conventional activity already engaged in by the scientific community; and those steps, when viewed as a whole, add nothing significant beyond the sum of their parts taken separately.
That is, the inventive concept must be found in the application of the law of nature, and not in the discovery of the law of nature. This is contrary to the Anglo-Canadian orthodoxy, which holds that the inventive contribution may lie in either the idea or the application, so long as the claim itself is to the application. So, in Hickton's Patent (1909), 26 RPC 339, 348 (CA) Fletcher Moulton LJ said that
invention may lie in the idea, and it may lie in the way in which it is carried out, and it may lie in the combination of the two; but if there is invention in the idea plus the way of carrying it out, then it is good subject-matter for Letters Patent.
Affirming this as part of Canadian law, the SCC in Shell Oil,  2 SCR 536 554, stated
A disembodied idea is not per se patentable. But it will be patentable if it has a method of practical application.
The US Federal Circuit has long held the same view as the Anglo-Canadian courts, and the story of the US law of patentable subject matter is that of the efforts of the Federal Circuit to bend the USSC jurisprudence into a more acceptable shape. The USSC position is incoherent, as “[t]he "laws of nature" are an essential part of the working of many and probably most patented inventions,” (Harvard Mouse 2002 SCC 76, , Binnie J), and consequently there has always been some ambiguity in the USSC case law to be exploited. Moreover, while Funk Bros, Benson and Flook represent the purest expression of the USSC’s reasoning, Diehr more closely approaching the orthodox position, and has always been the Federal Circuit’s favourite USSC decision.
Ultramercial, v Hulu (No 2), is our first look at how the Fed Cir will deal with Prometheus. The Court’s opinion, written by Rader J, is very much in the traditional Federal Circuit mold. In a passage that had me wondering if he had been reading Shell Oil, Rader CJ explained at slip op 14 that
a claim is not patent eligible only if, instead of claiming an application of an abstract idea, the claim is instead to the abstract idea itself. . . . The inquiry here is to determine on which side of the line the claim falls: does the claim cover only an abstract idea, or instead does the claim cover an application of an abstract idea?
Rader CJ rejected the notion that a claim will be unpatentable if there is an abstract idea at its core (slip op 16):
a claim may be premised on an abstract idea and, indeed, the abstract idea may be of central importance to the invention—the question for patent eligibility is whether the claim contains limitations that meaningfully tie that abstract idea to an actual application of that idea through meaningful limitations.
But how to deal with the USSC decisions? Diehr was duly relied upon, but Prometheus had to be addressed. Here Rader CJ engaged with the preemption theory that has emerged as the main rationale advanced by the USSC for its view that laws of nature cannot form the basis for a valid claim. As originally explained in Benson:
It is conceded that one may not patent an idea. But in practical effect that would be the result if the formula for converting BCD numerals to pure binary numerals were patented in this case. The mathematical formula involved here has no substantial practical application except in connection with a digital computer, which means that if the judgment below is affirmed, the patent would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself expalin
This is misguided and contrary to Anglo-Canadian law. As the SCC explained in Burton Parsons  1 SCR 555 in which “[t]he objections raised against the claims really are that, except those pertaining to some specific embodiments of the invention, the others are so framed as to cover every practical embodiment,”
If the patent is to have a practical value, it must cover all [formulations of the new type of cream] which can yield the desirable result . . . [I]f, in order to guard against possible invalidity, some area is left open between what is the invention as disclosed and what is covered by the claims, the patent may be just as worthless as if it was invalid. Everybody will be free to use the invention in the unfenced area.
Nonetheless, Rader CJ was forced to accept the preemption argument, no doubt against his better judgment. He correctly recognized that “[t]he concern . . .which has become clearer through the Supreme Court’s more recent precedents, is to deny patentability to an idea itself, rather than an application of that idea.”
[T]he Supreme Court has stated that a claim is not meaningfully limited if it merely describes an abstract idea or simply adds “apply it.” . . . We also know that, if a claim covers all practical applications of an abstract idea, it is not meaningfully limited.
The question, then, is defining the level of generality of the abstract idea that underpins the patent. The patent at issue in this case, U.S. Patent No. 7,346,545, claims in very broad terms “A method for distribution of products over the Internet,” by requiring a consumer to view an advertisement before accessing copyrighted content. The problem, as described in the patent, is that
Recently, the widespread use of the Internet has made it possible to distribute and share intellectual property in its digital form, worldwide, beyond the control of the intellectual property rights holders. . . [S]everal factors encourage the growing violation of intellectual property using the Internet. . . . Young people are becoming accustomed to getting music for free and have shown little guilt about the fact that they are breaking the law.
At the same time, advertisers today are facing very unpleasant realities in conventional advertising space. More specifically: 1) the proliferation of cable channels and attendant "channel surfing" during commercials breaks; 2) consumer habits of taping shows and then fast-forwarding through commercials during playback; 3) new hard-disk TV recorders that can scan out commercials. Further, Internet banner ads have hit new lows in responses.
On this description, the idea behind the invention is specific to the problem of the Internet, and the basic idea is that “upon logging on to an Internet web site where intellectual property products, such as musical composition or written articles, are for sale via download, a consumer may choose to obtain the right to download selected intellectual property products ('IP products') by viewing or participating in an advertiser's message or commercial, rather than by paying for the intellectual property products with cash or credit card.” If that idea is described at that level, then it appears to be preempted.
But according to the Federal Circuit, “The abstract idea at the heart of the ’545 patent, which the district court properly identified, is ‘us[ing] advertising as an exchange or currency.’” Described at this higher level of generality, the idea is clearly not preempted, because, as Rader CJ emphasized, the claim is tied in many ways to an Internet implementation.
Whether the USSC will view an Internet implementation as “meaningful” post-solution activity remains to be seen. But for the time being at least, it seems that the key to getting business method patents in the US will be to describe the basic idea at a high level of generality, so that the application in the patent is a specific instance of that idea.