Will U.S. District Courts Give Up Trying to Understand Section 101 Patent Eligibility?

By Peter Schechter

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A United States District Judge recently denied an accused infringer’s motion to dismiss the complaint based on the infringer’s defense of patent subject matter ineligibility under 35 U.S.C. Section 101.  While there’s nothing unusual about that, Judge Nielson certified the court’s order upholding patent validity for immediate appeal to the Court of Appeals for the Federal Circuit, and wrote: “if this court’s ruling is erroneous, it would welcome reversal by the Federal Circuit.”  That is truly extraordinary.  Whether the Court of Appeals accepts the certification and hears the interlocutory appeal remains to be seen, as are the consequences of the appellate court’s likely refusal to do so.

It is almost becoming “standard operating procedure” in U.S. patent infringement litigation for the defendant to file an early motion to dismiss the complaint asserting that the patent is invalid under 35 U.S.C. Section 101 as claiming patent-ineligible subject matter.  Such a motion to dismiss may be granted at the early pleading stage only when there are no factual allegations that prevent resolving the eligibility question as a matter of law.  In the case of Alexsam, Inc. v. HealthEquity, Inc.,[1] filed in the U.S. District Court for the District of Utah, defendant HealthEquity filed just such a motion to dismiss the complaint, arguing both the absence of any plausible factual issue that would preclude dismissal, and patent subject matter ineligibility in accordance with the U.S. Supreme Court’s Alice Corp. Pty. Ltd. v. CLS Bank Intern.[2] (“Alice”) decision and subsequent decisions by the Court of Appeals for the Federal Circuit (“CAFC”) interpreting and applying Alice.

AlexSam’s patent discloses “a multifunction card system which allows for the activation of prepaid phone cards and the use of Electronic Gift Certificate™ cards, loyalty cards, debit cards, and medical information cards” and “provides for the immediate linkage of these various functions.”  U.S. District Judge Nielson undertook the now familiar Alice two-step inquiry for distinguishing patents that claim laws of nature, natural phenomena, and abstract ideas from those that claim patent-eligible applications of those concepts.  After reviewing “many similar cases,” the court stated its view that the claims of AlexSam’s patent present a “close call” at the first step of the Alice inquiry, that is, whether they are directed to an abstract idea.  Judge Nielson explained that the answer to this “step one” inquiry depends primarily upon how one chooses to characterize the claims.  The District Court also found the “step two” Alice inquiry to be a close call, and stated that its resolution “is subject to reasonable dispute.”

It is so difficult to determine whether a patent granted by the United States Patent and Trademark Office claims patent-ineligible subject matter precisely because the CAFC has been completely unable – since the Supreme Court’s Alice decision in 2014 – to articulate consistent, clear, and understandable rules for making the determination.  The state of Section 101 jurisprudence today can only be described as chaotic.  One needs to look no further than the CAFC’s recent denial of en banc rehearing, by an evenly split 6-6 vote of the active circuit court judges, of the highly controversial 2-1 split decision in American Axle & Manufacturing, Inc. v. Neapco Holdings LLC.[3]  The order denying rehearing en banc produced five separate concurring and dissenting opinions running to more than forty pages of legal dissertation, leading some commentators to exclaim that “the CAFC is broken.”

Faced with the impossible task of deciphering CAFC case law, U.S. District Judge Nielson in Alexsam essentially threw up his hands and did the best he could, noting that “both parties have cited authoritative cases addressing at least somewhat analogous patent claims that appear to support their conflicting positions and, in all candor, this court finds some of these cases difficult to reconcile with one another.”  Judge Nielson is a master of understatement.

Next, however, Judge Nielson took the highly unusual step of certifying the court’s order denying HealthEquity’s motion to dismiss the complaint for immediate interlocutory appeal to the CAFC pursuant to 28 USC Section 1292(b).  That statutory provision states that “when a district judge, in making in a civil action an order not otherwise appealable under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order.”

Section 1292(b) appeals are permissive and the CAFC may decline to hear them, however, even where the district judge makes the required three-part certification.  The CAFC has accepted and heard 1292(b)-certified interlocutory appeals in patent cases only a small number of times in its almost 40-year history, and has done so only in unusual circumstances.  Where the certified question is deemed to involve an “ordinary” issue that is typically dealt with on appeal after conclusion of the case and after final judgment has been entered, such as claim construction, the CAFC has consistently declined to hear the interlocutory appeal.

Section 101 patent eligibility is probably an “ordinary” issue in the same sense that claim construction is an “ordinary” issue typically resolved on appeal in the normal course of a patent infringement case.  There being no other unusual circumstances mentioned by Judge Nielson in the order denying HealthEquity’s motion to dismiss, it seems highly unlikely that the CAFC will exercise its discretion to accept and hear the 1292(b)-certified interlocutory appeal.  As a result, the time and money of the parties and the precious resources of the district court will likely be wasted litigating a case in which the presiding judge has already expressed his lack of confidence in validity of the patent under Section 101, while not dismissing the complaint on that basis.  The 1292(b) certification would seem to be a hollow and useless exercise in this situation.

Since Judge Nielson stated that he would welcome being reversed by the CAFC in the event he has reached the wrong conclusion regarding the outcome of the Alice two-step determination, he would have been better off granting HealthEquity’s motion to dismiss AlexSam’s complaint.  That action would have immediately produced a final judgment appealable by AlexSam without raising any element or issue of discretion on the CAFC’s part to hear and decide the issue.  When the CAFC refuses to hear HealthEquity’s interlocutory appeal, we may well see other U.S. district judges “throwing up their hands” and granting motions to dismiss patent infringement complaints due to the patent claiming patent-ineligible subject matter as a matter of course.  By doing so, U.S. district judges would ensure that they only spend their time presiding over patent infringement cases where a 3-judge panel of the CAFC has already determined that the patent claims are not invalid under Section 101.  How the CAFC will decide the Section 101 patent eligibility issue in any given case, however, depends entirely on the composition of the particular 3-judge panel that hears the appeal.  This much was recently made perfectly clear in American Axle & Manufacturing, to any extent that it was not already clear enough before the “broken” CAFC issued its five-opinion order denying rehearing en banc review in that case.

[1] Case No. 2:19-cv-00445, 2020 WL 4569276 (D. Utah Aug. 7, 2020).

[2] 573 U.S. 208 (2014).

[3] ___ F.3d. ___, 2020 WL 4377542 (Fed. Cir. July 31, 2020).