Federal Circuit Downs Internet Advertising Patent in Ultramercial v. Hulu

On November 14, the Federal Circuit issued another in a series of decisions striking down computer-based patent claims following the Supreme Court’s June 2014 opinion in Alice Corp. v. CLS Bank. The decision, Ultramercial Inc. v. Hulu, LLC, illustrates the magnitude of Alice and provides further ammunition for parties challenging patents to computer software and computer-implemented commercial activities.

The Federal Circuit’s decision caps a long-running dispute over the validity of Ultramercial’s U.S. Patent 7,346,545, which claimed ad-based methods for distributing copyrighted media over the internet by (i) offering consumers free access to the media in exchange for viewing a sponsor’s advertisement and (ii) receiving payment from the sponsor for displaying the advertisement. Claim 1 of the ’545 patent is representative of the claims at issue:

1.  A method for distribution of products over the Internet via a facilitator, said method comprising the steps of:

a first step of receiving, from a content provider, media products that are covered by intellectual-property rights protection and are available for purchase, wherein each said media product being comprised of at least one of text data, music data, and video data;

a second step of selecting a sponsor message to be associated with the media product, said sponsor message being selected from a plurality of sponsor messages, said second step including accessing an activity log to verify that the total number of times which the sponsor message has been previously presented is less than the number of transaction cycles contracted by the sponsor of the sponsor message;

a third step of providing the media product for sale at an Internet website;

a fourth step of restricting general public access to said media product;

a fifth step of offering to a consumer access to the media product without charge to the consumer on the precondition that the consumer views the sponsor message;

a sixth step of receiving from the consumer a request to view the sponsor message, wherein the consumer submits said request in response to being offered access to the media product;

a seventh step of, in response to receiving the request from the consumer, facilitating the display of a sponsor message to the consumer;

an eighth step of, if the sponsor message is not an interactive message, allowing said consumer access to said media product after said step of facilitating the display of said sponsor message;

a ninth step of, if the sponsor message is an interactive message, presenting at least one query to the consumer and allowing said consumer access to said media product after receiving a response to said at least one query;

a tenth step of recording the transaction event to the activity log, said tenth step including updating the total number of times the sponsor message has been presented; and

an eleventh step of receiving payment from the sponsor of the sponsor message displayed.

Ultramercial accused various internet content providers of infringing the ’545 patent, and the defendants moved to dismiss on the basis that the claims were invalid under 35 U.S.C. § 101 for covering patent-ineligible subject matter. The district court granted that motion in 2010.

On appeal, the Federal Circuit initially reversed, concluding that the claims were valid under § 101. Ultramercial I, 657 F.3d 1323 (Fed. Cir. 2011). But the Supreme Court vacated that judgment and ordered the Federal Circuit to reconsider in light of Mayo v. Prometheus, in which the Supreme Court addressed patent eligibility in the context of medical diagnostic methods. Having considered Mayo on remand, the Federal Circuit declined to change its ruling and entered another decision reversing the district court. Ultramercial II, 722 F.3d 1335 (Fed. Cir. 2013). Once again, the Supreme Court ordered the Federal Circuit to reconsider, having by then issued the Alice decision regarding patent eligibility for computerized inventions. In taking up the case for the third time, the Federal Circuit concluded that Alice compels an opposite result.

The Federal Circuit’s analysis closely tracked Alice in holding Ultramercial’s claims invalid. The court concluded that the asserted claims described “only the abstract idea of showing an advertisement before delivering free content,” a concept that was “devoid of a concrete or tangible application.” Having concluded that the claims involved an abstraction, the court moved to the second step in the Alice analysis—determining whether the claims “do significantly more than simply describe that abstract method.” On that issue, the court held that most of the claim’s steps set forth the basic abstract idea of offering media content in exchange for viewing an advertisement. None of the specific steps recited in the claims, such as updating an activity log, restricting public access to media content, and using internet communication, added anything but “conventional steps, specified at a high level of generality,” which was insufficient to transform the underlying abstract idea into patent-eligible subject matter. The court also noted that (i) nothing tied the claims to a particular “novel machine or apparatus,” as neither the internet nor a general-purpose computer qualified as such, and (ii) the claim methods failed to “transform any article to a different state or thing” because the claimed exchange of content permissions and payment obligations were themselves abstract. Accordingly, the Federal Circuit affirmed the lower court decision invalidating the claims.

On close reading, the Federal Circuit’s latest Ultramercial decision is notable in at least three regards.

First, the court affirmed a decision invalidating the ’545 patent on a pre-answer motion to dismiss, which provides a clear path for accused infringers to attack similar patents early and without expending discovery costs.

Second, Ultramercial is only one among a wave of post-Alice decisions invalidating similar claims, but the case nonetheless uniquely demonstrates the impact of the Alice decision. Before Alice, the Federal Circuit twice considered the same case and twice held upheld the ’545 patent’s claims under § 101, and it did so the second time even after considering Mayo. Alice quite clearly tipped the scales and led the Federal Circuit to reach the opposite result.

Finally, Ultramercial provides additional guidance in applying the Alice standard for assessing patent eligibility of computer-implemented, and particularly internet-based, inventions. In determining whether the ’545 patent’s claims involved an abstraction under the first Alice prong, the court described an abstract idea as one “having no particular concrete or tangible form.” The court hinted that certain limitations, such as consulting an activity log “add[ed] a degree of particularity” but in this case failed to turn the abstract idea into something concrete. The message, it would seem, is that adding highly specific, well-defined, and, if possible, tangible steps or limitations might shield a claim from being abstract. For example, claim 1 of the ’545 patent might have been narrowed to require an interactive sponsor message and a consumer response to a particular query (steps 8-9). In addition, the specific entries required in the claimed activity log might have been defined in more depth (step 10). The court indicated that not all software-based patents will “necessarily be directed to an abstract idea” and that “[f]uture cases may turn out differently,” but patentees should assume that Alice has raised that bar substantially. Under the second Alice prong, the court reasoned that conventional, generically claimed steps would not transform an abstract idea into patent-eligible subject matter. Notably, the court also applied the “machine or transformation” test, assessing the claims for reliance on a specific machine or performance of a tangible transformation of an article. Here again, the court’s analysis emphasizes the importance of tying the claims to a tangible device or object and including specific, detailed limitations rather than broad, generalized language.

After Ultramercial, the test for subject matter eligibility under § 101 still remains difficult to understand and apply. But the decision does provide some guidance (noted in the previous paragraph) for drafting viable claims to computer-implemented inventions.