IP Law Daily Invalidation of method patents on loan-acquisition help affirmed
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Wednesday, January 20, 2016

Invalidation of method patents on loan-acquisition help affirmed

By Mark Engstrom, J.D.

A federal district court correctly concluded that the asserted claims of two Mortgage Grader patents were invalid abstract ideas, the U.S. Court of Appeals for the Federal Circuit has ruled (Mortgage Grader, Inc. v. First Choice Loan Services, Inc., January 20, 2016, Stark, L.). The patents in suit described systems and methods for assisting borrowers in obtaining loans. Because all of the asserted claims were directed to the abstract idea of “anonymous loan shopping” and none of the claims contained an “inventive concept” that transformed the abstract idea into a patent-eligible invention, the judgment of the district court was affirmed.

Background. Mortgage Grader sued Costco Wholesale Corporation, First Choice Loan Services, and NYLX Inc. for infringement of U.S. Patent Nos. 7,366,694 and 7,680,728, which described systems and methods for assisting borrowers in obtaining loans. Defendants First Choice and NYLX (hereinafter, “the appellees”) asserted—as affirmative defenses and counterclaims—that neither of the patents claimed patent-eligible subject matter.

Mortgage Grader filed a motion to strike the invalidity defense that the appellees had asserted under 35 U.S.C. §101. According to Mortgage Grader, the appellees failed to show good cause for reasserting the defense after they dropped it in their initial invalidity contentions. The appellees responded that the Supreme Court’s 2014 decision in Alice Corp. v. CLS Bank Int’l, 134 S.Ct. 2347, constituted good cause for the amendment.

In Alice, the Supreme Court held that “merely requiring generic computer implementation” did not transform an abstract idea into a patent-eligible invention.Alice made it clear that a claim directed to an abstract idea did not become patent eligible under §101 merely by requiring a “generic computer implementation.” The district court agreed with the appellees and denied Mortgage Grader’s motion to strike.

Thereafter, the appellees sought a summary judgment because the asserted claims were, in the appellees’ view, patent-ineligible under §101. The court found that all of the asserted claims were directed to the abstract idea of “anonymous loan shopping,” and that none of the asserted claims included an inventive concept. Because Mortgage Grader could not show that the appellees had infringed a valid patent claim, the court granted summary judgment to the appellees.

On appeal, Mortgage Grader argued that its motion to strike the appellees’ invalidity defense should not have been denied. It also argued that the district court should have denied summary judgment to the appellees because the court improperly resolved factual disputes and misapplied the “Mayo/Alice” test for patent eligibility.

Motion to strike invalidity defense. The district court judge applied his recently issued Standing Patent Rules (“S.P.R.s”) to the parties’ litigation. Pertinent to the appeal was the S.P.R.s’ requirement that invalidity contentions be served by any party who opposed a patent infringement claim.

In this case, the appellees initially raised the affirmative defense of patent ineligibility in their answer to the filed complaint. Nevertheless, they dropped the defense in their initial invalidity contentions, which were served on December 20, 2013. In 2014, the Supreme Court issued its decision in Alice. In their final invalidity contentions, the appellees informed Mortgage Grader of their intention to challenge the validity of the asserted patents under Alice.

Notwithstanding two exceptions that were inapplicable to this case, S.P.R. 4.2.2 required “good cause” to amend an invalidity contention in a final contention. In that context, a prerequisite to good cause was a showing of diligence, the circuit court explained.

In applying S.P.R. 4.2.2, the district court found that, in general, a party could not claim diligence when it included a defense in its answer to a complaint, dropped the defense in its initial invalidity contentions, and then added the defense to its final invalidity contentions. Nevertheless, the district court decided thatAlice provided “significant additional clarity on the effect, or lack of effect, of requiring the use of a computer in the claims,” and therefore concluded that Alicerepresented a sufficient change to justify the inclusion of a “new §101 argument” in the defendants’ final invalidity contentions.

Mortgage Grader argued that the district court had abused its discretion by failing to strike the appellees’ §101 defense from their final invalidity contentions. According to Mortgage Grader, Alice neither created a new defense nor changed the law, and for that reason, the Alice decision could not be used to support a finding of “good cause” for the purpose of amending the appellees’ invalidity contentions.

The Federal Circuit found no abuse of discretion in the district court’s ruling. Significantly, the court’s decision in Ultramercial, Inc. v. Hulu, LLC, 772 F.3d 709 (2014), showed that a §101 defense that was previously lacking in merit could be deemed meritorious after Alice. That type of result was most likely to occur with patent claims (such as the claims in this case) that involved “implementations of economic arrangements using generic computer technology.”

For example, the asserted claims of Mortgage Grader’s ’694 patent required the use of a “computer system” or “computer network” for facilitating anonymous loan shopping, and the asserted claim of Mortgage Grader’s ’728 patent required the “programmatic generation” of a credit grade and the use of a “network” for shopping for loans. In that context, the district court did not abuse its discretion when it allowed the appellees to add a §101 defense after Alice. Mortgage Grader’s arguments to the contrary were unpersuasive.

Because the district court did not abuse its discretion, the circuit court affirmed the denial of Mortgage Grader’s motion to strike the appellees’ invalidity defense.

Summary judgment of patent ineligibility. The Federal Circuit concluded that the district court had correctly applied the Mayo/Alice framework, had correctly found that the asserted claims were directed to the abstract idea of “anonymous loan shopping,” and had correctly decided that the claims did not include an “inventive concept” that transformed the abstract idea into a patent-eligible invention.

With respect to the first step of the Mayo/Alice analysis—determining whether the asserted claims were directed to a patent ineligible concept—the Federal Circuit found that the claim limitations recited nothing more than the “collection of information” to generate a credit grade for facilitating anonymous loan shopping. The series of steps covered by the asserted claims—borrowers applying for a loan, third parties calculating the borrower’s credit grade, lenders providing loan pricing information to the third parties based on the borrowers’ credit grades, and the borrowers deciding whether they will disclose their identities to a lender—could all be performed by humans without a computer, the court explained.

With respect to the second step of the Mayo/Alice analysis—determining whether the asserted patent claims identified an “inventive concept” that transformed the abstract idea into a patent-eligible invention—the Federal Circuit found that the asserted claims added only “generic computer components” such as an interface, a network, and a database, and that those components did not satisfy the inventive concept requirement. After Alice, the recitation of generic computer limitations did not make an otherwise ineligible patent claim patent-eligible.

Because all of the asserted claims were directed to an abstract idea and nothing in the claims added an inventive concept, the claims were not patent eligible under 35 U.S.C. §101.

Resolution of factual disputes. Mortgage Grader argued that the district court had improperly resolved genuine disputes of material fact—against Mortgage Grader—in connection with its summary judgment decision. The Federal Circuit disagreed.

According to the Federal Circuit, a §101 analysis could sometimes be conducted and resolved—on a motion for summary judgment—without resolving issues of fact. In this case, for example, Mortgage Grader and the appellees had submitted conflicting expert declarations. However, in making its patent-eligibility determination, the district court limited its review to the claims and the specifications of the patents in suit, and the existence of dueling expert testimonies did not, in this case, raise a genuine issue of material fact.

According to the Federal Circuit, the appellees’ experts provided only non-material historical information about how homeowners obtained mortgages in the period before the Internet, and that information added “little if anything” to the patent specification. In fact, neither of appellees’ experts referenced any of the asserted patent claims.

Although Mortgage Grader’s expert had opined that the asserted patents required the use of a computer, the expert’s opinion did not create a genuine dispute of material fact because Alice had clarified that the use of a generic computer to implement a “fundamental economic practice” could not provide an inventive concept that was sufficient to save a patent claim from a finding of patent ineligibility.

Ultimately, the Federal Circuit found that no reasonable factfinder could conclude, based on the parties’ expert reports, that the asserted claims were directed to patent-eligible subject matter.

The case is No. 2015-1415.

Attorneys: Craig R. Kaufman and Michael Chaocha Ting (TechKnowledge Law Group LLP) for Mortgage Grader, Inc. Rebecca Jean Stempien Coyle and Paul Grandinetti (Levy & Grandinetti) for First Choice Loans Services, Inc. and NYLX, Inc.

Companies: Mortgage Grader, Inc.; First Choice Loans Services, Inc.; NYLX, Inc.

MainStory: TopStory Patent FedCirNews

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