Yaritza Velez

In Fort Properties, Inc. v. American Master Lease LLC, the U.S. Court of Appeals for the Federal Circuit held that a real estate investment tool designed to enable property owners to buy and sell properties without incurring tax liability was too abstract and, therefore, patent ineligible under 35 U.S.C. § 101. The investment tool was intended to invoke the benefits of 26 U.S.C. § 1031, which allows an owner of investment property to exchange one property for another of “like kind” without incurring tax liability if certain conditions were met.

The U.S. District Court for the Central District of California invalidated the 41 claims in U.S. Patent No. 6,292,788 (’788 Patent) for failing to meet the subject matter eligibility requirements of 35 U.S.C. § 101, thus granting summary judgment in favor of Fort Properties, Inc. In its § 101 analysis, the District Court relied on the Federal Circuit’s decision, In re Bilski, and applied the machine-or-transformation test found therein.[1] Under the machine prong, the Court found that the claims of the ’788 Patent were not “tied to a particular machine or apparatus.”[2] Regarding the transformation prong, the District Court concluded that the deedshares were not articles transformed into different states or things and represented only legal ownership interests in property. After the District Court issued its decision, the U.S. Supreme Court stated in Bilski v.Kappos that the machine-to-transformation test was not the exclusive test for patentability, but it was still “a useful and important clue.”[3]

The Federal Circuit applied a similar test and affirmed the District Court’s decision. First, the Federal Circuit found that the first 31 claims of the ’788 Patent did not satisfy the patent-eligibility requirements of § 101. According to the Court, these claims did not require the use of a computer and merely involved conceptual steps, thereby failing the machine-prong of the test. Additionally, the Court found that these claims disclosed an abstract concept and thus did not meet the transformation test. Relying on Bilski, the Federal Circuit stated that “an abstract concept cannot be transformed into patentable subject matter merely because of connections to the physical world through deeds, contracts, and real property.”[4] The Court distinguished the instant case from Diamond v. Diehr,[5] where the Supreme Court found that a method for molding raw, uncured synthetic rubber into cured precision products using a mathematical formula was patentable because it was not an attempt to patent a mathematical formula, but rather an industrial process.[6]

Next, the Federal Circuit reviewed claims 32 through 41 of the ’788 Patent. Like the first 31 claims, claims 32 through 41 lacked the transformation qualities necessary to qualify under § 101. Additionally, the Court determined that the computer limitation in claims 32 through 41 required a computer simply to generate a plurality of deedshares and thus was not a significant component of the claimed process. The Federal Circuit distinguished the instant case from Ultramercial, LLC v. Hulu, LLC,[7] where the court held that an invention that “require[d] intricate and complex computer programming” and “specific application to the Internet and cybermarket environment” was sufficient to qualify for patent eligibility.[8]

The Federal Circuit’s decision leaves practitioners and patent applicants with a better understanding of what is required when drafting claims, particularly those involving financial transactions. The Court emphasized the need for strong connections with the physical world, as well as significant computer involvement in the performance of the claimed process.

[1] 545 F.3d 943, 956 (Fed. Cir. 2008).

[2] Fort Props., Inc. v. Am. Master Lease LLC, No. 2009-1242, 1, 5 (Fed. Cir. Feb. 27, 2012).

[3] 130 S.Ct. 3218, 3227 (2010).

[4] Fort Properties, No. 2009-1242 at 10.

[5] 450 U.S. 175, 192-93 (1981).

[6] Id.

[7] 657 F.3d 1323, 1328 (Fed. Cir. 2011).

[8] Id.

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