Fort Properties, Inc. v. American Master Lease LLC

By Zi Wang

In Fort Properties, Inc. v. American Master Lease LLC, 2012 WL 603969 (Fed. Cir. 2012), the Federal Circuit affirmed the district court’s holding that a method patent for creating real estate investment instrument adapted for performing tax-deferred exchanges is invalid because it is directed at an unpatentable abstract idea, even though the claim language of the patent at issue recited a computer in certain operations.

American Master Lease LLC (“AML”) holds the ‘788 patent at issue.  The ‘788 patent discloses an investment tool designed to enable property owners to buy and sell properties without incurring tax liability pursuant to a tax law provision that exempts certain investment property exchanges when an owner of investment property exchanges one property for another of like kind and certain conditions are met.

Specifically, the claims require the aggregation of a number of properties into a “real estate portfolio.”  The property interests in this portfolio are then divided into shares, called “deedshares”, and are sold to investors much in the same way that a company sells stock.  Each deedshare can be encumbered by its own mortgage debt, which provides flexibility to real estate investors attempting to structure their debts in a way that complies with the exemption provision of tax law.

All claims in the ‘788 patent are method claims.  Claim 1 discloses:

  1. A method of creating a real estate investment instrument adapted for performing tax-deferred exchanges comprising:

aggregating real property to form a real estate portfolio;

encumbering the property in the real estate portfolio with a master agreements; and

creating a plurality of deedshares by dividing title in the real estate portfolio into a plurality of tenant-in-common deeds of at least one predetermined denomination, each of the plurality of deedshares subject to a provision in the master agreement for reaggregating the plurality of tenant-in-common deeds after a specified interval.

Two of the other independent claims, claims 22 and 32, are nearly identical to claim 1—though claim 32 contains an additional limitation requiring a computer to “generate a plurality of deedshares.”  The only other independent claim, claim 11, discloses a method of transferring ownership of deedshares in a manner consistent with the tax law provision discussed above.

Fort Properties, Inc. brought action against AML and moved for summary judgment of invalidity in the district court.  The district court invalidated all claims in the ‘788 patent for failing to claim patent-eligible subject matter under 35 U.S.C. § 101.  In reaching its decision, the district court relied on In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) and applied the machine-or-transformation test.  The court held that the patent failed both prongs of the test and accordingly invalidated the whole patent.  AML appealed the decision to the Federal Circuit.

In its opinion, The Federal Circuit cited to four seminal Supreme Court cases that deal with the question of when an invention qualifies as a patent-eligible process as opposed to an abstract idea, namely, Bilski v. Kappos, 130 S.Ct. 3218 (2010); Diamond v. Diehr, 450 U.S. 175 (1985); Parker v. Flook, 437 U.S. 584 (1978); and Gottschalk v. Benson, 409 U.S. 63 (1972).  The Federal Circuit analogized the invention in the ‘788 patent to the invention in Bilski, which is an investment tool not requiring the use of a computer.

AML argued that claims 1-31 constitute a patentable process and not an abstract idea because they require a series of steps to take place in the real world that involve real property, deeds, and contracts.  More specifically, AML contended that the deeds remove the invention from the realm of the abstract because they are physical legal documents signifying real property ownership.  Fort Properties, on the other hand, argued that the claimed method of aggregating property, making it subject to an agreement, and then issuing ownership interests to multiple parties consists entirely of mental processes and abstract intellectual concepts.  Fort Properties pointed out that the Bilski invention’s intertwinement with deeds, contracts, and real property does not transform the abstract method into a patentable process.

The Federal Circuit sided with Fort Properties and drew extensive similarities between the invention at issue and the Bilski invention.  The Federal Circuit further stated that its reasoning is in accord with its own precedent in In re Comiskey, 554 F.3d 967 (Fed. Cir. 2009), and in In re Schrader, 22 F.3d 290 (Fed. Cir. 1994).

The court then turned to the question of how claim limitations involving computers apply in the § 101 analysis.  The court relied on three of its own 2011 and 2012 cases: Cybersource v. Retail Decisions, Inc., 654 F.3d 1366 (Fed. Cir. 2011); Ultramercial, LLC v. Hulu, LLC, 657 F.3d 1323 (Fed. Cir. 2011); and Dealertrack, Inc. v. Huber, 2012 WL 164439 (Fed. Cir. 2012).  The court opined that the basic character of a process claim drawn to an abstract idea is not changed by claiming only its performance by computers, or by claiming the process embodied in program instructions on a computer readable medium.  Instead, to impart patent-eligibility to an otherwise unpatentable process under the theory that the process is linked to a machine, the use of the machine must impose meaningful limits on the claim’s scope.  As a positive example, the court pointed to the claimed invention in Ultramercial, which “required intricate and complex computer programming” and “specific application to the Internet and a cybermarket environment.”  The addition of the computer to the claims was not merely insignificant post-solution activity; rather, the invention
itself involved “advances in computer technology,” and it was thus sufficient to qualify the claims for patent eligibility under § 101.

The court then held that the computer limitation in the patent at issue is akin to that in Dealertrack, and does not play a significant part in permitting the claimed method to be performed.  The computer limitation here is a broad and general limitation that does not impose meaningful limits on the claim’s scope.  AML simply added a computer limitation to claims covering an abstract concept—that is, the computer limitation is simply insignificant post-solution activity.  Therefore the computer limitation cannot impart patent-eligiblity here.

In this case the Federal Circuit once again took on the task of drawing the line between patentable process claims and patent-ineligible abstract ideas after Supreme Court’s Bilski v. Kappos decision.  Together with patents in Cybersource and Dealertrack, the patent in the present case was struck down for covering unpatentable abstract ideas, recitation to computers notwithstanding.  In the most likely scenario, method patent claims that are otherwise unpatentable under § 101 will not be upheld by the court if the recitation to a computer is simply post-solution activity.  To put it in another way, if a computer merely facilitates practice of an invention, rather than enables it, the recitation to a computer in patent claims is superfluous for § 101 purposes.  On the other hand, if an invention has a complicated-enough interface with computerization that it can be described as an advance in computer technology, then Ultramercial should control and it is possible for the patent to be upheld.

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