In Hantz Software, LLC, v. Sage Intacct, Inc.1, the Court of Appeals for the Federal Circuit affirmed the decision of the District Court for the Northern District of California to invalidate patents that are ineligible under 35 U.S.C. § 101. The district court held all the patent claims ineligible, not just the claims asserted in the litigation. The Federal Circuit affirmed the invalidity decision as to the asserted claims, but vacated the district court’s judgment as to the non-asserted claims.
Hantz Software, LLC (“Hantz”) asserted two patents: U.S. Patent Nos. 8,055,559 (“the ’559 patent”) and 8,055,560 (“the ’560 patent”). Claim 1 of the ’559 patent is representative and is directed to computer-implemented accounting methods or systems for accounts receivable and accounts payable within a multi-company system.2
The patents were said to solve problems in multi-company business accounting systems that record and organize company financial activity, such as forced manual entry, by the use of “balancing lines” to “automatically add” “input invoice detail lines” and “define an outstanding balance associated with each of the distinct companies.”3
The District Court Decision
Hantz sued Sage Intacct, Inc. (“Sage”) and asserted infringement of “one or more” of claims of the ’559 and ’560 patents. Its complaint alleged that Sage’s infringement was “detailed in [the accompanying] Exhibit C”, which provided claim charts for only claims 1 and 31–33 of the asserted patents. Sage moved to dismiss the complaint under the Federal Rules of Civil Procedure 12(b)(6) on the basis that the claims were invalid under 35 U.S.C. § 101 as being patent-ineligible.4 Significantly, Sage never counterclaimed the invalidity of any of the non-asserted patent claims.
In addressing Sage’s motion, the district court applied the two-step Alice test.5 In step 1, the court determined that the claims are directed to an abstract idea – improving financial recordkeeping for multi-company businesses via balancing lines.6 According to the court, “The asserted claims are directed precisely to what the Federal Circuit has held to be an abstract idea.”7 In step 2, the district court determined that the claims fail to recite an inventive concept that transforms the claimed method into a patentable application of the abstract idea.8 The court reasoned that claim 1 of the patents generally claim a method for accomplishing an abstract idea through conventional computer functions: entering invoice amounts, adding up the invoice amounts, and displaying outstanding balances. These steps recite “basic functions of a computer” and set forth a result-focused and functional method. They do not impart an inventive concept.9 The court applied the same analysis to independent claim 31, but was silent on claims 32 and 33.10
The Federal Circuit Appeal
The Federal Circuit affirmed the district court’s § 101 invalidity analysis of the ’559 and ’560 patents. On appeal Hantz took issue with the district court’s holding that “[t]he Asserted Patents therefore fail both prongs of the Alice test” because that decision swept into its invalidity holding the non-asserted claims in each patent.11
The Federal Circuit agreed with Hantz because its operative complaint alleged that Sage infringed “one or more claims” of each asserted patent, but that Sage’s infringement was “detailed in Exhibit C” to the complaint that included claim charts for only claims 1, and 31-33 of each patent.12 The Court concluded that because Sage had not made any invalidity counterclaims on the non-asserted claims, the district court erred to the extent its decision invalidated those claims. The Court vacated the district court’s judgment insofar as it held any claims other than the asserted claims of each asserted patent ineligible and affirmed in all other respects.13