Supreme Court Update: Abramski v. United States (12-1493) and Alice Corporation Pty. Ltd. v. CLS Bank International (13-298)

June 24, 2014 Supreme Court Update

Greetings, Court fans!

The Court is starting to roll out the big decisions, including in Halliburton Co. v. Erica P. John Fund, Inc. (13-317) yesterday on the viability of the fraud-on-the market theory in securities class actions. We'll bring you our take on Halliburton soon, but in the meantime, let's clear out two more cases from last week: Abramski v. United States (12-1493), upholding the conviction of a straw purchaser under the Gun Control Act of 1968; and Alice Corporation Pty. Ltd. v. CLS Bank International (13-298), holding that a patent-ineligible abstract idea doesn't become patentable just because you implement it on a computer.

Turning first to Abramski v. United States (12-1493), former cop Bruce Abramski probably shouldn't have offered to use his old police ID to buy a gun at a discount for his uncle. Or answered "yes" on a federal form asking if he was the actual buyer of the gun. Or kept a receipt from his uncle documenting the entire transaction, which federal agents found while executing a search warrant at his home in connection with a different crime. Having done all those things, Abramski was indicted for making false statements in connection with a gun purchase, in violation of 18 U.S.C. §922(a)(6) and 18 U.S.C. §924(a)(1)(A).

The Gun Control Act of 1968 requires gun dealers to verify the identity of potential purchasers, run background checks, and maintain records including purchasers' name, age, and residence. Would-be purchasers must complete Form 4473, which asks, in relevant part: "Are you the actual transferee/buyer of the firearm(s) listed on this form? Warning: You are not the actual buyer if you are acquiring the firearm(s) on behalf of another person. If you are not the actual buyer, the dealer cannot transfer the firearm(s) to you." Section U.S.C. §922(a)(6) makes it unlawful to make false statements "intended or likely to deceive [a dealer] with respect to any fact material to the lawfulness of the sale" of a gun. Section 924(a)(1)(A) makes it unlawful to make false statements "with respect to the information required … to be kept" in a dealer's records. Abramski argued that his false answer was not "material to the lawfulness of the sale" under §922(a)(6) because his uncle was legally eligible to own a gun. Abramski also argued that his answer was not one of the items "required … to be kept" by a dealer under §924(a)(1)(A). The District Court rejected Abramski's arguments, as did the Court of Appeals for the Fourth Circuit.

The Court affirmed, 5-4, with Justice Kennedy joining the liberal wing of the Court behind a decision penned by Justice Kagan. First, the Court considered and rejected a new argument by Abramski, that the identity of the "actual buyer" of a gun is never "material to the lawfulness of the sale" under §922(a)(6). The Court acknowledged that §922 regulates gun dealers' transactions with "persons" without specifically referencing straw purchasers. But, in context, it was clear that the statute establishes an elaborate system to verify a purchaser's identity and check his background, to keep guns away from criminals and others who should not have them, and to assist the police in investigating gun crimes. Abramski's interpretation – which would allow anyone, even someone ineligible to own a gun, simply to send an eligible deliveryman in his stead – would defeat the purpose of the statute. Justice Kagan was unmoved by Abramski's and the dissent's argument that buying a gun for someone else was no different than buying a gun on the secondary market, which Congress has left "largely untouched." She noted that "the scarcity of controls in the secondary market provides no reason to gut the robust measures Congress enacted at the point of sale." The Court also rejected Abramski's narrower argument that his false answer on Form 4473 was not material because his uncle was eligible to buy a gun anyway (i.e., he was a cheapskate, but not a criminal). Congress purposefully made gun dealers – highly regulated, legally knowledgeable entities with access to the background check database – responsible for verifying a gun purchaser's eligibility. "Nothing could be less consonant with the statutory scheme than placing that inquiry in the hands of an unlicensed straw purchaser." Finally, the Court found that Abramski had violated §924(a)(1)(A) because the Attorney General requires dealers to retain a completed copy of Form 4473 which contained the "actual buyer" question that Abramski answered falsely.

Justice Scalia wrote for the dissenters, who agreed with Abramski's narrower argument that §922 only regulates gun dealers' transactions with the "persons" standing before them, and does not prohibit a person who is eligible to receive and possess firearms from buying a gun for another person who is eligible to receive and possess firearms. Scalia criticized the majority for its "purpose-based" interpretation, adding that even if the statute would prevent crime more effectively if it looked past the proverbial "man at the counter," checking and recording the identity of the person at the counter was not entirely worthless. Scalia listed several scenarios in which the Act deems the "man at the counter" to be the "true purchaser" even though it is clear the gun will end up in another's hands – notably, guns as gifts, guns for resale, and guns as raffle prizes – and posed this troubling question: "why is the majority convinced that a statute with so many admitted loopholes does not contain this particular loophole?" The dissenters also would have found for Abramski on §924(a)(1)(A), on the ground that a purchaser's response to the "actual buyer" question is not one of the enumerated items of information a dealer is required to keep, and that hooking criminal liability on the fact that the regulation requires the dealer to hold on to the entire form "carries the text of the statute a bridge too far." For both 18 U.S.C. §922(a)(6) and 18 U.S.C. §924(a)(1)(A), to the extent the statutes were ambiguous, the dissenters would have applied the rule of lenity and let Abramski off.

Next, we turn to Alice Corporation Pty. Ltd. v. CLS Bank International (13-298), where the Court was thoroughly unimpressed with Alice Corporation's patent claims to an "invention" that "relates to methods and apparatus, including electrical computers … applied to financial matters and risk management." Alice Corporation owned several patents on a business method aimed at limiting "settlement risk," the risk that a party in a financial transaction will fail to fulfill its obligations. The above-mentioned "electrical computers" would create shadow records of each participant's financial records, use them to determine which transactions the parties had sufficient resources to fulfill, and allow only those transactions to go forward. The patents-in-suit claimed this business method, use of a computer system to carry out the method, and specific programing code. CLS sued Alice Corporation in D.C. District Court, seeking a declaratory judgment that Alice Corporation's patent claims were invalid, unenforceable, or not infringed; Alice Corporation counterclaimed for infringement. The District Court sided with CLS, holding that the claims were not eligible for patent protection. A divided panel initially reversed, but the Federal Circuit ultimately reheard the case en banc and affirmed the District Court's judgment. The Supreme Court affirmed.

Justice Thomas wrote the unanimous majority opinion. Section 101 of the Patent Act provides patent protection for "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof." The Court has long held that "laws of nature, natural phenomena, and abstract ideas" are not patentable under Section 101. Under Mayo Collaborative Services v. Prometheus Laboratories, Inc. (2012), courts must first determine whether the claims at issue are directed to one of these patent-ineligible concepts, and if so, whether the claims nevertheless contain an "inventive concept" that would transform them into a patent-eligible application. Here, the Court readily found that the claims at issue were directed to an "abstract idea," citing Bilski v. Kappos (2010). In Bilski, the Court found that a business method aimed at hedging against the risk of price swings in commodities markets to be an unpatentable abstract idea. Like the concept of "hedging" in Bilski, the concept of "intermediated settlement" was a "fundamental economic practice long prevalent in our system of commerce." Turning to the second step in Mayo, the Court held that Alice Corporation's patents were not saved by the fact that they involved a computer system. The computer system at issue, according to the majority, was not special in any way. In short, "[s]tating an abstract idea while adding the words ‘apply it with a computer'" will not make something patentable.

Justice Sotomayor, joined by Justices Ginsburg and Breyer, wrote a one paragraph concurrence to express her view that business methods are not patentable, period.

We'll be back soon with Halliburton and other recent decisions.

Kim, Jenny & Tadhg