Supreme Court could limit software patents in Alice case

A case before the U.S. Supreme Court earlier this week could have a huge impact on business-method and software patents, with some experts concerned that the court could put significant limits on what can be patented.

The court heard oral arguments this week in Alice v. CLS Bank, with justices wrestling with a question of where to draw the line between which business methods running on a computer are patentable and which are too obvious to be patented.

The long-running patent case, which forced a splintered 10-judge decision at the U.S. Court of Appeals for the Federal Circuit, is a complicated one, with some patent experts saying they expect the court to attempt to clarify patentability rules, but most unsure of what those rules will look like.

Some experts, including the lead lawyer for patent owner Alice, have suggested that the Supreme Court could essentially wipe out software and business-method patents if justices rule broadly in the case, but many patent attorneys expect the high court to take a less sweeping approach.

After the Supreme Court, in a 2010 case called Bilski v. Kappos, declined to set a hard definition of which computerized business methods are patentable, many patent experts expect the high court to attempt to craft clearer rules. The Supreme Court in the Bilski ruling encouraged lower courts to come up with a patentability test, but instead, the Federal Circuit delivered a fractured decision on the Alice case.

U.S. courts have wrestled for years with questions about whether software and business methods should be patentable, and if so, where the line should be. U.S. patent law gives little guidance, with Section 101 of Title 35 of U.S. Code saying that patentable inventions include any "new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof." The invention has to be original and cannot be obvious, but the code contains few other limits on what can be patented.

In the Alice case, the Supreme Court has a range of options; it could invalidate Alice's patents and leave patent law alone, and on the other end of the spectrum, it could throw out software and business-method patents, said Matt Levy, patent counsel at trade group the Computer and Communications Industry Association. However, the court is "extremely unlikely" to throw out those two categories of patents, he said.

Many of the groups filing briefs in the Alice case asked the court for more certainty, and it seems likely to attempt to write a clearer rule.

"The big problem now is that we really don't know where to draw the line at all," Levy said. "If we have a piece of software, or a software invention, there's no easy way to tell which side of the line it's on."

The Alice court fight involves four electronic-trading patents owned by Australian company Alice and developer Ian Shepherd. Lawyers for CLS Bank, a huge financial clearinghouse that facilitates more than US$5 trillion in transactions each day, argue the patents cover a computerized version of the centuries-old concept of escrow, while lawyers for Alice say the patented processes are much more complicated.

Shepherd, in an email, noted that four of the company's patents have been reviewed and granted by the U.S. Patent and Trademark Office on four separate occasions. Shepherd developed the processes in the early '90s, while CLS began operating in 2002, so "it's not that we're quibbling over a timing difference of just a year or so," he said.

The case also touches on a hot debate about the U.S. patent system, beyond the issue of what ideas are too obvious to be patented. CLS lawyer Mark Perry has called Alice a nonpracticing entity [NPE] -- commonly called a patent troll by critics. Many tech companies are currently pushing U.S. lawmakers to crack down on abusive lawsuits filed by companies that don't make products, but use patent infringement lawsuits as their primary business model.

"Alice has never built a computer system capable of settling transactions according to the claimed method, has never written instructions to program any computer to perform the method, and has never practiced any of the asserted claims," Perry wrote in a brief for the Supreme Court.

Shepherd disputed Perry's assertions, but said the lawsuit has limited the company's ability to commercialize his patents. "Unlike CLS, we're a very small entity and lack the resources to 'promote' our position in any way," he said by email.

Alice invested about $15 million to build a computer system to implement Shepherd's shadow records process in the 1990s, he added, but the company wasn't able to complete the project.

"We built more than those steps/operations reflected in the claims at issue in our litigation," he said. "Having built a working system to about 95 percent completion, the 2000 tech crash happened (unfortunately) and, as a consequence of this, we postponed completing the development of our system and bringing it to market."

In 2001, Alice "become aware" that CLS Bank likely infringed one of the company's patents, he said. The company approached CLS about licensing, and the bank filed its lawsuit against Alice in 2007.

Alice has "commercialization aspirations if only we had the personnel and [money] to do this -- something that's currently very challenging given this litigation," Shepherd said. "I would like to think that these company characteristics don't qualify Alice being judged to be a nasty NPE/patent troll."

During Supreme Court oral arguments Monday, several of the justices seemed to look for a way to more clearly define what types of business methods and software are patentable, but it's not clear what those rules might look like. Some justices, including John Roberts and Stephen Breyer, seemed to voice frustration that attorneys for Alice, CLS and the U.S. Department of Justice didn't provide clear, simple rules for deciding what computerized business methods are patentable -- although the DOJ proposed a multiple-step test.

Lawyers for both Alice and CLS Bank urged the court to rule narrowly in their case, but patent experts said the court is likely to address the bigger issue of computerized business-method patents.

Justices could apply past decisions to the Alice patents and stop there, or could go a step further and extend their ruling in the 2012 case Mayo v. Prometheus, in which the court ruled that a method of giving a drug to a patient wasn't eligible for a patent, to abstract ideas run on a computer, said Fabio Marino, a computer scientist and IP attorney at McDermott Will & Emery.

Justices didn't advocate for a "bright-line test" throwing out all software and business-method patents, he said. "The more reasonable assumption is they will come up with a more limited test," he said.

The high court may look for a test that permits patenting of a computerized business method only when it describes a detailed and substantive process related to running on a computer, added Rob Unikel, an IP lawyer with Kaye Scholer.

"Of course, the difficulty is in predicting whether the justices will be able to agree on the proper formulation of such a rule or test --- certainly the Federal Circuit wasn't able to -- and, if so, what the precise requirements of that rule or test will be," he said by email. "As the saying goes, the devil is in the details."

The court could rule narrowly on Alice's patents, or it could "try to articulate a rationale for what might make certain software or business methods patent eligible, while others are patent ineligible," added IP attorney Jennifer Spaith with Dorsey & Whitney.

The case raises the question about whether software and business methods are patentable, but the court may not go that far, she said. "The court has the ability to state that certain subject matter, such as software or business methods, simply isn't eligible for patent protection, no matter how innovative or commercially successful the subject matter may be," she said by email. "The issues are nuanced, so a complete ban on all software patents, for example, is not likely."

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's email address is grant_gross@idg.com.