US High Court Shuts Door On Many Software Patents

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Software patents have become a major problem in the United States. These patents are often so vague and broad, they are hindering innovation and economic growth, according to many businesses, economists, and patent experts. But thanks to a ruling yesterday by the United States Supreme Court,the ranks of software patents may soon be decimated.

In Alice Corp v. CLS Bank Int’l [pdf], the court unanimously held that some software is patent-eligible subject matter, but not everything that uses software or runs on a computer is patent-eligible. An abstract idea does not become patent-eligible simply because it is implemented using a computer. “[T]he mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention,” Justice Clarence Thomas declared in the court’s opinion.

This is “one of the most important intellectual property decisions of recent memory,” said Prof. Robin Feldman of University of California Hastings College of the Law. “This will cast doubt on a wide swath of patents that have been granted, particularly many of the software patents that have been plaguing society.”

The ruling will be a big relief to companies trying to do business in the United States, because they are often sued for allegedly infringing such patents. Conversely, the ruling will cause consternation for patent assertion entities – more often known as “patent trolls” – because these companies frequently own and attempt to enforce extremely broad software patents.

The US Patent and Trademark Office (USPTO) began granting patents on software-related inventions in the late 1960s. The agency issued tens of thousands of these patents, comprising nearly 20 percent of all patents the USPTO issued in 2011, according to Federal Circuit Judge Kimberly A. Moore.

In recent years, however, the validity of many software patents came under a cloud, as courts struggled to determine which computer-implemented inventions were just abstract ideas, and thus not patent-eligible subject matter. The law in this area became so confused, patent experts could not determine with any confidence whether a computer-implemented invention was patentable subject matter.

The Federal Circuit, often referred to as America’s “patent court,” tried to bring clarity to this area of the law. However, the court’s May 2013 decision in Alice Corp v. CLS Bank Int’l[pdf] only compounded the confusion. The en banc court of 10 judges issued six different and often contradictory views on whether and when software-related inventions were patentable subject matter.

“There seemed to be no clear, agreed-upon test for determining when a computer implemented invention is patent-eligible subject matter,” said Margaret M. Duncan, a Chicago-based partner in the law firm of McDermott Will & Emery. The Federal Circuit’s decision in Alice, she added, just “added additional confusion.”

So the Supreme Court agreed to review the Federal Circuit’s decision.

A Patent on Escrow

The patentee in this case, Alice Corp., obtained US patents covering an electronic escrow service that ensures the integrity of securities sales made online. Using this service, a buyer puts the required payment into electronic escrow, the seller puts the offered securities into escrow, and only then does the third party holding the escrowed items settle the transaction by delivering payment to the seller and securities to the buyer.

Alice patented its online escrow service in three different ways. First, its patents included method claims, which asserted exclusive rights in Alice’s method for performing online escrow. Second, the patents included claims for manufactured items, specifically, computer-readable media (such as a computer disk) holding software directing a computer to carry out Alice’s escrow process. Third, the patents included claims for a system, consisting of a computer configured to implement the escrow process.

Alice sued CLS for infringing these patents. CLS countered that the patents were invalid because they did not cover patent-eligible subject matter. The district court agreed with CLS and struck the patents. This ruling was upheld in May 2013 by a splintered Federal Circuit. And the US Supreme Court subsequently upheld the Federal Circuit decision.

The high court set forth a two-step test for distinguishing patent-eligible inventions from patent-ineligible ones. “First, we determine whether the claims at issue are directed to one of those patent-ineligible concepts [laws of nature, natural phenomena, and abstract ideas].” If the claims are so directed, the court examines whether the claims add “an ‘inventive concept’ – i.e., an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.’” If there is no added inventive concept, the claim is not patent-eligible.

The Supreme Court found Alice’s patented invention was directed to an abstract and well-known business concept:

[T]he claims before us are drawn to the concept of intermediated settlement, i.e., the use of a third party to mitigate settlement risk. …[This] concept of intermediated settlement is “ ‘a fundamental economic practice long prevalent in our system of commerce.’” …Thus, intermediated settlement … is an “abstract idea” beyond the scope of §101 [which specifies which inventions are patent-eligible subject matter].

Alice also claimed a computer to implement this abstract idea, but that was not enough to add an inventive concept. “[I]f a patent’s recitation of a computer amounts to a mere instruction to ‘implemen[t]’ an abstract idea ‘on … a computer’ … that addition cannot impart patent eligibility,” the court explained.

And that was all Alice’s method claims invention did, according to the court.

The method claims do not, for example, purport to improve the functioning of the computer itself. Nor do they effect an improvement in any other technology or technical field. Instead, the claims at issue amount to “nothing significantly more” than an instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer. Under our precedents, that is not “enough” to transform an abstract idea into a patent-eligible invention. [Cites omitted.]

Alice’s system and computer-readable medium claims fared no better. “Because petitioner’s system and media claims add nothing of substance to the underlying abstract idea, we hold that they too are patent ineligible under §101,” the court ruled.

The Fallout

The ruling is good news for companies doing business in the United States, particularly high tech and financial services firms. These companies have been hit with a barrage of infringement suits filed by patent trolls. Many of those suits are now likely to thrown out on summary judgment or on motions to dismiss.

The Alice decision, combined with another recent Supreme Court ruling, is likely to drive down new patent troll lawsuits. Octane Fitness, LLC v. Icon Health & Fitness, Inc. allows a trial judge to force a patentee to pay the defendant’s attorney fees if the patentee brings an exceptionally weak case. So if a troll asserts patent claims made dubious by Alice, the troll risks a fee-shifting award that could run into millions of dollars.

“This certainly puts a damper on patent trolls’ business model,” said Cynthia E. Kernick, a partner in the Pittsburgh office of the Reed Smith law firm. She added, “After a few district court rulings granting fee-shifting, you’ll really see a slowdown on the trolls’ lawsuits.”

Alice seems to bring the US position on software patents more closely in line with Europe, Japan, China and many other nations. These countries require an invention to have a “technical effect” in order to be eligible for patent protection.

Software produces a technical effect – and is patent-eligible – if it (for instance) improves the operation of the computer running the software, such as by allowing the machine to run faster or make more efficient use of memory. If the software simply runs on the computer, there is no technical effect and the software is unpatentable. Because of this “technical effect” requirement, many types of computer-implemented inventions, such as business methods, are not patentable.

The US Supreme Court didn’t go so far as to outlaw business method patents. (However, three justices added a concurring opinion in Alice stating that they believe business methods are not patent-eligible.)

Nor did the US Supreme Court explicitly require all computer-implemented inventions to be produce a technical effect in order to be patent-eligible. But the court’s language was certainly suggestive, noting that Alice’s method claims were patent-ineligible because they didn’t “improve the functioning of the computer” nor “effect an improvement in any other technology or technical field.”

However, patent expert disagree on whether Alice requires computer-implemented inventions to have a technical effect. Expect that issue to arise soon before trial courts and the Federal Circuit.

Steven Seidenberg is a freelance reporter and attorney who has been covering intellectual property developments in the US for more than 15 years. He is based in the greater New York City area and may be reached at info@ip-watch.ch.

Steven Seidenberg may be reached at info@ip-watch.ch.

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