After Court Ruling, US Still In Disarray On Software Patents

What inventions are eligible for patent protection? That question has roiled the US legal system for the last decade. But the Federal Circuit Court of Appeals (often called the nation’s patent court) was supposedly riding to the rescue. The court’s eagerly-awaited en banc decision in CLS Bank Int’l v. Alice Corp. [pdf] was widely expected to clarify the patentability of computer-related inventions, which play a vital role in the US economy. Unfortunately, instead of clarifying the law, the court’s 10 May ruling increased the confusion, casting doubt on more than 300,000 patents – including one-fifth of all patents issued last year.

Alice Corp. owns US patents covering a high-tech twist on the hoary device of escrow. The company’s patents cover a computerised trading platform that ensures purchasers and sellers in financial transactions can satisfy their obligations to one another. Before a transaction closes, a trusted third party verifies that the seller can deliver the specified securities and the purchaser has the money to pay for them.

Alice protected this trading platform using three different categories of patent claims. The company claimed:

• a process (the confirmation method used by Alice’s trading platform),
• a manufactured item (a computer-readable medium, such as a computer disk, that holds software directing a computer to carry out Alice’s specified process), and
• a machine (a computerised system configured to carry out a series of steps implementing Alice’s claimed escrow process).

These three types of claims often are referred to in short-hand as, respectively, method claims, computer-readable media claims, and system claims.

CLS challenged the validity of all three types of Alice’s patent claims. The district court ruled against Alice, finding that all the company’s claimed inventions were just abstract ideas and thus ineligible for patent protection under Section 101 of the Patent Act.

Alice appealed, and on 10 May, the Federal Circuit upheld the lower court’s ruling that none of Alice’s inventions were patent-eligible subject matter. The Federal Circuit, however, split badly over why the inventions were ineligible subject matter – and even if they were ineligible. The ten participating judges issued five opinions and one “additional reflection,” none of which were supported by a majority of the court.

The judges took the case en banc, hoping to provide “objective standards for section 101 patent-eligibility. Instead we have propounded at least three incompatible standards, devoid of consensus,” Federal Circuit Judge Pauline Newman wrote.

Applying these different standards, seven of the ten judges found Alice’s method and computer-readable media claims were just patent-ineligible abstract ideas. The court split down the middle, 5-5, over whether Alice’s system claims were abstract ideas, but this was sufficient to uphold the district court’s decision striking down those claims.

This fractured result disappointed many observers, who had hoped the Federal Circuit would bring clarity to a confused and contentious area of the law. “This doesn’t resolve anything,” said Robert Sachs, a partner in the law firm of Fenwick & West. “It just provides more fodder for courts and litigants to use in their battles. It just adds more fuel to the fire.”

Rudderless Patent System

In a narrow sense, the Federal Circuit’s CLS decision is a non-event. The court’s only legally binding action was to issue a bare bones per curiam opinion upholding the district court’s decision to throw out Alice’s patents. The five Federal Circuit opinions (and the additional reflection of Chief Judge Rader) are just dicta.

Yet these dicta are important for a variety of reasons. For starters, they reveal the Federal Circuit is in thorough disarray over the patentability of computer-related inventions. “The court is irreparably divided,” Sachs said.

This disarray will encourage more challenges to the validity of computer-related patents. “Now, all accused infringers [of computer-related patents] will try to raise §101 as a defense. Why not? No one knows what the standard is. Even the Federal Circuit doesn’t. And the district court judge may grant the defendant’s motion just to make the case go away,” said Lee A. Hollaar, a professor at the University of Utah and author of the book, Legal Protection of Digital Information.

This disarray in the Federal Circuit also will create conflicting court rulings on patent-eligibility, since the district courts have no clear guidance on what the law is. And when any of these cases are appealed to the Federal Circuit, the result will depend on which judges are selected by chance to hear the matter. “With today’s judicial deadlock, the only assurance is that any successful innovation is likely to be challenged in opportunistic litigation, whose result will depend on the random selection of the [Federal Circuit] panel,” Judge Newman wrote.

The growing litigation costs and legal uncertainty will hinder America’s vital technology sector. But other parts of the economy will be hurt, too, because almost all companies now use computer-related inventions. “Software and computers are found even in gas pumps,” Hollaar noted.

All this legal confusion does not affect just a small percentage of computer-related inventions. Under the standard propounded in Federal Circuit Judge Alan Lourie’s opinion (and supported by five judges, more than any other of the court’s CLS opinions), a wide swath of computer-related inventions could lose their patent protection.

Applying Judge Lourie’s standard would mean “the death of hundreds of thousands of patents, including all business method, financial system, and software patents as well as many computer implemented and telecommunications patents,” Federal Circuit Judge Kimberly Moore wrote. It would wipe out all patents in the technology area, she added, noting that the USPTO issued 320,799 such patents from 1998-2011 and that such patents constituted almost 20 percent of all patents issued by the agency in 2011.  This “would decimate the electronics and software industries,” Judge Moore stated. “There has never been a case which could do more damage to the patent system than this one.”

Not everyone agrees that Judge Lourie’s standard would go so far or be so harmful. It could well eliminate a large percentage of existing computer-related patents, but that would be good for innovation, competition and the economy, some experts assert. It would protect many small tech companies, for instance, which increasingly are being drowned in a rising tide of patent litigation.

Supreme Confusion?

The Federal Circuit may not have the last word on this case. Many observers expect Alice to file a certiorari petition with the US Supreme Court, asking that court to review the Federal Circuit’s decision.

Few certiorari petitions succeed. The Supreme Court has granted just 1 percent of petitions on average over the past ten years.

But this case has a good chance of beating the odds. Because the stakes are so high and the Federal Circuit is so riven, the US Supreme Court would probably grant certiorari, according to many experts.

“With the judges [on the Federal Circuit] so evenly split, this case is screaming out for Supreme Court guidance,” said David Long, a member of the Dow Lohnes law firm. “Even some of the Federal Circuit’s opinions indicated that this would be a good case for the Supreme Court to review.”

Yet even the Supreme Court is unlikely to bring clarity to this area of the law. Indeed, the court bears significant responsibility for creating this mess, according to some experts, because its past rulings on patent eligibility have been hazy and hard to reconcile with one another. They are “a fairly confusing set of Supreme Court cases,” Hollaar said.

Still, so long as the Supreme Court specifies some legal test for patent-eligible computer-related inventions – even if that test is vague – providing a single legal standard would be an improvement on the current situation. Said Hollaar, “The Supreme Court is not likely to handle this case well, but some guidance from that court would be good.”