Software Patents at the US Supreme Court: Patenting of escrow accounts

17 06 2014

The Supreme Court recently heard arguments over whether a company named Alice Corporation can own an “invention” for escrow accounts. While the idea of escrow has been around for centuries, Alice Corp has a patent that describes the concept of using a computer to implement it.

For Alice’s opponent, CLS Bank, a lot is at stake since the bank uses the patented process to clear millions of dollars in financial transactions each day. Even more is at stake for an American patent system swamped by millions of low-quality patents, many of them — like the one belonging to Alice Corp — related to software.

What can and can’t be patented

While the Supreme Court has issued many decisions about patent rules in recent years, the Alice case looks at the more fundamental question of what sort of things should receive patent protection in the first place. For now, the law is clear that “abstract ideas” like math formulas or gravity can’t be patented, and that specific applications that describe a process for implementing an idea are eligible for a patent. The question in Alice is where software fits into all this.

“Software or business method patents are typically broad patents that often cover basic methods of doing business,” said Brian LaCorte, a lawyer at Ballard Spahr, who is skeptical about patents that describe using a computer to implement age-old ideas such as escrow accounts.

From an economic perspective, to the degree that such software patents fail to offer genuinely new ideas, they appear to upset the notion of treating the patent system as a bargain between society and inventors.

As Robin Feldman, an influential patent scholar, wrote in the New York Times, patents like the one belonging to Alice Corp can result in the government handing out a powerful monopoly without receiving anything of value in return — the “inventor” gets a patent, but doesn’t disclose any undiscovered science or ideas. Another scholar, Mark Lemley, said of such patents in 2011, “they claim everything but contribute nothing.”

The Alice case also comes at a time that the Supreme Court is paring back patents in other areas. Last year, for instance, the court ruled that human genes are not eligible for patents.

Are software patents a “tax” on the tech sector?

The Alice case induced a long list of companies to file briefs, including a joint submission from a group of tech companies  – including Google, Amazon, Facebook and Netflix — that are rivals in the marketplace, but that have come together to ask the Supreme Court to squash abstract software patents.

“Abstract software patents have become a plague on computer-related industries,” noted the companies in their brief. The filing also claimed that the proliferation of such patents is “effectively tax innovation,” and includes a 1991 quote from former Microsoft CEO Bill Gates that warns that patents could have brought the early software industry to “a standstill.”

For many, the issue right now isn’t just theoretical. David Selinger, CEO of web-shopping firm RichRelevance, says his company spent about four percent of its annual revenue last year managing patent trolls.

“I think there’s a strong case for abolishing all software patents…or at a minimum, software patents should reasonably advance art and describe how you’re doing it,” Selinger, whose company also filed a brief arguing the Alice Corp “invention” should be ineligible for a patent, told me.

Other tech companies, including Microsoft and IBM, have taken a different view of the case, suggesting in their briefs that Alice Corp’s patents are not appropriate but expressing approval for other types of software patents.

Supreme Court cleans up unfinished business

One reason the Alice case is before the Supreme Court in the first place is that the court made a hash of the same issue four years ago. In a 2010 decision known as Bilski, the court explored many of the same issues that are now before it in Alice — but provided little useful guidance on how to screen for such patents in the future.

In the Bilski case, the Court rejected a patent describing a computer-related method for hedging commodity risks. In doing so, however, the Justices also threw out a “machine-or-transformation” test that had been used to evaluate when a patent should be granted, while also failing to provide alternate criteria for lower courts and the Patent Office to use instead. The situation soon became even more complicated after an appeals court panel, hearing the Alice case, attempted to apply Bilski — and produced a messy judgment in the form of seven different opinions from ten judges.

For the Supreme Court, then, Alice is an opportunity to correct its earlier mistake by finding a better way to draw a circle around what can and can’t be patented. The court is unlikely to outlaw software patents altogether, but will likely instead issue rules that make them easier to challenge — and to reduce the likelihood the Patent Office will issue them in the first place. In the short term, however, the Supreme Court’s decision is unlikely to do much to flush away many of the millions of low-quality patents already in the system.

Update: The transcript of the court’s recent finding is now available; legal observers have suggested that the Justices’ line questioning mean they are inclined to invalidate Alice’s patent, but not eliminate software patents altogether.

Outside attention

The Alice case is unusual because of the attention it is drawing from outside the legal community. Along with the attention from the tech industry, Alice also gave rise to weekend editorials by the New York Times and the Economist.

All the interest reflects how patents — and the monopoly they grant over ideas — have proliferated in recent years, and led to the rise of patent trolls like Intellectual Ventures, which don’t use the patents they acquire, but simply demand money from others. (By most accounts, Alice Corp is such a troll.)

The US Supreme Court, which has heard several other patent cases this term, is also not the only branch of government looking to fix the patent system: The US White House issued a series of executive orders to curb patent trolls, while Congress is expected to pass a patent reform bill this spring.


Competition authorities OK Nortel patent sale and generate bidding war

15 07 2011

The competition authorities in theUS have granted approval for Nortel Networks to sell its significant IP portfolio to rival companies for an estimated $4.5 billion… Read more about it here.

Players that have shown an interest in the 6000 or so patents and applications include: Research in Motion, Apple and surprisingly Google….in so far as these patents seem to predominately relate to wireless technology Google either just acquired these patents to prevent the competition  from getting them or they are planning to use these to litigate against their rivals…..this should get interesting….

New Zealand puts a stake in the ground regarding software patents

14 07 2011

The New Zealand government is supporting a new Patents Bill which is supposedly aimed at banning the patenting of software. It would seem the patenting of embedded software will be allowable whereas the patenting of pure front-end applications such as GUIs will not be allowed. This approach seems to be based on the premise that embedded software has a technical effect outside the realm of pure computation- in line with the view adopted in Europe.  Not a bad approach……

However, far from clearing up the debate and drawing the lines of patentability for all to appreciate their approach seems to have confused matters for practitioners in that country even further….. Full article available here

Of course, the New Zealand government’s implementation of this “seemingly sound” approach will only reveal itself in time…… and the muddy waters should hopefully clear up then. It seems that much can be learned from their forthright approach – in any event, the technical skill of the patenting authorities in New Zealand will certainly be tested soon enough – if they want to ensure a consistent approach to the implementation of this policy…..

A perspective on the patentability of software in South Africa

10 07 2011

The patenting of SA software is the subject of much heated debate. Though the concept has never having been examined by our judicial system, software patent applications are being granted by our Patent Office. Former public service & administration minister Geraldine Fraser-Moleketi recently described software patents as “an issue that poses a considerable threat to the growth of the African software sector”, adding that there had been “recent pressure by certain multinational corporations to file software patents in our national and regional patent offices”. She said all of the “current so-called developed countries built up their considerable software industries in the absence of software patents”, adding that for those same countries to insist on software patents now was “simply to place patents as barriers in front of newcomers”. Fraser-Moleketi said African software developers faced enough barriers as it was without the introduction of artificial restrictions on what programs they were and were not allowed to write.

Whereas free software and open standards are intended to be open and encourage competition, patents are exclusive and anti-competitive by their nature. Indeed, it is a common argument that when established multinational software companies register their extensive software patent portfolios in developing nations, they potentially destroy any competition from local software product developers. However, the flip side of the coin is that these controversial software patents may well serve as the foundation on which local software companies can enter the global marketplace and compete with these established multinationals.

Consider this:

  • These patents effectively provide a means for local software companies to play on the same turf as industry leaders such as Oracle and Adobe.
  • A software patent often provides a start-up company with the traction to build its business as a real competitor in the international arena.

Microsoft is one such company, one that has made extensive use of our patenting system, having patented more than 300 software-related inventions in SA. Microsoft co-founder and former CEO Bill Gates once said: “If people had understood how patents would be granted when most of today’s ideas were invented and had taken out patents, the industry would be at a complete standstill today. The solution is patenting as much as we can. A future start-up with no patents of its own will be forced to pay whatever price the giants choose to impose. That price might be high. Established companies have an interest in excluding future competitors.”

Accordingly, as long as small start-up companies refrain from patenting their software inventions in SA, they are effectively leaving the playing field wide open for established corporations to obtain monopolies in those areas.

The SA Patents Act of 1978 excludes a “program for a computer” from patentability. However, this exclusion applies only to the extent to which a patent or an application for a patent relates to software or a computer program, as such. Therefore, an apparatus or a system for using software would not be excluded from patentability. Hence, a system or an apparatus used in a software-related invention does not necessarily contravene this software exclusion either.

Note, secondly, that the SA Patent Office is a so-called non-examining patent office. This means that the patent applications lodged with it are not subject to examination in terms of the invention’s patentability. It is therefore unlikely that a patent application directed to a computer program will be rejected by the office. What can happen in practice is that an SA patent directed to a software program is challenged in court by third parties who, of their own volition, have determined that the patent is directed to unpatentable subject matter and wish to attack the validity of the patent on that basis.

However, there has not been any litigation on the patentability of software in SA to date, and there is therefore no clear indication of our courts’ likely interpretation of this section of the Patents Act. Indeed, the boundaries of computer software patentability are still to be determined. Substantial similarities nevertheless exist between our Patents Act and the UK’s Patents Act. Therefore, our courts may well turn to the decisions in Britain and Europe for guidance on SA software-related matters. Instructively, the British Patents Act also generally excludes inventions that reside in programs for computers “as such” from patentability.

Be that as it may, a consultation was recently initiated between the UK government, via the Patent Office, on whether patents should be granted for computer software in that country. The government reaffirmed the principle that patents were for technological innovations. Software should not be patentable where there is no technological innovation, and technological innovations should not cease to be patentable merely because the innovation lies in software.

Therefore, software patents are not rejected outright in the UK. Rather, the technical effect or contribution provided by the computer program forms the basis of an assessment of whether or not the invention is excluded from patent protection.

As we eagerly await a relevant SA court decision, several ways exist whereby the prohibition on computer software patentability can legitimately be circumvented. The result would be a valid SA patent that is enforceable against and will provide a barrier to entry for multinational software companies in SA. Such a software patent may place the local competitor on as near an equal footing with these multinational companies as they are ever likely to get.