Over the course of the past year a case about four financial software patents has taken on great significance. In 2007, Alice Corp accused CLS Bank of infringing its patents on a type of computerized trading platform that used "shadow accounts." In the years since then, the Supreme Court has significantly tightened up the rules about what is patentable. In 2011, Alice's patents were thrown out by a federal judge, who ruled they didn't cover patentable subject matter.
Last year, Alice won a surprising reversal. An appeals panel ruled 2-1 that Alice's patents should be allowed after all, suggesting only the most abstract of claims should be barred from winning patents under Section 101. The third judge, US Circuit Judge Sharon Prost, wrote a blistering dissent, suggesting that the ruling violated Supreme Court guidance, by allowing a patent on a financial technology that was "literally ancient."
With the waters thus muddied, the Federal Circuit, which hears all patent appeals, made the choice to reconsider CLS Bank v. Alice Corp. as an "en banc" case that all the judges would weigh in on. It became a highly anticipated decision, with many observers wondering what the nation's top patent court would have to say about software patents in the wake of several Supreme Court rulings giving more strict guidance about the patent system.
The answer is now clear: not much at all. A lengthy opinion issued Friday reflects nothing but division, with ten judges essentially splitting 5-5 on key issues. That means that the lower court decision will stand, and CLS Bank will be free to operate without making patent-related payments to Alice. It also means that no binding precedent will come from the ruling, since no portion of the document is signed by a majority of the judges. In a footnote on the front page of his opinion, Chief Judge Randall Rader wrote:
No portion of any opinion issued today other than our Per Curiam Judgment garners a majority. The court is evenly split on the patent eligibility of the system. Although a majority of the judges on the court agree that the method claims do not recite patent eligible subject matter, no majority of those judges agrees as to the legal rationale for that conclusion. Accordingly, though much is published today discussing the proper approach to the patent eligibility inquiry, nothing said today beyond our judgment has the weight of precedent.
The decision is reflective of a total division on the most important patent-related court in the country, and it will bring little relief to companies seeking guidance on what their chances are if they are confronted by a competitor or a "troll" seeking royalties.
A five-judge faction sees a path to narrow patent grants
Notably, this high-stakes patent battle came from the world of finance, where trading and banking methods have come to be patented only in recent years, usually with patent claims that also mention software and computers.
Reformers certainly had wanted the lower court decision to stand. Tech companies like Google, Red Hat and HP, as well as reform groups like Public Knowledge and the Electronic Frontier Foundation, had urged such a result. But they also wanted case law that would make it clear some technologies—like financial innovations—simply aren't appropriate for patenting.
That didn't happen. CLS and its reformer allies barely won today. The victory came about as the result of a deeply split court, with the real division in the opinion coming down to what the judges think about "system" claims, where the judges effectively deadlocked 5-5. Seven of the judges agreed that other types of claims, the "method" and "computer-readable media" claims, aren't eligible for patents (although for different reasons.)
Five of the judges wanted to throw out the patents on "Section 101" grounds ruling that they were too abstract to be patented. Reviewing five relevant Supreme Court cases ranging from 1972 to 2011, this faction of the court concluded there should be an "integrated approach" to Section 101, finding primarily that patents "should not be allowed to preempt the fundamental tools of discovery" which must remain "free to all."
In Mayo v. Prometheus, for instance, a Supreme Court decision banned a patent on a diagnostic medical test, even though it described specific steps like "giving a particular man-made drug to a patient" and "drawing and testing blood." But the patented method boiled down to a natural law and added only steps that were "well-understood, routine, conventional activity, previously engaged in by researchers in the field."
With background of Supreme Court decisions, the judges found that Alice Corporation's idea of reducing risk by facilitating trades through a "third-party intermediation" was too abstract to be allowed. "[I]t is a 'disembodied' concept... a basic building block of human ingenuity, untethered from any real-world application," wrote the judges.
The system claims just take those method claims and add the words "apply it" on a computer, the judges suggest. By allowing the claims, the dissenting judges are ignoring Supreme Court precedent. "Not only has the world of technology changed, but the legal world has changed," they write. "The Supreme Court has spoken... on the question of patent eligibility, and we must take note of that change. Abstract methods do not become patent-eligible by being clothed in computer language."
Chief Judge: A computer without software “collects dust, not data”
The five-judge opinion shutting down the Alice patents is followed by a four-judge opinion that would allow the patents or at least their so-called "system" claims. The group of four judges, led by Chief Judge Randall Rader, made it perfectly clear that the decision as a whole means almost nothing.
Rader's four-judge group affirmed the broad scope of what is eligible for patenting under Section 101, written in 1952. "Both inventions and discoveries are eligible for patenting," wrote Rader. "Before 1952, the courts had used phrases including 'creative work,' 'inventive faculty,' and 'flash of creative genius' which compared the existing invention to some subjective notion of sufficient 'inventiveness' as the test for patentability."
In the view of these four judges the 1952 Act, written largely by a patent judge and a chief patent examiner, got rid of that "flash of creative genius." It simply stated that to get a patent, an idea couldn't be obvious. This simple test for "nonobviousness" would be more "objective" than a test for inventiveness.
The four-judge opinion is a full-throated defense of software patents. In one passage, the judges justify the software patents covering the "wonders" of the "smart phone" by citing Diamond v. Diehr, a 1981 Supreme Court case on a patent on a rubber-curing process that is a key decision relied on by software patent supporters. Rader wrote:
The combination of new software and a computer machine accomplishes wonders by reducing difficult processes—like determining where someone is on the earth, instantly translating Chinese to English, or performing hundreds of functions in a hand-held device called a “smart phone”—into a series of simple steps. For example, the Supreme Court upheld precisely this kind of combination for the computer-implemented parameters to run a rubber press—breaking the known steps into tiny mathematical calculations that advanced a known function beyond prior capabilities. See Diehr, 450 U.S. at 179. Indeed, much of the innovative energy and investment of the past few decades have [sic] focused on software improvements that have produced revolutions in modern life, including the “smart phone.”
That software-hardware combination must be allowed to be patented, Rader argued. "Machines are expressly eligible subject matter. Having said that, however, were it not for software, programmable computers would be useless. A computer without software collects dust, not data."
In Rader's view, allowing software patents just isn't that different from allowing patents on more physical electronics. An inventor could claim a machine "with circuitry, transistors, capacitors, and other tangible electronic components precisely arrayed to accomplish the function of translating Chinese to English," wrote Rader. "The fact that innovation has allowed these machines to move from vacuum-tube-filled specialized mechanical behemoths, to generalized machines changed by punch cards, to electronically programmable machines that can fit in the palm of your hand, does not render them abstract."
Fearing “the death... of thousands” of business method patents
From there the defenses of software patents got more strident and more alarmed. Noting that the court is "irreconcilably fractured" over these patents, Judge Kimberly Moore writes that "there has never been a case which could do more damage to the patent system than this one." In her section of the decision, Moore grieves for "the death of hundreds of thousands of patents, including all business method, financial system, and software patents" that would take place, she believes, if the side voting to block Alice Corporation's patents prevailed.
In 2011 more than 42,000 patents were granted in computer software and hardware fields, she notes. If the other side prevailed, she calculates that up to 20 percent of them could have been rendered invalid, which would "decimate the electronics and software industries." That's actually "quite frankly a low estimate," writes Moore, who also fears for the "financial system, business method, and telecom patents" that could be at risk.
Finally, Judge Pauline Newman wrote her own opinion which seems to suggest Section 101 should never be used to kill patents. She suggested the idea that patents can inhibit research and innovation is just a vast misunderstanding. "[T]he popular press has accepted the theory that experimentation is barred for patented subject matter, as have my colleagues" she wrote, footnoting recent articles in The New York Times and The New Yorker which pointed out—accurately—that research scientists and doctors can and were being stopped from examining their own patients' genes by the owner of certain genetic patents.
Newman sees the fractured court as being an invitation for "opportunistic litigation" that could block innovation, but she sees the opportunists as those attacking the patent, not companies seeking to defend themselves from patent attacks.
Clarity on software patents will likely remain elusive without a clear Supreme Court ruling or legislative action on the issue. At the end of the day, the appeals court given control of the US patent system appears more divided than ever in the wake of the Alice Corp v. CLS Bank decision. A core of at least five judges is intent on protecting the wide grasp of the current patent system, resisting strategies—like a more strict reading of Section 101—that could chip away at its energetic sprawl.
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