Supreme Court hears argument on a patent worthy of King Tut

An hour-long oral argument (PDF) at the US Supreme Court today didn't reveal much about what kind of test the justices might install to stop overly "abstract" patents from being granted. But several justices did seem skeptical about the idea that Australian holding company Alice Corp. had invented much of anything with its patents on a form of financial risk-management.

Alice Corp v. CLS Bank could be the most wide-ranging patent case in years if the justices choose to install a new test on software or "business method" patents. They last addressed the issue in Bilski, but that case left in place a rule that was unevenly applied. And the chaotic state of the law became clear when the Alice v. CLS case resulted in a deeply fractured set of opinions from the nation's top patent court.

Alice is an Australian holding company that used four patents to make infringement claims against CLS Bank back in 2007. CLS Bank, owned by more than 60 large banks throughout the world, is a key piece of the global banking infrastructure, settling upwards of $5 trillion in foreign-exchange trades each day.

Breyer: So there's a man with an abacus...

The argument today began with Alice's attorney describing his client's technology as a complicated way of solving a "very specific problem," but his adjective-laden language immediately drew sharp questioning, suggesting simplicity in the underlying concepts.

Alice's lawyer Carter Phillips described the patents:

What we claim is a very specific way of dealing with a problem that came into being in the early 1970s, of how to try to eliminate the risk of non-settlement in these very massive multiparty problems in which you need to deal with difficulties that exist at different time zones simultaneously and to do it with a computer so that you not only take them on chronologically, deal with them sequentially, based on the kind of software analysis that the patent specifically describes by function.

And it goes even further than that, and does something that no escrow agent—and no intermediated settler that I know of. It actually blocks specific transactions that, in the shadow account, would violate the terms of the settlement that would ultimately be implemented.

"Let me put it this way," responded Justice Anthony Kennedy. "If you describe that to a second-year college class in engineering and said here's—here's my idea, now you go home and you program this over the weekend, my guess is... that that would be fairly easy to program."

"I don't disagree with it, Justice," said Phillips.

The exchange suggests Kennedy may have taken note of briefs like that from Public Knowledge, which expressed one of Alice's 200+ word patent claims as seven simple lines of code.

That was followed by Justice Stephen Breyer's question, which suggested the Alice patent is describing a method of settling accounts that is in fact ancient.

"I mean, imagine King Tut sitting in front of the pyramid where all his gold is stored, and he has the habit of giving chits away," said Breyer. "He hires a man with an abacus, and when the abacus keeping track sees that he's given away more gold than he has in storage, he says, stop.... How is that [the Alice patent] less abstract than King Tut, if we had the same thing with a grain elevator, if we had the same thing with a reservoir of water, if we had the same thing with my checkbook?"

"It goes to the question of the methodology," said Phillips. "It seems to me that in some of what you described there is a caricature of what this invention is." He continued: 

The concept here is not simply to say stop. Stop is obviously part of the element of it. But it's also designed to ensure that at the end of the day, this transaction, in the midst of literally a global set of deals that are going on simultaneously, will be implemented at the appropriate time in the appropriate way... it seems to me it's difficult to say that's an abstract idea as implemented.

"It sounds like you're trying to revive the patenting of a function," said Justice Sonia Sotomayor. "That's all I'm seeing in this patent is the function of reconciling accounts, the function of making sure they're paid on time. But in what particular way, other than saying do it through a computer, is this something new and not functional?"

"You create the shadow accounts," said Phillips. "You monitor through the software that allows you to do that." He urged the court to look at the flow charts in the appendices in the patent.

Their skepticism toward Alice's patent doesn't really say much about how this case could affect the overall landscape, however. CLS Bank's lawyer, Mark Perry, described Alice's patents as outlining a system that comes down to "debit, credit, and pay." Killing off the patent could be done cleanly and easily within the already existing rules under the Bilski case, he said.

Perry went on to answer a series of questions about what kind of technologies could and couldn't get patents in his view.

At one point, Sotomayor asked Perry how Alice could have written their patents "to make their software eligible." Perry explained that Alice could have written a patent to address a specific problem with data compression. But before answering, he took the opportunity to point out that Alice and its founder had earned four patents without ever actually coding anything.

"Justice Sotomayor, they have no software, first," said Perry. "They've never written software. They've never programmed a computer. So that's a nonexistent set."

Toward a tougher test?

US Solicitor General Don Verrilli also argued before the court, presenting the government's position that software patents should only be granted when they "improve the functioning of the computer technology." While the court could stick to Bilski to dismantle Alice's patents, it would be preferable to offer more clarity. The danger in patenting basic business ideas persists, Verrilli said.

"The concern in a situation like this one is that if this is patent eligible, it's hard to see why, for example, the first person who came up with a frequent flier program wouldn't have been able to claim a patent there," said Verrilli. "After all, that's a business method for improving customer loyalty implemented on a computer."

Patents on frequent flier programs, or the Oakland A's methods of evaluating baseball players made famous in the book Moneyball, are "things that our intuitions tell us just don't belong in the patent system." And Section 101, governing abstraction, should be a usable tool to kick such patents out.

Even in the best-case scenario from reformers' point of view, Alice v. CLS won't be a "silver bullet" eliminating bad patents or patent trolling. They'll still be seeking legislative change through means like the Innovation Act, scheduled to be debated by the Senate this week. And it's worth noting that relatively few patents are even challenged on the grounds of Section 101 "abstraction," the battlefield that Alice and CLS are dueling on.

Still, a clear test for abstract patents, placed early in litigation, could aid companies that want to fight off patent troll claims rather than quickly settle them.

As CLS's lawyer Perry noted, most of the software industry—including big patent holders—would be OK with a robust, clear, Section 101 test. "The software industry is all before this Court saying, this is fine with us," pointed out Perry. "Every company in the United States practically, except for IBM, is saying, go ahead."