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Supreme Court to Tackle Patent Eligibility of Software Business Methods

The United States Supreme Court has decided to take on a patent case addressing whether software implemented methods are eligible for patent protection.

The United States Supreme Court has decided to take on a patent case addressing whether software implemented methods are eligible for patent protection.

On December 6, 2013, the Supreme Court granted certiorari in a case with potential to affect the validity of thousands of patents that cover computer-implemented business method patents.  The case, CLS Bank International v. Alice Corporation, involves four patents covering a computerized currency trading system that eliminates the risk that one party to a transaction will be unable to pay its obligation by the time an agreed upon transaction takes place.  The system consists of a financial intermediary who creates a shadow debit and credit account for each party, tracks the parties’ transactions between the time an agreement is struck and the time the transaction is carried out, and adjusts the shadow debit and credit accounts accordingly.  The system only pays either party if both remain capable of meeting their obligation at the time the transaction is carried out.  In this way, the system eliminates the risk that one party will perform when the other is no longer able to do so.

The case is on appeal from an en banc decision (meaning a decision where all of the court’s judges weighed in on the decision rather than the typical three-judge panel) of the Federal Circuit issued May 10, 2013.  In that decision, a majority of the Federal Circuit held that all of the patents at issue were invalid for lack of patentable subject matter under 35 U.S.C. § 101.  Section 101 of the Patent Act limits patentable inventions to new and useful machines, processes, manufactures and compositions, or improvements of these.  It serves as a threshold inquiry about whether a creation should be considered for patent protection.  To be patentable, an invention that meets Section 101’s requirements must also be new, nonobvious and properly described under Sections 102, 103 and 112 of the Patent Act.

In the seven opinions that issued from the ten Federal Circuit judges sitting en banc, no clear standard emerged on the correct test for determining whether a computer-implemented invention covers patentable subject matter.  The May 2013 decision issued after a successful petition for rehearing en banc following a Federal Circuit panel opinion issued in July 2012.  In that opinion, the panel had reversed the District of D.C. and held the patents at issue valid.  The two judge majority on the original Federal Circuit panel had also held that unless it was “manifestly evident” that a patent claim, as a whole, was directed to an ineligible abstract idea, a claim was not inadequate, for that reason, under § 101.

In taking this case, the Supreme Court may address whether claims to computer-implemented inventions – from systems and processes to machines and items of manufacture – are directed to patent eligible subject matter.   How the Supreme Court will come down on this issue is unknown, but the leading opinion from the en banc Federal Circuit decision, written by Judge Lourie, provides some insight on how judges are approaching the issue.  Judge Lourie said that the abiding concern is that patents not preempt the fundamental tools of discovery so that such tools remain “free to all . . . and reserved exclusively to none.”  Thus, Judge Lourie’s concern was not necessarily about broad claims, but about claims that encompass the full scope of a fundamental concept.

While many established technology companies are hoping the Supreme Court will use this case to establish a patentable subject matter standard that will invalidate the sorts of broad and vague patent claims patent trolls use against them, the desirability of such a standard for entrepreneurs is less clear.  Particularly in the financial technology space, entrepreneurs largely rely on computer implemented business method patents to protect their ideas, and if the Supreme Court implements a strict standard limiting the patentability of such methods, entrepreneurs may not be able to rely on patents as a competitive advantage.  Without the protection of a patent, financial technology start-ups may not have adequate protection from copycats who can implement start-ups’ inventions without reimbursing inventors for the investment they put into creation.  In short, if the Supreme Court decides CLS v. Alice in a way that invalidates many computer implemented business method patents, financial technology start-ups may lack sufficient protection to keep inventing.

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