Software Patents Get Rare Look From U.S. Supreme Court

The U.S. Supreme Court grappled with the standards for software patents, considering the issue for the first time in decades in a case that has divided the computer industry.

Moving from questions about computer code to hypothetical examples involving King Tut and Archimedes, the justices spent an hour-long argument today searching for principles to govern hundreds of thousands of patents that have a software component. Although several justices suggested skepticism about disputed financial-services patents owned by an Australian company, the session ended with no clear consensus on broader principles.

The case has drawn in dozens of companies. Retailers and Internet businesses including Google Inc. (GOOG) say the court should help weed out baseless royalty demands over common ideas such as e-commerce or web hosting. Software makers led by Microsoft Corp. (MSFT) say overly strict limits on patents would reduce incentives to develop cutting-edge programs that detect when a car airbag should deploy or let people alter photographs.

Justice Stephen Breyer likened the court’s task to Odysseus’s journey in Greek mythology between two sea monsters, Scylla and Charybdis. The court is “sailing between these two serious harms,” he said.

Limiting Risk

The case concerns claims that CLS Bank International, a New York-based provider of settlement services, infringed patents owned by Melbourne-based Alice Corp. The patents cover a computerized system for using an intermediary to limit the risk that one party to a derivative trade will renege on its obligations.

CLS says Alice’s patents run afoul of Supreme Court decisions that say abstract ideas aren’t entitled to legal protection. Alice, which is partially owned by National Australia Bank Ltd. (NAB), said the abstract-idea exception to patent eligibility is a narrow one.

Justice Ruth Bader Ginsburg suggested that Alice’s argument was doomed by a 2010 Supreme Court decision that limited patents on business methods by rejecting a proposed patent on a system for hedging energy trades. She asked Alice’s lawyer, Carter Phillips, how his client’s idea was any “less abstract than hedging.”

Other justices were similarly skeptical. Justice Anthony Kennedy said a group of college engineering students could probably write the computer code for Alice’s idea over a weekend.

‘Fairly Easy’

“My guess is that that would be fairly easy to program,” he said.

Breyer took the court on a journey through the ancient world and his own youth as he pressed Phillips to explain what was so innovative about the Alice idea. Describing Alice’s idea as merely ensuring that someone didn’t become insolvent, Breyer said it was like a man with an abacus telling King Tut he had given away more of his gold than he has in storage.

“Or my mother, who used to look at my checkbook,” he said. “When she saw that, in fact, I had written more checks than I had in the account, she would grab it,” he said. Breyer later invoked the ancient Greek scientist Archimedes in his questioning.

Phillips said the patents covered a system that “actually blocks specific transactions” that otherwise “would violate the terms of the settlement that would ultimately be implemented.”

‘Well Understood’

The lawyer for CLS, Mark Perry, told the justices the Alice patents “don’t claim anything that was not conventional, well-understood and routine.”

Perry told the justices they didn’t need to do more than apply two recent rulings, the business-methods case and a 2012 ruling limiting patents on diagnostic medical tests.

The Obama administration is urging the court to issue a broader ruling that would put new limits on the availability of software patents. Solicitor General Donald Verrilli told the court that software was eligible for patenting only if it “improved the functioning of the computer technology” or “is used to improve another technology.”

Verrilli urged the court to provide “clarity” to examiners in the U.S. Patent and Trademark Office. The office in recent years has tightened the standards it uses when reviewing software patent applications.

Chief Justice John Roberts was skeptical, saying the government had offered a “non-exhaustive” list of six considerations for patent examiners to weigh.

Greater Clarity

“I’m just doubtful that that’s going to bring about greater clarity and certainty,” Roberts said.

The Supreme Court has never directly said that software can be patented, although cases in the 1970s and 1980s involved software-related inventions.

The case involves the basic question of eligibility for patent protection. Other parts of the Patent Act impose additional requirements, including novelty and usefulness.

Software has both transformed society and been the source of a rise in patent litigation. The Government Accountability Office last year estimated that almost half of all patent lawsuits filed from 2007 to 2011 involved software.

The issue splintered the appeals court charged with interpreting U.S. patent law. In the Alice-CLS case, 10 judges of the U.S. Court of Appeals for the Federal Circuit, in a May 2013 decision, issued six opinions covering 125 pages.

Alice’s patents are under fire even from companies that say that software generally should be eligible for legal protection. Microsoft, Adobe Systems Inc. and Hewlett-Packard Co. (HPQ) filed a brief urging the court to rule against Alice, even while setting a low bar for patent eligibility in other cases.

The case, which the Supreme Court will resolve by July, is Alice v. CLS Bank International, 13-298.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editors responsible for this story: Patrick Oster at poster@bloomberg.net Mark McQuillan, Steven Komarow

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