Software Patent Protection Curbed by U.S. Supreme Court

Software developers can’t get a patent simply for taking an abstract idea and implementing it on a computer, the U.S. Supreme Court said, ruling for the first time in decades on protection for software innovation.

The justices today unanimously rejected a bid by Melbourne-based Alice Corp. to patent a computerized system for limiting the risk that one party to a financial transaction will renege on its obligations. Writing for the court, Justice Clarence Thomas said the patent improperly covered a “fundamental economic practice.”

The decision may give a new tool to Google Inc. and other companies fighting what they say are frivolous lawsuits over software patents. At the same time, the ruling stopped short of creating special standards restricting software patents.

“People were fearful this would be some broad, sweeping decision saying you can’t patent a computer-implemented invention,” said Peg Duncan, a patent lawyer with McDermott Will & Emery in Chicago. “The Supreme Court didn’t say that.”

Dozens of companies took positions in the case. Retailers and Internet businesses including Google and Inc. urged the court to weed out baseless royalty demands, while software makers led by Microsoft Corp. said overly strict limits on patents would reduce incentives to develop cutting-edge programs.

Both sides declared victory.

‘Existing Law’

“Microsoft is pleased that the court has confirmed existing law that abstract ideas are not eligible for patent protection and distinguished the Alice patent from software inventions,” said Horacio Gutierrez, the company’s deputy general counsel.

While the decision “could have gone farther,” it might help eliminate some of the patents frequently used in lawsuits against technology companies, said Matt Levy, counsel for the Computer & Communications Industry Association, whose members include Google, Facebook Inc. and EBay Inc.

“The kind of software patents that are just egregious, that just say, ‘we do X on a computer,’ are not patentable,” Levy said in a conference call.

The ruling marks the sixth time this year the Supreme Court has limited the power of patent holders.

“The court is doing many things that are restricting the ability to enforce patents rights and in this case to obtain patent rights,” Robert Sachs, a patent lawyer at Fenwick & West in San Francisco.

Infringement Claimed

The latest case centered on claims that CLS Bank International, a New York-based provider of financial settlement services, infringed patents owned by Alice Corp. The patents involve the use of a third party to reduce settlement risk.

In ruling against Alice, Thomas pointed to past Supreme Court decisions that say abstract ideas aren’t entitled to legal protection. Alice’s patents, Thomas said, “merely require generic computer implementation” of that sort of abstract idea.

Alice, which is partially owned by National Australia Bank Ltd., unsuccessfully argued that the abstract-idea exception to patent eligibility is a narrow one.

“Obviously, the client is disappointed, but not surprised,” said Carter Phillips, the lawyer who argued on Alice’s behalf in the case. “The court clearly was unimpressed by the patent and the presence of a computer as part of the invention did not change its view that the patent really just embodies an abstract idea.”

Direct Threat

CLS says it processes more than $5 trillion worth of foreign exchange transactions per day.

Alice’s patent claims “directly threatened an entity that is vital to the functioning of the largest and most liquid market in the world, foreign exchange,” CLS Chief Executive Officer David Puth said in an e-mailed statement after today’s ruling.

Some companies expressed frustration that the court didn’t provide more guidance. The opinion was so specific to the Alice patent that it did little to clarify the line between what’s eligible for a patent and what isn’t, said Manny Schecter, chief patent counsel for Armonk, New York-based International Business Machines Corp. The problem, he said, is in defining what’s “abstract.”

“They still don’t provide any more guidance that will help us with the next case that comes along,” Schecter said in a telephone interview. “I can’t imagine that the Supreme Court wants to take on every one of these cases. It’s going to be a source of great frustration.”

Ruling Upheld

Today’s decision upheld a ruling by the Washington-based federal appeals court that handles patent cases.

The case involved the basic question of eligibility for patent protection. Other parts of the Patent Act, not directly at issue before the Supreme Court, impose additional requirements, including novelty and usefulness.

It can be faster and cheaper to challenge a patent by arguing that an invention isn’t eligible for protection than to dig into details of the validity or infringement of the patent. The eligibility argument is used by many companies sued by owners of patents for common Internet functions.

The case is Alice v. CLS Bank International, 13-298.

Download: Bloomberg Law: Bergman on Software Patents (Audio)

Download: Altegris CIO Rivkin Lauds Apple-Google Patent Dispute (Audio)

Before it's here, it's on the Bloomberg Terminal. LEARN MORE