Tuesday, February 25, 2014

CLS Bank v. Alice is not about 'the death of software patents': it's more like Bilski Reloaded

Four years ago people advocating the abolition of software patents made a lot of noise, including a movie named Patent Absurdity, about a case pending then before the Supreme Court of the United States: Bilski v. Kappos. They hoped that the Supreme Court would not only affirm the Federal Circuit's holding that Bilski and his co-inventor Warsaw weren't entitled to a patent on a risk-hedging business method, but that it would interpret 35 U.S.C. § 101, the statutory definition of which inventions are eligible for patent protection in the U.S. (applications must still meet all other patentability criteria such as novelty and non-obviousness), in a way that would render many, if not most or even all, software patents invalid.

The Supreme Court's June 2010 opinion fell far short of those hopes and expectations. The Bilski stuff was held patent-ineligible on the grounds of being too abstract, but the court declined to provide further guidance of the restrictive kind some had argued for. On page 9 of the Bilski ruling, a more restrictive approach was rejected because it "would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals". While that passage was based on a reference to amicus briefs submitted by pro-software-patent organizations, the way the SCOTUS refers to those concerns leaves no doubt that the justices who supported the passage agreed that the Bilski decision shouldn't cause collateral damage in those areas. At the very least it showed that the court had been perfectly aware of some people's abolitionist hopes and dreams, but declined their invitations to legislate from the bench on an issue it simply didn't have to reach.

Four years later history appears to be repeating itself as a result of the Supreme Court's grant of certiorari (i.e., decision to hear the case) in CLS Bank v. Alice. And I venture to predict a similar outcome: the ruling will, once again, be very narrow because, just like in Bilski, the facts of the case don't lend themselves to a decision of broad scope.

These are the four Alice patents at issue:

Don't be misled by words like "apparatus", "systems", and "computer program products". These are business method patents, not software patents in the sense of patents relating to software, or "computer-implemented" (another term that appears in those patents), innovation. The Alice patents relate to the very basic idea of having a third party ensure, like an escrow, that a transaction between two parties only takes place if the mutual obligations are met. That's what Alice seeks to monopolize. Some of these claims are downright business method claims (though the parties stipulated before the district court that they should be interpreted as requiring computer implementation); the others are business method claims camouflaging as system or program claims.

What has created the widespread perception of this being a software patents case is primarily that two opposing camps, for disparate reasons, place the emphasis in their argument on what implications this case allegedly has for software patents:

  1. The first group consists of those who don't want patents like the Alice patents to be invalidated on the grounds of patent-ineligibility under § 101. There are two subgroups of this group:

    • (1a) those who absolutely want business methods to be(come) patentable by declaring them as computer-implemented invention (CII) patents, and

    • (1b) those who would probably invalidate the Alice patents anyway on non-novelty or obviousness grounds, but who don't want § 101 to be the vehicle for invalidation.

  2. The second group already wanted Bilski to result in a restrictive ruling that didn't happen then and won't happen now.

I have some examples:

  • Alice Corporation is, obviously, in group 1a. In its petition for certiorari, Alice grossly overstated the key issue to be reviewed as follows:

    "Whether claims to computer-implemented inventions--including claims to systems and machines, processes, and items of manufacture--are directed to patent-eligible subject matter within the meaning of 35 U.S.C. § 101 as interpreted by this Court?"

    Alice knows that judges will be more receptive to the idea of patenting software than that of patenting abstract business methods. And it hopes to get support from some of those who fear that if business method patents fall, software patents might be next in line. Those facts still don't make this anything other than a case involving business method patent claims that make only token references to computer hardware. A more honest question on review would have looked like this:

    "Can an otherwise-unpatentable abstract business method be patented in circumvention of 35 U.S.C. § 101 by mentioning magic words such as 'computer-implemented', 'computer' or 'program' in the claims?"

    While honest, this would be a no-go, which is why Alice prefers to blow things out of proportion.

    Circuit Judge Newman, who dissented from the Federal Circuit's majority in Bilski and wanted even that ultra-abstract patent application to pass the test, may also be part of this group. She may be more comfortable than others with the notion of a patent system without any meaningful boundaries.

  • Circuit Judge Moore wrote an alarmist dissent-in-part:

    "I am concerned that the current interpretation of § 101, and in particular the abstract idea exception, is causing a free fall in the patent system. [...] And let's be clear: if all of these claims, including the system claims, are not patent-eligible, this case is the death of hundreds of thousands of patents, including all business method, financial system, and software patents as well as many computer implemented and telecommunications patents." (emphasis added)

    At the end of an even more alarmist footnote, she writes: "There has never been a case which could do more damage to the patent system than this one."

    Statements like these do nothing to discourage abolitionists from filing briefs in this context. But the actual intention of this 1b group of people is to warn against excessive use of § 101 (as opposed to other means of killing bad patents). Just like Alice and its fellow proponents of business method patents, they feel that the specter of software patent abolition will scare U.S. judges, who are well aware of the significance of the IT industry to the American economy. That agenda still doesn't change the substance of Alice's patent claims.

  • The Electronic Frontier Foundation (EFF) is part of the second group but makes an interesting point in the amicus brief it filed in support of a SCOTUS review of the Federal Circuit decision:

    "Indeed, that failure [by the Fed. Cir.] to provide guidance led to a wrong and dangerous ruling in WildTangent, Inc. v. Ultramercial LLC, et al., No. 13-255. A petition for certiorari in that case is also currently pending before this Court; amicus believes that the WildTangent case would provide a better vehicle than this one to resolve how Section 101 applies to computer-implemented inventions. Brief of Amicus Curiae Electronic Frontier Foundation in Support of Petitioner, WildTangent, Inc. v. Ultramercial, LLC, et al., No. 13-255. However, the question surrounding the scope of Section 101 needs to be addressed by this Court, and this case, too, provides an opportunity for that to happen."

    So the EFF admits that CLS Bank v. Alice is a suboptimal context for raising the issue of software patent-eligibility. By the way, the patent at issue in the WildTangent case relates to advertising-financed online video viewing. It's also a business method patent, though it involves a digital media business as opposed to a financial services business.

I wouldn't read too much into the fact that the Supreme Court accepted to take a look at CLS Bank v. Alice. The Federal Circuit was hopelessly divided. It affirmed the decision to invalidate all of Alice's asserted claims, which I agree with the EFF was the right outcome, but only on the basis of affirmance by an equally divided court, not a substantive decision that received majority support. Only a minority of the circuit judges would have upheld the method patent claims. But there was also a majority that argued the method and system claims should rise or fall together -- and a few judges actually wanted to uphold the method claims as well. Regardless of whether the Supreme Court necessarily finds any important issue in CLS Bank v. Alice that goes beyond Bilski, it may have seen a need to speak out on this difficult issue.

In Bilski, the message to software patent abolitionists was that the U.S. patent system was intended by Congress to be inclusive and expansive. Between the lines, the SCOTUS told abolitionists that they needed to talk to Congress. Circuit Judges O'Malley and Linn wrote a dissenting opinion that makes a clear distinction between what the law is today and what some people, right or wrong, might prefer it to be. Notably, these two circuit judges would have considered even Alice's method claims patent-eligible, but they tell abolitionists that this case does not provide an opportunity for them to bring about the change they desire:

"We finally note that certain Amici express concern regarding the proliferation and aggressive enforcement of low quality software patents. [...] They seem to believe that patents on early generation technology inhibit technological advances. [...]

We do not discount Amici's concerns, we just disagree with what they ask us to do to quell them. Congress can, and perhaps should, develop special rules for software patents. It could, for instance, limit their life by limiting the term of such patents. [...] Or, Congress could limit the scope of software patents by requiring functional claiming. Or, it could do both, or devise some other rule. But broadening what is a narrow exception to the statutory definition of patent eligibility should not be the vehicle to address these concerns. While Congress may, this court may not change the law to address one technological field or the concerns of a single industry."

For the final part of this post I'd like to get back to what those Alice patents are really about. Circuit Judge Moore's alarmist words relate to Circuit Judge Lourie's opinion that all of Alice's patent claims-in-suit are ineligible. I don't mean to take a position here on which of these opinions is right (I've already said that I'm against those Alice patents). There are some interesting points in all of the different opinions provided by this fractured Federal Circuit (except that Circuit Judge Newman in my view totally misunderstood the concern of some people about patents in certain fields: she thought that people were concerned about limits on experimentation, when the concern is actually about incremental innovation, which requires real products to be developed and distributed). But since the Lourie opinion is of concern to some who say it is tantamount to the death of software patents, let's look at certain passages in the Lourie text that show this impact assessment blows things out of proportion:

"The concept of reducing settlement risk by facilitating a trade through third-party intermediation is an abstract idea because it is a 'disembodied' concept, [...] a basic building block of human ingenuity, untethered from any real-world application."

"Apart from the idea of third-party intermediation, the claim's substantive limitations require creating shadow records, using a computer to adjust and maintain those shadow records, and reconciling shadow records and corresponding exchange institution accounts through end-of-day transactions. None of those limitations adds anything of substance to the claim."

"First, the requirement for computer implementation could scarcely be introduced with less specificity; the claim lacks any express language to define the computer's participation."

"Furthermore, simply appending generic computer functionality to lend speed or efficiency to the performance of an otherwise abstract concept does not meaningfully limit claim scope for purposes of patent eligibility. [...] That is particularly apparent in this case. Because of the efficiency and ubiquity of computers, essentially all practical, real-world applications of the abstract idea implicated here would rely, at some level, on basic computer functions--for example, to quickly and reliably calculate balances or exchange data among financial institutions. At its most basic, a computer is just a calculator capable of performing mental steps faster than a human could. Unless the claims require a computer to perform operations that are not merely accelerated calculations, a computer does not itself confer patent eligibility."

"Whether the instructions are issued in real time, every two hours, or at the end of every day, there is no indication in the record that the precise moment chosen to execute those payments makes any significant difference in the ultimate application of the abstract idea."

If the Lourie opinion had become precedent (which it has not) or if this line of reasoning became effectively precedent after the SCOTUS decision, the paragraphs I quoted above (and they are just a subset of what could have been selected) contain more than enough ammunition for those defending or upholding true software patents -- for one example, patents on software techniques that enhance performance.

Circuit Judge Lourie and those joining in his opinion did not mean to abolish genuine software patents. They just don't want fake software patents to pass the § 101 test. In the particular context of Alice's system claims, the following question is raised:

"[D]o the limitations of the claim, including any computer- based limitations, add 'enough' beyond the abstract idea itself to limit the claim to a narrower, patent-eligible application of that idea? Or, is it merely a Trojan horse designed to enable abstract claims to slide through the screen of patent eligibility?"

The SCOTUS can close the door to Trojan horses without abolishing software patents. I guess it will find a way to do the former without collateral damage. It carefully avoided unintended consequences in Bilski. There may be even more noise now than there was four years ago, but U.S. substantive patent law hasn't changed since.

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