New York Times

Justices Leery of Software Patent Case

March 31, 2014

By Adam Liptak

WASHINGTON — In a case with the potential to reshape the software industry, theSupreme Courton Mondayseemed poisedto issue fresh limits on patents for computer-based business methods.

Though the case originated far from Silicon Valley, it has been closely watched as an indicator of how specific or abstract technical ideas can be to become eligible for patent protection. Patent claims over the way such ideas are incorporated into computers, cellphones and other devices have become a challenge for many high-tech companies.

Those companies often have interests that tug in opposite directions.  They tend to hold large portfolios of valuable patents and want to protect them.  But they must also contend with “patent trolls,” companies that have obtained patents on sometimes vague concepts and which are more active in the courthouse than on the production line.

Most of the justices seemed skeptical about extending patent protection to the claimed invention at issue, a sort of computerized escrow mechanism that helps ensure that both sides in a transaction do what they have promised to do.

But given the importance of the software industry in the information economy, the court also appeared wary of a misstep in announcing a general legal principle. The court’s task, Justice Stephen G. Breyer said, was “to go between Scylla and Charybdis.”

On the one hand, Justice Breyer said, the court should not allow the patent system to stifle innovation. “There is a risk,” he said, that “instead of having competition on price, service and better production methods, we’ll have competition on who has the best patent lawyer.

“And if you go the other way and say never” allow software patents, he went on, “then what you do is you rule out real inventions with computers.”

The patents in question, owned by the Alice Corporation, outlined steps for mitigating settlement risks among multiple parties. The company’s lawyer, Carter G. Phillips, pointed the justices to a flow chart in one of the briefs to explain how the method worked.

Chief Justice John G. Roberts Jr. inspected it. “Just looking at it,” he said, “it looks pretty complicated. There are a lot of arrows.”

But Justice Anthony M. Kennedy asked whether “a second-year college class in engineering” or “any computer group of people sitting around a coffee shop in Silicon Valley” could convert the idea into computer code “over a weekend.” Mr. Phillips said yes, adding “that’s true of almost any software.”

The patents were challenged by CLS Bank International, which says it clears $5 trillion in foreign exchange transactions a day using methods to ensure that both sides performed. The Alice Corporation’s patents, the bank said, merely recited “the fundamental economic concept of intermediated settlement of escrow.”

Several justices appeared to agree. Justice Breyer said the method had been around since the abacus and was used by his mother to keep him from overdrawing his checking account.“There is an abstract idea here,” he said. “It’s called solvency.”

The justices considered only the threshold question of whether the Alice Corporation’s ideas were eligible to be patented. The court has said that laws of nature, natural phenomena and abstract ideas do not qualify.

Were Alice’s ideas to make it over that hurdle, they would still be subject to challenges for obviousness, lack of novelty or indefiniteness. The initial step of patent eligibility, Mr. Phillips said, should be “a very coarse filter.”

In recent decisions, the court has been skeptical of protecting discoveries and ideas even at that threshold stage if doing so would hamper innovation. In 2010, the court ruled that a method of hedging risk was not eligible to be patented. In 2012, it said the same thing about correlations between drug dosages and treatment.

Mark A. Perry, a lawyer for the bank, said Monday’s case, the Alice Corporation v. CLS Bank International, No. 13-298, was similar to the 2010 case, Bilski v. Kappos. “It is hedging against credit default rather than price fluctuation, but it is simply hedging,” he said.

A trial court invalidated the Alice Corporation’s patents, saying they recited only abstract concepts. That decision was effectively affirmedby the United States Court of Appeals for the Federal Circuit, a specialized court in Washington that hears patent disputes. But the decision was badly fractured, with seven opinions, none of which commanded a majority.

The Supreme Court also seemed likely to rule for the bank, though it was not clear how broadly. The justices did not seem inclined to adopt the aggressive approach urged by Solicitor General Donald B. Verrilli Jr., who argued in support of the bank and said that only a limited number of software patents should be recognized.

Mr. Phillips said the government’s approach would declare “in one fell swoop hundreds of thousands of patents invalid.”

Mr. Perry said the court needed only to apply its earlier decisions to find in his client’s favor.

“This is not the death of software patents,” he said, citing supportive briefs filed in the case from prominent companies. “The software industry is all before this court saying, ‘This is fine with us.’ Every company in the United States practically, except for IBM, is saying go ahead. This will not affect software patents.”

Justice Kennedy asked Mr. Perry what sorts of business processes would remain eligible for patents under his theory. He rattled off a few: data compression, streaming video, encryption.

Mr. Verrilli had a harder time providing an example, though he said “a process for additional security point-of-sale credit card transactions using particular encryption technology — that might well be patent-eligible.”