Software at the Supreme Court: A guide to Monday’s blockbuster patent case

U.S. Supreme Court

On Monday, the Supreme Court will hear arguments over whether a company named Alice Corp can own an “invention” for escrow accounts. While the idea of escrow has been around for centuries, Alice Corp has a patent that describes the concept of using a computer to implement it.

For Alice’s opponent, CLS Bank, a lot is at stake since the bank uses the patented process to clear millions of dollars in financial transactions each day. Even more is at stake for an American patent system swamped by millions of low-quality patents, many of them — like the one belonging to Alice Corp — related to software.

What can and can’t be patented

While the Supreme Court has issued many decisions about patent rules in recent years, Alice looks at the more fundamental question of what sort of things should receive patent protection in the first place. For now, the law is clear that “abstract ideas” like math formulas or gravity can’t be patented, and that specific applications that describe a process for implementing an idea are eligible for a patent. The question in Alice is where software fits into all this.

“Software or business method patents are typically broad patents that often cover basic methods of doing business,” said Brian LaCorte, a lawyer at Ballard Spahr, who is skeptical about patents that describe using a computer to implement age-old ideas such as escrow accounts.

From an economic perspective, to the degree that such software patents fail to offer genuinely new ideas, they appear to upset the notion of treating the patent system as a bargain between society and inventors.

As Robin Feldman, an influential patent scholar, wrote in the New York Times last week, patents like the one belonging to Alice Corp can result in the government handing out a powerful monopoly without receiving anything of value in return — the “inventor” gets a patent, but doesn’t disclose any undiscovered science or ideas. Another scholar, Mark Lemley, said of such patents in 2011, “they claim everything but contribute nothing.”

The Alice case also comes at a time that the Supreme Court is paring back patents in other areas. Last year, for instance, the court ruled that human genes are not eligible for patents.

Are software patents a “tax” on the tech sector?

The Alice case induced a long list of companies to file briefs, including a joint submission from a group of tech companies  — including Google, Amazon, Facebook and Netflix — that are rivals in the marketplace, but that have come together to ask the Supreme Court to squash abstract software patents.

“[A]bstract software patents have become a plague on computer-related industries,” noted the companies in their brief. The filing also claimed that the proliferation of such patents is “effectively tax innovation,” and includes a 1991 quote from former Microsoft CEO Bill Gates that warns that patents could have brought the early software industry to “a standstill.”

For many, the issue right now isn’t just theoretical. David Selinger, CEO of web-shopping firm RichRelevance, says his company spent about four percent of its annual revenue last year managing patent trolls.

“I think there’s a strong case for abolishing all software patents…or at a minimum, software patents should reasonably advance art and describe how you’re doing it,” Selinger, whose company also filed a brief arguing the Alice Corp “invention” should be ineligible for a patent, told me.

Other tech companies, including Microsoft and IBM, have taken a different view of the case, suggesting in their briefs that Alice Corp’s patents are not appropriate but expressing approval for other types of software patents. (Patently-O has a detailed rundown here.)

Supreme Court cleans up unfinished business

One reason the Alice case is before the Supreme Court in the first place is that the court made a hash of the same issue four years ago. In a 2010 decision known as Bilski, the court explored many of the same issues that are now before it in Alice — but provided little useful guidance on how to screen for such patents in the future.

In the Bilski case, the Court rejected a patent describing a computer-related method for hedging commodity risks. In doing so, however, the Justices also threw out a “machine-or-transformation” test that had been used to evaluate when a patent should be granted, while also failing to provide alternate criteria for lower courts and the Patent Office to use instead. The situation soon became even more complicated after an appeals court panel, hearing the Alice case, attempted to apply Bilski — and produced a messy judgment in the form of seven different opinions from ten judges.

For the Supreme Court, then, Alice is an opportunity to correct its earlier mistake by finding a better way to draw a circle around what can and can’t be patented. The court is unlikely to outlaw software patents altogether, but will likely instead issue rules that make them easier to challenge — and to reduce the likelihood the Patent Office will issue them in the first place. In the short term, however, the Supreme Court’s decision is unlikely to do much to flush away many of the millions of low-quality patents already in the system.

Update: The transcript of Monday’s court is now available; legal observers have suggested that the Justices’ line questioning mean they are inclined to invalidate Alice’s patent, but not eliminate software patents altogether.

Outside attention

The Alice case is unusual because of the attention it is drawing from outside the legal community. Along with the attention from the tech industry, Alice also gave rise to weekend editorials by the New York Times and the Economist.

All the interest reflects how patents — and the monopoly they grant over ideas — have proliferated in recent years, and led to the rise of patent trolls like Intellectual Ventures, which don’t use the patents they acquire, but simply demand money from others. (By most accounts, Alice Corp is such a troll.)

The Supreme Court, which has heard several other patent cases this term, is also not the only branch of government looking to fix the patent system: The White House issued a series of executive orders to curb patent trolls, while Congress is expected to pass a patent reform bill this spring.

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