Most Software Patents Will Survive US Supreme Court Ruling

On 19 June 2014 the US Supreme Court handed down its keenly-awaited decision in Alice Corporation Pty Ltd v CLS Bank International, ruling that Alice’s claims directed to a computer-implemented scheme for mitigating settlement risk in financial transactions are ineligible for patent protection.

The case was widely regarded as being about the patentability of software, perhaps because the question presented to the Court by Alice was ‘whether claims to computer-implemented inventions – including claims to systems and machines, processes, and items of manufacture – are directed to patent-eligible subject matter…’.

In the final reckoning, however, the Supreme Court’s unanimous opinion (authored by Justice Thomas) avoids addressing this broad question, establishing only that Alice’s claims do no more than ‘simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer’, which is insufficient to render the ineligible abstract idea patentable.

Based on the reasoning of the Court in Alice, claims directed to computer-implemented inventions (i.e. ‘software patent’ claims) which do more than simply apply an abstract idea, such as a financial scheme, using conventional computer hardware, are still eligible for patent protection.  The Court gave the example of claims directed ‘to improv[ing] the functioning of the computer itself or effect[ing] an improvement in any other technology or technical field’ as being distinguishable from the situation in Alice.  However, there is no suggestion that this is intended as an exhaustive category of patent-eligible software-based inventions.

Most software that performs some new and useful function, over and above the mere application of some abstract idea, therefore remains patentable in the US.

Interestingly, the Supreme Court’s decision appears to draw the US law on patent-eligibility of computer-implemented inventions closer to the approach taken in Europe, where excluded subject matter, such as business methods, are disregarded when assessing whether a claim is directed to a patentable ‘invention’.  A similar tendency can be observed in last year’s Research Affiliates decision of the Australian Federal Court (though a ruling in an appeal of that decision is currently pending), while the new New Zealand patent law, due to commence in September 2014, contains a European-style exclusion for computer programs ‘as such’.  It may well be that we are seeing a degree of international consensus emerging in relation to the patent-eligibility of computer-implemented ‘business methods’, which would be welcome.

Two-Step Approach to Eligibility

Alice Corporation’s patents at issue in the case disclose a computer-implemented scheme for mitigating settlement risk, i.e. the risk that only one party to a financial transaction will pay what it owes, by using a third-party intermediary.  As described and claimed in the patents, the intermediary is a computer system that maintains ‘shadow’ copies of the parties’ account details and transactions, and permits the completion of only those transactions that would not leave either party in a position where it was unable to meet its obligations to the other.

In reaching a conclusion on patent-eligibility, the Court drew heavily on its own recent decision in Mayo Collaborative Services v Prometheus Laboratories, Inc., in which it set forth what it now describes as ‘a framework for distinguishing patents that claim laws of nature, natural phenomena, and abstract ideas from those that claim patent-eligible applications of those concepts.’

This ‘framework’ is summarised as a two-step process:

1. determine whether the claims at issue are directed to a patent-ineligible concept (i.e. a law of nature, natural phenomenon or abstract idea); and
2. if so, inquire as to whether there is something else in the claims, considering the elements of each claim both individually and as an ordered combination, sufficient to ‘transform the nature of the claim’ into a patent-eligible application of the ineligible concept.

In the case of Alice’s claims, the Court determined firstly that they were indeed ‘drawn to the abstract idea of intermediated settlement.’

At the second step, the Court determined that the claims ‘merely require generic computer implementation’ and thus ‘fail to transform that abstract idea into a patent-eligible invention.’

Impact of Alice Likely to be Limited

The impact of the Alice decision on the patentability of software-based inventions is going to depend largely upon how broadly it is interpreted by the USPTO, the Federal District Courts and the Court of Appeals for the Federal Circuit.

It seems to me that the Supreme Court has been careful to emphasis that it intends the decision to be applied fairly narrowly, noting that:

At some level, “all inventions . . . embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas.” Thus, an invention is not rendered ineligible for patent simply because it involves an abstract concept. “[A]pplication[s]” of such concepts “to a new and useful end,” we have said, remain eligible for patent protection.

Accordingly, in applying the §101 exception, we must distinguish between patents that claim the “buildin[g] block[s]” of human ingenuity and those that integrate the building blocks into something more, thereby “transform[ing]” them into a patent-eligible invention. The former “would risk disproportionately tying up the use of the underlying” ideas, and are therefore ineligible for patent protection. The latter pose no comparable risk of pre-emption, and therefore remain eligible for the monopoly granted under our patent laws. (Citations omitted.)

Thus, for example, if Alice had developed, described and claimed a new and particularly effective implementation of the intermediated settlement scheme, such that others would remain free to exploit alternative (though possibly inferior) implementations, then it is quite likely that its patents would have been valid.  A claim including some specific hardware and/or software functionality would avoid the problem of ‘genericism’ identified by the Court.

Comparison with European Approach

Some would regard the Supreme Court’s approach as inappropriate to the patent-eligibility analysis, but rather being more akin to an objection under 35 USC §112 that the claims are overly broad relative to the disclosure, or under 35 USC §103 that the generic computer-implementation of a financial scheme is obvious.

I have some sympathy for this position.  It is, in effect, the way the European Patent Office (EPO) approaches the question.  During examination at the EPO, if there are elements in a claim that are prima facie ‘technical’ (e.g. mention of computer processors, database records, etc), then it will generally pass the hurdle of eligibility.  However, the analysis then proceeds to an evaluation of inventive step, for which purpose all features of the claim that relate to excluded subject matter are disregarded.  What remains is a combination of technical elements, which are assessed for novelty and/or inventiveness in the absence of the excluded subject matter which cannot, itself, contribute to an ‘invention’.

In the case of an invention such as Alice’s, the elements remaining at this stage of the EPO analysis are nothing more than conventional, or ‘generic’, computer hardware or software components, which the EPO regards as ‘notoriously’ well-known, such that no specific prior art need be cited.

The approach taken by the Supreme Court in Alice is therefore not so different in process or outcome from that employed by the EPO.  Indeed, the UK courts have adopted an approach that is even closer to that of the Supreme Court, by evaluating eligibility before proceeding to assessment of inventive step (though according to similar criteria, and typically resulting in the same outcome).  Yet many computer-implemented inventions are patentable in Europe, including the UK (see, e.g., Computer-Aided Design Method Held Patentable in UK for one example). 

In fact, the scope of patent-eligibility for software-based inventions should remain broader in the US than in Europe, since all ‘business methods’ are expressly excluded under the European Patent Convention, and there is a requirement inherent in European law that an invention provide a technical solution to a technical problem.  The Supreme Court has thus far stopped short of ruling that the US law excludes business methods in all circumstances, or that an invention must necessarily fall within some defined category of ‘technology’.

Comparison with Recent Australian Decision

It is also interesting to compare the approach of the Supreme Court with that of the Australian Federal Court in last year’s Research Affiliates case (see Research Affiliates Loses Appeal Against Business Method Rejection).  The Australian judge was particularly concerned that the patent specification and claims in that case did not provide adequate detail of exactly how the computer was to be programmed for the construction and use of passive portfolios and indexes for securities trading, i.e. that the claims appeared to be for nothing more than a generic computer implementation of a mere business scheme.

While this resonates quite strongly with the Supreme Court ruling in Alice, it is not clear to me that it is a valid approach under the Australian ‘manner of manufacture’ test for patent-eligibility.  It will therefore be of great interest to see what the Full Bench of the Federal Court has to say in its decision on the appeal, which was heard in November 2013 and is still pending.  The court will now have the benefit of comparison with the US Supreme Court ruling – and I would speculate that it may have been holding back on finalising a judgment for this very reason.

Conclusion – Business as Usual for Most ‘Software Patents’

Overall, I do not think that the decision in Alice changes anything in the US law regarding patent-eligibility of software-based inventions.  In its earlier opinion in Bilski v Kappos the Court was clear that it considered ‘abstract’ business schemes and ideas to be ineligible for patent protection, and it comes as no great surprise that the Court regards merely implementing such a scheme via software, without something more, to be insufficient to confer patentability. 

Computers are useful, after all, but they are not actually magic!

Tags: Appeal, Business processes, Computer programs, Patentable subject matter, US