The Justices have danced around the question for years.  Critics (including a decided majority of academic analysts) have bemoaned the drag on innovation for decades.  But now the Supreme Court will have a chance to face the question squarely, in Alice Corp. v. CLS Bank International:  does the Patent Act authorize patents on software – more specifically, on computer-implemented inventions?

The patent dispute in this case is a big one, worthy of the Court’s attention.  The patent covers a system (and a method) for reducing “settlement risk” in financial transactions.  The most common application involves the common arrangement in which several parties (typically banks) make transfers among themselves electronically through the course of the day, with a transfer of net balances to finalize those transactions at the end of each day.  The difficulty arises when, at the end of the day, one of the parties is unable to pay its net share; the dislocation of that party’s failure often spreads widely through the network of counterparties.

Generally speaking, the invention at issue involves a central computer that creates “shadow accounts” for all parties to the system, credits and debits those balances with transactions through the course of the day, and permits transactions to proceed only when the shadow balances remain above zero; the effect of the system is to ensure that no party will fail to make its counterparties whole at the end of the day.  Alice Corp. holds a patent on that invention.  CLS Bank International is a large financial institution that operates a network that settles about five trillion dollars’ worth of transactions per day; the CLS systems for settlement arguably infringe the Alice Corp. patent.

The case reaches the Court because the Court’s last word on the subject, the 2010 decision in Bilski v. Kappos, left the topic in such disarray.  The Court in that case invalidated a patent on a hedging method as presenting an unpatentable subject matter, too abstract to be claimed by an inventor.  The reasoning of Bilski, however, has left the Federal Circuit completely at sea.  In this case, for example, heard before an en banc panel of ten judges, the court issued seven separate opinions, none of which garnered the support of a majority.

The case is profoundly difficult for petitioner Alice Corp. (represented by Carter Phillips), because the Justices all agreed in Bilski that there is a category of idea that is so abstract that a patent claiming the idea cannot issue. Accepting that reasoning but coming up with a crisp and powerful distinction from the patent in this case (which is on a different, arguably more complex, method) is not a simple task.  And it is not the route that Alice Corp. chooses.

Rather, Alice Corp. boldly proposes a return to first principles, advising the Court that its opinion in Bilski (and its predecessors) reflects a wrong turn that needs to be corrected now.  It concedes that there is an exception from the Patent Act for “fundamental truths,” but in its view the category is limited almost exclusively to mathematical formulations “equivalent to a law of nature.”  If the purpose of the Patent Act is to reward human ingenuity, then it is sensible to issue a patent for technical advances beyond those laws of nature.

Although that argument might sound abstract in my summary, Alice Corp. powerfully criticizes the mode of judicial analysis that has arisen under Bilski.  As understood and applied by the Federal Circuit, the court should look behind the specific language of the patent claims and specification to decide whether the patent, as a whole, essentially covers an identifiable abstract idea.  Alice Corp. presents a powerful case that this post-Bilski analysis is intolerable.  For one thing (as the seven opinions below demonstrate), it is hopelessly indefinite – there is at some level of generality an abstract idea behind every patent.  Alice Corp. also scores points arguing that the search for the abstract idea behind the patent reflects an unjustified judicial excursion that improperly ignores the specific language of the claims that the PTO approves to define the invention.

The proper question, according to Alice Corp., is whether the claimed invention extends to a patentable subject matter; if the claims do not describe a fundamental truth, then the invention is patentable.  If the Court has concerns about bad patents that do not reflect important advances, it has much more appropriate tools to handle those issues – the novelty, obviousness, and definiteness requirements of the Patent Act.  Again, the strong reliance on those requirements is a bold move; the argument on this point closely resembles the argument that the United States presented in Mayo to no avail.  The point presumably reflects a tactical (and admirable) decision to develop a position that is internally coherent and logically defensible.

Alice Corp. draws support from (among others) a powerful amicus brief filed by IBM in support of neither party, a project for which IBM retained former Solicitor General Paul Clement.  IBM has filed amicus briefs in many recent cases about patentability, emphasizing its balanced perspective:  it has for decades been the most prolific patentee in the United States, but at the same time it is one of the most frequent defendants in patent lawsuits.  In this case, IBM shifts position.  In past cases (most obviously Bilski), IBM has supported the idea that a “technical contribution” requirement would limit the “abstract idea” exception appropriately.  In this case, however, IBM explains that the pervasive inability of the Federal Circuit to apply any such test has convinced IBM that the entire enterprise should be abandoned.

Although the brief is filed in support of neither party, the parallel to Alice Corp.’s arguments gives great aid to the company’s position.  Here, the IBM brief argues that the Court should jettison entirely the doctrinal effort to exclude patents that only claim “abstract” ideas.  Similarly, IBM emphasizes (as it has in past cases) that a vigorous application of the novelty and obviousness requirements could solve much of the problems with “bad” patents that drive relevant policy concerns.

The most powerful part of the brief is an extended paean to the important role that software plays in the economy, the mind-boggling amounts of money spent on research and development of software, and some of the powerful developments (advances in cryptography being the leading example) that would fall from patent protection if the Court continues further down the route it laid out in Bilski.

After the series of bold moves in the top-side briefs, the brief for CLS Bank, represented by Mark Perry, seems almost pedestrian in its caution.  Of course, the bank has the luxury of the recent decisions in Bilski and Mayo. Those cases support (if they don’t compel) the doctrinal framework of the decision below: inventions covering abstract ideas are not patentable unless they are in some all-but-undefinable way “significantly more” than the abstract idea (“significantly more” being the technical term of art the Court promulgated as guidance in Mayo).

Thus, it is enough for the bank to sit back and point out each of the steps in which the arguments that Alice Corp. presents depart from the Court’s recent analysis on the patentability question.  The bank’s argument that the invention here is no less abstract than the invention invalidated in Bilski is persuasive.  To my mind, it proves the point that the bold strategic moves Alice Corp. made in its brief were necessary. If the Justices are going to uphold this patent, the most likely reason will be that they are persuaded that they’ve made some serious missteps in recent years; and if they’re willing to distinguish Bilski they wouldn’t need much help from Alice Corp.’s briefing to justify that result.

The Solicitor General (representing the Patent and Trademark Office) also weighs in supporting the Federal Circuit.  The government urges the Court to continue along the path it sketched in Bilski and Mayo.  Specifically, the government emphasizes a distinction between patents that represent advances in the operation of computers and patents that use computers to implement manipulations of “abstract legal and economic concepts.”  Because this patent, like the one at issue in Bilski, uses a computer to manipulate abstract economic concepts, it is, in the government’s view, unpatentable.

This is a case in which the oral argument is sure to be exciting.  The case has the potential to be one of the most important patent cases in decades (at least if the Court reverses the Federal Circuit).  The advocates on both sides are highly skilled.  The Justices surely will be fully engaged.  Not to be missed.

Posted in Alice Corporation Pty. Ltd. v. CLS Bank Int'l, Featured, Merits Cases

Recommended Citation: Ronald Mann, Argument preview: Justices have chance to provide final solution to quandary about patenting software, SCOTUSblog (Mar. 20, 2014, 1:53 PM),