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Argument analysis: Justices seeking path between Scylla and Charybdis for financial services patent

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.  And when the Supreme Court granted review in Alice Corp. v. CLS Bank International, there was a prospect that the Court would shed some much-needed light on the question whether (or when) the Patent Act authorizes patents on software (more specifically, on computer-implemented inventions).  But by the end of the argument it seemed plain that few (if any) of the Justices were inclined to provide any large pronouncements on that front (or any other front).

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 which settles about $5 trillion of transactions a day; the CLS systems for settlement arguably infringe the Alice Corp. patent.

The biggest problem with Alice’s case (presented by Carter Phillips) is its similarity to Bilski v. Kappos, a 2010 case in which the Court invalidated a patent on a method of hedging.  So it was no surprise that Justice Ginsburg interrupted Phillips less than a minute into his argument to ask how the case differs from Bilski.  Phillips’s position is that this case presents a “very specific way” of resolving the business problem at end, and thus is not so abstract as to be unpatentable under Bilski.

Justice Breyer, for one, seemed most unwilling to accept Phillips’s distinction between his patent and the abstract idea that it implements.  Displaying his penchant for memorable hypotheticals, he analogized the patent in this case to ancient Egyptian practices:

Imagine King Tut sitting in front of the pyramid where all his gold is stored, and he has the habit of giving chits away.  Good for the gold, which is given at the end of the day.  And he hires a man with an abacus, and when the abacus keeping track sees that he’s given away more gold than he has in storage, he says, stop.

When Phillips responded that this was a “caricature,” Justice Breyer rejoined: “Of course it’s a caricature.  It’s a caricature designed to suggest that there is an abstract idea here.  It’s called solvency. And what you do is you take the idea of solvency and you say apply it.  And you say apply it through the computer.”

Another pervasively critical strain of questioning raised the concern that Alice’s patent, at bottom, could be viewed as a simple combination of an unpatentable idea with the computer.  So, for example, Justice Kennedy pressed the view that nothing about the computer’s role in the patent was innovative: “If you describe that to a second-year college class in engineering and said . . . here’s my idea, now you go home and you program over this weekend, my guess is that that would be fairly easy to program. . . .  So the fact that the computer is involved, . . . it seems to me, is necessary to make it work.  But . . . the innovative aspect is certainly not in the creation of the program to make that work.  All you’re talking about is – if I can use the word – an “idea.”

Phillips doggedly stuck to the position he laid out in his brief – that the only sensible course for the Court is to limit the “abstract idea” exception from patentability to a narrow class of truly basic items:  “I’ll be the first one to confess that trying to use language to describe these things is not all that easy.  But the way you can meaningfully look at this is to say that this is not simply something that was a fundamental truth.  . . . It operates in a much more specific and concrete environment.”

But Justice Breyer circled back again, late in Phillips’s argument, expanding on Justice Kennedy’s concern that the patent is nothing more than implementing an idea on a computer:

If you simply say, take an idea that’s abstract and implement it on a computer . . . there is a risk that you will take business in the United States . . . and 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, then what you do is you rule out real inventions with computers.  . . . And so in those 42 briefs, there are a number of suggestions as to how to go between Scylla and Charybdis.  . . . I need to know what in your opinion is the best way of sailing between these two serious harms.

Arguing for respondent CLS Bank International, Mark Perry did his best to stick to the straightforward argument of his brief, starting with the contention that “[t]he path between Scylla and Charybdis was charted in Bilski and Mayo.”  The Justices, however, spent much of his argument struggling with the question of what more they might say to shed some light on the distinction between the unpatentably abstract and the patentably innovative.  So, for example, almost begging for advice, Justice Breyer pressed Perry for some specific formulation he might use to clarify that distinction: “Now, will you at some point in the next few minutes give me your impression of, if it were necessary to go further, what would the right words or example be?”

Perry for the most part, though, tried to avoid getting trapped into any particular formulation that might derail him from his main point that the Court need not do anything other than apply Bilski and Mayo directly to this case.  To be sure, he did readily concede that some innovations related to software are patentable: “Of course, a patent that describes sufficiently how a computer does a new and useful thing, whether it’s data compression or any other technological solution to a business problem, a social problem, or a technological problem, would be within the realm of the patent laws. This is not such a patent.” It was clear, however, that the range of that concession was quite limited, as he emphasized that “[i]f you can do it by head and hand, then the computer doesn’t add anything inventive.”

Solicitor General Donald Verrilli had a slightly rougher time, trying to articulate the boundary drawn in the brief filed by his office on behalf of the Patent and Trademark Office.  His basic view was simple enough, that “[a]n abstract idea does not become patent-eligible merely by tacking on an instruction to use a computer to carry it out.”  The patent would be appropriate only if the claims provided a “meaningful limit” to a claim of the entire idea.  Taken on its face, that standard could almost be the same as the standard offered by Phillips for Alice Corp.

But Justice Breyer (the author of Mayo) pressed Verrilli on his notion that the boundary between “abstract” and “innovative” should draw a line between “business” and “technology” (which would easily exclude the Alice Corp. patent).  For example, Breyer challenged Verrilli to explain why a “computer improvement that, in fact, leads to an improvement in harvesting cotton” is patentable, but a “computer improvement that leads to an improvement in the method of selling bonds over the telephone” is not.

The Chief Justice also seemed deeply troubled by the vagueness of Verrilli’s position:  “You mentioned a while ago the need for greater clarity and certainty in this area.  And . . . in your brief you’ve got a non-exhaustive list of factors to consider, and there are six different ones.  And I’m just doubtful that that’s going to bring about greater clarity and certainty.”

Perhaps the oddest thing about the argument is how disinterested the Justices were in the merits of this particular patent.  Phillips and Perry repeatedly tried to turn the discussion to the features of the patent at issue.  Indeed, their disagreement became somewhat heated toward the end of the argument: Phillips insisted that Perry had erred in claiming that a complex document Phillips had discussed in his opening presentation in fact was not related to the claims asserted against CLS. But for the Justices, the dominant train of thought seemed to be a concern, captured best in Justice Breyer’s reference to Scylla and Charybdis, that the Justices might offer a formulation that derailed commercial development.  They seemed worried that the strategy reflected in Bilski and Mayo – say as little as possible and let the PTO and Federal Circuit work it out – was leading to so much confusion that they would be forced to draw some lines themselves, but not at all sure where to draw them, and apparently not in the least concerned about the fate of this particular patent. I think we can pencil this one down for a decision the last week of June.

Recommended Citation: Ronald Mann, Argument analysis: Justices seeking path between Scylla and Charybdis for financial services patent, SCOTUSblog (Apr. 3, 2014, 5:41 PM),