Bloomberg News

Edison Echoed as U.S. Court Looks at Software Patents

March 31, 2014

Thomas Edison

Thomas Alva Edison with the his phonograph. Source: Hulton Archive/Getty Images

The U.S. Supreme Court is poised to consider software patents for the first time in decades, weighing a case that has divided the computer industry and may affect almost half the country’s patent suits.

The justices hear arguments today on perhaps the biggest of the six patent cases before them in their current nine-month term. The case, part of a broader debate that extends to Congress, centers on how high the bar should be when software makers seek legal protection.

Dozens of companies are trying to shape the outcome. Retailers and Internet businesses including Google Inc. (GOOG:US) say the court should help weed out baseless royalty demands over common ideas like e-commerce or web hosting. Software makers led by Microsoft Corp. (MSFT:US) say overly strict limits would reduce incentives to develop cutting-edge programs that detect when a car airbag should deploy or let people alter photographs.

“It’s a digital idea for a digital age, so why wouldn’t we get a patent on it?” Dana Rao, associate general counsel at San Jose, California-based Adobe Systems Inc. (ADBE:US), maker of the Photoshop photo-altering program. “If Edison were alive today, he would be writing his inventions in software.”

The Supreme Court is likely to impose at least some limits as it delves into a topic that has splintered the appeals court charged with interpreting U.S. patent law. Ten judges of the U.S. Court of Appeals for the Federal Circuit, in a May 2013 decision, issued six opinions covering 125 pages.

Transforming Society

Software has both transformed society and been the source of a rise in patent litigation. The Government Accountability Office last year estimated that almost half of all patent lawsuits filed from 2007 to 2011 involved software. Severe restrictions, one Federal Circuit judge said, could mean “the deaths of hundreds of thousands of patents.”

“The fact that we have not policed this patentability requirement and have allowed the issuance of a lot of abstract, overbroad patents for doing business on the Internet -- those patents have fueled this litigation,” Suzanne Michel, senior patent counsel for Mountain View, California-based Google.

The GAO study, published in August, found that 39 percent of software-related suits were against companies outside technology fields. Those included retailers and drugmakers who were sued over features on their websites.

The GAO estimated the number of patents with some element of software rose from 25,000 in 1991 to 125,000 in 2011, climbing from a quarter of those issued to more than half.

Setting Limits

The Supreme Court has never directly said that software can be patented, although cases in the 1970s and 1980s involved software-related inventions. Since 2010, the high court has put limits on patents for business methods, diagnostic medical tests and human genetic sequences.

The latest case concerns claims that CLS Bank International, a New York-based provider of settlement services, infringed patents owned by Melbourne-based Alice Corp. The patents cover a computerized system for using an intermediary to limit the risk that one party to a derivative trade will renege on its obligations.

CLS says Alice’s patents run afoul of Supreme Court decisions that say abstract ideas aren’t entitled to legal protection. The patents “purport to monopolize a fundamental economic practice of protecting against risk,” CLS said.

Alice, which is partially owned by National Australia Bank Ltd. (NAB), said the abstract-idea exception to patent-eligibility is a narrow one, covering only “fundamental truths,” such as mathematical formulas.

Basic Question

The company said its patents “do not foreclose the use of any abstract idea, but instead prescribe one particular way of reducing a particular kind of settlement risk by using a computer in a particular way.”

The case involves the basic question of eligibility for patent protection. Other parts of the Patent Act impose additional requirements, including novelty and usefulness.

Alice’s patents are under fire even from companies that say that software generally should be eligible for legal protection. Microsoft, Adobe and Hewlett-Packard Co. (HPQ:US) filed a brief urging the court to rule against Alice, even while setting a low bar for patent eligibility in other cases.

“The patents at issue here are directed to an unpatentable business method combined with an equally abstract directive to perform that method using a computer,” the three companies argued.

Go Further

Some companies say the court should go further and sharply restrict software patents to ensure they don’t cover all uses of common functions, such as using an online map to find a store or sending e-mail attachments.

“I don’t categorically say that I could never find a patentable thing in software, but I’ve yet to actually meet one in the wild.” said Van Lindberg, vice president for technology at Rackspace Hosting Inc. (RAX:US), which provides servers and software that let companies offload their back-end computing and storage needs.

Other companies say that would be an overreaction. The U.S. Patent and Trademark Office has tightened the standards for issuing software patents since the 1990s and early 2000s, when many of the most controversial ones were issued, said Rouz Tabaddor, chief intellectual property counsel at CoreLogic Inc. (CLGX:US) in Irvine, California.

“People get upset at the system and instead of trying to correct it, they say, ‘Let’s destroy it,’” said Tabaddor, whose company makes software for valuing a house based on tax, sales and property data.

‘Coarse Filter’

Raising the standard for patent-eligibility on software could help defendants fend off some cases without spending what could add up to millions of dollars in legal fees.

International Business Machines Corp. (IBM:US), the world’s biggest computer-services provider, says eligibility is the wrong way to approach the problem. Rather than trying to figure out what is “abstract” in the software field, courts should focus on the patent law’s novelty and usefulness requirements, said Marian Underweiser, IBM’s intellectual property policy counsel.

Eligibility “is a coarse filter,” Underweiser said. “There are other parts of the patent law that are supposed to do the hard work.”

The case, which the Supreme Court will resolve by July, is Alice v. CLS Bank International, 13-298.

To contact the reporters on this story: Greg Stohr in Washington at gstohr@bloomberg.net; Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editors responsible for this story: Patrick Oster at poster@bloomberg.net; Bernard Kohn at bkohn2@bloomberg.net Mark McQuillan, Don Frederick


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