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Software Patenting in Crisis

By Jonathan T. Kaplan, Esq.                                    October 2013

High courts wrestle with question of when inventions that rely on software for implementation are really patentable.

Part I (please also see Parts II and III)

It may seem incredible to many that in 2013, when computers have become ubiquitous, the following could still be a question: whether inventions described as relying significantly upon software for their implementation, can be the proper subject of a U.S. patent application.

Yet this is precisely the question that was just wrestled with, this past Spring, by the highest court for patent trial appeals, other than the Supreme Court. The Court of Appeals for the Federal Circuit (CAFC) is the centralized appellate court, for all U.S. patent trials. Rulings of the CAFC are reviewable only by the Supreme Court, and the Supreme Court will only rarely review such cases.

In May of this year, the CAFC issued a truly amazing opinion, in the case of CLS Bank Int’l v. Alice Corp. Pty, LTD., 717 F.3d 1269; 106 U.S.P.Q.2D 1696 (Fed. Cir. 2013).

The case is about four patents owned by an Australian company called Alice Corp. The patents are generally about the “settlement” of financial transactions. Even after a first and second party have agreed to perform a trade, with respect to certain financial instruments, there is still a delay in actual realization of the transaction, because of a process called settlement. Stated generally, settlement is about the use of a trusted third-party, to make sure that either the trade completes successfully, or, if one or more parties to the trade cannot fulfill their obligations, that the trade is completely unexecuted. To those familiar with the engineering term, settlement can be described as a way of making sure a trade is an atomic action.

For purposes of the CAFC’s opinion, the court divided the claims of the patents into three groups, based upon the basic form in which the claims are written: as methods for doing settlement (“the method claims”), as data processing systems that perform settlement (“the system claims”), and as computer-readable media which, if executed on a computer, would perform settlement (“the media claims”).

At the trial (or “district”) court level, all the claims had been ruled invalid, because they were directed to subject matter that the court considered ineligible for patenting.

Patentable subject matter is defined, under U.S. law, by a section of the patent law called § 101. This section defines the kinds of things, potentially patentable under U.S. law, as follows: “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” Further, another section of the patent law (§ 100(b)), defines the term “process” to mean “process, art, or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.”

Given the broad definition of § 101, one may well wonder why there is any question of whether software is patentable since, at the very least, it can always be described as a process.

The problem is that over the past approximately 160 years, the Supreme Court has created three exceptions, to the statutory definition of patentable subject matter: laws of nature, natural phenomena, and abstract ideas. The purpose behind adopting these exceptions is that they represent the basic tools of progress, for science and technology. Therefore, the Supreme Court considers it bad public policy, to prevent the free use of such basic tools.

How does software fit into this thinking? That will be the topic for my next blog.

Mr. Kaplan runs a small IP law firm, specializing in patents, located in the northern suburb of Portland, OR. He has substantial experience representing clients with bet-the-company technology. Mr. Kaplan has over 20 years of experience and, before starting his own practice over 10 years ago, worked at large top-tier IP practices for over 10 years (the last several at the partner level). Mr. Kaplan obtained an M.S.E.E. from MIT and, subsequent to MIT, earned his J.D. at the NYU School of Law. Mr. Kaplan’s work at MIT included a substantial research component, both at the A.I. Lab and the Research Laboratory for Electronics, resulting in a Master’s thesis upon which two patents were obtained. Mr. Kaplan is admitted to practice law in three states (CA, NY, and WA) and is registered with the USPTO.

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