Tech Firms Urge Supreme Court Action on Software Patent Quagmire

The U.S. Supreme Court has decided to jump into a software patent case that could resolve the muddled situation that has been vexing IT companies, legal experts and federal judges for years.

Specifically, the Supreme Court said earlier this month that it would rule on Alice Corp. Pty. v. CLS Bank International, a case involving the patent status of software developed by an Australian firm specializing in financial-industry IT.

The historical quagmire surrounding software protection is reflected not only in a string of conflicting case law decisions, but also in the legal flip-flops that have occurred in this case. The outcome could have a significant impact on the course of innovation and the economics of IT.

“We are at a point in this country where this sector is one of the most important elements in our economy,” Todd Dickinson, executive director of the American Intellectual Property Law Association, told the E-Commerce Times. “Hopefully, the Supreme Court will provide a strong clarification of the issues here.”

Computerized Elements

The saga began when CLS Bank emerged as the winner of a case resulting from a U.S. District Court ruling in favor of the bank’s contention that patents held by financial software developer Alice Corp. Pty. were invalid. As a result, Alice was stymied in its ability to pursue its assertion that CLS Bank had infringed on Alice’s patents for data-processing programs used for settling foreign exchange transactions.

A key question in the case — befuddling inventors and judges alike — is the degree to which innovative ideas using computerized media even qualify for consideration as worthy of patent protection. In legal terms, the standard is referred to as “subject matter eligibility.”

Courts have differed on whether computerized elements are essential to the patent viability of innovative business techniques. The district court ruled that Alice’s patents were not valid because the company’s innovative approach to managing certain financial transactions was not sufficiently integrated with the use of computerized media.

After losing that legal battle, Alice appealed. The first flip-flop in the case occurred when a three-judge panel at the U.S. Federal Circuit Court of Appeals for the District of Columbia reversed the district court, making Alice the winner. CLS Bank then took the option of seeking a decision from a full en banc panel of 10 judges at the same court. Those 10 judges agreed to reverse and vacate the three-judge reversal, making CLS Bank again the winner. That prompted Alice to appeal to the Supreme Court.

However, the 10 judges issued multiple opinions, so the decision favoring CLS Bank has limited impact in terms of legal precedent — opening the door for further review by the Supreme Court. (Note: At the district and appeals court levels, the case title is CLS Bank International v. Alice Corp. Pty.).

‘Admittedly and Hopelessly Fractured’

Alice Corp. devoted much of its Supreme Court petition to the need for clarification of the legal standard related to the role of computerized media. Referencing a series of conflicting court cases as well as the divergent views of the 10 appeals court judges, Alice told the Supreme Court that “no clear standard exists, and the federal circuit is admittedly and hopelessly fractured” in its approach.

Of course, Alice is not seeking just clarification of the law as a beneficial outcome in and of itself — it is also hoping the court will again make it the winner in the case and thus enable it to pursue enforcement against alleged infringements.

“Yes, Alice is asking the court to rule that Alice’s patent claims are directed to subject matter that is eligible for patenting under section 101 of the Patent Act,” Constantine Trela, a partner at Sidley Austin, told the E-Commerce Times. Sidley Austin is representing Alice.

For its part, CLS Bank is looking for the high court to rule definitively in its favor.

“CLS Bank has prevailed at all stages of this litigation,” the company said in a statement provided to the E-Commerce Times by spokesperson Nick Warren. “Both the trial court and the appellate court agreed with CLS Bank that the patent claims asserted by Alice are ineligible because they do nothing more than recite the basic economic concept of intermediated settlement, a form of escrow.

“The U.S. Supreme Court has been clear in previous cases that such claims may not be patented, and CLS Bank is confident that the court will reach the same conclusion here,” it added.

“This case affords the Supreme Court the opportunity to give further guidance to the federal courts and the Patent Office regarding the standards to be applied in reviewing the patent-eligibility of business method patents like these,” the bank said.

‘The Current Situation Is Untenable’

Heavyweights in the IT sector have been active in the case. IBM entered an individual amicus brief at the appeals court level. Google, Dell, Red Hat and other IT firms filed a joint amicus brief with the appeals court as well.

Several amicus briefs have already been filed at the U.S. Supreme Court reinforcing Alice’s contention that U.S. law regarding software patents is a legal shambles.

Without Supreme Court intervention, “the tumult in the law will continue to cast uncertainty on issued U.S. patents like Accenture’s with claims to computer systems operating specialized software,” said Accenture in its brief.

Since the appeals court ruled in the Alice case in May 2013, “two irreconcilable decisions” regarding software patents have been issued at the appeals court level, one of them involving Accenture itself, the company said.

“We feel the Supreme Court should take the case because the current situation is untenable,” Steve Borsand, executive vice president for intellectual property at Trading Technologies International, told the E-Commerce Times. Trading Technologies and a group of other IT companies including real estate data firm Corelogic also filed a joint amicus brief expressing support for the Supreme Court to clarify software patent law.

Foreign Exchange Trading

The business context of the case is intriguing in that it reverberates through the worldwide foreign-exchange trading market. Alice began operations in the early 1990s and obtained its first patent in 1992. In general, the company’s products and patents are used in the financial-transactions market, especially regarding the business settlement function.

CLS Bank began operations in 2002 “as the result of the collaborative efforts of foreign exchange market participants and various central banks, including the Federal Reserve System in the U.S., the European Central Bank and the Bank of England, in response to regulatory concerns regarding foreign exchange,” according to a bank document.

CLS Bank was actually organized under a provision of the Federal Reserve Act. One of the bank’s major tasks is to facilitate the settlement of foreign exchange accounts.

In October 2002 Alice notified CLS Bank about its concerns that the bank was likely infringing on Alice’s financial settlement patents and offered to license the Alice programs to the bank. The parties continued discussions without resolution until CLS Bank filed its case with the U.S. District Court in 2007.

As a corporate objective, Alice says that since 2007 its resources “have primarily been diverted to the CLS litigation” and that the company’s efforts to commercialize its products “have assumed a secondary role.”

John K. Higgins is a career business writer, with broad experience for a major publisher in a wide range of topics including energy, finance, environment and government policy. In his current freelance role, he reports mainly on government information technology issues for ECT News Network.

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