February 7, 2013, 7:30 p.m. ET
Court to Consider When Software Can Be Patented
By ASHBY JONES
Wall Street Journal
http://online.wsj.com/article_email/SB10001424127887324906004578290313667148712-lMyQjAxMTAzMDAwNzEwNDcyWj.html
A federal appeals court in Washington, D.C., will hear arguments Friday
over a fundamental question that has vexed the technology industry for
nearly two decades: When is a piece of software patentable?
The issue has created a curious split in the technology sector. On one
side lie technology giants such as Google Inc., Facebook Inc. and Intuit
Inc., which largely believe the Patent & Trademark Office has issued too
many software patents in recent years and would like to see courts apply
a more exacting standard when reviewing them.
On the other lies a collection of big and small technology companies and
patent holders, including International Business Machines Corp., IBM
+0.91% which contend that tighter standards on software patents could
hinder innovation.
"It's a huge case for the patent-law community," said Matthew Moore, a
patent lawyer at Latham & Watkins LLP in Washington, D.C., who isn't
involved in the case. "Because we're talking about software, the
decision could affect an enormous number of companies."
The case, which will be argued before the U.S. Court of Appeals for the
Federal Circuit, a specialized court that mostly handles patent cases,
concerns a computer program that helps foreign-exchange buyers and
sellers settle their trades.
In 2007, CLS Bank International sued Alice Corp., an Australian company
partly owned by National Australia Bank Ltd., NAB.AU +1.36% asking a
court to invalidate several Alice patents on the idea.
CLS, which sells services to buyers and sellers on the foreign-exchange
markets, argued that Alice's patents described a process—using an
intermediary to settle trades—that has been around for a long time. In
the parlance of patent law, the fundamental idea behind the software is
too "abstract" to patent, CLS's lawyers argued.
"Basic economic concepts, such as hedging, are not patentable," said CLS
lawyer Mark Perry of Gibson Dunn & Crutcher LLP in Washington, D.C.
"This case involves a similar economic concept, financial
intermediation, and is similarly not eligible for a patent."
Alice countered that the patents did more than just bring an old idea
into the computer age.
The patents "require the use of a computer to serve as an electronic
intermediary in a particular way—one of myriad ways in which two parties
might exchange obligations using a computer as an electronic
intermediary," wrote Alice's lawyers at Williams & Connolly LLP in a
recent court filing. The "computer in all of Alice's claims is far more
than a 'token' addition...and the claims are not directed to abstract
ideas."
After the trial court ruled for CLS in 2011, a three-judge panel for the
Federal Circuit reversed that finding last year. Later, after
recognizing the central issue's importance, a larger panel of judges on
the court decided to take up the case.
Many lawyers say the case could ultimately be headed to the U.S. Supreme
Court. For now, however, a broad swath of American industry, from big
technology companies to Internet retailers, hope the appellate court
draws some clearer lines on when software is patentable.
"If you own a house, you typically know the boundaries of what you own,"
said Matthew Schruers, a lawyer for the Computer & Communications
Industry Association, which submitted a "friend-of-the-court" brief on
behalf of its members, which include Google, Yahoo Inc. YHOO +0.71% and
eBay Inc. EBAY +0.72% "But with so many software patents, the boundaries
simply aren't clear."
Mr. Schruers and others say that the lack of clear guidance has allowed
the Patent & Trademark Office in recent years to issue a glut of
software patents. In Mr. Schruers' opinion, these patents too often end
up in the hands of licensing companies, often called "patent-assertion
entities" or, more derisively, "trolls," that have flooded the courts
with lawsuits.
"Because the patents are often unclear, there's no way to know whether
an infringement claim by a competitor or a troll is legitimate until
you've spent $8 million in litigation fees," said Mr. Schruers.
Were the standards clearer, added Peter Brann, a lawyer in Lewiston,
Maine, who filed a brief on behalf of several Internet retailers,
including L.L. Bean Inc.,Overstock.com Inc. and Newegg Inc., companies
could know earlier whether to pay for a license from a licensing
company, or take their chances in litigation. "Patent trolls bank on
this uncertainty," he said. "It's how they make their money."
The PAEs and other smaller technology companies caution against overly
restrictive rules on software patents or, even worse, a blanket ban on
them. "Some clarification on the issues is welcomed, but too much
restriction is only going to stifle innovation," said Matthew McAndrews,
a lawyer in Chicago who represents PAEs and other small inventors and
patent-holders.
IBM, one of the largest patent holders in the country, has aligned
itself alongside some of these smaller players. "[S]oftware patents as a
class are under attack and have been ever since the software industry
began to rely on patent protection," wrote IBM lawyers in a
friend-of-the-court brief filed late last year. The "vast majority of
computer-implemented inventions are patent eligible."
One thing both sides agree on: drawing a fine line between software that
is truly new and that which simply moves an old idea to the Internet
isn't going to be easy for a court. "I just don't see an elegant rule
coming out that's simple to apply," said Ed Reines, a patent lawyer at
Weil, Gotshal & Manges LLP in Silicon Valley, who isn't involved in the
case. "You basically have a 'you-know-an-innovation-when-you-see-it'
standard, and I'm not sure how fast that's going to change."
----------------
A version of this article appeared February 8, 2013, on page B5 in the
U.S. edition of The Wall Street Journal, with the headline:
Software-Patents Question Goes Before Federal Court.
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Associate Professor Fax (713) 743-3927
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University of Houston
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