May has been an interesting month in the world of software patents. This post is about a US court decision ruling that a particular software invention is not patentable. I’ve written another post about a UK court decision that confimrs the patentability of a different software invention and that helps clarify UK practice.

The case in the US is a decision of the Court of Appeal for the Federal Circuit (CAFC) in the matter of CLS vs Alice Corporation. Alice Corporation have some US patents (US 5,970,479  ; 6,912,510  ; 7,149,720 and 7,725,375) directed to reducing settlement risk by effecting trades through a third-party intermediary (supervisory institution) empowered to verify that both parties can fulfil their obligations before allowing the exchange – i.e., a form of escrow – to avoid settlement risk (the risk that either party does not pay its obligations after a transaction has been agreed). The invention was claimed as a method and a computerised trading platform.

A US District Court held that the claims of the patent were not drawn to patent eligible subject matter, and Alice appealed that decision.

US law states that “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor”, subject other provisions of the patent legislation. This broad definition is limited by established exceptions stating that laws of nature, natural phenomena and abstract ideas are excluded from patent eligibility.

So, when it comes to considering whether software is patent eligible subject matter, the question is framed in terms of defining whether an invention is “abstract”. Abstraction cannot be overcome purely by providing a computer for carrying out an otherwise abstract method. However in practice the US authorities can be easily persuaded that inventions are not abstract, particularly bearing in mind the openeness to granting patents for methods of doing business – of which these patents are an example. As an aside – these would never get anywhere in Europe. In fact, two corresponding European Patent Applications were filed but were not granted.

The CAFC upheld the finding of patent ineligibility. First of all, it was acknowledged that the concept of reducing settlement risk by facilitating a trade through third-party intermediation is an abstract idea because it is a “disembodied” concept. Then, the question was one of whether the specific features of the claim added “significantly more” to the stock of human knowledge. The claims required creating shadow records, using a computer to adjust and maintain those shadow records, and reconciling shadow records and corresponding exchange institution accounts through end-of-day transactions. However it was held that none of these limitations adds anything of substance to the claim, and so the claims were held not to contain patent-eligible subject matter.

In itself the decision is perhaps not remarkable, although in my view it is a relief that the “right” decision was reached. The significance of the case comes more from its profile and the manner of the decision. The case had been keenly anticipated, and was heard en banc, meaning that a panel of ten judges voted on the outcome. It was hoped that the CAFC would provide helpful guidelines for assessing patent eligibility, as this is an area that remains problematic. However, the panel was in the end evenly split on whether the claims were patent-eligible or not; and it is clear from the dissenting opinions filed by various judges that there remain fundamentally different views between different judges on what should be patent-eligible.

Some commentators have picked up on comments from one of the dissenting opinions opining that the finding of invalidity of the patents in this case could have far-reaching consequences for other patents and be potentially catastrophic for the software industry and various other industries. But my understanding is that the decision is unlikely to set any binding precedent because there was not a large majority between the judges on the panel. And in any event, I don’t see any general principles being outlined that would have significantly changed the position.

So, this case regrettably seems to represent a missed opportunity, both for ensuring greater legal certainty and also for providing some guidelines that might help avoid poor quality patents being granted.