US Supreme Court to scrutinise eligibility of software for patent protection

The nine justices will hear a one-hour oral argument in a case of interest not just to software companies but also to a wide range of businesses that sell products containing computer-implemented features. The ruling, expected by the end of June, will affect companies involved in such industries as healthcare, IT, communications and high-tech engineering.

Google Inc, Dell Inc, Verizon Communications Inc, Microsoft Corp, Hewlett-Packard Co and engine manufacturer Cummins Inc, are among the companies that have filed legal papers weighing in on the issue.

Companies vary over what kind of eligibility threshold they would prefer. Those that often get sued for patent infringement, such as Google, favor a tighter definition. Those that want to protect their own patents, such as IBM Corp, would prefer that most software be patent eligible.

With the rise of computer-based products, courts have struggled to apply patent law. Some legal experts, including the Electronic Frontier Foundation, a digital civil liberties group, say that too many patents are issued by the U.S. Patent and Trademark Office and courts are too keen to uphold them. In 2011, almost 125,000 software patents were granted by the patent office, up from about 25,000 in 1991, the U.S. Government Accountability Office (GAO) said in an August 2013 report.

Tech companies are especially concerned about litigation brought by so-called "patent trolls," defined as companies that hold patents only for the purpose of suing other companies that are seeking to develop new products. The resulting litigation stifles innovation, the companies say. Congress is considering legislation aimed at reining in patent trolls.

Between 2007 and 2011, trolls accounted for an estimated 19 percent of all patent infringement lawsuits, according to the GAO report.

Patent owners that do not manufacture products are much likelier than ones that do to bring lawsuits based on software inventions, according to a study released last week by RPX, a publicly traded patent clearinghouse.

The U.S. Court of Appeals for the Federal Circuit in Washington, D.C., which has primary responsibility for interpreting patent law, has struggled to adopt a test that judges can use to review software patent claims, with various judges reaching different conclusions.

Record proportion of IP cases
The case before the high court involves Alice Corporation Pty Ltd, which holds patents for a computer system that facilitates financial transactions. The patents are challenged by CLS Bank International, which says they are not patent eligible. In May 2013, the federal appeals court ruled for CLS but the judges were split 5-5 on which legal test to adopt.

The issue comes before the Supreme Court at a time when the court is hearing the highest proportion of intellectual property cases in its history, including eight during the nine-month term that ends in June.

The legal question boils down to how innovative an invention should be to receive legal protection. The U.S. Patent Act states that anyone who "invents or discovers a new and useful process, machine, manufacture, or composition of matter," or an improvement of an existing one, can get a patent. An invention related to an abstract idea can be patented, but it must include a way of applying the idea.

Trading Technologies International Inc, which sells software for use in derivatives trading, is one of the companies that favors broad patent eligibility.

Steven Borsand, the company's executive vice president for intellectual property, said his company relies heavily on its patents. It successfully sued a unit of Cantor Fitzgerald LP for infringement and has settled other cases, he said.

Borsand said he was concerned that in seeking to target patent trolls the high court also would hurt businesses that are making legitimate use of their patents.

"We spend a lot of money developing stuff. Once it's out there, it's pretty easy to copy," he said. "That's what happened."

Daniel Nazer, an attorney with the Electronic Frontier Foundation, said that restrictions on patent eligibility would lead to greater innovation because companies would be forced to come up with new products instead of relying on patent protections.

"That's how people get cheaper, better products," he said. "You stay a step ahead."

The case is Alice Corp v. CLS Bank, U.S. Supreme Court, 13-298.

© Thomson Reuters 2014