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Intellectual Property Rights in Software: Go Ask Alice

February 13, 2013

Disputes over the range of patent law, and over IP law generally, ought to be of keen importance to hunters of alpha. The Bilski patent dispute made this case in one context, as did the travails of Sergei Aleynikov in another.

One especially knotty question is whether and to what extent business methods become patentable by getting embedded in computer software.

Now the U.S. Court of Appeals for the Federal Circuit (the full court at this stage of proceedings) has heard arguments in the matter of CLS Bank v. Alice Corporation. Alice is a technology company owned in part by National Australia Bank Ltd., and is the patent holder in this matter. It was also the victor of the last stage in proceedings, the decision last summer by a three-judge panel of the appellate court.

The arguments before the court en banc, held on February 8, are worth discussion here because the patent claims involved are very broad, touching the infrastructures of both the buy and sell sides.  One of the claims, known as the ‘479 payment, asserts exclusive rights to a method “of exchanging obligations as between parties, each party holding a credit record and a debit record with an exchange institution….” The heart of this method is the use of a neutral intermediary who simultaneously directs both parties to adjust their accounts or records in order to mitigate settlement risk. Unsurprisingly this neutral intermediary shall employ a computer to maintain shadow balances of debits and credits.

Forward from Bilski

CLS, Alice’s adversary in this matter, runs a foreign-exchange settlement system, and in its opposition to Alice’s claims it invoked the 2010 Bilski precedent. It points out that in the run-up to Bilski v. Kappos, Bernard Bilski had sought to patent a method by which buyers or sellers who are vulnerable to sudden shifts in energy costs may limit their exposure. The U.S. Supreme Court   said that, yes, a business method may count as the sort of process that can be protected by a patent in appropriate circumstances; but, no, Bilski’s application was not one of those circumstances, because his claims represented attempts to patent abstract ideas, essentially the ideas involved in all energy commodity hedging.

Unfortunately, SCOTUS wasn’t very specific about how a court was to determine in a particular case which ideas are abstract. I would argue that all software intended for use on general purpose computers is by definition abstract. The whole point of the digital revolution, and the move away from the analog devices that preceded it, is that given enough time and memory, any digital computer can run any program. The digital revolution has abstracted from the one-time important distinctions among, say: film cameras, cash registers, book shelves, and typewriters!

It seems clear, though, that neither SCOTUS nor the appeals court wants to take this you-can’t-patent-abstractions notion as embraced in Bilski to the point of rendering all software unpatentable.

In applying Bilski, then, the two-judge majority on the three-judge panel that decided the case last summer finessed the abstract question of what “abstract” means by devoting itself instead to the matter of the standard for review. It said that the Alice claims should not be deemed to be ineligible as abstract ideas unless it is “manifestly evident” that this is what they are, or (putting the same point, it seems, in different words) only when that is the “single most reasonable understanding” of the claims.

In Alice, the abstract idea of “using an intermediary to help consummate exchanges between parties” was part of the claim. But the majority said the claim considered as a whole might well be considered “concrete, palpable, tangible, and otherwise not abstract,” in part because the computer-processed specifications about the shadow accounts and how they would work leave plenty of room for other analogous arrangements outside of the coverage of this patent and thus don’t preempt further innovation.

Common Sense and the Commons

I have to say that it didn’t make a very persuasive case for that. That roll-case of antonyms for abstract, “concrete, palpable, tangible,” itself suggests an awareness of the weakness of the underlying argument. Many readers, working through its decision (not to mention the dissent) will still be left with the sense that a fairly common-sense arrangement, the use of a dual escrow as a way to ensure smooth settlement, will be taken away from the intellectual commons. Anyway: the majority said it could not conclude that abstractness was itself “manifestly evident,” and the patent stood.

So what happened at the en banc hearing Friday, February 8? What matters is not so much what the judges said or asked (which is often misleading) but to whom they said it.  Mike Masnick, a patent-oriented blogger over at Techdirt, says the hearing was packed, “with lots of patent lawyers and Patent Office folks in attendance.”

The pros in the patent-law field see this as a pivotal case. I submit the pros in alternative investments should do likewise, before they wake up to discover that the use of computerized accounts by a contracted-for third party as a method of risk mitigation has magically turned into private property.