May 15, 2013 | By Daniel Nazer

What's At Stake in CLS Bank—Do Software Patents Hold Up The Sky?

Last week’s big decision in CLS Bank v. Alice saw a divided Federal Circuit tackle the patentability of software. Five judges voted to strike down patent claims to a “computer system” programmed to implement a financial transaction. But five judges would have upheld the claims. With the case seemingly headed to the Supreme Court, what’s at stake?

The key question in CLS Bank was whether an abstract idea (such as using an escrow agent as part of a financial transaction) can be patented if, instead of claiming the idea itself, the applicant claims a computer system that implements the idea. (Of course, the law precludes patent protection for laws of nature, natural phenomena, and abstract ideas.) In a thoughtful opinion by Judge Lourie, five members of the Federal Circuit held that merely “appending generic computer functionality” to an otherwise abstract concept is not enough to make it non-abstract, or somehow patentable.

The other members of the court reacted to this suggestion with alarm. Warning of a “free fall of the patent system,” Judge Moore wrote:

Let’s be clear: if all of these claims, including the system claims, are not patent-eligible, this case is the death of hundreds of thousands of patents, including all business method, financial system, and software patents as well as many computer implemented and telecommunications patents.

Perhaps more significantly, Judge Moore claimed that this “would decimate the electronics and software industries.” These are dramatic claims. But will the sky fall if we get rid of abstract software patents?

It is important to realize that software patents and the software industry are not the same thing. As Judge Moore’s own scholarship shows, patent issuance is “a poor measure of innovation value.” And there are straightforward economic reasons why patents and software are a bad fit. Far from being an incentive, software patents tend to operate as a barrier to entry and a tax on innovation. As Bill Gates wrote back in 1991: “If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today.”

Recent events in New Zealand confirm that the software industry does not need patents. With the strong backing of its IT community, the NZ government is clarifying its law to ensure that software is not patentable. It will add the following language to its patent act:

(1) A computer program is not an invention and not a manner of manufacture for the purposes of this Act.(2) Subsection (1) prevents anything from being an invention or a manner of manufacture for the purposes of this Act only to the extent that a claim in a patent or an application relates to a computer program as such.(3) A claim in a patent or an application relates to a computer program as such if the actual contribution made by the alleged invention lies solely in it being a computer program.

The head of NZ’s largest software company welcomed the move, explaining that “software patents are counter-productive, often used obstructively and get in the way of innovation."

Almost 20 years ago, in a case called In Re Alappat, the Federal Circuit held that an algorithm implemented in a general-purpose computer is patentable. That case opened the floodgates to software patents, which, in turn, have led to the rise of the patent troll. Software patents by their nature are vague and often broad, giving trolls a powerful tool to use to threaten lawsuits and demand licensing fees. More often than not, these trolls neither make nor sell anything, but are quite successful at shaking down creators and creating a chilling effect on innovation. There’s great momentum lately to fix the troll problem, but, to be sure, the root of that problem is software patents themselves.

Ultimately, we hope the United States Supreme Court will decide that Section 101 of the Patent Act does not allow for abstract ideas to become patentable simply by implementing these ideas in a general purpose computer or on the Internet. There is no reason to fear that such a ruling would decimate the software industry. To the contrary, it would more likely remove a barrier to innovation.

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