It’s often hard to recognize the evolving nature of legal regimes amidst the fast-paced and so-called revolutionary social and technological changes facilitated by digital and networked technologies. Laws, norms, and conventions developed over centuries are being problematized and rethought as new social, technological, and economic realities emerge. Computer software, a technology that’s mainstream adoption is but some three decades old, is arguably challenging the contours of patent regimes, which the innovation and economies of many states are built upon. The Supreme Court of the United States’ (SCOTUS) recent decision in the case of Alice Corp. Pty. Ltd. v. CLS Bank International, et al has moved the United States’ legal system one step closer to accounting for new, digitally-based business practices.
As Barry Sookman, partner with McCarthy Tétrault in the Toronto office and a Member of the IPOsgoode Advisory Board, neatly summarizes, “Patent law is based upon the social and economic rationale of balancing encouraging innovation and the avoidance of monopolies which can stifle competition.” In general, these principles have been extended into the realm of software as a means of rewarding and protecting the fruits of the inventor's labour in the hopes of stimulating and fostering further advances and discoveries through public disclosure mechanisms. Patents, and software patents, are, therefore key elements of the contemporary economic system.
However, while software may be generally similar to other types of inventions, the nature of software industries and software itself make the application of existing patent laws somewhat problematic. Economist and former Non-Resident Fellow at the Brookings Institute Ben Klemens argues, in Math You Can’t Use, that there are three dissimilarities that must be recognized when dealing with software: 1) detailed descriptions of a software often constitute the program itself, making it hard to distinguish between ‘ideas’ and ‘implementation’; 2) software are pieces of mathematics, which courts agree are not patentable; and, 3) software is written and produced by vast categories of users and programmers, making restrictions to competition problematic (at pp. 4-5).
These three issues entail disproportionate levels of competitive and monopolistic advantage to whoever acquires a patent right first. For example, a patent holder is able to extract burdensome rents from a competitor who wishes to build off of the works of others or create interoperable technologies based on previously existing patented discoveries.
In Alice Corp. Pty. Ltd. v. CLS Bank International, et al the SCOTUS was tasked with determining whether the patents at issue in the case, held by Alice Corps', were eligible for patent protection or whether they were simply ‘abstract ideas’.
The case centered around a computerized process for limiting “settlement risk” during financial exchanges between two parties by employing a computer system as a third-party intermediary. This 'third-party' creates and tracks digital account ledgers that mirror the balances that the exchanging parties hold in their ‘real-world’ accounts in order to determine whether or not a given transaction can be processed and supported by the parties' assets. As the SCOTUS decision states, "In sum, the patents in suit claim (1) the foregoing method for exchanging obligations (the method claims), (2) a computer system configured to carry out the method for exchanging obligations (the system claims), and (3) a computer-readable medium containing program code for performing the method of exchanging obligations (the media claims)".
In 2007, CLS Bank filed suit against Alice Corps in the hopes of obtaining a declaratory judgment that the patents at issue were invalid and, therefore, not infringed by CLS Bank’s use of a similar business practice. Following a SCOTUS decision in 2010, Bilski v. Kappos (561 US 593), the parties filed cross-motions for summary judgments on whether the patents were eligible under the 35 U.S.C. § 101.
Section 101 of the Patent Act defines patents as eligible for: “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 to the conditions and requirements of this title” (35 U. S. C. §101). However, since 1972, the SCOTUS has held that "abstract intellectual concepts are not patentable” (Gottschalk v. Benson, 409 U. S. 63, 67). As recently as 2011, in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 US, the Court has upheld this principle out of concern that “patent law not inhibit further discovery by improperly tying up the future use of laws of nature” (Mayo, 566 US 16).
Using the two-part test set out in Mayo, the Court found that “because petitioner’s system and media claims add nothing of substance to the underlying abstract idea, we hold that they too are patent ineligible under §101” (Alice Corp., 573 US 17). In the concurring statement Justice Sotomayor, joined with Justices Gisburg and Breyer, agreed that “any claim that merely describes a method of doing business does not qualify as a ‘process’ under §101’” (Alice Corp., 573 US 1). The Court found that “there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediated settlement at issue here. Both are squarely within the realm of ‘abstract ideas’ as we have used that term” (Alice Corp., 573 US 10).
The decision in Alice Corp. Pty. Ltd. v. CLS Bank International, et al is careful not to extend this principle too far, which would run the risk of making all software patents ineligible. The Court recognizes that “an invention is not rendered ineligible for patent simply because it involves an abstract concept” (Alice Corp., 573 US 6). Applications of abstract ideas that are “to a new and useful end” (Alice Corp., 573 US 6) remain eligible for patent protection.
The SCOTUS decision in this case represents another step in the evolution of American intellectual property laws, in commercial contexts, in adapting to new technological and social circumstances. The Court has not defined what types of software and business practices are eligible for patent protection. Instead, it has reaffirmed long-standing principles about what types are not: those that monopolize the building blocks of human knowledge and invention, such as abstract ideas, and prevent further innovation.
In doing so, the decision in Alice Corp. Pty. Ltd. v. CLS Bank International, et al is another precedent in favour of competitive markets and the avoidance of the deleterious affects of excessive rent-seeking by patent holders that make overly broad claims on the tools necessary for human development and innovative creations.
Joseph F. Turcotte is an IPilogue Editor, a PhD Candidate and SSHRC Doctoral Fellow in the Communication & Culture Program (Politics & Policy) at York University, and a Nathanson Graduate Fellow at the Jack & Mae Nathanson Centre on Transnational Human Rights, Crime and Security at Osgoode Hall Law School.