Software patents are absolutely essential for America’s technology sector—or they are choking that sector to death. Experts vehemently disagree on which view is correct. So do executives running hardware, software and Internet businesses. Judges have been just as confused, and not just about the economic value of these software patents. They have been unable to agree on which software patents (if any) are valid, and which should be struck down as unpatentable “abstract ideas.” That’s why so many businesses and their patent counsel were eagerly awaiting the Federal Circuit’s en banc decision in CLS Bank Int’l v. Alice Corp. The court was tackling this issue of patent eligibility head on, aiming to bring much-needed clarity to this area of the law.

Alas, that didn’t happen. On May 10, when the Federal Circuit issued its decision in CLS, the court revealed that it was as confused as everyone else. The 10 judges issued five opinions and one set of “additional reflections,” none of which garnered majority support. Instead of specifying a standard for patent-eligible computer-related inventions, “we have propounded at least three incompatible standards, devoid of consensus,” wrote Federal Circuit Judge Pauline Newman.

The court’s action “confused the issue even more,” said Prof. Lee Hollaar of the University of Utah, author of the book, Legal Protection of Digital Information. “This threw a cloud over tens of thousands of issued patents.”  As a result, businesses throughout the nation will face more uncertainty about what computer-related technology can be patented; they will spend more time and money fighting about this court; and they will be unable to predict what the results of their legal battles will be.

Flexible Test

The patents at issue in this case claimed a computer-implemented version of escrow, enabling a trusted third party to verify, before a deal closed, that both parties in a financial transaction could uphold their ends of the deal: The seller could deliver the securities, and the buyer could pay for them. Alice’s patents claimed methods of verification (method claims), software on computer-readable media instructing computers to perform the verification (computer-readable media claims), and computer systems configured to perform the verification (system claims).

By a 7-3 vote, the Federal Circuit struck down Alice’s method claims and computer-readable media claims, holding they covered little more than abstract ideas (about escrow), which are not patent-eligible subject matter. The court split 5-5 over whether the system claims were also mere abstract ideas, but this was sufficient to uphold the district court’s decision striking down these claims.

Judge Alan Lourie authored the Federal Circuit’s plurality opinion, which was supported by five judges. Lourie applied a flexible, fact-based test that, in his words, “turns primarily on the practical likelihood of a claim preempting a fundamental concept.”  In order for a claim to cover patent-eligible subject matter, he stated, the claim must “not be coextensive with a natural law, natural phenomenon, or abstract idea.”  The claim “must include one or more substantive limitations that … add ‘significantly more’ [human invention] to the basic principle, with the result that the claim covers significantly less [than the entire principle].” 

Federal Circuit Judge Kimberly Moore vigorously objected to this standard, warning it would result in “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.”  Moreover, she wrote, Lourie’s standard “would render ineligible nearly 20 percent of all the patents that actually issued in 2011. … [And] this is quite frankly a low estimate.”

New Nightmare

The Federal Circuit’s decision in CLS is a nightmare for businesses and their patent counsel. The court has cast doubt on a vast number of patents, without providing a clear standard for determining whether any of these patents are valid.

“What businesses hate most is uncertainty, and now if someone asserts a [computer-related] patent, no one knows if the patent is valid,” Hollaar says.

The ruling thus will encourage accused infringers to challenge the validity of computer-related patents. It also will increase companies’ willingness to trespass on their rivals’ patents, because those patents may be invalid. The net result for companies will be lots of litigation and higher legal costs.

Some business sectors will suffer more than others. “The financial services industry will take the biggest hit, then ecommerce, online shopping, and the ad-serving business,” says Robert Sachs, a partner at Fenwick & West.

However, all types of companies will be hurt. “All businesses use software and computers,” Hollaar says, noting that even gas stations use computerized gas pumps.

Call to Congress

The confusion over computer-related inventions can’t go on forever. The issue is too important to both the law and the U.S. economy.

Congress could clarify the law. “If businesses put pressure on Congress, pointing out the wide-ranging nature of this problem and its importance to the economy, Congress would act,” Hollaar says. He adds that “ IP issues are nonpartisan,” so an amendment to the patent law could well get through the usually deadlocked legislature.

Unfortunately, the business community can’t agree on what Congress should do. Companies disagree strongly about which computer-related inventions should be patent-eligible. With the business community at odds with itself, Congress is unlikely to act anytime soon.

The Federal Circuit could yet resolve matters. “The new judges being added to this court could provide the swing votes,” says David Long, a member of Dow Lohnes.

But because the Federal Circuit is now so split, many experts expect the Supreme Court to step in. “This is a key issue of patent-eligibility, and some of the Federal Circuit judges in CLS asked for the Supreme Court’s guidance,” Long says. He adds that if Alice files a cert petition (as many observers anticipate), there is “a strong likelihood that the Supreme Court will take this case.”