Supreme Court: You can patent software, but only if it's 'transformative'

The court's ruling in Alice Corp. v. CLS Bank International finds no "innovative concept" in a system for hedging risk in financial transactions based on a shadow intermediary account that determines each party's likelihood of nonpayment.

Software patent holders are breathing a sigh of relief following the Supreme Court's decision in Alice v. CLS Bank. All that is required for a patent based on an "abstract idea," such as Alice's intermediated-settlement system for approving financial transactions, is that the idea be new and "transformative."

The court ruled that Alice's method, system, and media claims were all ineligible for patent under federal statute 35 U. S. C. § 101. Alice's claims are based on abstract ideas, according to the court. They simply describe a method for performing an established business practice: hedging risk in financial transactions by using an intermediary.

What are the chances that a party engaged in a financial transaction will not pay what they owe? Alice's process for determining the risk creates a "shadow" account to mirror the party's real account and update to match that account as the balance changes in real time. Based on the results, it determines how able the party is to pay what they promised. Literally at the end of the day, the system alerts financial institutions about the transactions that are "permitted" based on the shadow account.

Use of a computer to carry out operations in a specific order does not all by itself make the process patent-eligible. You have to improve the performance of the computer or otherwise "transform" the natural material or abstract idea in a productive way. (Diamond v. Diehr, 1981, 450 U. S. 175, 188.)

Or as the Supreme Court explained it in a recent case, you have to transform the building blocks of "human ingenuity" into "something more" (Mayo Collaborative Services v. Prometheus Laboratories, Inc., 2012, 566 U. S. ___). In its 2013 decision in the Alice case, the U.S. Court of Appeals for the Federal Circuit used the term "significantly more" (717 F. 3d 1269, 1286). The failure to transform is what invalidates the patents for the Alice process based on all three of the patent claims:

(1) a method for exchanging financial obligations,
(2) a computer system configured to carry out the method for exchanging obligations, and
(3) a computer-readable medium containing program code for performing the method of exchanging obligations

Some things you just can't patent

35 U. S. C. § 101 has an implicit exception: “[l]aws of nature, natural phenomena, and abstract ideas.” (Association for Molecular Pathology v. Myriad Genetics, Inc., 2013, 569 U. S. ___, ___ (slip op., at 11))

The court applies the two-step test used in Mayo. First, the court asks whether the patent claim falls under one of 101's exceptions. If it does, the court looks for an "inventive concept" that transforms the exception into something patent-eligible.

Here the Supreme Court ruled that "the concept of intermediated settlement is ‘a fundamental economic practice long prevalent in our system of commerce.’” (Bilski v. Kappos, 2010, 561 U. S. 593, 611.) That qualifies Alice's method as an abstract idea, just as the court ruled on the risk hedging in Bilski.

The second step in Mayo is asking whether the patent claim is more than just a reorganization of existing processes. Where's the innovative transformation that makes it patent-eligible? In Mayo, the process for monitoring and adjusting a drug dosage for an auto-immune disease merely instructed doctors treating the disease to follow "applicable laws."

In Diehr, the patent was based on use of a sensor to monitor the internal temperature of rubber as it was cured. The rubber-curing process itself was established in the industry, but no one had thought of using a thermocoupler inside the mold to send internal-temperature measures to a computer that calculated the required cure time based on the real-time temperature information. The Diehr  innovation was transformative, so the court ruled the process was eligible for a patent.

Alice claimed that because its intermediated-settlement process was so computer-intensive, it was transformative. But the Supreme Court ruled that the process did not represent any improvement, either to the computer systems themselves, or to any other "technology or technical field." It merely described how to combine existing intermediated-settlement steps in a particular order on a generic computer. The court asked: What's new about that?

Just as with Alice's method claim, the lack of anything innovative or transformative rendered the company's system and media claims unpatentable.

By focusing on patent eligibility, the court side-stepped the novelty, non-obviousness, and prior-art requirements of §§ 101, 102. and 103. According to Michael Borella on the PatentDocs blog, the decision blurs the distinctions between those statutes. The Alice decision continues a trend begun in Limelight Networks, Inc. v. Akamai Technologies, Inc. and Nautilus, Inc. v. Biosig Instruments, Inc., according to Borella. He claims there will now be "new avenues for challenging the validity of patents."