A recent case in the US Supreme Court, Alice Corp. v CLS Bank International, has clarified when business methods and computer software can be registered as patents in the United States.
Under US patent law, anyone who “invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof" can apply to register a patent. This is very wide and there is no statutory exclusion for computer programs or other business methods "as such". However the US courts have long held that laws of nature, natural phenomena, and abstract ideas are not patentable inventions.
The main question raised under the Alice case was whether a computer system for mitigating "settlement risk" was eligible for patent protection under US patent law. In short, the US Supreme Court unanimously determined that no, this was not a patentable invention as these patent claims merely cover an abstract idea.
What do the Alice patents cover?
The Alice patents cover a scheme for mitigating “settlement risk": the risk that only one party to an agreed financial exchange will perform its obligations. In particular, the patent claims are designed to facilitate the exchange of financial obligations between two parties by using a computer system as a third-party intermediary. The patents covered a method for exchanging financial obligations, and a computer system and code to carry it out.
In short, the software created a "shadow" ledger, enabling a financial institution to keep track of obligations owed between different counterparties to transactions. The institution can then keep track of the balances of obligations owed, so that transactions can be processed only if the shadow ledger indicates sufficient resources to satisfy the obligations.
In essence, this is a software implementation of the concept of intermediated settlement: two counterparties conduct a transaction through a third party; the third party ensures that both counterparties perform their obligations; otherwise the transaction is not processed.
Why are these claims not patentable under US law?
The US Supreme Court held that the concept of intermediated settlement was "a fundamental economic practice long prevalent in our system of commerce". In other words, the idea behind the software was not new, and was therefore not patentable.
It is possible to take an old idea and implement it in an inventive way, so that a new patentable invention is created. However, since the method of implementing intermediated settlement in software required only generic code, the particular system for which a patent was claimed also failed. In essence, the Supreme Court held that the claimed patent was for a simple implementation of the concept of intermediated settlement, and could not therefore be allowed:
"…the relevant question is whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer. They do not."
Rather, the function performed by the computer at each step of the process was "purely conventional", and did not add anything new. There was nothing new in the software or the computer system, beyond the fact that they were implementing the long-established idea of intermediated settlement. For those reasons, the patent claims failed.
Although the US has traditionally been seen as more willing to grant software patents than European patent authorities, this case confirms the applicability on both sides of the Atlantic of the basic rule: "an idea itself is not patentable". It is the implementation of an idea that can be protected by patent, so long as the implementation itself meets the requirements of "an invention".
In the UK, patents for software and business methods are not granted, unless there is some other "technical effect" within the invention as a whole. In practice, it is difficult to obtain software and business method patents and other types of protection, including confidentiality and encryption, are often used to protect the value of software.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2014. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
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