Every few months or so, whether I’m asked directly or online chatter picks up, the question of software patents comes up and more often than not, it’s in the context of software startups. There’s no question that patents apply to software and as a general matter, intellectual property is an important concern for all software companies; whether in the startup phase or more firmly established over a number of years. In this column, although I’ll briefly explain what patents are and how they apply to software, I’m going to emphasize why999 out of 1,000 times, patents most likely don’t apply to software. This may be surprising to you because history has indicated otherwise. In 1997, for instance, Amazon was granted a patent for one-click purchases: http://patft1.uspto.gov/netacgi/nph-Parser?patentnumber=5960411. For many, including myself, the one-click patent is the poster child for improperly granted software patents. For reasons I’ll discuss in a moment, had that patent been applied for today, it would likely be denied.

A word of caution: Unlike most of my legal columns where I tend to avoid legalese and case citations, that’s not the situation here. I’m going to nerd-out a bit on the case law as to software patents because although much has been written about software patents and related intellectual property ownership rights, nobody has really spelled out three important points: (1) Why software and its related business processes are patentable subject matter, (2) how we got into the mess of software patents and the related phenomenon of patent trolls, and (3) how the problem appears to have been fixed.

As a point of personal pride, this is the first article I’ve written since my youngest son Reginald Keith was accepted into law school; one of his choices is my alma mater, Rutgers Law School. I dedicate this article to Keith and wish him well as he graduates this May from Penn State. Very soon, he begins the grind of law school, where, I’m sure, he’ll be an unqualified success and in the years to come will far surpass whatever accomplishments I’ve made in the legal profession.

DISCLAIMER: This and all Legal Notes columns should not be construed as specific legal advice. Although I’m a lawyer, I’m not your lawyer. The column presented here is for informational purposes only. Whenever you’re seeking legal advice, your best course of action is to always seek advice from an experienced attorney licensed in your jurisdiction.

Patents in General

A patent is a form of an intellectual property right from a governmental authority that grants the right to exclude others from making, using, or selling an inventionfor a limited time. Unlike other intellectual property rights, copyrights, and trademarks that grant affirmative rights for you to do something such as copying, using, distributing, selling, etc., a patent is different in that it grants you the right to exclude others from making, using, or selling your invention.

Briefly, a copyright is the exclusive right to copy, print, publish, perform, film, distribute, etc. a creative work such as a book, article, song, movie, painting, etc. A trademark is a word(s) or symbol(s) used to represent a product or company. To differentiate the three, let’s use an Apple computer as an example. For Apple’s products and packing, patents for both utility and design apply. The Apple logo and name (its brand) are protected by trademark. And finally, Apple’s website is protected by copyright.

There’s a fourth intellectual property class known as a trade secret. A trade secret, as the name indicates, is a secret process or technique used by a company to manufacture products or provide services. Famous trade secrets are the Coke Formula, Kentucky Fried Chicken’s 11 herbs and spices, and Google’s search algorithms.

Patent Requirements

To get a patent, you must satisfy two important requirements. The first is having something that is patentable. This is known as patentable subject matter. The second, assuming that what you’re dealing with is patentable subject matter, is that you must satisfy the conditions of patentability. This is known as novelty and non-obviousness.

What is an invention for patent purposes? In the United States, this is codified under 35 U.S. Code § 101 (https://www.law.cornell.edu/uscode/text/35/101). Patentable subject matter is a new useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof. Things that occur naturally in nature are not patentable. Abstract ideas are not patentable.

In the United States, the patent term is 20 years from the earliest filing date of the application upon which the patent is granted. To calculate an exact date, the United States Patent and Trademark Office (USPTO) provides a calculator that you can download: https://www.uspto.gov/sites/default/files/documents/patent_term_calculator.xls. In 2013, the United States joined most of the rest of the world when it switched to being a first-to-file from a first-to-invent jurisdiction. This switch occurred with the enactment of the America Invents Act. As you will soon learn, this act has provided mechanisms that make it more difficult to acquire software-based patents.

Patentable subject matter is a new useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.

What does it mean that an invention or the improvement to the invention must be novel and non-obvious? Novelty is about being new in that it isn’t covered by prior art, whether covered under patent or in the public domain. The requirements for novelty are defined in 35 U.S. Code § 102 (https://www.law.cornell.edu/uscode/text/35/102). As for non-obviousness, this is often referred to as the inventive step, meaning that a person having ordinary skill in the art (PHOSITA) wouldn’t or couldn’t have come up with the same solution. If something would be obvious to a PHOSITA, which are the traits of a mythical person for legal analysis purposes, although what you have may be patentable subject matter and is novel, you won’t have satisfied the conditions promulgated under the law. The requirements for non-obviousness are defined in 35 U.S. Code § 103 (https://www.law.cornell.edu/uscode/text/35/103). As it turns out for patents related to software, it’s this inventive step that has been focused upon to invalidate software patents.

How Patents Apply to Software

Applying what you know about patents based on what’s defined as patentable subject matter in the US per 35 U.S. Code § 101, a business process is eligible to be patented. It’s not entirely accurate to say that the software itself is patentable. The code, as it appears on screen in an IDE, is itself the subject of copyright. What the code does when executed, that’s the stuff of patents because that’s a business process or method. At its heart, software is how business processes are implemented.

It’s not enough to look at the statute’s text. You also have to look at how a statute is applied. In this context, there are several important Supreme Court of the United States (SCOTUS) cases:

  • Gottschalk v. Benson (409 U.S. 63) (1972): This case stood for the proposition that an abstract idea could not be patented. It held that the numerical algorithm under examination was not patentable becausethe patent would wholly pre-empt the mathematical formula and in practical effect, be a patent on the algorithm itself. The case left open the door that an algorithm (software) under the right circumstances could be patentable subject matter under 35 U.S. Code § 101. https://supreme.justia.com/cases/federal/us/409/63/case.html
  • Parker v. Flook (437 U.S. 584) (1978): This case held that an invention, assuming it to be different from prior art based on the use of a mathematical formula, would only be patentable ifthe invention was novel and non-obvious (35 U.S. Code § 102 and 103 respectively). https://supreme.justia.com/cases/federal/us/437/584/case.html
  • Diamond v. Diehr (450 U.S. 175) (1981): This case held that a physical process controlled by a computer (software) did not preclude patentability. The Diamond case applied both the Gottschalk and Parker cases. https://supreme.justia.com/cases/federal/us/450/175/case.html .

These three cases (Gottschalk, Parker, and Diamond) set forth an important test for whether a business process is patentable. This test is known as the Machine or Transformation Test. The three cases are collectively known as the patent eligibility trilogy.

Fast Forward to 1998: State Street and the Software Patent Glut

The United States Court of Appeals in 1998 decided the case of State Street Bank & Trust Co. v. Signature Financial Group, Inc. (149 F.3d. 1368) (http://law.justia.com/cases/federal/appellate-courts/F3/149/1368/560460/). The State Street case applied Gottschalk, Parker, and Diamond and then held that a patent is eligible for protection if it involved some practical application and it produces a useful, concrete, and tangible result. This case applied 35 U.S. Code § 101. The State Street case had the practical effect of making business process patents easier to acquire because along the way, the requirements under 35 U.S. Code § 102 and specifically 103 for non-obviousness, were assumed to be satisfied if the subject matter involved a computer.

It’s important to note two important points. First, the SCOTUS did not hear or review the State Street Case. Second, the Federal Circuit is the circuit that hears patent appeal cases. Therefore, although the State Street case wasn’t decided by the SCOTUS, the Federal Circuit’s decision was binding as if that were the case. The following year, Amazon was granted its one-click patent along with a glut of business process software patents that left technology and the intellectual property community scratching their heads. It also gave birth to that universally reviled creature: the patent troll! As you may have already surmised, the State Street case was a widely criticized decision, both in business and academic circles.

Some Hope in 2006: eBay v. MercExchange, LLC (547 U.S. 388) (2006)

For the purposes of this article, the 2006 eBay SCOTUS case (https://supreme.justia.com/cases/federal/us/547/388/opinion.html) isn’t relevant for its holding, which was about the standard of review to apply when adjudicating a patent injunction case. What’s of interest for the purpose of this article is Justice Anthony Kennedy’s concurring opinion where he remarked about the increasing number of business method patents where there was "Potential vagueness and suspect validity." What Justice Kennedy was saying to his follow justices and the Federal Circuit (in the opinion of this author) was "Hey, we’re getting a lot of petitions for certiorari to review patents that, from this non-technical justice’s purview, appear to be improperly granted." Patents are, in general, highly technical matters that the SCOTUS would be quite happy if the Federal Circuit would deal with correctly. There’s a reason why for over a decade the SCOTUS didn’t deal with the question of software patents—they hoped the Federal Circuit would clean up the mess.

A certiorari is an order for a higher court to review the decision made by a lower court.

2008: Bilski—The Federal Circuit Tries to Clarify State Street

In 2008, the Federal Circuit took another crack at fixing the mess it created with State Street in the case of In Re Bilski (545 F.3rd 943) (2008) (http://law.justia.com/cases/federal/appellate-courts/cafc/07-1130/07-1130-order-2011-03-27.html) where the court held that the "Useful, concrete, and tangible test articulated in State Street should no longer be relied upon." The court went on to hold that "A method claim is surely patentable subject matter if (1) it is tied to a particular machine or apparatus and (2), it transforms a particular article into a different state or thing." As you’ll see in the next section, the SCOTUS wasn’t entirely impressed and therefore, had to clarify the Federal Circuit’s opinion.

2010: The SCOTUS Attempts to Clean Up the Federal Circuit’s Mess with Bilski v. Kappos (561 U.S. 593)(2010)

Eventually, Bilski made its way to the SCOTUS (https://supreme.justia.com/cases/federal/us/561/08-964/). The SCOTUS affirmed the Federal Circuit’s case in Bilski, but went on to hold that the machine or transformation test is not the only way to determine patent eligibility, but rather, it’s a useful tool. If you’re thinking that this opinion from the SCOTUS is as useful as the paid consultant’s advice of "It depends," you’d be right. This is why I say "attempts."

In the 11 years after State Street, for all practical purposes, we were in no better shape to deal with the problem of software patents. What we expect from the courts is to provide clarity, but both the Federal Circuit and the SCOTUS came up woefully short. You may have heard this before. Now, you know why.

2011: Congress to the Rescue with the America Invents Act? Yes!

The question mark in the heading is a bit tongue-in-cheek because it’s rare, in today’s day and age, for Congress to solve problems. With the Leahy-Smith America Invents Act, even the harshest critics of Congress would have to agree that in this case, Congress made things better. To understand why, you have to take a few steps away from legislation and go back to the U.S. Constitution. Specifically, you need to look at the source of authority on patents that can be found in Article I, Section 8, Clause 8 and which reads:

To promote the progress of science and useful arts, by securing for limited times to authors and inventorsthe exclusive right to their respective writings and discoveries.

The authority to grant patents in the US is founded in, of all things, the Copyrights Clause of the U.S. Constitution. The emphasized parts relate to patents. The "useful art" expression is where we get the phrases "state of the art" and "prior art." The "progress of science" relates to authors and their writings and that’s the subject of copyright.

The most important point is where in the Constitution this authority is promulgated. It’s in Article I, which sets forth among other things, the Congress, which has the primary responsibility, as representatives of the people, to create laws. Article II creates the Executive Branch, which has the primary responsibility to administer and enforce the law. Finally, Article III is the Judiciary, which is responsible for interpreting the law. The SCOTUS, as an Article III entity, in addition to signaling to Federal Circuit, was also signaling to Congress, another branch of government, to fulfill its obligations under Article I and specifically, the copyrights and patents clause in this case. Congress’ answer was the Leahy-Smith America Invents act of 2011.

In addition to transforming the US from a first-to-invent to a first-to-file jurisdiction, the American Invents Act gave rise to a procedure known as Inter Partes Review. Inter Partes Review is a procedure that challenges the validity of a patent. This is an administrative proceeding, as opposed to a formal judicial trial, and translates into a faster hearing dates and lower costs. This Inter Partes Review process is a direct result of the problems since 1999 with software patents; although the review applies to any patent, regardless of subject matter.

Post America Invents Act Decisions (Alice, Mayo, and Cuozzo)

In 2014, the SCOTUS decided on Alice Corp. v. CLS Bank International (134 S.Ct. 2347) (https://supreme.justia.com/cases/federal/us/573/13-298/opinion3.html). The court held that "Merely requiring generic computer implementation fails to transform an abstract idea into a patent-eligible invention." In other words, just having code run on a computer is not enough to satisfy the non-obviousness requirements in 35 U.S. Code § 103.

It’s important to note that litigation in this case dated back to 2007. In the intervening time, Bilski was decided and another important case: Mayo Collaborative Services v. Prometheus Laboratories, Inc. (132 S.Ct. 1289)(2012) (https://supreme.justia.com/cases/federal/us/566/10-1150/opinion3.html) was also decided. In the Mayo Case, a two-step test was created to analyze individual claims within a patent. In the first step of the test, the court has to determine if the claim contains an abstract idea, such as an algorithm or computation method. If not, the claim is potentially patentable. If yes, step two of the test must be applied. In step two, the court has to determine if there’s "something extra," or what’s known as the "Inventive Step." Now skip to the present. This step goes to 35 U.S. Code § 103. The Alice case applied Mayo to all patent cases, not just software and business process/method patent cases.

In 2016, the SCOTUS decided on Cuozzo Speed Techs v. Lee (136 S.Ct. 2131)(2016) (https://supreme.justia.com/cases/federal/us/579/15-446/). In Cuozzo, the SCOTUS upheld two very important points. In part (1), the Patent Trial and Appeal Board (PTAB), conducts the Inter Partes proceeding the Broadest Reasonable Interpretation (BRI) standard (https://www.uspto.gov/web/offices/pac/mpep/s2111.html) when reviewing patent claims, as opposed to plain and ordinary meaning. In part (2), the PTAB’s statutory authority to conduct a Inter Partes Review is not subject to judicial review and such decisions are not appealable to the federal courts. In other words, based on Cuozzo, the US Patent and Trademark Office (USPTO) is going to get deference from the courts. That, coupled with the Inter Partes Review and the new case law on software patents, makes it so that we (hopefully) will no longer see the problems that resulted from the ill-fated State Street decision of 1999.

Conclusion

This article’s title is "Say Goodbye to Most Software Patents." That’s not to say that software patents are per se invalid. That’s not the case. For all practical purposes, software patents aren’t relevant for most companies for two basic reasons.

First, they’re exceedingly difficult to obtain based on current criteria and are easy to challenge vis a vis Inter Partes Review. Patents should be difficult to obtain and software/business process method patents shouldn’t be any different. Under the current procedures and case law, the burden is where it should be, on the part of the patent applicant. Cases like State Street eased that burden too much. Patents provide important incentives. But taken too far, they begin to stifle innovation. And as previously stated, such a climate gives rise to patent trolls.

Second, a patent may not be a first best intellectual property option for your firm; your best option may be a trade secret instead. At the beginning of this article, I briefly discussed trace secrets. I think we all agree that Google’s search algorithms are exceptionally valuable. These are protected by trade secret, and when you think about it for a moment, it makes perfect sense.

A patent may not be your first intellectual property option for your firm; your best option may be a trade secret instead.

Patents have two important characteristics. First, they must be disclosed. For any patent, there’s no secret sauce. We know how they work. Because there are statutory protections over their use, there’s no issue with disclosure. And for things like drugs and consumer goods, etc., disclosure is a requirement. In other cases, like software services behind a firewall, disclosure isn’t required.

Second, patents are only valid for a limited time. Trade secrets have no such limitation. The only requirement is that reasonable measures are taken to keep the trade secret a secret. Reasonable measures include such devices as confidentiality and non-disclosure agreements.

The patent process is also quite expensive and lengthy and thus, typically out of reach for most companies, especially startups. Even if that weren’t the case, you still have to confront novelty and non-obviousness that are codified in 35 U.S. Code § 102 and 103 respectively. Think of the business applications you write. How much of that is novel and non-obvious such that it isn’t embodied in prior art? Most likely, none of it is. Finally, if yours is an open-source project, you end up granting patent rights, either expressly or on an implied basis. Why waste your time? If you think you have a valid patent, consult a qualified attorney to see if you’re the one-in-a-thousand case!