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The Alice Decision and Its Fallout in the U.S.

September 25, 2018

In most of the world, software can’t be patented unless it’s an element within a hardware device or system. The U.S. was a rare exception to this rule until June 2014, when the U.S. Supreme Court ruling in Alice Corp. v. CLS Bank (Alice) sent software patents straight down the rabbit hole. It’s been more than four years since Alice and the dust still hasn’t settled. In the interim, the confusion has spread to other types of patents. Here’s how it happened:

U.S. Code 35 § 101

Section 101 of Title 35 is just a paragraph within U.S. patent law, but it is critically important because it defines what can be patented, saying: “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.” However, there are three notable exceptions to the rules under § 101. Patents cannot be granted for:

  • laws of nature
  • natural phenomena
  • abstract ideas.

Defining the exceptions

The meaning of these terms might seem fairly obvious, but the Supreme Court has never supplied concrete definitions, and different understandings have caused chaos in recent years. According to the Iowa Law Review, “Virtually no cases or legal scholarship have focused on what these terms mean in a scientific or philosophical context — that is, what science considers to be a ‘law of nature,’ whether a phenomenon is ‘natural,’ or when a product is ‘of nature.’”

As a result, there is a disconnect between what the three exceptions seem to mean and what they mean to the U.S. Patent and Trademark Office (USPTO) and the courts. The courts have even ruled that there are some additional exceptions that inhabit places between the three official ones. (“Disembodied concepts” and “disembodied algorithms and formulas,” for example, land somewhere between laws of nature and abstract ideas.)

Landmark Supreme Court cases

Software has been patentable in the U.S. since the Bilski v. Kappos Supreme Court ruling in 2010. At that time, the court declared that software was patentable if it met the “machine-or-transformation test,” a principle dating back to an 1876 Supreme Court decision about the patentability of a specific process for making flour. The machine-or-transformation test says that a process can be patented if it is tied to a particular machine or it transforms a particular article into a different state or thing.

However, things became unclear when it came to patenting processes in biotechnology. For example, in a 2012 patent infringement lawsuit between Mayo v. Prometheus, the Supreme Court issued a ruling against the patentability of a specific diagnostic test for the treatment of certain autoimmune diseases. “Prometheus’ patents set forth laws of nature—namely, relationships between concentrations of certain metabo­lites in the blood and the likelihood that a dosage of a thiopurine drug will prove ineffective or cause harm,” the court said, and rejected Prometheus’ patents because they documented “entirely natural processes.”

Those who supported the 2012 ruling felt it freed doctors to do their jobs without fear of being sued for infringement. Critics, on the other hand, feared the results of the decision. Gene Quinn of IP Watchdog exclaimed, “The sky is falling!” and worried that “an enormous number of patents will now have no enforceable claims” and that “hundreds of billions of dollars in corporate value has been erased.”

In 2013, another landmark patent case made headlines – Molecular Pathology v. Myriad Genetics. This one reversed several 20-year-old patents owned by Myriad Genetics. Back in 1994, the medical company had patented its discovery of the two breast cancer genes now known as BRCA1 and BRCA2, as well as several related diagnostic tests. In 2013, the Supreme Court invalidated those patents because Myriad Genetics did not create anything. The identification of the BRCA gene sequences, while scientifically significant, was determined insufficient to form the basis of a patent.

The Myriad ruling reinforced the lesson from Prometheus – merely identifying an existing natural phenomenon is not patentable. Subsequently, the USPTO instructed its examiners to be more stringent about claims involving laws of nature and natural phenomena. (They didn’t mention abstract ideas.)

Alice through the looking glass

In 2014, Alice Corporation held four patents for financial trading systems in which the risk of non-payment for the buyer and seller were mitigated by a third party, who essentially held payments in escrow. When CLS Bank started their own similar service, Alice sued them for infringement. CLS countersued, alleging that Alice’s patents were invalid.

The Supreme Court agreed. It held that “the claims at issue are drawn to the abstract idea of intermediated settlement, and that merely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention.”

The problem is that the court didn’t specify what would make it patent-eligible – only that for an invention to qualify for a patent, it had to deliver something “significantly more” than an abstract idea.

After Alice, USPTO examiners got much tougher and the number of rejected software patent applications skyrocketed. By August 2015, § 101 rejections made up 15% of all denied applications, more than double the 7% prior to Alice.

However, software applications are only a small part of USPTO submissions. Business method patent applications have been affected even more, with § 101 rejections growing from 31% to 82%. It’s also been estimated that hundreds of previously granted software patents have been invalidated in the wake of Alice, and there have been dozens of patent-court appeals, with very few resulting in the reinstatement of patents.

Going forward

The USPTO continues to release examiner guidance in hopes of clarifying what “significantly more” means. In the meanwhile, some people like David Kappas, former director of the USPTO, feel that it’s time to abolish § 101 altogether.

As time goes on, applicants, lawyers and courts continue to try and make sense of Alice. Some recent cases offer hope that things are getting a bit more reasonable and nuanced, evidenced by three invalidated software patents that were reinstated in 2016 by the U.S. Court of Appeals for the Federal Circuit.

However, the future remains unclear and, as new technologies improve with time, important decisions will need to be made about the relevant intellectual property. It leaves many of us wondering: how long can a patent system that was developed to handle traditional inventions continue to function in the 21st century without a major overhaul?