This post was first published on 19th September, 2014.

A thought is emerging in the US that the Alice vs. CLS decision was a game-changer and that software patent protection in the country has been seriously eroded. Let us see what happened between them and how it affects us.

Who is Alice?

Alice Corporation claims to be an innovator in financial markets. The Company has obtained patents on its innovations worldwide, including in the United States. It was founded by privately-held Alice Ventures (AV) in the early 1990s, National Australia Bank Limited (NAB) became a shareholder in 1995 and a 50% shareholder in 2000.

Who is CLS?

CLS (originally Continuous Linked Settlement) is a specialist US financial institution that provides settlement services to its members in the foreign exchange market. Since it began operations in 2002, CLS has rapidly become the market-standard for foreign exchange settlement.

What is the problem?

Alice Corporation owns four patents (08/070,13609/567,507, 10/331,331 and 11/166,387) on electronic methods and computer programs for financial-trading systems on which trades between two parties who are to exchange payment are settled by a third party in ways that reduce counterparty or settlement risk or the risk that one party will perform while the other may not. According to Alice’s account, CLS Bank began to use a similar technology in 2002. Alice notified CLS Bank of its probable infringement of Alice’s patents and the companies discussed licensing of the patents.

What was CLS’ take on this?

CLS says: The concept of a third-party to confirm a complete transaction is called Escrow, and has been used in finance for thousands of years. The patents in question described how the escrow function could be performed by a general-purpose computer. However, they did not describe how such a computer would work, and did not include any source code or specifications.

Australian Ian Shepherd received the patents in 1999, and then formed Alice Corporation to own the patent. However, Alice never produced any computer system as described in the patents or did not use the patents in any of its business. CLS, a consortium of banks, has actually developed such a computer system that it uses, to facilitate business worth US$ 5 trillion everyday.

What ensued?

Alice Corporation’s patent was alleged to be invalid under sections 35 USC 112, 35 USC 102 and 35 USC 103, but mostly under section 35 USC 101 as it was deemed to be an abstract idea.

In simple terms, the sections say:

Section 101: disqualifies abstract ideas from being patented

Section 102: requires the invention to be novel

Section 103: disqualifies patents that are tiny or insignificant in difference from existing technology or are obvious to anyone familiar with the subject

Section 112: does not allow for patents that are too vague for someone reading the application to understand

What created the stir in the industry?

There are 11 rulings in the last 3 months alone on different cases against patent holders. All these rulings might seem like common sense, but it is important to remember that every single one of these patents was examined and approved by the Patent Office. That is because until recently, this kind of an invention was considered eligible for patent protection. The Patent Office has issued hundreds of thousands of software patents over the last two decades and many of them look like this.

Circuit Judge Kimberly Ann Moore commented “If all of these claims, including the system claims, are not patent-eligible, this case is 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.”

Are all software patents in danger?

This doesn’t necessarily mean that all software patents are in danger – these are mostly patents that are particularly vulnerable to challenge under the new Alice precedent. But it does mean that the pendulum of Patent Law is now clearly swinging in an anti-patent troll direction. Every time a patent gets invalidated, it strengthens the bargaining position of every defendant facing a lawsuit from a patent troll.

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