Since the United States Supreme Court first addressed the patentability of computer software in Gottschalk v. Benson, the law surrounding the patentability of software has changed considerably, leaving many to wonder whether software is in fact patentable at all. Originally in Benson, the Supreme Court decided that software was not patentable, but then later retracted the blanket prohibition against patenting software. The Federal Circuit then spent the better part of two decades trying to figure out under what circumstances software (or computer-related processes) should be patentable. This seemed to culminate in the 1998 ruling of the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group, Inc. Unfortunately, the waters were once again made murky as a result of the 2008 ruling by the Federal Circuit in In re Bilski.

Ultimately, the Supreme Court stepped in to address the machine-or-transformation test in Bilski v. Kappos. The questions presented to the Court for consideration were: (1) whether the Federal Circuit erred by creating the so-called “machine or transformation” test, which requires a process to be tied to a particular machine or apparatus, or transform an article into a different state or thing, in order to be patentable subject matter; and (2) whether the machine or transformation test contradicts Congressional intent (pursuant to 35 U.S.C. 273) to allow for business methods to be patented.

On June 28, 2010, the Supreme Court held that the machine-or-transformation test is not the sole test for patent eligibility under §101, and that the Federal Circuit erred when it ruled that it was the singular test to determine whether an invention is patentable subject matter. Justice Kennedy explained that the argument advanced in favor of categorical exclusion of business methods is undermined by the fact that federal law explicitly contemplates the existence of at least some business method patents. Under §273(b)(1), if a patent-holder claims infringement based on a method in a patent, the alleged infringer can assert a defense of prior use. By allowing this defense, the statute itself acknowledges that there may be business method patents. For more on the Supreme Court ruling in Bilski, see Supreme Court Decides Bilski and Dissecting Bilski.

Furthermore, in Bilski, 8 out of 9 Justices (i.e., everyone except Justice Scalia) signed onto an opinion that recognized that the patent claims in State Street were patent eligible subject matter. Indeed, the dissenters in Bilski specifically acknowledged that the claims at issue in State Street did not deal with processes, but dealt with machines. See Footnote 40 of the Steven’s dissent. The import of this is that machines are specifically patent eligible subject matter, so if the claims of State Street are to machines then claims that are similarly configured would also be directed to machines and therefore patent eligible.

Claim 1 of U.S. Patent No. 5,193,056, which was at issue in State Street, recites:

A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:

(a) computer processor means for processing data;

(b) storage means for storing data on a storage medium;

(c) first means for initializing the storage medium;

(d) second means for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds, assets and for allocating the percentage share that each fund holds in the portfolio;

(e) third means for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;

(f) fourth means for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and

(g) fifth means for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds.

(Emphasis added to draw attention to the “tangible” elements of the claim.)

Thus, it would seem that after Bilski it should have been settled that a data processing system was patent eligible subject matter either as a method or as a machine. So how then did the Federal Circuit manage to reach a 5 to 5 tie in CLS Bank v. Alice Corp. relating to claims for a data processing system? It would seem that the Federal Circuit did not consider the impact of the Supreme Court’s jurisprudence on the claims at issue in the cases the Supreme Court has heard.

Take a look at a couple of the systems claims in CLS Bank v. Alice Corporation. Claim 1 of U.S. Patent No. 7,725,375 recites:

A data processing system to enable the exchange of an obligation between parties, the system comprising:

a first party device,

a data storage unit having stored therein

(a) information about a first account for a first party, independent from a second account maintained by a first exchange institution, and

(b) information about a third account for a second party, independent from a fourth account maintained by a second exchange institution;

and a computer, coupled to said data storage unit, that is configured to

(a) receive a transaction from said first party device;

(b) electronically adjust said first account and said third account in order to effect an exchange obligation arising from said transaction between said first party and said second party after ensuring that said first party and/or said second party have adequate value in said first account and/or said third account, respectively; and

(c) generate an instruction to said first exchange institution and/or said second exchange institution to adjust said second account and/or said fourth account in accordance with the adjustment of said first account and/or said third account, wherein said instruction being an irrevocable, time invariant obligation placed on said first exchange institution and/or said second exchange institution.

Now look at claim 26 of the ’375 patent:

A data processing system to enable the exchange of an obligation between parties, the system comprising:

a communications controller,

a first party device, coupled to said communications controller,

a data storage unit having stored therein

(a) information about a first account for a first party, independent from a second ac- count maintained by a first exchange institution, and

(b) information about a third account for a second party, independent from a fourth account maintained by a second exchange institution; and

a computer, coupled to said data storage unit and said communications controller, that is configured to

(a) receive a transaction from said first party device via said communications controller;

(b) electronically adjust said first account and said third account in order to effect an exchange obligation arising from said transaction between said first party and said second party after ensuring that said first party and/or said second party have adequate value in said first account and/or said third account, respectively; and

(c) generate an instruction to said first ex- change institution and/or said second ex- change institution to adjust said second account and/or said fourth account in accordance with the adjustment of said first account and/or said third account, wherein said instruction being an irrevocable, time invariant obligation placed on said first exchange institution and/or said second exchange institution.

First, notice that in all three claims, the preamble recites a data processing system. At least with respect to claim 1 of the ’056 patent, the Supreme Court believed the claim represents a patent eligible machine. So exactly how do the claims in the ’375 patent cover something that isn’t a machine and isn’t patent eligible?

The Supreme Court will have to step in and clear up this uncertainty. Let’s hope that they speak in direct, clear and easy-to-interpret ways, lest we have more uncertainty with such a critically important part of our innovation economy.

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