Business Methods are Patentable, Rules Federal Circuit Court of Appeals

On Monday, the Federal Circuit Court of Appeals in Washington ruled that a business method devised for reducing risk in financial transactions is eligible for patent protection. Holding contrary to general perceptions, the appeals court ruled that the four business methods devised and owned by Alice Corporation, which reduce the risks in the operation of a computer system while exchanging financial obligations, are unique and patentable.

Alice Corporation is partly owned by the National Australia Bank Ltd and specializes in innovative financial patents. In 2007, London-based CLS Bank International, which runs a service for reducing risk in foreign-exchange transactions, sued the company over the patents.

In the lawsuit, CLS claimed that the patents owned by Alice were invalid in U.S. under Section 101 of the Patent Act. The mentioned section of the Patent Act excludes “laws of nature, natural phenomena and abstract ideas” from the ambit of patentable items. However, the same section also mentions that unique applications of ideas are patentable.

In 2010, in Bilski v. Kappos, the U.S. Supreme Court explained Section 101 and ruled that a business-method patent for guarding against investment risk in certain markets should be construed as an “abstract idea.” CLS relied on that judgment.

The District Court in Washington followed the Bilski judgment and found that Alice could not patent its method to insure the execution of deals made by third parties. However, the Federal Circuit has disagreed.

Writing for the majority, Judge Richard Linn observed, “The abstractness of the ‘abstract ideas’ test to patent eligibility has become a serious problem, leading to great uncertainty.” The court also noted that all innovations to some degree or other rest on natural phenomena and abstract principles. So, in order to qualify for patent protection, inventions simply need to attach an idea to a specific application.

Alice’s patents involve the creation of special credit and debit records on computerized systems to ensure that there are sufficient funds on each side to complete a transaction. The majority found that such special “shadow” records are a specific application.

However, dissenting judge Sharon Prost said, “Just a few months ago, the Supreme Court reversed us in a Section 101 case for a second time in its last three terms, hinting (not so tacitly) that our subject matter patentability test is not sufficiently exacting.” Prost also said that Alice was in essence trying to patent the basic idea of “credit intermediation” which dates back to the Roman Empire.

The case is CLS Bank International et al v. Alice Corporation Pty Ltd, U.S. Court of Appeals for the Federal Circuit, No. 11-1301.