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U.S. Software Patents: Obtainable, Enforceable, and as Important as Ever

Managing Intellectual Property
June 2015

Cook, Elliot C., Bludau, Brandon S., Jiron, Darren M.


Authored by Brandon S. Bludau, Elliot C. Cook, and Darren M. Jiron

In the wake of recent US court decisions interpreting Section 101, the patent eligibility statute, more than a few commentators have exclaimed, "Software Patents Are Dead!" Such headlines certainly succeed in grabbing the attention of technologists and business leaders, but they are also dangerously misleading. Far from being "dead," patent protection for software-driven innovations remains viable and important. It is true that certain types of software-related patents, especially in the business method area, have received more scrutiny from courts and the USPTO following the US Supreme Court's decision in Alice Corp v CLS Bank Int'l in June 2014. Scrutiny of business method patents, however, does not suggest any preclusion of "software" patents generally. Business methods represent only a very narrow slice within a broad universe of software-driven technologies. And with care and an understanding of the developing law, patents may still be obtained for business method innovations. Regardless of the specific software-driven technology involved, companies that forego patent protection face a perilous road, as they will have no means of stopping competitors from copying and selling competing products and services. Thus, rather than falling victim to sensationalist headlines about the demise of software patents, technology companies must remain as vigilant as ever in protecting their investments in software technologies through patents.

Neglecting Patent Protection Remains Hazardous
Without patent protection, there is no way for a company to stop a competitor from analysing the company's products, copying those products, and then marketing and selling a competing version of those products to (former) customers of the company. Without patents, such copying is not only legal–it is good business.

Foregoing patent protection in the software area is especially dangerous. There are few natural barriers to entry because, in contrast to many other areas, there are often no significant requirements for tooling development, mechanical design, materials acquisition, etc. Often, little more than a laptop and a capable software engineer is all that is required to reverse engineer and replicate software-driven product features. Competitors that copy can sell their competing products for less, as copying avoids the costs of research and development that the innovating company incurred. And, rather than having to waste time experimenting with unsuccessful forerunners of a software-based system, the competitor is able to proceed directly to making and selling the version that the innovating company developed and perfected (as well as complementary products and services stemming from the success of its copying). As a result, the competitor that is unhindered by patents can quickly and easily gain an upper hand in the market. Patent protection, especially in the software area, can mean the difference between a company that thrives and one that fails.

Software-Based Patents Are Alive and Well
Contrary to misleading headlines suggesting that software inventions are categorically unpatentable and unenforceable, the USPTO continues to grant patents for software innovations, and courts continue to uphold software patent claims as patenteligible under Section 101. While the US Supreme Court's decisions in Bilski v Kappos in 2010 and Alice last year have reshaped the test for patent-eligible subject matter, neither decision shuts the door to software-based patenting or business method patenting. Companies should thus reject the misinformed and inaccurate view that "software" is unpatentable.

A glimpse at recent data from the USPTO demonstrates the recent success companies are having in obtaining patents for various types of software-based inventions. As shown in the chart above, various types of software-based inventions were patented by the USPTO at rates even higher in 2014 than in 2013 and previous years.

Of the USPTO's 23 classes of subject matter relating to data processing (from the range of Class 700–Class 726), 14 experienced higher rates of patenting in 2014 than in 2013–some significantly so. For example, patents relating to interactive video distribution (Class 725) were up 58%, patents relating to multicomputer data transfer (Class 709) were up 31%, and patents relating to information security (Class 726) were up 30%. Areas that declined include financial and business practice management (Class 705), arithmetic processing and calculating (Class 708), and error correction and detection (Class 714). Notably, even in these categories where the number of issued patents declined, there were still many patents that issued.

These data indicate that far from being "dead," software patents remain available. They also underscore the fact that software-based innovations span a huge range of technology areas. Further, the Alice decision and others do not apply equally across the range of software-based technologies. Software, referring to a set of instructions that directs the operation of a computer, is ubiquitous in modern products. Smart phones, robotics, automobiles, medical devices, web servers, financial systems, and nearly limitless other products and systems all benefit from software- driven features. Broadly characterizing patents for such features as "software patents," and implying that Alice has threatened the viability of the general class of "software patents," is inaccurate. In the wake of Alice, the types of patents under the most scrutiny fall most commonly in the business method area and comprise only a small sliver of software-driven technologies.

For example, the patent claims at issue in Alice were directed to a method of mitigating settlement risk, the method being automated using general purpose computers. The Court found that, for claims directed to an abstract idea–especially a traditional business operation–merely automating that abstract idea using general purpose computers is not enough for patent eligibility. To be patent-eligible, an inventive concept beyond mere automation of the abstract concept would be needed to transform the claim into something substantially more than a claim to the abstract concept itself.

Accordingly, while certain types of software-related claims in the business method and financial services areas may experience higher scrutiny after Alice, patent claims to software-based innovations in countless other technical fields remain largely unfettered by similar scrutiny. For example, in software-driven areas such as machine vision, wearable devices, actuator systems, robotics, control systems, mobile devices, web implementation, and many others, technical solutions to technological problems may feature prominently and serve as the basis for the types of inventive concepts the Court was looking for in Alice. And, even in the business method area, the Court has indicated that patents are still available. Patentees just need to take extra care in making sure to include in the claims more than mere automation of an abstract idea.

Far from being dead, software patents remain obtainable from the USPTO and necessary for high-tech companies. In fact, as the range of software-based technologies continues to expand, so do the opportunities for obtaining enforceable software-related patents.

Courts Are Upholding Software Patents
Some mistakenly believe that "software" patents have little chance of surviving a validity challenge before a US court, and, therefore, such patents have little value even if they are issued by the USPTO. The misperception that US courts are routinely striking down all software patents may stem from the recent increase in litigation motion practice relating to patent-eligibility. Recent data regarding such motions, however, indicate that many types of software patents are being upheld by courts.

It is certainly true that in recent months, there has been an increasing number of motions filed in district courts challenging patent-eligibility under Section 101. This is true for both early motions (for example, motions to dismiss or for judgment on the pleadings) and for summary judgment motions. From January 1, 2015, to April 20, 2015, district courts issued 24 decisions on motions to dismiss or for judgment on the pleadings relating to the issue of patent-eligibility. The same number of decisions on such early motions issued during the entire year of 2014, according to Docket Navigator. From January 1, 2015 to April 20, 2015, district courts issued 16 decisions on summary judgment relating to patent-eligibility, and 23 such decisions during all of 2014, according to statistics taken from Docket Navigator. While the Alice decision is cited in many of these motions, and has been cited in several decisions finding patents ineligible under Section 101, it is important to recognize that courts are not invaliding software patents as a class.

An analysis of the 30 summary judgment decisions regarding patent-eligibility that have issued after Alice is instructive. (While decisions on motions to dismiss and motions for judgment on the pleadings are also illuminating, these decisions often lack finality. In particular, many such motions are denied without prejudice to refiling after claim construction, or for refiling later as a summary judgment motion.)

The chart above indicates the disposition of such motions, where a grant indicates that the challenged patent was found ineligible under Section 101, a denial indicates the opposite result, and a partial grant/denial indicates that two or more patents were addressed in the decision and one was found ineligible and another eligible, according to data collected by Finnegan.

While more than two-thirds of the recently filed summary judgment motions resulted in at least partial success, these summary judgment motions were not distributed across all areas of software- based technologies. In fact the opposite is true. Upon close inspection of the patent claims at issue in these summary judgment motions, certain important differences can be seen between the types of technologies found patentable and those found unpatentable in these decisions.

Among the motions that were granted (where the patents were found invalid under Section 101), the challenged patent claims were focused in business method or financial services areas. As examples of claims found to be patent-ineligible, some were directed to processes for anonymous loan shopping (Mortgage Grader v Costco Wholesale Corp, Central District of California, January 12, 2015), techniques for negotiating product or service upgrades (Tenon & Groove v Plusgrade SEC, District of Delaware, January 6, 2015), automatically determining automobile loan and lease payments (AutoAlert v Dominion Dealer Solutions, Central District of California, December 23, 2014), options for customers to place limitations on their own bank account (Joao Bock Transaction Sys v Jack Henry & Assocs, District of Delaware, December 15, 2014), depositing pennies into a savings account based on rounding up financial transaction amounts (Every Penny Counts v Wells Fargo Bank NA, Middle District of Florida, September 11, 2014), converting loyalty award credits from one vendor to another (Loyalty Conversion Sys v Am Airlines, Eastern District of Texas, September 3, 2014), and reducing interest payments on a mortgage (CMG Financial Servs v Pacific Trust Bank, Central District of California, August 29, 2014). From these decisions, and others at the summary judgment stage, it can be seen that certain technology areas are more vulnerable to a patent-eligibility challenge than others.

On the other hand, in those decisions where claims were deemed patent-eligible under Section 101, the claims spanned wide areas of software-related technology outside of the business method and financial services areas. Examples include techniques for controlling access to digital content on a data carrier using distinct memories, data types and use rules (Smartflash v Apple, Eastern District of Texas, February 13, 2015), methods for encoding and decoding data (Cal Inst of Tech v Hughes Commc'ns, Central District of California, November 3, 2014), remotely monitoring data associated with an internet session (Helios Software v SpectorSoft, District of Delaware, September 18, 2014), and software for designing sheet metal forming tools (Autoform Eng'g v Eng'g Tech Assocs, Eastern District of Michigan, September 5, 2014). Of course, these data likely exhibit some selection bias, as accused infringers are more likely to file such motions for summary judgment where they believe that the asserted claims are vulnerable to a challenge under Section 101. Software patent claims considered likely to be upheld as patent-eligible would thus not factor into this data.

The Federal Circuit's December 2014 decision in DDR Holdings v also confirms the continued viability of software-related patents. In that case, one of the challenged patents was directed to techniques for website development. The patent's claims addressed the problem of retaining website visitors who could otherwise be transported away from a website by clicking on an advertisement. As the Federal Circuit explained, because the invention was "necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks," it satisfied the requirements of 35 USC § 101. The court further noted that, "[a]lthough the claims address a business challenge (retaining website visitors), it is a challenge particular to the Internet."

Accordingly, while Alice has impacted the analytical framework that courts apply to the issue of patent-eligibility, and has resulted in more scrutiny for certain types of inventions than others, technology companies should appreciate that a myriad of different types of software-related innovations remain patent-eligible post-Alice. Because courts continue to uphold such patents, and the USPTO continues to grant them, companies will be missing critical opportunities and vital protection against competitors if they decide to forego patent protection for software- based inventions.

Takeaways for Technology Companies
For companies designing and developing new software-based products and services, obtaining patent protection is just as critical after the Alice decision as it was before. To the extent these companies invest valuable human and financial capital in their software technologies, and want to exclude competitors from copying their software-based innovations, patents remain indispensable business tools. Technology companies should also recognize that, because the USPTO and the courts are continuing to find numerous types of software-based inventions eligible for patenting, patent protection is available for a great majority of modern-day software innovations.

For those companies that subscribe to the false reports of software patents being obsolete, however, the future is likely not so bright. Not only do they risk the loss of business to lawful copying by rivals, but they may also find themselves defenceless when those same rivals obtain patents of their own for software-based innovations that are needed to compete in the marketplace.

Originally printed in Managing Intellectual Property. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.