On February 8, 2013, the Federal Circuit Court of Appeals met to consider a case that could shape the future of technology innovation in the United States. The case involved the Alice Corporation, an Australian company that obtains financial market patents from the United States, the United Kingdom, and other major trading nations. Alice holds four patents for a business method that CLS Bank International employs to reduce risk in financial transactions. In 2007, Alice sued CLS Bank International and other companies for patent infringement, hoping to reap financial gain. CLS Bank, however, countersued Alice claiming that Alice’s patents were in violation of Section 101 of the Patent Act.
Section 101 states that the U.S. government cannot grant patents for “laws of nature, natural phenomena, and abstract ideas.” Rather, patents must involve only practical applications of abstract ideas. But what is the difference between an abstract idea and a practical application? The answer to this question involves high stakes—billions of dollars in the IT industry.
Many lawyers who represent IT companies describe patent-enforcing companies (such as Alice Corporation) as “patent trolls.” Such companies do not produce a product themselves. Rather patent trolls make money by threatening to sue technology companies that supposedly make use of their patented ideas. The patent troll is usually not the inventor, but rather a company that has purchased patents from bankrupt technology companies, usually failed start-ups. Patent trolls generally target companies with annual revenues between $50 and $200 million. These companies are large enough to pay licensing fees, but often lack resources to pay steep litigation fees.
For example, a company called Ultramercial obtained a patent for the idea of “pre-roll advertisements”—ads placed prior to the broadcasting of free video clips broadcast on YouTube and Hulu. These ads are a major revenue source for YouTube, Hulu, and other companies. One of these companies, Wild Tangent, sued Ultramercial asserting that its patent claim was invalid; however, an appellate court upheld a lower court’s ruling declaring the patent valid. In the summer of 2012, the Supreme Court issued a ruling in the case asking the appellate court to reconsider its ruling, which, if not overturned, would force companies such as YouTube and Hulu to pay large licensing fees to Ultramercial.
According to Google general council Kent Walker, “Abuses of our patent system cost the economy $29 billion in 2011, raising prices and reducing choice. Technology moves incredibly fast, and the United States Patent and Trademark Office need to take prompt action.”
Software patents were not even recognized by U.S. Courts until the States Street case of 1998. Up to that point, many companies had patented software ideas for business methods, but none of the patents had been enforced. In 1998, the U.S. Court of Appeals recognized Signature Financial Group’s patent of a business method using computers and allowed the company to collect licensing fees from States Street Bank.
Since the States Street decision, the U.S. court system has been floundering with the issue. Different courts have come down on different sides. In the earlier appellate hearing of the Alice case, two judges of the three-judge panel held for Alice Corporation and argued for an extraordinarily broad interpretation of patent law. Now, most of the heavyweights of the U.S. IT sector—Google, IBM, Facebook, Intel, and others—have filing amicus briefs, legal opinions in support of one side or the other. IBM, which has led the world in number of new patents for 21 years, filed a brief in support of Alice. Google and Facebook, which are leading product producers, filed in support of CLS Bank. Intel, a computer chip manufacturer that has many patents but is fearful of the large number of patents in the field of theoretical chip design, also filed on the side of the bank.
The new appellate court decision will likely pave the way for the Supreme Court to weigh in on the matter more extensively. A decision in favor of Alice would mean an explosion of patent litigation and increase in costs for IT producers. A decision against Alice would be a boost for large IT software manufacturers and creators on online content and products who may be less careful about paying licensing fees to small patent holders. The Department of Justice has filed an amicus brief favoring neither side. Instead, the department has called on the appellate court not to issue a decision that would create a hard-and-fast rule, but that would allow the courts to consider each case individually. This action indicates that the U.S. government feels that both positions have some merit. On the one hand, patent trolls are reducing U.S. productivity. On the other hand, the Department of Justice recognizes the need to protect the owners of intellectual property.

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How unique does an idea need to be to warrant patent protection? Should the idea of pre-roll advertisements be patentable?

Are patent trolls justified in their actions? Do they provide a means of rewarding small innovators?

Are patent lawsuits likely to decrease or increase innovation in the United States?


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