Prelude to SCOTUS Oral Arguments in Alice v. CLS Bank, Part 2

Eric Gould Bear

In part 2, which follows below, we discuss why software start-up companies need patents. Bear also further analyzes the briefs filed, including the one filed by LinkedIn, Netflix, Twitter, Yelp and Rackspace, which he characterizes as taking “a fairly radical stance.”

Without further ado, here is part 2.

QUINN: I was hoping you might be able to give us an idea of how a software startup company uses patents as an asset to leverage building, growing, and further innovating?

BEAR: Sure.  Startups have to move with velocity and with a high level of excellence simultaneously.  And they’re fiscally challenged for the most part, so have to operate very lean.  There’s a challenge with regards to patent filing because the costs are hard to justify as having any immediate benefit.  And when you weigh your weekly or daily burn, it’s really hard to swallow the costs of investing in patents. That’s certainly the case for startups like the ones I advise at the Capital Factory incubator in Austin.  Most don’t know with certainty if they’re even going to survive to the next year.

The bet they’re each making is that they’ve got something special that can make a dent in the universe. So, I’d protect those innovations as soon as possible while building minimum viable products – whether or not those first versions even have the inventive aspects embedded out of the gate.  CEOs of early stage startups spend a lot of their time talking to prospective investors.  And as an investor myself, one of the things I look for is how they’ll secure their corner of the market and keep competitors from moving in?  I believe that patenting the special sauce is a great preventative measure.  Someone else might be able to build fast, but if you put a stake in the ground marking and protecting your IP territory then you’ve got an edge.

QUINN: Right.  If you’re going to go out and you’re going to start to need to hire some coders or hire some people to help you move forward with your business thinking about a truly, truly startup business that’s all coming together a lot of them find real value in having a patent application on file that defines their invention.  I’ve had clients that can raise money based on that.  It also defines what the rights are so they feel more secure moving forward to seek assistance from others knowing that and they’re not going to just go out and try and take it for themselves because at some point in time there will be a patent that will issue.

BEAR: Yes, there might be.  You never know, right?  I mean, everything is up in the air right now and this may be the worst moving target we’ve ever had.

QUINN: Well, that’s certainly true.  I feel pretty good if I tell someone that they are likely going to be able to get a patent. Of course, I do give negative opinions. But when I tell someone it looks good we have been able to get them a patent with meaningful commercial patent claims, but that’s because we are not just throwing something up against the wall to see if it will stick.  But in order to do that we have to spend a lot more time, money, and energy to describe these things from multiple different angles because we don’t know which angle is ultimately at the end of the day going to be the one that the courts says, okay, describing it that way is satisfactory.

BEAR: Seasoned counsel makes a big difference.

QUINN: But that raises costs.  And it makes it harder for startups. Uncertainty is always bad for business, and the uncertainty we have with software at the moment undoubtedly hurts the economy, including having negative effect on jobs.

BEAR: Establishing interdependent relationships can be particularly effective.  I like it when patent prosecution is willing to work for equity.  That way, everyone’s got skin in the game.  But it doesn’t always work because each party has their own fiscal realities.

To my earlier point – when planning for an exit – the main things you’ve got are your team, your product, your customers, partnerships and your IP.  Strength in each of those pillars is going to make for a powerful play.

QUINN: Right, right.  Now, let me ask you this question while I’ve got you here because one of the things I think our readers would be really interested in hearing from you about which of the briefs should be read in order to understand the best points?

BEAR: Well, I would start with the Trading Technologies brief.

QUINN: Oh, well, yeah, I’m sorry.  I walked right into that one. I know you were involved in that and you signed onto that brief.  I actually think that’s one of the better briefs.  So I certainly appreciate that.  Do you want to talk about that brief?  How that came about and what you particularly liked about it?

BEAR: The TT brief is great for many reasons.  And I owe thanks to Abha Divine at Techquity Capital for introducing me to the IP braintrust at Trading Technologies, including Jay Knobloch and Steve Borsand.  One thing that’s hard to ignore is the diversity and breadth of amici.  The collaboration is strikingly unusual.  And then, it stands out as advocating for an approach that’s distinct from the approaches of both CLS and Alice.

From a readability standpoint, I like the way it distinguishes the §101 exclusions.  As you know, there are three categories of exclusions – laws of nature, phenomena and abstract ideas.  The brief also makes it clear that using software to convert a general-purpose computer into a newly functioning machine should always be patent eligible.  The reasons for that are made plain.  The brief teaches that at the core of every invention is an abstract idea.  This reveals the flaws inherent in tests that take apart a claim and ignore its specific claim language – attempts to wash away limitations until the only thing left is an abstract idea.  From my vantage point, it looks like that’s what happened at the Federal Circuit.  When you do that, in my opinion, you’re always going to end up with an abstract idea.  And if that’s what is being considered as the third prong of the §101 exclusion, then nothing is really patentable, right?

QUINN: Yes, amen to that.  And the Patent Trial and Appeal Board at the Patent Office, in the first decision they reached in a contested case, did just that.  They looked at a piece of software and they removed all of the tangible items because they were saying storage means, and memory and that sort of thing, well that’s not new, it’s conventional. So let’s just remove all that is convention from the claim.  After they kept removing all the tangible pieces from the claim it was as if they had some epiphany – WOW – what’s left is an idea and it’s not even a particularly well a written idea because it doesn’t even make any sense.  Well of course it doesn’t make any sense! You removed all the tangible parts of the claim!

BEAR: That seems to be exactly what transpired in this case.  And what the respondents for CLS are arguing – and those in support of CLS are arguing – is that there’s no specific disclosure of particular steps.  “It’s all abstract and therefore can’t be eligible.”  That is, if you ignore the specifics of the disclosure and limitations in the claims.  Now, to be clear, I don’t have an opinion on whether the claims at issue pass muster on §102, §103, or even §112.  Ok?  Because I haven’t analyzed it on those terms.

QUINN: I don’t know either. And that’s the frustrating thing about §101. A patent ineligibility conclusion is saying that regardless of whether the innovation is useful, new, non-obvious, and described so others of skill in the art can understand it, we’re not going to give you a patent. To say that about software just seems extraordinarily naive.  I mean you can’t even drive a car any more without software.

BEAR: Certainly not in 2014.   And to those points, I would say that the IEEE brief and the IBM brief are both solid briefs that use mostly comfortable logic.  IBM goes to an extreme in saying that all computer readable media is §101 eligible, so courts should jump past §101 entirely.  They also talk about all inventions including abstract ideas.  And that’s key, you know, from an inventor’s perspective.  The reality is – whether working on a white board with co-workers or jumping out of bed with a sudden inspiration – an idea on a white board is not built yet, it’s not tested, it’s a conception.  And then we build and test it.  We reduce it to practice.  And we have to claim our inventions in patent applications with sufficient disclosure so that another person having ordinary skill in the art can go out and make it or use it themselves.

But it all starts with an idea, an inspiration to make something better for the world.  And that’s what the patent system is here to protect – these human-made, or “man-made” as the cited rulings have been languaged, human-conceived inventions.  IBM talked about patents being key to competition, in a good way.  And the IEEE brief says there’s no such thing as a “software patent.”  As I said earlier, I believe the balance between hardware and software is irrelevant.  It just doesn’t matter.  It all goes into making the machine.  Adding software to a general-purpose machine can transform that machine into a special-purpose machine.  And then, we’re talking about the combination.  Underneath the hood, it doesn’t matter how much is hard or soft.

IEEE talks about the risks to the economy of eliminating the ability to patent software functionality.  It’s “functionality” in my mind that we patent, not software per se.  I would recommend reading those briefs along with TT.  They’re pretty easy to digest and there are no games being played.

QUINN: Yes. I like those two briefs myself.  And I thought one of the more strong statements in all of the briefs came from the IEEE brief at the very beginning where they say, and I’m just going to paraphrase here, it’s almost crazy to be addressing this issue in the year 2014. I think they’re right.  If you look around, computer implemented processes, software if you want to call it that, drive the economy.  To say that such a major driver of innovation and the economy is not patentable is ludicrous.  If we’re going to say that then we might as well just not have a patent system, quite frankly.

BEAR: Because the arguments don’t degrade or demarcate gracefully.  They just – the repercussions will spill all over.  On that note, there’s an amusing little brief worth visiting.  It’s by a number of companies including LinkedIn, Netflix, Twitter, Yelp and Rackspace – whom I respect and appreciate as innovators – and takes a fairly radical stance.  I believe it’s important for anyone reading along to be studying briefs on all sides.  Their main approach is to establish that software patents are not only not necessary, but hinder innovation.  While positioning themselves to be seen as utopian, the politics strike me as appealing to the fearful, emotionally insecure side of people.  Twitter represents that they are recruiting engineers based on a purported fact that they don’t want to engage in offensive patenting.  It seems intentionally misleading and inviting reactionary public support.  Let me read you a sentence.  It says, “Both trade secret and copyright law already protect software and effectively prevent both wrongful use and explicit copying by others.”  As if, somehow, that addresses the issues at hand.

QUINN: Right.  And the thing that I try to point to people is trade secrets don’t really protect your software unless what you have is a black box.  If you have a system where you collect the input, you put it through your software, you process it and then deliver an output then okay trade secret protection might work for that.  But if you’re putting this out into the world no matter how good the encryption is it can be reversed engineered. If there is somebody good enough to encrypt it then there is somebody good enough to decrypt it and with a trade secret once it’s out it’s gone.  You have nothing.

BEAR: You lose your intellectual property advantage.  The mini-brief ventures far afield of the material variables in other ways, too.  They take pot shots, for example, at individual inventors lacking means to manufacture or market at scale.  It reads, “Software patents serve at most as a sort of consolation prize giving unsuccessful innovators a chance of recovering some portion of their investment years later.”  They say they’re arguing for getting rid of software patents, but their posturing all leans towards getting rid of patents, period.

QUINN: That’s exactly right.  And that’s the subterfuge here is that this is not about software patents for entities like the ACLU.  This is about the patent system, period.  The ACLU are very late comers to this patent stuff.  They show up in the Myriad case and now they show up here.  At the end of the day, if they win here they’ll show up somewhere else to continue to try and fight patents until there are no patents remaining.

BEAR: As weak as it is, it’s a useful catalyst for dialog and for debunking a lot of the myths.  Your column has done a great job of raising and debunking these myths.

QUINN: Well, thanks.  Sometimes I feel like we’re shoveling water back into the ocean.  But I don’t know.

BEAR: There are so many opinions and arguments, and so much political posturing.  It’s hard to keep up.

One issue that hits close to home for early-stage startups is the need to be running in parallel – protecting one’s investment in IP while simultaneously trying to build a new product and fledgling operation.  There are so many factors that can cause a product or a company to fail.  Many have nothing to do with the quality of the ideas.  It can be a problem with time to market or how well you create a funnel of new customers. You may have great ideas and a great protectable implementation or business approach, but that idea may not work because of business variables having nothing to do with it.  And I believe the patent system should be backing those who take a stab at R&D and then try to build products – whether they succeed or fail.

That R&D can generate patents and offers a shot at being implemented by others.  And the monopolies afforded by the Constitution to patent owners should empower them to recoup and profit from their investments.  Why not celebrate those who contribute to our body of competitive inventions – inventions that have potential to make a difference in the world?  Personally, I’d like to see the system work better to support synergy between small inventors and the big companies that are successful at making and selling products.

But, alas, we’ve followed the oddball briefs away from material issues.  And there are so many other important topics to discuss.  I feel like we’ve just scratched the surface.

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