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Broad and Broader

Companies such as Walker Digital have been emboldened to seek e-commerce patents-and to enforce them-thanks to a critical 1998 U.S. Appeals Court decision. In the case, California-based Signature Financial Group and Boston’s State Street Bank went to court over a method of calculating the value of a customer’s share of multiple mutual funds. Signature claimed its patent gave it exclusive rights to this classic computer accounting system, known as the “hub and spoke” method, which is used widely by banks around the world.

State Street’s lawyers argued that neither mathematical algorithms nor business methods were patentable. The law had long been murky on both these issues, and in the initial decision a judge ruled in State Street’s favor, agreeing that Signature’s computerized business method didn’t deserve the same patent protection given to other types of inventions. On appeal, however, the higher court firmly upheld Signature’s claims, giving an unequivocal green light to patenting software-enabled business practices. According to Alan Fisch, an intellectual property attorney with Howrey Simon Arnold & White in Washington, D.C., the “State Street” decision marks nothing less than “the endpoint of a nearly 30-year line of debate over what is patentable in this field.”

Less than a generation ago, in the early days of the computer age, the PTO simply refused to grant patents on software. The reasoning then was that software code is made up of strings of instructions, something like the recipes in a cookbook. And historically, the U.S. legal system has treated instruction sets as forms of expression protected by copyright law-not patents.

The distinction is far from trivial because copyright, by protecting a whole work and not its individual parts, allows practitioners far more latitude. Thus, a symphony may be copyrighted, but musical notes, phrasings, and motifs are kept in the public domain, so that they can be used in other pieces of music. Likewise, the PTO’s traditional thinking was that basic software algorithms should be freely available to all programmers. As co-creator of the Linux/GNU operating system and “open source” software advocate Richard Stallman notes, “A decade ago, the field of software functioned without patents. It produced innovations such as Windows, virtual reality, spreadsheets and networks. And because of the absence of patents, programmers could develop software using these innovations.”

Early on, the courts tended to agree with this view, as in a 1972 Supreme Court ruling that compared software’s logical steps to “mental processes” that not only couldn’t be patented, but had to be preserved in the public domain as the “basic tools of scientific and technological work.” Over time, though, this position began to erode. In the landmark 1981 case Diamond vs. Diehr, the Supreme Court upheld a patent on a rubber-making machine controlled by software. Here the logic was that software had altered the machine’s functioning so significantly that it had effectively created an entirely new, and eminently patentable, invention.

The precedent established by Diamond vs. Diehr left the door to software patents slightly ajar, and it wasn’t long before a flood of applications came rushing in. By the early 1990s, software had become one of the fastest growing sectors of the U.S. patent system. By one estimate, the PTO, which had once categorically rejected the idea of patenting software, will have granted close to 100,000 software patents by the end of this year.

From the outset, software patents posed serious problems, as programmers realized that they were technically violating patents when they developed programs that generated footnotes (U.S. Patent No. 4,648,067) or compared documents (Patent No. 4,807,182), to name just two. By approving patents on widely used subroutines, many felt the PTO was endangering the entire software industry. The situation led Mitch Kapor, founder of Lotus Corp. and now a principal of cyberspace think-tank The Electronic Frontier Foundation, to predict in 1991 an impending meltdown in the industry because of proliferating lawsuits. He warned of a “Bhopal of software patents,” referring to the world’s most deadly industrial disaster that struck the Union Carbide plant in Bhopal, India, in 1984.

Yet so far at least, the effects of software patents have not been nearly so dire as predicted. Eugene R. Quinn, Jr., a law professor at Barry University School of Law in Florida, has tracked the number of patent lawsuits over the past decade. While he has found a significant rise in the number of lawsuits filed, he also notes that the number of full-blown trials has so far held steady. “A lot of cross-licensing is going on, especially in the software field,” Quinn says, “because many of the patents out there are invalid.” Some legal scholars liken the situation to a commercial equivalent of MAD (mutually assured destruction) in which patents act as powerful deterrents to attack but can’t actually be used. Another restraint is the high cost of going to trial, which the American Intellectual Property Law Association puts at over $1.2 million even for simple patent disputes. Although the situation clearly favors bigger firms, Quinn says, there is a good deal of fear among all parties, and incentives to co-operate are high.

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