OPINION: Rulings could shake up software patents
On Aug.11, the U.S. District Court in the Eastern District of Texas issued a permanent injunction barring Microsoft from selling recent versions of its Word software, because the software violates a patent for processing XML, a markup language that allows users to customize the underlying format of text documents. The patent is held by a small Canadian company named i4i Inc., to whom the court also awarded damages of approximately $290 million.
Twenty-three days later, on Sept.3, the U.S. Court of Appeals for the Federal Circuit granted Microsoft a stay of the injunction, noting simply, “[T]he court determines based upon the motion papers submitted that Microsoft has met its burden to obtain a stay of the injunction.” On Sept. 23, the court heard arguments on the appeal, during which Microsoft argued that courts must construct claims properly, the i4i patent is invalid and Microsoft did not infringe it, and common sense cannot be abandoned when it comes to damages calculations.
Throughout the trial and on appeal, Microsoft’s main defense has been that the i4i’s patent is invalid. That is a difficult argument to win, however, because courts initially assume that the U.S. Patent and Trademark Office does not issue invalid patents. The Chairman of i4i, Loudon Owen, picked up on the absence of any new Microsoft arguments on appeal, noting, “The good thing is there was nothing surprising.  It was the same thing that failed at trial.”
Although the court has not yet ruled on the appeal, there were some interesting questions during oral argument.
One of the judges, Judge Kimberly Moore, questioned the way in which damages were calculated in the original ruling. In particular, she took issue with the assumption that XML users who bought a $90 version of Windows would have been willing to pay considerably more for a substitute, stating, “Not everyone who is willing to pay $90 or $200 for a product is willing to pay $500.”

In contrast to Moore’s challenge to the validity of i4i’s damage award, there were also questions that should have pleased the Canadian company. Although Microsoft had previously acknowledged being in contact with i4i about the XML technology, its lawyers argued that there was no direct evidence that anyone at Microsoft had actually read i4i’s patent. For its part, i4i said that Microsoft had approached them in 2000. The two companies made presentations to each other concerning the possibility that Microsoft might license i4i’s XML technology, but they never consummated a licensing agreement. During oral argument, Judge Alvin Schall challenged the conclusion of Microsoft’s lawyers that no one at Microsoft had ever read the patent, stating, “I find it hard to believe that Microsoft didn’t read the patent.”
Despite these questions, the court gave no clear indication of how it might rule on the appeal.  If Microsoft loses its appeal, then it has only three choices: stop selling Word, buy a license from or otherwise settle with i4i, or develop a workaround that does not violate i4i’s patent.
An interesting backdrop to i4i’s case is another case that the Federal Circuit Court heard previously. On June 1, the U.S. Supreme Court granted certiorari in the Bilski case, and oral argument is scheduled to take place on Nov. 9. The Bilski case could provide the Supreme Court with an opportunity to resolve the ongoing debate over the wisdom of having software patents in the first place.
At issue is whether a “process” must be tied to a particular machine or apparatus or transform a particular condition into a different state to be considered as patent-eligible subject matter. When the Federal Circuit Court heard the Bilski case, the majority opinion characterized the issue as whether the claimed method is a patent-eligible “process,” as the patent statute uses that term. The court explained that although any series of actions or operations is a process in the dictionary sense of that term, the Supreme Court has held that the statutory meaning is narrower than the dictionary meaning. For example, the court noted that patent-eligible processes do not include “laws of nature, natural phenomena, [or] abstract ideas.”
The limiting legal principle applies not just to processes, but to anything on which a patent is sought. The court concluded that a claimed process is patent-eligible if it is tied to a particular machine or apparatus, or it transforms a particular article into a different state or thing.

The appeal of the Bilski case to the Supreme Court has attracted a great deal of attention, including several friend-of-court briefs, because of its implications with respect to the continued viability of software patents. For example, Red Hat Inc., a provider of Linux and open-source technology, filed one of the friend-of-court briefs, asking the Court to uphold the Federal Circuit Court’s ruling. In doing so, however, Red Hat argues that an opinion of the Federal Circuit Court in 1994 mistakenly ignored the guidance of the Supreme Court and ruled that if someone could show that certain software was “useful” and produced “a concrete and tangible result,” then that software could be patented.

Prior to that decision, courts had held that an abstraction, by itself, could not be patented and that, in order to be patentable, an abstraction must be incorporated into a particular machine or be a process that “transforms a particular article into a different state or thing.” 
Rob Tiller, the assistant general counsel at Red Hat who filed the brief on behalf of Red Hat, said, “Our patent system is supposed to foster innovation, but for open source and software in general, it does the opposite. Software patents form a minefield that slows and discourages software innovation. The Bilski case presents a great opportunity for the Supreme Court to rectify this problem.”

Red Hat and others argue that the Supreme Court should clarify the law and disallow patents that are mere abstractions and are not incorporated into machines. If the Supreme Court agrees with that argument, it could upset many software patents, including many held by Microsoft and, regrettably for i4i, the one at issue in i4i v. Microsoft.    

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