The nation's top patent court has stopped a lower court from throwing out four patents on financial software, used to sue a bank dealing in foreign currency exchanges.

The controversial opinion, countered by a blistering dissent by one member of the three-judge panel, shows that the US Court of Appeals for the Federal Circuit is in disarray about just what is patentable. An "abstract idea" can't win a patent, but the judges on the court are in disagreement about just what that is.

"The majority has failed to follow the Supreme Court’s instructions—not just in its holding, but more importantly in its approach," wrote Judge Sharon Prost, scolding her two colleagues who are willing to let these patents slip through the "abstract idea" test. The recent Mayo v. Prometheus case demands that there be an "inventive concept" in granted patents. "Just a few months ago, the Supreme Court reversed us in a § 101 case for a second time in its last three terms, hinting (not so tacitly) that our subject matter patentability test is not sufficiently exacting," she wrote.

The Federal Circuit is going back to allowing patents that are not only abstract, they are "literally ancient," notes Prost. The type of "financial intermediation" described in the patent—basically a form of escrow providing for trusted transactions—dates back to the early Roman Empire.

The decision, CLS Bank v. Alice Corp. (PDF), pushes against recent Federal Circuit and U.S. Supreme Court decisions that have blocked patents for being too abstract. Now the case will head back to a district court in Washington D.C. for continued litigation.

The patents describe a kind of escrow that involves creating trust between parties by the use of "shadow accounts." The patent-holder, Alice Corp., used the patents to sue CLS Bank, a company that deals in foreign exchange.

Alice Corp., half of which is owned by National Australia Bank, has a bare-bones website that lists its patents and emphasizes licensing. Still, the company insists it is not a "patent troll," but rather a "market development company" owning only patents invented by its CEO, Ian Shepherd. Those patents "developed organically as the result of a multimillion dollar effort to bring to market innovations that he conceived in the early 1990s," according to a statement [PDF] Alice made to the district court.

Recent decisions cut back on "abstract" patents

Whether an idea is too "abstract" is just part of the decision when determining a patent's validity, codified under what patent lawyers know as Section 101 of the patent law. Other key sections, like 102 and 103, are meant to test whether a patent is novel (truly new) and non-obvious.

Since Bilski was decided in 2010, a number of cases have been considered by appeals courts about whether "business methods"—involving software and computers to varying degrees—should be patentable. Mostly, those decisions have limited patentability, but this week's CLS Bank v. Alice Corp. decision seems to push in the other direction.

In December 2010, the Federal Circuit ruled that patents related to digital image "halftoning" should not be thrown out as abstract, in Research Corp. Technologies v. Microsoft. The opinion was authored by Chief Judge Randall Rader, who has often takes an expansive view of what can be patented.

Also in December 2010, the Federal Circuit decided Mayo v. Prometheus, which would have allowed a patent in the increasingly controversial space of medical diagnostic testing.

In August 2011, a Federal Circuit panel found that a method of checking for fraud on the internet could not be patented in CyberSource Corp. v. Retail Decisions, Inc. CyberSource's patent was seen as a sort of "take this, but do it on a computer" case.

In September 2011, a Federal Circuit panel ruled in Ultramercial v. Hulu that a patent describing making a viewer watch an ad to pay for online content was allowable under Section 101—a decision that alarmed many in the tech community. In May 2012, however, the Supreme Court overruled that decision, ordering the Federal Circuit to reconsider the case in light of Mayo v. Prometheus (below).

In February 2012, in Dealertrack v. Huber, the Federal Circuit invalidated a patent on "computer aided" methods of evaluating a credit application. (The opinion was written by Judge Linn, who also authored this week's CLS Bank decision.)

LINK to Dealertrack v. Huber

LINK to Dealertrack v. Huber Also in February 2012, the Federal Circuit decided Fort Properties, Inc. v. American Master Lease LLC, ruling a method of creating a tax-deferred retail estate investment was unpatentable.

In March 2012, the Supreme Court ruled in Mayo v. Prometheus, tossing out a medical diagnostic patent that the Federal Circuit had allowed sixteen months earlier.

New decision, new direction?

Judge Richard Linn, who authored the CLS Bank decision, takes the position that a patent should only be disallowed under section 101 if it's "manifestly evident" that it's unpatentable. The claims of these Alice Corp. patents are specific enough to be allowed, he ruled.

That view seems to push back against most of the decisions listed above, like CyberSource and Prometheus, notes Jim Myers, a Ropes & Gray partner whose patent practice involves mostly defending financial institutions against patent assertions.

"It's very difficult to advise your client and to understand how to litigate pats when the test is not clear and predictable and the boundary lines aren't," says Myers. "It looks like there's a starting point here, of 'tie goes to the patent.'"

Others argue that the line on what constitutes an "abstract idea" was as muddled as could be already.

"This is an area of law where it's impossible to get predictable clarity on what is patentable," says Michael Risch, a law professor at Villanova University.

Risch suggests that there are other elements of patent law—like the question of whether Alice Corp.'s invention is truly new or not—that seeped into the CLS Bank opinion.

Judge Prost's dissent argues there isn't much more to this than escrow, whereas the other two judges suggested there's something more specific and narrow described. "The majority was convinced these 'shadow records' did something different than just computerized escrow," says Risch. "The patentee made a [successful] case that this is not your usual escrow. Whether that's true or not, I have no idea."

Costly battles over financial patents ahead

A generation ago, the idea that financial institutions would be coping with patent battles must have seemed ludicrous. With a few notable exceptions, patent battles have been an unwelcome guest in the banking and insurance landscape.

Those companies would like to see so-called "business method" patents excluded from the system. In fact, the big banks argued the Supreme Court should have done that in the Bilski case, but only garnered four votes for that position.

It makes sense they'd want that. Kicking out patents under a Section 101 test is generally more efficient—and thus cheaper—than having to knock out patents by proving they're obvious or not new.

Like many patent disputes, the battle over the Alice Corp. patents may boil down to a battle over whether they describe any truly new invention or not. And minimizing risks through "financial intermediation," as Prost notes in her dissent, is a "literally ancient" idea, dating back to the early Roman Empire.

Speaking to a Reuters reporter, CLS Bank's lawyer opined that this case is firmly in the ignominious tradition of patents that take basic ideas and throw in some "do it on a computer" language. "This is really a very basic, fundamental concept implemented on a computer," said Steven Glassman, of the Kaye Scholer law firm. "There's no advance in computer technology of any sort."

Either way, CLS Bank will now have to pay for an extended court battle to prove that Ian Shepard's "financial market innovations" are nothing special after all.