A landmark 2014 ruling by the Supreme Court called into question the validity of many software patents. In the wake of that ruling, countless broad software patents became invalid, dealing a blow to litigation-happy patent trolls nationwide.

But this week the US Patent and Trademark Office (USPTO) proposed new rules that would make it easier to patent software. If those rules take effect, it could take us back to the bad old days when it was easy to get broad software patents—and to sue companies that accidentally infringe them.

The Federal Circuit Appeals Court is the nation's highest patent court below the Supreme Court, and it is notoriously patent friendly. Ever since the Supreme Court's 2014 ruling, known as Alice v. CLS Bank, the Federal Circuit has worked to blunt the ruling's impact. In a 2016 ruling called Enfish, the Federal Circuit ruling took a single sentence from the Supreme Court's 2014 ruling and used it as the legal foundation for approving more software patents.

This legal theory, known as the "technical effects doctrine," holds that software that improves the functioning of a computer should be eligible for a patent. A version of this rule has long held sway in Europe, but it has only recently started to have an impact in US law.

This week, the Patent Office published a new draft of the section on examining software and other potentially abstract ideas in its Manual of Patent Examination Procedure (MPEP). This is the official document that helps patent examiners understand and interpret relevant legal principles. The latest version, drawing on recent Federal Circuit rulings, includes far tighter restrictions on what may be excluded from patentability.

This matters because there's significant evidence that the proliferation of software patents during the 1990s and 2000s had a detrimental impact on innovation—precisely the opposite of how patents are supposed to work.

In the decade before 2014, a growing army of patent trolls were acquiring broad, vague software patents and using them to demand big payments from companies producing actual products. One 2012 study estimated that this kind of thing cost the economy $29 billion per year.

Another researcher calculated that 60 percent of the patent troll revenue came from patents related to software and high tech, with the especially aggressive cases focused on pure software: 115 lawsuits against 435 defendants for a patent for "Associating online information with geographic areas," 106 defendants threatened with a patent for a "Customer based product design module," and 79 defendants in a case regarding a "digital fingerprinting" patent.

On the flip side, the argument that without software patents modern tech-based companies can't thrive seems weaker every day. A 2015 article calculated that 30 percent of billion-dollar startups have zero patents.

How the courts legalized—then limited—software patents

The courts have long held that patents can't claim abstract ideas or laws of nature. And until the 1990s, courts held that most software patents were attempts to claim mathematical algorithms—a kind of abstract idea. But a series of Federal Circuit rulings gradually watered down this rule. By the turn of the century, there were few meaningful limits to patenting software.

The result was a proliferation of patents that soon turned into a proliferation of software-related patent litigation. The Supreme Court had largely given the Federal Circuit a free hand to develop this area of the law in the 1990s and early 2000s. But then the high court started to check the lower court's work—and it didn't like what it found.

In 1996, a team at a teaching hospital in Montréal found that the correct dosage for a certain drug could be partially determined by measuring metabolites in the bloodstream and published the results of its research. While this scientific finding couldn't be patented directly, a company called Prometheus Laboratories sought a patent on the concept of drawing a patient's blood, measuring the level of the metabolites, and then providing a diagnosis based on the research. They argued that this was a patent on a process, not an abstract idea.

The Patent Office bought this argument, but the Supreme Court didn't. In a 2012 ruling called Mayo v. Prometheus, the Supreme Court ruled that the patent was claiming the law of nature itself and adding nothing truly inventive.

From this emerged a two-part test for patentability. Here is the MPEP's summary of what is often now referred to as the Mayo/Alice test:

The first part of the Mayo test is to determine whether the claims are directed to an abstract idea, a law of nature or a natural phenomenon (i.e., a judicial exception). If the claims are directed to a judicial exception, the second part of the Mayo test is to determine whether the claim recites additional elements that amount to significantly more than the judicial exception. The Supreme Court has described the second part of the test as the search for an 'inventive concept'.

Back to software: in 2014, the Supreme Court ruled on the case of Alice v CLS Bank regarding a stock computer on which is loaded software to facilitate trades with a third-party intermediary. Their opinion directly applied the Mayo test: like the research result with a blood test tacked on, the technical details of the Alice software patent were really just a fig leaf over a claim on an abstract concept:

Viewed as a whole, petitioner’s method claims simply recite the concept of intermediated settlement as performed by a generic computer. The method claims do not, for example, purport to improve the functioning of the computer itself or effect an improvement in any other technology or technical field. An instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer is not "enough" to transform the abstract idea into a patent-eligible invention.

This seemed to be a real blow against all those patent claims for taking a business and doing it on the Internet and possibly any claim for pure software without new hardware. Software patent supporters feared—and opponents hoped—that the Alice ruling could lead to wholesale invalidation of software patents. And these hopes and fears were partially realized: in the months after the Alice decision, a lot of software patents were declared invalid by lower courts. This had an immediate effect on the patent trolls' favorite strategy, because their nastygrams to businesses of the form "we will win eventually in court so you might as well spare the effort and pay now" lost credibility.

But software patent owners had a powerful ally in the Federal Circuit, which is responsible for interpreting and fleshing out the Supreme Court's rulings. The Federal Circuit is more favorable to software patents, and since 2014 it has interpreted the high court's rulings in a way that limits the Alice decision's impact on software patent holders.