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U.S. appeals court takes up closely watched patent fight

By Erin Geiger Smith

(Reuters) - A federal appeals court is set to consider a case closely watched by Google Inc, Facebook Inc and other technology companies that could determine how far the patent system should go in protecting software inventions.

The U.S. Court of Appeals for the Federal Circuit, which specializes in patent cases, will hear arguments on Friday over whether patents should be granted for business methods whose main innovation is that they require the use of a computer.

Only some business methods can be patented, an issue that has gone to the U.S. Supreme Court.

CLS Bank International, which runs a foreign-exchange settlement system, is seeking to convince the Washington, D.C., court's nine judges that financial markets technology company Alice Corp's patents represent abstract ideas and are thus invalid.

Alice, based in Melbourne, Australia, and owned in part by National Australia Bank Ltd, holds a portfolio of patents, including four that cover a computerized system for exchanging financial obligations. The company argues that when an invention requires the use of a computer, even if it involves an abstract idea, "it's patentable if the computer plays a significant role in the invention."

In July, a three-judge panel of the appeals court agreed with Alice in a split decision. But dissenting Judge Sharon Prost criticized the majority for flouting Supreme Court precedent. CLS was later granted its petition to re-argue the case before the full court.

CLS, which originally brought the case in 2007, has argued that Alice's patents seek to monopolize an idea that's long been a part of financial transactions.

"Computer-implemented methods are important to the economy, and we hope this case can shed some light" on the law in the area, CLS attorney Mark Perry, of the law firm Gibson Dunn & Crutcher, said in an interview.

An attorney for Alice declined to comment, citing the pending litigation.

Many technology and Internet companies worry that too many patents have been granted for simple ideas, hindering others from building innovations using those principles. They say this slows technology development, though other companies, including smaller developers and individuals, say inventors deserve legal protections for their innovations.

Google, Dell Inc and Facebook filed a friend-of-the-court brief criticizing the appeals panel's earlier decision.

They wrote that "bare-bones patents" like Alice's do not innovate enough on their own to deserve patent protection. "The real work comes later, when others undertake the innovative task of developing concrete applications," they wrote.

LinkedIn Corp, Twitter and others also submitted a friend-of-the-court brief, arguing against too much leniency in granting patents, though they did not pledge support for either side in the case.

International Business Machines Corp, on the other hand, filed a brief saying most software inventions qualify for patent protection. IBM, which has topped the list of U.S. patent recipients for 20 years, cautioned the court against creating a strict rule that would further limit protection, though it did not side with either party in the lawsuit.

John Vandenberg, an attorney at the law firm Klarquist Sparkman who filed the brief for the LinkedIn and Twitter group, said a finding in favor of CLS could allow judges to throw out other lawsuits immediately if they determine a patent covers an abstract idea.

The case comes after two Supreme Court decisions involving similar issues of patent eligibility.

In Bilski v. Kappos, the high court found in 2010 that a business-method patent for guarding against investment risk was an abstract idea and could not be patented. Last March, in Mayo v. Prometheus, the court ruled that a company could not patent a diagnostic process involving blood tests because observations about natural phenomena cannot be protected.

The case is CLS Bank International et al v. Alice Corporation Pty Ltd, U.S. Court of Appeals for the Federal Circuit, No. 11-1301.

(Reporting By Erin Geiger Smith; Editing by Martha Graybow and Douglas Royalty)

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