The U.S. Supreme Court will rule for the first time in decades on patent protection for computer software, taking up a case that has divided the industry and may reverberate through the American economy.

The justices on Friday agreed to hear arguments on a patented system for limiting the risk that one party to a derivative trade won’t follow through on its obligations. The case splintered a federal appeals court in a ruling that one judge said called hundreds of thousands of patents into question.

On one side of the debate are Google, Facebook and JPMorgan Chase & Co., which say patent standards for software are too lax and open companies to unwarranted lawsuits. On the other are Microsoft and Oracle, whose trade group told the appeals court that limiting protection for genuine innovation could hurt the nation’s economy.

Raleigh-based Red Hat also has been a consistent opponent against software patents.

“This is going to affect virtually every industry,” said Linda Thayer, a patent lawyer with the Finnegan firm in Boston. “Nowadays, we’re in a highly connected, wired Internet world where pretty much everything is implemented by software. Where is the line where there is a true invention?”

The Supreme Court has struggled to decide what types of innovations qualify for patent coverage, generally imposing some limits without drawing categorical lines against legal protection.

On its website, Red Hat takes a stand against software patents.

“Red Hat has consistently taken the position that software patents generally impede innovation in software development and that software patents are inconsistent with open source/free software,” the company says.  ”Red Hat representatives have addressed this issue before the National Academies of Science, the U.S. Federal Trade Commission, and the U.S. Department of Justice. Red Hat is also a signatory to a petition to the European Union encouraging the EU not to adopt a policy of permitting software patents. We will continue to work to promote this position and are pleased to join our colleagues in the open source/free software community, as well as those proprietary vendors which have publicly stated their opposition to software patents, in that effort.”

However, Red Hat also acknowledges that it has created “a corresponding portfolio of software patents for defensive purposes.”

Earlier this year, Red Hat prevailed in a court battle in a patent case that the company declared as a “decisive victory” over so-called patent trolls.

However, the patent battle continues. 

“A relatively small number of very large companies have amassed large numbers of software patents,” Red Hat says. “We believe such massive software patent portfolios are ripe for misuse because of the questionable nature of many software patents generally and because of the high cost of patent litigation.”

Business Methods

In 2010, the justices divided over the rules governing patents for business methods, and last year the court limited patents for diagnostic medical tests. Most recently, in June, the court restricted companies’ ability to patent human genetic sequences. The Supreme Court has never directly said that software can be patented, although cases in the 1970s and 1980s involved software-related inventions.

The case centers on claims that CLS Bank International infringed patents owned by Alice Corp., a Melbourne-based company partially owned by National Australia Bank Ltd.

The software-patenting issue left the 10-member U.S. Court of Appeals for the Federal Circuit unable to produce a majority opinion.

The judges instead produced six separate opinions covering 125 pages. A majority said aspects of Alice’s patents covering a method of performing the idea weren’t eligible for protection, while the judges were evenly split regarding systems to implement that idea.

The Supreme Court will hear arguments in March or April and rule by July.

Eligibility Standard

The case involves the basic question of eligibility for patent protection. Other parts of the Patent Act, not directly at issue before the Supreme Court, impose additional requirements, including novelty and usefulness.

Alice argued in its appeal that the Federal Circuit is “admittedly and hopelessly fractured” on eligibility, necessitating Supreme Court review.

The company said the lead opinion at the Federal Circuit improperly required a showing that an invention was novel in order to clear the eligibility hurdle.

CLS argued that the lower court ruling is consistent with the policy behind the eligibility requirement: “ensuring that a patentee cannot preclude an entire realm of future innovation while contributing very little to the development of those inventions.”

Challenging Patents

That standard is important because it can be faster and cheaper to challenge a patent by arguing that an invention isn’t eligible for protection than to dig into details of the validity or infringement of the patent. The eligibility argument is used by many companies sued by owners of patents for common Internet functions.

“This issue is becoming very prominent in many district court cases involving software-related inventions and these new covered business method proceedings at the U.S. Patent and Trademark Office,” said Rob Sterne of Sterne Kessler in Washington. “Many experts believe that the law is very unclear right now and it’s hard to predict what the decision will be from any tribunal.”

Sterne’s firm handled the application process for the Alice patents, and Sterne declined to comment on the specifics of the case.

The case is Alice v. CLS Bank International, 13-298.