National Australia Bank has lost its most recent court battle in a long-running effort by the bank to earn a return on a speculative, 18-year-old investment in a technology company.
On Friday, the full bench of the United States Court of Appeals for the Federal Circuit ruled against NAB's half-owned associate Alice Corporation and in favour of CLS Bank.
Alice Corp had been seeking to enforce a patent that the firm contended describes the operating model of the specialist foreign exchange bank, CLS.
Alice Corp's patents describe a method by which banks exchange obligations through the use of shadow credit and debit records held by a supervisory institution. The patents describe the priority order and limitations that apply to the processing of the obligations, and the need for each bank that uses the supervisory institution to maintain a credit balance in the shadow record.
The significance to CLS Bank of these patents, assuming they were valid, was that the approach closely parallels the business methods adopted by banks.
Established in 1997 by several of the world's major banks, CLS Bank is a collaborative enterprise that aims to curtail (and almost eliminate) settlement risk. It arose from the then usual practice of delayed settlement on foreign exchange transactions. Scores of banks and other financial institutions now own CLS, including NAB and Australia's other major banks.
The US Court of Appeals held that "the asserted claims drawn to methods, computer-readable media, and systems are not patent eligible and are hence invalid." The Alice Corporation's patents, the court ruled, "fail to recite patent-eligible subject matter."
The court took a dim view of the patent claims.
The majority of the court bench wrote: "The requirement for computer participation in these claims fails to supply an 'inventive concept' that represents a non-trivial, non-conventional human contribution or materially narrows the claims relative to the abstract idea they embrace.
"Nor does requiring the supervisory institution to create and adjust a 'shadow credit record' and a 'shadow debit record' narrow the claims from the realm of abstraction.
"With the term 'shadow record', the claim uses extravagant language to recite a basic function required of any financial intermediary in an escrow arrangement – tracking each party’s obligations and performance.
"Viewed properly as reciting no more than the necessary tracking activities of a supervisory institution, the steps relating to creating a 'shadow record' and then obtaining and adjusting its balance are insignificant '[pre]-solution activity'."
The court also concluded that "providing end-of-day instructions to the exchange institutions to reconcile the parties' real-world accounts with the day's accumulated adjustments to their shadow records is a similarly trivial limitation that does not distinguish the claimed method."
The majority of the bench wrote that "upholding Alice's claims to methods of financial intermediation would pre-empt [the] use of this approach in all fields, and would effectively grant a monopoly over an abstract idea."
Melbourne inventor Ian Shepherd, through his company Alice Corporation Pty Ltd, filed a series of patents in the early 1990s in the US and elsewhere.
NAB acquired a stake in Shepherd's business in 1995. The bank has invested A$26 million in Alice Corporation since that time, including a top up of US$700,000 during the period of the full court appeal. The bank holds 50 per cent of the ordinary shares and all of the preference shares in the company.