US Supreme Court will rule on NAB's patent gamble

The Supreme Court of the United States may resolve the fate of one of the more esoteric investments of National Australia Bank.

Last week, the court agreed to hear Alice Corporation versus CLS Bank International, a complex legal wrangle that turns on how software is patented. The court will hear arguments early next year.

In May, 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 patents that the firm said described 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 are valid, is that their approach closely parallels the business methods adopted by the bank.

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 full bench's decision has been much discussed - and much attacked - in specialist legal circles, mainly over its failure to reach a clear consensus on the legal issues. The judges had agreed that Alice's patents weren't valid but couldn't agree on what test should apply when determining the validity of a software patent.

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.

Curiously, mention of its holding in Alice vanished from NAB's 2013 annual report.