Of all the risks encountered in the software and information technology space, patent infringement is one of the most difficult to control, as well as potentially one of the most costly. This is because the profusion of business method patents issued in the past two decades has created a legal minefield where
The stakes are extremely high. Damages in patent infringement litigation can run into the hundreds of millions of dollars, and the patent holder can also obtain an injunction forbidding further use of the patented invention. Continuing to use a patented invention with knowledge of a patent holder's claim of right, even if these rights are disputed, can lead a court to determine that the infringement was willful and "enhance" (or even multiply) the patent holder's damage award.
Where the claimed patent involves a critical business process of the enterprise, not only the bottom line but also the enterprise's very ability to function may be imperiled, even though the threat is often unforeseeable beforehand without an expensive patent search that few companies think or care to undertake for seemingly nonproprietary business processes.
The risk landscape may soon be dramatically altered, however, by an upcoming U.S. Supreme Court decision that's poised to rewrite the law of business method patents.
Origins of the business method patent and the patent troll
Most software and Web patents are for business methods. After the U.S. Court of Appeals for the Federal Circuit confirmed in State Street Bank v. Signature Financial Group that methods of doing business could be patent-eligible subject matter if they produced a "useful, concrete and tangible result," a flood of business method patents were issued during the dot-com boom of the late 1990s and early 2000s.
This period also saw a spike in patent infringement cease-and-desist letters and "offers to license" from holders of business method patents. Many such organizations were so-called "patent trolls" -- they had no interest in commercializing their inventions, but were only seeking to extract license fees and infringement damages from companies with little inkling that apparently routine or ubiquitous methods and processes could be patented.
In the past few years, the courts and the Patent and Trademark Office (PTO) began to scrutinize business method patents more skeptically. In 2001, the court hearing Amazon.com Inc.'s infringement suit against Barnesandnoble.com LLC invalidated Amazon's "1-Click" patent for a single-user-action electronic fulfillment method on the ground that it was obvious in light of the prior art.
The PTO has now instituted a procedure whereby patents for business methods are given an independent second review, resulting in far fewer business method patents being issued and a corresponding decrease in applications. Unlike copyrights and trademarks, a patent is expensive to apply for, to maintain and defend against invalidation, requiring tens of thousands of dollars in attorney and filing fees -- and if litigation is involved, that amount is usually multiplied tenfold or twentyfold.
Federal circuit rules on patentability
In Bilski v. Kappos, now before the U.S. Supreme Court, we have a landmark case that will test the viability of business method patents, including computer or network processes. In Bilski, the Patent Office refused to grant a patent for a method of hedging risk in commodities trading, not on obviousness grounds (which was the issue in the Amazon case), but rather because the application was not directed to patent-eligible subject matter.
To be patentable under the statute (35 U.S.C. 101), an invention must be a "new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof." Business method patents are "process" patents. The Federal Circuit court, hearing the patent applicant's appeal, agreed with the Patent Office that the application did not describe a "patent-eligible process." In its full-panel opinion, reported at 545 F.3d 943 (2008), the court rewrote the legal standard for patentability of business methods, throwing the validity of more than a decade of business method patents into question.
Under the court's legal test (referred to as the machine-or-transformation test), a process is only patentable if (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. The rationale for these limitations is that the patent statute was never intended to protect abstract principles, laws or phenomena of nature (even if just discovered) or mental processes, since, as the court put it, these are "the basic tools of scientific and technological work." In the court's view, requiring the limitation of process patent claims to a specific machine or the transformation of some specific matter safeguards against a patent owner pre-empting all uses of a fundamental principle that everyone ought to be able to resort to in the furtherance of progress.
The concern to prevent any patent owner from pre-empting all uses of a principle led the Federal Circuit to make some further caveats. First, if a principle can be implemented only by using a particular machine, limiting the patent claims to that machine will not turn the principle into a patent-eligible process. So, for example, in Gottschalk v. Benson, 409 U.S. 63 (1972), discussed extensively in Bilski, the Supreme Court held that a numerical algorithm for converting binary-coded decimal numerals into pure binary numerals was not a patentable process even when limited to a digital computer, since the algorithm will always be implemented on a computer. (This concept obviously has great significance for the validity of many software and Internet business method patents.)
Applying the machine-or-transformation standard with these caveats, the Federal Court affirmed the Patent Office's denial of the patent claims for Bilski's risk hedging method. It also eviscerated (without formally overruling) its ruling in State Street by holding that the "useful, concrete and tangible result" standard is no longer valid. At the same time, it refused to categorically exclude business methods as patent-eligible subject matter.
Under the Federal Circuit's reasoning, most business methods implemented through software or Internet would no longer be patentable, and a lot of patent trolls' cudgels would vaporize in their hands.
In part 2 of this tip on business method patents, find out why although Bilski's patent is "dead," any celebration of the imminent death of business method and software patents is premature.
Andrew M. Baer is an attorney and founder of Baer Business Law LLC, a Philadelphia firm focused on providing clients with cost-efficient business counseling and transactional assistance, particularly in the areas of technology and intellectual property law. Baer can be contacted at email@example.com.