How Bilski v. Kappos may define the future of business method patents

The Bilski v. Kappos business method patents ruling may make users of third-party software and IT services reconsider strategies for managing patent infringement risk.

In part two, SearchCompliance contributor Andrew Baer focuses on a case that could change the landscape of patent infringement risk and litigation.   The first part of this tip discussed the legal history of business method patents

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 Many IT professionals may have heard of Bilski v. Kappos, in which the Patent Office did not grant a patent for a business method of hedging risk in commodities trading; the Federal Circuit court affirmed the denial.

The U.S. Supreme Court agreed to hear an appeal on Bilski v. Kappos, and the case was argued before the justices Nov. 9. While a ruling is not expected until June, a review of the oral argument transcript leads to two key conclusions:

  1. Bilski's patent is deader than Jacob Marley.
  2. However, any celebration of the imminent death of business method and software patents is premature.

The tenor of the questions posed to the patent applicant's counsel can only be described as incredulous. One by one, the justices raised common practices and techniques that could qualify as patent-eligible business methods using Bilski's argument: speed dating (Justice Sonia Sotomayor); an 80%-effective method of keeping students awake during an antitrust class (Justice Stephen Breyer); a method of maximizing wealth by buying low and selling high (Chief Justice John Roberts); and horse whispering (Justice Antonin Scalia).

Bilski's counsel soberly defended the potential patentability of each of these methods provided that it was new, useful and nonobvious in light of the prior art (the other requirements for patentability under the statute).

Bilski's argument is that hedging risk in commodities trading shouldn't be categorically excluded from patenting just because it doesn't centrally involve equipment, wires and electricity like the telephone and the telegraph. Only literary works, abstract principles and mental processes can be excluded, the argument goes, and Bilski's invention is none of these.

Despite the virtual certainty that the Supreme Court will reach the same result as the lower court with regard to the denial of Bilski's patent, what really matters for the landscape of patent risk in the software and IT industries is how it gets there.

The justices were clearly troubled by all the caveats to the Federal Circuit's machine-or-transformation test and by the difficulty (or impossibility) of determining where the test ends and the caveats begin, especially when the "machine" is a computer and the "process" or "method" is implemented by software.

It is hard to escape the conclusion that the Supreme Court justices find the "machine-or-transformation" test as spelled out by the Federal Circuit impractical to apply, as well as dissatisfying on an intellectual level. The government also argued that the court need not even address the patent eligibility of software innovations, since nothing like this was involved in Bilski's patent claims.

It is possible, therefore, that the court could rule narrowly and reject Bilski's patent using the very permissive standard for patent eligibility argued by his own counsel: abstract ideas and mental processes are not patent-eligible subject matter, but anything else -- i.e., anything that is rooted in the "real world," that is, a "practical application of a useful result" -- can (theoretically) qualify.

In the court's opinion technology may end up with the same definition as that given to hard-core pornography by Justice Potter Stewart in a famous 1964 Supreme Court case: 'I know it when I see it.'
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 On the other hand, the justices, particularly the newest one, Sotomayor, do seem to want some definition of patentability around "science or technology" or the "technological arts." The problem, as Bilski's counsel pointed out during his initial questioning, is how to define technology. When Justice Ruth Bader Ginsburg commented that in Europe, patentability is tied to a particular definition of technology, Bilski's counsel correctly responded that European patent law excludes business methods, so the European definition should not apply to the U.S. statute.

Reading the tea leaves, the "technology" requirement appeared to resonate with several justices, so this may show up in the final opinion. At the same time, for a variety of reasons, the justices seem concerned about defining technology too narrowly and would probably like the Patent and Trademark Office to step up and provide some further guidance in this area. Indeed, in the court's opinion, technology may end up with the same definition as that given to hard-core pornography by Justice Potter Stewart in a famous 1964 Supreme Court case: "I know it when I see it."

All in all, the risk associated with abstract and ethereal business method patents -- those patents, beloved of the patent trolls, that relate broadly to managing money, risk, liabilities, business relationships and other intellectual intangibles but don't get into IT nuts and bolts -- has diminished. However, where a software patent drills down concretely to interactions with a microprocessor or other effects of the software on a computer, for example, it is hard to argue that the patent is not "based in science or technology."

Therefore, while general internal business processes are probably less vulnerable to attack, the patents of smart business software developers -- industry players with granular knowledge of the technology that they are able to communicate to their attorneys drafting the patent claims -- should survive in some form, although certain broader claims may be invalidated. Both before and after the Bilski v. Kappos decision, users of third-party business software and IT services should consider shifting the infringement risk arising from these products and services to the vendor through contractual noninfringement warranties and infringement indemnification.

However the court rules, we can expect some, albeit limited, relief from the tornadic onslaught of the patent trolls.

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 andrew@baerbizlaw.com.


This was first published in February 2010
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