Business Method Patents and the Bilski Case

Wealth of Ideas Newsletter, January 2009

Every once in a while, a case comes along that changes the world of intellectual property in a profound way. State Street Bank v. Signature Financial Group, decided in 1998, opened the floodgates to a slew of business method patents - including patents that were the object of some of the biggest and most hotly debated patent cases (such as Amazon's "one click" patent and many others related to doing business online).

Ten years later, the Bilski decision may have undone a lot of what State Street had wrought.

To recap the case: Two inventors, Bernard Bilski and Rand Warsaw, had developed a hedging strategy for use in commodities trading, and attempted to patent it about a decade ago. The patent application was not on a computer program or any other piece of technology – just a method by which commodity sellers could use hedge contracts to reduce the risk that a commodity's wholesale price might change. The USPTO rejected their application. Bilski and Warsaw appealed that decision and, in October 2008, the Court of Appeals for the Federal Circuit (the CAFC, which hears patent appeals) upheld the USPTO's ruling on the grounds that the method was not patentable. The CAFC's ruling defined patentability in a newer, stricter way, one that prevents patents in which all the steps take place inside the human mind. Patentability is now limited to inventions that are 1) tied to a particular machine or 2) transform an "article" into a different state or thing.

Ramifications

The critics of the State Street decision see the Bilski decision as correcting a wrong. But business method patents are nothing new. In fact, as early as in the 1892 Patent Office granted U.S. Patent 467,872 for Means for Securing Travelers Against Loss by Accident. Nor have business method patents gone forever; it is still possible to obtain a business method patent—there is even a section of the USPTO website devoted to helping inventors obtain business method patents. It’s just going to be a lot harder to prove that a given business method deserves a patent. And whether that’s good news or bad news is an issue that many in the patent world are still debating.

The concern that the Bilski decision causes for many inventors attempting to patent software (and the more abstract business methods) is the requirement that the method "must be tied to a particular machine or apparatus." Most computers, with their ability to run several programs at once without being dedicated to any of them, are not considered a "particular machine." Indeed, the "machine-or-transformation test" is one that 9 out of 12 of the justices agreed was problematic in the age of the Internet. (But they denied Bilski a patent all the same.)

For the overworked and understaffed Patent Office, the idea of fewer business method and software patents might just be a welcome change. But if it goes too far and takes away the patent rights of inventors who hold existing business method and software patents, the Bilski decision might set a dangerous precedent. And for companies like Microsoft whose fortunes are built on software (not hardware) patents, Bilski is a frightening specter. As one blogger commented, the day of the Bilski decision was "a good day for Open Source."

So where do we go from here?

Bilski and Warsaw just asked the Supreme Court to review this decision. Whether or not the Supremes will agree to hear the case remains to be seen. In the meantime, it's going to be much more difficult to obtain a business method or software patent from here on out, and even harder to enforce them. GPC will cover the breaking news on the Bilski case in our Wealth of Ideas blog as well as this newsletter.

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