Wealth of Ideas Newsletter, November 2009

By the time oral arguments began November 9 before the US Supreme Court in the Bernard L. Bilski v. David J. Kappos case, more than 70 separate industry and policy groups had filed amicus curiae (“friend of the court”) briefs, seeking to bring various issues to the Court’s attention.

These groups have different reasons for opposing or supporting a ruling in favor of Bilski, but many share the opinion that business method patents have the potential to stifle innovation, free trade and maybe even free speech.

Are business methods patents really such a menace?

Bilski in Brief

The case that would become Bilski v. Kappos (or, simply, “Bilski”) first began over a decade ago, when inventors Rand Warsaw and Bernard Bilski, founders of Pittsburgh-based WeatherWise USA Inc., filed a patent application for a method of trading weather risk. The patent office rejected their application on the basis that it did not involve a patentable subject matter. The inventors first appealed the examiner’s decision to the Board of Appeals and Interferences (BAI) at the USPTO. The BAI upheld the examiner’s rejection.

Bilski and Warsaw then appealed that decision to the Court of Appeals for the Federal Circuit (CAFC), which hears patent appeals. In October 2008, the CAFC issued an en banc decision upholding the USPTO's rejection on the grounds that the method was not patentable. In this landmark decision, the CAFC addressed the core question of patentability of business method patents.

Reversing itself, the CAFC defined patentability in a much more narrow way than it previously did in its famous State Street decision (State Street Bank v. Signature Financial Group). Patentability is now limited to inventions that are 1) tied to a specific machine or 2) transform an “article” into a different state or thing. This became known as the “machine or transformation” test. (For more background info on the Bilski case, see “Business Method Patents and the Bilski Case,” Wealth of Ideas newsletter, January 2009.) Bilski appealed this to the Supreme Court and was granted certiorari.

Red Hat’s Amicus Brief: Should Software Be Patentable?

Red Hat announced on October 1, 2009 that it had filed its own amicus brief with the Supreme Court. Although the Bilski case concerns the standard for patenting a process that isn’t tied to a particular machine – not software in particular – it raises many questions that also relate to software patents.

“Our patent system is supposed to foster innovation, but for open source and software in general, it does the opposite,” said Rob Tiller, Red Hat vice president and assistant general counsel for IP, in a news release issued by the open source company on October 1. “Software patents form a minefield that slows and discourages software innovation. The Bilski case presents a great opportunity for the Supreme Court to rectify this problem.”

Red Hat contends that the complex nature of software and the often vague descriptions of software processes in many software patents make it difficult for software developers – both open source and otherwise – to produce new programs without risking a lawsuit. For that reason, Red Hat is requesting that software be excluded from patentability altogether.

It is easy to see the motivation behind this position. Red Hat is not an innovator. They have never developed any new software. Their business model was based on taking an open source Linux operating system, packaging it in a box, offering some tech support and selling the heretofore free product developed by others for a profit. Just as generic drug companies profit from R&D done by an innovator pharma company, Red Hat – which does no R&D on its own and has no need for patents, which are meant to protect innovation – does the same to other software companies. For Red Hat, patents are a menace standing in the way of ripping off profits from products invented by others.

Business Method Patents and E-Commerce

Although one of the most well-known business method patents was issued to an online retailer – namely, Amazon.com’s famous “One-Click” patent, which it wielded against competitor BarnesandNoble.com – online retailers nonetheless are largely opposed to business method patents.

In an amicus brief filed on behalf of seven major online merchants – including Overstock.com, Crutchfield Corp. and L.L. Bean Inc. – attorney Peter Brann argues that there are 11,000 patents related to the Internet, and many, if not most, of them are business method patents. Furthermore, Brann points out that “the number of patent infringement cases filed has nearly doubled in the 15 years since federal courts first recognized the legitimacy of business method patents.”

The brief argues that because of the nature of e-commerce, online retailers are especially vulnerable to patent lawsuits. And because it’s much cheaper and easier to take a license for several thousand dollars than to enter into a lengthy lawsuit that could cost upwards of $2 million, online retailers usually settle without a fight.

“Internet retailers collectively spend hundreds of millions of dollars on patent settlements that would be much better spent on innovation, job creation and job retention,” Brann contends in the brief.

Here, again, the motivation behind this position is transparent. Unlike Amazon, which invented a new business model – online retailing – most other online retailers are not innovators and follow in Amazon’s footsteps. They don’t usually file for patents and have no need for them.

Et tu, ACLU?

Oddly enough, even the ACLU has found an angle in the Bilski case that it finds problematic. In an amicus curiae brief it filed back in 2008 – before the Federal Circuit Court heard, and rejected, Bilski’s appeal – the ACLU argued that allowing the Bilski patent is tantamount to allowing the patenting of abstract ideas. And that, contended the ACLU, could endanger free speech.

"If the government had the authority to grant exclusive rights to an idea,” says Christopher Hansen, senior staff attorney with the ACLU’s First Amendment Working Group, in the ACLU’s press release regarding the brief, “the fundamental purpose of the First Amendment - to protect an individual's right to thought and expression - would be rendered meaningless."

This, of course, is sheer nonsense, as no patent can limit the content itself, only a specific mechanism of content delivery. It is not unusual that the ACLU finds itself on the wrong side of an argument.

In Defense of Business Method Patents

Not all the briefs filed regarding the Bilski case were anti-business method patents, however. Global management consulting leader Accenture and Pitney Bowes filed an amicus brief back in March 2009 stating that business methods should be patentable without physical limitations such as the “machine or transformation” test.

"[T]he Federal Circuit in Bilski struck down an analysis that has worked for more than a century, regardless of the technology," said the brief, arguing that the machine-or-transformation test "violates this Court's precedent, ignores Congressional intent, arbitrarily limits the available scope of patentable processes, and anchors the standard for patent eligibility in the Machine Age of the early 20th century."

Indeed, despite erroneous allegations to the contrary, business method patents did not originate with the State Street decision in 1998. They go way back. In 1778, an English patent was issued to John Knox for a “Plan for assurances on lives of persons from 10 to 80 years of age.” Business methods patents had been issued in the US since 1799 when Jacob Perkins received a patent for a method of “Detecting Counterfeit Notes”.

The motivation for patents comes from the need to foster the progress of society by encouraging inventors to disclose their inventions to the public in a quid-pro-quo exchange for limited exclusivity. Science benefits from it, technology benefits from it, so why shouldn’t business benefit from it too? Innovative methods of doing business ultimately benefit consumers.

The fundamental test for patentability has always been: (a) usefulness; (b) novelty; and (c) non-obviousness. If an invention is useful, novel and non-obvious, it should be patentable no matter what the subject matter of the invention is, as public disclosure of novel methods will ultimately benefit the society.

Software patents have also been issued long before the State Street Bank decision. Although pure algorithms are not patentable, a computer running a specific and novel software program was long deemed to be patentable. The age of industrial revolution is long behind us. In the Information Age, most innovation is done today in the area of software that runs processors and other information processing – making everyday devices around us smart. Innovation in software and information processing drives much of the innovation in other industries. Making software unpatentable would undoubtedly stifle innovation across many industries.

Overlooked in many of these arguments is the fact that business method patents have been recognized by Congress, which in the 1999 American Inventors’ Protection Act legislated special provisions for business method patents (which became the law – 35 U.S.C. §273). It would be the height of judicial activism for the Supreme Court to overrule the Congress and to rule business method patents out of existence.