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Supreme Court hedges on business method patents

Bilski v. Kappos decision does little to quiet a fierce debate on the value and harm of such patents raging in the business and academic worlds, Stanford Law fellow Larry Downes writes.

Editors' note: This is a guest column. See Larry Downes' bio below.

Those who hoped the Supreme Court today would finally end the scourge of so-called business method patents will have to wait a little longer.

In the closely watched case of Bilski v. Kappos, the justices on Monday agreed with a lower court and the Patent Office that a claimed system to hedge energy prices using weather projections was merely an "abstract idea" ineligible for patent protection. (See PDF of ruling.)

But the court could not agree on a general prohibition for business method patents urged by the U.S. Court of Appeals for the Federal Circuit in earlier proceedings. As a result, Monday's decision does little to quiet a fierce debate on the value and harm of such patents raging in both the business and academic worlds.

The Federal Circuit--the same court that more than 10 years ago opened the floodgates to business method patents--had rejected the Bilski patent because it was not tied to a particular "machine," and it did not affect any "transformation" of matter in the physical world.

Adoption of the "machine or transformation" test by the Supreme Court would have effectively ended the patentability of business methods and would have sharply circumscribed the availability of patent protection for most software claims. But a majority of the Supreme Court, led by Justice Anthony Kennedy, rejected the machine-or-transformation test as a misreading of both the Patent Act and the court's earlier patent decisions.

"This court's precedents establish that the machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes," Justice Kennedy wrote. But it is "not the sole test for deciding whether an invention is a patent-eligible 'process.'"

State Street lives
The explosion of business method patents--and the messy trail of litigation that has followed--began with a Federal Circuit case from 1998. Before that time, basic business methods were widely assumed to be unpatentable. But in the State Street Bank case, the Federal Circuit found no reason why patents should be limited to inventions that included some kind of novel equipment or chemical process to implement.

In State Street, the Federal Circuit rejected a general ban on business method patents. Instead, lower courts were instructed to uphold such patents if they produced a "useful, concrete, and tangible result," and met all the procedural and substantive requirements of patentability, including novelty and "nonobviousness."

A business method patent, like all patents, gives the holder a 20-year monopoly on the use of the method.

Patents have been granted for the process of exercising a cat with a laser pointer, for reserving office bathrooms, and for enticing customers to order more food at fast-food restaurants. A patent was even granted for the process of obtaining a patent.

After State Street, the Patent Office began granting applications for basic paper-and-pencil systems and simple software implementations, including everything from Amazon.com's "1-Click" feature to seemingly obvious or dangerously broad innovations.

Patents have been granted for the process of exercising a cat with a laser pointer, for reserving office bathrooms, and for enticing customers to order more food at fast-food restaurants. A patent was even granted for the process of obtaining a patent. In 2007 alone, the Patent Office received more than 10,000 applications for business method patents. The office has a backlog today of more than 600,000 applications overall.

The State Street decision has been widely condemned as a source of increasing and expensive litigation, especially in Internet applications. One academic study found that the creation of a new online product or service today would likely infringe as many as 4,000 patents, many of them ridiculously broad.

Groups such as the Electronic Frontier Foundation have been kept busy challenging some of the worst excesses of the Patent Office's generosity. Companies such as Amazon and Microsoft have questioned the wisdom of business method patents, even though those companies hold many such patents.

In rejecting Bilski's claims in 2008, the Federal Circuit appeared ready to recant the State Street case, perhaps in the wake of widespread criticism of the damage its "innovation" in broader patent rules had caused. (The Federal Circuit is the only court that hears appeals in U.S. patent cases, and its decisions are therefore highly influential with other federal courts and the Patent Office.) Indeed, several judges of the Federal Circuit called for State Street to be explicitly overruled.

Instead, Monday's Supreme Court decision refused to endorse or reject State Street. And while the majority rejected the "machine or transformation" requirement as a threshold test for patentability, the opinion did not foreclose the adoption of other "limiting" criteria.

Justice Kennedy, who in earlier decisions has expressed skepticism about the widespread approval of business method patents by the Patent Office, encouraged the Federal Circuit, in future cases, to try other tests. His opinion, however, gave little guidance to lower courts of the kinds of less severe limits that would be consistent with the Patent Act.

Justice Stevens' last effort fails
All nine Justices agreed that the Bilski patent was rightly rejected, but there was sharp disagreement over why. Justice John Paul Stevens, who on Monday retired from the Supreme Court after 34 years, wrote a lengthy concurring opinion that had the look of a failed effort at a majority decision.

In Stevens' view, the State Street decision was an unfortunate anomaly, one he was eager to reject outright. His concurrence, joined by Justices Ruth Bader Ginsburg, Stephen Breyer, and Sonia Sotomayor, argued that a "general method of engaging in business transactions" is not patentable and, other than the last decade, has never been thought to be otherwise.

"[A] claim that merely describes a method of doing business does not qualify as a 'process,'" Stevens wrote, and therefore can never satisfy the requirements for a patent.

Justice Stevens' scholarly opinion, filled with a detailed history of process patents in England and the United States, is almost three times the length of the majority opinion. It is likely that Stevens was initially assigned to write on behalf of the court but that his broad condemnation of business method patents could not secure the necessary fifth vote to speak for the court.

Reading between the lines, in fact, it appears that Justice Kennedy was initially in a Stevens majority. When he and Stevens could not agree on an outright rejection of business methods, however, Kennedy joined with the four other justices who did not sign on to Stevens' opinion and wrote on their behalf.

This also would explain why the Bilski case, argued last fall, was not released until Monday, the last day of the Supreme Court's term.