You may not know it, but the co-founders of Zavee have a background as practicing lawyers. That fact is usually enough to keep us from blogging about legal topics on Zavee Thinking, but one of the end-of-term Supreme Court decisions issued yesterday is both interesting and important to small businesses: a patent case called Bilski v. Kappos.
The Court doesn’t handle patent cases very often, both because the legal issues rarely become Supreme-worthy and because the underlying facts are often very technical. Bilski is an exception on both counts, as the issue is extremely important and the facts aren’t very difficult.
Bilski filed for what is called a “business method” patent, in this case a procedure for instructing buyers and sellers how to hedge against the risk of price fluctuations in the energy sector. The patent application was originally denied because the Appeals Court held that a “process” was patent-eligible only if it either was tied to a particular machine or apparatus or physically transformed a particular article into a different state or thing (think of a process for cutting a diamond or desalinating seawater). This is called the “machine or transformation” test and it played a central role in the Bilsky decision.
No one can patent natural phenomena, laws of nature or (and this is critical) abstract ideas. In fact, the Supreme Court held that the Bilski patent was properly denied not because it failed the “machine or transformation” test – the Court rejected that as a litmus test for process patents – but because it was an abstract idea. The problem for business people is that the Court explicitly refused to define what kinds of business methods could both fail the “machine or transformation” test and pass the “abstract ideas” test – and thus be patent-eligible.
Why is this a big deal? The purpose of patent law (which was pioneered by Thomas Jefferson) is to encourage innovation by granting inventors who disclose their invention a monopoly over the subject of the patent. Some inventors don’t like that bargain: the formula for Coca-Cola has never been patented because its owners think disclosure is too risky – they worry that flavor chemists could reverse-engineer the formula and come up with something that tastes like almost like Coke but doesn’t violate the patent.
With business method patents the risk is the opposite: that despite disclosure businesses could inadvertently infringe on a patent just by conducting their business. Although the patent described in this famous Onion article would never be upheld, Congress was nervous enough about business method patents that in 1999 it enacted a specific defense against certain infringement claims relating to business methods. Even with this defense, however, businesses will have to choose between investing in resources to effectively monitor both new patents and their own business to prevent infringement or take the risk of possible litigation. Either choice is risky and potentially very expensive.
The fundamental question about business method patents is whether they help or hinder innovation. Another way to ask the question is whether the absence of patent protection would deter inventors from incurring the cost and risk of invention. In science and technology, the benefits of patents are clear: no one would invest in drug discovery if the results of their efforts immediately had to be shared – for free – with drug companies that hadn’t put any time or money into the research. On the other hand, methods of doing business have been competing in the marketplace for centuries without patent protection.
Using a similar analysis, four of the nine Justices concluded that business methods should not be patent-eligible, but they were outvoted (all nine agreed that the Bilski patent was too abstract to be eligible). The Court’s opinion has received critical reviews, since it was so narrowly decided that it leaves the important questions unanswered. Yet it seems inevitable that the Court will have to grapple with the issue of business method patents before too long. The lines are blurring between technology that is clearly patent-eligible and abstractions that clearly are not – a factor, perhaps, in the Court’s non-decision – and the risk to both businesses and inventors is great.
The Zavee takeaway:
- Whether methods of doing business are patentable is an important question, one the Supreme Court should have answered yesterday.
- If you are developing a novel way to do business, think twice before investing in a patent. Bilski didn’t kill the business method patent but it didn’t offer a strong endorsement, either.
- It’s not impossible that someday you will be on the receiving end of an infringement claim. If it happens, find the best patent lawyer you can and don’t give up hope – you may be able to beat the claim or even the patent itself.