Most attorneys are not surprised to learn that it is possible to patent a unique design for an automotive engine or an innovative medical technique. But, patenting the idea for a method to hedge risk may raise the eyebrows of even the most seasoned attorney. Since the late 1990s, a significant number of companies and individuals have believed that patent protection should no longer be exclusive to scientists burrowed away in their laboratories or engineers adorned with their stereotypical pocket protectors. Instead, they believed that these inventors must make room for sales managers, business teams, and CEOs whose innovative "business methods" should be eligible for patent protection. This issue has been the source of some controversy in the patent community, and decisions from the Federal Circuit have not been entirely clear or consistent with that court's precedents.
The U.S. Supreme Court recently weighed in on the issue when it decided Bilski v. Kappos, 1 a decision that could impact how you and/or your competitors view business method patents going forward.
First, what is a "business method"? It seems safe to say that to date, no precise legal definition of "business method" has emerged. Often, "business method" is used as a shorthand for describing an innovative way of doing business, often (but not always) utilizing computer software.
Formerly, innovations in business approaches and methods were considered not patentable, because they were considered more like an abstract idea rather than technology that produced a useful and tangible result. Business method innovations gained acceptance, however, after courts began to embrace the idea that software could be patentable.
Even ten years ago, software patents were highly controversial. They were hotly debated in such forums as the U.S. Patent Office's software patent public hearings of 1994. A number of courts, including the United States Supreme Court, struggled with whether software innovations could be protected and whether the proper mechanism should be patent or copyright law. Ultimately, the courts defined enough guidelines to judge what types of software innovations could be the subject of a patent.
The jurisprudence that developed through the software patent controversy paved the way for the ultimate acceptance of patenting innovations in business methods. As a result of the software patent controversy, courts assessed whether an invention could be the subject of a patent in a more abstract and general way. With courts growing more comfortable with software patents and their inherently abstract nature, the stage was set to apply that higher level of thinking in the context of a business method patent.
In July 1998, the U.S. Court of Appeals for the Federal Circuit decided State Street Bank v. Signature Financial Group, which took that next step when it held that a patent for managing mutual funds produced a useful and tangible result and, thus, the patent described proper patentable subject matter.2An immediate result of the State Street Bank decision was the creation of a new class of inventors. Business managers, sales personnel, CEOs, stock brokers, and others joined the corpus of potential inventors.
Business Method Patent Examples
Initially, business method patents were a hybrid of Internet technology and business innovation. Jay Walker's patents are a prime example. Jay Walker's name might not be immediately recognizable, but his company and its commercials are. Jay Walker's company is Priceline.com, and, with William Shatner as its spokesperson, Priceline.com's services became widely known. Walker's many patents covered, among other things, a reverse auction approach to locating airline tickets via the Internet, i.e. , the "name-your-price" ticket ordering system. His patents and business plan to secure large numbers of business method patents were featured as the cover story in the May 17, 1999 issue of Forbes magazine.
Perhaps spurred in part by the early successes of Jay Walker and others, as well as the Federal Circuit's decision in State Street Bank , companies in the dot-com era flocked to file these hybrid Internet/business method-type patents. However, this period also saw filings of what can be termed as "pure" business method patent applications. This new crop of filings no longer relied upon having a computer or Internet component to justify patentability, but rather showed a more aggressive patent drafting style by claiming innovative business approaches as the sole patentable subject matter. The claim at issue in Bilski is just one example of this type of business method.
In general, one way to assess the different types of business method patents is to examine them on a spectrum. At one end of the spectrum are traditional technology-laden innovations, such as new automotive engine designs or new chemical manufacturing process. The middle category contains the hybrid inventions. Software-implemented inventions, like e-commerce-type patents, exemplify this category. At the other end of the spectru are "pure" business method innovations.
The Invention At Issue in Bilski
The Bilski patent application claimed a "pure" business method innovation for managing or hedging the consumption risk costs of a commodity sold at a fixed price. The method sought to be patented comprised steps that did not require implementation with a machine. While patent claims are not the easiest pieces of literature to read and often appear a contortion of the English language, only a complete reproduction of Bilski's claim can convey the full impact of what Bilski was attempting to patent:
A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprises the steps of:
(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;
(b) identifying market participants for said commodity having a counter-risk position to said consumers; and
(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.
Supreme Court's Decision In Bilski
On June 28, 2010, the United States Supreme Court issued its long-awaited decision in Bilski, addressing whether inventions claiming business methods are eligible for patent protection. Notably, this was the first time in nearly thirty years that the Supreme Court has issued a decision in what constitutes patent-eligible subject matter.
Generally, for any invention to be eligible for patenting, the invention must comply with Section 101 of the U.S. Patent Act: "Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title."3While innovative methods are generally patentable, courts have crafted three limited, judge-made exceptions to what is patent-eligible subject matter under Section 101: an invention cannot be merely an abstract idea, a law of nature, or a physical phenomenon. Because Bilski's invention dealt with managing or hedging the consumption risk costs of a commodity ( e.g. , coal) that is sold at a fixed price and did not require a machine to implement it, a core issue in the case was whether the claimed subject matter was solely directed to an abstract idea, and hence would not constitute patent-eligible subject matter under Section 101.
The Supreme Court struck down the "pure" business method of Bilski as being merely an abstract idea that fails to recite patent-eligible subject matter. The Court explained that the primary claims of Bilski explain the basic concept of hedging, or protecting against risk, and that allowing petitioners to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea. Because the Court held that the claimed subject matter merely recited an abstract idea, Bilski's patent application was refused.
Although the Court struck down Bilski's pure business method claim, the Court's opinion chose a more flexible approach in examining whether a business method innovation will satisfy the patent-eligibility requirements of Section 101. They did this to ensure that future innovations are not foreclosed from patent protection by a test that is too rigid to accommodate unforeseen technologies. The Court's flexible test could allow software companies greater latitude in arguing that their software or e-commerce inventions are not merely abstract ideas, but rather recite patent-eligible subject matter. Parties may find this beneficial whether they are arguing to gain allowance of their software or e-commerce patent applications in the U.S. Patent Office, arguing in federal court that a patent is not invalid under Section 101, or confronting a potential licensee who seeks a lower royalty rate by claiming that the licensed patent is suspect under Section 101.
Of additional benefit to those seeking business method patents is that the Court rejected a categorical exclusion of business methods from the scope of patent-eligible subject matter. While the Court did not precisely define business methods, by rejecting a categorical exclusion, the Court avoided creating a bright-line rule that the U.S. Patent Office and the courts could have broadly used against such inventions.
Most people in the patent community, without regard to their role in it, desired clarity and a workable framework for determining patent eligibility from the Bilski Court. One may argue whether that was the result. It appears that the door may have been opened a little wider for software and e-commerce patents, but with that seeming flexibility, the Court has appeared to have re-introduced a degree of unbounded uncertainty. It remains to be seen how the lower courts, the Federal Circuit, and the Patent Office will apply Section 101 in the post- Bilski era.
The patent community may not have long to wait to see the Federal Circuit's response. The day after the Supreme Court decided Bilski, it granted certiorari in two other cases from the Federal Circuit, vacated the Federal Circuit decisions in those cases, and remanded them to the Federal Circuit for further consideration in light of Bilski. What the Federal Circuit does next undoubtedly bears watching. 1 130 S. Ct. 3218 (2010).
2 149 F.3d 1368 (Fed. Cir. 1998).
3 35 U.S.C. § 101 (2007).
John V. Biernacki is a Partner at Jones Day and a member of the bar in Michigan and Ohio. Susan M. Gerber is an Associate at Jones Day and a member of the bar in Ohio.