[EAS] Methods Patents

[Peter J. Kindlmann]

Methods and madness
May 8th 2008 | WASHINGTON, DC
From The Economist print edition


Patent reform may soon happen in the courts, if not on Capitol Hill

ONLY those inventions "worth to the public the 
embarrassment of an exclusive patent" should 
receive patent protection, declared Thomas 
Jefferson, himself an inventor and America's 
first commissioner of patents. Since his day some 
patents have proved to be more of an 
embarrassment than others. Most notorious are 
"business methods" patents, such as the patent 
held by Priceline, an online ticket agency, for 
the Dutch-auction method of selling tickets. 
Thousands of these patents have been issued since 
they were first recognised in 1998. But the 
federal court charged with hearing patent appeals 
has hinted that it may use a case, in which 
arguments were due to be heard on May 8th, to cut 
back the scope of patent protection for business 
methods.

The patent application submitted by would-be 
inventors Bernard Bilski and Rand Warsaw is 
startling in its breadth and simplicity: it 
claims exclusive rights to the process of using 
transactions to hedge the risk that demand for a 
commodity will change. The United States Patent 
and Trademark Office (USPTO) rejected the 
application because it was not limited to the use 
of a particular machine and did not describe any 
methods for working out which transactions to 
perform. Any device or method could be used, or 
none at all. As a result, the USPTO explained, 
the application amounted to an attempt to patent 
an abstract idea-the idea of hedging consumption 
risk using contracts.

Mr Bilski appealed. But rather than hear the 
appeal in the normal fashion, the court took the 
unusual step of calling for the parties, and 
anyone else with an interest in the case, to 
address not only whether the patent should be 
granted, but also whether the court should 
overturn the 1998 case in which it first held 
that business-methods patents could be awarded. 
That opened the door to a legal free-for-all by 
academics, industry, and inventors. The American 
Civil Liberties Union, a free-speech advocacy 
group, made its debut appearance in the field of 
patent law to argue that allowing patents on 
mental processes would run afoul of the 
constitutional protection for freedom of thought.

The outcome of the Bilski case could affect the 
validity of billions of dollars worth of 
business-methods, software, and financial 
patents. The firms that receive such patents are 
divided on their worth. Some companies that own 
lots of patents, including many business-methods 
patents, such as IBM and Microsoft, are 
nonetheless urging the court to cut back on 
"pure" methods patents and allow only patents on 
inventions that use machines or produce tangible, 
physical results. Other firms, such as Accenture 
and American Express, warn that the court will 
distort inventors' incentives if it restricts 
patents on useful methods for minimising risk or 
managing information.

John Squires, the chief intellectual-property 
counsel at Goldman Sachs, an investment bank, 
says business-methods patents are an important 
way to safeguard the invention of innovative 
financial techniques. He says reformers should 
focus on urging policymakers to improve the 
quality of issued patents of all kinds.

Some other Wall Street firms are more wary. 
Patents protect intellectual property, but they 
also breed lawsuits. Research by Josh Lerner of 
Harvard Business School found that patents on 
financial innovations were 27 times more likely 
than average to result in litigation. The 
defendants in these suits tend to be big 
investment banks and other financial 
institutions. Mr Lerner discovered that the most 
frequent plaintiffs in such lawsuits are 
patent-holding companies whose only line of 
business is the litigation of patent suits.

Given the stakes, this week's hearing is unlikely 
to be the last exchange of words on Mr Bilski's 
case. Whichever side ultimately loses will 
probably appeal to the Supreme Court. While the 
arguments rage in the courts, Congress seems 
content to do nothing at all about patent reform. 
On May 5th the Senate removed the bipartisan 
Patent Reform Act from its calendar. Among other 
sensible proposals, it would have switched the 
United States from a "first to invent" to a 
"first to file" patent system, which the rest of 
the world uses. But it is now back on the shelf, 
which is a pity. Courts can twiddle with the 
edges of statutory language, but only Congress 
can rewrite broken laws.

Copyright © 2008 The Economist Newspaper and The 
Economist Group. All rights reserved.

------------------------------------
You've heard me comment before on the broken 
state of the patent system. This is a case worth 
watching in the particularly embattled area of 
business method patents, "27 times more likely 
than average to result in litigation."  --PJK
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