Industrial Organization in Context: Updates and discussion topics, 2010.

June 2010 Bilski v. Kappos

On page 512, referring to the expansive trend in standards for patentability under U.S. law in general and in particular to business method patents, there is a short discussion of In re Bilski:

This particular tide may be turning, or at least eddying about. Following a series of Supreme Court decisions that narrowed some aspects of patent protection,65  the October 2008 C.A.F.C. Court decision In re Bilski ruling confirmed the U.S. Patent and Trademark Office's denial of a business method patent for a way to hedge risk in commodities trading. Retreating somewhat from the broad reach of Court decision State Street Bank, the C.A.F.C. found in patent law the requirement for business method patentability that the method either be "tied to a particular machine or apparatus" or "transforms a particular article into a different state or thing" (2007-1130, p. 10). Bilski's method satisfied neither part of this machine-or-transformation test, and was not patentable.66

The U.S. Supreme Court issued its decision in the appeal mentioned in footnote 66 on 28 June 2010.1  The Court was unanimous in confirming Patent Office denial of Bilski's application for a patent on a method of hedging risk, the range of views contained in the lead and two concurring opinions seems to guarantee that a future court will revisit the issue of business method patents.

It may be most efficient to present Justice Breyer's summary, in a brief concurring opinion, of four points shared by the majority2  and concurring3  opinions (slip op., pp. 2--3, internal citations omitted):

The majority opinion viewed the issue ("whether a patent can be issued for a claimed invention designed for the business world") in the context of an evolutionary change in the nature of innovation (p. 8):

It is true that patents for inventions that did not satisfy the machine-or-transformation test were rarely granted in earlier eras, especially in the Industrial Age. . .. But times change. Technology and other innovations progress in unexpected ways. . .

and (p. 9):
The machine-or-transformation test may well provide a sufficient basis for evaluating processes similar to those in the Industrial Age---for example, inventions grounded in a physical or other tangible form. But there are reasons to doubt whether the test should be the sole criterion for determining the patentability of inventions in the Information Age. . . .the machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.
The majority settled the issue before it without addressing the broad question of the patentability of business methods (p. 13):
Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis of this Court's [previous] decisions . . ., which show that petitioners' claims are not patentable processes because they are attempts to patent abstract ideas.

Justice Stevens' opinion includes a thorough treatment of received views on what types of innovations have and have not been considered patentable. It also discusses economic arguments about business method patents (pp. 41--44, footnotes and internal citations omitted, not set off as a list in the original):

  • Innovators often capture advantages from new business methods notwithstanding the risk of others copying their innovation. Some business methods occur in secret and therefore can be protected with trade secrecy.
  • And for those methods that occur in public, firms that innovate often capture long-term benefits from doing so, thanks to various first mover advantages, including lockins, branding, and networking effects.
  • Business innovation, moreover, generally does not entail the same kinds of risk as does more traditional, technological innovation. It generally does not require the same "enormous costs in terms of time, research, and development," . . ., and thus does not require the same kind of "compensation to [innovators] for their labor, toil, and expense," . . .
  • Nor, in many cases, would patents on business methods promote progress by encouraging "public disclosure." ůMany business methods are practiced in public, and therefore a patent does not necessarily encourage the dissemination of anything not already known. And for the methods practiced in private, the benefits of disclosure may be small: Many such methods are distributive, not productive---that is, they do not generate any efficiency but only provide a means for competitors to one-up each other in a battle for pieces of the pie. . . .
  • In any event, even if patents on business methods were useful for encouraging innovation and disclosure, it would still be questionable whether they would, on balance, facilitate or impede the progress of American business. For even when patents encourage innovation and disclosure, "too much patent protection can impede rather than `promote the Progress of . . . useful Arts."' . . .
  • The primary concern is that patents on business methods may prohibit a wide swath of legitimate competition and innovation. . .  Innovation in business methods is often a sequential and complementary process in which imitation may be a "spur to innovation" and patents may "become an impediment." . . .

Although they agreed that it had been proper to reject Bilski's application for a patent, the four concurring justices would have embraced the opportunity to settle the broader question presented by the appeal (p. 2):

The wiser course would have been to hold that petitioners' method is not a "process" because it describes only a general method of engaging in business transactions---and business methods are not patentable.

65. See eBay Inc v. MercExchange (547 U.S. 388 2006), making clear that a finding that a patent has been infringed does not automatically entitle the patent-holder to an injunction against the infringer; this weakens the bargaining position of patent trolls; International Co. v. Teleflex Inc. et al. (550 U.S. 398 2007), validating rejection of a patent claimed for a combination of two known elements on the ground that the combination was obvious; and Microsoft Corp. v. AT&T (550 U.S. 437 2007), establishing that U.S. software patents cannot be enforced outside the United States.

Back to text at footnote 65.

66. In June, 2009, the U.S. Supreme Court agreed to hear an appeal of the Court decision Bilski ruling.

Back to text at footnote 66.

1. Bilski v. Kappos 561 U.S. ____ (2010).

Back to text at footnote 1.

2. Authored by Justice Kennedy, joined in by Chief Justice Roberts and Justices Thomas, Alito, and Scalia. Justice Scalia did not join in two sections of Justice Kennedy's opinion.

Back to text at footnote 2.

3. Authored by Justice Stevens and joined in by Justices Ginsburg, Breyer and Sotomayor.

Back to text at footnote 3.