June 1 (Bloomberg) -- The U.S. Supreme Court agreed to consider what types of business methods qualify for patent protection in a case with ramifications for the software, biotechnology and financial services industries.

The justices today said they will review a lower court decision that narrowed the class of patentable inventions, excluding some innovations that don’t have a physical component. Because it came from the federal appeals court that handles all patent appeals, the ruling had marked a watershed in U.S. intellectual property law.

The issue is dividing companies. Microsoft Corp., International Business Machines Corp. and a financial-services industry trade group supported limits on business method patents at the appeals court, while others, including consulting company Accenture Ltd. and appliance maker Royal Philips Electronics NV, say the court’s requirements on inventors are too strict.

“The decision is overreaching, works an unnecessary sea change in deep-rooted principles of patent law and will necessitate a massive revaluation of America’s intangible technology assets,” Amsterdam-based Philips argued in papers urging the Supreme Court to step in.

The case will mark the first time since 1981 the Supreme Court has ruled on the types of innovations covered by the U.S. Patent Act. The justices will hear arguments and rule during the nine-month term that starts in October.

In the dispute before the court, inventors Bernard L. Bilski and Rand A. Warsaw are seeking a patent on a way to buy or sell energy at a fixed price based on the expected weather for a season.

9-3 Ruling

The U.S. Court of Appeals for the Federal Circuit in October ruled against Bilski and Warsaw. The court said in a 9-3 decision that business-method patents must either be connected to a machine or “transform” an item from one state to another.

The appeals court overturned its own 1998 decision that said business methods are entitled to patent protection if they had a “useful, concrete and tangible result.” The 1998 ruling, which involved a computerized accounting method for managing a mutual fund, opened the door to a flood of such patents.

The potential impact of the October decision is a subject of dispute. The Obama administration, urging the Supreme Court not to get involved, characterized the Federal Circuit ruling as a narrow one that would have limited impact on the patentability of software and biotechnological and chemical inventions.

Patent Protection

The Federal Circuit “did not hold that business methods are categorically ineligible for patent protection,” argued U.S. Solicitor General Elena Kagan, the administration’s top courtroom lawyer. “Indeed, the majority expressly rejected calls to endorse that view.”

Kagan’s brief backed the position of the U.S. Patent and Trademark Office, which over the past few years has sought to give greater scrutiny to applications.

The patent office grants patents to processes, machines, manufactured items and compositions of matter including drug compounds. Courts have wrangled for decades over how to define processes.

Bilski and Warsaw contended in their appeal that the Federal Circuit “has essentially confined all process patents to manufacturing methods, using a test that may have been appropriate during the Industrial Age but no longer fits our modern information-based economy.”

Credit Purchases

Last week a federal judge in Florida invoked the Bilski decision in invalidating a patent related to a way consumers can save or donate part of their credit or debit purchases. The patent owner claimed that Bank of America Corp.’s Keep the Change program infringed the patent.

“Courts all over the country area applying Bilski in different ways,” said David Hanson, represented the two men in the appeals court arguments.

The Supreme Court under Chief Justice John Roberts has limited patent rights in a series of cases.

“They were itching to say something about this,” said Brad Wright, a patent lawyer with Banner & Witcoff in Washington and patent law professor at George Mason University. “They haven’t had a chance to do anything with this area since 1981.”

He said the Supreme Court probably would decide, perhaps unanimously, that Bilski and Warsaw’s invention wasn’t worthy of a patent.

Sotomayor Nomination

Even so, the nomination of Sonia Sotomayor to succeed the retiring Justice David Souter might mean a more favorable hearing for the inventors than they otherwise would have received.

Souter was one of three justices who in 2006 suggested support for tighter limits on business-method patents. Sotomayor worked on intellectual property matters as a private lawyer.

“The expected change in the composition of the Supreme Court may make it less hostile to Bilski than might otherwise have been expected,” said Edward Reines, a patent lawyer at Weil Gotshal in Silicon Valley.

Among the businesses that urged the Supreme Court to hear the appeal were biotechnology company Medistem Inc., software maker Borland Software Corp. and mailing technology company Pitney Bowes Inc.

The case is Bilski v. Warsaw, 08-964.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net; Susan Decker in Washington at sdecker1@bloomberg.net.

Last Updated: June 1, 2009 12:59 EDT