Nov. 9 (Bloomberg) -- The U.S. Supreme Court today considers a patent dispute that will determine how much legal protection is afforded abstract business innovations and has drawn in companies including Microsoft Corp., Google Inc. and Novartis Corp.

The justices have received 68 briefs from outsiders, a record for a business case, attesting to the potential impact. Bank of America Corp., American Express Co., Morgan Stanley and Accenture LLP are all pressing arguments in the case, which stems from a patent application for a method of hedging weather- related risks when buying and selling energy.

The fight is splitting industries, dividing companies that rely on their own intellectual property from those aiming to head off expensive infringement lawsuits. The court’s ruling, likely to affect billions of dollars in patent rights, will be its first since 1981 on what types of innovations qualify for legal protection.

“You can look not just at the number but also at the diversity of companies that are interested,” said Marc Pernick, a patent lawyer at Morrison & Foerster LLP in Palo Alto, California. “That shows that the decision may have dramatic and far-reaching consequences.”

Applications for so-called business method patents have soared over the past decade, from 974 in fiscal 1997 to a peak of 14,364 in 2008, according to the U.S. Patent and Trademark Office.

Limiting Protection

The justices are reviewing a federal appeals court decision that limited the types of methods eligible for protection. The lower court said methods must have some physical component, through either a connection to a machine or their power to transform an item into a different state.

At the Supreme Court, those urging restrictions on method patents include Microsoft, based in Redmond, Washington; Bank of America, based in Charlotte, North Carolina; Google, based in Mountain View, California; Hartford Financial Services Group Inc., based in Hartford, Connecticut; and Morgan Stanley, based in New York.

Those companies argue that method patents can undermine innovation. Companies can develop novel products and still risk being sued or subjected to royalty demands by someone who already held a patent on the idea, they say.

‘Spike in Litigation’

“The recent explosion in abstract patents claiming business or financial methods and software -- and the spike in litigation associated with those patents -- has presented a significant hindrance to innovation,” argued Bank of America, Google, Morgan Stanley and other companies in a brief.

Microsoft, the world’s biggest software maker, is facing more than four dozen patent infringement lawsuits, mostly by small companies seeking hundreds of millions of dollars for features within the Windows operating system or Office suite of software.

A group of Internet retailers told the court they too are facing a steady barrage of lawsuits, at a cost of hundreds of millions of dollars. Many are filed by so-called patent trolls that aim only to collect royalties or damages from established companies, not to put an innovation to use themselves, the retailers said.

“In effect, business method patents amount to a tax on Internet commerce,” argued the group, which includes J.C. Penney Co., based in Plano, Texas.

Riddled With Lawsuits

A collection of insurers say their industry is likewise riddled with lawsuits. The insurers are urging the high court to declare that annuities, life insurance policies and other types of contracts aren’t patentable subject matter.

The Obama administration is also advocating a tougher standard for granting method patents, as is Bloomberg LP, the New York-based parent company of Bloomberg News.

On the other side, arguing that the lower court standard is too restrictive, are New York-based American Express; Minneapolis-based Medtronic Inc.; Novartis, the New York-based unit of Novartis AG; Palm Inc., based in Sunnyvale, California; and Accenture, the U.S. subsidiary of Accenture Plc.

Novartis, which develops genetic testing techniques, said the lower court ruling could discourage innovation. It “could have an immediate, negative impact on personalized health care, an area of great importance to patients and to Novartis,” the company said in a legal brief.

Accenture said the lower court ruling raises questions about some of its 360 U.S. patents, covering such areas as insurance claim analysis, energy commodities transactions and credit-risk management.

Broad Rights

Small software, financial services and electronic commerce companies are also backing broad patent rights. Four software makers argued that “the inability to appropriately protect software-related innovation is crippling the ability of small- and mid-size entrepreneurial software companies to compete in the market against more established companies.”

The dispute involves Bernard L. Bilski and Rand A. Warsaw, founders of a Pittsburgh company that sells customized consumer energy products. The appeals court said they weren’t entitled to a patent on their hedging method.

Warsaw, who has degrees in nuclear engineering and business, said in an interview a patent would protect a method he and Bilski spent years developing.

“We have innovation, research and development, original mathematics,” he said. “Once it’s all laid out in front of somebody, it’s fairly easy to duplicate.”

The Obama administration said the Bilski patent “would preempt the abstract idea of hedging consumption risk.”

The justices will rule by July in the case, Bilski v. Kappos, 08-964.

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

Last Updated: November 9, 2009 00:00 EST